Pamt Corp: Form 10-Q for the period ended Mar 31, 2024

FORWARD-LOOKING INFORMATION

Certain information included in this Quarterly Report on Form 10-Q constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to expected future financial and operating results, prospects, plans or events, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, excess capacity in the trucking industry; surplus inventories; recessionary economic cycles and downturns in customers' business cycles; increases or rapid fluctuations in fuel prices, inflation, interest rates, fuel taxes, tolls, and license and registration fees; potential economic, business or operational disruptions or uncertainties due to public health crises; the resale value of the Company's used equipment; the price and availability of new equipment consistent with anticipated acquisition and replacement plans; increases in compensation for and difficulty in attracting and retaining qualified drivers and owner-operators; increases in insurance premiums and deductible amounts relating to accident, cargo, workers' compensation, health, and other claims; increases in the number or amount of claims for which the Company is self-insured; inability of the Company to continue to secure acceptable financing arrangements; seasonal factors such as harsh weather conditions that increase operating costs; competition from trucking, rail, and intermodal competitors including reductions in rates resulting from competitive bidding; the ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations; our ability to develop and implement suitable information technology systems and prevent failures in or breaches of such systems; the impact of pending or future litigation; general risks associated with doing business in Mexico, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, political and economic instability and terrorism; the potential impact of new laws, regulations or policy, including, without limitation, laws and regulations governing the classification of independent contractors as employees, tariffs, import/export, trade and immigration regulations or policies; a significant reduction in or termination of the Company's trucking service by a key customer; and other factors, including risk factors, included from time to time in filings made by the Company with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking events and circumstances discussed above and in company filings might not transpire.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the fiscal year ended December 31, 2023.

BUSINESS OVERVIEW

The Company is a holding company that owns subsidiaries engaged in providing truckload dry van carrier services transporting general commodities throughout the continental United States, as well as in the Canadian provinces of Ontario and Quebec. The Company’s consolidated operating subsidiaries also provide transportation services in Mexico through its gateways in Laredo and El Paso, Texas under agreements with Mexican carriers. Unless the context otherwise requires, this report presents information regarding the Company and its subsidiaries on a consolidated basis. The Company’s administrative headquarters are in Tontitown, Arkansas. From this location we manage operations conducted through our wholly-owned subsidiaries based in various locations around the United States and in Mexico and Canada. The operations of these subsidiaries can generally be classified into either truckload services or brokerage and logistics services. 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 and logistics operations have similar economic characteristics and are impacted by virtually the same economic factors as discussed elsewhere in this report.

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 63.5% and 64.7% of total revenues, excluding fuel surcharges, for the quarters ended March 31, 2024, and 2023, respectively. The remaining revenues, excluding fuel surcharges, were generated from brokerage and logistics services.

The main factors that impact our profitability on the expense side are costs incurred in transporting freight for our customers. Currently, our most challenging costs include fuel, driver recruitment, training, wage and benefits costs, independent broker costs (which we record as purchased transportation), insurance, maintenance and capital equipment costs.

In discussing our results of operations, we use revenue, before fuel surcharge (and fuel expense, net of fuel surcharge), because management believes that eliminating the impact of this sometimes volatile source of revenue allows a more consistent basis for comparing our results of operations from period to period. During the three months ended March 31, 2024 and 2023, approximately $21.6 million and $28.3 million, respectively, of the Company’s total revenue was generated from fuel surcharges. We may also discuss certain changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the variable cost nature of certain expenses makes a comparison of changes in expenses as a percentage of revenue more meaningful than absolute dollar changes.

RESULTS OF OPERATIONS – TRUCKLOAD SERVICES

The following table sets forth, for truckload services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Fuel costs are reported net of fuel surcharges.

THREE MONTHS ENDED MARCH 31, 2024 VS. THREE MONTHS ENDED MARCH 31, 2023

During the first quarter of 2024, truckload services revenue, before fuel surcharges, decreased by 18.4% to $102.2 million as compared to $125.2 million during the first quarter of 2023. The decrease relates primarily to a 14.0% decrease in loaded miles travelled from 48.9 million for the first quarter of 2023 to 42.1 million for the first quarter of 2024 and to a 5.2% decrease in our rate per loaded mile, from $2.56 for the first quarter of 2023 to $2.43 for the first quarter of 2024. The reduction in loaded miles was primarily driven by a 7.5% reduction in the average number of trucks operated combined with a 4.3% reduction in average miles driven by each truck for the first quarter of 2024 compared to the first quarter of 2023. The reduction in truck count and miles resulted from a less favorable freight market year over year, characterized by an oversupply of available trucks in the market compared to available freight.

Salaries, wages and benefits increased from 36.2% of revenues, before fuel surcharges, in the first quarter of 2023 to 40.5% of revenues, before fuel surcharges, during the first quarter of 2024. This percentage-based increase relates primarily to an increase in the percentage of miles driven by company-employed drivers, as opposed to third-party owner-operators during the first quarter of 2024 compared to the first quarter of 2023. In addition, the interaction of salaries and wages with fixed-cost characteristics combined with the year to year reduction in first quarter revenue, resulted in an increase in this category when measured as a percentage of revenue.

Operating supplies and expenses increased from 10.0% of revenues, before fuel surcharges, during the first quarter of 2023 to 12.4% of revenues, before fuel surcharges, during the first quarter of 2024. The increase relates primarily to the interaction of expenses with fixed-cost characteristics, such as rents, driver training schools and operating taxes and licenses with a decrease in revenue. The increase also relates to an increase in the average surcharge-adjusted fuel price paid per gallon of diesel fuel, due to decreased fuel surcharge collections from customers for the quarter ended March 31, 2024 compared to March 31, 2023.

Rent and purchased transportation decreased from 24.6% of revenues, before fuel surcharges, during the first quarter of 2023 to 22.2% of revenues, before fuel surcharges, during the first quarter of 2024. The decrease was primarily due to a decrease in the percentage of miles driven by third-party owner-operators as opposed to company-employed drivers, as well as a decrease in the rates paid to third-party owner-operators for the quarter-ended March 31, 2024 compared to March 31, 2023.

Depreciation increased from 12.9% of revenues, before fuel surcharges, during the first quarter of 2023 to 18.3% of revenues, before fuel surcharges, during the first quarter of 2024. The increase relates primarily to an increase in cost for replacement revenue equipment compared to the cost of retired equipment and to the interaction of a decrease in operating revenues with the fixed-cost nature of depreciation expense.

Insurance and claims decreased from 12.3% of revenues, before fuel surcharges, during the first quarter 2023 to 4.7% of revenues, before fuel surcharges, during the first quarter 2024. This decrease relates primarily to specific auto liability claims being settled in the latter half of 2023, and a reduction of the auto liability claims reserved in the first quarter of 2024, as compared to the first quarter of 2023. While our claims reserve did decrease quarter over quarter, we still saw an increase in the rate per mile paid for auto liability insurance in the first quarter of 2024 compared to the first quarter of 2023.

Non-operating income increased from 0.6% of revenues, before fuel surcharges, during the first quarter of 2023 to 3.7% of revenues, before fuel surcharges, during the first quarter of 2024. This increase resulted primarily from an increase in interest income recognized, combined with a larger increase in the market value of our marketable equity securities portfolio as of March 31, 2024 as compared to March 31, 2023.

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 99.3% for the first quarter of 2023 to 104.2% for the first quarter of 2024.

RESULTS OF OPERATIONS – LOGISTICS AND BROKERAGE SERVICES

The following table sets forth, for logistics and brokerage services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Brokerage service operations occur specifically in certain divisions; however, brokerage operations occur throughout the Company in similar operations having substantially similar economic characteristics.

THREE MONTHS ENDED MARCH 31, 2024 VS. THREE MONTHS ENDED MARCH 31, 2023

During the first quarter of 2024, logistics and brokerage services revenue, before fuel surcharges, decreased 13.9% to $58.8 million as compared to $68.3 million during the first quarter of 2023. The decrease was primarily related to a 23.4% decrease in revenue per load, partially offset by a 12.4% increase in the number of loads during the first quarter 2024 as compared to 2023. The decrease in revenue per load was due to a reduction in rates paid for brokered loads, as spot market rates were negatively impacted by downward rate pressure driven by the challenging truckload freight rate environment across our industry year to year.

Rents and purchased transportation increased from 82.4% of revenues, before fuel surcharges, during the first quarter of 2023 to 86.1% of revenues, before fuel surcharges, during the first quarter of 2024. The increase results from paying third-party carriers a larger percentage of customer revenue, coupled with the interaction of a decrease in operating revenues with the need for purchased transportation.

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 88.8% for the first quarter of 2023 to 93.9% for the first quarter of 2024.

RESULTS OF OPERATIONS – COMBINED SERVICES

THREE MONTHS ENDED MARCH 31, 2024 VS. THREE MONTHS ENDED MARCH 31, 2023

Net income for all divisions was approximately $0.3 million, or 0.2% of revenues, before fuel surcharges, for the first quarter of 2024 as compared to net income of $5.2 million, or 2.7% of revenues, before fuel surcharges, for the first quarter of 2023. The decrease in net income resulted in diluted earnings per share of $0.01 for the first quarter of 2024 as compared to diluted earnings per share of $0.23 for the first quarter of 2023.

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, and borrowings under our credit facilities, installment notes, and investment margin account.

During the first three months of 2024, we generated $9.6 million in cash from operating activities. Investing activities used $9.8 million in cash in the first three months of 2024. Financing activities used $20.4 million in cash in the first three months of 2024.

Our primary use of funds is for the purchase of revenue equipment. We typically use installment notes with fixed interest rates and terms ranging from 36 to 84 months, our existing line of credit on an interim basis, proceeds from the sale or trade of equipment, and cash flows from operations to finance capital expenditures and repay long-term debt. During the first three months of 2024, we utilized cash on hand, installment notes, and our line of credit to finance purchases of revenue equipment and other assets of approximately $21.8 million.

During the remainder of 2024, we expect to purchase approximately 519 new trucks and 1,196 new trailers while continuing to sell or trade older equipment, which we expect to result in net capital expenditures of approximately $82.5 million.

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

During the first three months of 2024, we maintained a revolving line of credit. Amounts outstanding under the line bear interest at Term SOFR plus 1.35% (6.68% at March 31, 2024), are secured by our trade accounts receivable and mature on July 1, 2026. An “unused fee” of 0.25% is charged if average borrowings are less than $18.0 million. At March 31, 2024 outstanding advances on the line of credit were approximately $0.1 million, consisting of letters of credit, with availability to borrow $59.9 million.

Trade accounts receivable increased from $80.6 million at December 31, 2023 to $92.3 million at March 31, 2024. The increase resulted from an increase in freight revenues, which flow through accounts receivable, coupled with the reduction of receivables held in suspense during the first quarter of 2024 as compared to the fourth quarter of 2023.

Prepaid expenses and deposits decreased from $13.2 million at December 31, 2023 to $10.8 million at March 31, 2024. The decrease relates to the normal amortization of items prepaid as of December 31, 2023.

Revenue equipment decreased from $689.2 million at December 31, 2023 to $675.5 million at March 31, 2024. The decrease is primarily due to the disposition of aging trucks and trailers during the first quarter of 2024, partially offset by purchases of new trucks and trailers during the first quarter of 2024.

Land increased from $23.1 million at December 31, 2023 to $36.5 million at March 31, 2024. The increase is primarily due to the purchase of 16.23 acres in El Paso, TX that will serve as an additional terminal for our truckload operations.

Accounts payable decreased from $62.7 million at December 31, 2023 to $38.7 million at March 31, 2024. This decrease was primarily attributable to payments made in the first quarter of 2024 on contracts for revenue equipment placed in service, but not yet paid for at December 31,2023. There are no outstanding invoices for revenue equipment at March 31, 2024.

Long-term debt and current maturities of long term-debt are reviewed on an aggregate basis, as the classification of amounts in each category are typically affected merely by the passage of time. Long-term debt and current maturities of long-term debt, on an aggregate basis, increased from $261.7 million at December 31, 2023 to $271.6 million at March 31, 2024. The increase was primarily related to the financing of additional revenue equipment during the first quarter of 2024.

NEW ACCOUNTING PRONOUNCEMENTS

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

Our primary market risk exposures include equity price risk, interest rate risk, commodity price risk (the price paid to obtain diesel fuel for our trucks), and foreign currency exchange rate risk. The potential adverse impacts of these risks are discussed below. While the Company has used derivative financial instruments in the past to manage its interest rate and commodity price risks, the Company does not currently enter into such instruments for risk management purposes or for speculation or trading.

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

Equity Price Risk

We hold certain actively traded marketable equity securities, which subjects the Company to fluctuations in the fair market value of its investment portfolio based on the current market price of such securities. The recorded value of marketable equity securities increased to $45.8 million at March 31, 2024 from $43.2 million at December 31, 2023. A 10% decrease in the market price of our marketable equity securities would cause a corresponding 10% decrease in the carrying amounts of these securities, or approximately $4.6 million. For additional information with respect to the marketable equity securities, see Note D to our condensed consolidated financial statements.

Interest Rate Risk

Our line of credit bears interest at a floating rate equal to SOFR plus a fixed percentage. Accordingly, changes in SOFR, which are affected by changes in interest rates, or a change to a new index rate, will affect the interest rate on, and therefore our costs under, the line of credit. Assuming $18.0 million of variable rate debt was outstanding under our line of credit for a full fiscal year, a hypothetical 100 basis point increase in SOFR would result in approximately $180,000 of additional interest expense.

Commodity Price Risk

Prices and availability of all petroleum products are subject to political, economic, and market factors that are generally outside of our control. Accordingly, the price and availability of diesel fuel, as well as other petroleum products, can be unpredictable. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition. Based upon our 2023 fuel consumption, a 10% increase in the average annual price per gallon of diesel fuel would increase our annual fuel expenses by $8.2 million.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk related to the activities of our branch office located in Mexico. Currently, we do not hedge our exchange rate exposure through any currency forward contracts, currency options, or currency swaps as all of our revenues, and substantially all of our expenses and capital expenditures, are transacted in U.S. dollars. However, certain operating expenditures and capital purchases related to our Mexico branch office are incurred in or exposed to fluctuations in the exchange rate between the U.S. dollar and the Mexican peso. Based on 2023 expenditures denominated in pesos, a 10% increase in the exchange rate would increase our annual operating expenses by $0.9 million.

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

Based on management’s evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2024, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes to the Company’s risk factors as previously disclosed in Item 1A to Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.