Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________to__________

 

Commission File Number: 0-15057 

P.A.M. TRANSPORTATION SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		71-0633135
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification no.)

 

297 West Henri De Tonti, Tontitown, Arkansas 72770

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (479) 361-9111

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.

Yes  ☑

No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☑

No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐				Accelerated filer ☑
Non-accelerated filer  ☐ (Do not check if a smaller reporting company)				Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐

No  ☑

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class		Outstanding at October 19, 2016
Common Stock, $.01 Par Value		6,408,831

 

 

P.A.M. TRANSPORTATION SERVICES, INC.

Form 10-Q

For The Quarter Ended September 30, 2016

Table of Contents

   

Part I. Financial Information
Item 1.	Financial Statements (unaudited).
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015
	Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2016
	Notes to Condensed Consolidated Financial Statements as of September 30, 2016
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.
Item 4.	Controls and Procedures.
Part II. Other Information
Item 1.	Legal Proceedings.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6.	Exhibits.
Signatures
Exhibits

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands, except share and per share data)

 

 

See notes to condensed consolidated financial statements.

 

 

  

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (unaudited) (in thousands, except per share data)

 

 

See notes to condensed consolidated financial statements.

 

 

   

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (unaudited) (in thousands)

 

 

__________

(1) Net of deferred income taxes of $(364), $0, $(333), and $0, respectively.

(2) Net of deferred income taxes of $67, $220, $269, and $220, respectively.

(3) Net of deferred income taxes of $(230), $(940), $618, and $(844), respectively.

 

See notes to condensed consolidated financial statements.

 

   

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands)

 

 

See notes to condensed consolidated financial statements.

 

   

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (unaudited) (in thousands)

 

 

See notes to condensed consolidated financial statements.

 

 

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2016

 

 

 

  

 

 

  

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, 2015.

 

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 and in 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 88.9% and 87.1% of total revenues, excluding fuel surcharges for the three months ended September 30, 2016 and 2015, respectively. Truckload services revenues, excluding fuel surcharges, represented 88.1% and 87.4% of total revenues, excluding fuel surcharges for the nine months ended September 30, 2016 and 2015, respectively. The remaining revenues, excluding fuel surcharges, were 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 benefits 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 fuel 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 months ended September 30, 2016 and 2015, approximately $13.5 million and $15.0 million, respectively, of the Company’s total revenue was generated from fuel surcharges. During the nine months ended September 30, 2016 and 2015, approximately $36.0 million and $48.8 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 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 reported net of fuel surcharges.

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
		(percentages)
Operating revenues, before fuel surcharge			100.0				100.0				100.0				100.0
Operating expenses:
Salaries, wages and benefits			32.4				32.6				32.2				33.6
Operating supplies and expenses			9.0				8.6				10.0				8.8
Rent and purchased transportation			35.3				30.0				34.1				28.6
Depreciation			11.9				10.5				11.4				10.2
Insurance and claims			4.2				4.8				4.8				4.8
Other			2.2				2.7				2.3				2.9
Gain on sale or disposal of property			(1.1	)			(1.7	)			(1.6	)			(2.0	)
Total operating expenses			93.9				87.5				93.2				86.9
Operating income			6.1				12.5				6.8				13.1
Non-operating income (expense)			1.3				(0.1	)			0.5				0.2
Interest expense			(1.0	)			(0.9	)			(1.0	)			(0.8	)
Income before income taxes			6.4				11.5				6.3				12.5

 

THREE MONTHS ENDED SEPTEMBER 30, 2016 VS. THREE MONTHS ENDED SEPTEMBER 30, 2015

 

During the third quarter of 2016, truckload services revenue, before fuel surcharges, increased 6.3% to $85.3 million as compared to $80.2 million during the third quarter of 2015. The increase was primarily related to an increase in the number of miles traveled which was due to an increase in both the number of trucks operating in the fleet and equipment utilization. This increase was partially offset by a decrease in the average rate charged to customers for our services. The average number of trucks operating in the fleet increased from 1,832 trucks during the third quarter of 2015 to 1,882 trucks during the third quarter of 2016 while the average miles traveled per truck each workday increased from 480 miles during the third quarter of 2015 to 505 miles during the third quarter of 2016. The increases in truck count and average daily utilization resulted in an increase in the total number of miles traveled from 56.3 million miles during the third quarter of 2015 to 60.8 million miles during the third quarter of 2016. The average rate charged to customers per total mile during the third quarter of 2016 decreased $0.03 as compared to the average rate charged during the third quarter of 2015.

 

Salaries, wages and benefits decreased from 32.6% of revenues, before fuel surcharges, in the third quarter of 2015 to 32.4% of revenues, before fuel surcharges, during the third quarter of 2016. The percentage-based decrease is primarily a result of the interaction of expenses with fixed-cost characteristics, such as general and administrative wages, maintenance wages, operations wages, and payroll taxes with an increase in revenues for the periods compared. On a dollar basis, Salaries, wages and benefits increased from $26.1 million during the third quarter 2015 to $27.6 million during the third quarter of 2016. The increase relates primarily to an increase in group health insurance claims expensed under the Company’s self-insured health plan and an increase in workers’ compensation costs during the third quarter of 2016 as compared to the third quarter of 2015.

 

Operating supplies and expenses increased from 8.6% of revenues, before fuel surcharges, during the third quarter of 2015 to 9.0% of revenues, before fuel surcharges, during the third quarter of 2016. The increase relates primarily to an increase in amounts paid for driver recruiting and training. The Company recruits a significant portion of its drivers from third-party driver training schools and pays a fee for each driver employed by the Company at the end of the training period. Throughout 2015, and continuing into 2016, the per-driver fee charged by the Company’s largest provider of recruits increased periodically in accordance with an agreed upon fee schedule arrangement. The scheduled fee increases, along with an increase in the count of drivers recruited and other associated recruiting costs, resulted in an increase of $1.0 million in recruiting costs during the third quarter of 2016 as compared to the third quarter of 2015.

 

Rent and purchased transportation increased from 30.0% of revenues, before fuel surcharges, during the third quarter of 2015 to 35.3% of revenues, before fuel surcharges, during the third quarter of 2016. The increase was primarily due to an increase in driver lease expense as the average number of owner-operators under contract increased from 422 during the third quarter of 2015 to 567 during the third quarter of 2016. 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 increased from 10.5% of revenues, before fuel surcharges, during the third quarter of 2015 to 11.9% of revenues, before fuel surcharges, during the third quarter of 2016. The increase relates primarily to an increase in the size of the Company’s owned equipment fleet, an increase in equipment costs, and to a change in the estimated residual values of certain equipment. Since the end of third quarter of 2015, the company-owned truck and trailer fleets have increased by 122 units and 289 units, respectively, including company-owned trucks being leased by owner-operators. The Company uses a three-year and seven-year equipment replacement cycle for trucks and trailers, respectively, and the cost of new trucks and trailers have increased significantly over the previous three-year and seven-year periods. Depreciating higher cost equipment over the same length of time will result in an increase in depreciation expense during the respective period. During the third quarter of 2016, the Company reduced the expected residual values of certain groups of trucks due to a prolonged depressed used truck market. The reduction in expected residual values resulted in additional depreciation expense of approximately $0.5 million during the third quarter of 2016.

 

Insurance and claims decreased from 4.8% of revenues, before fuel surcharges, during the third quarter of 2015 to 4.2% of revenues, before fuel surcharges, during the third quarter of 2016. The decrease relates primarily to amounts which are due back to the Company in relation to a lawsuit which claimed the Company was in violation of minimum wage laws. This lawsuit is discussed in the section “Legal Proceedings” in Part II, Item 1, of this Report.

 

Other expenses decreased from 2.7% of revenues, before fuel surcharges, during the third quarter of 2015 to 2.2% of revenues, before fuel surcharges, during the third quarter of 2016. The decrease relates primarily to a decrease in amounts expensed for professional services.

 

Gains on sale or disposal of property decreased from 1.7% during the third quarter of 2015 to 1.1% during the third quarter of 2016. The decrease relates primarily to fewer trucks being sold during the third quarter of 2016 as compared to the third quarter of 2015 as a result of a less favorable used equipment market.

 

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased from 87.5% for the third quarter of 2015 to 93.9% for the third quarter of 2016.

 

NINE MONTHS ENDED SEPTEMBER 30, 2016 VS. NINE MONTHS ENDED SEPTEMBER 30, 2015

 

For the nine months ended September 30, 2016, truckload services revenue, before fuel surcharges, increased 9.5% to $254.3 million as compared to $232.3 million for the nine months ended September 30, 2015. The increase was primarily related to an increase in the number of miles traveled due to an increase in both the number of trucks operating in the fleet and an increase in equipment utilization. The average number of trucks operating in the fleet increased from 1,813 trucks during the first nine months of 2015 to 1,896 trucks during the first nine months of 2016, while the average miles traveled per truck each work day increased from 473 miles during the first nine months of 2015 to 491 miles during the first nine months of 2016. The increase in truck count combined with the increase in average daily utilization resulted in an increase in the total number of miles traveled from 163.7 million miles during the first nine months of 2015 to 178.8 million miles traveled during the first nine months of 2016.

 

Salaries, wages and benefits decreased from 33.6% of revenues, before fuel surcharges, during the nine months of 2015 to 32.2% of revenues, before fuel surcharges, during the nine months of 2016. The percentage-based decrease was primarily a result of the interaction of expenses with fixed-cost characteristics, such as general and administrative wages, maintenance wages, operations wages, and payroll taxes with an increase in revenues for the periods compared. On a dollar basis, Salaries, wages and benefits increased from $78.0 million during the first nine months of 2015 to $82.0 million during the first nine months of 2016. The increase relates primarily to an increase in group health insurance claims expensed under the Company’s self-insured health plan during the first nine months of 2016 as compared to the first nine months of 2015. To a lesser extent, the increase was the result of an increase in wages paid to non-driver employees during the first nine months of 2016 as compared to the first nine months of 2015. This increase was partially offset by a decrease in company driver wages paid during the first nine months of 2016 as compared to company driver wages paid during the first nine months of 2015. 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 or equipment leased from the Company. While each group is generally compensated on a per-mile basis, owner-operator payments are classified in the Company’s financial statements under Rent and purchased transportation. The decrease in company driver wages primarily resulted from a decrease in the proportion of total miles driven by company drivers during the first nine months of 2016 in comparison to the proportion of total miles driven by company drivers during the first nine months of 2015. This proportional decrease was the result of an increase in the average number of owner-operators under contract from 395 during the first nine months of 2015 to 546 during the first nine months of 2016.

 

 

  

Operating supplies and expenses increased from 8.8% of revenues, before fuel surcharges, during the first nine months of 2015 to 10.0% of revenues, before fuel surcharges, during the first nine months of 2016. The increase relates primarily to an increase in amounts paid for driver recruiting and training. The Company recruits a significant portion of its drivers from third-party driver training schools and pays a fee for each driver employed by the Company at the end of the training period. Throughout 2015, and continuing into 2016, the per-driver fee charged by the Company’s largest provider of recruits increased periodically in accordance with an agreed upon fee schedule arrangement. The scheduled fee increases, along with an increase in the count of drivers recruited and other associated recruiting costs, resulted in an increase of $3.6 million in recruiting costs during the first nine months of 2016 as compared to the first nine months of 2015.

 

Rent and purchased transportation increased from 28.6% of revenues, before fuel surcharges, during the first nine months of 2015 to 34.1% of revenues, before fuel surcharges, during the first nine months of 2016. The increase was primarily due to an increase in driver lease expense as the average number of owner-operators under contract increased from 395 during the first nine months of 2015 to 546 during the first nine months of 2016. 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 increased from 10.2% of revenues, before fuel surcharges, during the first nine months of 2015 to 11.4% of revenues, before fuel surcharges, during the first nine months of 2016. The increase relates primarily to an increase in the size of the Company’s owned equipment fleet, an increase in equipment costs, and to a change in the estimated residual values of certain equipment. Since the end of third quarter of 2015, the company-owned truck and trailer fleets have increased by 122 units and 289 units, respectively, including company-owned trucks being leased by owner-operators. The Company uses a three-year and seven-year equipment replacement cycle for trucks and trailers, respectively, and the cost of new trucks and trailers have increased significantly over the previous three-year and seven-year periods. Depreciating higher cost equipment over the same length of time will result in an increase in depreciation expense during the respective period. During the first nine months of 2016, the Company reduced the expected residual values of certain groups of trucks due to a prolonged depressed used truck market. The reduction in expected residual values resulted in additional depreciation expense of approximately $0.5 million during the first nine months of 2016.

 

Other expenses decreased from 2.9% of revenues, before fuel surcharges, during the first nine months of 2015 to 2.3% of revenues, before fuel surcharges, during the first nine months of 2016. The decrease relates primarily to a decrease in amounts expensed for professional services in relation to claims litigation, a decrease in uncollectible revenue, and a decrease in amounts expensed for building rents.

 

Gains on sale or disposal of property decreased from 2.0% during the first nine months of 2015 to 1.6% during the first nine months of 2016. The decrease relates primarily to fewer trucks being sold during the first nine months of 2016 as compared to the first nine months of 2015 and to a less favorable used equipment market for trucks which resulted in a decrease in gains realized on a per-truck basis.

 

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased from 86.9% for the first nine months of 2015 to 93.2% for the first nine months of 2016.

 

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.

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
		(percentages)
Operating revenues, before fuel surcharge			100.0				100.0				100.0				100.0
Operating expenses:
Salaries, wages and benefits			5.0				3.5				4.5				2.9
Rent and purchased transportation			93.4				94.4				92.2				94.0
Other			0.6				0.6				0.6				0.6
Total operating expenses			99.0				98.5				97.3				97.5
Operating income			1.0				1.5				2.7				2.5
Non-operating income (expense)			0.7				(0.1	)			0.2				0.0
Interest expense			(0.5	)			(0.4	)			(0.5	)			(0.3	)
Income before income taxes			1.2				1.0				2.4				2.2

 

 

 

THREE MONTHS ENDED SEPTEMBER 30, 2016 VS. THREE MONTHS ENDED SEPTEMBER 30, 2015

 

During the third quarter of 2016, logistics and brokerage services revenue, before fuel surcharges, decreased 10.3% to $10.6 million as compared to $11.9 million during the third quarter of 2015. The decrease relates to a decrease in the average rates charged to our customers and to a decrease in the number of brokered loads during the third quarter of 2016 as compared to the third quarter of 2015.

 

Salaries, wages and benefits increased from 3.5% of revenues, before fuel surcharges, in the third quarter of 2015 to 5.0% of revenues, before fuel surcharges, during the third quarter of 2016. The increase relates to an increase in wages paid to employees assigned to the logistics and brokerage division during the third quarter of 2016 as compared to the third quarter of 2015 and to a lesser extent, to an increase in the number of employees assigned to the logistics and brokerage services division.

 

Rents and purchased transportation decreased from 94.4% of revenues, before fuel surcharges, during the third quarter of 2015 to 93.4% of revenues, before fuel surcharges, during the third quarter of 2016. The decrease relates to a decrease in the negotiated amounts paid to 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 from 98.5% for the third quarter of 2015 to 99.0% for the third quarter of 2016.

 

NINE MONTHS ENDED SEPTEMBER 30, 2016 VS. NINE MONTHS ENDED SEPTEMBER 30, 2015

 

During the first nine months of 2016, logistics and brokerage services revenue, before fuel surcharges, increased 2.0% to $34.2 million as compared to $33.6 million during the first nine months of 2015. The increase relates to an increase in the number of brokered loads during the first nine months of 2016 as compared to the first nine months of 2015.

 

Salaries, wages and benefits increased from 2.9% of revenues, before fuel surcharges, during the first nine months of 2015 to 4.5% of revenues, before fuel surcharges, during the first nine months of 2016. The increase relates to an increase in wages paid to employees assigned to the logistics and brokerage division during the first nine months of 2016 as compared to the first nine months of 2015 and to a lesser extent, to an increase in the number of employees assigned to the logistics and brokerage services division.

 

Rents and purchased transportation decreased from 94.0% of revenues, before fuel surcharges, during the first nine months of 2015 to 92.2% of revenues, before fuel surcharges during the first nine months of 2016. The decrease relates to a decrease in negotiated amounts paid to 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, improved from 97.5% for the first nine months of 2015 to 97.3% for the first nine months of 2016.

 

RESULTS OF OPERATIONS – COMBINED SERVICES

 

THREE MONTHS ENDED SEPTEMBER 30, 2016 VS. THREE MONTHS ENDED SEPTEMBER 30, 2015

 

Net income for all divisions was approximately $3.5 million, or 3.6% of revenues, before fuel surcharges for the third quarter of 2016 as compared to a net income of $5.8 million, or 6.3% of revenues, before fuel surcharges for the third quarter of 2015. The decrease in net income resulted in diluted earnings per share of $0.53 for the third quarter of 2016 as compared to diluted earnings per share of $0.80 for the third quarter of 2015.

 

NINE MONTHS ENDED SEPTEMBER 30, 2016 VS. NINE MONTHS ENDED SEPTEMBER 30, 2015

 

Net income for all divisions was approximately $10.4 million, or 3.6% of revenues, before fuel surcharges for the first nine months of 2016 as compared to net income of $18.2 million, or 6.9% of revenues, before fuel surcharges for the first nine months of 2015. The decrease in net income resulted in diluted earnings per share of $1.54 for the first nine months of 2016 as compared to diluted earnings per share of $2.46 for the first nine months of 2015.

 

LIQUIDITY AND CAPITAL RESOURCES

Our business has required, and will continue to require, a significant investment in new revenue equipment. Our primary sources of liquidity have been funds provided by operations, proceeds from the sales of revenue equipment, issuances of equity securities, and borrowings under our lines of credit, installment notes, and investment margin account.

 

 

 

During the first nine months of 2016, we generated $42.2 million in cash from operating activities. Investing activities used $36.2 million in cash in the first nine months of 2016. Financing activities used $6.0 million in cash in the first nine months of 2016.

 

Our primary use of funds is for the purchase of revenue equipment. We typically use installment notes, our existing line of credit on an interim basis, proceeds from the sale or trade of equipment, and cash flows from operations to finance capital expenditures and repay long-term debt. During the first nine months of 2016, we utilized cash on hand, installment notes, and our lines of credit to finance purchases of revenue equipment and other assets of approximately $55.9 million.

 

Occasionally, we finance the acquisition of revenue equipment through installment notes with fixed interest rates and terms ranging from 36 to 60 months. During the first nine months of 2016, the Company’s subsidiary, P.A.M. Transport, Inc., entered into installment obligations totaling approximately $52.2 million for the purpose of purchasing revenue equipment. These obligations are payable in either 36 monthly installments or 60 monthly installments at interest rates ranging from 1.99% to 2.55%.

 

During the remainder of 2016, we expect to purchase approximately 143 new trucks and 406 new trailers while continuing to sell or trade older equipment, which we expect to result in net capital expenditures of approximately $18.4 million. Management believes we will be able to finance our near term needs for working capital over the next twelve months, as well as any planned capital expenditures during such period, with cash balances, cash flows from operations, and borrowings believed to be available from financing sources. We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek additional equity capital. The availability of additional capital will depend upon prevailing market conditions, the market price of our common stock and several other factors over which we have limited control, as well as our financial condition and results of operations. Nevertheless, based on our recent operating results, current cash position, anticipated future cash flows, and sources of financing that we expect will be available to us, we do not expect that we will experience any significant liquidity constraints in the foreseeable future.

 

We currently intend to retain our future earnings to finance our growth and do not anticipate paying cash dividends in the foreseeable future.

 

During the first nine months of 2016, we maintained a $40.0 million revolving line of credit. Amounts outstanding under the line of credit bear interest at LIBOR (determined as of the first day of each month) plus 1.50% (2.02% at September 30, 2016), are secured by our accounts receivable and mature on June 1, 2018. At September 30, 2016 outstanding advances on the line of credit were approximately $7.7 million, including $0.8 million in letters of credit, with availability to borrow $32.3 million.

 

Trade accounts receivable increased from $49.3 million at December 31, 2015 to $58.0 million at September 30, 2016. The increase relates to a general increase in freight revenues, which flows through the accounts receivable account, during the third quarter of 2016 as compared to the last quarter of 2015.

 

Accounts receivable-other increased from $5.9 million at December 31, 2015 to $12.7 million at September 30, 2016. The increase relates primarily to an increase in amounts receivable from the Company’s third-party qualified intermediary. The Company contracts with a third-party qualified intermediary in order to accomplish tax-deferred, like-kind exchanges related to its revenue equipment. Under the program, dispositions of eligible trucks or trailers and acquisitions of replacement trucks or trailers are made in a form whereby any associated tax gains related to the disposal are deferred. To qualify for like-kind exchange treatment, we exchange, through our qualified intermediary, eligible trucks or trailers being disposed with trucks or trailers being acquired. Amounts held by the Company’s third-party qualified intermediary are dependent on the timing and extent of the Company’s revenue equipment sales and/or purchase activities, which can fluctuate significantly from period-to-period. The increase also relates to amounts receivable from a vendor as part of our tire program and will be collected throughout the remainder of 2016. To a lesser extent, the increase also relates to an increase in amounts advanced to our drivers and third party brokers as of September 30, 2016 compared to December 31, 2015.

 

Marketable equity securities increased from $24.6 million at December 31, 2015 to $25.6 million at September 30, 2016. The $1.0 million increase was related to a net increase in market value of approximately $1.4 million, purchases of equity securities with a cost basis of approximately $0.9 million, reduced by sales of marketable equity securities with a combined cost basis of approximately $0.5 million, other than temporary write downs of approximately $0.7 million, and returns of capital of approximately $0.1 million during the first nine months of 2016.

 

Income taxes refundable decreased from $2.9 million at December 31, 2015 to $0.6 million at September 30, 2016 as a result of receiving an income tax refund of approximately $2.4 million during the first quarter of 2016.

 

 

  

Revenue equipment, at September 30, 2016, which generally consists of trucks, trailers, and revenue equipment accessories such as Qualcomm™ satellite tracking units and auxiliary power units, increased approximately $4.2 million as compared to December 31, 2015. The increase relates to the purchase of new trucks and trailers in a greater quantity than the quantity of trucks and trailers disposed. The increase is also reflective of the higher purchase price of new trucks and trailers compared to the trucks and trailers which are being replaced and sold.

 

Accounts payable increased from $17.8 million at December 31, 2015 to $25.7 million at September 30, 2016. The $7.9 million increase was primarily related to an increase of approximately $8.1 million in the amount of bank drafts outstanding in excess of bank balance which had been reclassified as accounts payable at September 30, 2016 as compared to December 31, 2015.

 

Accrued expenses and other liabilities decreased from $27.1 million at December 31, 2015 to $23.7 million at September 30, 2016. The decrease was primarily related to the payment of approximately $3.5 million for a lawsuit which claimed that the Company was in violation of minimum wage laws with regard to certain activities performed by employee drivers (see Note M to our condensed consolidated financial statements). Also contributing to the decrease was a decrease of approximately $1.3 million of margin account borrowings. The decrease was partially offset by an increase of approximately $1.4 million in amounts accrued at the end of the period which were payable to third-party owner-operator drivers. These payables can vary significantly throughout the year depending on the timing of the actual date of payment in relation to the last day of the reporting period.

 

Long-term debt and current maturities of long term-debt are reviewed on an aggregate basis as the classification of amounts in each category are typically affected merely by the passage of time. Long-term debt and current maturities of long-term debt, on an aggregate basis, increased from $139.2 million at December 31, 2015 to $155.3 million at September 30, 2016. The increase was primarily related to the net effect of additional borrowings made during the first nine months of 2016, reduced by installment note payments made during the first nine months of 2016.

 

Treasury stock increased from $101.8 million at December 31, 2015 to $122.5 million at September 30, 2016. The increase relates primarily to the payment of approximately $17.7 million for shares of our common stock purchased under a tender offer completed during the second quarter of 2016, including fees and expenses related to the offer and to common stock purchases of approximately $3.0 million under the Company’s stock repurchase program also made during the first nine months of 2016.

 

NEW ACCOUNTING PRONOUNCEMENTS

See Note B to the condensed consolidated financial statements for a description of the most recent accounting pronouncements and their impact, if any, on the Company.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Our primary market risk exposures include equity price risk, interest rate risk, commodity price risk (the price paid to obtain diesel fuel for our trucks), and foreign currency exchange rate risk. The potential adverse impact of these risks and the general strategies we employ to manage such risks are discussed below.

 

The following sensitivity analyses do not consider the effects that an adverse change may have on the overall economy nor do they consider additional actions we may take to mitigate our exposure to such changes. Actual results of changes in prices or rates may differ materially from the hypothetical results described below.

 

Equity Price Risk

We hold certain actively traded marketable equity securities, which subjects the Company to fluctuations in the fair market value of its investment portfolio based on the current market price of such securities. The recorded value of marketable equity securities increased to $25.6 million at September 30, 2016 from $24.6 million at December 31, 2015. A 10% decrease in the market price of our marketable equity securities would cause a corresponding 10% decrease in the carrying amounts of these securities, or approximately $2.6 million. For additional information with respect to the marketable equity securities, see Note C to our condensed consolidated financial statements.

 

Interest Rate Risk

Our line of credit bears interest at a floating rate equal to LIBOR plus a fixed percentage. Accordingly, changes in LIBOR, which are affected by changes in interest rates, will affect the interest rate on, and therefore our costs under, the line of credit. Assuming $7.0 million of variable rate debt was outstanding, a hypothetical 100 basis point increase in LIBOR for a one year period would result in approximately $70,000 of additional interest expense.

 

 

  

Commodity Price Risk

Prices and availability of all petroleum products are subject to political, economic, and market factors that are generally outside of our control. Accordingly, the price and availability of diesel fuel, as well as other petroleum products, can be unpredictable. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition. Based upon our 2015 fuel consumption, a 10% increase in the average annual price per gallon of diesel fuel would increase our annual fuel expenses by $5.1 million.

 

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk related to the activities of our branch office located in Mexico. Currently, we do not hedge our exchange rate exposure through any currency forward contracts, currency options, or currency swaps as all of our revenues, and substantially all of our expenses and capital expenditures, are transacted in U.S. dollars. However, certain operating expenditures and capital purchases related to our Mexico branch office are incurred in or exposed to fluctuations in the exchange rate between the U.S. dollar and the Mexican peso. Based on 2015 expenditures denominated in pesos, a 10% increase in the exchange rate would increase our annual operating expenses by $50,000.

 

Item 4. Controls and Procedures.

 

Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on management’s evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2016, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in internal controls over financial reporting. We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

  

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The nature of our business routinely results in litigation, primarily involving claims for personal injuries and property damage incurred in the transportation of freight. We believe that all such routine litigation is adequately covered by insurance and that adverse results in one or more of those cases would not have a material adverse effect on our financial condition.

 

We were a defendant in a collective-action lawsuit which was filed on August 22, 2013, in the United States District Court for the Western District of Arkansas. The plaintiffs, who are current and former drivers and who worked for the Company during the period of August 22, 2010, through the date of the filing, alleged claims for unpaid wages under the Fair Labor Standards Act and the Arkansas Minimum Wage Law. The complaint alleged that the Company failed to pay newly hired drivers minimum wage during orientation, training, and while traveling during normal business hours and that the Company failed to pay all drivers when working on assignment for more than 24 hours. The plaintiffs sought to enjoin the Company from continuing its pay practices related to the allegations. They also sought actual damages, liquidated damages equal to accrual damages, court costs, and legal fees. During 2014, the Company reached a preliminary settlement with the plaintiffs in the amount of $3,950,000 and accordingly reserved this amount, along with estimated settlement costs, in its 2014 consolidated financial statements. During the first quarter of 2015, the Company negotiated a reduction in the settlement amount to approximately $3,450,000. During the second quarter of 2016, the plaintiffs’ motion for final approval of the lawsuit was approved by the court and the settlement was paid in June 2016. During the third quarter of 2016, the Company became entitled to receive approximately $350,000 in amounts previously issued to plaintiffs who could not be located, in accordance with the settlement agreement. The loss under this claim was not covered by existing insurance policies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

The Company’s stock repurchase program has been extended and expanded several times, most recently in May 2014, when the Board of Directors reauthorized 500,000 shares of common stock for repurchase under the initial September 2011 authorization. Since the reauthorization, the Company has repurchased 214,291 shares of its common stock under this repurchase program.

 

On February 18, 2016, the Company commenced a tender offer to repurchase up to 325,000 shares of the Company’s outstanding common stock at a price of up to $30.00 per share. On March 18, 2016, the Company extended the offer and increased the offer from 325,000 shares to 425,000 shares and the offer price from up to $30.00 per share to an offer price of up to $34.00 per share. Following the expiration of the tender offer on April 5, 2016, the Company accepted 567,413 shares of its common stock for purchase at $31.00 per share, including 142,413 oversubscribed shares tendered, at an aggregate purchase price of approximately $17.6 million, excluding fees and expenses related to the offer. The Company funded the purchase of the accepted shares tendered with available cash and accounted for the repurchase of these shares as treasury stock on the Company’s condensed consolidated balance sheet as of September 30, 2016.

 

The following table summarizes the Company’s common stock repurchases during the third quarter of 2016 made pursuant to the stock repurchase program. No shares were purchased during the quarter other than through this program, and all purchases were made by or on behalf of the Company and not by any “affiliated purchaser”.

 

Issuer Purchases of Equity Securities
Period		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of publicly announced plans or programs				Maximum number of shares that may yet be purchased under the plans or programs (1)
July 1-31, 2016			-			$	-				-				328,501
August 1-31, 2016			21,781				19.12				21,781				306,720
September 1-30, 2016			21,011				19.76				21,011				285,709
Total			42,792			$	19.43				42,792

  

(1)

The Company’s stock repurchase program does not have an expiration date.

 

 

  

Item 6. Exhibits.

  

Exhibit Number		Exhibit Description
3.1		Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q filed on May 15, 2002.)
3.2		Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Company's Form 8-K filed on December 11, 2007.)
4.1		Amended and Restated Loan Agreement, dated March 28, 2016, by and among P.A.M. Transport, Inc., First Tennessee Bank National Association and the Company (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on April 1, 2016.)
4.2		Fourth Amended and Restated Consolidated Revolving Credit Note, dated March 28, 2016, by P.A.M. Transport, Inc. in favor of First Tennessee Bank National Association (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed on April 1, 2016.)
4.3		Amended and Restated Security Agreement, dated March 28, 2016, by and between P.A.M. Transport, Inc. and First Tennessee Bank National Association (incorporated by reference to Exhibit 4.3 of the Company’s Form 8-K filed on April 1, 2016.)
4.4		Fourth Amended and Restated Guaranty Agreement of the Company, dated March 28, 2016, in favor of First Tennessee Bank National Association (incorporated by reference to Exhibit 4.4 of the Company’s Form 8-K filed on April 1, 2016.)
31.1		Rule 13a-14(a) Certification of Principal Executive Officer
31.2		Rule 13a-14(a) Certification of Principal Financial Officer
32.1		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

  

SIGNATURES

  

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	P.A.M. TRANSPORTATION SERVICES, INC.
Dated: November 2, 2016	By: /s/ Daniel H. Cushman
	Daniel H. Cushman
	President and Chief Executive Officer
	(principal executive officer)
Dated: November 2, 2016	By: /s/ Allen W. West
	Allen W. West
	Vice President-Finance, Chief Financial
	Officer, Secretary and Treasurer
	(principal accounting and financial officer)

 

 

 

P.A.M. TRANSPORTATION SERVICES, INC.

Index to Exhibits to Form 10-Q

   

Exhibit Number		Exhibit Description
3.1		Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q filed on May 15, 2002.)
3.2		Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Company's Form 8-K filed on December 11, 2007.)
4.1		Amended and Restated Loan Agreement, dated March 28, 2016, by and among P.A.M. Transport, Inc., First Tennessee Bank National Association and the Company (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on April 1, 2016.)
4.2		Fourth Amended and Restated Consolidated Revolving Credit Note, dated March 28, 2016, by P.A.M. Transport, Inc. in favor of First Tennessee Bank National Association (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed on April 1, 2016.)
4.3		Amended and Restated Security Agreement, dated March 28, 2016, by and between P.A.M. Transport, Inc. and First Tennessee Bank National Association (incorporated by reference to Exhibit 4.3 of the Company’s Form 8-K filed on April 1, 2016.)
4.4		Fourth Amended and Restated Guaranty Agreement of the Company, dated March 28, 2016, in favor of First Tennessee Bank National Association (incorporated by reference to Exhibit 4.4 of the Company’s Form 8-K filed on April 1, 2016.)
31.1		Rule 13a-14(a) Certification of Principal Executive Officer
31.2		Rule 13a-14(a) Certification of Principal Financial Officer
32.1		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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