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MRTN > SEC Filings for MRTN > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for MARTEN TRANSPORT LTD


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with the selected consolidated financial data and our consolidated condensed financial statements and the related notes 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 included in our Form 10-K, Part 1, Item 1A for the year ended December 31, 2012. 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, until we deconsolidated MWL effective March 28, 2013. 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 $13.0 million, or 8.6%, in the first three months of 2013. Our operating revenue, net of fuel surcharges, increased $10.1 million, or 8.2%, compared with the first three months of 2012. Truckload segment revenue, net of fuel surcharges, increased 6.5% primarily due to an increase in our average truckload revenue, net of fuel surcharges, per tractor per week of 5.3% and an increase in our average fleet size of 2.2% from the first three months of 2012. Fuel surcharge revenue increased by $2.9 million, or 10.1%. Logistics segment revenue, net of intermodal fuel surcharges, increased 12.9% compared with the first three months of 2012. The increase in logistics revenue primarily resulted from volume growth in each of our internal brokerage and intermodal services. Logistics revenue represented 26.0% of our operating revenue in the first three months of 2013 compared to 24.4% in the first three months of 2012.

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 92.4% in the first three months of 2013 from 93.7% in the first three months of 2012. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharge revenue, improved to 90.6% for the first three months of 2013 from 92.2% for the first three months of 2012. Our net income increased 32.2% to $7.2 million in the first three months of 2013 from $5.4 million in the first three months of 2012.

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At March 31, 2013, we had approximately $9.0 million of cash and cash equivalents, $336.2 million in stockholders' equity and no long-term debt outstanding. In the first three months of 2013, net cash flows provided by operating activities of $22.0 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $9.5 million, to repay $2.7 million of long-term debt, to partially construct and acquire regional operating facilities in the amount of $982,000, to pay cash dividends of $553,000, and to increase cash and cash equivalents by $5.6 million. We estimate that capital expenditures, net of proceeds from dispositions, will be approximately $68 million for remainder of 2013. 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 periods indicated certain operating
statistics regarding our revenue and operations:

                                                                Three Months
                                                               Ended March 31,
                                                           2013              2012

Truckload Segment:
Total Truckload revenue (in thousands)                 $     121,734     $     114,451
Average truckload revenue, net of fuel surcharges,
per tractor per week(1)                                $       3,368     $       3,197
Average tractors (1)                                           2,193             2,146
Average miles per trip                                           627               618
Total miles - company-employed drivers (in
thousands)                                                    54,895            51,281
Total miles - independent contractors (in thousands)             941             1,264

Logistics Segment:
Total Logistics revenue (in thousands):                $      42,740     $      37,023
Brokerage:
Marten Transport
Revenue (in thousands)                                 $      14,469     $      13,706
Loads                                                          9,430             8,086
MWL
Revenue (in thousands)                                 $       6,676     $       8,245
Loads                                                          3,758             3,682
Intermodal:
Revenue (in thousands)                                 $      21,595     $      15,072
Loads                                                          8,590             5,842
Average tractors                                                  78                56

(1) Includes tractors driven by both company-employed drivers and independent contractors. Independent contractors provided 49 and 52 tractors as of March 31, 2013 and 2012, respectively.


Comparison of Three Months Ended March 31, 2013 to Three Months Ended March 31, 2012

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

                                                                          Dollar           Percentage
                                                                          Change             Change
                                              Three Months             Three Months       Three Months
                                                  Ended                   Ended              Ended
                                                March 31,               March 31,          March 31,
(Dollars in thousands)                     2013           2012        2013 vs. 2012      2013 vs. 2012
Operating revenue:
Truckload revenue, net of fuel
surcharge revenue                       $   94,965     $   89,198     $        5,767                6.5 %
Truckload fuel surcharge revenue            26,769         25,253              1,516                6.0
Total Truckload revenue                    121,734        114,451              7,283                6.4

Logistics revenue, net of intermodal
fuel surcharge revenue(1)                   37,760         33,436              4,324               12.9
Intermodal fuel surcharge revenue            4,980          3,587              1,393               38.8
Total Logistics revenue                     42,740         37,023              5,717               15.4

Total operating revenue                 $  164,474     $  151,474     $       13,000                8.6 %

Operating income:
Truckload                               $   10,000     $    7,128     $        2,872               40.3 %
Logistics                                    2,538          2,391                147                6.1
Total operating income                  $   12,538     $    9,519     $        3,019               31.7 %

Operating ratio(2):
Truckload                                     91.8 %         93.8 %
Logistics                                     94.1           93.5
Consolidated operating ratio                  92.4 %         93.7 %

(1) Logistics revenue is net of $2.1 million and $2.5 million of inter-segment revenue in each of the 2013 and 2012 periods, 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 $14.5 million and $13.6 million, and Logistics segment depreciation expense was $1.2 million and $891,000, in the 2013 and 2012 periods, respectively.

Our operating revenue increased $13.0 million, or 8.6%, to $164.5 million in the 2013 period from $151.5 million in the 2012 period. Our operating revenue, net of fuel surcharges, increased $10.1 million, or 8.2%, to $132.7 million in the 2013 period from $122.6 million in the 2012 period. 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 $31.7 million in the 2013 period from $28.8 million in the 2012 period.

Truckload segment revenue increased $7.3 million, or 6.4%, to $121.7 million in the 2013 period from $114.5 million in the 2012 period. Truckload segment revenue, net of fuel surcharges, increased 6.5% primarily due to an increase in our average truckload revenue, net of fuel surcharges, per tractor per week of 5.3% and an increase in our average fleet size of 2.2% from the 2012 period. The increase in revenue per tractor per week and the improvement in our overall cost structure primarily caused the increase in profitability in the 2013 period.


Logistics segment revenue increased $5.7 million, or 15.4%, to $42.7 million in the 2013 period from $37.0 million in the 2012 period. Logistics segment revenue, net of intermodal fuel surcharges, increased 12.9%. The increase in logistics revenue resulted from continued volume growth in each of our internal brokerage and intermodal services. The increase in the operating ratio for our Logistics segment in the 2013 period was primarily due to an increase 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 periods indicated the dollar and percentage increase or decrease of the items in our unaudited consolidated condensed statements of operations, and those items as a percentage of operating revenue:

                                            Dollar           Percentage             Percentage of
                                            Change             Change             Operating Revenue
                                         Three Months       Three Months             Three Months
                                            Ended              Ended                    Ended
                                          March 31,          March 31,                March 31,
(Dollars in thousands)                  2013 vs. 2012      2013 vs. 2012         2013            2012

Operating revenue                       $       13,000                8.6 %         100.0 %        100.0 %
Operating expenses (income):
Salaries, wages and benefits                     3,854               10.1            25.6           25.3
Purchased transportation                         4,325               14.5            20.8           19.7
Fuel and fuel taxes                              1,199                3.1            24.5           25.8
Supplies and maintenance                            (3 )                -             5.8            6.3
Depreciation                                     1,153                7.9             9.5            9.6
Operating taxes and licenses                       188               11.9             1.1            1.0
Insurance and claims                               (11 )             (0.2 )           3.5            3.8
Communications and utilities                        72                5.9             0.8            0.8
Gain on disposition of revenue
equipment                                         (890 )            (58.4 )          (1.5 )         (1.0 )
Other                                               94                2.7             2.2            2.3
Total operating expenses                         9,981                7.0            92.4           93.7
Operating income                                 3,019               31.7             7.6            6.3
Net interest income                                  6               28.6               -              -
Income before income taxes                       3,013               31.6             7.6            6.3
Less: Income before income taxes
attributable to noncontrolling
interest                                           (77 )            (47.8 )           0.1            0.1
Income before income taxes
attributable to Marten Transport,
Ltd.                                             3,090               32.9             7.6            6.2
Provision for income taxes                       1,334               33.9             3.2            2.6
Net income                              $        1,756               32.2 %           4.4 %          3.6 %

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 7.0% increase in the total miles driven by company drivers and increases to several components of the amount paid to company drivers during 2012, which was partially offset by a decrease in employees' health insurance expense of $362,000 due to a decrease 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 $4.3 million in total, or 14.5%, in the 2013 period from the 2012 period. Payments to carriers for transportation services we arranged in our brokerage and intermodal operations increased $4.8 million to $32.8 million in the 2013 period from $28.0 million in the 2012 period. The portion of purchased transportation expense related to our independent contractors, including fuel surcharges, decreased $465,000 in the 2013 period, 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 $1.2 million in the 2013 period from the 2012 period. Net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads) decreased $448,000, or 3.4%, to $12.7 million in the 2013 period from $13.2 million in the 2012 period. Fuel surcharges passed through to independent contractors, outside drayage carriers and railroads were $4.2 million in the 2013 period and $2.9 million in the 2012 period. 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 decrease in net fuel expense was primarily due to continued progress with the cost control measures stated above, partially offset by an increase in total miles driven and an increase in the DOE national average cost of fuel to $4.02 per gallon in the 2013 period from $3.96 per gallon in the 2012 period. Net fuel expense represented 11.4% of truckload and intermodal revenue, net of fuel surcharges, in the 2013 period, compared with 13.1% in the 2012 period.

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 a 2.2% increase in our average fleet size. 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.

Gain on disposition of revenue equipment increased to $2.4 million in the 2013 period from $1.5 million in the 2012 period due to an increase in the market value for used revenue equipment. 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 92.4% in the 2013 period from 93.7% in the 2012 period. The operating ratio for our Truckload segment improved to 91.8% in the 2013 period from 93.8% in the 2012 period. The operating ratio for our Logistics segment was 94.1% and 93.5% in the 2013 and 2012 periods, respectively. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharge revenue, improved to 90.6% in the 2013 period from 92.2% in the 2012 period.

Our effective income tax rate increased slightly to 42.2% for the 2013 period from 41.9% for the 2012 period.

As a result of the factors described above, net income increased 32.2% to $7.2 million in the 2013 period from $5.4 million in the 2012 period. Net earnings per diluted share increased to $0.32 in the 2013 period from $0.25 in the 2012 period.


Liquidity and Capital Resources

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. Our primary sources of liquidity are funds provided by operations and our revolving credit facility. A portion of our tractor fleet is provided by independent contractors who own and operate their own equipment. We have no capital expenditure requirements relating to those drivers who own their tractors or obtain financing through third parties.

The table below reflects our net cash flows provided by operating activities, net cash flows used for investing activities and net cash flows (used for) provided by financing activities for the periods indicated.

                                                                  Three Months
                                                                 Ended March 31,
(In thousands)                                                 2013          2012
Net cash flows provided by operating activities              $  21,994     $  19,779
Net cash flows (used for) investing activities                 (13,085 )     (15,173 )
Net cash flows (used for) provided by financing activities      (3,341 )         211

In the first three months of 2013, net cash flows provided by operating activities of $22.0 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $9.5 million, to repay $2.7 million of long-term debt, to partially construct and acquire regional operating facilities in the amount of $982,000, to pay cash dividends of $553,000, and to increase cash and cash equivalents by $5.6 million. In the first three months of 2012, net cash flows provided by operating activities of $19.8 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $11.2 million, to partially construct and acquire regional operating facilities in the amount of $4.0 million, to pay cash dividends of $441,000, and to increase cash and cash equivalents by $4.8 million.

We estimate that capital expenditures, net of proceeds from dispositions, will be approximately $68 million for the remainder of 2013. In the first three months of 2013, we paid a quarterly cash dividend of $0.025 per share of common stock in the amount of $553,000. In the first three months of 2012, we paid a quarterly cash dividend of $0.02 per share of common stock in the amount of $441,000. We currently expect to continue to pay quarterly cash dividends in the future. The payment of cash dividends in the future, and the amount of any such dividends, will depend upon our financial condition, results of operations, cash requirements, and certain corporate law requirements, as well as other factors deemed relevant by our Board of Directors. As current federal and state bonus depreciation provisions expire, we expect an increase in our current income tax payments as a portion of our deferred tax liability for property and equipment reverses. 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 maintain a credit agreement that provides for an unsecured committed credit facility which matures in May 2016. The aggregate principal amount of the credit facility of $50 million may be increased at our option, subject to completion of signed amendments with the lender, up to a maximum aggregate principal amount of $75 million. At March 31, 2013, there was no outstanding principal balance on the credit facility. As of that date, we had outstanding standby letters of credit of $7.4 million and remaining borrowing availability of $42.6 million. This facility bears interest at a variable rate based on the London Interbank Offered Rate or the lender's Prime Rate, in each case plus/minus applicable margins.

Our credit facility prohibits us from paying, in any fiscal year, dividends in excess of 25% of our net income from the prior fiscal year. This facility also . . .

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