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PTSI > SEC Filings for PTSI > Form 10-K on 15-Mar-2013All Recent SEC Filings

Show all filings for PAM TRANSPORTATION SERVICES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for PAM TRANSPORTATION SERVICES INC


15-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Business Overview

The Company's administrative headquarters are in Tontitown, Arkansas. From this location we manage operations conducted through our wholly owned subsidiaries based in various locations around the United States, Mexico, and Canada. The operations of these subsidiaries can generally be classified into either truckload services or brokerage and logistics services. Truckload services include those transportation services in which we utilize company owned trucks or owner-operator owned trucks. Brokerage and logistics services consist of services such as transportation scheduling, routing, mode selection, transloading and other value added services related to the transportation of freight which may or may not involve the usage of company owned or owner-operator owned equipment. Both our truckload operations and our brokerage/logistics operations have similar economic characteristics and are impacted by virtually the same economic factors as discussed elsewhere in this Report. All of the Company's operations are in the motor carrier segment.

For both operations, substantially all of our revenue is generated by transporting freight for customers and is predominantly affected by the rates per mile received from our customers, equipment utilization, and our percentage of non-compensated miles. These aspects of our business are carefully managed and efforts are continuously underway to achieve favorable results. Truckload services revenues, excluding fuel surcharges, represented 91.8%, 93.5% and 85.9% of total revenues, excluding fuel surcharges for the twelve months ended December 31, 2012, 2011 and 2010, respectively.

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The main factors that impact our profitability on the expense side are costs incurred in transporting freight for our customers. Currently, our most challenging costs include fuel, driver recruitment, training, wage and benefit costs, independent broker costs (which we record as purchased transportation), insurance, and maintenance and capital equipment costs.

In discussing our results of operations we use revenue, before fuel surcharge, (and fuel expense, net of surcharge), because management believes that eliminating the impact of this sometimes volatile source of revenue allows a more consistent basis for comparing our results of operations from period to period. During 2012, 2011 and 2010, approximately $82.9 million, $75.1 million and $49.5 million, respectively, of the Company's total revenue was generated from fuel surcharges. We also discuss certain changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the high variable cost nature of certain expenses makes a comparison of changes in expenses as a percentage of revenue more meaningful than absolute dollar changes.

Results of Operations - Truckload Services

The following table sets forth, for truckload services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Fuel costs are shown net of fuel surcharges.

                                                Years Ended December 31,

                                              2012        2011         2010
Operating revenues, before fuel surcharge      100.0 %     100.0 %      100.0 %
Operating expenses:
  Salaries, wages and benefits                  50.7        44.4         44.4
  Fuel expense, net of fuel surcharge           10.4        18.8         19.8
  Rent and purchased transportation              0.3         1.6          2.3
  Depreciation and amortization                 14.0        12.8         11.1
  Operating supplies and expenses               14.3        14.5         12.4
  Operating taxes and licenses                   1.8         1.9          2.0
  Insurance and claims                           5.0         4.9          5.3
  Communications and utilities                   0.8         0.9          1.1
  Other                                          1.9         2.3          2.0
  Loss on sale or disposal of property           0.0         0.0          0.1
Total operating expenses                        99.2       102.1        100.5
Operating income (loss)                          0.8        (2.1 )       (0.5 )
Non-operating income                             1.2         0.6          0.3
Interest expense                                (0.9 )      (0.7 )       (0.8 )
Income (loss) before income taxes                1.1 %      (2.2 )%      (1.0 )%

2012 Compared to 2011

For the year ended December 31, 2012, truckload services revenue, before fuel surcharges, increased 2.9% to $273.4 million as compared to $265.8 million for the year ended December 31, 2011. The increase relates primarily an increase in the average number of miles traveled per unit each work day from 434 miles during 2011 to 449 miles during 2012.

Salaries, wages and benefits increased from 44.4% of revenues, before fuel surcharges, during 2011 to 50.7% of revenues, before fuel surcharges, during 2012. The increase relates primarily to an increase in driver lease expense, which is a component of salaries, wages and benefits. The increase in driver lease expense is the result of an increase in the average number of owner operators under contract from 48 during 2011 to 149 during 2012. The increase in costs in this category, as they relate to the increase in owner operators, are partially offset by a decrease in other expense categories, such as repairs and fuel, which are generally borne by the owner operator. Partially offsetting the increase related to owner operator expenses was a decrease in expenses associated with employee workers' compensation benefits.

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Fuel expense, net of fuel surcharge, decreased from 18.8% of revenues, before fuel surcharges, during 2011 to 10.4% of revenues, before fuel surcharges, during 2012. The decrease relates primarily to a decrease in the average surcharge-adjusted fuel price paid per gallon of diesel fuel and to an increase in the average miles-per-gallon ("mpg") experienced. The average surcharge-adjusted fuel price paid per gallon of diesel fuel decreased from $1.43 during 2011 to $0.91 during 2012 as a result of more favorable fuel surcharge arrangements made with customers and to an increase in the number of owner operators in our fleet. Fuel surcharge collections can fluctuate significantly from period to period as they are generally based on changes in fuel prices from period to period so that during periods of rising fuel prices fuel surcharge collections increase while fuel surcharge collections decrease during periods of falling fuel prices. Fuel surcharge revenue generated from transportation services performed by owner operators is reflected as a reduction in net fuel expense, while fuel surcharges paid to owner operators for their services is reported along with their base rate of pay in the Salaries, wages and benefits category. These categorizations have the effect of reducing our net fuel expense while increasing Salaries, wages and benefits category, as discussed above. The average mpg experienced increased during 2012 as compared to the mpg experienced during 2011 as a result of replacing older trucks with newer trucks, which are more fuel efficient and to the implementation of driver bonus programs which are tied directly to fuel efficiency.

Rent and purchased transportation decreased from 1.6% of revenues, before fuel surcharges, during 2011 to 0.3% of revenues, before fuel surcharges, during 2012. The decrease relates primarily to a decrease in amounts paid for third-party equipment rentals and to third-party transportation service providers as well as a decrease in amounts reserved for excess mileage fees paid to certain equipment manufacturers upon the trade of older trucks for new trucks.

Depreciation and amortization increased from 12.8% of revenues, before fuel surcharges, during 2011 to 14.0% of revenues, before fuel surcharges, during 2012. The increase relates primarily to purchases of new trucks made during 2012 which replaced older trucks within the fleet. These new truck replacements have a significantly higher purchase price than those trucks that are being replaced and are also being depreciated over a shorter period of time as the Company accelerates its truck replacement cycle from every five years to a replacement cycle of every three years. This reduction in replacement cycle, combined with a higher purchase price, results in higher depreciation expense over a shorter period of time. The decrease in the truck replacement cycle time is intended to reduce fuel costs, improve driver and customer satisfaction, and to reduce long-term maintenance costs as well as increase fleet efficiency by reducing maintenance down-time.

Operating supplies and expenses decreased from 14.5% of revenues, before fuel surcharges, during 2011 to 14.3% of revenues, before fuel surcharges, during 2012. The decrease relates primarily to a decrease in amounts paid for equipment maintenance costs during 2012 as compared to amounts paid during 2011 as a result of replacing older equipment with new equipment. Partially offsetting this decrease was an increase in amounts paid for driver training schools during 2012 as compared to amounts paid during 2011. The increase in driver training and recruiting costs are a result of heightened competition for qualified drivers as industry demand has increased and increased regulations have forced some drivers to exit the profession.

Operating taxes and licenses decreased from 1.9% of revenues, before fuel surcharges, during 2011 to 1.8% of revenues, before fuel surcharges, during 2012. The decrease, as a percentage of revenue, resulted from the interaction of expenses with fixed-cost characteristics, such as registration fees, with an increase in revenues for the periods compared. On a dollar basis, operating taxes and licenses, which consists primarily of equipment registration fees, increased from $4.9 million during 2011 to $5.0 million during 2012.

Insurance and claims expense increased from 4.9% of revenues, before fuel surcharges, during 2011 to 5.0% of revenues, before fuel surcharges, during 2012. The increase relates primarily to an increase in auto liability and cargo related claims expenses incurred during 2012 as compared to 2011.

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Other expenses decreased from 2.3% of revenues, before fuel surcharges, during 2011 to 1.9% of revenues, before fuel surcharges, during 2012. The decrease relates primarily to a decrease in amounts expensed for uncollectible revenue, professional services, and for other supplies and expenses.

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, decreased to 99.2% for 2012 from 102.1% for 2011.

Non-operating income increased from 0.6% of revenues, before fuel surcharges, during 2011 to 1.2% of revenues, before fuel surcharges, during 2012. The components of this category consist primarily of dividends earned and gains or losses on the Company's investments in marketable equity securities. The increase relates primarily to an increase in the amount of dividends and capital gains recognized between the periods on the Company's investments in marketable equity securities.

2011 Compared to 2010

For the year ended December 31, 2011, truckload services revenue, before fuel surcharges, increased 9.5% to $265.8 million as compared to $242.8 million for the year ended December 31, 2010. The increase related primarily to an increase in the average rate charged to customers per total mile during 2011 as compared to 2010. During 2011, the average rate charged to customers per total mile increased by $0.10 as compared to the average rate charged during 2010.

Salaries, wages and benefits remained at 44.4% of revenues, before fuel surcharges, for both 2010 and 2011. Using a dollar-based comparison, salaries, wages and benefits increased from $107.9 million during 2010 to $118.0 million during 2011. The dollar-based increase related primarily to the rescission of a pay rate reduction plan, an increase in driver wages, and an increase in driver lease expense. Rescission of the 5% pay rate reduction plan, which had been in effect during the first seven months of 2010 but not at anytime during 2011, had the effect of increasing comparative salaries and wages by 5% following the rescission date in August 2010. Driver wages increased as the number of company driver compensated miles increased from 192.1 million miles during 2010 to 195.1 million miles during 2011. Driver lease expense, which is a component of salaries, wages and benefits, increased as the average number of owner-operators under contract increased from 29 during 2010 to 48 during 2011. The Company also experienced an increase in expenses associated with employee workers compensation benefits.

Fuel expense, net of fuel surcharge, decreased from 19.8% of revenues, before fuel surcharges, during 2010 to 18.8% of revenues, before fuel surcharges, during 2011. The decrease, as a percentage of revenue, related to interaction of higher revenues without a proportional increase in fuel costs as the increase in the average rate charged to customers on a per-mile basis outpaced the per-mile increase in fuel costs. Using a dollar-based comparison, fuel expense increased from $48.1 million during 2010 to $49.9 million during 2011. The dollar-based increase related primarily to an increase in the average surcharge-adjusted price paid per gallon of fuel from $1.35 during 2010 to $1.43 paid per gallon during 2011. The fuel surcharge collections vary from period to period as they are generally based on changes in fuel prices from period to period so that during periods of rising fuel prices fuel surcharge collections increase while fuel surcharge collections decrease during periods of declining fuel prices.

Rent and purchased transportation decreased from 2.3% of revenues, before fuel surcharges, in 2010 to 1.6% of revenues, before fuel surcharges, in 2011. The decrease related primarily to a decrease in amounts paid to third party transportation service providers.

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Depreciation and amortization increased from 11.1% of revenues, before fuel surcharges, in 2010 to 12.8% of revenues, before fuel surcharges, in 2011. The increase related primarily to 2011 revenue equipment acquisitions placed in service during 2011 and to revisions made during 2011 to the estimated useful lives and residual values of our trucks to facilitate the acceleration of our planned truck replacement cycle from five years to three years. Using a dollar-based comparison, depreciation and amortization increased from $26.9 million during 2010 to $34.1 million during 2011 as the revisions generally resulted in higher monthly depreciation expense over a shorter period of time.

Operating supplies and expenses increased from 12.4% of revenues, before fuel surcharges, during 2010 to 14.5% of revenues, before fuel surcharges, during 2011. The increase related primarily to an increase in equipment maintenance and repair costs as the Company extended the life of its existing fleet of trucks and trailers during 2010. Also contributing to the increase was an increase in amounts paid to driver training schools for the periods compared as competition for qualified drivers increased during a period when increased regulations forced some drivers to exit the profession. On a dollar basis, operating supplies and expenses increased from $30.1 million during 2010 to $38.7 million during 2011. The primary components of the increase were an increase in maintenance and repair costs of $6.6 million and an increase in driver recruiting costs of $1.5 million.

Operating taxes and licenses decreased from 2.0% of revenues, before fuel surcharges, during 2010 to 1.9% of revenues, before fuel surcharges, during 2011. The decrease, as a percentage of revenue, resulted from the interaction of expenses with fixed-cost characteristics, such as registration fees, with an increase in revenues for the periods compared. On a dollar basis, operating taxes and licenses, which consists primarily of equipment registration fees, remained constant at $4.9 million during each of the periods compared.

Insurance and claims expense decreased from 5.3% of revenues, before fuel surcharges, during 2010 to 4.9% of revenues, before fuel surcharges, during 2011. The decrease, as a percentage of revenue, related to the interaction of insurance premiums, based on a factor other than revenue, with increased revenues. Insurance premiums based on a mileage basis, such as auto liability premiums, and on a value basis, such as physical damage premiums, decreased as a percentage of revenues as a result of higher revenues for the periods compared. On a dollar basis, insurance and claims expense increased from $12.8 million during 2010 to $13.1 million during 2011. This dollar-based increase related primarily to an increase in amounts reserved for auto liability claims during 2011 as compared to 2010.

Other expenses increased from 2.0% of revenues, before fuel surcharges, during 2010 to 2.3% of revenues, before fuel surcharges, during 2011. The increase related primarily to an increase in building rents, advertising expenses and professional services fees.

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased to 102.1% for 2011 from 100.5% for 2010.

Non-operating income increased from 0.3% of revenues, before fuel surcharges, during 2010 to 0.6% of revenues, before fuel surcharges, during 2011. The components of this category consist primarily of dividends earned and gains or losses on the Company's investments in marketable equity securities. The increase related primarily to an increase in the amount of dividends and capital gains recognized between the periods on the Company's investments in marketable equity securities.

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Results of Operations - Logistics and Brokerage Services

The following table sets forth, for logistics and brokerage services, the
percentage relationship of expense items to operating revenues, before fuel
surcharges, for the periods indicated. Brokerage service operations occur
specifically in certain divisions; however, brokerage operations occur
throughout the Company in similar operations having substantially similar
economic characteristics. Rent and purchased transportation, which includes
costs paid to third party carriers, are shown net of fuel surcharges.

                                                            Years Ended December 31,

                                                        2012          2011          2010
Operating revenues, before fuel surcharge                 100.0 %       100.0 %       100.0 %
Operating expenses:
  Salaries, wages and benefits                              1.8           1.9           4.6
  Fuel expense                                              0.0           0.0           0.0
  Rent and purchased transportation, net of fuel
surcharge                                                  95.2          95.7          93.0
  Depreciation and amortization                             0.0           0.0           0.0
  Operating supplies and expenses                           0.0           0.0           0.0
  Operating taxes and licenses                              0.0           0.0           0.0
  Insurance and claims                                      0.0           0.0           0.1
  Communications and utilities                              0.1           0.2           0.3
  Other                                                     0.2           0.3           0.7
  Gain on sale or disposal of property                      0.0           0.0          (1.2 )
Total operating expenses                                   97.3          98.1          97.5
Operating income                                            2.7           1.9           2.5
Non-operating income                                        0.2           0.1           0.3
Interest expense                                           (0.2 )        (0.1 )        (0.6 )
Income before income taxes                                  2.7 %         1.9 %         2.2 %

2012 Compared to 2011

For the year ended December 31, 2012, logistics and brokerage services revenues, before fuel surcharges, increased 32.1% to $24.3 million as compared to $18.4 million for the year ended December 31, 2011. The increase was primarily the result of an increase in the number of loads brokered during 2012 as compared to 2011.

Salaries, wages and benefits decreased from 1.9% of revenues, before fuel surcharges, in 2011 to 1.8% of revenues, before fuel surcharges, in 2012. The decrease, as a percentage of revenues, resulted primarily from the fixed cost characteristics of wages which do not fluctuate with changes in revenue, such as general and administrative and marketing wages. Using a dollar-based comparison, salaries, wages and benefits increased from $0.3 million during 2011 to $0.4 million during 2012 as the number of employees assigned to the logistics and brokerage services division increased.

Rent and purchased transportation decreased from 95.7% of revenues, before fuel surcharges, in 2011 to 95.2% of revenues, before fuel surcharges, in 2012. The decrease relates to a decrease in amounts charged by third party logistics and brokerage service providers.

The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, decreased to 97.3% for 2012 from 98.1% for 2011.

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2011 Compared to 2010

For the year ended December 31, 2011, logistics and brokerage services revenues, before fuel surcharges, decreased 53.7% to $18.4 million as compared to $39.7 million for the year ended December 31, 2010. The decrease was primarily the result of a decrease in the number of loads brokered during 2011 as compared to 2010. The decrease in the number of loads resulted primarily from the closing of a brokerage office located in New Jersey during the third quarter of 2010.

Salaries, wages and benefits decreased from 4.6% of revenues, before fuel surcharges, in 2010 to 1.9% of revenues, before fuel surcharges, in 2011. The decrease related to a decrease in salaries and benefits associated with the closing of a brokerage office located in New Jersey during the third quarter of 2010.

Rent and purchased transportation increased from 93.0% of revenues, before fuel surcharges, in 2010 to 95.7% of revenues, before fuel surcharges, in 2011. The increase related to an increase in amounts charged by third party logistics and brokerage service providers.

The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased to 98.1% for 2011 from 97.5% for 2010.

Results of Operations - Combined Services

2012 Compared to 2011

Income tax expense was approximately $1.4 million in 2012 resulting in an effective rate of 39.4%, as compared to an income tax benefit of approximately $2.7 million in 2011 resulting in an effective rate of 48.9%. The effective tax rate differs from the statutory rate primarily due to the existence of partially non-deductible meal and incidental expense per-diem payments to company drivers. Per-diem payments may cause a significant difference in the Company's effective tax rate from period-to-period as the proportion of non-deductible expenses to pre-tax net income increases or decreases.

We determined, based on significant judgment, that a valuation allowance against our deferred tax assets has not been necessary. Management evaluates the ability to realize its deferred tax assets based upon negative and positive evidence available and, based on the evidence available at this time, management concludes that it is "more likely than not" that we will be able to realize the benefit of our deferred tax assets in the near future.

As of December 31, 2012, there were no significant unrecognized tax benefits and an adjustment to the Company's consolidated financial statements for uncertain tax positions was not required as management believes that the Company's significant tax positions taken in income tax returns filed or to be filed are supported by clear and unambiguous income tax laws.

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 we operate generally provide for a deficiency assessment statute of limitation period of three years and as a result, the Company's tax years 2009 and forward remain open to examination in those jurisdictions. During 2012, the Company has not recognized or accrued any interest or penalties related to uncertain income tax positions and does not believe it is reasonably possible that our unrecognized tax benefits will significantly change within the next twelve months.

The combined net income for all divisions was $2.2 million, or 0.7% of revenues, before fuel surcharge, for 2012 as compared to the combined net loss for all divisions of $2.9 million or 1.0% of revenues, before fuel surcharge, for 2011. The increase in income resulted in an increase in diluted earnings per share to $0.25 for 2012 from a diluted loss per share of $0.32 for 2011.

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2011 Compared to 2010

Income tax benefit was approximately $2.7 million in 2011 resulting in an effective rate of 48.9%, as compared to an income tax benefit of approximately $0.9 million in 2010 resulting in an effective rate of 59.2%. The effective tax rate differed from the statutory rate primarily due to the existence of partially non-deductible meal and incidental expense per-diem payments to company drivers as well as tax credits related to the Company's purchase of qualified alternative motor fuel vehicles during 2010. Per-diem payments may cause a significant difference in the Company's effective tax rate from period-to-period as the proportion of non-deductible expenses to pre-tax net income increases or decreases.

We determined, based on significant judgment, that a valuation allowance against our deferred tax assets was not necessary. Management evaluates the ability to realize its deferred tax assets based upon negative and positive evidence available and, based on the evidence available, management concluded that it was "more likely than not" that we would be able to realize the benefit of our deferred tax assets in the near future.

As of December 31, 2011, there were no significant unrecognized tax benefits and an adjustment to the Company's consolidated financial statements for uncertain tax positions was not required as management believed that the Company's significant tax positions taken in income tax returns filed or to be filed are supported by clear and unambiguous income tax laws.

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 we operate generally provide for a deficiency assessment statute of limitation period of three years and as a result, the . . .

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