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 -------- ---------- (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 X No ----- ----- 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) <TABLE> <CAPTION> September 30, December 31, 1998 1997 ------------- ----------- (UNAUDITED) <S> <C> <C> 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 ------------- ----------- Total current assets . . . . . . . . . 33,509 32,015 ------------- ----------- Property and equipment: Revenue equipment, building and land, office equipment, and other . . . . . . . 164,822 155,051 Accumulated depreciation . . . . . . . . . (45,849) (42,375) ------------- ----------- Net property and equipment . . . . . . 118,973 112,676 Other assets . . . . . . . . . . . . . . . . . 746 575 ------------- ----------- TOTAL ASSETS. . . . . . . . . . . $153,228 $145,266 ------------- ----------- ------------- ----------- 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 ------------- ----------- Total current liabilities. . . . . . . 47,209 46,311 Long-term debt, less current maturities . . . 29,829 30,663 Deferred income taxes. . . . . . . . . . . . . 24,538 22,588 ------------- ----------- Total liabilities. . . . . . . . . . . 101,576 99,562 ------------- ----------- 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 ------------- ----------- Total shareholders' investment . . . . 51,652 45,704 ------------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT. . . . . $153,228 $145,266 ------------- ----------- ------------- ----------- </TABLE> The accompanying notes are an integral part of these balance sheets.
MARTEN TRANSPORT, LTD. CONDENSED STATEMENTS OF INCOME (In thousands, except share information) (Unaudited) <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> 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 ------- ------- -------- -------- ------- ------- -------- -------- </TABLE> The accompanying notes are an integral part of these statements.
MARTEN TRANSPORT, LTD. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 ---- ---- <S> <C> <C> 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 -------- -------- 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) -------- -------- 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) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . 106 (595) CASH AND CASH EQUIVALENTS: Beginning of period. . . . . . . . . . . . . . . . . 2,052 3,028 -------- -------- End of period. . . . . . . . . . . . . . . . . . . . $ 2,158 $ 2,433 -------- -------- -------- -------- CASH PAID (RECEIVED) FOR: Interest . . . . . . . . . . . . . . . . . . . . . . $ 3,049 $ 3,117 -------- -------- -------- -------- Income taxes . . . . . . . . . . . . . . . . . . . . $ 2,045 $ (135) -------- -------- -------- -------- </TABLE> 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: <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, (In thousands, except per-share amounts) 1998 1997(a) 1998 1997(a) ------ -------- ------ -------- <S> <C> <C> <C> <C> 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 ------ ------ ------ ------ ------ ------ ------ ------ </TABLE> 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. <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, 1998 1997(a) 1998 1997(a) ------ -------- ------ -------- <S> <C> <C> <C> <C> Number of option shares . . . . . . . . . . . . . . 11,250 217,500 11,250 217,500 Weighted-average exercise price . . . . . . . . . . $ 17.25 $ 13.57 $ 17.25 $ 13.57 ------- -------- ------- -------- ------- -------- ------- -------- </TABLE> (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.