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PTSI > SEC Filings for PTSI > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for PAM TRANSPORTATION SERVICES INC

Form 10-K for PAM TRANSPORTATION SERVICES INC


14-Mar-2014

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 92.6%, 91.8% and 93.5% of total revenues, excluding fuel surcharges for the twelve months ended December 31, 2013, 2012 and 2011, 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 2013, 2012 and 2011, approximately $89.7 million, $82.9 million and $75.1 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,
                                              2013         2012        2011

Operating revenues, before fuel surcharge       100.0 %     100.0 %     100.0 %
Operating expenses:
Salaries, wages and benefits (1)                 36.7        39.7        41.3
Fuel expense, net of fuel surcharge               2.7        10.4        18.8
Rent and purchased transportation (1)            21.9        11.3         4.7
Depreciation                                     13.5        14.0        12.8
Operating supplies and expenses                  12.0        14.3        14.5
Operating taxes and licenses                      1.7         1.8         1.9
Insurance and claims                              5.0         5.0         4.9
Communications and utilities                      0.8         0.8         0.9
Other                                             2.3         1.9         2.3
Gain on sale or disposal of property             (0.3 )       0.0         0.0
Total operating expenses                         96.3        99.2       102.1
Operating income (loss)                           3.7         0.8        (2.1 )
Non-operating income                              0.5         1.2         0.6
Interest expense                                 (1.1 )      (0.9 )      (0.7 )
Income (loss) before income taxes                 3.1 %       1.1 %      (2.2 )%

(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.

2013 Compared to 2012

For the year ended December 31, 2013, truckload services revenue, before fuel surcharges, increased 6.1% to $290.1 million as compared to $273.4 million for the year ended December 31, 2012. The increase related primarily 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 200.8 million miles during 2012 to 209.8 million miles during 2013 primarily as a result of an increase in the average number of trucks in service, which increased from 1,760 during 2012 to 1,804 during 2013. The average percentage of uncompensated miles declined from 8.7% of total miles during 2012 to 7.3% of total miles during 2013. The average rate charged per total mile during 2013 increased $0.02 as compared to the average rate charged during 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.

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Salaries, wages and benefits decreased from 39.7% of revenues, before fuel surcharges, during 2012 to 36.7% of revenues, before fuel surcharges, during 2013. The decrease related primarily to a decrease in Company driver wages paid during 2013 as compared to Company driver wages paid during 2012. Our driver pool consists of both company divers and third-party owner operators. 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 2013 in comparison to the proportion of total miles driven by company drivers during 2012. This proportional decrease was the result of an increase in the average number of owner operators under contract from 149 during 2012 to 322 during 2013 and a corresponding decrease in the average number of company drivers. On a dollar basis, total salaries, wages and benefits decreased from $108.4 million during 2012 to $106.4 million during 2013. Partially offsetting the decrease was an increase in costs associated with workers' compensation benefits during the 2013 as compared to 2012.

Fuel expense, net of fuel surcharge, decreased from 10.4% of revenues, before fuel surcharges, during 2012 to 2.7% of revenues, before fuel surcharges, during 2013. 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 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 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 above. The average mpg experienced increased during 2013 as compared to the mpg experienced during 2012 as a result of replacing older trucks with newer trucks, which are more fuel efficient.

Rent and purchased transportation increased from 11.3% of revenues, before fuel surcharges, during 2012 to 21.9% of revenues, before fuel surcharges, during 2013. The increase relates primarily to an increase in driver lease expense as the average number of owner operators under contract increased from 149 during 2012 to 322 during 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 14.0% of revenues, before fuel surcharges, during 2012 to 13.5% of revenues, before fuel surcharges, during 2013. The percentage-based decrease relates primarily 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 14.3% of revenues, before fuel surcharges, during 2012 to 12.0% of revenues, before fuel surcharges, during 2013. The decrease related primarily to a decrease in amounts paid for equipment maintenance costs during 2013 as compared to amounts paid during 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 2013 as compared to amounts paid during 2012. 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.

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Operating taxes and licenses decreased from 1.8% of revenues, before fuel surcharges, during 2012 to 1.7% of revenues, before fuel surcharges, during 2013. The decrease related primarily to a decrease in amounts paid for equipment registration fees from $5.0 million during 2012 to $4.9 million during 2013.

Other expenses increased from 1.9% of revenues, before fuel surcharges, during 2012 to 2.3% of revenues, before fuel surcharges, during 2013. The increase relates primarily to an increase 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, improved to 96.3% for 2013 from 99.2% for 2012.

Non-operating income decreased from 1.2% of revenues, before fuel surcharges, during 2012 to 0.5% of revenues, before fuel surcharges, during 2013. The components of this category consist primarily of dividends earned and gains or losses on the Company's investments in marketable equity securities. The decrease relates primarily to a decrease in the amount of gains recognized between the periods on the Company's investments in marketable equity securities.

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 decreased from 41.3% of revenues, before fuel surcharges, during 2011 to 39.7% of revenues, before fuel surcharges, during 2012. The decrease related primarily to a decrease in expenses associated with workers' compensation benefits. To a lesser extent, the decrease related to a decrease in company driver wages paid during 2012 as compared to company driver wages paid during 2011. Our driver pool consists of both company divers and third-party owner operators. 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 2012 in comparison to the proportion of total miles driven by company drivers during 2011. This proportional decrease was the result of an increase in the average number of owner operators under contract from 48 during 2011 to 149 during 2012. On a dollar basis, total salaries, wages and benefits decreased from $109.7 million during 2011 to $108.4 million during 2012. Offsetting the majority of the decrease in company driver wages was an increase in general and administrative wages paid during 2012 as compared to 2011. Partially offsetting the decrease was an increase in costs associated with group health benefits paid during 2012 as compared to 2011.

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 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 Rents and purchased transportation category. These categorizations have the effect of reducing our net fuel expense while increasing Rents and purchased transportation 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.

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Rent and purchased transportation increased from 4.7% of revenues, before fuel surcharges, during 2011 to 11.3% of revenues, before fuel surcharges, during 2012. The increase relates primarily to an increase in driver lease expense as the average number of owner operators under contract increased 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 cost categories, such as repairs and fuel, which are generally borne by the owner operator.

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.

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.

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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,
                                              2013         2012        2011

Operating revenues, before fuel surcharge       100.0 %     100.0 %     100.0 %
Operating expenses:
Salaries, wages and benefits                      2.6         1.8         1.9
Fuel expense                                      0.0         0.0         0.0
Rent and purchased transportation                94.3        95.2        95.7
Depreciation                                      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         0.0
Communications and utilities                      0.1         0.1         0.2
Other                                             0.3         0.2         0.3
Gain on sale or disposal of property              0.0         0.0         0.0
Total operating expenses                         97.3        97.3        98.1
Operating income                                  2.7         2.7         1.9
Non-operating income                              0.1         0.2         0.1
Interest expense                                 (0.3 )      (0.2 )      (0.1 )
Income before income taxes                        2.5 %       2.7 %       1.9 %

2013 Compared to 2012

For the year ended December 31, 2013, logistics and brokerage services revenues, before fuel surcharges, decreased 5.1% to $23.0 million as compared to $24.3 million for the year ended December 31, 2012. The decrease was primarily the result of a decrease in the brokered load rates during 2013 as compared to 2012.

Salaries, wages and benefits increased from 1.8% of revenues, before fuel surcharges, in 2012 to 2.6% of revenues, before fuel surcharges, in 2013. The increase resulted from an increase in the number of employees assigned to the logistics and brokerage services division.

Rent and purchased transportation decreased from 95.2% of revenues, before fuel surcharges, in 2012 to 94.3% of revenues, before fuel surcharges, in 2013. 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, remained unchanged at 97.3% for 2013 and 2012.

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.

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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.

Results of Operations - Combined Services

2013 Compared to 2012

Income tax expense was approximately $3.8 million in 2013 resulting in an effective rate of 38.8%, as compared to an income tax expense of approximately $1.4 million in 2012 resulting in an effective rate of 39.4%. 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.

In determining whether a tax asset valuation allowance is necessary, management, in accordance with the provisions of ASC 740-10-30, weighs all available evidence, both positive and negative to determine whether, based on the weight of that evidence, a valuation allowance is necessary. If negative conditions exist which indicate a valuation allowance might be necessary, consideration is then given to what effect the future reversals of existing taxable temporary differences and the availability of tax strategies might have on future taxable income to determine the amount, if any, of the required valuation allowance. As of December 31, 2013, management determined that the future reversals of existing taxable temporary differences and available tax strategies would generate sufficient future taxable income to realize its tax assets and therefore a valuation allowance was not necessary.

As of December 31, 2013, 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 2010 and forward remain open to examination in those jurisdictions. During 2013, 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 $5.9 million, or 1.9% of revenues, before fuel surcharge, for 2013 as compared to the combined net income for all divisions of $2.2 million or 0.7% of revenues, before fuel surcharge, for 2012. The increase in net income resulted in an increase in diluted earnings per share to $0.68 for 2013 from a diluted earnings per share of $0.25 for 2012.

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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 . . .

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