Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
Overview
The business of the Company, conducted through our wholly owned subsidiary, Florida Rock & Tank Lines, Inc. (Tank Lines), which is a Southeastern U.S. based tank truck company, is to transport petroleum and other liquids and dry bulk commodities.
CONSOLIDATED FINANCIAL HIGHLIGHTS
Years ended September 30
(Amounts in thousands except per share amounts)
Change
Revenues
Operating profit
Income before income taxes
Net income
Per common share:
Basic
Diluted
Total Assets
Total Debt
Shareholders' Equity
Common Shares Outstanding
Book Value Per Common Share
Our revenues are primarily based on a set rate per volume of product hauled to arrive at a desired rate per mile traveled. The rate also incorporates the cost of fuel at an assumed price plus fuel surcharges to address the fluctuation in fuel prices. Over time, the fuel surcharge tables in the industry have become so numerous and varied, both by
carriers and customers, that they have simply become a part of the overall rating structure to arrive at that desired price per mile by market. We consider fuel surcharge revenue to be revenue from services rather than other revenues. As a result, the Company determined there is no reason to report fuel surcharges as a separate revenue line item and fuel surcharges are reported as part of Operating revenues.
The Company’s operations are influenced by a number of external and internal factors. External factors include levels of economic and industrial activity, driver availability and cost, government regulations regarding driver qualifications and limitations on the hours drivers can work, petroleum product demand in the Southeast which is driven in part by tourism and commercial aviation, and fuel costs. Internal factors include revenue mix, equipment utilization, Company imposed restrictions on hiring drivers under the age of 21 or drivers without at least one year of driving experience, auto and workers’ compensation accident frequencies and severity, administrative costs, and group health claims experience.
Our operating costs primarily consist of the following:
Compensation and Benefits - Wages and employee benefits for our drivers and terminal support personnel is the largest component of our operating costs. These costs are impacted by such factors as miles driven, driver pay increases, driver turnover and training costs and additional driver pay due to temporary out-of-town deployments to cover business.
Fuel Expenses - Our fuel expenses will vary depending on miles driven as well as such factors as fuel prices (which can be highly volatile), the fuel efficiency of our fleet and the average haul length.
Repairs and Tires – This category consists of vehicle maintenance and repairs (excluding shop personnel) and tire expense (including amortization of tire cost and road repairs). These expenses will vary based on such factors as miles driven, the age of our fleet, and tire prices.
Other Operating Expenses – This category consists of tolls, hiring costs, out-of-town driver travel cost, terminal facility maintenance and other operating expenses. These expenses will vary based on such factors as, driver availability and out-of-town driver travel requirements, business growth and inflation among others.
Insurance and Losses – This includes costs associated with insurance premiums, and the self-insured portion of liability, workers’ compensation, health insurance and cargo claims and wreck repairs. We work very hard to manage these expenses through our safety and wellness programs, but these expenses will vary depending on the frequency and severity of accident and health claims, insurance markets and deductible levels.
Depreciation Expense – Depreciation expense consists of the depreciation of the cost of fixed assets such as tractors and trailers over the life assigned to those assets. The amount of depreciation expense is impacted by equipment prices and the timing of new equipment purchases. We expect the cost of new tractors and trailers to continue to increase, impacting our future depreciation expense.
Rents, Tags and Utilities Expenses – This category consists of rents payable on leased facilities and leased equipment, federal highway use taxes, vehicle registrations, license and permit fees and personal property taxes assessed against our equipment, communications, utilities and real estate taxes.
Sales, General and Administrative Expenses – This category consists of the wages, bonus accruals, benefits, travel, vehicle and office costs for our administrative personnel as well as professional fees and amortization charges for intangible assets purchased in acquisitions of other businesses.
Corporate Expenses – Corporate expenses consist of wages, bonus accruals, insurance and other benefits, travel, vehicle and office costs for corporate executives, director fees, stock option expense and aircraft expense.
Gains/Loss on Disposition of Property, Plant & Equipment – Our financial results for any period may be impacted by any gain or loss that we realize on the sale of used equipment, losses on wrecked equipment, and disposition of other assets. We periodically sell used equipment as we replace older tractors and trailers. Gains or losses on equipment sales can vary significantly from period to period depending on the timing of our equipment replacement cycle, market prices for used equipment and losses on wrecked equipment.
To measure our performance, management focuses primarily on transportation revenue growth, revenue miles, our preventable accident frequency rate (“PAFR”), our operating ratio (defined as our operating expenses as a percentage of our operating revenue), turnover rate (excluding drivers related to terminal closures) and average driver count (defined as average number of revenue producing drivers including owner operators (O.O.) under employment over the specified time period) as compared to the same period in the prior year.
ITEM
Operating Revenues
Revenue Miles
Revenue Per Mile
PAFR (incidents per 1M miles) goal of 1.87
Operating Ratio
Driver Turnover Rate
Avg. Driver Count incl. owner operators
COMPARATIVE RESULTS OF OPERATIONS
Fiscal Years ended September 30
(dollars in thousands)
Revenue miles (in thousands)
Operating Revenues
Cost of operations:
Compensation and benefits
Fuel expenses
Repairs & tires
Other operating
Insurance and losses
Depreciation expense
Rents, tags & utilities
Sales, general & administrative
Corporate expenses
Gain on sale of terminal sites
Loss (gain) on disposition of PP&E
Total cost of operations
Total operating profit
Fiscal Year 2023 versus 2022
The Company reported net income of $2,673,000, or $.74 per share for the fiscal year ended September 30, 2023, compared to $7,190,000, or $1.98 per share in the same period last year. Net income in the fiscal year ended September 30, 2022 included $6,281,000, or $1.73 per share, from one-time gains on real estate net of income taxes.
Revenue miles were up 579,000, or 2.7%, over the same period last year. Operating revenues for the period were $94,785,000, up $6,903,000 from the same period last year due to an increase in miles, rate increases and an improved business mix. Operating revenue per mile was up $.20, or 4.8%.
Compensation and benefits increased $5,587,000, mainly due to the increases in driver compensation, a $331,000 increase in training pay versus the same period last year and increases in owner operators. Fuel expense decreased $1,317,000 due to lower diesel prices. Insurance and losses decreased $1,103,000 due to lower risk and health insurance claims. Depreciation expense was down $127,000 in the period. Sales, general & administrative increased $1,286,000 due mainly to bonus accruals, increased travel and higher 401(k) match. Corporate expenses were up $204,000 due to $368,000 of costs related to the pending merger. Gain on sale of equipment was $1,047,000 versus $739,000 in the same period last year.
As a result, operating profit this period was $3,282,000 compared to $9,299,000 in the same period last year. Prior year gain on the sale of land was $8,330,000 due to the sale of our former terminal location in Tampa, FL. Operating ratio was 96.5 versus 89.4 in the same period last year.
Fiscal Year 2022 versus 2021
The Company reported net income of $7,190,000, or $1.98 per share, in fiscal year 2022 compared to $625,000, or $.18 per share, in fiscal year 2021. Net income in fiscal year 2022 included $6,281,000, or $1.73 per share, from gains on real estate sales net of income taxes. Net income in fiscal year 2021 included $1,170,000, or $.34 per share, from gains on real estate sales net of income taxes.
Revenue miles in fiscal year 2022 were down 2,539,000, or 11%, over the prior year due to a lower average driver count (down ~40 drivers from last year). Operating revenues for fiscal year 2022 were $87,882,000, up $6,614,000 from fiscal year 2021. Operating revenue per mile in fiscal year 2022 was up $.72, or 21.1% due to rate increases, higher fuel surcharges and an improved business mix.
Compensation and benefits increased $1,708,000 in fiscal year 2022, mainly due to the increased driver compensation package offset by a lower driver count and non-driver personnel reductions. Fuel expense increased $3,658,000 in fiscal year 2022 as a result of higher diesel prices. Insurance and losses increased $906,000 in fiscal year 2022, primarily as a result of the maximum limit COVID health claim ($420,000), a negative workers’ compensation adjustment from a prior year claim ($380,000), and two vehicle rollovers ($269,000). Depreciation expense was down $1,117,000 in fiscal year 2022. SG&A expense was higher by $542,000 in fiscal year 2022 which included a one-time transaction bonus of $394,000 following the sale of the Tampa property for certain members of management. Gain on the sale of land was $8,330,000 in fiscal year 2022 due to the sale of our former terminal location in Tampa, FL compared to $1,614,000 in fiscal year 2021 due to the sale of our former terminal location in Pensacola, FL and the sale and partial leaseback of our terminal in Chattanooga, TN. Gain on the sale of assets was $739,000 in fiscal year 2022 versus a loss of ($179,000) in fiscal year 2021.
As a result, operating profit in fiscal year 2022 was $9,299,000 compared to $880,000 in fiscal year 2021. Operating ratio was 89.4 in fiscal year 2022 versus 98.9 in fiscal year 2021. Excluding the gain on sale of Tampa terminal and the one-time transaction bonus, adjusted operating profit in fiscal year 2022 was $1,363,000 as compared to an adjusted operating loss of ($734,000) in fiscal year 2021. The COVID medical claim, the prior year workers’ compensation claim and the two Q4 rollover incidents resulted in a total charge of $1,268,000 in fiscal 2022.
Non-GAAP Financial Measures
To supplement the financial results presented in accordance with GAAP, Patriot presents certain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Patriot uses these non-GAAP financial measures to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. These measures are not, and should not be viewed as, substitutes for GAAP financial measures.
Adjusted Operating Profit
Adjusted operating profit excludes the impact of the gain on sale of terminal sites and the one-time transaction bonus related to the sale. Adjusted operating profit is presented to provide additional perspective on underlying trends in Patriot’s core operating results. A reconciliation between operating profit and adjusted operating profit is as follows:
Twelve months ended
September 30, 2022
September 30, 2021
Operating profit
Adjustments:
Gain on sale of terminal sites
One-time transaction bonus
Adjusted operating profit (loss)
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains its operating accounts with Wells Fargo Bank, N.A. and these accounts directly sweep overnight against the Wells Fargo revolver. Our revolver has a maximum amount available of $15 million and as of September 30, 2023, we had no debt outstanding on this revolver, $1,754,000 letters of credit and $13,246,000 available for additional borrowings. The Company expects our fiscal year 2024 cash generation to cover the cost of our operations and our budgeted capital expenditures.
Cash Flows - The following table summarizes our cash flows from operating, investing and financing activities for each of the periods presented (in thousands of dollars):
Years Ended September 30,
Total cash provided by (used for):
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
Outstanding debt at the beginning of the period
Outstanding debt at the end of the period
Operating Activities - Net cash provided by operating activities (as set forth in the cash flow statement) was $8,872,000 for the year ended September 30, 2023, $4,235,000 in 2022 and $2,772,000 in 2021. The total of net income plus depreciation and amortization less gains on sales of property and equipment increased $3,477,000 versus last year. These changes are described above under “Comparative Results of Operations”.
Investing Activities – Investing activities include the purchase of property and equipment, any business acquisitions and proceeds from sales of property and equipment upon retirement. For the year ended September 30, 2023, cash used in investing activities was $10,862,000 which included the proceeds from retirements net of the purchase of property, plant and equipment. For the year ended September 30, 2022, cash provided by investing activities was $5,661,000 which included the proceeds from retirements net of the purchase of property, plant and equipment.
For the year ended September 30, 2021, cash provided by investing activities was $2,173,000 which included the proceeds from retirements net of the purchase of property, plant and equipment.
Financing Activities – Financing activities primarily include net changes to our outstanding revolving debt and proceeds from the sale of shares of common stock through employee equity incentive plans and dividends. For the year ended September 30, 2023, cash provided by financing activities was $117,000 due to proceeds from exercised stock options offset by expired stock options. For the year ended September 30, 2022, cash used in financing activities was $12,493,000 due to dividends paid offset by proceeds from exercised stock options.
For the year ended September 30, 2021, cash used in financing activities was $10,008,000 primarily due to dividends paid. The Company had no outstanding long-term debt on September 30, 2023 or September 30, 2022.
Credit Facilities - The Company has a five-year credit agreement with Wells Fargo Bank N.A. which provides a $15 million revolving line of credit with a $10 million sublimit for stand-by letters of credit. The amounts outstanding under the credit agreement bear interest at a rate of 1.1% over the Secured Overnight Financing Rate (“SOFR”), which may change quarterly based on the Company’s ratio of consolidated total debt to consolidated total capital. A commitment fee of 0.12% per annum is payable quarterly on the unused portion of the commitment. The credit agreement contains certain conditions and financial covenants, including a minimum tangible net worth. As of September 30, 2023, the tangible net worth covenant would have limited our ability to pay dividends or repurchase stock with borrowed funds to a maximum of $5,332,000 combined.
Cash Requirements - The Company projects that cash flows from operating activities, cash on hand and the funds available under its revolving credit agreement will be adequate to finance its capital expenditures, any dividends paid and its working capital needs for the next 12 months and the foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
Except for the letters of credit described above under “Liquidity and Capital Resources,” the Company does not have any off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future material effect on its financial condition.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Accounting estimates are considered to be critical if (1) the nature of the estimates and assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (2) the impact of the estimates and assumptions on financial condition or operating performance is material. Actual results could differ from the estimates and assumptions used. Management of the Company considers the following accounting policies critical to the reported operations of the Company:
Accounts Receivable Valuation . The Company is subject to customer credit risk that could affect the collection of outstanding accounts receivable. To mitigate these risks, the Company performs credit reviews on all new customers and periodic credit reviews on existing customers. A detailed analysis of late and slow pay customers is prepared monthly and reviewed by senior management. The overall collectability of outstanding receivables is evaluated, and allowances are recorded as appropriate. Significant changes in customer credit could require increased allowances and affect cash flows.
Property and Equipment and Impairment of Tangible and Intangible Assets . Property and equipment is recorded at cost less accumulated depreciation. Provision for depreciation of property and equipment is computed using the straight-line method based on the following estimated useful lives:
Years
Buildings and improvements
Revenue equipment
Other equipment
The Company periodically reviews property and equipment for potential impairment whenever events or circumstances indicate the carrying amount of a long-lived asset may not be recoverable. The analysis consists of a review of future anticipated results considering business prospects and asset utilization. If the sum of these future cash flows (undiscounted and without interest charges) is less than the carrying amount of the assets, the Company would record an impairment loss based on the fair value of the assets with the fair value of the assets generally based upon an estimate of the discounted future cash flows expected with regards to the assets and their eventual disposition as the measure of fair value. The Company performs an annual impairment test on goodwill and other intangible assets. Changes in estimates or assumptions could have an impact on the Company’s financials.
Claims and Insurance Accruals. The nature of the transportation business subjects the Company to risks arising from workers’ compensation, automobile liability, and general liability claims. The Company retains the exposure on liability claims of $250,000 and $500,000 for workers’ compensation claims and has third party coverage for amounts exceeding the retention up to the amount of the policy limits. The Company expenses during the year an estimate of risk insurance losses based upon independent actuarial analysis, insurance company estimates, and our monthly review of claims reserve changes. In making claim reserve changes we rely upon estimates of our insurance company adjusters, attorney evaluations, and judgment of our management. Our estimates require judgment concerning the nature, severity, comparative liability, jurisdiction, legal and investigative costs of each claim. Claims involving serious injury have greater uncertainty of the eventual cost. In the past, our estimate of the amount of individual has increased from insignificant amounts to the full deductible as we learn more information about the claim in subsequent periods. We obtain an independent actuarial analysis at least twice annually to assist in estimating the total reserves expected on including claim development and incurred but not reported . Payments made under a captive agreement for each year’s fund are scheduled in advance using actuarial
methodology. The captive agreement provides that we will share in the underwriting results, good or bad, within a $250,000 per occurrence layer of loss through retrospective premium adjustments. We also retain exposure on employee health benefits up to $250,000 per covered participant each calendar year plus a $84,500 aggregate deductible for any claims exceeding $250,000. We estimate claim liability using historical payment trends and specific knowledge of larger claims. Health claims are expensed as the health services are rendered so there is only a two-month lag in payments on average. We are usually aware of the larger claims before closing each accounting period reducing the amount of uncertainty of the estimate. Our accrued insurance liabilities for retiree benefits are recorded by actuarial calculation. Including the potential exposure in the captive we have $2.65 million of estimated insurance liabilities. In the event that actual costs for these claims are different than estimates we will have adjustments in future periods. It is likely that we will experience either or of 5-10% of prior year estimated insurance liabilities in any year. Our total accrued insurance liabilities excluding the captive as of September 30, 2023, 2022, and 2021 amounted to $2.2 million, $2.5 million, and $2.6 million, respectively.
Income Taxes. The Company accounts for income taxes under the asset-and-liability method. Deferred tax assets and liabilities represent items that will result in taxable income or a tax deduction in future years for which the related tax expense or benefit has already been recorded in our statement of earnings. Deferred tax accounts arise as a result of timing differences between when items are recognized in the consolidated financial statements compared with when they are recognized in the tax returns. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent recovery is not probable, a valuation allowance is established and included as an expense as part of our income tax provision. No valuation allowance was recorded at September 30, 2023, as all deferred tax assets are considered more likely than not to be realized. Significant judgment is required in determining and assessing the impact of complex tax laws and certain tax-related contingencies on the provision for income taxes. As part of the calculation of the provision for income taxes, we assess whether the benefits of our tax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we accrue the largest amount of the benefit that is more likely than not of being sustained in our financial statements. Such accruals require estimates and judgments, whereby actual results could vary materially from these estimates. Further, a number of years may elapse before a particular matter, for which an established accrual was made, is audited and resolved.
INFLATION
Most of the Company’s operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations.
In addition to inflation, fluctuations in fuel prices can affect profitability. Most of the Company’s contracts with customers contain fuel surcharge provisions. Although the Company historically has been able to pass through most long-term increases in fuel prices and operating taxes to customers in the form of surcharges and higher rates, there is no guarantee that this will be possible in the future. See “Risk Factors—We may be adversely impacted by fluctuations in the price and availability of fuel.”
SEASONALITY
Our business is subject to seasonal trends common in the refined petroleum products delivery industry. We typically face reduced demand for refined petroleum products delivery services during the winter months and increased demand during the spring and summer months. Further, operating costs and earnings are generally adversely affected by inclement weather conditions. These factors generally result in lower operating results during the first and second fiscal quarters of the year and cause our operating results to fluctuate from quarter to quarter. Our fuel efficiency is somewhat lower in colder months.
Item 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk . We are exposed to the impact of interest rate changes through our variable-rate borrowings under the Credit Agreement. Under the Wells Fargo revolving credit line, the applicable margin for borrowings at September 30, 2023 was 1.1% over SOFR.
The Company did not have any variable or fixed rate debt outstanding at September 30, 2023, so a sensitivity analysis was not performed to determine the impact of hypothetical changes in interest rates on the Company’s results of operations and cash flows.
Commodity Price Risk . The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather, global politics and other market factors. Historically, we have been able to recover a significant portion of fuel price increases from our customers in the form of fuel surcharges. The typical fuel surcharge table provides some margin contribution at higher diesel fuel prices but also results in some margin erosion at lower diesel fuel prices. The price and availability of diesel fuel can be unpredictable as well as the extent to which fuel surcharges can be collected to offset such increases. In fiscal 2023 and 2022, a significant portion of fuel costs was recovered through rate and fuel surcharges.
