P.A.M. TRANSPORTATION SERVICES, INC. Business Overview
The Company's administrative headquarters are inTontitown, Arkansas . From this location we manage operations conducted through our wholly owned subsidiaries based in various locations aroundthe United States ,Mexico , andCanada . The operations of these subsidiaries can generally be classified into either truckload services or brokerage and logistics services. This designation is based primarily on the ownership of the asset that performed the freight transportation service. Truckload services are performed by Company divisions that generally utilize Company- owned trucks, long-term contractors, or single-trip contractors to transport loads of freight for customers, while brokerage and logistics services coordinate or facilitate the transport of loads of freight for customers and generally involve the utilization of single-trip contractors. 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 82.7%, 80.0% and 86.3% of total revenues, excluding fuel surcharges for the twelve months endedDecember 31, 2019 , 2018 and 2017, respectively. The main factors that impact our profitability on the expense side are costs incurred in transporting freight for our customers. Currently, our most challenging costs include fuel, driver recruitment, training, wage and benefit costs, independent broker costs (which we record as purchased transportation), insurance and claims, and maintenance and capital equipment costs. - 22 -
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In discussing our results of operations we use revenue, before fuel surcharge (and operating supplies and 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 2019, 2018 and 2017, approximately$74.7 million ,$87.4 million and$64.3 million , respectively, of the Company's total revenue was generated from fuel surcharges. We also discuss certain changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the high variable cost nature of certain expenses makes a comparison of changes in expenses as a percentage of revenue more meaningful than absolute dollar changes.
Results of Operations - Truckload Services
The following table sets forth, for truckload services, the percentage
relationship of expense items to operating revenues, before fuel surcharges, for
the periods indicated. Operating supplies and expenses are shown net of fuel
surcharges.
Years Ended December 31,
2019 2018 2017
Operating revenues, before fuel
surcharge 100.0 % 100.0 % 100.0 %
Operating expenses:
Salaries, wages and benefits 34.5 32.4 30.9
Operating supplies and expenses, net of
fuel surcharge 6.5 1.5 4.7
Rent and purchased transportation 28.3 34.4 39.9
Depreciation 15.0 13.7 13.1
Insurance and claims 9.8 4.8 5.4
Other 3.6 3.0 2.7
Gain on sale or disposal of property 0.0 (0.1 ) 0.0
Total operating expenses 97.7 89.7 96.7
Operating income 2.3 10.3 3.3
Non-operating income (expense) 1.5 (1.0 ) 1.7
Interest expense (2.1 ) (1.6 ) (1.1 )
Income before income taxes 1.7 % 7.7 % 3.9 %
2019 Compared to 2018
For the year ended December 31, 2019 , truckload services revenue, before fuel
surcharges, increased 2.0% to $363.6 million as compared to $356.6 million for
the year ended December 31, 2018 . The increase relates primarily to a 7.8%
increase in our rate per loaded mile, from $1.71 for the year ended December 31,
2018 to $1.84 for the year ended December 31, 2019 , and to an increase in the
average number of trucks in service from 1,901 during 2018 to 2,075 during 2019.
These increases were partially offset by a decrease in the average number of
miles travelled per day by our trucks in 2019 compared to 2018, which was a
result of a decrease in the average length of haul of shipments offered by our
customers.
Salaries, wages and benefits increased from 32.4% of revenues, before fuel
surcharges, during 2018 to 34.5% of revenues, before fuel surcharges, during
2019. The increase relates primarily to an increase in company driver wages paid
during 2019 compared to 2018. The increase in driver wages relates primarily to
route specific raises that were phased in throughout 2019 and to an increase in
wages and benefits paid to regional and short-haul drivers. In addition, the
proportion of total miles driven by company drivers increased as the number of
company drivers increased year-over-year.
Operating supplies and expenses increased from 1.5% of revenues, before fuel
surcharges, during 2018 to 6.5% of revenues, before fuel surcharges, during
2019. The increase relates primarily to an increase in the average
surcharge-adjusted fuel price paid per gallon of diesel fuel, which was a result
of decreased fuel surcharge collections from customers. Fuel surcharge
collections can fluctuate significantly from period to period as they are
generally based on changes in fuel prices from period to period so that, during
periods of rising fuel prices, fuel surcharge collections increase, while fuel
surcharge collections decrease during periods of falling fuel prices. Also
contributing to the increase was an increase in the proportion of total miles
driven by company drivers for the year ended December 31, 2019 compared to
December 31, 2018 . This increase in miles driven by company drivers has the
effect of increasing our net operating supplies and expenses while decreasing
the Rent and purchased transportation category, as fuel surcharge revenue
generated from transportation services performed by owner-operators is reflected
as a reduction in net operating supplies and expenses, while fuel surcharges
paid to owner-operators for their services is reported along with their base
rate of pay in the Rent and purchased transportation category.
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Rent and purchased transportation decreased from 34.4% of revenues, before fuel surcharges, during 2018 to 28.3% of revenues, before fuel surcharges, during 2019. The decrease was primarily due to a reduction in the proportion of total miles driven by owner-operators for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . Depreciation increased from 13.7% of revenues, before fuel surcharges, during 2018 to 15.0% of revenues, before fuel surcharges, during 2019. This increase is primarily the result of an increase in the average number of trucks and trailers owned by the company. During 2019, the average number of company-owned trucks and trailers increased by 199 and 503, respectively, compared to 2018. The Company uses a three-year replacement cycle for trucks it intends to trade back or sell and a five-year life cycle for tractors it intends to place in its lease to own program. Trailers are on a seven-year replacement cycle. 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. Insurance and claims increased from 4.8% of revenues, before fuel surcharges, during 2018 to 9.8% of revenues, before fuel surcharges, during 2019. This increase is primarily the result of the negative impact of estimated amounts reserved for the anticipated settlement of a lawsuit which claims that the Company was in violation of minimum wage laws with regard to certain activities performed by employee drivers and for a similar suit brought against the Company by certain individuals who assert that they were misclassified as owner-operators. This increase was partially offset by decreases in insurance premiums resulting from the election to become self-insured for certain categories of property damage and liability risk. The Company became self-insured for property damage on company-owned trucks commencing onSeptember 1, 2018 . Prior to this, the Company paid insurance premiums and was insured for property damage insurance coverage for company-owned trucks through a third-party insurance carrier. In addition, the Company became self-insured for certain layers of auto liability claims in excess of$1.0 million commencingSeptember 1, 2019 . During the first nine months of 2019, and for the entire year of 2018, the Company paid for auto liability insurance coverage for claims in excess of$1.0 million through various third-party insurance carriers. Other expenses increased from 3.0% of revenues, before fuel surcharges, during 2018 to 3.6% of revenues, before fuel surcharges, during 2019. This increase related primarily to an increase in amounts expensed for legal fees and other supplies and expenses. This increase was partially offset by a decrease for amounts expensed for uncollectible revenue. Non-operating income increased from a loss of 1.0% of revenues, before fuel surcharges, during 2018 to 1.5% of revenue, before fuel surcharges, during 2019. This increase resulted primarily from an increase in the market value of our marketable equity securities portfolio atDecember 31, 2019 compared toDecember 31, 2018 . The unrealized pre-tax gain in market value for 2019 was approximately$3,698,000 compared to a net unrealized pre-tax loss in market value of approximately$5,763,000 reported as Non-operating expense for 2018. Interest expense increased from 1.6% of revenues, before fuel surcharges, during 2018 to 2.1% of revenues, before fuel surcharges, during 2019. This increase is attributable to market increases in interest rates and to increases in amounts financed by the Company for new equipment. The increase in amounts financed was the result of growth in the number of company-owned trucks and trailers operated within our fleet. 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 89.7% for 2018 to 97.7% for 2019. - 24 -
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Table of Contents 2018 Compared to 2017 For the year endedDecember 31, 2018 , truckload services revenue, before fuel surcharges, increased 10.6% to$356.6 million as compared to$322.4 million for the year endedDecember 31, 2017 . The increase relates primarily to a 13.3% increase in our rate per loaded mile, from$1.51 for the year endedDecember 31, 2017 to$1.71 for the year endedDecember 31, 2018 , and to an increase in the average number of trucks in service from 1,835 during 2017 to 1,901 during 2018. These increases were partially offset by a decrease in the average number of miles travelled per day by our trucks in 2018 compared to 2017, which was a result of a decrease in the average length of haul of shipments offered by our customers. Salaries, wages and benefits increased from 30.9% of revenues, before fuel surcharges, during 2017 to 32.4% of revenues, before fuel surcharges, during 2018. The increase relates primarily to an increase in company driver wages paid during 2018 compared to 2017. The increase in driver wages relates primarily to a per mile pay increase that went into effect during the last week ofDecember 2017 , and to route specific raises that were phased in throughout 2018. These per mile pay increases raised the average rate per mile paid to company drivers, which increased driver pay by approximately$7.4 million for 2018 compared to 2017. In addition, the proportion of total miles driven by company drivers increased as the number of company drivers increased year-over-year. Also contributing to the increase were salaries, wages and benefits paid to regional and short-haul drivers, which increased by approximately$5.1 million for the periods compared. This increase occurred as we expanded our regional dedicated service offerings during 2018. Operating supplies and expenses decreased from 4.7% of revenues, before fuel surcharges, during 2017 to 1.5% of revenues, before fuel surcharges, during 2018. The decrease relates primarily to a decrease in the average surcharge-adjusted fuel price paid per gallon of diesel fuel, which was a result of increased fuel surcharge collections from customers. Fuel surcharge collections can fluctuate significantly from period to period as they are generally based on changes in fuel prices from period to period so that, during periods of rising fuel prices, fuel surcharge collections increase, while fuel surcharge collections decrease during periods of falling fuel prices. Fuel surcharge revenue generated from transportation services performed by owner-operators is reflected as a reduction in net operating supplies and expenses, while fuel surcharges paid to owner-operators for their services is reported along with their base rate of pay in the Rent and purchased transportation category. These categorizations have the effect of reducing our net operating supplies and expenses while increasing the Rent and purchased transportation category, as discussed below. Rent and purchased transportation decreased from 39.9% of revenues, before fuel surcharges, during 2017 to 34.4% of revenues, before fuel surcharges, during 2018. The decrease was primarily due to a reduction in amounts paid for equipment leases during 2018 compared to 2017, as the scheduled expiration of our final truck operating lease occurred during the first quarter of 2018. Trucks leased under these operating leases were replaced with company-owned trucks as the scheduled expirations occurred. Also contributing to the decrease was a decrease in the average number of owner-operators under contract from 634 during 2017 to 574 during 2018, partially offset by an increase in the average rate per mile, including fuel surcharges, paid to owner-operators during the respective periods. Depreciation increased from 13.1% of revenues, before fuel surcharges, during 2017 to 13.7% of revenues, before fuel surcharges, during 2018. This increase is primarily the result of an increase in the average number of trucks and trailers owned by the company. As previously discussed, new trucks were purchased to replace trucks returned under expiring operating leases. This transition resulted in a shift in expense from the Rent and purchased transportation category to the Depreciation category as leased trucks were replaced with owned trucks. During 2018, the average number of company-owned trucks and trailers increased by 305 and 597, respectively, compared to 2017. The Company uses three- or five-year and seven-year equipment replacement cycles for trucks and trailers, respectively, and the cost of new trucks and trailers have increased significantly over the previous three- or five-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. Insurance and claims decreased from 5.4% of revenues, before fuel surcharges, during 2017 to 4.8% of revenues, before fuel surcharges, during 2018. This decrease primarily resulted from a decision to become self-insured for property damage on company-owned trucks commencing onSeptember 1, 2018 . During 2017, the Company paid for property damage coverage for company-owned trucks through a third-party insurance carrier for the entire year. - 25 - -------------------------------------------------------------------------------- This coverage was in place throughAugust 31, 2018 , when the Company dropped insurance coverage and became self-insured. Also contributing to the decrease as a percentage of revenue, before fuel surcharges, is the interaction of the increase in revenue with the decrease in total miles driven. Miles driven generally serve as the premium basis for the majority of our insurance coverage. Non-operating income decreased from 1.7% of revenues, before fuel surcharges, during 2017 to a loss of 1.0% of revenue, before fuel surcharges, during 2018. This decrease resulted primarily from the adoption of ASU 2016-01 onJanuary 1, 2018 . As discussed in "Item 8. Financial Statements and Supplementary Data, Note 4 to the Consolidated Financial Statements -Marketable Equity Securities ," this standard requires that equity investments be adjusted to market value each period with current period gains and losses in value recorded in net income. Previous guidance generally required that unrealized gains and losses be reported on our consolidated balance sheets in Accumulated Other Comprehensive Income. During 2017, equity investments were sold with pre-tax realized gains of approximately$4,735,000 . During 2018, equity investments were sold with pre-tax realized gains of approximately$375,000 . In addition, our marketable securities portfolio had net unrealized pre-tax losses in market value of approximately$5,763,000 , which was reported as Non-operating expense for 2018. Interest expense increased from 1.1% of revenues, before fuel surcharges, during 2017 to 1.6% of revenues, before fuel surcharges, during 2018. This increase is attributable to market increases in interest rates, and to increases in amounts financed by the Company for new equipment. The increase in amounts financed was the result of the replacement of trucks operated under equipment leases during 2017 with company-owned trucks, as discussed previously, and to overall growth in the number of company-owned trucks and trailers operated within our fleet. The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, improved from 96.7% for 2017 to 89.7% for 2018.
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 operations occur specifically
in certain divisions; however, brokerage operations occur throughout the Company
in similar operations having substantially similar economic characteristics.
Rent and purchased transportation, which includes costs paid to third-party
carriers, are shown net of fuel surcharges.
Years Ended December 31,
2019 2018 2017
Operating revenues, before fuel surcharge 100.0 % 100.0 % 100.0 %
Operating expenses:
Salaries, wages and benefits 5.8 4.6 4.9
Rent and purchased transportation 86.4 88.1 89.8 Insurance and claims 0.1 0.1 0.1 Other 2.4 1.6 1.2 Total operating expenses 94.7 94.4 96.0 Operating income 5.3 5.6 4.0 Non-operating income (expense) 0.8 (0.5 ) 0.8 Interest expense (1.1 ) (0.7 ) (0.6 ) Income before income taxes 5.0 % 4.4 % 4.2 % 2019 Compared to 2018 For the year endedDecember 31, 2019 , logistics and brokerage services revenues, before fuel surcharges, decreased 15.0% to$75.9 million as compared to$89.3 million for the year endedDecember 31, 2018 . The decrease was primarily the result of a decrease in freight rates charged to customers during 2019 as compared to 2018. Salaries, wages and benefits increased from 4.6% of revenues, before fuel surcharges, in 2018 to 5.8% of revenues, before fuel surcharges, in 2019. The increase relates primarily to the effect of lower revenues without a corresponding decrease in those wages with fixed cost characteristics, such as general and administrative wages. - 26 -
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Rent and purchased transportation decreased from 88.1% of revenues, before fuel surcharges, in 2018 to 86.4% of revenues, before fuel surcharges, in 2019. The decrease results from paying third-party carriers a smaller percentage of customer revenue. 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 94.4% for 2018 to 94.7% for 2019. 2018 Compared to 2017 For the year endedDecember 31, 2018 , logistics and brokerage services revenues, before fuel surcharges, increased 74.7% to$89.3 million as compared to$51.1 million for the year endedDecember 31, 2017 . The increase was primarily the result of an increase in the number of loads brokered and to improvement in freight rates during 2018 as compared to 2017. Salaries, wages and benefits decreased from 4.9% of revenues, before fuel surcharges, in 2017 to 4.6% of revenues, before fuel surcharges, in 2018. This decrease primarily relates to increases in freight rates outpacing employee wage growth and to efficiency improvements in our brokerage and logistics operations which allowed improvements in the quantity of loads booked per employee to increase year over year. Rent and purchased transportation decreased from 89.8% of revenues, before fuel surcharges, in 2017 to 88.1% of revenues, before fuel surcharges, in 2018. The decrease results from paying third-party carriers a smaller percentage of customer revenue. 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 96.0% for 2017 to 94.4% for 2018.
Results of Operations - Combined Services
2019 Compared to 2018
Income tax expense was approximately
In determining whether a tax asset valuation allowance is necessary, management,
in accordance with the provisions of Accounting Standards Codification ("ASC")
740-10-30, weighs all available evidence, both positive and negative to
determine whether, based on the weight of that evidence, a valuation allowance
is necessary. If negative conditions exist which indicate a valuation allowance
might be necessary, consideration is then given to what effect the future
reversals of existing taxable temporary differences and the availability of tax
strategies might have on future taxable income to determine the amount, if any,
of the required valuation allowance. As of December 31, 2019 , management
determined that the future reversals of existing taxable temporary differences
and available tax strategies would generate sufficient future taxable income to
realize its tax assets and therefore a valuation allowance was not necessary.
The Company recognizes a tax benefit from an uncertain tax position only if it
is more likely than not that the position will be sustained on examination by
taxing authorities, based on the technical merits of the position. As of
December 31, 2019 , an adjustment to the Company's consolidated financial
statements for uncertain tax positions has not been required as management
believes that the Company's tax positions taken in income tax returns filed or
to be filed are supported by clear and unambiguous income tax laws. The Company
recognizes interest and penalties related to uncertain income tax positions, if
any, in income tax expense. During 2019 and 2018, the Company has not recognized
or accrued any interest or penalties related to uncertain income tax positions.
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The Company and its subsidiaries are subject toU.S. and Canadian federal income tax laws as well as the income tax laws of multiple state jurisdictions. The major tax jurisdictions in which we operate generally provide for a deficiency assessment statute of limitation period of three years and as a result, the Company's tax years 2016 and forward remain open to examination in those jurisdictions. The combined net income for all divisions was$7.9 million , or 1.8% of revenues, before fuel surcharge, for 2019 as compared to the combined net income for all divisions of$24.0 million or 5.4% of revenues, before fuel surcharge, for 2018. Diluted earnings per share decreased from$3.90 for the year endedDecember 31, 2018 to$1.34 for the year endedDecember 31, 2019 . 2018 Compared to 2017 Income tax expense was approximately$7.3 million in 2018, resulting in an effective rate of 23.4%, as compared to an income tax benefit of approximately$(24.3) million in 2017, resulting in an effective rate of (165.9%). This increase primarily resulted from tax benefits in 2017 resulting from the passage of the Tax Cuts and Jobs Act onDecember 22, 2017 . The Company recorded a tax benefit of$29.3 million in the fourth quarter 2017 related to the revaluation of its net deferred tax attributes. This benefit to 2017 was partially offset by a reduction in the federal corporate income tax rate from 35% in 2017 to 21% effectiveJanuary 1, 2018 . The effective tax rate is also impacted by the existence of partially non-deductible meal and incidental expense per-diem payments to company drivers. Per-diem payments may cause a significant difference in the Company's effective tax rate from period-to-period as the proportion of non-deductible expenses to pre-tax net income increases or decreases. In accordance with the provisions of ASC 740-10-30, as ofDecember 31, 2018 , management determined that the future reversals of existing taxable temporary differences and available tax strategies would generate sufficient future taxable income to realize its tax assets and therefore a valuation allowance was not necessary. Additionally, as ofDecember 31, 2018 , management determined that an adjustment to the Company's consolidated financial statements for uncertain tax positions was not required as management believes that the Company's tax positions taken in income tax returns filed or to be filed are supported by clear and unambiguous income tax laws. During 2018 and 2017, the Company did not recognize or accrue any interest or penalties related to uncertain income tax positions. The combined net income for all divisions was$24.0 million , or 5.4% of revenues, before fuel surcharge, for 2018 as compared to the combined net income for all divisions of$38.9 million or 10.4% of revenues, before fuel surcharge, for 2017. The decrease in net income resulted in a decrease in diluted earnings per share to$3.90 for 2018 from a diluted earnings per share of$6.08 for 2017.
Quarterly Results of Operations
The following table presents selected consolidated financial information for each of our last eight fiscal quarters throughDecember 31, 2019 . The information has been derived from unaudited consolidated financial statements that, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the quarterly information. Quarter Ended Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 2019 2019 2019 2019 2018 2018 2018 2018 (unaudited) (in thousands, except earnings per share data) Operating revenues$ 128,686 $ 133,000 $ 128,994 $ 123,497
118,999 119,789 121,461 141,381 115,702 125,285 127,172 123,500 Operating income (loss)
9,687 13,211 7,533 (17,884 ) 3,756 10,017 13,153 14,676 Net income (loss) 8,301 8,654 4,581 (13,636 )
1,387 7,289 9,248 6,070
Income per common
share:
Basic $ 1.40 $ 1.47 $ 0.80 $ (2.37 ) $ 0.22 $ 1.18 $ 1.53 $ 1.02
Diluted $ 1.39 $ 1.45 $ 0.79 $ (2.37 ) $ 0.22 $ 1.17 $ 1.52 $ 1.01
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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, borrowings under our lines of credit, installment notes and investment margin account, and issuances of equity securities. During 2019, we generated$84.3 million in cash from operating activities compared to$82.3 million and$50.6 million in 2018 and 2017, respectively. Investing activities used$62.3 million in cash during 2019 compared to$55.3 million and$45.3 million in 2018 and 2017, respectively. The cash used for investing activities in all three years related primarily to the purchase of revenue equipment such as trucks and trailers and related equipment such as auxiliary power units. Financing activities used$22.0 million in cash during 2019 compared to using$27.0 million during 2018 and providing$5.2 million during 2017. See the Consolidated Statements of Cash Flows in Item 8 of this Report. Our primary use of funds is for the purchase of revenue equipment. We typically use installment notes, our existing lines 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 2019 and 2018, we utilized cash on hand, installment notes, and our lines of credit to finance revenue equipment purchases of approximately$100.1 million and$140.4 million , respectively. We often finance the acquisition of revenue equipment through installment notes with fixed interest rates and terms ranging from 36 to 84 months. AtDecember 31, 2019 , the Company's subsidiaries had combined outstanding indebtedness under such installment notes of$224.8 million . These installment notes are payable in monthly installments, ranging from 36 monthly installments to 84 monthly installments, at a weighted average interest rate of 3.65%. AtDecember 31, 2018 , the Company's subsidiaries had combined outstanding indebtedness under such installment notes of$211.0 million . These installment notes were payable in monthly installments, ranging from 36 to 84 months at a weighted average interest rate of 3.61%. In order to maintain our truck and trailer fleet count, it is often necessary to purchase replacement units and place them in service before trade units are removed from service. The timing of this process often requires the Company to pay for new units without any reduction in price for trade units. In this situation, the Company later receives payment for the trade units as they are delivered to the equipment vendor and have passed vendor inspection. During the twelve months endedDecember 31, 2019 and 2018, the Company received approximately$11.2 million and$11.9 million , respectively, for units delivered for trade. During 2019, we maintained a revolving line of credit. OnJanuary 25, 2019 , certain terms of this revolving line of credit were amended to increase the borrowing limit from$40.0 million to$60.0 million , extend the term by one year, reduce the interest rate by 25 basis points and make certain other changes. See "Item 8. Financial Statements and Supplementary Data, Note 1 to the Consolidated Financial Statements - Accounting Policies, Subsequent Events" in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , for additional information. Under the amended credit facility, amounts outstanding under the line bear interest at LIBOR (determined as of the first day of each month) plus 1.25% (2.96% atDecember 31, 2019 ), are secured by our trade accounts receivable and mature onJuly 1, 2022 . The amended credit facility also establishes an "unused fee" of 0.25% if average borrowings are less than$18.0 million . AtDecember 31, 2019 outstanding advances on the line of credit were approximately$17.4 million , including approximately$0.4 million in letters of credit, with availability to borrow$42.6 million . Trade accounts receivable decreased from$63.4 million atDecember 31, 2018 to$61.8 million atDecember 31, 2019 . The decrease relates to a general decrease in freight revenue and fuel surcharge revenue, which flows through the accounts receivable account, during the fourth quarter of 2019 as compared to the freight revenue and fuel surcharge revenue generated during the fourth quarter of 2018. Prepaid expenses and deposits decreased from$10.4 million atDecember 31, 2018 to$8.7 million atDecember 31, 2019 . The decrease primarily relates to a reduction in pre-paid auto-liability insurance premiums as the Company became self-insured for certain layers of claims in excess of$1.0 million onSeptember 1, 2019 . - 29 -
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Marketable equity securities atDecember 31, 2019 increased approximately$2.0 million as compared toDecember 31, 2018 . The increase resulted from purchases of marketable equity securities of$0.2 million , offset by sales of marketable equity securities of approximately$3.0 million , and an increase in the market value of the remaining portfolio of approximately$4.8 million . AtDecember 31, 2019 , the remaining marketable equity securities have a combined cost basis of approximately$24.2 million and a combined fair market value of approximately$29.5 million . The Company has developed a strategy to invest in securities from which it expects to receive dividends that qualify for favorable tax treatment, as well as appreciate in value. The Company anticipates that increases in the market value of the investments combined with dividend payments will exceed interest rates paid on borrowings for the same period. During 2019, the Company received dividends of approximately$1.3 million . The holding term of these securities depends largely on the general economic environment, the equity markets, borrowing rates, and the Company's cash requirements. Income taxes refundable decreased from approximately$1.9 million atDecember 31, 2018 to approximately$0.5 million atDecember 31, 2019 . The primary reason for this decrease was the receipt of income tax refunds received during 2019. Revenue equipment atDecember 31, 2019 , which generally consists of trucks, trailers, and revenue equipment accessories such as Qualcomm™ satellite tracking units and auxiliary power units, increased approximately$67.4 million as compared toDecember 31, 2018 . The increase relates primarily to overall fleet growth of company-owned trucks and trailers utilized by the company atDecember 31, 2019 compared toDecember 31, 2018 and to the higher purchase price of new trucks and trailers compared to the trucks and trailers which are being replaced and sold. Other assets atDecember 31, 2019 increased by approximately$2.1 million compared toDecember 31, 2018 . The Company recognized approximately$2.1 million for a right-of-use asset related to certain property leases as ofDecember 31, 2019 in accordance with the provisions of ASC Topic 842, which the Company adopted onJanuary 1, 2019 . The provisions of ASC Topic 842 require the recognition of a right-of-use asset and right-of-use liability for certain types of leases; see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - 2019 Leases" for more information on this topic. Accrued expenses and other liabilities increased from$23.5 million atDecember 31, 2018 to$40.6 million atDecember 31, 2019 . The increase was primarily related to an increase in the amount reserved for the anticipated settlement of a lawsuit which claims that the Company was in violation of minimum wage laws with regard to certain activities performed by employee drivers.The United States District Court for the Western District of Arkansas granted preliminary approval of a$16.5 million settlement of the suit, subject to final approval by the court. Also contributing to the increase was an increase in legal reserves related to a lawsuit brought against the Company by certain individuals who assert that they were misclassified as owner-operators. See "Item 3. Legal Proceedings" for more information regarding this litigation. Finally, amounts reserved for self-insured auto liability claims increased, as the Company became self-insured for certain layers of auto liability claims in excess of$1.0 million onSeptember 1, 2019 . These increases were partially offset by a decrease of approximately$3.8 million in margin borrowings against our marketable equity securities. Current maturities of long term-debt and long-term debt fluctuations are reviewed on an aggregate basis as the classification of amounts in each category are typically affected merely by the passage of time. Current maturities of long-term debt and long-term debt, on an aggregate basis, atDecember 31, 2019 , increased approximately$20.6 million as compared toDecember 31, 2018 . The increase was related to additional borrowings on our revolving line of credit and under installment notes entered into during 2019, net of the principal portion of scheduled installment note payments made during 2019. - 30 - -------------------------------------------------------------------------------- For 2020, we expect to purchase 540 new trucks while continuing to sell or trade equipment that has reached the end of its life cycle, which we expect to result in net capital expenditures of approximately$52.3 million . Management believes we will be able to finance our existing needs for working capital over the next twelve months, as well as acquisitions of revenue equipment and any other asset acquisitions or capital transactions 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 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.
Contractual Obligations and Commercial Commitments
The following table sets forth the Company's contractual obligations and
commercial commitments as of
Payments due by period
(in thousands)
Less than 1 to 3 3 to 5 More than
Total 1 Year Years Years 5 Years
Long-term debt (1) $ 243,966 $ 75,068 $ 87,497 $ 77,756 $ 3,645
Operating leases (2) 2,628 1,003 1,171 454 -
Total $ 246,594 $ 76,071 $ 88,668 $ 78,210 $ 3,645
(1) Including interest.
(2) Represents building, facilities, and drop yard operating leases.
Inflation
Inflation has an impact on most of our operating costs. Over the past three years, the effect of inflation has been minimal.
Adoption of Accounting Policies
See "Item 8. Financial Statements and Supplementary Data, Note 1 to the Consolidated Financial Statements - Accounting Policies, Recent Accounting Pronouncements."
Critical Accounting Policies The preparation of financial statements in accordance with accounting principles generally accepted inthe United States of America requires management to adopt accounting policies and make significant judgments and estimates that impact the amounts reported in our consolidated financial statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenue, expenses, and associated disclosures of contingent assets and liabilities are affected by judgments and estimates. In many cases, there are alternative assumptions, policies, or estimation techniques that could be used. Management evaluates its assumptions, policies, and estimates on an ongoing basis, utilizing historical experience, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts would be reported using differing estimates or assumptions. Management considers our critical accounting policies to be those that require more significant judgments and estimates when we prepare our consolidated financial statements. Our critical accounting policies include the following: Accounts receivable and allowance for doubtful accounts. Accounts receivable are presented in the Company's consolidated financial statements net of an allowance for estimated uncollectible amounts. Management estimates this allowance based upon an evaluation of the aging of our customer receivables and historical write-offs, as well as other trends and factors surrounding the credit risk of specific customers. The Company continually updates the - 31 - -------------------------------------------------------------------------------- history it uses to make these estimates so as to reflect the most recent trends, factors and other information available. In order to gather information regarding these trends and factors, the Company also performs ongoing credit evaluations of its customers. Customer receivables are considered to be past due when payment has not been received by the invoice due date. Write-offs occur when we determine an account to be uncollectible and could differ from the allowance estimate as a result of a number of factors, including unanticipated changes in the overall economic environment or factors and risks surrounding a particular customer. Management believes its methodology for estimating the allowance for doubtful accounts to be reliable; however, additional allowances may be required if the financial condition of our customers were to deteriorate and could have a material effect on the Company's consolidated financial statements. Depreciation of trucks and trailers. Depreciation of trucks and trailers is calculated by the straight-line method over the assets' estimated useful lives, which range from three to seven years, down to an estimated salvage value at the end of the assets' estimated useful lives. Management must use its judgment in the selection of estimated useful lives and salvage values for purposes of this calculation. In some cases, the Company has agreements in place with certain manufacturers whereby salvage values are guaranteed by the manufacturer. In other cases, where salvage values are not guaranteed, estimates of salvage value are based on the expected market values of equipment at the time of disposal. The depreciation of trucks and trailers over their estimated useful lives and the determination of any salvage value also require management to make judgments about future events. Therefore, the Company's management periodically evaluates whether changes to estimated useful lives or salvage values are necessary to ensure these estimates accurately reflect the economic reality of the assets. This periodic evaluation may result in changes in the estimated lives and/or salvage values used by the Company to depreciate its assets, which can affect the amount of periodic depreciation expense recognized and, ultimately, the gain or loss on the disposal of an asset. Future changes in our estimated useful life or salvage value estimates, or fluctuations in market value that are not reflected in current estimates, could have a material effect on the Company's consolidated financial statements. Impairment of long-lived assets. Long-lived assets are reviewed for impairment in accordance with ASC Topic 360, "Property, Plant, and Equipment." This authoritative guidance provides that whenever there are certain significant events or changes in circumstances, the value of long-lived assets or groups of assets must be tested to determine if their value can be recovered from their future cash flows. In the event that undiscounted cash flows expected to be generated by the asset are less than the carrying amount, the asset or group of assets must be evaluated for impairment. Impairment exists if the carrying value of the asset exceeds its fair value. Significantly all of the Company's cash flows from operations are generated by trucks and trailers, and as such, the cost of other long-lived assets are funded by those operations. Therefore, management tests for the recoverability of all of the Company's long-lived assets as a single group at the entity level and examines the forecasted future cash flows generated by trucks and trailers, including their eventual disposition, to determine if those cash flows exceed the carrying value of the long-lived assets. Forecasted cash flows are estimated using assumptions about future operations. To the extent that facts and circumstances change in the future, our estimates of future cash flows may also change either positively or negatively. In light of the Company's market capitalization during 2019 and net operating profits of the Company for the years endedDecember 31, 2019 and 2018, no impairment indicators existed which required management to test the Company's long-lived assets for recoverability as ofDecember 31, 2019 . As such, no impairment losses were recorded during 2019. Claims accruals. The Company is self-insured for health and workers' compensation benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred but not reported (IBNR) claims. IBNR claims are estimated using historical lag information and other data either provided by outside claims administrators or developed internally. Actual claims payments may differ from management's estimates as a result of a number of factors, including evaluation of severity, increases in legal or medical costs, and other case-specific factors. The actual claims payments are charged against the Company's recorded accrued claims liabilities and have been historically reasonable with respect to the estimates of the liabilities made under the Company's methodology. However, the estimation process is generally subjective, and to the extent that future actual results materially differ from original estimates made by management, adjustments to recorded accruals may be necessary which could have a material effect on the Company's consolidated financial statements. Based upon our 2019 health and workers' compensation expenses, a 10% increase in both claims incurred and IBNR claims would increase our annual health and workers' compensation expenses by approximately$0.5 million . - 32 -
-------------------------------------------------------------------------------- OnSeptember 1, 2019 , the Company elected to become self-insured for certain layers of auto liability claims in excess of$1.0 million . The Company specifically reserves for claims that are expected to exceed$1.0 million when fully developed, based on the facts and circumstances of those claims.
Revenue recognition
. Revenue is recognized over time as freight progresses towards its destination and the transportation service obligation is fulfilled. For loads picked up during the reporting period, but delivered in a subsequent reporting period, revenue is allocated to each period based on the transit time in each period as a percentage of total transit time. See "Item 8. Financial Statements and Supplementary Data, Note 2 to the Consolidated Financial Statements - Revenue Recognition." Income Taxes. The Company's deferred tax assets and liabilities represent items that will result in taxable income or a tax deduction in future years for which the Company has already recorded the related tax expense or benefit in its consolidated statements of operations. Deferred tax accounts arise as a result of timing differences between when items are recognized in the Company's consolidated financial statements compared to when they are recognized in the Company's tax returns. In establishing the Company's deferred income tax assets and liabilities, management makes judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In determining whether a tax asset valuation allowance is necessary, management, in accordance with the provisions of ASC 740-10-30, weighs all available evidence, both positive and negative to determine whether, based on the weight of that evidence, a valuation allowance is necessary. If negative conditions exist which indicate a valuation allowance might be necessary, consideration is then given to what effect the future reversals of existing taxable temporary differences and the availability of tax strategies might have on future taxable income to determine the amount, if any, of the required valuation allowance. Significant management judgment is required as it relates to future taxable income, future capital gains, tax settlements, valuation allowances, and the Company's ability to utilize tax loss and credit carryforwards. As ofDecember 31, 2019 , management determined that the future reversals of existing taxable temporary differences and available tax strategies would generate sufficient future taxable income to realize its tax assets and therefore a valuation allowance was not necessary. Management believes that future tax consequences have been adequately provided for based on the current facts and circumstances and current tax law. However, should current circumstances change or the Company's tax positions be challenged, different outcomes could result which could have a material effect on the Company's consolidated financial statements.
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