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PTSI > SEC Filings for PTSI > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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

Form 10-Q for PAM TRANSPORTATION SERVICES INC


8-Nov-2013

Quarterly Report


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

FORWARD-LOOKING INFORMATION

Certain information included in this Quarterly Report on Form 10-Q constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to expected future financial and operating results or events, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, excess capacity in the trucking industry; surplus inventories; recessionary economic cycles and downturns in customers' business cycles; increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, tolls, license and registration fees; the resale value of the Company's used equipment and the price of new equipment; increases in compensation for and difficulty in attracting and retaining qualified drivers and owner-operators; increases in insurance premiums and deductible amounts relating to accident, cargo, workers' compensation, health, and other claims; unanticipated increases in the number or amount of claims for which the Company is self insured; inability of the Company to continue to secure acceptable financing arrangements; seasonal factors such as harsh weather conditions that increase operating costs; competition from trucking, rail, and intermodal competitors including reductions in rates resulting from competitive bidding; the ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations; a significant reduction in or termination of the Company's trucking service by a key customer; and other factors, including risk factors, included from time to time in filings made by the Company with the Securities and Exchange Commission ("SEC"). The Company undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the fiscal year ended December 31, 2012.

BUSINESS OVERVIEW

The Company's administrative headquarters are in Tontitown, Arkansas. From this location we manage operations conducted through 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. These aspects of our business are carefully managed and efforts are continuously underway to achieve favorable results. For the three and nine month periods ended September 30, 2013, truckload services revenues, excluding fuel surcharges, represented 93.3% and 92.4%, respectively, of total revenues, excluding fuel surcharges, with remaining revenues, excluding fuel surcharges, being generated from brokerage and logistics services. For the three and nine month periods ended September 30, 2012, truckload services revenues, excluding fuel surcharges, represented 92.1% and 91.7%, respectively, of total revenues, excluding fuel surcharges, with remaining revenues, excluding fuel surcharges, being generated from brokerage and logistics services.

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 the three and nine months ending September 30, 2013, approximately $22.7 million and $68.6 million, respectively, of the Company's total revenue was generated from fuel surcharges. During the three and nine months ending September 30, 2012 approximately $20.1 million and $61.6 million, respectively, of the Company's total revenue was generated from fuel surcharges. We may 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.



                                            Three Months Ended              Nine Months Ended
                                               September 30,                  September 30,
                                           2013             2012           2013            2012
                                                              (percentages)

Operating revenues, before fuel
surcharge                                     100.0           100.0           100.0          100.0

Operating expenses:
Salaries, wages and benefits (1)               35.4            38.3            36.7           39.7
Fuel expense, net of fuel surcharge             1.0             9.2             2.8           11.3
Rent and purchased transportation (1)          23.3            12.8            21.6           10.0
Depreciation                                   13.1            14.1            13.4           13.8
Operating supplies and expenses                11.9            15.0            12.1           14.5
Operating taxes and licenses                    1.6             1.8             1.7            1.8
Insurance and claims                            5.0             5.1             5.0            4.9
Communications and utilities                    0.7             0.8             0.7            0.8
Other                                           2.4             1.6             2.3            1.8
(Gain) loss on sale or disposal of
property                                       (0.6 )           0.2            (0.4 )            -
Total operating expenses                       93.8            98.9            95.9           98.6
Operating income                                6.2             1.1             4.1            1.4
Non-operating income                            0.2             1.7             0.3            1.3
Interest expense                               (1.1 )          (0.9 )          (1.1 )         (0.9 )
Income before income taxes                      5.3             1.9             3.3            1.8

(1) In order to conform to industry practice, the Company began to classify payments to third-party owner operator drivers as purchased transportation rather than as salaries, wages and benefits as had been presented in reports prior to the period ended September 30, 2013. This reclassification has no effect on operating income, net income or earnings per share. The Company has made corresponding reclassifications to comparative periods shown.

THREE MONTHS ENDED SEPTEMBER 30, 2013 VS. THREE MONTHS ENDED SEPTEMBER 30, 2012

During the third quarter of 2013, truckload services revenue, before fuel surcharges, increased 7.8% to $73.9 million as compared to $68.5 million during the third quarter of 2012. The increase was primarily due to an increase in the number of miles traveled, a reduction in uncompensated miles, and an increase in the number of work days during the period. The number of miles traveled increased from 49.8 million miles during the third quarter of 2012 to 53.1 million miles during the third quarter of 2013 primarily due to an increase in equipment utilization as the average number of miles traveled each work day increased from 443 miles per truck during the third quarter of 2012 to 463 miles per truck during the third quarter of 2013. The average percentage of uncompensated miles declined from 8.6% of total miles for the third quarter of 2012 to 7.1% of total miles during the third quarter of 2013. Work days, which typically represent weekdays (excluding major holidays), increased to 64 days during the third quarter of 2013 from 63 days during the third quarter of 2012. Also contributing to the increase was an increase in equipment utilization as the Company continues to replace older trucks, which generally have a higher probability for mechanical problems which could disrupt en route service thereby reducing route efficiency.

Salaries, wages and benefits decreased from 38.3% of revenues, before fuel surcharges, in the third quarter of 2012 to 35.4% of revenues, before fuel surcharges, during the third quarter of 2013. The percentage decrease relates primarily to a reduction in company driver wages paid during the third quarter of 2012 as compared to company driver wages paid during the third quarter of 2013. Our driver pool consists of both company drivers and third-party owner operator drivers. Company drivers are employees of the Company and perform services in company-owned equipment while owner-operator drivers provide services, under contract, using their own equipment. While each group is generally compensated on a per-mile basis, owner-operator payments are classified in the Company's financial statements under the Rent and purchased transportation category. The percentage-based decrease in Salaries, wages and benefits resulted from a decrease in the proportion of total miles driven by company drivers during the third quarter of 2013 in comparison to the proportion of total miles driven by company drivers during the third quarter of 2012. This proportional decrease was the result of an increase in the average number of owner operators under contract from 170 during the third quarter of 2012 to 346 during the third quarter of 2013 and a similar corresponding decrease in the average number of company drivers. On a dollar basis, total salaries, wages and benefits decreased from $26.2 million during the third quarter of 2012 to $26.1 million during the third quarter of 2013. Partially offsetting the decrease was an increase in costs associated with group health benefits and workers compensation costs during the third quarter of 2013 as compared to the third quarter of 2012.


Fuel expense, net of fuel surcharge, decreased from 9.2% of revenues, before fuel surcharges, during the third quarter of 2012 to 1.0% of revenues, before fuel surcharges, during the third quarter of 2013. The decrease was primarily related to a decrease in the average surcharge-adjusted fuel price paid per gallon of diesel fuel, an increase in the average miles-per-gallon ("mpg") experienced, and to an increase in the number of owner operators in our fleet. The average surcharge-adjusted fuel price paid per gallon of diesel fuel decreased from $0.84 during the third quarter of 2012 to $0.12 during the third quarter of 2013 as a result of a more favorable fuel surcharge arrangements made with customers, favorable fuel prices negotiated with vendors, and an increase in the size of our owner operator 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 in the Rent and purchased transportation category. These categorizations have the effect of reducing our net fuel expense while increasing the Rent and purchased transportation category, as discussed below. The average mpg experienced increased during the third quarter of 2013 as compared to the mpg experienced during the third quarter of 2012 as a result of replacing older trucks with newer trucks, which are more fuel efficient. The Company has also implemented driver bonus programs which are tied directly to fuel efficiency.

Rent and purchased transportation increased from 12.8% of revenues, before fuel surcharges, during the third quarter of 2012 to 23.3% of revenues, before fuel surcharges, during the third quarter of 2013. The increase relates primarily to an increase in driver lease expense as the average number of owner operators under contract increased from 170 during the third quarter of 2012 to 346 during the third quarter of 2013. The increase in costs in this category, as they relate to the increase in owner operators, are partially offset by a decrease in other cost categories, such as repairs and fuel, which are generally borne by the owner operator.

Depreciation decreased from 14.1% of revenues, before fuel surcharges, during the third quarter of 2012 to 13.1% of revenues, before fuel surcharges, during the third quarter of 2013. The percentage-based decrease relates to the interaction of the fixed-cost characteristic of depreciation expense with an increase in revenues for the periods compared.

Operating supplies and expenses decreased from 15.0% of revenues, before fuel surcharges, during the third quarter of 2012 to 11.9% of revenues, before fuel surcharges, during the third quarter of 2013. The decrease relates primarily to a decrease in amounts paid for equipment maintenance costs during the third quarter of 2013 as compared to the third quarter of 2012 which is the result of replacing older equipment with new equipment.

Insurance and claims decreased from 5.1% of revenues, before fuel surcharges, during the third quarter of 2012 to 5.0% of revenues, before fuel surcharges, during the third quarter of 2013 but increased on a dollar-basis from $3.5 million for the third quarter of 2012 to $3.7 million for the third quarter of 2013. This dollar-based increase relates primarily to increases in auto liability premiums due to an increase in the number of miles traveled, which serves as the basis for the premium calculation, and to an increase in physical damage insurance expense due to an increase in the value of the equipment covered as a result of replacing older equipment with new equipment.

Other expenses increased from 1.6% of revenues, before fuel surcharges, during the third quarter of 2012 to 2.4% of revenues, before fuel surcharges, during the third quarter of 2013. The increase relates primarily to an increase in amounts expensed for uncollectible revenue 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, improved from 98.9% for the third quarter 2012 to 93.8% for the third quarter of 2013.

NINE MONTHS ENDED SEPTEMBER 30, 2013 VS. NINE MONTHS ENDED SEPTEMBER 30, 2012

For the first nine months ended September 30, 2013, truckload services revenue, before fuel surcharges, increased 7.2% to $219.5 million as compared to $204.7 million for the first nine months ended September 30, 2012. The increase was primarily due to an increase in the number of miles traveled, a reduction in uncompensated miles, and an increase in the average rate charged to customers. The number of miles traveled increased from 150.5 million miles for the first nine months of 2012 to 159.0 million miles for the first nine months of 2013 primarily due to an increase in equipment utilization as the average number of miles traveled each work day increased from 449 miles per truck during the first nine months of 2012 to 464 miles per truck during the first nine months of 2013. Also contributing to the increase in miles traveled was an increase in the average number of trucks in service, which increased from 1,756 trucks for the first nine months of 2012 to 1,795 trucks for the first nine months of 2013. The average percentage of uncompensated miles declined from 8.8% of total miles for the first nine months of 2012 to 7.4% of total miles for the first nine months of 2013. The average rate charged to customers per total mile during the first nine months of 2013 increased $0.02 as compared to the average rate charged during the first nine months of 2012.


Salaries, wages and benefits decreased from 39.7% of revenues, before fuel surcharges, in the first nine months of 2012 to 36.7% of revenues, before fuel surcharges, during the first nine months of 2013. The percentage decrease relates primarily to a reduction in company driver wages paid during the first nine months of 2012 as compared to company driver wages paid during the first nine months of 2013. Our driver pool consists of both company drivers and third-party owner operator drivers. Company drivers are employees of the Company and perform services in company-owned equipment while owner-operator drivers provide services, under contract, using their own equipment. While each group is generally compensated on a per-mile basis, owner-operator payments are classified in the Company's financial statements under the Rent and purchased transportation category. The percentage-based decrease in Salaries, wages and benefits resulted from a decrease in the proportion of total miles driven by company drivers during the first nine months of 2013 in comparison to the proportion of total miles driven by company drivers during the first nine months of 2012. This proportional decrease was the result of an increase in the average number of owner operators under contract from 129 during the first nine months of 2012 to 308 during the first nine months of 2013 and a similar corresponding decrease in the average number of company drivers. On a dollar basis, total salaries, wages and benefits decreased from $81.4 million during the first nine months of 2012 to $80.6 million during the first nine months of 2013. Partially offsetting the decrease was an increase in costs associated with workers' compensation claims expensed during the first nine months of 2013 as compared to the first nine months of 2012.

Fuel expense, net of fuel surcharge, decreased from 11.3% of revenues, before fuel surcharges, during the first nine months of 2012 to 2.8% of revenues, before fuel surcharges, during the first nine months of 2013. The decrease was primarily related to a decrease in the average surcharge-adjusted fuel price paid per gallon of diesel fuel, an increase in the average miles-per-gallon ("mpg") experienced, and to an increase in the number of owner operators in our fleet. The average surcharge-adjusted fuel price paid per gallon of diesel fuel decreased from $0.97 during the first nine months of 2012 to $0.29 during the first nine months of 2013 as a result of more favorable fuel surcharge arrangements made with customers, favorable fuel prices negotiated with vendors, and an increase in the size of our owner operator 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 in the Rent and purchased transportation category. These categorizations have the effect of reducing our net fuel expense while increasing the Rent and purchased transportation category, as discussed below. The average mpg experienced increased during the first nine months of 2013 as compared to the mpg experienced during the first nine months of 2012 as a result of replacing older trucks with newer trucks which are more fuel efficient. The Company has also implemented driver bonus programs which are tied directly to fuel efficiency.

Rent and purchased transportation increased from 10.0% of revenues, before fuel surcharges, during the first nine months of 2012 to 21.6% of revenues, before fuel surcharges, during the first nine months of 2013. The increase relates primarily to an increase in driver lease expense as the average number of owner operators under contract increased from 129 during the first nine months of 2012 to 308 during the first nine months of 2013. The increase in costs in this category, as they relate to the increase in owner operators, are partially offset by a decrease in other cost categories, such as repairs and fuel, which are generally borne by the owner operator.

Depreciation decreased from 13.8% of revenues, before fuel surcharges, during the first nine months of 2012 to 13.4% of revenues, before fuel surcharges, during the first nine months of 2013. The percentage-based decrease relates to the interaction of the fixed-cost characteristic of depreciation expense with an increase in revenues for the periods compared. On a dollar basis, depreciation increased from $28.2 million for the first nine months of 2012 to $29.5 million for the first nine months of 2013. The increase relates primarily to purchases of new trucks 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 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 the first nine months of 2012 to 12.1% of revenues, before fuel surcharges, during the first nine months of 2013. The decrease relates primarily to a decrease in amounts paid for equipment maintenance costs during the first nine months of 2013 as compared to amounts paid during the first nine months of 2012 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 the first nine months of 2013 as compared to amounts paid during the first nine months of 2012. The increase in driver training and recruiting costs are a result of heightened competition as industry demand for qualified drivers has increased while increased regulations have forced some qualified drivers to exit the profession.


Insurance and claims increased from 4.9% of revenues, before fuel surcharges, during the first nine months of 2012 to 5.0% of revenues, before fuel surcharges, during the first nine months of 2013. The increase relates primarily to an increase in auto liability premiums due to an increase in the number of miles traveled, which serves as the basis for the premium calculation, and to an increase in physical damage insurance expense due to an increase in the value of the equipment covered as a result of replacing older equipment with new equipment.

Other expenses increased from 1.8% of revenues, before fuel surcharges, during the first nine months of 2012 to 2.3% of revenues, before fuel surcharges, during the first nine months of 2013. The increase relates primarily to an increase in amounts expensed for uncollectible revenue 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, improved from 98.6% for the first nine months 2012 to 95.9% for the first nine months of 2013.

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.

                                                Three Months Ended              Nine Months Ended
                                                   September 30,                  September 30,
                                               2013             2012           2013            2012
                                                                  (percentages)

Operating revenues, before fuel surcharge         100.0           100.0           100.0          100.0

Operating expenses:
Salaries, wages and benefits                        2.8             1.9             2.5            1.7
Rent and purchased transportation                  95.1            95.1            94.2           95.1
Communications and utilities                        0.1             0.1             0.2            0.1
Other                                               0.3             0.1             0.3            0.2
Total operating expenses                           98.3            97.2            97.2           97.1
Operating income                                    1.7             2.8             2.8            2.9
Non-operating income                                0.1             0.4             0.1            0.3
Interest expense                                   (0.3 )          (0.2 )          (0.3 )         (0.2 )
Income before income taxes                          1.5             3.0             2.6            3.0

THREE MONTHS ENDED SEPTEMBER 30, 2013 VS. THREE MONTHS ENDED SEPTEMBER 30, 2012

During the third quarter of 2013, logistics and brokerage services revenue, before fuel surcharges, decreased 10.3% to $5.3 million as compared to $5.9 million during the third quarter of 2012. The decrease relates to a decrease in the number of brokered loads during the third quarter of 2013 as compared to the third quarter of 2012.

Salaries, wages and benefits increased from 1.9% of revenues, before fuel surcharges, in the third quarter of 2012 to 2.8% of revenues, before fuel surcharges, during the third quarter of 2013. The increase relates to an increase in the number of employees assigned to the logistics and brokerage services division.

. . .

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