Marten Transport, Ltd. — Form 10-Q Summary
Business context and reporting period
Marten Transport is a temperature-controlled and dry freight transportation company operating through Truckload, Dedicated, Intermodal and Brokerage segments in the United States, Mexico and Canada. This unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Operating revenue | $173.2 million | $161.9 million |
| Operating income | $13.9 million | $14.1 million |
| Operating margin | 8.0% | 8.7% |
| Net income | $8.2 million | $8.2 million |
| Diluted EPS | $0.25 | $0.25 |
| Operating cash flow | $37.7 million | $55.1 million |
| Capital expenditures, net of equipment-sale proceeds | $20.2 million | $8.3 million |
- Consolidated operating ratio was 92.0%, compared with 91.3% in the prior-year quarter. Excluding fuel surcharges from both revenue and expenses, the ratio was 91.1% versus 90.7%.
- Revenue increased 6.9%; revenue excluding fuel surcharges increased 3.1%. Fuel surcharge revenue rose to $16.6 million from $10.0 million, primarily due to higher fuel prices.
- Fuel and fuel taxes increased 32.2% to $26.0 million, while net fuel expense increased 4.4% to $11.3 million.
- Insurance and claims expense increased 21.2% to $8.9 million, principally because of higher workers’ compensation, auto liability and physical damage claims and higher auto liability premiums.
- Cash and cash equivalents were $9.1 million at March 31, 2017, compared with $0.5 million at December 31, 2016. Total assets were $661.3 million and stockholders’ equity was $445.5 million.
- There was no outstanding long-term debt at March 31, 2017. The company had a $40.0 million unsecured revolving facility, $10.2 million of standby letters of credit and $29.8 million of remaining borrowing availability.
Material changes versus the prior comparable period
- Truckload revenue increased 6.2% to $95.7 million, but operating income declined 13.9% to $6.0 million; the segment operating ratio worsened to 93.8% from 92.3%, primarily because of higher insurance and claims expense.
- Dedicated revenue increased 8.6% to $40.3 million and operating income increased 3.8% to $4.5 million; its operating ratio increased to 88.9% from 88.3%.
- Intermodal revenue increased 11.5% to $19.2 million and operating income increased 11.4% to $2.1 million, with an unchanged 88.8% operating ratio.
- Brokerage revenue increased 2.6% to $18.0 million and operating income increased 42.5% to $1.3 million, reflecting volume growth and cost controls.
- Operating cash flow declined $17.4 million, primarily reflecting less favorable working-capital changes than in Q1 2016. Investing cash use increased because of greater revenue-equipment purchases.
- Financing cash use decreased to $8.1 million from $44.8 million, as Q1 2017 included $7.9 million of net debt repayment but no share repurchases, compared with $7.5 million of repurchases and substantially higher debt repayment in Q1 2016.
- Other operating expense benefited from approximately $1.0 million of net proceeds from a lawsuit settlement. This unusual item helped offset higher operating costs.
- The effective income tax rate decreased to 40.5% from 41.1%, including a $95,000 tax benefit from adoption of ASU 2016-09 on share-based compensation.
Guidance, outlook, risks and contingencies
- Management expects approximately $77 million of capital expenditures, net of equipment-sale proceeds, for the remainder of 2017. The company also had $85.9 million of revenue-equipment purchase commitments and $578,000 of building-construction commitments for the remainder of 2017.
- Management believes liquidity is adequate for current and anticipated needs for at least the next twelve months and does not anticipate significant liquidity constraints.
- Quarterly dividends of $0.025 per share were declared. Future dividends remain subject to financial condition, cash requirements, board approval and credit-facility restrictions.
- The company self-insures portions of workers’ compensation, auto liability, general liability, cargo, property damage and employee health claims. It retains the first $1.0 million of each auto liability claim and the first $750,000 of each workers’ compensation claim; actual claims experience could materially affect results.
- Fuel-price volatility remains a key market risk. A 5% increase in the average diesel cost, based on Q1 consumption, would have increased fuel expense by approximately $1.3 million. Fuel surcharges do not fully offset fuel used for non-revenue miles or idling.
- Management reported no material changes to the risk factors disclosed in the 2016 Form 10-K. The company was in compliance with its credit covenants at March 31, 2017.
- Management expects adoption of the revenue-recognition standard effective January 1, 2018, and the leases standard effective in the first quarter of 2019, will not have a significant effect on the financial statements.
- Related-party transactions included approximately $1.2 million paid to or through Bauer Built, Inc. for fuel, tires and related services; a company director is Bauer Built’s principal stockholder. Marten also owns 45% of MW Logistics, LLC.
Investor verification checklist
- Verify whether higher insurance and claims costs, fuel prices and equipment ownership costs continue to pressure operating margins, especially in Truckload and Dedicated.
- Reconcile the expected $77 million of remaining 2017 net capital expenditures with operating cash flow, cash balances and available borrowing capacity.
- Review self-insurance reserves, standby letters of credit and adverse development in auto liability and workers’ compensation claims.
- Assess the sustainability and timing of the $85.9 million revenue-equipment purchase commitments and their effect on depreciation and free cash flow.
- Monitor fuel-surcharge recovery relative to diesel prices, non-revenue miles and idling exposure.
- Evaluate the effect of the lawsuit settlement and other unusual items on recurring operating performance.
- Review related-party purchases and MW Logistics balances for ongoing volume, pricing and exposure changes.