MARTEN TRANSPORT, LTD. The following discussion and analysis of our financial condition and results of operations should be read together with the selected consolidated financial data and our consolidated financial statements and the related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading "Risk Factors" beginning on page 6. We do not assume, and specifically disclaim, any obligation to update any forward-looking statement contained in this report. Overview We have strategically transitioned from a refrigerated long-haul carrier to a multifaceted business offering a network of refrigerated and dry truck-based transportation capabilities across our five distinct business platforms - Truckload, Dedicated, Intermodal, Brokerage and MRTN deMexico . The primary source of our operating revenue is provided by our Truckload segment through a combination of regional short-haul and medium-to-long-haul full-load transportation services. We transport food and other consumer packaged goods that require a temperature-controlled or insulated environment, along with dry freight, acrossthe United States and into and out ofMexico andCanada . Our agreements with customers are typically for one year. Our Dedicated segment provides customized transportation solutions tailored to meet each individual customer's requirements, utilizing temperature-controlled trailers, dry vans and other specialized equipment withinthe United States . Our agreements with customers range from three to five years and are subject to annual rate reviews. Generally, we are paid by the mile for our Truckload and Dedicated services. We also derive Truckload and Dedicated revenue from fuel surcharges, loading and unloading activities, equipment detention and other accessorial services. The main factors that affect our Truckload and Dedicated revenue are the rate per mile we receive from our customers, the percentage of miles for which we are compensated, the number of miles we generate with our equipment and changes in fuel prices. We monitor our revenue production primarily through average Truckload and Dedicated revenue, net of fuel surcharges, per tractor per week. We also analyze our average Truckload and Dedicated revenue, net of fuel surcharges, per total mile, non-revenue miles percentage, the miles per tractor we generate, our fuel surcharge revenue, our accessorial revenue and our other sources of operating revenue. Our Intermodal segment transports our customers' freight withinthe United States utilizing our temperature-controlled trailers and, beginning inSeptember 2019 , our refrigerated containers, each on railroad flatcars for portions of trips, with the balance of the trips using our tractors or, to a lesser extent, contracted carriers. The main factors that affect our Intermodal revenue are the rate per mile and other charges we receive from our customers. Our Brokerage segment develops contractual relationships with and arranges for third-party carriers to transport freight for our customers in temperature-controlled trailers and dry vans withinthe United States and into and out ofMexico throughMarten Transport Logistics, LLC , which was established in 2007 and operates pursuant to brokerage authority granted by the DOT. We retain the billing, collection and customer management responsibilities. The main factors that affect our Brokerage revenue are the rate per mile and other charges that we receive from our customers.
Operating results of our MRTN de
In addition to the factors discussed above, our operating revenue is also affected by, among other things,the United States economy, inventory levels, the level of truck and rail capacity in the transportation market, a contracting driver market, severe weather conditions and specific customer demand. 16 -------------------------------------------------------------------------------- Our operating revenue increased$31.1 million , or 3.7%, in 2020 from 2019. Our operating revenue, net of fuel surcharges, increased$50.7 million , or 6.8%, compared with 2019. Truckload segment revenue, net of fuel surcharges, increased 4.0% from 2019 primarily due to an increase in our average revenue per tractor. Dedicated segment revenue, net of fuel surcharges, increased 21.3% from 2019 primarily due to fleet growth driven by an increase in the number of Dedicated contracts we have with our customers. Intermodal segment revenue, net of fuel surcharges, increased 2.8% primarily due to increased revenue, net of fuel surcharges, per load. Brokerage segment revenue decreased 11.2% primarily due to a decrease in both revenue per load and load volume in 2020. Fuel surcharge revenue decreased to$83.8 million in 2020 from$103.4 million in 2019 due to significantly lower fuel prices. Our profitability is impacted by the variable costs of transporting freight for our customers, fixed costs, and expenses containing both fixed and variable components. The variable costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and independent contractor costs, which are recorded under purchased transportation. Expenses that have both fixed and variable components include maintenance and tire expense and our cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency and other factors. Our main fixed costs relate to the acquisition and subsequent depreciation of long-term assets, such as revenue equipment and operating terminals. We expect our annual cost of tractor and trailer ownership will increase in future periods as a result of higher prices of new equipment, along with any increases in fleet size. Although certain factors affecting our expenses are beyond our control, we monitor them closely and attempt to anticipate changes in these factors in managing our business. For example, fuel prices have significantly fluctuated over the past several years. We manage our exposure to changes in fuel prices primarily through fuel surcharge programs with our customers, as well as through volume fuel purchasing arrangements with national fuel centers and bulk purchases of fuel at our terminals. To help further reduce fuel expense, we have installed and tightly manage the use of auxiliary power units in our tractors to provide climate control and electrical power for our drivers without idling the tractor engine, and also have improved the fuel usage in the temperature-control units on our trailers. For our Intermodal and Brokerage segments, our profitability is impacted by the percentage of revenue which is payable to the providers of the transportation services we arrange. This expense is included within purchased transportation in our consolidated statements of operations. Our operating income improved 21.9% to$93.2 million in 2020 from$76.5 million in 2019. Our operating expenses as a percentage of operating revenue, or "operating ratio," improved to 89.3% in 2020 from 90.9% in 2019. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharges, improved to 88.2% in 2020 from 89.7% in 2019. Our net income improved 13.8% to$69.5 million , or$0.84 per diluted share, in 2020 from$61.1 million , or$0.74 per diluted share, in 2019. Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. AtDecember 31, 2020 , we had$66.1 million of cash and cash equivalents,$620.3 million in stockholders' equity and no long-term debt outstanding. In 2020, net cash flows provided by operating activities of$189.6 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of$102.2 million , to pay cash dividends of$52.4 million , and to upgrade and acquire regional operating facilities in the amount of$5.4 million , resulting in a$34.7 million increase in cash and cash equivalents. We paid cash dividends totaling$52.4 million in 2020 which consisted of a special dividend of$0.50 per share of common stock in December, along with quarterly cash dividends of$0.04 per share of common stock in the third and fourth quarters and of$0.027 per share of common stock in the first and second quarters. We estimate that capital expenditures, net of proceeds from dispositions, will be approximately$137 million in 2021. We believe our sources of liquidity are adequate to meet our current and anticipated needs for at least the next twelve months. Based upon anticipated cash flows, existing cash and cash equivalents balances, current borrowing availability and other sources of financing we expect to be available to us, we do not anticipate any significant liquidity constraints in the foreseeable future. We continue to invest considerable time and capital resources to actively implement and promote long-term environmentally sustainable solutions that drive reductions in our fuel and electricity consumption and decrease our carbon footprint. These initiatives include (i) reducing idle time for our tractors by installing and tightly managing the use of auxiliary power units, which are powered by solar panels and provide climate control and electrical power for our drivers without idling the tractor engine, (ii) improving the energy efficiency of our newer, more aerodynamic and well-maintained tractor and trailer fleets by optimizing the equipment's specifications, weight and tractor speed, equipping our tractors with automatic transmissions, converting the refrigeration units in our refrigerated trailers to the new, more-efficient CARB refrigeration units along with increasing the insulation in the trailer walls and installing trailer skirts, and using ultra-fuel efficient and wide-based tires, and (iii) upgrading all of our facilities to indoor and outdoor LED lighting along with converting all of our facilities to solar power. Additionally, we are an active participant in theUnited States EPA SmartWay Transport Partnership , in which freight shippers, carriers, logistics companies and other voluntary stakeholders partner with theEPA to measure, benchmark and improve logistics operations to reduce their environmental footprint. 17 -------------------------------------------------------------------------------- This Management's Discussion and Analysis of Financial Condition and Results of Operations includes discussions of operating revenue, net of fuel surcharge revenue; Truckload, Dedicated and Intermodal revenue, net of fuel surcharge revenue; operating expenses as a percentage of operating revenue, each net of fuel surcharge revenue; and net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads). We provide these additional disclosures because management believes these measures provide a more consistent basis for comparing results of operations from period to period. These financial measures in this report have not been determined in accordance withU.S. generally accepted accounting principles (GAAP). Pursuant to Item 10(e) of Regulation S-K, we have included the amounts necessary to reconcile these non-GAAP financial measures to the most directly comparable GAAP financial measures of operating revenue, operating expenses divided by operating revenue, and fuel and fuel taxes. Stock Split OnAugust 13, 2020 , we effected a three-for-two stock split of our common stock,$.01 par value, in the form of a 50% stock dividend. Our consolidated financial statements, related notes, and other financial data contained in this report have been adjusted to give retroactive effect to the stock split for all periods presented. COVID-19 Update The demand that our customers have from their customers within the COVID-19 pandemic for the food, beverages and other consumer goods that we transport and distribute varies significantly for each customer across their individual products, by region and in total - with the level of demand by freight lane also subject to significant fluctuations. Our continual redeployment of our drivers to match the changing freight demand by lane while minimizing empty miles has been and will continue to be imperative to the utilization of our revenue equipment and our operating revenue through this environment. Our execution of our unique multifaceted business model across our diverse customer base, including our ability to quickly make data-driven decisions and adjustments utilizing our in-house operating technology, has and will continue to be one of our key strengths as we proactively navigate through this fast-changing landscape in providing our essential service. Based upon anticipated cash flows, existing cash and cash equivalents balances, current borrowing availability and other sources of financing we expect to be available to us, we believe we are well-positioned for the sustainability of our business from a balance sheet perspective.
We fully embrace our responsibility to keep our valued employees safe, healthy and informed and have implemented measures including the following:
- Throughout our headquarters and regional operating facilities, we are applying
the social distancing guidelines by having a number of our office employees
work from their homes and by staggering shift and break times for our
maintenance personnel.
- We have increased the frequency and extent of disinfecting and cleaning of
each of our facilities and thoroughly disinfect all tractors prior to
assignment to our drivers.
- We provide hand sanitizer and masks to all of our employees. When handsanitizer was not available in March, we purchased the components and prepared
and distributed over 6,000 bottles.
- We provide clear communication to our employees promoting essential healthy
hygiene habits and assist in responsibly responding to potential symptoms
including self-quarantining and testing.
18--------------------------------------------------------------------------------
Results of Operations
The following table sets forth for the years indicated certain operating statistics regarding our revenue and operations:
2020 2019 2018
Truckload Segment:
Revenue (in thousands) $ 379,148 $ 378,000 $ 375,340
Average revenue, net of fuel surcharges, per
tractor per week(1) $ 3,926 $ 3,797 $ 3,833
Average tractors(1) 1,668 1,663 1,613
Average miles per trip 547 548 573
Total miles (in thousands) 165,267 155,177 153,514
Dedicated Segment:
Revenue (in thousands) $ 309,784 $ 265,984 $ 223,852
Average revenue, net of fuel surcharges, per
tractor per week(1) $ 3,316 $ 3,378 $ 3,300
Average tractors(1) 1,566 1,272 1,088
Average miles per trip 305 315 309
Total miles (in thousands) 132,597 108,814 93,269
Intermodal Segment:
Revenue (in thousands) $ 88,733 $ 90,394 $ 102,025
Loads 36,444 36,309 42,425
Average tractors 106 91 88
Brokerage Segment:
Revenue (in thousands) $ 96,709 $ 108,893 $ 86,377
Loads 58,986 63,200 51,104
(1) Includes tractors driven by both company-employed drivers and independent
contractors. Independent contractors provided 143, 92 and 46 tractors as of
December 31, 2020 , 2019 and 2018, respectively. 19
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Comparison of Year Ended
The following table sets forth for the years indicated our operating revenue,
operating income and operating ratio by segment, along with the change for each
component:
Dollar Percentage
Change Change
2020 vs. 2020 vs.
(Dollars in thousands) 2020 2019 2019 2019
Operating revenue:
Truckload revenue, net of fuel surcharge
revenue $ 342,357 $ 329,304 $ 13,053 4.0 %
Truckload fuel surcharge revenue 36,791 48,696 (11,905 ) (24.4 )
Total Truckload revenue 379,148 378,000 1,148 0.3
Dedicated revenue, net of fuel surcharge
revenue 271,550 223,935 47,615 21.3
Dedicated fuel surcharge revenue 38,234 42,049 (3,815 ) (9.1 )
Total Dedicated revenue 309,784 265,984 43,800 16.5
Intermodal revenue, net of fuel
surcharge revenue 79,944 77,750 2,194 2.8
Intermodal fuel surcharge revenue 8,789 12,644 (3,855 ) (30.5 )
Total Intermodal revenue 88,733 90,394 (1,661 ) (1.8 )
Brokerage revenue 96,709 108,893 (12,184 ) (11.2 )
Total operating revenue $ 874,374 $ 843,271 $ 31,103 3.7 %
Operating income:
Truckload $ 39,637 $ 29,666 $ 9,971 33.6 %
Dedicated 40,909 31,245 9,664 30.9
Intermodal 5,730 6,612 (882 ) (13.3 )
Brokerage 6,970 8,975 (2,005 ) (22.3 )
Total operating income $ 93,246 $ 76,498 $ 16,748 21.9 %
Operating ratio(1):
Truckload 89.5 % 92.2 %
Dedicated 86.8 88.3
Intermodal 93.5 92.7
Brokerage 92.8 91.8
Consolidated operating ratio 89.3 % 90.9 %
(1) Represents operating expenses as a percentage of operating revenue.
Our operating revenue increased$31.1 million , or 3.7%, to$874.4 million in 2020 from$843.3 million in 2019. Our operating revenue, net of fuel surcharges, increased$50.7 million , or 6.8%, to$790.6 million in 2020 from$739.9 million in 2019. This increase was due to a$47.6 million increase in Dedicated revenue, net of fuel surcharges, a$13.1 million increase in Truckload revenue, net of fuel surcharges, and a$2.2 million increase in Intermodal revenue, net of fuel surcharges, partially offset by a$12.2 million decrease in Brokerage revenue. Fuel surcharge revenue decreased to$83.8 million in 2020 from$103.4 million in 2019 due to significantly lower fuel prices. Truckload segment revenue increased$1.1 million , or 0.3%, to$379.1 million in 2020 from$378.0 million in 2019. Truckload segment revenue, net of fuel surcharges, increased$13.1 million , or 4.0%, to$342.4 million in 2020 from$329.3 million in 2019, primarily due to an increase in our average revenue per tractor. The improvement in the operating ratio in 2020 was primarily due to a decrease in net fuel expense as a percentage of revenue along with multiple cost control measures. 20
-------------------------------------------------------------------------------- Dedicated segment revenue increased$43.8 million , or 16.5%, to$309.8 million in 2020 from$266.0 million in 2019. Dedicated segment revenue, net of fuel surcharges, increased 21.3% primarily due to fleet growth driven by an increase in the number of Dedicated contracts we have with our customers. The improvement in the operating ratio in 2020 was primarily due to a decrease in net fuel expense as a percentage of revenue along with multiple cost control measures. Intermodal segment revenue decreased$1.7 million , or 1.8%, to$88.7 million in 2020 from$90.4 million in 2019. Intermodal segment revenue, net of fuel surcharges, increased 2.8% from 2019 primarily due to increased revenue, net of fuel surcharges, per load. The increase in the operating ratio in 2020 was primarily due to an increase in salaries, wages and benefits expense as a percentage of revenue. Brokerage segment revenue decreased$12.2 million , or 11.2%, to$96.7 million in 2020 from$108.9 million in 2019 primarily due to a decrease in both revenue per load and load volume. The increase in the operating ratio in 2020 was primarily due to an increase in the amounts payable to carriers for transportation services which we arranged as a percentage of our Brokerage revenue. The following table sets forth for the years indicated the dollar and percentage increase or decrease of the items in our consolidated statements of operations, and those items as a percentage of operating revenue: Dollar Percentage Percentage of Change Change Operating Revenue 2020 vs. 2020 vs. (Dollars in thousands) 2019 2019 2020 2019 Operating revenue$ 31,103 3.7 % 100.0 % 100.0 % Operating expenses (income): Salaries, wages and benefits 25,999 9.5 34.3 32.5 Purchased transportation (4,335 ) (2.7 ) 17.7 18.8 Fuel and fuel taxes (23,208 ) (19.1 ) 11.2 14.4 Supplies and maintenance 1,078 2.3 5.5 5.5 Depreciation 7,756 8.2 11.8 11.3 Operating taxes and licenses 740 7.3 1.2 1.2 Insurance and claims 9,253 24.2 5.4 4.5 Communications and utilities 302 3.9 0.9 0.9 Gain on disposition of revenue equipment (53 ) (0.6 ) (1.0 ) (1.0 ) Gain on disposition of facility (1,718 ) N/A (0.2 ) - Other (1,459 ) (6.3 ) 2.5 2.7 Total operating expenses 14,355 1.9 89.3 90.9 Operating income 16,748 21.9 10.7 9.1 Other 1,050 88.2 - (0.1 ) Income before income taxes 15,698 20.2 10.7 9.2 Income taxes expense 7,269 43.7 2.7 2.0 Net income$ 8,429 13.8 % 7.9 % 7.2 % Salaries, wages and benefits consist of compensation for our employees, including both driver and non-driver employees, employees' health insurance, 401(k) plan contributions and other fringe benefits. These expenses vary depending upon the size of our Truckload, Dedicated and Intermodal tractor fleets, the ratio of company drivers to independent contractors, our efficiency, our experience with employees' health insurance claims, changes in health care premiums and other factors. Salaries, wages and benefits expense increased$26.0 million , or 9.5%, in 2020 from 2019. This increase resulted primarily from additional company driver compensation expense of$17.7 million , a$1.4 million increase in bonus compensation expense for our non-driver employees and a$1.3 million increase in employees' health insurance expense as a result of increased self-insured medical claims. 21
-------------------------------------------------------------------------------- Purchased transportation consists of amounts payable to railroads and carriers for transportation services we arrange in connection with Brokerage and Intermodal operations and to independent contractor providers of revenue equipment. This category will vary depending upon the amount and rates, including fuel surcharges, we pay to third-party railroad and motor carriers, the ratio of company drivers versus independent contractors and the amount of fuel surcharges passed through to independent contractors. Purchased transportation expense decreased$4.3 million in total, or 2.7%, in 2020 from 2019. Amounts payable to railroads and drayage carriers for transportation services within our Intermodal segment decreased$3.3 million to$56.0 million in 2020 from$59.3 million in 2019, primarily due to a decrease in the fuel surcharge component of the amounts payable. Amounts payable to carriers for transportation services we arranged in our Brokerage segment decreased$9.0 million to$81.6 million in 2020 from$90.7 million in 2019, primarily due to a decrease in both revenue per load and load volume. The portion of purchased transportation expense related to independent contractors within our Truckload and Dedicated segments, including fuel surcharges, increased$8.0 million in 2020 as the number of independent contractors rose. We expect our purchased transportation expense to increase as we grow our Intermodal and Brokerage segments. Fuel and fuel taxes decreased by$23.2 million , or 19.1%, in 2020 from 2019 primarily due to significantly lower fuel prices. Net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads) decreased$6.0 million , or 19.9%, to$24.1 million in 2020 from$30.1 million in 2019. Fuel surcharges passed through to independent contractors, outside drayage carriers and railroads decreased to$9.7 million from$12.1 million in 2019.The United States Department of Energy , orDOE , national average cost of fuel decreased to$2.55 per gallon from$3.06 per gallon in 2019. Net fuel expense decreased to 3.5% of Truckload, Dedicated and Intermodal segment revenue, net of fuel surcharges, from 4.8% in 2019. We have worked diligently to control fuel usage and costs by improving our volume purchasing arrangements and optimizing our drivers' fuel purchases with national fuel centers, focusing on shorter lengths of haul, installing and tightly managing the use of auxiliary power units in our tractors to minimize engine idling and improving fuel usage in the temperature-control units on our trailers. Auxiliary power units, which we have installed in our company-owned tractors, provide climate control and electrical power for our drivers without idling the tractor engine. Depreciation relates to owned tractors, trailers, containers, auxiliary power units, communication units, terminal facilities and other assets. The$7.8 million , or 8.2%, increase in depreciation in 2020 was primarily due to an increase in the size of our fleet of tractors. We expect our annual cost of tractor and trailer ownership will increase in future periods as a result of higher prices of new equipment, which will result in greater depreciation over the useful life. Insurance and claims consist of the costs of insurance premiums and accruals we make for claims within our self-insured retention amounts, primarily for personal injury, property damage, physical damage to our equipment, cargo claims and workers' compensation claims. These expenses will vary primarily based upon the frequency and severity of our accident experience, our self-insured retention levels and the market for insurance. The$9.3 million , or 24.2%, increase in insurance and claims in 2020 was primarily due to an increase in our insurance premiums along with increases in the cost of our self-insured workers' compensation, auto liability and physical damage claims related to our revenue equipment. Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods which could materially impact our financial results depending on the frequency, severity and timing of claims.
Gain on disposition of revenue equipment was
Gain on disposition of facility was$1.7 million in 2020. The disposition of the facility, located inForest Park, GA , was part of our long-term program to expand and update the footprint of our facilities throughoutthe United States . We held the facility as rental property since 2011 after constructing a larger facility in the area. Any future gains or losses on disposition of facilities will be impacted by the market for real estate, which is beyond our control.
The
As a result of the foregoing factors, our operating income improved 21.9% to$93.2 million in 2020 from$76.5 million in 2019. Our operating expenses as a percentage of operating revenue, or "operating ratio," improved to 89.3% in 2020 from 90.9% in 2019. The operating ratio for our Truckload segment was 89.5% in 2020 and 92.2% in 2019, for our Dedicated segment was 86.8% in 2020 and 88.3% in 2019, for our Intermodal segment was 93.5% in 2020 and 92.7% in 2019, and for our Brokerage segment was 92.8% in 2020 and 91.8% in 2019. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharges, improved to 88.2% in 2020 from 89.7% in 2019. 22 --------------------------------------------------------------------------------
The decrease in our other non-operating income was primarily due to less interest income earned in 2020.
Our effective income tax rate increased to 25.6% in 2020 from 21.4% in 2019. Additional income tax expense of$1.1 million was included in 2020 to adjust for certain discrete tax benefit reserves, which we evaluate based on the current facts, circumstances and information available. Additional income tax benefits of$1.4 million were included in 2019 which resulted from certain discrete tax benefits included in our tax filings in the period which were not previously recognized. As a result of the factors described above, net income improved 13.8% to$69.5 million , or$0.84 per diluted share, in 2020 from$61.1 million , or$0.74 per diluted share, in 2019.
Comparison of Year Ended
The following table sets forth for the years indicated our operating revenue,
operating income and operating ratio by segment, along with the change for each
component:
Dollar Percentage
Change Change
2019 vs. 2019 vs.
(Dollars in thousands) 2019 2018 2018 2018
Operating revenue:
Truckload revenue, net of fuel surcharge
revenue $ 329,304 $ 322,324 $ 6,980 2.2 %
Truckload fuel surcharge revenue 48,696 53,016 (4,320 ) (8.1 )
Total Truckload revenue 378,000 375,340 2,660 0.7
Dedicated revenue, net of fuel surcharge
revenue 223,935 187,137 36,798 19.7
Dedicated fuel surcharge revenue 42,049 36,715 5,334 14.5
Total Dedicated revenue 265,984 223,852 42,132 18.8
Intermodal revenue, net of fuel
surcharge revenue 77,750 85,572 (7,822 ) (9.1 )
Intermodal fuel surcharge revenue 12,644 16,453 (3,809 ) (23.2 )
Total Intermodal revenue 90,394 102,025 (11,631 ) (11.4 )
Brokerage revenue 108,893 86,377 22,516 26.1
Total operating revenue $ 843,271 $ 787,594 $ 55,677 7.1 %
Operating income:
Truckload $ 29,666 $ 35,067 $ (5,401 ) (15.4 )%
Dedicated 31,245 18,589 12,656 68.1
Intermodal 6,612 11,150 (4,538 ) (40.7 )
Brokerage 8,975 5,542 3,433 61.9
Total operating income $ 76,498 $ 70,348 $ 6,150 8.7 %
Operating ratio(1):
Truckload 92.2 % 90.7 %
Dedicated 88.3 91.7
Intermodal 92.7 89.1
Brokerage 91.8 93.6
Consolidated operating ratio 90.9 % 91.1 %
(1) Represents operating expenses as a percentage of operating revenue.
23
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Our operating revenue increased $55.7 million , or 7.1%, to $843.3 million in
2019 from $787.6 million in 2018. Our operating revenue, net of fuel surcharges,
increased $58.5 million , or 8.6%, to $739.9 million in 2019 from $681.4 million
in 2018. This increase was due to a $36.8 million increase in Dedicated revenue,
net of fuel surcharges, a $22.5 million increase in Brokerage revenue, and a
$7.0 million increase in Truckload revenue, net of fuel surcharges, partially
offset by a $7.8 million decrease in Intermodal revenue, net of fuel surcharges.
Fuel surcharge revenue decreased to $103.4 million in 2019 from $106.2 million
in 2018. A shift of a portion of line haul revenue to fuel surcharge revenue,
which began in mid-first quarter of 2018 as a result of changes in a number of
customer agreements, reduced our revenue excluding fuel surcharges by $17.5
million in 2019 and by $12.9 million in 2018, while increasing our fuel
surcharge revenue by the same amounts.
Truckload segment revenue increased $2.7 million , or 0.7%, to $378.0 million in
2019 from $375.3 million in 2018. Truckload segment revenue, net of fuel
surcharges, increased $7.0 million , or 2.2%, to $329.3 million in 2019 from
$322.3 million in 2018 primarily due to an increase in our average number of
tractors. The shift from line haul revenue to fuel surcharge revenue as a result
of changes in a number of customer agreements decreased our Truckload revenue
excluding fuel surcharges by $3.4 million in 2019 and by $2.8 million in 2018,
while increasing our fuel surcharge revenue by the same amounts. The increase in
the operating ratio in 2019 was primarily due to an increase in salaries and
wages as a percentage of revenue.
Dedicated segment revenue increased $42.1 million , or 18.8%, to $266.0 million
in 2019 from $223.9 million in 2018. Dedicated segment revenue, net of fuel
surcharges, increased 19.7% primarily due to fleet growth driven by an
increase in the number of Dedicated contracts we have with our customers and an
increase in our average revenue per tractor. The shift from line haul revenue to
fuel surcharge revenue as a result of changes in a number of customer agreements
decreased our Dedicated revenue excluding fuel surcharges by $14.1 million in
2019 and by $10.1 million in 2018, while increasing our fuel surcharge revenue
by the same amounts. The improvement in the operating ratio for our Dedicated
segment was primarily due to an increase in our average revenue per tractor,
startup costs associated with new business that began in 2018 and multiple cost
control measures.
Intermodal segment revenue decreased $11.6 million , or 11.4%, to $90.4 million
in 2019 from $102.0 million in 2018. Intermodal segment revenue, net of fuel
surcharges, decreased 9.1% from 2018 due to a decrease in load volume. The
increase in the operating ratio in 2019 was primarily due to increases in
salaries and wages, fuel expense and amounts payable to railroads as a
percentage of revenue.
Brokerage segment revenue increased
24
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The following table sets forth for the years indicated the dollar and percentage
increase or decrease of the items in our consolidated statements of operations,
and those items as a percentage of operating revenue:
Dollar Percentage Percentage of
Change Change Operating Revenue
2019 vs. 2019 vs.
(Dollars in thousands) 2018 2018 2019 2018
Operating revenue $ 55,677 7.1 % 100.0 % 100.0 %
Operating expenses (income):
Salaries, wages and benefits 22,109 8.8 32.5 32.0
Purchased transportation 14,337 9.9 18.8 18.4
Fuel and fuel taxes (292 ) (0.2 ) 14.4 15.4
Supplies and maintenance 5,884 14.4 5.5 5.2
Depreciation 6,552 7.4 11.3 11.2
Operating taxes and licenses 627 6.6 1.2 1.2
Insurance and claims (456 ) (1.2 ) 4.5 4.9
Communications and utilities 1,075 16.2 0.9 0.8Gain on disposition of revenue equipment (1,436 ) (19.8 )
(1.0 ) (0.9 )
Other 1,127 5.1 2.7 2.8
Total operating expenses 49,527 6.9 90.9 91.1
Operating income 6,150 8.7 9.1 8.9
Other (509 ) (74.7 ) (0.1 ) (0.1 )
Income before income taxes 6,659 9.4 9.2 9.0
Income taxes expense 615 3.8 2.0 2.0
Net income $ 6,044 11.0 % 7.2 % 7.0 %
Salaries, wages and benefits expense increased
Purchased transportation expense increased$14.3 million in total, or 9.9%, in 2019 from 2018. Amounts payable to carriers for transportation services we arranged in our Brokerage segment increased$18.3 million to$90.7 million in 2019 from$72.3 million in 2018, primarily due to an increase in brokerage revenue. Amounts payable to railroads and drayage carriers for transportation services within our Intermodal segment decreased$5.8 million to$59.3 million in 2019 from$65.0 million in 2018. This decrease was due to decreased intermodal revenue. The portion of purchased transportation expense related to independent contractors within our Truckload and Dedicated segments, including fuel surcharges, increased$1.8 million in 2019. Fuel and fuel taxes decreased by$292,000 , or 0.2%, in 2019 from 2018. Net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads) increased$644,000 , or 2.2%, to$30.1 million in 2019 from$29.4 million in 2018. Fuel surcharges passed through to independent contractors, outside drayage carriers and railroads decreased to$12.1 million from$14.0 million in 2018. TheDOE national average cost of fuel decreased to$3.06 per gallon from$3.18 per gallon in 2018. Net fuel expense also decreased to 4.8% of Truckload, Dedicated and Intermodal segment revenue, net of fuel surcharges, from 4.9% in 2018. We have worked diligently to control fuel usage and costs by improving our volume purchasing arrangements and optimizing our drivers' fuel purchases with national fuel centers, focusing on shorter lengths of haul, installing and tightly managing the use of auxiliary power units in our tractors to minimize engine idling and improving fuel usage in the temperature-control units on our trailers. Supplies and maintenance consist of repairs, maintenance, tires, parts, oil and engine fluids, along with load-specific expenses including loading/unloading, tolls, pallets and trailer hostling. Our supplies and maintenance expense increased$5.9 million , or 14.4%, from 2018 primarily due to higher outside repair and parts costs associated, in part, with operating a larger fleet.
The
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The $456,000 decrease in insurance and claims in 2019 was primarily due to a
decrease in the cost of our self-insured workers' compensation claims, partially
offset by increases in the cost of auto liability and physical damage claims
related to our tractors and trailers.
Gain on disposition of revenue equipment increased to $8.7 million in 2019 from
$7.2 million in 2018 primarily due to an increase in our average gain for each
tractor and trailer sold.
As a result of the foregoing factors, our operating income improved 8.7% to
$76.5 million in 2019 from $70.3 million in 2018. Our operating expenses as a
percentage of operating revenue, or "operating ratio," was 90.9% in 2019 and
91.1% in 2018. The operating ratio for our Truckload segment was 92.2% in 2019
and 90.7% in 2018, for our Dedicated segment was 88.3% in 2019 and 91.7% in
2018, for our Intermodal segment was 92.7% in 2019 and 89.1% in 2018, and for
our Brokerage segment was 91.8% in 2019 and 93.6% in 2018. Operating expenses as
a percentage of operating revenue, with both amounts net of fuel surcharges,
were 89.7% in both 2019 and 2018.
The increase in our other non-operating income was primarily due to additional interest income earned in 2019.
Our effective income tax rate decreased to 21.4% in 2019 from 22.5% in 2018 primarily due to a reduction in non-deductible expenses.
As a result of the factors described above, net income improved 11.0% to$61.1 million , or$0.74 per diluted share, in 2019 from$55.0 million , or$0.67 per diluted share, in 2018.
Liquidity and Capital Resources
Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. Our primary sources of liquidity are funds provided by operations and our revolving credit facility. A portion of our tractor fleet is provided by independent contractors who own and operate their own equipment. We have no capital expenditure requirements relating to those drivers who own their tractors or obtain financing through third parties.
The table below reflects our net cash flows provided by operating activities, net cash flows used for investing activities and net cash flows used for financing activities for the years indicated.
(In thousands) 2020 2019
2018
Net cash flows provided by operating activities$ 189,598 $ 156,460 $ 154,204 Net cash flows used for investing activities (106,325 ) (140,509 ) (104,851 ) Net cash flows used for financing activities (48,607 ) (41,253 ) (8,381 ) In 2007, our Board of Directors approved, and we announced a share repurchase program to repurchase up to one million shares of our common stock either through purchases on the open market or through private transactions and in accordance with Rule 10b-18 of the Exchange Act. In 2015, our Board of Directors approved and we announced an increase in the share repurchase program, providing for the repurchase of up to$40 million , or approximately two million shares, of our common stock, which was increased by our Board of Directors to 3.3 million shares inAugust 2017 to reflect the five-for-three stock split effected in the form of a stock dividend onJuly 7, 2017 . InAugust 2019 , our Board of Directors approved and we announced an increase from current availability in our existing share repurchase program providing for the repurchase of up to$34 million , or approximately 1.8 million shares, of our common stock, which was increased by our Board of Directors to 2.7 million shares inAugust 2020 to reflect the three-for-two stock split effected in the form of a stock dividend onAugust 13, 2020 . The timing and extent to which we repurchase shares depends on market conditions and other corporate considerations. The repurchase program does not have an expiration date. We repurchased and retired 53,064 shares of common stock for$597,000 in the first quarter of 2020 and 300,000 shares of common stock for$3.8 million in the fourth quarter of 2018. We did not repurchase any shares in 2019. As ofDecember 31, 2020 , future repurchases of up to$33.4 million , or approximately 2.6 million shares, were available in the share repurchase program. 26 -------------------------------------------------------------------------------- In 2020, net cash flows provided by operating activities of$189.6 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of$102.2 million , to pay cash dividends of$52.4 million , and to upgrade and acquire regional operating facilities in the amount of$5.4 million , resulting in a$34.7 million increase in cash and cash equivalents. In 2019, net cash flows provided by operating activities of$156.5 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of$136.9 million , to pay cash dividends of$42.1 million , and to upgrade regional operating facilities in the amount of$2.9 million , resulting in a$25.3 million decrease in cash and cash equivalents. In 2018, net cash flows provided by operating activities of$154.2 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of$97.5 million , to acquire and upgrade regional operating facilities in the amount of$5.9 million , to pay cash dividends of$5.5 million , and to repurchase and retire 300,000 shares of our common stock for$3.8 million , resulting in a$41.0 million increase in cash and cash equivalents. Beginning in 2018, our net cash flows have been increased by the new tax laws established by the Tax Cuts and Jobs Act of 2017, which reduces the federal corporate statutory income tax rate and establishes bonus depreciation that allows for full expensing of qualified assets. We estimate that capital expenditures, net of proceeds from dispositions, will be approximately$137 million in 2021. We paid cash dividends totaling$52.4 million in 2020 which consisted of a special dividend of$0.50 per share of common stock in December, along with quarterly cash dividends of$0.04 per share of common stock in the third and fourth quarters and of$0.027 per share of common stock in the first and second quarters. We paid cash dividends totaling$42.1 million in 2019 which consisted of a special dividend of$0.433 per share of common stock in September, along with quarterly cash dividends of$0.02 per share of common stock in each quarter of 2019. Quarterly cash dividends of$0.017 per share of common stock were declared in each quarter of 2018 and totaled$5.5 million . We currently expect to continue to pay quarterly cash dividends in the future. The payment of cash dividends in the future, and the amount of any such dividends, will depend upon our financial condition, results of operations, cash requirements, and certain corporate law requirements, as well as other factors deemed relevant by our Board of Directors. We believe our sources of liquidity are adequate to meet our current and anticipated needs for at least the next twelve months. Based upon anticipated cash flows, existing cash and cash equivalents balances, current borrowing availability and other sources of financing we expect to be available to us, we do not anticipate any significant liquidity constraints in the foreseeable future. InAugust 2018 , we entered into an amendment to our unsecured committed credit facility which reduces the aggregate principal amount of the facility from$40.0 million to$30.0 million and extends the term of the facility toAugust 2023 . AtDecember 31, 2020 , there was no outstanding principal balance on the facility. As of that date, we had outstanding standby letters of credit to guarantee settlement of self-insurance claims of$17.0 million and remaining borrowing availability of$13.0 million . This facility bears interest at a variable rate based on the London Interbank Offered Rate or the lender's Prime Rate, in each case plus/minus applicable margins. Our credit facility prohibits us from paying, in any fiscal year, stock redemptions and dividends in excess of 25% of our net income from the prior fiscal year. Waivers allowing stock redemptions and dividends in excess of the 25% limitation in total amounts of up to$60 million in 2020 and of up to$65 million in 2019 were obtained from the lender inNovember 2020 andAugust 2019 , respectively. This facility also contains restrictive covenants which, among other matters, require us to maintain compliance with cash flow leverage and fixed charge coverage ratios. We were in compliance with all covenants atDecember 31, 2020 and 2019. The following is a summary of our contractual obligations as ofDecember 31, 2020 . Payments Due by Period 2022 2024 And And (In thousands) 2021 2023 2025 Thereafter Total Purchase obligations for revenue equipment$ 107,160 $ - $ - $ -$ 107,160 Operating lease obligations 524 334 116 - 974 Total$ 107,684 $ 334 $ 116 $ -$ 108,134
The obligation to issue shares of our common stock under our nonqualified
deferred compensation plan at
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Other than standby letters of credit maintained in connection with our self-insurance programs in the amount of$17.0 million along with purchase obligations and operating leases summarized above in our summary of contractual obligations, we did not have any other material off-balance sheet arrangements atDecember 31, 2020 . Inflation and Fuel Costs Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices, accident claims, health insurance and employee compensation. We attempt to limit the effects of inflation through increases in freight rates and cost control efforts. In addition to inflation, fluctuations in fuel prices can affect our profitability. We require substantial amounts of fuel to operate our tractors and power the temperature-control units on our trailers. Substantially all of our contracts with customers contain fuel surcharge provisions. Although we historically have been able to pass through a significant portion of long-term increases in fuel prices and related taxes to customers in the form of fuel surcharges and higher rates, such increases usually are not fully recovered. These fuel surcharge provisions are not effective in mitigating the fuel price increases related to non-revenue miles or fuel used while the tractor is idling. Seasonality Our tractor productivity generally decreases during the winter season because inclement weather impedes operations and some shippers reduce their shipments. At the same time, operating expenses generally increase, with harsh weather creating higher accident frequency, increased claims, lower fuel efficiency and more equipment repairs. Critical Accounting Policies The preparation of financial statements in conformity withU.S. generally accepted accounting principles requires management to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our consolidated financial statements and related notes. We base our estimates, assumptions and judgments on historical experience, current trends and other factors believed to be relevant at the time our consolidated financial statements are prepared. However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and such differences could be material. We believe that the following critical accounting policies affect our more significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements. Revenue Recognition. We account for our revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers, which we adopted onJanuary 1, 2018 using the modified retrospective method. The current revenue standard requires us to recognize revenue and related expenses within each of our four reporting segments over time, compared with our former policy in which we recorded revenue and related expenses on the date shipment of freight was completed. We account for revenue of our Intermodal and Brokerage segments and revenue on freight transported by independent contractors within our Truckload and Dedicated segments on a gross basis because we are the principal service provider controlling the promised service before it is transferred to each customer. We are primarily responsible for fulfilling the promise to provide each specified service to each customer. We bear the primary risk of loss in the event of cargo claims by our customers. We also have complete control and discretion in establishing the price for each specified service. Accordingly, all such revenue billed to customers is classified as operating revenue and all corresponding payments to carriers for transportation services we arrange in connection with brokerage and intermodal activities and to independent contractor providers of revenue equipment are classified as purchased transportation expense within our consolidated statements of operations. 28 -------------------------------------------------------------------------------- Accounts Receivable. We are dependent upon a limited number of customers, and, as a result, our trade accounts receivable balance is highly concentrated. Trade accounts receivable are recorded at the invoiced amounts, net of an allowance for credit losses. Our allowance for credit losses was$348,000 as ofDecember 31, 2020 and$382,000 as ofDecember 31, 2019 . A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers' financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The allowance for credit losses is based on the best information available to us and is reevaluated and adjusted as additional information is received. We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy. We review the adequacy of our allowance for credit losses monthly. Property and Equipment. The transportation industry requires significant capital investments. Our net property and equipment was$654.2 million as ofDecember 31, 2020 and$640.4 million as ofDecember 31, 2019 . Our depreciation expense was$102.9 million in 2020,$95.1 million in 2019 and$88.6 million in 2018. We compute depreciation of our property and equipment for financial reporting purposes based on the cost of each asset, reduced by its estimated salvage value, using the straight-line method over its estimated useful life. We determine and periodically evaluate our estimate of the projected salvage values and useful lives primarily by considering the market for used equipment, prior useful lives and changes in technology. We have not changed our policy regarding salvage values as a percentage of initial cost or useful lives of tractors and trailers within the last ten years. We believe that our policies and past estimates have been reasonable. Actual results could differ from these estimates. A 5% decrease in estimated salvage values would have decreased our net property and equipment as ofDecember 31, 2020 by approximately$14.4 million , or 2.2%. Impairment of Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets were considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell. Insurance and Claims. We self-insure, in part, for losses relating to workers' compensation, auto liability, general liability, cargo and property damage claims, along with employees' health insurance with varying risk retention levels. We maintain insurance coverage for per-incident and total losses in excess of these risk retention levels in amounts we consider adequate based upon historical experience and our ongoing review. However, we could suffer a series of losses within our self-insured retention limits or losses over our policy limits, which could negatively affect our financial condition and operating results. We are responsible for the first$1.0 million on each auto liability claim and for the first$750,000 on each workers' compensation claim. We have$17.0 million in standby letters of credit to guarantee settlement of claims under agreements with our insurance carriers and regulatory authorities. The insurance and claims accruals in our consolidated balance sheets were$39.6 million as ofDecember 31, 2020 and$31.7 million as ofDecember 31, 2019 . We reserve currently for the estimated cost of the uninsured portion of pending claims. We periodically evaluate and adjust these reserves based on our evaluation of the nature and severity of outstanding individual claims and our estimate of future claims development based on historical development. Actual results could differ from these current estimates. In addition, to the extent that claims are litigated and not settled, jury awards are difficult to predict. Share-based Payment Arrangement Compensation. We have granted stock options to certain employees and non-employee directors. We recognize compensation expense for all stock options net of an estimated forfeiture rate and only record compensation expense for those shares expected to vest on a straight-line basis over the requisite service period (normally the vesting period). Determining the appropriate fair value model and calculating the fair value of stock options require the input of highly subjective assumptions, including the expected life of the stock options and stock price volatility. We use the Black-Scholes model to value our stock option awards. We believe that future volatility will not materially differ from our historical volatility. Thus, we use the historical volatility of our common stock over the expected life of the award. The assumptions used in calculating the fair value of stock options represent our best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and we use different assumptions, stock option compensation expense could be materially different in the future. 29
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We have also granted performance unit awards to certain employees which are subject to vesting requirements over a five-year period, primarily based on our earnings growth. The fair value of each performance unit is based on the closing market price on the date of grant. We recognize compensation expense for these awards based on the estimated number of units probable of achieving the performance and service vesting requirements of the awards, net of an estimated forfeiture rate.
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