Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with the selected consolidated financial data and our consolidated condensed financial statements and the related notes appe
a
ring elsewhere in this report.
This discussion and analysis
contains forward-looking statements that involve risks,
uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those included in our Form 10-K, Part 1, Item 1A for th
e year ended December 31, 201
8
.
We do not assume, and specifically disclaim, any obligation to update any forward-looking statement
contained in this
report.
Overview
We have strategically transitioned from a long-haul carrier to a multifaceted business offering a network of truck-based transportation capabilities across our five distinct business platforms – Truckload, Dedicated, Intermodal, Brokerage and MRTN de Mexico.
The primary source of our operating revenue is provided by our Truckload segment through a combination of regional short-haul and medium-to-long-haul full-load transportation services. We transport food and other consumer packaged goods that require a temperature-controlled or insulated environment, along with dry freight, across the United States and into and out of Mexico and Canada. Our agreements with customers are typically for one year.
Our Dedicated segment provides customized transportation solutions tailored to meet individual customers’ requirements, utilizing temperature-controlled trailers, dry vans and other specialized equipment within the United States. Our agreements with customers range from three to five years and are subject to annual rate reviews.
Generally, we are paid by the mile for our Truckload and Dedicated services. We also derive Truckload and Dedicated revenue from fuel surcharges, loading and unloading activities, equipment detention and other accessorial services. The main factors that affect our Truckload and Dedicated revenue are the rate per mile we receive from our customers, the percentage of miles for which we are compensated, the number of miles we generate with our equipment and changes in fuel prices. We monitor our revenue production primarily through average Truckload and Dedicated revenue, net of fuel surcharges, per tractor per week. We also analyze our average Truckload and Dedicated revenue, net of fuel surcharges, per total mile, non-revenue miles percentage, the miles per tractor we generate, our fuel surcharge revenue, our accessorial revenue and our other sources of operating revenue.
Our Intermodal segment transports our customers’ freight within the United States utilizing our temperature-controlled trailers on railroad flatcars for portions of trips, with the balance of the trips using our tractors or, to a lesser extent, contracted carriers. The main factors that affect our Intermodal revenue are the rate per mile and other charges we receive from our customers.
Our Brokerage segment develops contractual relationships with and arranges for third-party carriers to transport freight for our customers in temperature-controlled trailers and dry vans within the United States and into and out of Mexico through Marten Transport Logistics, LLC, which was established in 2007 and operates pursuant to brokerage authority granted by the DOT. We retain the billing, collection and customer management responsibilities. The main factors that affect our Brokerage revenue are the rate per mile and other charges that we receive from our customers.
Operating results of our MRTN de Mexico business which offers our customers door-to-door service between the United States and Mexico with our Mexican partner carriers is reported within our Truckload and Brokerage segments.
In addition to the factors discussed above, our operating revenue is also affected by, among other things, the United States economy, inventory levels, the level of truck and rail capacity in the transportation market, a contracting driver market, severe weather conditions and specific customer demand.
Our operating revenue increased $12.1 million, or 6.5%, in the first three months of 2019 from the first three months of 2018. Our operating revenue, net of fuel surcharges, increased $11.6 million, or 7.1%, compared with the first three months of 2018. Truckload segment revenue, net of fuel surcharges, decreased 0.1% from the first three months of 2018, primarily due to a reduction in our average number of tractors, principally offset by an increase in our average revenue per tractor. Dedicated segment revenue, net of fuel surcharges, increased 15.5% from the first three months of 2018, primarily due to fleet growth driven by an increase in the number of Dedicated contracts we have with our customers. Intermodal segment revenue, net of fuel surcharges, decreased 5.1% due to a reduced load volume. Brokerage segment revenue increased 30.0% due to increases in both volume and rates in the first three months of 2019. Fuel surcharge revenue increased slightly to $23.6 million in the first three months of 2019 from $23.1 million in the first three months of 2018.
Our profitability is impacted by the variable costs of transporting freight for our customers, fixed costs, and expenses containing both fixed and variable components. The variable costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and independent contractor costs, which are recorded under purchased transportation. Expenses that have both fixed and variable components include maintenance and tire expense and our cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency and other factors. Our main fixed costs relate to the acquisition and subsequent depreciation of long-term assets, such as revenue equipment and operating terminals. We expect our annual cost of tractor and trailer ownership will increase in future periods as a result of higher prices of new equipment, along with any increases in fleet size. Although certain factors affecting our expenses are beyond our control, we monitor them closely and attempt to anticipate changes in these factors in managing our business. For example, fuel prices have significantly fluctuated over the past several years. We manage our exposure to changes in fuel prices primarily through fuel surcharge programs with our customers, as well as through volume fuel purchasing arrangements with national fuel centers and bulk purchases of fuel at our terminals. To help further reduce fuel expense, we have installed and tightly manage the use of auxiliary power units in our tractors to provide climate control and electrical power for our drivers without idling the tractor engine, and also have improved the fuel usage in the temperature-control units on our trailers. For our Intermodal and Brokerage segments, our profitability is impacted by the percentage of revenue which is payable to the providers of the transportation services we arrange. This expense is included within purchased transportation in our consolidated condensed statements of operations.
Our operating income improved 30.4% to $17.7 million in the first three months of 2019 from $13.6 million in the first three months of 2018. Our operating expenses as a percentage of operating revenue, or “operating ratio,” improved to 91.1% in the first three months of 2019 from 92.7% in the first three months of 2018. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharges, improved to 89.9% in the first three months of 2019 from 91.7% in the first three months of 2018. Our net income improved 31.1% to $13.5 million, or $0.25 per diluted share, in the first three months of 2019 from $10.3 million, or $0.19 per diluted share, in the first three months of 2018.
Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At March 31, 2019, we had $85.5 million of cash and cash equivalents, $587.7 million in stockholders’ equity and no long-term debt outstanding. In the first three months of 2019, net cash flows provided by operating activities of $36.8 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $4.6 million, to upgrade regional operating facilities in the amount of $846,000, and to pay cash dividends of $1.6 million, resulting in a $28.8 million increase in cash and cash equivalents. We estimate that capital expenditures, net of proceeds from dispositions, will be approximately $119 million in the remainder of 2019. We believe our sources of liquidity are adequate to meet our current and anticipated needs for at least the next twelve months. Based upon anticipated cash flows, existing cash and cash equivalents balances, current borrowing availability and other sources of financing we expect to be available to us, we do not anticipate any significant liquidity constraints in the foreseeable future.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes discussions of operating revenue, net of fuel surcharge revenue; Truckload, Dedicated and Intermodal revenue, net of fuel surcharge revenue; operating expenses as a percentage of operating revenue, each net of fuel surcharge revenue; and net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads). We provide these additional disclosures because management believes these measures provide a more consistent basis for comparing results of operations from period to period. These financial measures in this report have not been determined in accordance with U.S. generally accepted accounting principles (GAAP). Pursuant to Item 10(e) of Regulation S-K, we have included the amounts necessary to reconcile these non-GAAP financial measures to the most directly comparable GAAP financial measures of operating revenue, operating expenses divided by operating revenue, and fuel and fuel taxes.
Results of Operations
The following table sets forth for the periods indicated certain operating statistics regarding our revenue and operations:
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Truckload Segment:
|
|
|
|
|
|
|
|
|
Revenue (in thousands)
|
|
$
|
91,722
|
|
|
$
|
93,017
|
|
Average revenue, net of fuel surcharges, per tractor per week
(1)
|
|
$
|
3,859
|
|
|
$
|
3,679
|
|
Average tractors
(1)
|
|
|
1,616
|
|
|
|
1,696
|
|
Average miles per trip
|
|
|
562
|
|
|
|
603
|
|
Total miles (in thousands)
|
|
|
37,236
|
|
|
|
40,582
|
|
|
|
|
|
|
|
|
|
|
Dedicated Segment:
|
|
|
|
|
|
|
|
|
Revenue (in thousands)
|
|
$
|
57,725
|
|
|
$
|
48,833
|
|
Average revenue, net of fuel surcharges, per tractor per week
(1)
|
|
$
|
3,382
|
|
|
$
|
3,267
|
|
Average tractors
(1)
|
|
|
1,125
|
|
|
|
1,009
|
|
Average miles per trip
|
|
|
322
|
|
|
|
297
|
|
Total miles (in thousands)
|
|
|
23,643
|
|
|
|
21,135
|
|
|
|
|
|
|
|
|
|
|
Intermodal Segment:
|
|
|
|
|
|
|
|
|
Revenue (in thousands)
|
|
$
|
22,971
|
|
|
$
|
24,652
|
|
Loads
|
|
|
9,251
|
|
|
|
10,737
|
|
Average tractors
|
|
|
87
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Brokerage Segment:
|
|
|
|
|
|
|
|
|
Revenue (in thousands)
|
|
$
|
26,605
|
|
|
$
|
20,458
|
|
Loads
|
|
|
15,266
|
|
|
|
11,889
|
|
(1)
|
Includes tractors driven by both company-employed drivers and independent contractors. Independent contractors provided 46 and 55 tractors as of March 31, 2019 and 2018, respectively.
|
Comparison of Three Months Ended
March 31, 2019
to Three Months Ended
March 31, 2018
The following table sets forth for the periods indicated our operating revenue, operating income and operating ratio by segment, along with the change for each component:
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
(Dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019 vs. 2018
|
|
|
2019 vs. 2018
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truckload revenue, net of fuel surcharge revenue
|
|
$
|
80,167
|
|
|
$
|
80,216
|
|
|
$
|
(49
|
)
|
|
|
(0.1
|
)%
|
Truckload fuel surcharge revenue
|
|
|
11,555
|
|
|
|
12,801
|
|
|
|
(1,246
|
)
|
|
|
(9.7
|
)
|
Total Truckload revenue
|
|
|
91,722
|
|
|
|
93,017
|
|
|
|
(1,295
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dedicated revenue, net of fuel surcharge revenue
|
|
|
48,924
|
|
|
|
42,364
|
|
|
|
6,560
|
|
|
|
15.5
|
|
Dedicated fuel surcharge revenue
|
|
|
8,801
|
|
|
|
6,469
|
|
|
|
2,332
|
|
|
|
36.0
|
|
Total Dedicated revenue
|
|
|
57,725
|
|
|
|
48,833
|
|
|
|
8,892
|
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermodal revenue, net of fuel surcharge revenue
|
|
|
19,755
|
|
|
|
20,808
|
|
|
|
(1,053
|
)
|
|
|
(5.1
|
)
|
Intermodal fuel surcharge revenue
|
|
|
3,216
|
|
|
|
3,844
|
|
|
|
(628
|
)
|
|
|
(16.3
|
)
|
Total Intermodal revenue
|
|
|
22,971
|
|
|
|
24,652
|
|
|
|
(1,681
|
)
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage revenue
|
|
|
26,605
|
|
|
|
20,458
|
|
|
|
6,147
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
$
|
199,023
|
|
|
$
|
186,960
|
|
|
$
|
12,063
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truckload
|
|
$
|
7,555
|
|
|
$
|
6,815
|
|
|
$
|
740
|
|
|
|
10.9
|
%
|
Dedicated
|
|
|
5,515
|
|
|
|
2,488
|
|
|
|
3,027
|
|
|
|
121.7
|
|
Intermodal
|
|
|
2,394
|
|
|
|
2,978
|
|
|
|
(584
|
)
|
|
|
(19.6
|
)
|
Brokerage
|
|
|
2,269
|
|
|
|
1,313
|
|
|
|
956
|
|
|
|
72.8
|
|
Total operating income
|
|
$
|
17,733
|
|
|
$
|
13,594
|
|
|
$
|
4,139
|
|
|
|
30.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ratio
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truckload
|
|
|
91.8
|
%
|
|
|
92.7
|
%
|
|
|
|
|
|
|
|
|
Dedicated
|
|
|
90.4
|
|
|
|
94.9
|
|
|
|
|
|
|
|
|
|
Intermodal
|
|
|
89.6
|
|
|
|
87.9
|
|
|
|
|
|
|
|
|
|
Brokerage
|
|
|
91.5
|
|
|
|
93.6
|
|
|
|
|
|
|
|
|
|
Consolidated operating ratio
|
|
|
91.1
|
%
|
|
|
92.7
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Represents operating expenses as a percentage of operating revenue.
|
Our operating revenue increased $12.1 million, or 6.5%, to $199.0 million in the 2019 period from $187.0 million in the 2018 period. Our operating revenue, net of fuel surcharges, increased $11.6 million, or 7.1%, to $175.5 million in the 2019 period from $163.8 million in the 2018 period. This increase was due to a $6.6 million increase in Dedicated revenue, net of fuel surcharges, and a $6.1 million increase in Brokerage revenue, partially offset by a $49,000 decrease in Truckload revenue, net of fuel surcharges, and a $1.1 million decrease in Intermodal revenue, net of fuel surcharges. Fuel surcharge revenue increased slightly to $23.6 million in the 2019 period from $23.1 million in the 2018 period. A shift of a portion of line haul revenue to fuel surcharge revenue, which began in mid-first quarter of 2018 as a result of changes in a number of customer agreements, reduced our revenue excluding fuel surcharges by $3.6 million in the 2019 period and by $1.7 million in the 2018 period, while increasing our fuel surcharge revenue by the same amounts.
Truckload segment revenue decreased $1.3 million, or 1.4%, to $91.7 million in the 2019 period from $93.0 million in the 2018 period. Truckload segment revenue, net of fuel surcharges, was $80.2 million in each of the 2019 and 2018 periods as a reduction in our average number of tractors in the 2019 period was offset by an increase in our average revenue per tractor. The shift from line haul revenue to fuel surcharge revenue as a result of changes in a number of customer agreements decreased our Truckload revenue excluding fuel surcharges by $782,000 in the 2019 period and by $282,000 in the 2018 period, while increasing our fuel surcharge revenue by the same amounts. The improvement in the operating ratio in the 2019 period was primarily due to the increase in our average revenue per tractor driven by increased rates with our customers.
Dedicated segment revenue increased $8.9 million, or 18.2%, to $57.7 million in the 2019 period from $48.8 million in the 2018 period. Dedicated segment revenue, net of fuel surcharges, increased 15.5% primarily due to fleet growth driven by an increase in the number of Dedicated contracts we have with our customers. The shift from line haul revenue to fuel surcharge revenue as a result of changes in a number of customer agreements decreased our Dedicated revenue excluding fuel surcharges by $2.9 million in the 2019 period and by $1.4 million in the 2018 period, while increasing our fuel surcharge revenue by the same amounts. The improvement in the operating ratio for our Dedicated segment was primarily due to an increase in our average revenue per tractor and startup costs associated with new business that began in the 2018 period.
Intermodal segment revenue decreased $1.7 million, or 6.8%, to $23.0 million in the 2019 period from $24.7 million in the 2018 period. Intermodal segment revenue, net of fuel surcharges, decreased 5.1% from the 2018 period due to a decrease in load volume. The increase in the operating ratio in the 2019 period was primarily due to increased driver wages in the period.
Brokerage segment revenue increased $6.1 million, or 30.0%, to $26.6 million in the 2019 period from $20.5 million in the 2018 period due to an increase in both volume and rates with our customers. The improvement in the operating ratio in the 2019 period was primarily due to a decrease in the amounts payable to carriers for transportation services which we arranged as a percentage of our Brokerage revenue.
The following table sets forth for the periods indicated the dollar and percentage increase or decrease of the items in our unaudited consolidated condensed statements of operations, and those items as a percentage of operating revenue:
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Percentage of
Operating Revenue
|
|
|
|
Three Months
Ended
March 31,
|
|
|
Three Months
Ended
March 31,
|
|
|
Three Months
Ended
March 31,
|
|
(Dollars in thousands)
|
|
2019 vs. 2018
|
|
|
2019 vs. 2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
12,063
|
|
|
|
6.5
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
4,702
|
|
|
|
8.0
|
|
|
|
31.9
|
|
|
|
31.5
|
|
Purchased transportation
|
|
|
3,223
|
|
|
|
9.2
|
|
|
|
19.2
|
|
|
|
18.7
|
|
Fuel and fuel taxes
|
|
|
(1,367
|
)
|
|
|
(4.7
|
)
|
|
|
13.9
|
|
|
|
15.5
|
|
Supplies and maintenance
|
|
|
685
|
|
|
|
6.6
|
|
|
|
5.6
|
|
|
|
5.6
|
|
Depreciation
|
|
|
728
|
|
|
|
3.3
|
|
|
|
11.3
|
|
|
|
11.7
|
|
Operating taxes and licenses
|
|
|
46
|
|
|
|
2.0
|
|
|
|
1.2
|
|
|
|
1.2
|
|
Insurance and claims
|
|
|
(415
|
)
|
|
|
(4.0
|
)
|
|
|
5.0
|
|
|
|
5.5
|
|
Communications and utilities
|
|
|
267
|
|
|
|
15.9
|
|
|
|
1.0
|
|
|
|
0.9
|
|
Gain on disposition of revenue equipment
|
|
|
(337
|
)
|
|
|
(27.8
|
)
|
|
|
(0.8
|
)
|
|
|
(0.6
|
)
|
Other
|
|
|
392
|
|
|
|
7.6
|
|
|
|
2.8
|
|
|
|
2.8
|
|
Total operating expenses
|
|
|
7,924
|
|
|
|
4.6
|
|
|
|
91.1
|
|
|
|
92.7
|
|
Operating income
|
|
|
4,139
|
|
|
|
30.4
|
|
|
|
8.9
|
|
|
|
7.3
|
|
Other
|
|
|
(89
|
)
|
|
|
(47.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Income before income taxes
|
|
|
4,228
|
|
|
|
30.7
|
|
|
|
9.0
|
|
|
|
7.4
|
|
Income taxes expense
|
|
|
1,013
|
|
|
|
29.3
|
|
|
|
2.2
|
|
|
|
1.8
|
|
Net income
|
|
$
|
3,215
|
|
|
|
31.1
|
%
|
|
|
6.8
|
%
|
|
|
5.5
|
%
|
Salaries, wages and benefits consist of compensation for our employees, including both driver and non-driver employees, employees’ health insurance, 401(k) plan contributions and other fringe benefits. These expenses vary depending upon the size of our Truckload, Dedicated and Intermodal tractor fleets, the ratio of company drivers to independent contractors, our efficiency, our experience with employees’ health insurance claims, changes in health care premiums and other factors. Salaries, wages and benefits expense increased $4.7 million, or 8.0%, in the 2019 period from the 2018 period. This increase resulted primarily from additional company driver compensation expense of $3.2 million and an increase in bonus compensation expense for our non-driver employees of $1.2 million.
Purchased transportation consists of amounts payable to railroads and carriers for transportation services we arrange in connection with Brokerage and Intermodal operations and to independent contractor providers of revenue equipment. This category will vary depending upon the amount and rates, including fuel surcharges, we pay to third-party railroad and motor carriers, the ratio of company drivers versus independent contractors and the amount of fuel surcharges passed through to independent contractors. Purchased transportation expense increased $3.2 million in total, or 9.2%, in the 2019 period from the 2018 period. Amounts payable to carriers for transportation services we arranged in our Brokerage segment increased $4.8 million to $22.1 million in the 2019 period from $17.3 million in the 2018 period, primarily due to an increase in brokerage revenue. Amounts payable to railroads and drayage carriers for transportation services within our Intermodal segment decreased $1.2 million to $14.7 million in the 2019 period from $15.9 million in the 2018 period. This decrease was due to decreased intermodal revenue. The portion of purchased transportation expense related to independent contractors within our Truckload and Dedicated segments, including fuel surcharges, decreased $387,000 in the 2019 period. We expect our purchased transportation expense to increase as we grow our Intermodal and Brokerage segments.
Fuel and fuel taxes decreased by $1.4 million, or 4.7%, in the 2019 period from the 2018 period. Net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads) decreased $2.3 million, or 24.9%, to $7.0 million in the 2019 period from $9.3 million in the 2018 period. Fuel surcharges passed through to independent contractors, outside drayage carriers and railroads decreased to $2.8 million from $3.3 million in the 2018 period. Despite the United States Department of Energy national average cost of fuel being consistent at $3.02 per gallon in each of the 2019 and 2018 periods, net fuel expense decreased to 4.7% of Truckload, Dedicated and Intermodal segment revenue, net of fuel surcharges, from 6.5% in the 2018 period. The net fuel expense to revenue improved primarily due to a $3.6 million shift during the 2019 period of a portion of line haul revenue to fuel surcharge revenue as a result of changes in a number of customer agreements, compared with a $1.7 million shift to fuel surcharge revenue in the 2018 period. Increases in our miles per gallon and in our revenue rate per mile in the 2019 period further improved this ratio. We have worked diligently to control fuel usage and costs by improving our volume purchasing arrangements and optimizing our drivers’ fuel purchases with national fuel centers, focusing on shorter lengths of haul, installing and tightly managing the use of auxiliary power units in our tractors to minimize engine idling and improving fuel usage in the temperature-control units on our trailers. Auxiliary power units, which we have installed in our company-owned tractors, provide climate control and electrical power for our drivers without idling the tractor engine.
Insurance and claims consist of the costs of insurance premiums and accruals we make for claims within our self-insured retention amounts, primarily for personal injury, property damage, physical damage to our equipment, cargo claims and workers’ compensation claims. These expenses will vary primarily based upon the frequency and severity of our accident experience, our self-insured retention levels and the market for insurance. The $415,000 decrease in insurance and claims in the 2019 period was primarily due to decreases in self-insured workers’ compensation and cargo claims, partially offset by an increase in self-insured auto liability claims. Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods which could materially impact our financial results depending on the frequency, severity and timing of claims.
Gain on disposition of revenue equipment increased to $1.5 million in the 2019 period from $1.2 million in the 2018 period primarily due to an increase in our average gain for each tractor and trailer sold. Future gains or losses on dispositions of revenue equipment will be impacted by the market for used revenue equipment, which is beyond our control.
As a result of the foregoing factors, our operating income improved 30.4% to $17.7 million in the 2019 period from $13.6 million in the 2018 period. Our operating expenses as a percentage of operating revenue, or “operating ratio,” improved to 91.1% in the 2019 period from 92.7% in the 2018 period. The operating ratio for our Truckload segment was 91.8% in the 2019 period and 92.7% in the 2018 period, for our Dedicated segment was 90.4% in the 2019 period and 94.9% in the 2018 period, for our Intermodal segment was 89.6% in the 2019 period and 87.9% in the 2018 period, and for our Brokerage segment was 91.5% in the 2019 period and 93.6% in the 2018 period. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharges, improved to 89.9% in the 2019 period from 91.7% in the 2018 period.
Our effective income tax rate decreased slightly to 24.8% in the 2019 period from 25.0% in the 2018 period.
As a result of the factors described above, net income improved 31.1% to $13.5 million, or $0.25 per diluted share, in the 2019 period from $10.3 million, or $0.19 per diluted share, in the 2018 period.
Liquidity and Capital Resources
Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. Our primary sources of liquidity are funds provided by operations and our revolving credit facility. A portion of our tractor fleet is provided by independent contractors who own and operate their own equipment. We have no capital expenditure requirements relating to those drivers who own their tractors or obtain financing through third parties.
The table below reflects our net cash flows provided by operating activities, net cash flows used for investing activities and net cash flows used for financing activities for the periods indicated.
|
|
Three Months
Ended March 31,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
Net cash flows provided by operating activities
|
|
$
|
36,803
|
|
|
$
|
23,182
|
|
Net cash flows used for investing activities
|
|
|
(5,911
|
)
|
|
|
(27,392
|
)
|
Net cash flows used for financing activities
|
|
|
(2,129
|
)
|
|
|
(1,183
|
)
|
In 2007, our Board of Directors approved, and we announced a share repurchase program to repurchase up to one million shares of our common stock either through purchases on the open market or through private transactions and in accordance with Rule 10b-18 of the Exchange Act. In 2015, our Board of Directors approved and we announced an increase in the share repurchase program, providing for the repurchase of up to $40 million, or approximately two million shares, of our common stock, which was increased by our Board of Directors to 3.3 million shares in August 2017 to reflect the five-for-three stock split effected in the form of a stock dividend on July 7, 2017. The timing and extent to which we repurchase shares depends on market conditions and other corporate considerations. The repurchase program does not have an expiration date.
We repurchased and retired 200,000 shares of common stock for $3.8 million in the fourth quarter of 2018. We did not repurchase any shares in the first quarter of 2019 or in the rest of 2018. As of March 31, 2019, future repurchases of up to $12.6 million, or 806,000 shares, were available in the share repurchase program.
In the first three months of 2019, net cash flows provided by operating activities of $36.8 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $4.6 million, to upgrade regional operating facilities in the amount of $846,000, and to pay cash dividends of $1.6 million, resulting in a $28.8 million increase in cash and cash equivalents. In the first three months of 2018, net cash flows provided by operating activities of $23.2 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $22.8 million, to acquire and partially construct regional operating facilities in the amount of $4.4 million, and to pay cash dividends of $1.4 million, resulting in a $5.4 million decrease in cash and cash equivalents. Beginning in 2018, our net cash flows have been increased by the new tax laws established by the Tax Cuts and Jobs Act of 2017, which reduces the federal corporate statutory income tax rate and establishes bonus depreciation that allows for full expensing of qualified assets.
We estimate that capital expenditures, net of proceeds from dispositions, will be approximately $119 million for the remainder of 2019. A quarterly cash dividend of $0.03 per share of common stock was declared in the first quarter of 2019 and totaled $1.6 million. A quarterly cash dividend of $0.025 per share of common stock was declared in the first quarter of 2018 and totaled $1.4 million. We currently expect to continue to pay quarterly cash dividends in the future. The payment of cash dividends in the future, and the amount of any such dividends, will depend upon our financial condition, results of operations, cash requirements, and certain corporate law requirements, as well as other factors deemed relevant by our Board of Directors. We believe our sources of liquidity are adequate to meet our current and anticipated needs for at least the next twelve months. Based upon anticipated cash flows, existing cash and cash equivalents balances, current borrowing availability and other sources of financing we expect to be available to us, we do not anticipate any significant liquidity constraints in the foreseeable future.
In August 2018, we entered into an amendment to our unsecured committed credit facility which reduces the aggregate principal amount of the facility from $40.0 million to $30.0 million and extends the term of the facility to August 2023. At March 31, 2019, there was no outstanding principal balance on the facility. As of that date, we had outstanding standby letters of credit to guarantee settlement of self-insurance claims of $14.6 million and remaining borrowing availability of $15.4 million. This facility bears interest at a variable rate based on the London Interbank Offered Rate or the lender’s Prime Rate, in each case plus/minus applicable margins.
Our credit facility prohibits us from paying, in any fiscal year, stock redemptions and dividends in excess of 25% of our net income from the prior fiscal year. This facility also contains restrictive covenants which, among other matters, require us to maintain compliance with cash flow leverage and fixed charge coverage ratios. We were in compliance with all covenants at March 31, 2019 and December 31, 2018.
The following is a summary of our contractual obligations as of March 31, 2019.
|
|
Payments Due by Period
|
|
(In thousands)
|
|
Remainder
of 2019
|
|
|
2020
And
2021
|
|
|
2022
And
2023
|
|
|
Thereafter
|
|
|
Total
|
|
Purchase obligations for revenue equipment
|
|
$
|
91,061
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,061
|
|
Operating lease obligations
|
|
|
385
|
|
|
|
583
|
|
|
|
55
|
|
|
|
—
|
|
|
|
1,023
|
|
Total
|
|
$
|
91,446
|
|
|
$
|
583
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
92,084
|
|
Due to uncertainty with respect to the timing of future cash flows, the obligation under our nonqualified deferred compensation plan at March 31, 2019 of 241,754 shares of Company common stock with a value of $4.3 million has been excluded from the above table.
Off-balance Sheet Arrangements
Other than standby letters of credit maintained in connection with our self-insurance programs in the amount of $14.6 million along with purchase obligations and operating leases summarized above in our summary of contractual obligations, we did not have any other material off-balance sheet arrangements at March 31, 2019.
Inflation and Fuel Costs
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the last two years, the most significant effects of inflation have been on revenue equipment prices, accident claims, health insurance and employee compensation. We attempt to limit the effects of inflation through increases in freight rates and cost control efforts.
In addition to inflation, fluctuations in fuel prices can affect our profitability. We require substantial amounts of fuel to operate our tractors and power the temperature-control units on our trailers. Substantially all of our contracts with customers contain fuel surcharge provisions. Although we historically have been able to pass through a significant portion of long-term increases in fuel prices and related taxes to customers in the form of fuel surcharges and higher rates, such increases usually are not fully recovered. These fuel surcharge provisions are not effective in mitigating the fuel price increases related to non-revenue miles or fuel used while the tractor is idling.
Seasonality
Our tractor productivity generally decreases during the winter season because inclement weather impedes operations and some shippers reduce their shipments. At the same time, operating expenses generally increase, with harsh weather creating higher accident frequency, increased claims, lower fuel efficiency and more equipment repairs.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our consolidated condensed financial statements and related notes. We base our estimates, assumptions and judgments on historical experience, current trends and other factors believed to be relevant at the time our consolidated condensed financial statements are prepared. However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and such differences could be material. We believe that the following critical accounting policies affect our more significant estimates, assumptions and judgments used in the preparation of our consolidated condensed financial statements.
Revenue Recognition.
We account for our revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification 606,
Revenue from Contracts with Customers
, which we adopted on January 1, 2018 using the modified retrospective method. The new revenue standard requires us to recognize revenue and related expenses within each of our four reporting segments over time, compared with our former policy in which we recorded revenue and related expenses on the date shipment of freight was completed.
We account for revenue of our Intermodal and Brokerage segments and revenue on freight transported by independent contractors within our Truckload and Dedicated segments on a gross basis because we are the principal service provider controlling the promised service before it is transferred to each customer. We are primarily responsible for fulfilling the promise to provide each specified service to each customer. We bear the primary risk of loss in the event of cargo claims by our customers. We also have complete control and discretion in establishing the price for each specified service. Accordingly, all such revenue billed to customers is classified as operating revenue and all corresponding payments to carriers for transportation services we arrange in connection with brokerage and intermodal activities and to independent contractor providers of revenue equipment are classified as purchased transportation expense within our consolidated condensed statements of operations.
Accounts Receivable.
We are dependent upon a limited number of customers, and, as a result, our trade accounts receivable are highly concentrated. Trade accounts receivable are recorded at the invoiced amounts, net of an allowance for doubtful accounts. Our allowance for doubtful accounts was $317,000 as of March 31, 2019 and $348,000 as of December 31, 2018. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers’ financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The allowance for doubtful accounts is based on the best information available to us and is reevaluated and adjusted as additional information is received. We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy. We review the adequacy of our allowance for doubtful accounts monthly.
Property and Equipment.
The transportation industry requires significant capital investments. Our net property and equipment was $578.2 million as of March 31, 2019 and $588.2 million as of December 31, 2018. Our depreciation expense was $22.5 million for the first three months of 2019 and $21.8 million for the first three months of 2018. We compute depreciation of our property and equipment for financial reporting purposes based on the cost of each asset, reduced by its estimated salvage value, using the straight-line method over its estimated useful life. We determine and periodically evaluate our estimate of the projected salvage values and useful lives primarily by considering the market for used equipment, prior useful lives and changes in technology. We have not changed our policy regarding salvage values as a percentage of initial cost or useful lives of tractors and trailers within the last ten years. We believe that our policies and past estimates have been reasonable. Actual results could differ from these estimates. A 5% decrease in estimated salvage values would have decreased our net property and equipment as of March 31, 2019 by approximately $12.5 million, or 2.2%.
Impairment of Assets.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets were considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell.
Insurance and Claims.
We self-insure, in part, for losses relating to workers’ compensation, auto liability, general liability, cargo and property damage claims, along with employees’ health insurance with varying risk retention levels. We maintain insurance coverage for per-incident and total losses in excess of these risk retention levels in amounts we consider adequate based upon historical experience and our ongoing review. However, we could suffer a series of losses within our self-insured retention limits or losses over our policy limits, which could negatively affect our financial condition and operating results. We are responsible for the first $1.0 million on each auto liability claim and for the first $750,000 on each workers’ compensation claim. We have $14.6 million in standby letters of credit to guarantee settlement of claims under agreements with our insurance carriers and regulatory authorities. The insurance and claims accruals in our consolidated condensed balance sheets were $29.4 million as of March 31, 2019 and $28.1 million as of December 31, 2018. We reserve currently for the estimated cost of the uninsured portion of pending claims. We periodically evaluate and adjust these reserves based on our evaluation of the nature and severity of outstanding individual claims and our estimate of future claims development based on historical development. Actual results could differ from these current estimates. In addition, to the extent that claims are litigated and not settled, jury awards are difficult to predict.
Share-based Payment Arrangement Compensation.
We have granted stock options to certain employees and non-employee directors. We recognize compensation expense for all stock options net of an estimated forfeiture rate and only record compensation expense for those shares expected to vest on a straight-line basis over the requisite service period (normally the vesting period). Determining the appropriate fair value model and calculating the fair value of stock options require the input of highly subjective assumptions, including the expected life of the stock options and stock price volatility. We use the Black-Scholes model to value our stock option awards. We believe that future volatility will not materially differ from our historical volatility. Thus, we use the historical volatility of our common stock over the expected life of the award. The assumptions used in calculating the fair value of stock options represent our best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and we use different assumptions, stock option compensation expense could be materially different in the future.
We have also granted performance unit awards to certain employees which are subject to vesting requirements over a five-year period, primarily based on our earnings growth. The fair value of each performance unit is based on the closing market price on the date of grant. We recognize compensation expense for these awards based on the estimated number of units probable of achieving the performance and service vesting requirements of the awards, net of an estimated forfeiture rate.