Marten Transport (MRTN) 10-Q 2001 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington D.C.  20549

Form 10-Q

ý        QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarter ended September 30, 2001

Commission File Number 0-15010

MARTEN TRANSPORT, LTD.

(Exact name of registrant as specified in its charter)

Delaware	39-1140809
(State of incorporation)	(I.R.S. Employer Identification No.)
129 Marten Street, Mondovi, Wisconsin 54755
(Address of principal executive offices)
715-926-4216
(Registrant’s telephone number)

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

Yes  ý   No  o

The number of shares outstanding of the registrant’s Common Stock, par value $.01 per share, was 4,182,445 as of November 5, 2001.

PART I:  FINANCIAL INFORMATION

Item 1.  Financial Statements.

MARTEN TRANSPORT, LTD.

CONDENSED BALANCE SHEETS

(In thousands, except share information)

	September 30,			December 31,
	2001			2000
	(Unaudited)
ASSETS
Current assets:
Receivables	$	34,711		$	33,487
Prepaid expenses and other	5,943			8,195
Deferred income taxes	2,702			2,276
Total current assets	43,356			43,958
Property and equipment:
Revenue equipment, buildings and land, office equipment, and other	235,561			228,322
Accumulated depreciation	(73,478		)	(61,937		)
Net property and equipment	162,083			166,385
Other assets	2,876			1,730
TOTAL ASSETS	$	208,315		$	212,073
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities	$	17,632		$	13,490
Insurance and claims accruals	7,979			8,819
Current maturities of long-term debt	202			1,685
Total current liabilities	25,813			23,994
Long-term debt, less current maturities	73,716			88,216
Deferred income taxes	37,890			34,018
Total liabilities	137,419			146,228
Shareholders’ investment:
Common stock, $.01 par value per share, 10,000,000 shares authorized, 4,182,445 and 4,180,145 shares issued and outstanding	42			42
Additional paid-in capital	9,967			9,934
Retained earnings	61,061			55,869
Accumulated other comprehensive loss	(174		)	-
Total shareholders’ investment	70,896			65,845
TOTAL LIABILITIES AND
SHAREHOLDERS’ INVESTMENT	$	208,315		$	212,073

The accompanying notes are an integral part of these balance sheets.

MARTEN TRANSPORT, LTD.

CONDENSED STATEMENTS OF INCOME

(In thousands, except share information)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001			2000			2001			2000
OPERATING REVENUE	$	70,757		$	65,267		$	212,377		$	190,371
OPERATING EXPENSES:
Salaries, wages and benefits	21,533			18,967			64,063			54,612
Purchased transportation	15,346			15,125			46,599			46,050
Fuel and fuel taxes	11,616			10,959			35,066			29,673
Supplies and maintenance	5,559			4,641			16,629			13,665
Depreciation	6,806			6,497			20,094			18,601
Operating taxes and licenses	1,323			1,263			3,753			3,608
Insurance and claims	2,632			1,400			6,948			3,965
Communications and utilities	810			672			2,363			2,169
Gain on disposition of revenue equipment	(429		)	(317		)	(771		)	(590		)
Other	1,888			1,761			5,526			5,062
Total operating expenses	67,084			60,968			200,270			176,815
OPERATING INCOME	3,673			4,299			12,107			13,556
OTHER EXPENSES (INCOME):
Interest expense	1,182			1,642			4,056			4,450
Interest income and other	(126		)	(95		)	(323		)	(249		)
INCOME BEFORE INCOME TAXES	2,617			2,752			8,374			9,355
PROVISION FOR INCOME TAXES	995			1,046			3,182			3,555
NET INCOME	$	1,622		$	1,706		$	5,192		$	5,800
BASIC EARNINGS PER COMMON SHARE	$	0.39		$	0.41		$	1.24		$	1.37
DILUTED EARNINGS PER COMMON SHARE	$	0.38		$	0.41		$	1.23		$	1.37

The accompanying notes are an integral part of these statements.

MARTEN TRANSPORT, LTD.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT

(In thousands, except share information)

(Unaudited)

											Accumulated
											Other			Total			Compre-
						Additional					Compre-			Share-			hensive
	Common Stock					Paid-In		Retained			hensive			holders’			Income
	Shares		Amount			Capital		Earnings			Loss			Investment			(Loss)
Balance at December 31, 1999	4,300,145		$	43		$	9,934	$	49,628		$	-		$	59,605
Net income	-		-			-		5,800			-			5,800			$	5,800
Repurchase of common stock	(120,000	)	(1		)	-		(1,687		)	-			(1,688		)
Comprehensive income																	$	5,800
Balance at September 30, 2000	4,180,145		$	42		$	9,934	$	53,741		$	-		$	63,717
Net income	-		-			-		2,128			-			2,128			$	2,128
Comprehensive income																	$	2,128
Balance at December 31, 2000	4,180,145		$	42		$	9,934	$	55,869		$	-		$	65,845
Net income	-		-			-		5,192			-			5,192			$	5,192
Issuance of common stock	2,300		-			33		-			-			33
Transition adjustment related to change in accounting for derivative instruments and hedging activities, net of tax	-		-			-		-			(173		)	(173		)	(173		)
Unrealized loss on qualifying cash flow hedges, net of tax	-		-			-		-			(1		)	(1		)	(1		)
Comprehensive income																	$	5,018
Balance at September 30, 2001	4,182,445		$	42		$	9,967	$	61,061		$	(174	)	$	70,896

The accompanying notes are an integral part of these statements.

 MARTEN TRANSPORT, LTD.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months
	Ended September 30,
	2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Operations:
Net income	$	5,192		$	5,800
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation	20,094			18,601
Gain on disposition of revenue equipment	(771		)	(590		)
Deferred tax provision	3,446			4,033
Other comprehensive loss	(174		)	-
Changes in other current operating items	4,330			(1,457		)
Net cash provided by operating activities	32,117			26,387
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions:
Revenue equipment, net	(14,753		)	(41,966		)
Buildings and land, office equipment, and other additions, net	(268		)	(1,925		)
Net change in other assets	(1,146		)	(736		)
Net cash used for investing activities	(16,167		)	(44,627		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings	47,100			85,150
Repayment of long-term borrowings	(63,083		)	(65,222		)
Issuance of common stock	33			-
Repurchase of common stock	-			(1,688		)
Net cash provided by (used for) financing activities	(15,950		)	18,240
NET CHANGE IN CASH AND CASH EQUIVALENTS	-			-
CASH AND CASH EQUIVALENTS:
Beginning of period	-			-
End of period	$	-		$	-
CASH PAID (RECEIVED) FOR:
Interest	$	4,407		$	3,968
Income taxes	$	(129	)	$	599

The accompanying notes are an integral part of these statements.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

(1) Financial Statements

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements, and therefore do not include all information and disclosures required by generally accepted accounting principles for complete financial statements.  In the opinion of management, such statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our financial condition, results of operations and cash flows for the interim periods presented.  The results of operations for any interim period do not necessarily indicate the results for the full year.  The unaudited interim financial statements should be read with reference to the financial statements and notes to financial statements in our 2000 Annual Report on Form 10-K.

(2) Earnings Per Common Share

Basic and diluted earnings per common share were computed as follows:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(In thousands, except per-share amounts)	2001		2000		2001		2000
Numerator:
Net income	$	1,622	$	1,706	$	5,192	$	5,800
Denominator:
Basic earnings per common share - weighted-average shares	4,182		4,180		4,181		4,227
Effect of dilutive stock options	89		19		44		21
Diluted earnings per common share - weighted-average shares and assumed conversions	4,271		4,199		4,225		4,248
Basic earnings per common share	$	0.39	$	0.41	$	1.24	$	1.37
Diluted earnings per common share	$	0.38	$	0.41	$	1.23	$	1.37

The following options were outstanding but were not included in the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares and, therefore, including the options in the denominator would be antidilutive, or decrease the number of weighted-average shares.

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2001		2000		2001		2000
Number of option shares	14,100		76,250		66,800		76,250
Weighted-average exercise price	$	17.49	$	15.07	$	15.25	$	15.07

(3)  Stock Option Exercises

Options were exercised for 2,300 shares of our Common Stock, par value $.01 per share, under our stock option plans during the nine months ended September 30, 2001.

(4) Accounting for Derivative Instruments and Hedging Activities

On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” issued by the Financial Accounting Standards Board in 1998.  Statement No. 133, as amended, establishes accounting and reporting standards requiring the recording of each derivative instrument in the balance sheet as either an asset or liability measured at fair value.  Changes in the derivative instrument’s fair value must be recognized currently in earnings unless specific hedge accounting criteria are met.  For hedges which meet the criteria, the derivative instrument’s gains and losses, to the extent effective, may be recognized in accumulated other comprehensive income (loss) included in shareholders’ investment, rather than current earnings.

We have entered into commodity swap agreements to partially hedge our exposure to diesel fuel price fluctuations.  These agreements meet the specific hedge accounting criteria and have been designated as cash flow hedges.  The effective portion of the cumulative gain or loss on the derivative instruments has been reported as a component of accumulated other comprehensive loss and will be recognized into current earnings in the same period or periods during which the hedged transactions affect current earnings.  The ineffective portion, if any, will be recognized in current earnings during the period of change.  No ineffectiveness was recognized in current earnings during the first nine months of 2001.

The adoption of Statement No. 133 on January 1, 2001, resulted in a pretax accumulated other comprehensive loss of $279,000 ($173,000 net of income tax benefit) for derivative instruments that were issued, acquired or modified after December 31, 1998.  The accumulated other comprehensive loss was attributable to losses on effective cash flow hedges.  During 2001, approximately $223,000 of the net derivative loss included in accumulated other comprehensive loss as of January 1, 2001, is being reclassified into current earnings.  Amounts currently recorded in accumulated other comprehensive loss will be reclassified into current earnings by March 31, 2002, the termination date for swap agreements with a remaining notional amount of 2.7 million gallons, or by September 30, 2002, the termination date for a swap agreement with a remaining notional amount of 1.2 million gallons.

Derivative liabilities relating to commodity swap agreements totaling $281,000 have been recorded in accounts payable and accrued liabilities in the balance sheet as of September 30, 2001.  The fair value of commodity swap agreements is based upon the difference between the contractual strike prices and the futures prices as of the valuation date applied to the remaining notional amount.

(5) Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141, “Business Combinations,” and Statement No. 142, “Goodwill and Other Intangible Assets.”  Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001.  Statement No. 142 requires that, effective January 1, 2002, goodwill and intangible assets with indefinite lives no longer be amortized to earnings, but instead be reviewed for impairment.  Statement No. 142 also requires that separable intangible assets deemed to have definite lives continue to be amortized over their useful lives.  In August 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations,” which, effective January 1, 2003, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  In October 2001, Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” was released by the FASB.  This statement, effective January 1, 2002, addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  These statements are expected to have no impact on our results of operations or financial position.

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

Results of Operations

Operating revenue for the third quarter of 2001 increased 8.4 percent over the third quarter of 2000.  Operating revenue for the nine months ended September 30, 2001, increased 11.6 percent over the same period of 2000.  These increases were primarily the result of transporting additional freight associated with an increase in our fleet and an improvement in our equipment utilization.  Our contracts with customers provide for fuel surcharges based upon defined fluctuations in the price of diesel fuel.  Diesel fuel prices were higher in this year’s first and second quarters and lower in this year’s third quarter in comparison with the same periods of 2000.  As a result, the fuel surcharge revenue was $1.9 million higher for the first six months of 2001 and $514,000 lower for the third quarter of 2001 than in the corresponding periods of 2000.  We expect our operating revenue for the remainder of 2001 to remain at current levels.

Operating expenses for the third quarter of 2001 were 94.8 percent of operating revenue, versus 93.4 percent for the third quarter of 2000.  This ratio for the first nine months of 2001 was 94.3 percent, versus 92.9 percent for the same period of 2000.  All operating expense categories increased in 2001 primarily due to the transportation of additional freight and additions to our fleet, along with the items discussed below.  Purchased transportation expense increased slightly in the three months and nine months ended September 30, 2001.  The average number of independent contractors during the third quarter of 2001 increased from the third quarter of 2000.  The average number of independent contractors during the first nine months of 2001, however, decreased from the same period of 2000.  This decrease was offset by an increase in the rate per mile paid to independent contractors since the third quarter of 2000.  Independent contractors are responsible for their own salaries, wages and benefits expense, fuel and fuel taxes expense, and supplies and maintenance expense.  As a result, our expenses in these categories are reduced relative to revenue.  Fluctuations in the price of diesel fuel in 2001 also impacted fuel and fuel taxes expense.  Diesel fuel prices were higher in the first and second quarters of 2001 and lower in the third quarter of 2001 in comparison with the same periods of 2000.  Higher insurance premiums and an increase in the frequency of accident and cargo claims caused insurance and claims expense for the first nine months of 2001 to increase from the same period of 2000.  We anticipate our operating expenses as a percentage of revenue will remain at current levels for the remainder of 2001.

Interest expense decreased for the three months and nine months ended September 30, 2001, compared with the corresponding periods of 2000.  These decreases were the result of lower interest rates combined with a significant decrease in our average long-term debt outstanding during the third quarter and a slight increase in long-term debt during the first nine months of this year.  Our long-term debt is required to finance our planned revenue equipment additions.  We expect interest expense to remain at current levels for the remainder of 2001.

Our effective income tax rate was 38 percent for the first nine months of 2001 and the prior year.  We expect our effective income tax rate to remain at 38 percent for the remainder of 2001.

We adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, on January 1, 2001 (see Note 4 to the financial statements).  The effect of this change as of January 1, 2001, was a pretax accumulated other comprehensive loss of $279,000 ($173,000 net of income tax benefit).  During the first nine months of 2001, accumulated other comprehensive loss increased by $2,000 ($1,000 net of income tax benefit) to reflect an unrealized loss on our swap agreements from January 1, 2001 to September 30, 2001.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141, “Business Combinations,” and Statement No. 142, “Goodwill and Other Intangible Assets.”  The FASB also issued Statement No. 143, “Accounting for Asset Retirement Obligations” in August 2001, and Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in October 2001.  These statements, which are discussed in Note 5 to the financial statements, are expected to have no impact on our results of operations or financial position.

Capital Resources and Liquidity

Our operating activities during the first nine months of 2001 provided net cash of $32,117,000. Investments in property and equipment and other assets used net cash of $16,167,000, while financing activities, primarily the reduction of long-term debt, used net cash of $15,950,000 during this period.  We have continued to update and expand our fleet in 2001 and 2000 by investing in new, more efficient revenue equipment.  Our cash management practices minimize both cash and debt balances by utilizing our unsecured committed credit facility.  We have historically met our working capital requirements by effectively utilizing our operating profits, short turnover in accounts receivable and cash management practices.  We have not used and do not expect to use short-term borrowings to meet working capital needs.  We believe our liquidity will adequately meet anticipated near-term operating requirements.

Forward-Looking Information

This Quarterly Report on Form 10-Q contains certain forward-looking statements.  Any statements not of historical fact may be considered forward-looking statements.  Written words such as “may, ” “expect, ” “believe, ” “anticipate” or “estimate,” or other variations of these or similar words, identify such statements.  These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially, depending on a variety of factors, such as the industry driver shortage, the market for revenue equipment, fuel prices and general weather and economic conditions.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Effective January 1, 2001, we began recognizing unrealized gains and losses on commodity swap agreements used to hedge our exposure to diesel fuel price fluctuations.  The swap agreements are marked to market.  The effect of this change as of January 1, 2001, was a pretax accumulated other comprehensive loss of $279,000 ($173,000 net of income tax benefit).  During the first nine months of 2001, accumulated other comprehensive loss increased by $2,000 ($1,000 net of income tax benefit) to reflect an unrealized loss on our swap agreements from January 1, 2001 to September 30, 2001.

There have been no other significant changes since December 31, 2000, in market risk or market risk factors as discussed in the 2000 Annual Report to Shareholders.

PART II.  OTHER INFORMATION

ITEM 1.  Legal Proceedings.

There are currently no material pending legal, governmental, administrative or other proceedings to which we are a party or of which any of our property is the subject which are unreserved.

ITEM 2.  Changes in Securities and Use of Proceeds.

                None

ITEM 3.  Defaults Upon Senior Securities.

                None

ITEM 4.  Submission of Matters to a Vote of Security Holders.

                None

ITEM 5.  Other Information.

                None

ITEM 6.  Exhibits and Reports on Form 8-K.

                a)     No exhibits are filed with this report.

                b)    No reports on Form 8-K have been filed during the quarter ended September 30, 2001.

SIGNATURE

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

	MARTEN TRANSPORT, LTD.
	(Registrant)
Dated:  November 7, 2001	By:	/s/ Darrell D. Rubel
	Darrell D. Rubel
	Executive Vice President and Treasurer
	(Chief Financial Officer)