See notes to condensed consolidated financial statements.
All prior period share and per share data has been retroactively adjusted to reflect the stock split effective March 29, 2022.
See notes to condensed consolidated financial statements.
All prior period share and per share data has been retroactively adjusted to reflect the stock split effective March 29, 2022.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
All prior period share and per share data has been retroactively adjusted to reflect the stock split effective March 29, 2022.
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2022
NOTE A: BASIS OF PRESENTATION
In accordance with generally accepted accounting principles (“GAAP”) and applicable rules of the Securities and Exchange Commission, the information reported in this Quarterly Report on Form 10-Q for P.A.M. Transportation Services, Inc. and its legally distinct subsidiaries, unless otherwise indicated, is presented on a consolidated basis. Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “P.A.M.,” the “Company,” “we,” “our,” or “us” mean P.A.M. Transportation Services, Inc. and its consolidated subsidiaries.
The consolidated financial results for the three and six months ended June 30, 2022, include the results of our newly formed subsidiaries, Met Express, Inc. and Costar Equipment, Inc., from June 14, 2022, the date of the acquisition of substantially all of the assets and certain liabilities of Metropolitan Trucking, Inc. and its related entities, through June 30, 2022. All material intercompany items and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three and six-month periods ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and the footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2021.
On March 8, 2022, our Board of Directors declared a 2-for-1 forward stock split of the shares of our common stock, which was effected in the form of a 100% stock dividend. The stock split entitled each shareholder of record at the close of business on March 18, 2022, to receive one additional share of common stock for each share of common stock owned as of that date and was paid on March 29, 2022. Upon the completion of the stock split, our outstanding shares increased from approximately 11.1 million shares to approximately 22.2 million shares. All share and per share amounts in this quarterly report on Form 10-Q give effect to the stock split and have been adjusted retrospectively, where applicable, for all periods presented.
NOTE B: RECENT ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, (“ASU 2020-04”), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. ASU 2020-04 is effective as of March 12, 2020, through December 31, 2022. The Company has evaluated the provisions of this standard and determined that it is applicable to our line of credit and investment margin account. The London Interbank Offered Rate (“LIBOR”) is the basis for interest charges on outstanding borrowings for our line of credit. During the year 2021, the index for interest charges on the Company’s investment margin accounts was transitioned to the Secured Overnight Financing Rate (“SOFR”). The new index rate did not vary materially from LIBOR at the time of transition. The scheduled discontinuation of LIBOR is not expected to materially alter any provisions of either of these debt instruments, except for the identification of a replacement reference rate for our line of credit. The Company has evaluated the new guidance and does not expect it to have a material impact on its financial condition, results of operations, or cash flows.
NOTE C: REVENUE RECOGNITION
The Company has a single performance obligation, to transport our customer’s freight from a specified origin to a specified destination. The Company has the discretion to choose to self-transport or to arrange for alternate transportation to fulfill the performance obligation. Where the Company decides to self-transport the freight, the Company classifies the service as truckload services, and where the Company arranges for alternate transportation of the freight, the Company classifies the service as brokerage and logistics services. In either case, the Company is paid a rate to transport freight from its origin location to a specified destination. Because the primary factors influencing revenue recognition, including performance obligation, customer base, and timing of revenue recognition, are the same for both of its service categories, the Company utilizes the same revenue recognition method throughout its operations.
Company revenue is generated from freight transportation services performed utilizing heavy truck trailer combinations. While various ownership arrangements may exist for the equipment utilized to perform these services, including Company owned or leased, owner-operator owned, and third-party carriers, revenue is generated from the same base of customers. Contracts with these customers establish rates for services performed, which are predominantly rates that will be paid to pick up, transport and drop off freight at various locations. In addition to transportation, revenue is also awarded for various accessorial services performed in conjunction with the base transportation service. The Company also has other revenue categories that are not discussed in this note or broken out in our condensed consolidated statements of operations due to their immaterial amounts.
In fulfilling the Company’s obligation to transport freight from a specified origin to a specified destination, control of freight is transferred to us at the point it has been loaded into the driver’s trailer, the doors are sealed and the driver has signed a bill of lading, which is the basic transportation agreement that establishes the nature, quantity and condition of the freight loaded, the responsibility for invoice payment and the pickup and delivery locations. Our revenue is generated, and our customer receives benefit, as the freight progresses towards delivery locations. In the event our customer cancels the shipment at some point prior to the final delivery location and re-consigns the shipment to an alternate delivery location, we are entitled to receive payment for services performed for the partial shipment. Shipments are generally conducted over a relatively short time span, generally one to three days; however, freight is sometimes stored temporarily in our trailer at one of our drop yard locations or at a location designated by a customer. Our revenue is categorized as either Freight Revenue or Fuel Surcharge Revenue, and both are earned by performing the same freight transportation services, as discussed further below.
Freight Revenue – revenue generated by the performance of the freight transportation service, including any accessorial service, provided to customers.
Fuel Surcharge Revenue – revenue designed to adjust freight revenue rates to an agreed-upon base cost for diesel fuel. Diesel fuel prices can fluctuate widely during the term of a contract with a customer. At the point that freight revenue rates are negotiated with customers, a sliding scale is agreed upon that approximately adjusts diesel fuel costs to an agreed-upon base amount. In general, as fuel prices increase, revenue from fuel surcharge increases, so that diesel fuel cost is adjusted to the approximate base amount agreed upon.
Revenue is recognized over time as the freight progresses towards its destination and the transportation service obligation is fulfilled. For loads picked up during the reporting period, but delivered in a subsequent reporting period, revenue is allocated to each period based on the transit time in each period as a percentage of total transit time. There are no assets or liabilities recorded in conjunction with revenue recognized, other than accounts receivable and estimated credit losses.
NOTE D: MARKETABLE EQUITY SECURITIES
The Company’s investments in marketable securities consist of equity securities with readily determinable fair values. The cost of securities sold is based on the specific identification method, and interest and dividends on securities are included in non-operating income.
Marketable equity securities are carried at fair value, with gains and losses in fair market value included in the determination of net income. The fair value of marketable equity securities is determined based on quoted market prices in active markets, as described in Note J.
The following table sets forth market value, cost, and unrealized gains on equity securities as of June 30, 2022 and December 31, 2021.
| | June 30, 2022 | | | December 31, 2021 | |
| | (in thousands) | |
Fair market value | | $ | 37,585 | | | $ | 39,424 | |
Cost | | | 29,151 | | | | 29,385 | |
Unrealized gain | | $ | 8,434 | | | $ | 10,039 | |
The following table sets forth the gross unrealized gains and losses on the Company’s marketable securities as of June 30, 2022 and December 31, 2021.
| | June 30, 2022 | | | December 31, 2021 | |
| | (in thousands) | |
Gross unrealized gains | | $ | 10,830 | | | $ | 12,458 | |
Gross unrealized losses | | | 2,396 | | | | 2,419 | |
Net unrealized gain | | $ | 8,434 | | | $ | 10,039 | |
8
The following table shows the Company’s net realized gains during the three and six months ending on June 30, 2022 and 2021, respectively, on certain marketable equity securities.
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | |
Sales proceeds | | $ | - | | | $ | 760 | | | $ | - | | | $ | 1,421 | |
Cost of securities sold | | | - | | | | 418 | | | | - | | | | 540 | |
Realized gain / (loss) | | $ | - | | | $ | 342 | | | $ | - | | | $ | 881 | |
For the quarter ended June 30, 2022, the Company recognized dividends received of approximately $357,000 in non-operating income in its condensed consolidated statements of operations. For the quarter ended June 30, 2021, the Company recognized dividends received of approximately $309,000 in non-operating income in its condensed consolidated statements of operations.
For the six months ended June 30, 2022, the Company recognized dividends received of approximately $666,000 in non-operating income in its condensed consolidated statements of operations. For the six months ended June 30, 2021, the Company recognized dividends received of approximately $660,000 in non-operating income in its condensed consolidated statements of operations.
The Company’s equity securities are periodically used as collateral against any outstanding margin account borrowings. As of June 30, 2022, and December 31, 2021, the Company had outstanding borrowings of approximately $640,000 and $1,214,000, respectively, under its margin account. Margin account borrowings are used for the purchase of marketable equity securities and as a source of short-term liquidity and are included in accrued expenses and other liabilities on our condensed consolidated balance sheets.
Our marketable equity securities portfolio had a net unrealized pre-tax loss in market value of approximately $3,349,000 during the second quarter of 2022, and a net unrealized pre-tax gain in market value of approximately $1,632,000 during the second quarter of 2021, which were reported as non-operating income in its condensed consolidated statements of operations for the respective periods.
NOTE E: STOCK-BASED COMPENSATION
The Company maintains a stock incentive plan (the “Plan”) under which incentive and nonqualified stock options and other stock awards may be granted. Under the Plan, 3,000,000 shares are reserved for the issuance of stock awards to directors, officers, key employees, and others. The stock option exercise price and the restricted stock value under the Plan shall not be less than 85% of the fair market value of the Company’s common stock on the date the award is granted. The fair market value is determined by the closing price of the Company’s common stock, on its primary exchange, on the same date that the option or award is granted.
During February 2022, the Company granted 29,120 shares of common stock to certain key employees. These stock awards had grant date fair values of $38.80 per share, based on the closing price of the Company’s stock on the date of grant, and vest in 25% increments over four years, beginning one year from the anniversary date of the grant.
During May 2022, the Company granted 1,855 shares of common stock to non-employee directors. These stock awards had a grant date fair value of $29.60 per share, based on the closing price of the Company’s stock on the date of grant, and vested immediately.
During June 2022, the Company granted 3,500 shares of common stock to a key employee. This stock award had a grant date fair value of $27.68 per share, based on the closing price of the Company’s stock on the date of grant, and vests in 25% increments over four years, beginning one year from the anniversary date of the grant.
The total grant date fair value of stock vested during the first six months of 2022 was approximately $93,000. The total pre-tax stock-based compensation expense, recognized in salaries, wages and benefits during the first six months of 2022, was approximately $353,000 and includes approximately $55,000 recognized as a result of the grant of shares to certain non-employee directors. The recognition of stock-based compensation expense decreased both diluted and basic earnings per common share by approximately $0.01 during the first six months of 2022. As of June 30, 2022, the Company had stock-based compensation plans with total unvested stock-based compensation expense of approximately $2,776,000, which is being amortized on a straight-line basis over the remaining vesting period. As a result, the Company expects to recognize approximately $362,000 in additional compensation expense related to unvested stock awards during the remainder of 2022 and to recognize approximately $649,000, $641,000, $670,000, $343,000, and $111,000 in additional compensation expense related to unvested stock awards during the years 2023, 2024, 2025, 2026, and 2027, respectively.
9
The total grant date fair value of stock vested during the first six months of 2021 was approximately $80,000. The total pre-tax stock-based compensation expense, recognized in salaries, wages and benefits during the first six months of 2021, was approximately $253,000 and includes approximately $80,000 recognized as a result of the grant of 326 split-adjusted shares to each non-employee director. The recognition of stock-based compensation expense decreased both diluted and basic earnings per common share by approximately $0.03 during the first six months of 2021. As of June 30, 2021, the Company had stock-based compensation plans with total unvested stock-based compensation expense of approximately $2,035,000, which is being amortized on a straight-line basis over the remaining vesting period.
A summary of the status of the Company’s non-vested restricted stock as of June 30, 2022, and changes during the six months ended June 30, 2022, is as follows:
| | Restricted Stock | |
| | Number of Shares | | | Weighted- Average Grant Date Fair Value | |
Non-vested at January 1, 2022 | | | 239,212 | | | $ | 9.25 | |
Granted | | | 34,475 | | | | 37.18 | |
Canceled/forfeited/expired | | | - | | | | - | |
Vested | | | (4,355 | ) | | | 21.27 | |
Non-vested at June 30, 2022 | | | 269,332 | | | $ | 12.63 | |
NOTE F: SEGMENT INFORMATION
The Company follows the guidance provided by ASC Topic 280, Segment Reporting, in its identification of operating segments. The Company has determined that it has a total of two operating segments whose primary operations can be characterized as either Truckload Services or Brokerage and Logistics Services; however, in accordance with the aggregation criteria provided by FASB ASC Topic 280, the Company has determined that the operations of the two operating segments can be aggregated into a single reporting segment, Motor Carrier Operations. Truckload Services revenues and Brokerage and Logistics Services revenues, each before fuel surcharges, were as follows:
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | Amount | | | % | | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Truckload Services revenue | | $ | 134,698 | | | | 66.4 | | | $ | 98,040 | | | | 67.5 | | | $ | 259,676 | | | | 65.1 | | | $ | 188,398 | | | | 67.2 | |
Brokerage and Logistics Services revenue | | | 68,041 | | | | 33.6 | | | | 47,135 | | | | 32.5 | | | | 139,152 | | | | 34.9 | | | | 91,918 | | | | 32.8 | |
Total revenues | | $ | 202,739 | | | | 100.0 | | | $ | 145,175 | | | | 100.0 | | | $ | 398,828 | | | | 100.0 | | | $ | 280,316 | | | | 100.0 | |
These segment results include of the results of the truckload services and brokerage operations acquired from Metropolitan Trucking, Inc., and related subsidiaries in the business combination discussed in Note P to the condensed consolidated financial statements.
NOTE G: TREASURY STOCK
The Company’s stock repurchase program has been extended and expanded several times, most recently in November 2021, when the Board of Directors reauthorized 500,000 shares of common stock for repurchase under the initial September 2011 authorization. As of June 30, 2022, there remain 458,390 shares of common stock authorized for repurchase under this plan.
During the first quarter of 2022, prior to the stock split, we retired 12,268,395 shares of our treasury stock. Upon retirement of the treasury shares, we allocated the excess of the repurchase price over the par value of shares acquired to both retained earnings and paid-in capital. The portion allocated to paid-in capital was determined by applying the average paid-in capital per share, and the remaining portion was recorded to retained earnings. There was no effect on the Company’s overall equity position due to the retirement of treasury shares.
The Company accounts for treasury stock using the cost method. As of June 30, 2022, there were no shares held in the treasury.
10
NOTE H: EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by adjusting the weighted average number of shares of common stock outstanding by common stock equivalents attributable to dilutive restricted stock. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share. The computations of basic and diluted earnings per share were as follows:
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands, except per share data) | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 24,182 | | | $ | 15,317 | | | $ | 48,124 | | | $ | 27,266 | |
| | | | | | | | | | | | | | | | |
Basic weighted average common shares outstanding | | | 22,268 | | | | 22,905 | | | | 22,283 | | | | 22,903 | |
Dilutive effect of common stock equivalents | | | 177 | | | | 115 | | | | 191 | | | | 107 | |
Diluted weighted average common shares outstanding | | | 22,445 | | | | 23,020 | | | | 22,474 | | | | 23,010 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 1.09 | | | $ | 0.67 | | | $ | 2.16 | | | $ | 1.19 | |
Diluted earnings per share | | $ | 1.08 | | | $ | 0.67 | | | $ | 2.14 | | | $ | 1.18 | |
NOTE I: INCOME TAXES
The Company and its subsidiaries are subject to U.S. and Canadian federal income tax laws as well as the income tax laws of multiple state jurisdictions. The major tax jurisdictions in which the Company operates generally provide for a deficiency assessment statute of limitations period of three years, and as a result, the Company’s tax years 2018 and forward remain open to examination in those jurisdictions.
In determining whether a tax asset valuation allowance is necessary, management, in accordance with the provisions of ASC 740-10-30, Accounting for Income Taxes, weighs all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is necessary. If negative conditions exist which indicate a valuation allowance might be necessary, consideration is then given to what effect the future reversals of existing taxable temporary differences and the availability of tax strategies might have on future taxable income to determine the amount, if any, of the required valuation allowance. As of June 30, 2022, management determined that the future reversals of existing taxable temporary differences and available tax strategies would generate sufficient future taxable income to realize its tax assets and therefore a valuation allowance was not necessary.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the position will be sustained on examination by taxing authorities, based on the technical merits of the position. As of June 30, 2022, an adjustment to the Company’s condensed consolidated financial statements for uncertain tax positions has not been required as management believes that the Company’s tax positions taken in income tax returns filed or to be filed are supported by clear and unambiguous income tax laws. The Company recognizes interest and penalties related to uncertain income tax positions, if any, in income tax expense. During the six months ended June 30, 2022 and 2021, the Company has not recognized or accrued any interest or penalties related to uncertain income tax positions.
The Company’s effective income tax rates were 24.1% and 26.3% for the six months ended June 30, 2022 and 2021, respectively. Our effective tax rate for the six months ended June 30, 2022 differs from amounts computed by applying the United States federal statutory rates to pre-tax income primarily due to state income taxes and the tax benefits related to stock compensation.
11
NOTE J: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, marketable equity securities, accounts receivable, trade accounts payable, and borrowings.
The Company follows the guidance for financial assets and liabilities measured on a recurring basis. This guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
| Level 1: | | Quoted market prices in active markets for identical assets or liabilities. |
| | | |
| Level 2: | | Inputs other than Level 1 inputs that are either directly or indirectly observable such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable; or other inputs not directly observable, but derived principally from, or corroborated by, observable market data. |
| | | |
| Level 3: | | Unobservable inputs that are supported by little or no market activity. |
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
At June 30, 2022, the following items are measured at fair value on a recurring basis:
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Marketable equity securities | | $ | 37,585 | | | $ | 37,585 | | | | - | | | | - | |
The Company’s investments in marketable securities are recorded at fair value based on quoted market prices. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities.
The carrying amount for the line of credit approximates fair value because the line of credit interest rate is adjusted frequently.
For long-term debt other than the lines of credit, the fair values are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying value and estimated fair value of this other long-term debt at June 30, 2022 was as follows:
| | Carrying Value | | | Estimated Fair Value | |
| | (in thousands) | |
| | | | | | | | |
Long-term debt | | $ | 249,272 | | | $ | 245,669 | |
The Company has not elected the fair value option for any of its financial instruments.
NOTE K: NOTES PAYABLE
During the first six months of 2022, the Company’s subsidiaries entered into installment obligations totaling approximately $53.8 million for the purpose of purchasing revenue equipment. These obligations are payable in monthly installments and are recorded in long term debt and current maturities on the condensed consolidated balance sheets. The terms of these obligations vary from 36 months for trucks to 120 months for real estate. In addition, during June 2022 the Company’s subsidiaries assumed approximately $12.3 million of installment obligations as part of a business acquisition. The terms of these obligations vary from 1 month to 36 months for trucks acquired and from 24 months to 34 months for trailers acquired.
NOTE L: LITIGATION
We are involved in certain claims and pending litigation arising from the ordinary conduct of business. We also provide accruals for claims within our self-insured retention amounts. On September 1, 2019, we elected to become self-insured for certain layers of auto liability claims in excess of $1.0 million for which we previously maintained auto liability insurance coverage. On September 1, 2020, we elected to become self-insured for certain layers of auto liability claims in excess of $2.0 million. We currently specifically reserve for claims that are expected to exceed $2.0 million when fully developed, based on the facts and circumstances of those claims.
However, if we experience claims that are not covered by our insurance or that exceed our estimated claim reserve, it could increase the volatility of our earnings and have a materially adverse effect on our financial condition, results of operations or cash flows.
We are a defendant in a lawsuit which was filed on August 6, 2021, in the United States District Court for the Western District of Arkansas. The plaintiff is a former driver and is seeking class certification. The complaint alleges failure to pay minimum wage under the Fair Labor Standards Act and the Arkansas Minimum Wage Act, violations of the Electronic Funds Transfer Act (EFTA), violations of the Arkansas Wage Payment Law (discharge pay and unlawful, usurious advance fees), violations of the Arkansas Common Law, and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). Should this lawsuit be certified as a class action, to include similarly situated drivers as the plaintiff, the class will seek actual and liquated damages to include court costs and legal fees associated with the lawsuit. The class, if certified, will include any company driver employed from January 1, 2020 through the present and ongoing. A settlement agreement has been reached and is pending court approval. Management has determined that any losses under this claim will not be covered by existing insurance policies. The settlement has been fully reserved as of June 30, 2022.
NOTE M: LEASES
The Company currently leases shop, office and parking spaces in various locations in the United States and Mexico. The initial term for the majority of these leases is one year or less, with an option for early cancellation and an option to renew for subsequent one- month periods. These leases can be terminated by either party by providing notice to the other party of the intent to cancel or to not extend. Relatively short lease durations for these properties are intended to provide flexibility to the Company as changing operational needs and shifting opportunities often result in cancellation or non-renewal of these leases by the Company or the lessor.
The initial lease term for certain shop and office locations is for periods ranging from one to five years with early cancellation options. The Company prefers that leases include early cancellation provisions to prevent becoming locked into long-term leases that become operationally unjustified and to allow the flexibility to pursue more cost-effective options for similar properties if they become available. These leases often include the option to extend for additional periods, which may or may not be exercised. Based on historical experience, the Company does not always extend these leases, sometimes exercises the option to cancel leases early and sometimes lessors choose to cancel leases or not extend.
The Company leases trucks to owner-operators under our lease-to-own program. We also lease dock space to a related party at our Laredo, Texas terminal.
Right-of-Use Leases
The Company is party to operating leases which include initial terms ranging from three to five years and which do not include an option for early cancellation. In accordance with the provisions of ASC Topic 842, these leases resulted in the recognition of right-of-use assets and corresponding operating lease liabilities, respectively, valued at $0.7 million as of June 30, 2022. These assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date, using the Company’s incremental borrowing rate as of the respective dates of lease inception, as the rate implicit in each lease is not readily determinable. The right-of-use assets are recorded in other assets, and the lease liability is recorded in accrued expenses and other liabilities and in other long-term liabilities on our condensed consolidated balance sheet. Lease expense is recorded on a straight-line basis over the lease term and is recorded in rent and purchased transportation in our condensed consolidated statements of operations. While these lease agreements may contain provisions to extend after the initial term for an additional five years, the Company is not reasonably certain these extension options will be exercised. Therefore, potential lease payments that might occur under this extension period are not included in amounts recorded in our condensed consolidated balance sheets as of June 30, 2022.
Scheduled amounts and timing of cash flows arising from future right-of-use operating lease payments at June 30, 2022, are:
Maturity of Lease Liabilities | | (in thousands) | |
2022 (remaining) | | $ | 215 | |
2023 | | | 340 | |
2024 | | | 114 | |
2025 and thereafter | | | - | |
Total undiscounted operating lease payments | | $ | 669 | |
Less: Imputed interest | | | (20 | ) |
Present value of operating lease liabilities | | $ | 649 | |
| | | | |
Balance Sheet Classification | | | | |
Right-of-use assets (recorded in other non-current assets) | | $ | 649 | |
| | | | |
Current lease liabilities (recorded in other current liabilities) | | $ | 384 | |
Long-term lease liabilities (recorded in other long-term liabilities) | | | 265 | |
Total operating lease liabilities | | $ | 649 | |
| | | | |
Other Information | | | | |
Weighted-average remaining lease term for operating leases (in years) | | 1.72 | |
Weighted-average discount rate for operating leases | | | 3.72 | % |
Cash Flows
No new right-of-use assets were recognized as a non-cash asset addition that resulted from new operating lease liabilities during the three and six months ended June 30, 2022. Cash paid for amounts included in the present value of operating lease liabilities was $0.2 million during the three months ended June 30, 2022 and is included in operating cash flows, within the condensed consolidated statement of cash flows. Cash paid for amounts included in the present value of operating lease liabilities was $0.3 million during the six months ended June 30, 2022 and is included in operating cash flows, within the condensed consolidated statement of cash flows.
Operating Lease Costs
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Long-term | | $ | 153 | | | $ | 144 | | | $ | 304 | | | $ | 286 | |
Short-term | | | 565 | | | | 533 | | | | 1,111 | | | | 1,069 | |
Total | | $ | 718 | | | $ | 677 | | | $ | 1,415 | | | $ | 1,355 | |
Lease Revenue
The Company's operating lease revenue is disclosed in the table below.
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Leased truck revenue (recorded in revenue, before fuel surcharge) | | $ | 2,152 | | | $ | 1,835 | | | $ | 4,291 | | | $ | 3,405 | |
Leased building space revenue (recorded in non-operating income) | | | 99 | | | | 169 | | | | 327 | | | | 337 | |
Total lease revenue | | $ | 2,251 | | | $ | 2,004 | | | $ | 4,618 | | | $ | 3,742 | |
The Company leases trucks to owner-operators under operating leases, which generally have a term of up to five years and include options to purchase the truck at the end of the lease. In the event that an independent contractor defaults on their lease, the Company generally leases the truck to another independent contractor.
As of June 30, 2022, the gross carrying value of trucks underlying these leases was $55.9 million and accumulated depreciation was $34.2 million. Depreciation is calculated on a straight-line basis over the estimated useful life of the equipment, down to an estimated salvage value. In most cases, the Company has agreements in place with certain manufacturers whereby salvage values are guaranteed by the manufacturer. In other cases, where salvage values are not guaranteed, estimates of salvage value are based on the expected market values of equipment at the time of disposal. During the quarter ended June 30, 2022, the Company incurred $1.9 million of depreciation expense for these assets.
The Company leases dock space to a related party at our Laredo, Texas terminal and warehouse and office space to an unrelated lessee at a second Laredo, Texas terminal. The dock space and the warehouse and office space leased are depreciated in conjunction with the structures and improvements for the entire Laredo terminals on a straight-line basis over the estimated useful life of the assets. Lease income is recorded as a component of non-operating income in our condensed consolidated statements of operations.
Lease Receivables
Future minimum operating lease payments receivable at June 30, 2022:
| | (in thousands) | |
| | | | |
2022 (remaining) | | $ | 4,141 | |
2023 | | | 6,213 | |
2024 | | | 3,124 | |
2025 | | | 94 | |
2026 and thereafter | | | - | |
Total future minimum lease payments receivable | | $ | 13,572 | |
NOTE N: EFFECT OF COVID-19 PANDEMIC
The rapid spread of COVID-19 resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, increased border and port controls and closures, and shutdowns. These measures and the public health concerns resulting from the outbreak severely disrupted economic and commercial activity. The resulting impact on domestic and global supply chains caused slowdowns and reduced freight demand for transportation companies such as ours. Because we have a significant concentration of customers within the automotive industry, our freight volumes and revenues were significantly affected by the closure of North American automotive manufacturing facilities beginning in late March of 2020. Our automotive customers resumed operations during the second quarter of 2020 and have not been materially disrupted during 2021 or the first six months of 2022. Any future delays or interruptions of automotive production and other consumer activity affecting our customers that could result from any future wave of the virus or other similar outbreaks could further adversely affect our business. In addition, the implementation of measures to protect the health and safety of our employees, customers, vendors and the general public, or any state of federal vaccination mandates, may disrupt our ability to efficiently manage personnel and operations and to recruit and retain driver and non-driver personnel, which could have a material adverse effect on our operating results. Further, negative financial results, an economic downturn or uncertainty, or a tightening of credit markets caused by COVID-19 or other similar outbreaks could have a material adverse effect on our liquidity and our ability to effectively meet our short- and long-term financial obligations.
NOTE O: NONCASH INVESTING AND FINANCING ACTIVITIES
The Company financed approximately $6.6 million in equipment purchases during the first six months of 2022 utilizing noncash financing.
NOTE P: ACQUISITION OF METROPOLITAN TRUCKING
On June 14, 2022, subsidiaries of the Company, Met Express, Inc. and Costar Equipment, Inc. (collectively, the “Buyer”), entered into an Asset Purchase Agreement with Metropolitan Trucking, Inc., and related subsidiaries. Metropolitan Trucking, Inc. is a truckload carrier headquartered in Saddle Brook, New Jersey, providing asset-based dry van truckload transportation services, including local, regional, and dedicated services. The acquisition has been determined to be a business combination.
Pursuant to the Asset Purchase Agreement, the Buyer acquired substantially all the assets and certain specified liabilities of Metropolitan Trucking, Inc., and its related entities (the “Transaction”). The Buyer paid $79.9 million of total consideration, including cash and certain assumed indebtedness of Metropolitan Trucking, Inc., and its related entities. The Transaction closed on June 14, 2022.
Total cash paid of $64.3 million was funded out of the Company’s available cash. The Transaction included the assumption of $12.6 million of indebtedness and $2.9 million of other current liabilities. The Asset Purchase Agreement contains customary representations, warranties, covenants, escrow, and indemnification provisions.
The results of the acquired business have been included in the consolidated financial statements since the date of acquisition and represented 12.6% of consolidated total assets as of June 30, 2022 and represented 2.6% and 1.3% of operating revenue for the three and six months ended June 30, 2022, respectively. Acquisition related expenses of $0.4 million are included in the condensed consolidated statements of operations for the three and six months ended June 30, 2022.
The allocation of the purchase price is detailed in the tables below. The final purchase price allocation remains subject to other purchase accounting adjustments which may be identified, such as the final valuation of intangible assets and working capital adjustments, and therefore may differ materially from that reflected below.
The assets and liabilities associated with the acquisition were recorded at their fair values as of the acquisition date and the amounts are as follows:
| | (in thousands) | |
| | | | |
Trade and other accounts receivable | | $ | 10,821 | |
Other current assets | | | 316 | |
Property and equipment | | | 68,722 | |
Total assets | | | 79,859 | |
Accounts payable | | | (2,915 | ) |
Long-term debt | | | (12,627 | ) |
Total cash paid | | $ | 64,317 | |