SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1998
Commission File Number 0-15010
MARTEN TRANSPORT, LTD.
(Exact name of registrant as specified in its charter)
Delaware 39-1140809
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(State of incorporation) (I.R.S. Employer
Identification No.)
129 Marten Street, Mondovi, Wisconsin 54755
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(Address of principal executive offices)
715-926-4216
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(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 X No
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The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share, was 4,477,645 as of November 10, 1998.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.
MARTEN TRANSPORT, LTD.
CONDENSED BALANCE SHEETS
(In thousands, except share information)
September 30, December 31,
1998 1997
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $ 2,158 $ 2,052
Receivables . . . . . . . . . . . . . . . . 21,014 18,872
Prepaid expenses. . . . . . . . . . . . . . 6,120 6,921
Deferred income taxes . . . . . . . . . . . 4,217 4,170
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Total current assets . . . . . . . . . 33,509 32,015
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Property and equipment:
Revenue equipment, building and land,
office equipment, and other . . . . . . . 164,822 155,051
Accumulated depreciation . . . . . . . . . (45,849) (42,375)
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Net property and equipment . . . . . . 118,973 112,676
Other assets . . . . . . . . . . . . . . . . . 746 575
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TOTAL ASSETS. . . . . . . . . . . $153,228 $145,266
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LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities. . $ 13,307 $ 13,045
Insurance and claims accruals . . . . . . . 11,079 11,638
Current maturities of long-term debt. . . . 22,823 21,628
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Total current liabilities. . . . . . . 47,209 46,311
Long-term debt, less current maturities . . . 29,829 30,663
Deferred income taxes. . . . . . . . . . . . . 24,538 22,588
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Total liabilities. . . . . . . . . . . 101,576 99,562
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Shareholders' investment:
Common stock, $.01 par value per
share, 10,000,000 shares authorized,
4,477,645 shares issued
and outstanding . . . . . . . . . . . . . 45 45
Additional paid-in capital. . . . . . . . . 9,934 9,934
Retained earnings . . . . . . . . . . . . . 41,673 35,725
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Total shareholders' investment . . . . 51,652 45,704
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TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT. . . . . $153,228 $145,266
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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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
OPERATING REVENUE. . . . . . . . . . . . . . . . . . . $50,126 $44,676 $144,613 $127,046
------- ------- -------- --------
OPERATING EXPENSES:
Salaries, wages and benefits . . . . . . . . . . . . 14,803 13,086 43,763 38,294
Purchased transportation . . . . . . . . . . . . . . 12,297 9,746 34,845 25,765
Fuel and fuel taxes. . . . . . . . . . . . . . . . . 5,986 6,385 17,530 19,219
Supplies and maintenance . . . . . . . . . . . . . . 3,984 3,593 11,561 10,681
Depreciation . . . . . . . . . . . . . . . . . . . . 4,653 4,338 13,848 12,818
Operating taxes and licenses . . . . . . . . . . . . 874 928 2,730 2,585
Insurance and claims . . . . . . . . . . . . . . . . 996 779 2,816 2,746
Communications and utilities . . . . . . . . . . . . 659 547 1,842 1,589
Gain on disposition of revenue
equipment . . . . . . . . . . . . . . . . . . . . . (449) (54) (776) (163)
Other. . . . . . . . . . . . . . . . . . . . . . . . 1,210 1,155 3,704 3,462
------- ------- -------- --------
Total operating expenses . . . . . . . . . . . . 45,013 40,503 131,863 116,996
------- ------- -------- --------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . 5,113 4,173 12,750 10,050
OTHER EXPENSES (INCOME):
Interest expense . . . . . . . . . . . . . . . . . . 1,014 1,039 3,008 3,118
Interest income and other. . . . . . . . . . . . . . (69) (72) (172) (133)
------- ------- -------- --------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . 4,168 3,206 9,914 7,065
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . 1,667 1,282 3,966 2,826
------- ------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 2,501 $ 1,924 $ 5,948 $ 4,239
------- ------- -------- --------
------- ------- -------- --------
BASIC EARNINGS PER COMMON SHARE. . . . . . . . . . . . $ 0.56 $ 0.43 $ 1.33 $ 0.95
------- ------- -------- --------
------- ------- -------- --------
DILUTED EARNINGS PER COMMON SHARE. . . . . . . . . . . $ 0.55 $ 0.43 $ 1.31 $ 0.95
------- ------- -------- --------
------- ------- -------- --------
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,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Operations:
Net income . . . . . . . . . . . . . . . . . . . . $ 5,948 $ 4,239
Adjustments to reconcile net
income to net cash flows
from operating activities:
Depreciation . . . . . . . . . . . . . . . . 13,848 12,818
Gain on disposition of revenue
equipment. . . . . . . . . . . . . . . . . (776) (163)
Deferred tax provision. . . . . . . . . . . . 1,903 444
Changes in other current
operating items. . . . . . . . . . . . . . (1,638) (863)
-------- --------
Net cash provided by
operating activities. . . . . . . . . . 19,285 16,475
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions:
Revenue equipment, net . . . . . . . . . . . . . . (18,996) (15,504)
Building and land, office equipment,
and other additions, net . . . . . . . . . . . . (373) (287)
Net change in other assets. . . . . . . . . . . . . . (171) (605)
-------- --------
Net cash used for investing
activities. . . . . . . . . . . . . . . (19,540) (16,396)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . . - 15
Long-term borrowings . . . . . . . . . . . . . . . . 19,939 17,244
Repayment of long-term borrowings. . . . . . . . . . (19,578) (17,933)
-------- --------
Net cash provided by (used for)
financing activities. . . . . . . . . . 361 (674)
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INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . 106 (595)
CASH AND CASH EQUIVALENTS:
Beginning of period. . . . . . . . . . . . . . . . . 2,052 3,028
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End of period. . . . . . . . . . . . . . . . . . . . $ 2,158 $ 2,433
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CASH PAID (RECEIVED) FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 3,049 $ 3,117
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Income taxes . . . . . . . . . . . . . . . . . . . . $ 2,045 $ (135)
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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 generally accepted accounting principles 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 1997 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) 1998 1997(a) 1998 1997(a)
------ -------- ------ --------
Numerator:
Net income . . . . . . . . . . . . . . . . . . . . $2,501 $1,924 $5,948 $4,239
------ ------ ------ ------
Denominator:
Basic earnings per common share -
weighted-average shares . . . . . . . . . . . 4,478 4,440 4,478 4,439
Effect of dilutive stock options . . . . . . . . . 46 29 54 22
------ ------ ------ ------
Diluted earnings per common share -
weighted-average shares and
assumed conversions . . . . . . . . . . . . . 4,524 4,469 4,532 4,461
------ ------ ------ ------
------ ------ ------ ------
Basic earnings per common share. . . . . . . . . . . $ 0.56 $ 0.43 $ 1.33 $ 0.95
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings per common share. . . . . . . . . . $ 0.55 $ 0.43 $ 1.31 $ 0.95
------ ------ ------ ------
------ ------ ------ ------
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,
1998 1997(a) 1998 1997(a)
------ -------- ------ --------
Number of option shares . . . . . . . . . . . . . . 11,250 217,500 11,250 217,500
Weighted-average exercise price . . . . . . . . . . $ 17.25 $ 13.57 $ 17.25 $ 13.57
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------- -------- ------- --------
(a) 1997 information has been retroactively adjusted to reflect a
three-for-two stock split effective for shareholders of record as of
December 15, 1997.
(3) Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement No. 133) was issued
in June 1998, and is effective in our first quarter of 2000. Statement No.
133 requires companies to record the fair value of derivatives as either
assets or liabilities on the balance sheet. The accounting for gains or
losses from changes in the fair value of derivatives depends on the intended
use of the derivatives and whether the criteria for hedge accounting have
been satisfied. We have entered into commodity swap agreements to partially
hedge Marten's exposure to diesel fuel price fluctuations. Statement No. 133
is expected to have minimal impact on Marten's results of operations and
financial position because we do not hold significant derivative instruments as
of September 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Operating revenue for the third quarter of 1998 increased 12.2 percent over the
same period of 1997. Operating revenue for the first nine months of 1998
increased 13.8 percent over the same period last year. The primary reason for
these increases was the transportation of more freight associated with an
increase in our fleet, improved equipment utilization, and stronger customer
demand. Stronger customer demand also caused average freight rates to increase
in 1998. Our contracts with customers require fuel surcharges and rebates based
on significant fluctuations in the price of diesel fuel. Operating revenue in
the first nine months of 1998 was reduced by fuel rebates of $265,000 due to a
decrease in the price of diesel fuel. Operating revenue was increased by fuel
surcharges of $1,100,000 during the same period of 1997 due to an increase in
the price of diesel fuel. We expect operating revenue for the remainder of 1998
to exceed 1997 levels given planned revenue equipment additions.
Operating expenses for the third quarter of 1998 were 89.8 percent of operating
revenue, compared with 90.7 percent for the third quarter of 1997. This ratio
for the first nine months of 1998 was 91.2 percent, compared with 92.1 percent
for the same period of 1997. These improved ratios reflect more efficient
utilization of our revenue equipment. The transportation of additional freight
and expansion of our fleet caused most of the expense categories to increase in
1998. Purchased transportation expense significantly increased in 1998 due to a
continued increase in the number of independent contractor-owned vehicles in our
fleet. Our use of independent contractor-owned vehicles reduced the following
expenses relative to revenue since the independent contractors assume these
expenses: salaries, wages and benefits expense, fuel and fuel taxes expense,
and supplies and maintenance expense. A decrease in the price of diesel fuel in
1998 caused an additional decrease in our fuel and fuel taxes expense.
Insurance and claims expense in 1998 has been consistent with 1997 levels due to
continued favorable accident experience. We expect operating expenses as a
percent of revenue for the remainder of 1998 to remain at current levels.
Interest expense for the three-month and nine-month periods ended September 30,
1998, decreased from the same periods last year. This improvement was caused by
a decrease in our average long-term debt from 1997 to 1998. We expect interest
expense as a percent of revenue to remain at current levels.
We recorded net income of $2,501,000, or 55 cents per diluted share, for the
third quarter of 1998. This compares with net income of $1,924,000, or 43 cents
per diluted share, for the 1997 third quarter. Net income for the first nine
months of 1998 was $5,948,000, or $1.31 per diluted share, compared with net
income of $4,239,000, or 95 cents per diluted share, for the same period last
year. Earnings per share for 1997 have been retroactively adjusted to reflect a
three-for-two stock split effective for shareholders of record as of December
15, 1997. Continued increases in revenue, improved equipment utilization, and
expense control led to our improved results of operations.
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as discussed in
Note 3 to the financial statements. This statement, effective in our first
quarter of 2000, is expected to have minimal impact on our results of operations
and financial position because we do not have significant derivative instruments
as of September 30, 1998.
CAPITAL RESOURCES AND LIQUIDITY
Net cash flows from operations provided $19,285,000 during the first nine months
of 1998. Net cash of $19,540,000 was used to invest in property and equipment,
while financing activities provided $361,000 during this period. We continued
to update and expand our fleet in 1998 and 1997 by investing in new, more
efficient revenue equipment. We are committed to purchase approximately $5
million of new revenue equipment, net of trade-in allowances, during the fourth
quarter of 1998. We have paid, and expect to pay, for these purchases using
cash flow from operations and long-term debt.
Cash generated from operations historically has met Marten's working capital
needs despite a working capital deficit. The working capital deficit has been
caused by current maturities of long-term debt associated with additions to our
fleet. Subsequent to September 30, 1998, a substantial portion of these current
maturities has been replaced with non-current maturities associated with the
change in our long-term debt noted below. Our operating profits, short turnover
in accounts receivable and cash management practices allow us to effectively
meet our working capital requirements. Short-term borrowings have not been and
are not expected to be used to meet working capital needs. We believe our
liquidity will adequately satisfy expected near-term operating requirements.
In October 1998, we entered into agreements for $25 million in Series A Senior
Unsecured Notes and a $40 million unsecured committed credit facility. The
Senior Notes bear fixed interest at 6.78 percent and mature in October 2008.
The credit facility bears variable interest based on the London Interbank
Offered rate and matures in October 2001. The proceeds of these fundings have
been used to retire a substantial portion of existing long-term debt, and will
be used to invest in property and equipment and satisfy working capital
requirements.
IMPACT OF YEAR 2000
Computer programs have historically been written to abbreviate dates by using
two digits instead of four digits to identify a particular year. The so-called
"year 2000 problem" or "millennium bug" is the inability of computer software or
hardware to recognize or properly process dates ending in "00" and dates after
the year 2000. Significant attention is being focused as the year 2000
approaches on updating or replacing such software and hardware in order to avoid
system failures, miscalculations or business interruptions that might otherwise
result. Marten is taking the steps we believe are necessary to insure that this
potential problem does not adversely affect our operating results in the future.
We are continuing our as-yet incomplete assessment of the impact of the year
2000 problem.
Marten has reviewed its internal information systems and believes that the costs
and efforts to address the year 2000 problem will not be material to our
business, financial condition or results of operations, and may be resolved
through replacements and upgrades to our software or hardware. The year 2000
problem may, however, adversely impact Marten by affecting the business and
operations of parties with which we transact business, although we are unable to
precisely determine the likelihood or potential impact of any such event. There
can be no assurance that Marten will be able to effectively address year 2000
issues in a cost-efficient manner and without interruption to our business, or
that year 2000 problems encountered by our suppliers, customers or other parties
will not have a material impact on our business, financial condition and results
of operations.
Marten's state of readiness for the year 2000, our estimated costs associated
with year 2000 issues, the risks we face associated with year 2000 issues and
our year 2000 contingency plans are summarized below.
STATE OF READINESS.
Internally, we have implemented a three-phase process to assess year 2000
compliance of our systems and remediate any material non-compliance. The phases
are (1) to identify and test our material computer software and hardware in
order to determine whether they are year 2000 compliant; (2) to correct or
replace those software or hardware systems in which we determine there is a
material problem with year 2000 compliance; and (3) to internally test the
corrected or upgraded systems in order to determine whether they are year 2000
compliant. We have completed all three phases with respect to most of our
material internally-written and purchased information technology ("IT") systems
and non-IT systems and believe the systems are year 2000 compliant. However,
Marten also utilizes a sales and marketing system, an insurance claims
management system and a maintenance tracking system, all of which are in the
second phase. We expect these three systems will be through phase three and
achieve year 2000 compliance in 1999.
Externally, we have implemented a three-phase process to assess year 2000
compliance of the systems of our vendors and third party servicers, and
remediate any material non-compliance. The phases are (1) to identify the
vendors and other third parties with whom we transact business and determine
whether they are significant to our business ("core" parties); (2) to contact
the vendors and other third parties with whom we do business by, among other
methods, sending them letters and questionnaires designed to solicit information
relating to the year 2000 problem; and (3) to evaluate the responses received
from the vendors and other third parties. The questionnaire we are using asks
vendors and other third parties such questions as (i) whether they have a
documented year 2000 compliance plan, (ii) whether they are aware of any year
2000 readiness issues that could affect Marten, (iii) whether, if such an issue
exists, they have plans in place to ensure compliance, (iv) what their target
date is for year 2000 compliance and (v) whether they have any contingency
plans. We have substantially completed all three phases with respect to core
parties. We plan to follow up during 1999 with our core vendors and third
parties with whom we do business, and update our information regarding the year
2000 problem. We are in the first and second phases with respect to non-core
parties, and anticipate completing all phases with respect to non-core parties
before the end of 1998.
COSTS ASSOCIATED WITH YEAR 2000 ISSUES.
We estimate that the future costs associated with implementing all phases of our
year 2000 assessment and resolving any year 2000 problems will be between
$100,000 and $200,000. This estimated range includes expenditures for both
repairs and upgrades. We believe that these costs, assuming this estimate is
accurate, would not have a material effect on our business, financial condition
and results of operations. We estimate our costs to date associated with year
2000 issues to be less than $25,000. We anticipate that cash flow from
operations will be used to pay the costs associated with our year 2000 problem.
All year 2000 costs are expensed as incurred.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES.
We are unaware of any material risk to Marten associated with year 2000 issues
at the present time. We believe that the reasonably likely worst case year 2000
scenario is a decrease in the efficiency with which we procure and deliver
loads, and a decrease in the efficiency with which we receive payment for
services rendered. A decrease in efficiency, however, would not necessarily
result in a decrease in business. We expect that load procurement, load
delivery and billing all could be achieved through alternative methods within a
relatively short period of time. Any disruption, however, could result in some
lost revenue.
We face the additional risk of experiencing an increase in claims and litigation
relating to the year 2000 problem because, among other reasons, there is no
uniform definition of year 2000 "compliance" and because all vendor and third
party situations cannot be anticipated, particularly those involving third party
products. Such claims, if successful, could have a material adverse effect on
future results. Moreover, the costs of defending Marten against such claims,
even if ultimately resolved in our favor, could have a material adverse effect
on future results.
CONTINGENCY PLANS.
We have not yet developed specific contingency plans for the millennium bug
because our assessment of year 2000 issues is incomplete. We generally expect
that our contingency plans will be to identify and have available to us
alternate vendors and service providers to decrease the impact on Marten if one
or more of the core parties with whom we do business suffers a significant year
2000 problem. We expect to have Marten's contingency plans complete before the
end of 1998.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains certain forward-looking statements.
Any statements in this report that are not statements of historical fact may be
considered to be forward-looking statements. Written words such as "may,"
"will," "expect," "believe," "anticipate," "estimate" or "continue," or other
variations of these or similar words, identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially, depending on a variety of factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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 subject, and 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) Exhibits
Item No. Item Method of Filing
-------- ---- ----------------
10.12 Note Purchase and Private
Shelf Agreement dated
October 30, 1998, between
the Company and The Prudential
Insurance Company of
America . . . . . . . . . . . . . Filed with this report
electronically.
10.13 Credit Agreement dated
October 30, 1998, between
the Company and U.S. Bank
National Association . . . . . . . Filed with this report
electronically.
27.1 Financial Data
Schedule . . . . . . . . . . . . . Filed with this report
electronically.
b) No reports on Form 8-K have been filed during the quarter
ended September 30, 1998.
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 thereto duly authorized.
MARTEN TRANSPORT, LTD.
(Registrant)
Dated: November 12, 1998 By: /s/ Darrell D. Rubel
---------------------------------
Darrell D. Rubel
Executive Vice President and Treasurer
(Chief Financial Officer)
MARTEN TRANSPORT, LTD.
EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Quarter Ended September 30, 1998
Item No. Item Method of Filing
- -------- ---- ----------------
10.12 Note Purchase and Private
Shelf Agreement dated
October 30, 1998, between
the Company and The Prudential
Insurance Company of
America . . . . . . . . . . . . . . . .Filed with this report
electronically.
10.13 Credit Agreement dated
October 30, 1998, between
the Company and U.S. Bank
National Association. . . . . . . . . .Filed with this report
electronically.
27.1 Financial Data
Schedule. . . . . . . . . . . . . . . .Filed with this report
electronically.