PAM TRANSPORTATION SERVICES INC - Quarter Report: 2019 September (Form 10-Q)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

See notes to condensed consolidated financial statements.

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

See notes to Condensed Consolidated Financial Statements.

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

See notes to Condensed Consolidated Financial Statements.

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(in thousands)

See notes to Condensed Consolidated Financial Statements.

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2019

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

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 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, interest rates, fuel taxes, tolls, license and registration fees; the resale value of the Company’s used equipment and the price of new equipment; 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; unanticipated 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; litigation, including litigation related to alleged violations under the Fair Labor Standards Act and the Arkansas Minimum Wage Law; 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, 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; losses or fluctuations in the value of our marketable equity securities portfolio; and other factors, including risk factors, included from time to time in filings made by the Company with the Securities and Exchange Commission (“SEC”). The Company undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES

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, 2018.

BUSINESS OVERVIEW

The Company’s administrative headquarters are in Tontitown, Arkansas. From this location we manage operations conducted through 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 83.9% and 79.2% of total revenues, excluding fuel surcharges, for the three months ended September 30, 2019 and 2018, respectively. Truckload services revenues, excluding fuel surcharges, represented 79.2% and 79.7% of total revenues, excluding fuel surcharges, for the nine months ended September 30, 2019 and 2018, 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 September 30, 2019 and 2018, approximately $18.8 million and $23.1 million, respectively, of the Company’s total revenue was generated from fuel surcharges. During the nine months ended September 30, 2019 and 2018, approximately $57.8 million and $65.8 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 SEPTEMBER 30, 2019 VS. THREE MONTHS ENDED SEPTEMBER 30, 2018

During the third quarter of 2019, truckload services revenue, before fuel surcharges, decreased 0.4% to $92.4 million as compared to $92.8 million during the third quarter of 2018. The decrease in revenue was primarily the result of a decrease in miles driven during the third quarter of 2019 compared to the third quarter of 2018, primarily resulting from a labor strike during the period by the United Auto Workers against General Motors, who is the Company’s largest customer. The decrease in miles was partially offset by an increase in our average fleet size and average rate per mile charged to our customers during the third quarter 2019 compared to the third quarter 2018.

Salaries, wages and benefits increased from 31.5% of revenues, before fuel surcharges, in the third quarter of 2018 to 34.5% of revenues, before fuel surcharges, during the third quarter of 2019. This increase is primarily attributable to an increase in the average number of company drivers employed during the third quarter of 2019 compared to the third quarter of 2018 and to a corresponding increase in the proportion of total miles driven by company drivers for the periods compared. Also contributing to the increase are increases in the average rate per mile paid to company drivers on certain freight lanes.

Operating supplies and expenses increased from 1.0% of revenues, before fuel surcharges, during the third quarter of 2018 to 7.1% of revenues, before fuel surcharges, during the third quarter of 2019. The increase relates primarily to an increase in the average surcharge-adjusted fuel price paid per gallon of diesel fuel and to an increase in the average number of company owned trucks during the third quarter 2019 compared to the third quarter 2018. The average surcharge-adjusted fuel price paid per gallon of diesel fuel increased as a result of lower fuel surcharge collections from customers. Fuel surcharge collections can fluctuate significantly from period to period as they are generally based on changes in fuel prices from period to period so that, during periods of rising fuel prices, fuel surcharge collections increase, while fuel surcharge collections decrease during periods of falling fuel prices.

Rent and purchased transportation decreased from 34.1% of revenues, before fuel surcharges, during the third quarter of 2018 to 27.3% of revenues, before fuel surcharges, during the third quarter of 2019. The decrease was primarily due to a decrease in the number of loads transported by third party carriers during the third quarter 2019 compared to the third quarter 2018. This decrease occurred as the average number of company owned trucks increased for the third quarter 2019 compared to the third quarter 2018, providing additional company-owned capacity and diminishing some of the need to utilize third party carriers.

Depreciation increased from 13.0% of revenues, before fuel surcharges, during the third quarter of 2018 to 15.2% of revenues, before fuel surcharges, during the third quarter of 2019. This increase is primarily the result of an increase in the average number of trucks and trailers within our fleet for the third quarter of 2019 compared to the third quarter of 2018.

Insurance and claims expense decreased from 4.6% of revenues, before fuel surcharges, during the third quarter of 2018 to 4.0% of revenues before fuel surcharges, during the third quarter of 2019. This decrease primarily resulted from our decision to become self-insured for property damage on company owned trucks. The Company was insured for property damage insurance coverage for company owned trucks through a third party insurance carrier through August 31, 2018. Effective September 1, 2018, the Company became self-insured for property damage. Also contributing to the decrease was a reduction of auto-liability premiums paid for September 2019 compared to September 2018. Beginning September 1, 2019 the Company became self-insured for certain layers of auto-liability claims exposure, resulting in a reduction of insurance premiums expense, but with the potential for increased claims expense in future periods.

Interest expense increased from 1.6% of revenues, before fuel surcharges, during the third quarter 2018 to 2.2% of revenues, before fuel surcharges during the third quarter 2019. This increase is attributable to market increases in interest rates and to an increase in amounts financed under equipment installment notes.

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 87.4% for the third quarter of 2018 to 92.6% for the third quarter of 2019.

NINE MONTHS ENDED SEPTEMBER 30, 2019 VS. NINE MONTHS ENDED SEPTEMBER 30, 2018

For the nine months ended September 30, 2019, truckload services revenue, before fuel surcharges, increased 4.9% to $275.3 million as compared to $262.5 million for the nine months ended September 30, 2018. The increase in revenue was primarily the result of increases in our average fleet size and average rate per mile charged to our customers during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. These increases were partially offset by a decrease in the total number of miles driven during the first nine months of 2019 compared to the first nine months of 2018.

Salaries, wages and benefits increased from 32.8% of revenues, before fuel surcharges, in the first nine months of 2018 to 33.2% of revenues, before fuel surcharges, during the first nine months of 2019. This increase is primarily attributable to an increase in the average number of company drivers employed during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 and to a corresponding increase in the proportion of total miles driven by company drivers for the periods compared. Also contributing to the increase are increases in the average rate per mile paid to company drivers on certain freight lanes.

Operating supplies and expenses increased from 1.6% of revenues, before fuel surcharges, during the first nine months of 2018 to 5.6% of revenues, before fuel surcharges, during the first nine months of 2019. The increase relates primarily to an increase in the average surcharge-adjusted fuel price paid per gallon of diesel fuel and to an increase in the average number of company owned trucks during the first nine months of 2019 compared to the first nine months of 2018. The average surcharge-adjusted fuel price paid per gallon of diesel fuel increased as a result of lower fuel surcharge collections from customers. Fuel surcharge collections can fluctuate significantly from period to period as they are generally based on changes in fuel prices from period to period so that, during periods of rising fuel prices, fuel surcharge collections increase, while fuel surcharge collections decrease during periods of falling fuel prices.

Rent and purchased transportation decreased from 35.0% of revenues, before fuel surcharges, during the first nine months of 2018 to 28.8% of revenues, before fuel surcharges, during the first nine months of 2019. The decrease was primarily due to a decrease in the number of loads transported by third party carriers during the first nine months 2019 compared to the first nine months 2018. This decrease occurred as the average number of company owned trucks increased for the first nine months 2019 compared to the first nine months 2018, providing additional company-owned capacity and diminishing some of the need to utilize third party carriers.

Depreciation increased from 13.9% of revenues, before fuel surcharges, during the first nine months of 2018 to 14.8% of revenues, before fuel surcharges, during the first nine months of 2019. This increase is primarily the result of an increase in the average number of trucks and trailers within our fleet for the first nine months of 2019 compared to the first nine months of 2018.

Insurance and claims expense decreased from 4.9% of revenues, before fuel surcharges, during the first nine months of 2018 to 4.3% of revenues before fuel surcharges, during the first nine months of 2019. This decrease primarily resulted from our decision to become self-insured for property damage on company owned trucks. The Company was insured for property damage insurance coverage for company owned trucks through a third party insurance carrier through August 31, 2018. Effective September 1, 2018, the Company became self-insured for property damage. Also contributing to the decrease was a reduction of auto-liability premiums paid for September 2019 compared to September 2018. Beginning September 1, 2019 the Company became self-insured for certain layers of auto-liability claims exposure, resulting in a reduction of insurance premiums expense, but with the potential for increased claims expense in future periods.

Non-operating income increased from 0.3% of revenues, before fuel surcharges, during the first nine months of 2018 to 1.2% of revenues, before fuel surcharges, during the first nine months of 2019. This increase primarily resulted from an increase in income related to the change in market values of equity securities. An approximate $2.7 million increase in the market value of our marketable equity securities was recorded in non-operating income during the first nine months of 2019, compared to an approximate $0.3 million decrease in the market value of our equity securities recorded in non-operating income during the first nine months of 2018.

Interest expense increased from 1.5% of revenues, before fuel surcharges, during the first nine months of 2018 to 2.0% of revenues, before fuel surcharges during the first nine months of 2019. This increase is attributable to market increases in interest rates and to an increase in amounts financed under equipment installment notes.

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, improved from 91.1% for the first nine months of 2018 to 90.2% for the first nine months of 2019.

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 SEPTEMBER 30, 2019 VS. THREE MONTHS ENDED SEPTEMBER 30, 2018

During the third quarter of 2019, logistics and brokerage services revenue, before fuel surcharges, decreased 27.5% to $17.7 million as compared to $24.4 million during the third quarter of 2018. The decrease relates to a decrease in the number of loads and to a decrease in average rates charged during the third quarter of 2019 as compared to the third quarter of 2018.

Salaries, wages and benefits increased from 4.6% of revenues, before fuel surcharges, in the third quarter of 2018 to 5.9% of revenues, before fuel surcharges, during the third quarter of 2019. The increase relates primarily to the effect of lower revenues without a corresponding decrease in those wages with fixed cost characteristics, such as general and administrative wages.

Other operating expenses increased from 1.1% of revenues, before fuel surcharges, in the third quarter of 2018 to 1.6% of revenues, before fuel surcharges, during the third quarter of 2019. The increase related primarily to the effect of lower revenues without a corresponding decrease in operating expenses with fixed cost characteristics, such as depreciation and software subscriptions.

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 94.1% for the third quarter of 2018 to 96.0% for the third quarter of 2019.

NINE MONTHS ENDED SEPTEMBER 30, 2019 VS. NINE MONTHS ENDED SEPTEMBER 30, 2018

During the first nine months of 2019, logistics and brokerage services revenue, before fuel surcharges, decreased 13.8% to $57.5 million as compared to $66.7 million during the first nine months of 2018. The decrease relates to a decrease in average rates charged during the first nine months of 2019 as compared to the first nine months of 2018.

Salaries, wages and benefits increased from 4.3% of revenues, before fuel surcharges, in the first nine months of 2018 to 5.6% of revenues, before fuel surcharges, during the first nine months of 2019. The increase relates primarily to an increase in the average number of employees utilized by logistics and brokerage service operations and to the effect of lower revenues without a corresponding decrease in those wages with fixed cost characteristics, such as general and administrative wages.

Rents and purchased transportation decreased from 89.3% of revenues, before fuel surcharges, during the first nine months of 2018 to 87.0% of revenues, before fuel surcharges, during the first nine months of 2019. The decrease results from paying third party carriers a smaller percentage of customer revenue.

Non-operating income increased from 0.1% of revenues, before fuel surcharges, during the first nine months of 2018 to 0.7% of revenues, before fuel surcharges, during the first nine months of 2019. This increase primarily resulted from an increase in income related to the change in market values of equity securities. An approximate $2.7 million increase in the market value of our marketable equity securities was recorded in non-operating income during the first nine months of 2019, compared to an approximate $0.3 million decrease in the market value of our equity securities recorded in non-operating income during the first nine months of 2018.

Interest expense increased from 0.6% of revenues, before fuel surcharges, during the first nine months of 2018 to 1.1% of revenues, before fuel surcharges during the first nine months of 2019. This increase is attributable to market increases in interest rates.

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, improved from 94.6% for the first nine months of 2018 to 94.0% for the first nine months of 2019.

RESULTS OF OPERATIONS – COMBINED SERVICES

THREE MONTHS ENDED SEPTEMBER 30, 2019 VS. THREE MONTHS ENDED SEPTEMBER 30, 2018

Net income for all divisions was approximately $4.6 million, or 4.2% of revenues, before fuel surcharges for the third quarter of 2019 as compared to net income of $9.2 million, or 7.9% of revenues, before fuel surcharges for the third quarter of 2018. The decrease in net income resulted in diluted earnings per share of $0.79 for the third quarter of 2019 as compared to diluted earnings per share of $1.52 for the third quarter of 2018.

NINE MONTHS ENDED SEPTEMBER 30, 2019 VS. NINE MONTHS ENDED SEPTEMBER 30, 2018

Net income for all divisions was approximately $21.5 million, or 6.5% of revenues, before fuel surcharges for the first nine months of 2019 as compared to net income of $17.9 million, or 5.4% of revenues, before fuel surcharges for the first nine months of 2018. The increase in net income resulted in diluted earnings per share of $3.65 for the first nine months of 2019 as compared to diluted earnings per share of $2.89 for the first nine months of 2018.

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 lines of credit, installment notes, and our investment margin account.

During the first nine months of 2019, we generated $76.4 million in cash from operating activities. Investing activities used $53.8 million in cash in the first nine months of 2019. Financing activities used $22.6 million in cash in the first nine months of 2019.

Our primary use of funds is for the purchase of revenue equipment. We typically use installment notes, 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 nine months of 2019, we utilized cash on hand, installment notes, and our line of credit to finance purchases of revenue equipment and other assets of approximately $84.1 million.

We commonly finance the acquisition of revenue equipment through installment notes with fixed interest rates and terms ranging from 36 to 84 months. During the first nine months of 2019, the Company’s subsidiary, P.A.M. Transport, Inc., entered into installment obligations totaling approximately $61.6 million for the purpose of purchasing revenue equipment. These obligations are payable in monthly installments.

During the remainder of 2019, we expect to purchase approximately 125 new trucks and 60 new trailers while continuing to sell or trade older equipment, which we expect to result in net capital expenditures of approximately $13.0 million. Management believes we will be able to finance our near term needs for working capital over the next twelve months, as well as any planned capital expenditures during such period, with cash balances, cash flows from operations, and borrowings believed to be available from financing sources. We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek additional equity capital. The availability of additional capital will depend upon prevailing market conditions, the market price of our common stock and several other factors over which we have limited control, as well as our financial condition and results of operations. Nevertheless, based on our recent operating results, current cash position, anticipated future cash flows, and sources of financing that we expect will be available to us, we do not expect that we will experience any significant liquidity constraints in the foreseeable future.

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 nine months of 2019, we maintained a revolving line of credit. On January 25, 2019, certain terms of this revolving line of credit were amended to increase the borrowing limit from $40.0 million to $60.0 million, extend the term by one year, reduce the interest rate by 25 basis points and make certain other changes. See “Item 8. Financial Statements and Supplementary Data, Note 1 to the Consolidated Financial Statements – Subsequent Events” in our Annual Report on Form 10K for the year ended December 31, 2018, for additional information. Under the amended credit facility, amounts outstanding under the line bear interest at LIBOR (determined as of the first day of each month) plus 1.25% (3.35% at September 30, 2019), are secured by our trade accounts receivable and mature on July 1, 2022. The amended credit facility also establishes an “unused fee” of 0.25% if average borrowings are less than $18.0 million. At September 30, 2019 outstanding advances on the line of credit were approximately $9.8 million, including approximately $0.5 million in letters of credit, with availability to borrow $50.2 million.

Trade accounts receivable decreased from $63.4 million at December 31, 2018 to $60.6 million at September 30, 2019. The decrease resulted from a decrease in freight revenues, which flow through accounts receivable, during the third quarter of 2019 as compared to the fourth quarter of 2018.

Prepaid expenses and deposits decreased from $10.4 million at December 31, 2018 to $8.3 million at September 30, 2019. The decrease relates to the normal amortization of items prepaid as of December 31, 2018, partially offset by the annual prepayment of insurance premiums for various policies that renew on September 1^st each year. Insurance prepayments will be amortized over the life of the insurance policies, which is generally September 2019 to August 2020.

Marketable equity securities increased from $27.6 million at December 31, 2018 to $28.8 million at September 30, 2019. The $1.2 million increase was due to an increase in the market value of held marketable equity securities of $2.7 million, the purchase of marketable equity securities with a combined market value of approximately $0.1 million partially offset by sales of marketable equity securities with a combined market value of $1.6 million during the first nine months of 2019.

Accounts payable increased from $20.0 million at December 31, 2018 to $27.3 million at September 30, 2019. This increase was primarily attributable to an increase in accrued equipment purchases from $1.6 million at December 31, 2018 to $5.7 million at September 30, 2019 and to an increase in bank overdrafts from $3.7 million at December 31, 2018 to $5.8 million at September 30, 2019.

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 $221.2 million at December 31, 2018 to $230.6 million at September 30, 2019. The increase was primarily related to the addition of $61.6 million in equipment installment notes, partially offset by note payments made during the first nine months of 2019.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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 impact of these risks is 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 $28.8 million at September 30, 2019 from $27.5 million at December 31, 2018. 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 $2.9 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 LIBOR plus a fixed percentage. Accordingly, changes in LIBOR, which are affected by changes in interest rates, will affect the interest rate on, and therefore our costs under, the line of credit. Assuming $9.2 million of variable rate debt was outstanding under our line of credit for a full fiscal year; a hypothetical 100 basis point increase in LIBOR would result in approximately $92,000 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 2018 fuel consumption, a 10% increase in the average annual price per gallon of diesel fuel would increase our annual fuel expenses by $5.2 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 2018 expenditures denominated in pesos, a 10% increase in the exchange rate would increase our annual operating expenses by $267,000.

Item 4. Controls and Procedures.

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 September 30, 2019, 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 September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The nature of our business routinely results in litigation, primarily involving claims for personal injuries and property damage incurred in the transportation of freight. We believe that all such routine litigation is adequately covered by insurance and that adverse results in one or more of those cases would not have a material adverse effect on our financial condition.

We are a defendant in a collective-action lawsuit which was re-filed on December 9, 2016, in the United States District Court for the Western District of Arkansas. The plaintiffs, who are former drivers who worked for the Company during the period of December 6, 2013, through the date of the filing, allege violations under the Fair Labor Standards Act and the Arkansas Minimum Wage Law. The plaintiffs, through their attorneys, have filed causes of action alleging “Failure to pay minimum wage during orientation, failure to pay minimum wage to team drivers after initial orientation, failure to pay minimum wage to solo-drivers after initial orientation, failure to pay for compensable travel time, Comdata card fees, unlawful deductions, and breach of contract.” The plaintiffs are seeking actual and liquidated damages to include court costs and legal fees. The lawsuit is being vigorously defended and we cannot reasonably estimate, at this time, the possible loss or range of loss, if any, that may arise from this lawsuit. Management has determined that any losses under this claim will not be covered by existing insurance policies.

We are a defendant in a collective-action lawsuit which was filed on May 29, 2019, in the United States District Court for the Western District of Arkansas. The plaintiffs, who are independent contractors who have been under contract with the Company during the period of May 29, 2016, through the date of filing, allege violations under the Fair Labor Standards Act and the Arkansas Minimum Wage Law. The plaintiffs, through their attorneys, have filed causes of action alleging “misclassification as independent contractors, payment on the basis of miles without regard to the number of hours worked, improper deductions, and failure to pay minimum wage.” The plaintiffs are seeking actual and liquidated damages to include court costs and legal fees. The lawsuit is in preliminary stages and we cannot reasonably estimate, at this time, the possible loss or range of loss, if any, that may arise from this lawsuit. Management has determined that any losses under this claim will not be covered by existing insurance policies.

Item 1A. Risk Factors.

Other than the risk factors set forth below, there were no material changes during the period ended September 30, 2019 from the risk factors previously discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.

We are highly dependent on our major customers, the loss of or a reduction in services from one or more of which could have a material adverse effect on our business.

A significant portion of our revenue is generated from our major customers. For 2018, our top five customers, based on revenue, accounted for approximately 42% of our revenue, and our three largest customers, Fiat Chrysler Automobiles, General Motors Company, and Ford Motor Company, accounted for approximately 16%, 13% and 8% of our revenue, respectively. We also provide transportation services to other manufacturers who are suppliers for automobile manufacturers. As a result, the concentration of our business within the automobile industry is greater than the concentration in a single customer. Approximately 46% of our revenues for 2018 were derived from transportation services provided to the automobile industry.

Generally, we do not have long-term contractual relationships with our major customers, and we cannot assure that our customer relationships will continue as presently in effect. A reduction in or termination of our services by our major customers could have a material adverse effect on our business and operating results. Further, a continuation of the recent labor strike affecting General Motors or a labor strike affecting another major customer could significantly disrupt our business from that customer and adversely impact our operations and profitability.

A determination by regulators or judicial process that independent contractors are employees could expose us to various liabilities and additional costs.

Tax and other regulatory authorities, as well as independent contractors themselves, have increasingly asserted that independent contractors in the transportation service industry are employees rather than independent contractors. There can be no assurance that interpretations and laws that support the independent contractor status will not change or that regulatory authorities or independent contractors will not successfully assert a position that re-classifies independent contractors to be employees. If our independent contractors are determined to be our employees, that determination could materially increase our exposure under a variety of federal and state tax, workers’ compensation, unemployment benefits, labor, employment and tort laws, as well as our potential liability for employee benefits. In addition, such changes may be applied retroactively, and if so, we may be required to pay additional amounts to compensate for prior periods. Any of the above increased costs would adversely affect our business and operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Company’s stock repurchase program has been extended and expanded several times, most recently in April 2017, when the Board of Directors reauthorized 500,000 shares of common stock for repurchase under the initial September 2011 authorization. Since the reauthorization, the Company has repurchased 255,208 shares of its common stock under this repurchase program.

The following table summarizes the Company’s common stock repurchases during the third quarter of 2019. No shares were purchased during the quarter other than through this program, and all purchases were made by or on behalf of the Company and not by any “affiliated purchaser.”

Item 6. Exhibits.

SIGNATURES

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

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