Marten Transport, Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Marten Transport provides temperature-controlled and dry freight transportation across the United States, Mexico, and Canada through Truckload, Dedicated, Intermodal, and Brokerage segments. This unaudited filing covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $199.6 million | $170.7 million | $583.6 million | $515.3 million |
| Operating income | $19.0 million | $13.0 million | $50.8 million | $42.5 million |
| Operating margin | 9.5% | 7.6% | 8.7% | 8.3% |
| Net income | $15.3 million | $7.9 million | $39.3 million | $25.2 million |
| Net margin | 7.6% | 4.6% | 6.7% | 4.9% |
| Diluted EPS | $0.28 | $0.14 | $0.71 | $0.46 |
| Operating cash flow | Not separately provided | Not separately provided | $112.1 million | $94.7 million |
At September 30, 2018, cash and cash equivalents were $35.7 million, total assets were $745.3 million, stockholders’ equity was $564.1 million, and net property and equipment was $597.4 million. The company had no outstanding long-term debt or credit-facility borrowings. Its amended unsecured credit facility totals $30.0 million, with $15.4 million of remaining borrowing availability after $14.6 million of standby letters of credit.
Nine-month investing cash outflows were $88.8 million, including $130.9 million of revenue-equipment additions and $48.4 million of equipment-disposition proceeds. Financing cash outflows were $3.3 million, including $4.1 million of dividends. Cash increased $19.9 million during the nine months.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 17.0%, operating income increased 45.9%, and net income increased 94.2% year over year.
- Nine-month revenue increased 13.3%, operating income increased 19.5%, and net income increased 55.9%.
- Revenue excluding fuel surcharges increased 10.8% in the quarter and 8.0% for the nine months. Fuel-surcharge revenue increased primarily because of higher fuel prices and customer-contract changes that shifted some line-haul revenue into fuel surcharges.
- Nine-month Dedicated revenue increased 32.8%, Intermodal revenue increased 30.7%, and Brokerage revenue increased 21.7%. Total Truckload revenue declined 0.4%, while Truckload revenue excluding fuel surcharges declined 3.9% because of a smaller average tractor fleet.
- Quarterly consolidated operating ratio improved to 90.5% from 92.4%; the nine-month ratio improved to 91.3% from 91.7%. Dedicated’s nine-month operating ratio worsened to 91.9% from 88.6%, primarily due to higher driver wages, bonuses, and depreciation.
- Net fuel expense declined 31.8% for the nine months despite higher average diesel prices, aided by fuel surcharges, improved fuel efficiency, and operating initiatives.
- The effective tax rate declined to 20.2% in the quarter and 23.3% for the nine months, compared with 39.6% and 40.3%, respectively, primarily because of the Tax Cuts and Jobs Act. Third-quarter results also included a $630,000 discrete tax benefit.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $485,000. Management expects the ongoing effect on net income and financial position to be immaterial.
Guidance, Outlook, Risks, and Unusual Items
- Management estimates approximately $27 million of net capital expenditures for the remainder of 2018, including $28.5 million of committed revenue-equipment purchases before proceeds from dispositions.
- Management believes liquidity is adequate for at least the next twelve months and does not anticipate significant liquidity constraints.
- The company expects to continue quarterly cash dividends, subject to board approval and financial and legal considerations. The credit facility limits annual stock redemptions and dividends to 25% of prior-year net income and includes leverage and fixed-charge coverage covenants; the company was in compliance at September 30, 2018.
- Key operating risks include driver recruitment and retention, fuel-price volatility, severe winter weather, seasonality, inflation in equipment and compensation costs, customer concentration, and fluctuations in self-insured claims. A 5% increase in average diesel prices would have increased nine-month fuel expense by approximately $4.5 million.
- The company self-insures portions of workers’ compensation, auto liability, general liability, cargo, property damage, and employee health claims. It is responsible for the first $1.0 million of each auto-liability claim and the first $750,000 of each workers’ compensation claim.
- Management reported no material changes to previously disclosed risk factors, no other material off-balance-sheet arrangements beyond disclosed standby letters of credit, purchase obligations, and leases, and effective disclosure controls as of September 30, 2018.
- The company expects the new lease standard, effective in the first quarter of 2019, to have no significant effect on its financial statements, although additional disclosures will be required.
Investor Verification Checklist
- Verify whether Dedicated growth and contract wins can offset the continuing reduction in average Truckload tractors.
- Monitor operating-ratio trends, particularly the deterioration in the Dedicated segment and the high Brokerage operating ratio.
- Assess the sustainability of improved margins after fuel-surcharge contract changes and the lower effective tax rate.
- Review execution of the remaining 2018 equipment commitments and the effect of equipment prices and depreciation on future earnings and cash flow.
- Evaluate exposure to fuel prices, driver availability and compensation, customer concentration, winter seasonality, and self-insured accident and health claims.
- Confirm available borrowing capacity after standby letters of credit and continued compliance with credit-facility covenants.