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MRTN > SEC Filings for MRTN > Form 10-K on 14-Mar-2013All Recent SEC Filings

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Form 10-K for MARTEN TRANSPORT LTD


14-Mar-2013

Annual Report


ITEM 7. 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 financial statements and the related notes appearing 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 under the heading "Risk Factors" beginning on page 7. We do not assume, and specifically disclaim, any obligation to update any forward-looking statement contained in this report.

Overview

The primary source of our operating revenue is truckload revenue, which we generate by transporting long-haul and regional freight for our customers and report within our Truckload segment. Generally, we are paid by the mile for our services. We also derive truckload revenue from fuel surcharges, loading and unloading activities, equipment detention and other ancillary services. The main factors that affect our truckload 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 revenue, net of fuel surcharges, per tractor per week. We also analyze our average truckload revenue, net of fuel surcharges, per total mile, non-revenue miles percentage, the miles per tractor we generate, our accessorial revenue and our other sources of operating revenue.

Our operating revenue also includes revenue reported within our Logistics segment, which consists of revenue from our internal brokerage and intermodal operations, and through our 45% interest in MWL, a third-party provider of logistics services to the transportation industry. Brokerage services involve arranging for another company to transport freight for our customers while we retain the billing, collection and customer management responsibilities. Intermodal services involve the transport of our trailers on railroad flatcars for a portion of a trip, with the balance of the trip using our tractors or, to a lesser extent, contracted carriers. The main factors that affect our logistics revenue are the rate per mile and other charges we receive from our customers.

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 and specific customer demand.

Our operating revenue increased $34.8 million, or 5.8%, in 2012. Our operating revenue, net of fuel surcharges, increased $26.7 million, or 5.4%, compared with 2011. Truckload segment revenue, net of fuel surcharges, increased 5.8% primarily due to an increase in our average truckload revenue, net of fuel surcharges, per tractor per week of 5.6%. Fuel surcharge revenue increased by $8.1 million, or 7.2%. The changes in our operating statistics are primarily the result of the continued growth of our regional temperature-controlled operations, which we have increased from 4.6% at the end of 2007 to 73.7% of our truckload fleet as of December 31, 2012. By focusing on shorter lengths of haul in certain defined areas, we are addressing customer trends toward regional distribution to lower their transportation expense, furthering our own objectives of reducing fuel consumption per load, and matching some of our drivers' desires to stay closer to home. Logistics segment revenue, net of intermodal fuel surcharges, increased 4.6% compared with 2011. The increase in logistics revenue primarily resulted from volume growth in each of our internal brokerage and intermodal services. Logistics revenue represented 24.3% of our operating revenue in 2012 compared to 24.5% in 2011.


Our profitability on the expense side is impacted by 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 total 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 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. 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 fluctuated dramatically 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 installed auxiliary power units in our tractors to provide climate control and electrical power for our drivers without idling the tractor engine. For our Logistics segment, our profitability on the expense side is impacted by the percentage of logistics revenue we pay to providers for the transportation services we arrange.

Our operating expenses as a percentage of operating revenue, or "operating ratio," improved to 92.8% in 2012 from 92.9% in 2011. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharge revenue, improved to 91.1% for 2012 from 91.2% for 2011. Our net income increased to $27.3 million in 2012 from $24.3 million in 2011.

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At December 31, 2012, we had approximately $3.5 million of cash and cash equivalents, $2.7 million of long-term debt outstanding and $331.9 million in stockholders' equity. In 2012, net cash flows provided by operating activities of $85.5 million and cash and cash equivalents of $17.3 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $75.1 million, to partially construct and acquire regional operating facilities in the amount of $10.9 million, and to pay cash dividends of $18.7 million. We estimate that capital expenditures, net of proceeds from dispositions, will be approximately $65 million for 2013. In 2012, we paid cash dividends totaling $18.7 million which consisted of quarterly dividends of $0.02 per share of common stock in March and $0.025 per share in May, September and December, along with a special dividend of $0.75 per share in December. 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.

We have been transforming our business strategy to a multifaceted set of transportation service solutions, primarily regional temperature-controlled operations along with intermodal and brokerage services, while developing a diverse customer base that gains value from and expands each of these operating units. We believe that we are well-positioned regardless of the economic environment with this transformation of our services combined with our competitive position, cost control emphasis, modern fleet and strong balance sheet.


This Management's Discussion and Analysis of Financial Condition and Results of Operations includes discussions of operating, truckload and logistics revenue, and 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, operating revenue, operating expenses divided by operating revenue, and fuel and fuel taxes.

Results of Operations

The following table sets forth for the years indicated certain operating statistics regarding our revenue and operations:

                                                  2012            2011            2010
Truckload Segment:
Total Truckload revenue (in thousands)         $   483,323     $   455,847     $   392,764
Average truckload revenue, net of fuel
surcharges, per tractor per week(1)            $     3,339     $     3,162     $     2,968
Average tractors(1)                                  2,167           2,170           2,105
Average miles per trip                                 624             626             655
Total miles - company-employed drivers (in
thousands)                                         215,742         202,836         193,342
Total miles - independent contractors (in
thousands)                                           4,583           6,841          13,776

Logistics Segment:
Total Logistics revenue (in thousands)         $   155,133     $   147,832     $   124,156
Brokerage:
Marten Transport
Revenue (in thousands)                         $    53,161     $    48,354     $    41,219
Loads                                               32,533          25,412          21,896
MWL
Revenue (in thousands)                         $    30,648     $    34,463     $    35,247
Loads                                               16,120          17,194          18,704
Intermodal:
Revenue (in thousands)                         $    71,324     $    65,015     $    47,690
Loads                                               27,488          24,302          20,150
Average tractors                                        63              75              67

(1) Includes tractors driven by both company-employed drivers and independent contractors. Independent contractors provided 36, 48 and 86 tractors as of December 31, 2012, 2011 and 2010, respectively.


Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011

The following table sets forth for the years indicated our operating revenue,
operating income and operating ratio by segment, along with the change for each
component:

                                                                       Dollar            Percentage
                                                                       Change              Change
(Dollars in thousands)                2012            2011          2012 vs. 2011       2012 vs. 2011
Operating revenue:
Truckload revenue, net of fuel
surcharge revenue                  $   378,383     $   357,787     $        20,596                 5.8 %
Truckload fuel surcharge revenue       104,940          98,060               6,880                 7.0
Total Truckload revenue                483,323         455,847              27,476                 6.0

Logistics revenue, net of
intermodal fuel surcharge
revenue(1)                             138,960         132,890               6,070                 4.6
Intermodal fuel surcharge
revenue                                 16,173          14,942               1,231                 8.2
Total Logistics revenue                155,133         147,832               7,301                 4.9

Total operating revenue            $   638,456     $   603,679     $        34,777                 5.8 %

Operating income:
Truckload                          $    36,805     $    35,298     $         1,507                 4.3 %
Logistics                                9,048           7,732               1,316                17.0
Total operating income             $    45,853     $    43,030     $         2,823                 6.6 %

Operating ratio(2):
Truckload                                 92.4 %          92.3 %                                   0.1 %
Logistics                                 94.2            94.8                                    (0.6 )
Consolidated operating ratio              92.8 %          92.9 %                                  (0.1 )%

(1) Logistics revenue is net of $9.7 million and $9.0 million of inter-segment revenue in 2012 and 2011, respectively, for loads transported by our tractors and arranged by MWL that have been eliminated in consolidation.

(2) Represents operating expenses as a percentage of operating revenue.

Truckload segment depreciation expense was $56.7 million and $54.4 million, and Logistics segment depreciation expense was $4.2 million and $3.1 million, in 2012 and 2011, respectively.

Our operating revenue increased $34.8 million, or 5.8%, to $638.5 million in 2012 from $603.7 million in 2011. Our operating revenue, net of fuel surcharges, increased $26.7 million, or 5.4%, to $517.3 million in 2012 from $490.7 million in 2011. The increase in operating revenue, net of fuel surcharges, was due to an increase in truckload revenue, net of fuel surcharges, along with growth in logistics revenue. Fuel surcharge revenue increased to $121.1 million in 2012 from $113.0 million in 2011.


Truckload segment revenue increased $27.5 million, or 6.0%, to $483.3 million in 2012 from $455.8 million in 2011. Truckload segment revenue, net of fuel surcharges, increased 5.8% primarily due to an increase in our average truckload revenue, net of fuel surcharges, per tractor per week of 5.6%. The changes in our operating statistics are primarily the result of the continued growth of our regional temperature-controlled operations, which we have increased to 73.7% of our truckload fleet as of December 31, 2012 from 64.7% as of December 31, 2011. By focusing on shorter lengths of haul in certain defined areas, we are addressing customer trends toward regional distribution to lower their transportation expense, furthering our own objectives of reducing fuel consumption per load, and matching some of our drivers' desires to stay closer to home. The operating ratio for our Truckload segment in 2012 was consistent with 2011.

Logistics segment revenue increased $7.3 million, or 4.9%, to $155.1 million in 2012 from $147.8 million in 2011. Logistics segment revenue, net of intermodal fuel surcharges, increased 4.6%. The increase in logistics revenue resulted from continued volume growth in each of our internal brokerage and intermodal services. The improvement in the operating ratio for our Logistics segment in 2012 was primarily due to a decrease in the payments to carriers for transportation services which we arranged as a percentage of our brokerage revenue.

The following table sets forth for the years indicated the dollar and percentage increase or decrease of the items in our consolidated statements of operations, and those items as a percentage of operating revenue:

                                       Dollar            Percentage               Percentage of
                                       Change              Change               Operating Revenue
(Dollars in thousands)              2012 vs. 2011       2012 vs. 2011          2012            2011

Operating revenue                  $        34,777                 5.8 %          100.0 %         100.0 %
Operating expenses (income):
Salaries, wages and benefits                15,596                10.6             25.6            24.5
Purchased transportation                     3,937                 3.3             19.5            19.9
Fuel and fuel taxes                          8,001                 5.1             25.6            25.8
Supplies and maintenance                      (392 )              (1.0 )            6.3             6.7
Depreciation                                 3,373                 5.9              9.5             9.5
Operating taxes and licenses                   368                 5.8              1.1             1.1
Insurance and claims                         2,548                14.0              3.2             3.0
Communications and utilities                   334                 7.3              0.8             0.8
Gain on disposition of revenue
equipment                                   (1,502 )             (39.5 )           (0.8 )          (0.6 )
Other                                         (309 )              (2.2 )            2.1             2.3
Total operating expenses                    31,954                 5.7             92.8            92.9
Operating income                             2,823                 6.6              7.2             7.1
Net interest income                            (24 )            (100.0 )              -               -
Income before income taxes                   2,847                 6.6              7.2             7.1
Less: Income before income taxes
attributable to noncontrolling
interest                                      (310 )             (38.4 )            0.1             0.1
Income before income taxes
attributable to Marten
Transport, Ltd.                              3,157                 7.5              7.1             7.0
Provision for income taxes                     175                 1.0              2.8             3.0
Net income                         $         2,982                12.3 %            4.3 %           4.0 %


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 ratio of company drivers to independent contractors, our efficiency, our experience with employees' health insurance claims, changes in health care premiums and other factors. The increase in salaries, wages and benefits resulted primarily from a 6.4% increase in the total miles driven by company drivers, an additional $1.5 million of detention pay due to a change in our policy to compensate company drivers when they are detained at pick up or delivery and additional amounts paid to company drivers due to changes in our policies for safety and productivity bonuses and holiday pay. Additionally, employees' health insurance expense increased by $2.0 million due to an increase in our self-insured medical claims.

Purchased transportation consists of payments to independent contractor providers of revenue equipment and to carriers for transportation services we arrange in connection with brokerage and intermodal activities. This category will vary depending upon the ratio of company drivers versus independent contractors, the amount of fuel surcharges passed through to independent contractors and the amount and rates, including fuel surcharges, we pay to third-party railroad and motor carriers. Purchased transportation expense increased $3.9 million in total, or 3.3%, in 2012 from 2011. Payments to carriers for transportation services we arranged in our brokerage and intermodal operations increased $6.8 million to $117.6 million in 2012 from $110.8 million in 2011. The portion of purchased transportation expense related to our independent contractors, including fuel surcharges, decreased $2.9 million in 2012, primarily due to a decrease in the number of independent contractor-owned tractors in our fleet. We expect that purchased transportation expense will increase as we continue to grow our Logistics segment.

Fuel and fuel taxes increased by $8.0 million in 2012 from 2011. Net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads) increased $910,000, or 1.6%, to $56.3 million in 2012 from $55.3 million in 2011. Fuel surcharges passed through to independent contractors, outside drayage carriers and railroads were $13.8 million in 2012 and $12.8 million in 2011. 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. The increase in net fuel expense was primarily due to an increase in the DOE national average cost of fuel to $3.97 per gallon in 2012 from $3.83 per gallon in 2011 and an increase in total miles driven. The cost control measures stated above helped to offset these factors. Net fuel expense represented 13.0% of truckload and intermodal revenue, net of fuel surcharges, in 2012, compared with 13.6% in 2011.

Supplies and maintenance consist of repairs, maintenance, tires, parts, oil, and engine fluids, along with load-specific expenses including loading/unloading, tolls, pallets and trailer hostling. Our supplies and maintenance expense decreased $392,000, or 1.0%, from 2011 while our average fleet size was relatively consistent. We experienced higher tire and toll costs in 2012; however, these increased costs were more than offset by lower repair costs at both internal and external facilities.

Depreciation relates to owned tractors, trailers, auxiliary power units, communication units, terminal facilities and other assets. The increase in depreciation was primarily due to a continued increase in the cost of revenue equipment and an increase in the relative percentage of company-owned tractors to independent contractor-owned tractors in 2012. We expect our annual cost of tractor and trailer ownership will increase in future periods as a result of higher prices of new equipment, which will result in greater depreciation over the useful life.


Insurance and claims consist of the costs of insurance premiums and the 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 $2.5 million increase in insurance and claims in 2012 was primarily due to increases in the cost of physical damage claims related to our tractor and trailers and in the cost of workers' compensation accident claims. Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods depending on the frequency, severity and timing of claims and to adverse financial results if we incur large or numerous losses.

Gain on disposition of revenue equipment increased to $5.3 million in 2012 from $3.8 million in 2011 primarily due to an increase in the market value for used revenue equipment, along with an increase in the number of planned tractor dispositions. Future gains or losses on disposition 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 expenses as a percentage of operating revenue, or "operating ratio," improved to 92.8% in 2012 from 92.9% in 2011. The operating ratio for our Truckload segment was 92.4% and 92.3% in 2012 and 2011, respectively. The operating ratio for our Logistics segment was 94.2% and 94.8% in 2012 and 2011, respectively. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharge revenue, improved to 91.1% for 2012 from 91.2% for 2011.

Our effective income tax rate decreased to 39.9% for 2012 from 42.5% for 2011, primarily due to a decrease to our deferred income tax liability as a result of a change in income apportionment for several states.

As a result of the factors described above, net income increased to $27.3 million in 2012 from $24.3 million in 2011. Net earnings per diluted share increased to $1.23 in 2012 from $1.10 in 2011.


Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010

The following table sets forth for the years indicated our operating revenue,
operating income and operating ratio by segment, along with the change for each
component:

                                                                       Dollar            Percentage
                                                                       Change              Change
(Dollars in thousands)                2011            2010          2011 vs. 2010       2011 vs. 2010
Operating revenue:
Truckload revenue, net of fuel
surcharge revenue                  $   357,787     $   325,791     $        31,996                 9.8 %
Truckload fuel surcharge revenue        98,060          66,973              31,087                46.4
Total Truckload revenue                455,847         392,764              63,083                16.1

Logistics revenue, net of
intermodal fuel surcharge
revenue(1)                             132,890         115,223              17,667                15.3
Intermodal fuel surcharge
revenue                                 14,942           8,933               6,009                67.3
Total Logistics revenue                147,832         124,156              23,676                19.1

Total operating revenue            $   603,679     $   516,920     $        86,759                16.8 %

Operating income:
Truckload                          $    35,298     $    28,680     $         6,618                23.1 %
Logistics                                7,732           6,609               1,123                17.0
Total operating income             $    43,030     $    35,289     $         7,741                21.9 %

Operating ratio(2):
Truckload                                 92.3 %          92.7 %                                  (0.4 )%
Logistics                                 94.8            94.7                                     0.1
Consolidated operating ratio              92.9 %          93.2 %                                  (0.3 )%

(1) Logistics revenue is net of $9.0 million and $9.1 million of inter-segment revenue in 2011 and 2010, respectively, for loads transported by our tractors and arranged by MWL that have been eliminated in consolidation.

(2) Represents operating expenses as a percentage of operating revenue.

Truckload segment depreciation expense was $54.4 million and $49.0 million, and Logistics segment depreciation expense was $3.1 million and $2.9 million, in 2011 and 2010, respectively.

Our operating revenue increased $86.8 million, or 16.8%, to $603.7 million in . . .

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