EX-13 2 patiex13annual.htm PATI 2018 ANNUAL REPORT

Annual Report 2018

 

CONSOLIDATED FINANCIAL HIGHLIGHTS

Years ended September 30

(Amounts in thousands except per share amounts)

      2018       2017      

%

Change

  
                         
Revenues   $ 114,065       112,165       1.7  
Operating profit   $ 2,046       2,372       (13.7 )
Income before income taxes   $ 2,197       2,298       (4.4 )
Net income    $ 5,119       1,829       179.9  

 

Per common share:

                        
  Basic   $ 1.54       0.55       180.0  
  Diluted   $ 1.54       0.55       180.0  
                         
Total Assets   $ 69,817       67,954       2.7  
Total Debt   $ —        —        —   
Shareholders' Equity   $ 52,406       46,583       12.5  
Common Shares Outstanding     3,328       3,304       .7  
Book Value Per Common Share   $ 15.75       14.10       11.7  

 

 

BUSINESS. 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.

 

OBJECTIVES. The Company’s objectives are to continue building a substantial transportation company providing sound long-term growth and cash generation.

 

 

 

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To Our Shareholders

 

Fiscal year 2018 proved to be a year that saw challenges as well as opportunities. Among the challenges, we lost legacy business in the second and third quarters of fiscal 2017 and we experienced difficulty quickly replacing a meaningful portion of that business. As a result, the first and second quarters of fiscal 2018 were negatively impacted by excess equipment and personnel expense as we worked to right size the company. As we entered the latter part of the second quarter, meaningful progress had been made selling excess equipment and reducing expenses. At that same time, we began taking on significant new business with an existing customer and, as we closed out the fiscal year, our year over year revenue increased in the second half of the year.

 

On the year, our total revenues increased from $112,165,000 last year to $114,065,000 this year. The Company reported net income per share of $1.54 versus $.55 last year (this year included a $1.04 per share ($3,444,000) benefit from revaluing the Company’s net deferred tax liability as a result of the Tax Cuts and Jobs Act). We ended the year with no debt, grew cash and investments from $11,000,000 to $17,000,000 and increased our shareholders’ equity by $5,823,000 to $52,406,000.

 

During the year we experienced an increase in turnover as the driver shortage and heightened competition for drivers continued. In the latter part of fiscal 2018, we implemented significant changes to our hiring process; we added a driver advocate position and introduced productivity based driver pay in an expanded effort to attract and retain drivers. We are encouraged by the increased number of drivers hired and in training since these implementations and will continue to monitor our progress for any needed adjustments to our plan. Management continues to monitor market conditions, including the capacity shortage caused by a lack of drivers, and will evaluate each opportunity and its potential impact to our bottom line results prior to making a pricing decision.

 

Management continues to make adjustments to the strategy and operating plan to reduce expenses and right size our fleet as illustrated by the reduced depreciation expense and improved revenue per tractor. Health Insurance costs were atypically high in fiscal 2018. Management has spent considerable time reviewing and evaluating every aspect of our health benefits package and will be implementing several changes in fiscal 2019 in an effort to control and manage these health related expenses. We remain focused on improving our safety results, which resulted in some significant cost in 2018. While we believe that increased driver turnover has contributed to increased incident frequency, we anticipate improvement based on feedback from our enhanced Driver Trainer Program introduced in 2018. Recently we have seen a willingness by our customers to help pay for these added costs; however, rates must continue to increase to keep up with these rising costs and to improve the return on investment for our capital intensive industry.

 

We continue to work through a number of IT projects, and we are making progress. We have nearly completed implementation of our new automated billing software, and plan to soon complete the conversion of our servers and systems to a 3rd party cloud services provider which includes an upgrade to the next generation of dispatch software. We believe all of these projects are critical to our future success as they provide significant benefits and efficiencies to our drivers, our employees and our customers.

 

I want to thank our employees for their dedication to our process and their understanding of the changes we are making and support of our strategic plan for the future. Our people continue to focus every day on Safely Delivering our Customer’s Products On-Time and Accurately. I have been impressed with their tireless dedication, which was highlighted during Hurricanes Florence and Michael. These storms certainly had a negative impact on our financial results but, more importantly, on our employees in several of our locations. We can tell you that our people are all accounted for, many had significant damage to their homes and their lives disrupted, but they came back to work quickly and are doing everything they can to help the community and our customers recover from these catastrophic storms. We give heartfelt thanks for their loyalty and dedication.

 

I want to take this opportunity to recognize one of our drivers who had a particularly special year. Jacksonville driver, Dennis Rollins, was named as a Champion Finalist for the driver of the year by the National Tank Truck Carriers Association at its annual conference in Toronto, Canada. With 32 years as a professional driver and logging over 2.1 million accident free miles, Dennis exhibits all the qualities we look for in a company driver. Congratulations Dennis!

 

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The overall financial results for 2018 did not meet our expectations. Management continues to make the necessary adjustments to our plan to improve our performance. With the addition of business in fiscal 2018, along with the right sizing of our fleet and fixed costs, we believe we are making progress. Our primary goal for our shareholders is to grow profitably while maintaining a strong balance sheet. While we certainly maintained and improved our already strong balance sheet, we missed our goal of growing profitably this year. In order to achieve our goals next year, we are focused on strategically growing revenues while controlling and reducing several of our key expenses. Our strategy going forward for revenue growth is to concentrate our efforts in the markets where we have been successful finding and retaining quality drivers. With regards to reducing fixed costs we are focused on increasing the utilization of our equipment and measuring our success based on revenues and drivers per tractor. We are consistently analyzing all costs associated with insurance and SG&A and making appropriate changes when, and where, we can. With these focuses in mind, we are encouraged in our pursuit of our targeted levels of revenue and profitable results in fiscal 2019.

 

As always, we are keenly appreciative of your investment in our Company; we wish to thank you, our loyal shareholders, for your continued interest and support.

 

 

Respectfully yours,

 

Robert E. Sandlin Thompson S. Baker II

President & Chief Executive Officer Chairman

 

 

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OUR BUSINESS

 

On January 30, 2015, FRP Holdings, Inc. ("FRP") completed the tax-free spin-off (the “Spin-off") of Patriot Transportation Holding, Inc., (the "Company" or "Patriot"). In the Spin-off, FRP distributed all of the outstanding stock of the Company to FRP's shareholders as of the record date of January 9, 2015. FRP’s shareholders received one share of Patriot (stock symbol “PATI”) for every three shares of FRP owned on the record date resulting in 3,242,524 of Patriot shares outstanding on the distribution date. Patriot now is an independent, publicly traded company, and FRP retains no ownership in Patriot.

 

Patriot was incorporated on August 5, 2014 in connection with a corporate reorganization that preceded the Spin-off. The business of the Company is conducted through our wholly-owned subsidiary, Florida Rock & Tank Lines, Inc. (“Tank Lines”), the same subsidiary through which FRP operated the transportation business prior to the Spin-off.

 

Our business consists of hauling petroleum related products, dry bulk commodities and liquid chemicals. We are one of the largest regional tank truck carriers in North America. According to the Tank Truck Carrier 2017 Gross Revenue Report issued by Bulk Transporter, we are the 10th largest bulk tank carrier in North America by revenue.  We operate terminals in Florida, Georgia, Alabama, South Carolina, North Carolina and Tennessee. We do not own any of the products we haul; rather, we act as a third party carrier to deliver our customers’ products from point A to point B, using predominately Company employees and Company-owned tractors and tank trailers. Approximately 86% of our business consists of hauling liquid petroleum products (mostly gas and diesel fuel) from large scale fuel storage facilities to our customers’ retail outlets (e.g. convenience stores, truck stops and fuel depots) where we off-load the product into our customer’s fuel storage tanks for ultimate sale to the retail consumer. The remaining 14% of our business consists of hauling our customers’ dry bulk commodities such as cement, lime and various industrial powder products and liquid chemicals. As of September 30, 2018, we employed 541 revenue-producing drivers who operated our fleet of 396 Company tractors (excluding 5 being prepared for sale), 19 owner operators and 532 trailers from our 20 terminals and 6 satellite locations.

 

We are an important link in our customers’ fuel supply chain, transporting primarily from petroleum terminals to retail locations such as hypermarkets, convenience stores and truck stops.  We also provide the last mile of delivery service in the liquid chemical and dry bulk business primarily from distribution facilities or manufacturing facilities to the end user.  Cement and ash are delivered to concrete plants, powdered lime to industrial users and liquid chemicals primarily to the end user at a manufacturing plant or water treatment or storage facility. 

 

During fiscal 2018, the Company purchased 12 new tractors. Our fiscal 2019 capital budget includes 60 new tractors. We anticipate this more modern fleet will result in reduced maintenance expenses, improved operating efficiencies and enhanced driver recruitment and retention. At September 30, 2018 the Company operated a fleet of 415 tractors (excluding 5 being prepared for sale), and 532 tank trailers. The Company owns all of the tank trailers and tractors used to conduct our business, except for 19 tractors owned by owner-operators and 30 full-service leased 2019 model year tractors located in key areas without Company maintenance shops.

 

Approximately 86% of our business consists of hauling petroleum related products. Our petroleum clients include major convenience store and hypermarket accounts, fuel wholesalers and major oil companies.  We strive to build long-term relationships with major customers by providing outstanding customer service. During fiscal 2018, the Company’s ten largest customers accounted for approximately 59.1% of revenue. One of these customers, Murphy USA, accounted for 17.3% of revenue. The loss of any one of these customers could have a material adverse effect on the Company’s revenues and income. Our transportation services agreements with our customers generally are terminable upon 90-120 days’ notice, but nine of our top 10 accounts have been customers for at least 5 years. Our dry bulk and chemical customers include large industrial companies including cement and concrete accounts and product distribution companies.  Our customer relationships are long-standing and have grown over time as a result of consistently high safety and service levels.

 

Financial information about the company is presented in the financial statements included in this Annual Report.

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Five Year Summary-Years ended September 30

(Amounts in thousands except per share amounts)

 

      2018       2017       2016       2015       2014  
Summary of Operations:
Revenues   $ 114,065       112,165       120,172       122,882       129,162  
Operating profit   $ 2,046       2,372       7,790       5,586       5,343  
Interest expense   $ 39       80       130       112       109  
Income from continuing operations   $ 5,119       1,829       5,705       3,339       3,197  
Per Common Share (a):                                        
Basic   $ 1.54       .55       1.74       1.02       .99  
Diluted   $ 1.54       .55       1.74       1.02       .99  
                                         
Net income   $ 5,119       1,829       5,705       3,339       3,197  
Per Common Share (a):                                        
Basic   $ 1.54       .55       1.74       1.02       .99  
Diluted   $ 1.54       .55       1.74       1.02       .99  
                                         
Financial Summary:                                        
Current assets   $ 31,444       23,721       17,737       11,796       11,685  
Current liabilities   $ 10,163       10,028       10,573       12,103       9,950  
Property and equipment, net   $ 33,911       39,592       43,703       42,620       42,174  
Total assets   $ 69,817       67,954       66,299       59,526       61,134  
Long-term debt   $ —        —        —        —        7,282  
Shareholders’ equity   $ 52,406       46,583       43,946       37,202       32,722  
Net Book Value Per common share (a)   $ 15.75       14.10       13.36       11.37       10.09  
Other Data:                                        
Weighted average common shares:                                        
  Basic (a)     3,318       3,299       3,283       3,268       3,243  
  Diluted (a)     3,320       3,302       3,285       3,275       3,243  
Number of employees     783       857       959       979       942  
Shareholders of record   383       406       423       440       —   

Quarterly Results (unaudited)

(Dollars in thousands except per share amounts)

    First      Second     Third     Fourth  
    2018     2017     2018     2017     2018     2017     2018     2017  
Revenues $ 27,901     28,758     27,979     27,393     29,404     28,104     28,781     27,910  
Operating profit (loss) $ 744     1,248     (292 )    325     1,353     534     241     265  
Income (loss) before                                                
income taxes $ 736     1,218     (270 )   294     1,407     520     324     266  
Net income (loss) $ 3,592     912     (188 )    260     1,086     456     629     201  
 
Earnings per common share (a):
 Net income (loss)-                                                
  Basic $ 1.09     .28     (.06 )    .08     .33     .14     .19     .06  
  Diluted $ 1.09     .28     (.06 )    .08     .33     .14     .19     .06  
 
Market price per common share (b):
  High $ 20.31     26.42     20.33     26.60     22.65     23.50     22.06     20.33  
  Low $ 16.72     20.52     17.35     20.50     18.00     17.80     18.55     17.77  

 

(a) Earnings per share of common stock is computed independently for each quarter presented. The sum of the quarterly net earnings per share of common stock for a year may not equal the total for the year due to rounding differences. For comparative purposes, for the year ended September 30, 2014 and for the first quarter 2015, the number of common shares outstanding utilized for the calculation is based on the 3,242,524 shares of our common stock that was distributed to the shareholders of FRP in connection with the Spin-off and distribution on January 30, 2015.

(b) All prices represent Nasdaq reported high and low daily closing prices.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Executive Overview

 

The business of the Company, conducted through our wholly owned subsidiary, Florida Rock & Tank Lines, Inc., is to transport petroleum and other liquids and dry bulk commodities. We do not own any of the products we haul, rather, we act as a third party carrier to deliver our customer’s products from point A to point B predominately using Company employees driving Company owned tractors and tank trailers. Approximately 86% of our business consists of hauling liquid petroleum products (mostly gas and diesel fuel) from large scale fuel storage facilities to our customers’ retail outlets (e.g. convenience stores, truck stops and fuel depots) where we off-load the product into our customer’s fuel storage tanks for ultimate sale to the retail consumer. The remaining 14% of our business consists of hauling our customer’s dry bulk commodities such as cement, lime and various industrial powder products and liquid chemicals. As of September 30, 2018, we employed 541 revenue-producing drivers who operated our fleet of 396 Company tractors (excluding 5 being prepared for sale), 19 owner operators and 532 trailers from our 20 terminals and 6 satellite locations in Florida, Georgia, Alabama, South Carolina, North Carolina and Tennessee.  We experience increased seasonal demand in Florida during the spring and in most of our other locations during the summer months.

 

Our industry is characterized by such barriers to entry as the time and cost required to develop the capabilities necessary to handle hazardous material, the resources required to recruit, train and retain drivers, substantial industry regulatory and insurance requirements and the significant capital investments required to build a fleet of equipment, establish a network of terminals and, in recent years, the cost to build and maintain sufficient information technology resources to allow us to interface with and assist our customers in the day-to-day management of their product inventories.

 

Our ability to provide superior customer service at competitive rates and to operate safely and efficiently is important to our success in growing our revenues and increasing profitability. Our focus is to grow our profitability by executing on our key strategies of (i) increasing our business with existing and new customers, particularly hypermarket and large convenience store chains, that are willing to compensate us for our ability to provide superior, safe and reliable service, (ii) expanding our service offerings with respect to dry bulk and chemical products particularly in markets where we already operate terminals, (iii) earning the reputation as the preferred employer for tank truck drivers in all the markets in which we operate and (iv) pursuing strategic acquisitions. Our ability to execute this strategy depends on continuing our dedicated commitments to customer service and safety and continuing to recruit and retain qualified drivers.

 

Our industry is experiencing a severe driver shortage. As the need to hire drivers has risen across our industry the trend we are seeing is that more and more of the applicants are drivers with little to no experience in the tank truck business. Our management team is keenly focused on continuing to grow our driver count in markets where there are opportunities for us to grow our business and to retain all of our drivers at the levels we have historically achieved while balancing the aforementioned trends and associated risks of the “new to the industry” driver applicant pool. Through the implementation of a new software program, we have enhanced our ability to quickly identify, communicate with and ultimately hire qualified drivers.

 

There are several opportunities available today in our markets that will allow us to execute on our growth strategy so long as we can find, hire and retain qualified drivers to meet the demands of these opportunities. We believe the tighter driver market has and will continue to provide us with opportunities to capture new business. As these opportunities arise, we are willing to let certain lower priced business go in this environment to grow our business with customers willing to pay for our reliability and superior customer service.

 

We generate both transportation based revenue as well as fuel surcharge revenue. Our transportation revenue consists of base revenue for each delivery which is generally calculated by multiplying a negotiated mileage-based rate by the quantity of product delivered plus any fees for extra stops to load or unload, powered product unloading and toll cost reimbursements. These negotiated transportation rates compensate us both for transporting the products as well as for loading and unloading time.

 

While our base rates include a fixed amount to cover our cost of fuel using an assumed price for diesel, we have fuel surcharges in place with our customers that allow us to obtain additional compensation for fuel expense incurred when the

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price of diesel rises above that assumed price. Likewise, for some customers, the fuel surcharge system allows the customer to receive a lower cost from us when the price of diesel drops below that assumed price. There is a time lag between fuel price fluctuations and changes to fuel surcharges to our customers. In a rapidly rising price environment this time lag can negatively impact the Company’s financial results as we must pay the higher fuel cost immediately but in most cases aren’t able to adjust fuel surcharges to our customers until the end of the month. The main factors that affect our total revenue are the number of revenue miles driven, rates per mile, quantity of products hauled and the amount of fuel surcharges.

 

The Company’s operations are influenced by a number of external and internal factors. External factors include levels of economic and industrial activity in the United States and the Southeast, 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 23 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 serve new 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, worker’s 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 Equipment - Our financial results for any period may be impacted by any gain or loss that we realize on the sale of used equipment and losses on wrecked equipment. 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 total revenue growth, transportation revenue growth, revenue miles, our preventable accident frequency rate (“PAFR”), our operating ratio (defined as our operating expenses as

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a percentage of our operating revenue), turnover rate and average driver count (defined as average number of revenue producing drivers under employment over the specified time period) as compared to the same period in the prior year.

 

ITEM FY 2018 vs. FY 2017
Total Revenue Up 1.7%
Transportation Revenue Down 2.1%
Revenue Miles Down by .2%
PAFR Increased from 2.00 to 2.27
Operating Ratio Increased from 97.9% to 98.2%
Driver Turnover Rate Increased from 67% to 68%
Avg. Driver Count incl. owner oper. Down 7%

 

Highlights of Fiscal 2018

 

·Total revenue increased $1,900,000, or 1.7%.
·Annualized driver turnover rate increased from 67% last year to 68% this year.
·Insurance and losses increased $1,001,000.
·Depreciation expense decreased $783,000.
·The Company’s net income was $5,119,000, or $1.54 per share, compared to net income of $1,829,000, or $.55 per share in the same period last year. This year’s net income included $3,444,000, or $1.04 per share, due to a deferred tax benefit resulting from revaluing the company’s net deferred tax liabilities per the Tax Cuts and Jobs Act of 2017.

COMPARATIVE RESULTS OF OPERATIONS

 

    Fiscal Years ended September 30  
(dollars in thousands)   2018   %   2017   %   2016   %  
                           
Revenue miles (in thousands)     37,924               38,000               42,884          
                                                 
Revenues:                                                
Transportation revenue   $ 103,131       90.4 %     105,334       93.9 %     115,592       96.2 %
Fuel surcharges     10,934       9.6 %     6,831       6.1 %     4,580       3.8 %
Total Revenues     114,065       100.0 %     112,165       100.0 %     120,172       100.0 %
                                                 
Cost of operations:                                                
Compensation and benefits     48,010       42.1 %     48,109       42.9 %     51,069       42.5 %
Fuel expenses     17,434       15.3 %     14,991       13.4 %     15,157       12.6 %
Repairs & tires     7,194       6.3 %     7,077       6.3 %     7,777       6.5 %
Other operating     4,679       4.1 %     4,418       3.9 %     4,719       3.9 %
Insurance and losses     11,729       10.3 %     10,728       9.6 %     10,358       8.6 %
Depreciation expense     8,759       7.7 %     9,542       8.5 %     8,870       7.4 %
Rents, tags & utilities     3,385       3.0 %     3,384       3.0 %     3,834       3.2 %
Sales, general & administrative     9,735       8.5 %     9,404       8.4 %     9,626       8.0 %
Corporate expenses     2,124       1.8 %     2,711       2.4 %     2,946       2.4 %
Gain on property sale     —        0.0 %     —        0.0 %     (1,277 )     (1.1 %)
Gain on equipment sales     (1,030 )     (.9 %)     (571 )     (.5 %)     (697 )     (.5 %)
Total cost of operations     112,019       98.2 %     109,793       97.9 %     112,382       93.5 %
                                                 
Total operating profit   $ 2,046       1.8 %     2,372       2.1 %     7,790       6.5 %
                                                                 
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Fiscal Year 2018 versus 2017

 

Total revenues for the year were $114,065,000, up $1,900,000 from the prior year. Transportation revenues (excluding fuel surcharges) were $103,131,000, down $2,203,000 or 2.1% mainly due to the business losses in the second and third quarters of last year partially offset by the replacement of a meaningful portion of that business starting in the second quarter of this year. Miles declined by 76,000 to 37,924,000 versus 38,000,000 last year.

 

Compensation and benefits decreased $99,000 as a result of reducing personnel costs ($439,000) and lower driver pay and benefits expense ($1,155,000) mostly offset by higher owner operator pay ($1,495,000) as we added owner operators during the fiscal year. Net fuel expense (i.e. gross fuel expenses less fuel surcharges) decreased by $1,660,000 due to higher fuel surcharges on higher average diesel prices. Other operating expenses increased $261,000 due mainly to increased tolls (in most cases we bill our customers for toll expenses), environmental accruals and site maintenance and repairs at some of our terminal offices. Insurance and losses were up $1,001,000 due mainly to higher liability ($708,000) and medical ($575,000) claims partially offset by lower workers’ compensation expense. Depreciation expense was down $783,000 as a result of right sizing our fleet. SG&A was up $331,000 due mainly to severance expense, reorganizing our IT department, upgrading our IT infrastructure and higher advertising costs related to hiring drivers. Corporate expenses were down $587,000 due mainly to a decrease in legal and consulting fees and corporate management changes that occurred at the beginning of fiscal 2018. Gain on sale of assets increased $459,000 as we sold excess equipment, including excess trailers.

 

As a result, operating profit was $2,046,000 compared to $2,372,000 in the prior fiscal year Operating ratio was 98.2 versus a 97.9 last year.

 

 

Fiscal Year 2017 versus 2016

 

Total revenues were $112,165,000 in fiscal year 2017, down $8,007,000 or 6.7% from the prior year. Transportation revenues (excluding fuel surcharges) were down $10,258,000, or 8.9%, to $105,334,000 for the year ended September 30, 2017. Revenue miles declined by 4,884,000, or 11.4%, to 38,000,000 in fiscal 2017 versus fiscal 2016 mostly attributable to (i) business loss in a competitive bid due to rates, (ii) privatization of a customer fleet, (iii) the lower demand for gasoline in the earlier part of fiscal year 2017 and (iv) Hurricanes Harvey and Irma. Revenue per mile increased by 2.8% over fiscal year 2016 which partially offset the reduced miles. Fuel surcharge revenues were up $2,251,000 to $6,831,000 due to higher diesel prices and the positive benefits of renegotiating fuel surcharge tables with several key customers in the prior year.

 

Compensation and benefits decreased $2,960,000, or 5.8%, in fiscal year 2017 due to fewer miles driven partially offset by higher driver pay following the pay increase that went into effect June 30, 2017. Net fuel expense (i.e. gross fuel expenses less fuel surcharges) decreased by $2,417,000, or 23%, due to fewer miles driven and higher fuel surcharges.

 

Insurance and losses were up $370,000 in fiscal year 2017 versus fiscal year 2016 due mainly to increased risk and health claims. Depreciation increased $672,000 but was offset by lower repair and equipment leasing costs as we replaced leased equipment from a prior acquisition with new equipment. SG&A was down $222,000 and corporate expenses were down by $235,000 due to no bonus compensation expense in fiscal year 2017 and lower legal fees.

 

As a result, operating profit was $2,372,000 in fiscal year 2017 compared to $7,790,000 in fiscal year 2016. Fiscal year 2016 included $1,277,000 from the sale of the easement in Tampa, FL. Operating ratio was 97.9 in fiscal year 2017 compared to 94.6 in fiscal year 2016 excluding the gain on the Tampa easement sale.

 

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. As of September 30, 2018, we had no debt outstanding on this revolver, $3,043,000 outstanding under letters of credit and $21,957,000 available for additional borrowings. The Company expects our fiscal year 2019 cash generation to cover the cost of our operations and all of our budgeted capital expenditures.

9 
 

 

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,
    2018   2017   2016
Total cash provided by (used for):                        
Operating activities   $ 7,772       10,660       14,955  
Investing activities     (19,809 )     (5,376 )     (8,348 )
Financing activities     749        —         (602 )
Increase (decrease) in cash and cash equivalents   $ (11,288 )      5,284       6,005  
                         
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 $7,772,000 for the year ended September 30, 2018, $10,660,000 in 2017 and $14,955,000 in 2016. The total of net income plus depreciation and amortization less gains on asset dispositions increased $2,025,000 versus the same period last year. These changes are described above under “Comparative Results of Operations”. Deferred income taxes decreased $3,671,000 resulting from revaluing the Company’s net deferred tax liabilities per the Tax Cuts and Jobs Act of 2017. Prepaid expenses increased due to prepayment of Fiscal 2019 insurance and higher net insurance captive assets. These changes comprise the majority of the increase in net cash provided by operating activities.

 

Investing Activities – Investing activities include the purchase of property and equipment, purchase and sale of Treasury bills, any business acquisitions and proceeds from sales of these assets upon retirement. For the year ended September 30, 2018, we spent $19,809,000 on investing activities which included $2,574,000 for the purchase of equipment net of proceeds from retirements and $17,235,000 for the purchase of Treasury bills. For the year ended September 30, 2017, we spent $5,376,000 for the purchase of equipment net of proceeds from retirements.

 

In 2017, cash required by investing activities was $5,376,000 compared to $8,348,000 in 2016. The Company received $1,330,000 for an easement granted to the state of Florida over the Company's 25.2 acre terminal facility in Tampa, Florida resulting in a $1,277,000 gain during 2016.

 

Financing Activities – Financing activities primarily include net changes to our outstanding revolving debt. For the year ended September 30, 2018 cash provided by financing activities was $749,000. For the year ended September 30, 2017 we had no financing activities. The Company had no outstanding long-term debt on September 30, 2018 or September 30, 2017.

 

Cash used by financing activities in the year ended September 30, 2016, was $602,000.

 

Credit Facilities - The Company has a five-year credit agreement with Wells Fargo Bank N.A. which provides a $25 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 1.0% over LIBOR, which may change quarterly based on the Company’s ratio of consolidated total debt to consolidated total capital. A commitment fee of 0.15% per annum is payable quarterly on the unused portion of the commitment, which fee may change quarterly based on our ratio of consolidated total debt to consolidated total capital. The credit agreement contains certain conditions and financial covenants, including a minimum $25 million tangible net worth. As of September 30, 2018, the tangible net worth covenant would have limited our ability to pay dividends or repurchase stock with borrowed funds to a maximum of $17.8 million combined.

 

Cash Requirements - The Company currently expects its fiscal 2019 capital expenditures to be approximately $10 million for replacement equipment which we expect to be fully funded by our cash generated from our operations. The Company does not currently pay any cash dividends on common stock.

 

10 
 

While the Company is affected by environmental regulations, such regulations are not expected to have a major effect on the Company’s capital expenditures or operating results.

 

The Company expects that cash flows from operating activities, cash on hand and the funds available under its revolving credit agreement will be adequate to finance these capital expenditures 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 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 7-39
Revenue equipment 7-10
Other equipment 3-10

  

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 worker’s 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

11 
 

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 claims 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 loss reserves expected on claims including claim development and incurred but not reported claims. 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.  Our accrued insurance liabilities for claims as of September 30, 2018, 2017, and 2016 amounted to $2.1 million, $.8 million and $.9 million, respectively.   Payments made under a captive agreement for each year’s loss 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.  Including the potential exposure in the captive we have $4.5 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 gains or losses of 5-10% of prior year estimated insurance liabilities in any year.

 

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, 2018, 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.

 

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes our contractual obligations as of September 30, 2018:

 

    Payments due by period

Contractual Obligations

(thousands of dollars)

       Less than   1-3   3-5   More than
    Total   1 year   years   years   5 years
                     
Operating Leases   $ 4,024       1,021       1,615       1,337       51  
Purchase Commitments     6,519       6,289       230       —         —    
Other Long-Term Liabilities     1,031       76       154       154       647  
                                         
Total Obligations   $ 11,574       7,386       1,999       1,491       698  

 

 

 

12 
 

INFLATION

 

Most of the Company’s operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, inflation has been fairly modest with its impacts mostly related to equipment prices, tire prices and the compensation paid to drivers.

 

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 operating expenses also have been somewhat higher in the winter months, due primarily to decreased fuel efficiency and increased maintenance costs for tractors and trailers in colder months.

 

 

FORWARD LOOKING STATEMENTS

 

Certain matters discussed in this report contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those indicated by such forward-looking statements. These forward-looking statements relate to, among other things, capital expenditures, liquidity, capital resources and competition and may be indicated by words or phrases such as ”anticipate”, ”estimate”, ”plans”, ”projects”, ”continuing”, ”ongoing”, ”expects”, ”management believes”, ”the Company believes”, ”the Company intends” and similar words or phrases. The following factors and others discussed in the Company’s periodic reports and filings with the Securities and Exchange Commission are among the principal factors that could cause actual results to differ materially from the forward-looking statements: freight demand for petroleum products including recessionary and terrorist impacts on travel in the Company’s markets; fuel costs and the Company’s ability to recover fuel surcharges; accident severity and frequency; risk insurance markets; driver availability and cost; the impact of future regulations regarding the transportation industry; availability and terms of financing; competition in our markets; interest rates, and inflation and general economic conditions. However, this list is not a complete statement of all potential risks or uncertainties.

 

These forward-looking statements are made as of the date hereof based on management’s current expectations, and the Company does not undertake an obligation to update such statements, whether as a result of new information, future events or otherwise. Additional information regarding these and other risk factors may be found in the Company’s other filings made from time to time with the Securities and Exchange Commission.

 

 

13 
 

CONSOLIDATED STATEMENTS OF INCOME - Years ended September 30

(In thousands, except per share amounts)

    Years Ended September 30,  
    2018   2017   2016  
Revenues:                        
  Transportation revenues   $ 103,131       105,334       115,592  
  Fuel surcharges     10,934       6,831       4,580  
Total revenues     114,065       112,165       120,172  
                         
Cost of operations:                        
  Compensation and benefits     48,010       48,109       51,069  
  Fuel expenses     17,434       14,991       15,157  
  Repairs & tires     7,194       7,077       7,777  
  Other operating     4,679       4,418       4,719  
  Insurance and losses     11,729       10,728       10,358  
  Depreciation expense     8,759       9,542       8,870  
  Rents, tags & utilities     3,385       3,384       3,834  
  Sales, general & administrative     9,735       9,404       9,626  
  Corporate expenses     2,124       2,711       2,946  
  Gain on property sale     —        —        (1,277 )
  Gain on equipment sales     (1,030 )     (571 )     (697 )
Total cost of operations     112,019       109,793       112,382  
                         
Total operating profit     2,046       2,372       7,790  
                         
BP claim settlement     —        —        1,687  
Interest income and other     190       6       6  
Interest expense     (39 )     (80 )     (130 )
                         
Income before income taxes     2,197       2,298       9,353  
(Benefit from) provision for income taxes     (2,922 )      469       3,648  
                         
Net income   $ 5,119       1,829       5,705  
                         
Earnings per common share:                        
  Net income-                        
    Basic   $ 1.54       .55       1.74  
    Diluted   $ 1.54       .55       1.74  
                         
Number of shares (in thousands) used in computing:              
  -basic earnings per common share     3,318       3,299       3,283  
  -diluted earnings per common share     3,320       3,302       3,285  
                               

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - Years ended September 30 (In thousands)

      2018       2017       2016  
Net income   $ 5,119       1,829       5,705  
Other comp. income (loss) net of tax:                      
 Actuarial gain retiree health     —         —         123  
 Unrealized investment losses, net     (9 )      —         —    
 Loss on retiree health, net     (32 )     —         —    
 Tax reform gain on retiree health     32       —         —    
Comprehensive income   $ 5,110       1,829       5,828  
                           

 

See notes to consolidated financial statements

14 
 

CONSOLIDATED BALANCE SHEETS - As of September 30

(In thousands, except share data)

      2018        2017   
Assets                
Current assets:                
  Cash and cash equivalents   $ 1       11,289  
  Treasury bills available for sale     17,298       —    
  Accounts receivable (net of allowance for doubtful                
   accounts of $153 and $150, respectively)     7,866       7,642  
  Federal and state taxes receivable     547       516  
  Inventory of parts and supplies     895       855  
  Prepaid tires on equipment     1,746       1,913  
  Prepaid taxes and licenses     609       612  
  Prepaid insurance     2,348       823  
  Prepaid expenses, other     134       71  
    Total current assets     31,444       23,721  
                 
Property, plant and equipment, at cost:                
  Land     2,773       2,773  
  Buildings     5,713       5,639  
  Equipment     86,224       93,511  
      94,710       101,923  
Less accumulated depreciation     60,799       62,331  
      33,911       39,592  
                 
Goodwill     3,431       3,431  
Intangible assets, net     855       1,021  
Other assets, net     176       189  
Total assets   $ 69,817       67,954  
                 
Liabilities and Shareholders' Equity                
Current liabilities:                
  Accounts payable   $ 3,271       4,948  
  Bank Overdraft     625       —    
  Accrued payroll and benefits     3,963       4,143  
  Accrued insurance     1,896       558  
  Accrued liabilities, other     408       379  
    Total current liabilities     10,163       10,028  
                 
Deferred income taxes     5,940       10,045  
Accrued insurance     204       193  
Other liabilities     1,104       1,105  
Commitments and contingencies (Note 11)                
Shareholders' equity:                
  Preferred stock, 5,000,000 shares authorized,                
   of which 250,000 shares are designated Series A                
   Junior Participating Preferred Stock; $0.01 par                
   value; none issued and outstanding     —         —    
  Common stock, $.10 par value; (25,000,000 shares authorized;                
   3,328,466 and 3,303,802  shares issued and outstanding, respectively     333       330  
  Capital in excess of par value     37,436       36,726  
  Retained earnings     14,472       9,353  
  Accumulated other comprehensive income, net     165       174  
    Total shareholders' equity     52,406       46,583  
Total liabilities and shareholders' equity   $ 69,817       67,954  
See notes to consolidated financial statements                

 

 

15 
 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended September 30

(In thousands)

 

   2018     2017     2016    
Cash flows from operating activities:                    
 Net income $ 5,119     1,829     5,705    
 Adjustments to reconcile net income to                    
  net cash provided by operating activities:              
 Depreciation and amortization   9,469     10,293     9,729  
 Deferred income taxes   (4,105 )    (434 )    2,145  
 Gain on asset dispositions   (1,043 )   (602 )   (2,222 )
 Stock-based compensation   589     808     745  
 Net changes in operating assets and liabilities:                  
  Accounts receivable   (224 )    (599 )    339  
  Inventory of parts and supplies   (40 )   (44 )   (31 ) 
  Prepaid expenses   (1,418 )    198     (98 ) 
  Other assets   (64 )   14     132  
  Accounts payable and accrued liabilities   (490 )   (545 )   (448 )
  Income taxes payable and receivable   (31 )    (255 )    (146 )
  Long-term insurance liabilities and other                  
   long-term liabilities   10     (3 )    (895 )
 Net cash provided by operating activities   7,772     10,660     14,955  
                   
Cash flows from investing activities:                  
 Purchase of property and equipment   (4,656 )    (6,332 )     (11,503 ) 
 Purchase of Treasury bills   (17,235 )   —       —    
 Proceeds from the sale of property, plant and equipment   2,082     956     3,155  
 Net cash used in investing activities   (19,809 )   (5,376 )   (8,348 )
                   
Cash flows from financing activities:                  
 (Decrease) Increase in bank overdrafts   625     —       (773 )
 Proceeds from borrowing on revolving credit facility   —       —        13,536  
 Payments on revolving credit facility   —       —        (13,536 ) 
 Excess tax benefits from exercise of stock options   —       —       171  
 Proceeds from exercised stock options   124     —       —    
 Net cash provided by (used in) financing activities   749     —       (602 )
                   
Net increase (decrease) in cash and cash equivalents   (11,288 )   5,284     6,005  
Cash and cash equivalents at beginning of year   11,289     6,005     —    
Cash and cash equivalents at end of the year $ 1     11,289     6,005  
                   
Supplemental disclosures of cash flow information:                  
 Cash paid during the year for:                  
  Interest $ 33     53     74  
  Income taxes $ 1,427     1,578     1,909  
                             

 

 

See notes to consolidated financial statements.

 

16 
 

 

 

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY - Years ended September 30

(In thousands, except share amounts)

 

 

                      Accumulated    
            Capital in         Other   Total
      Common Stock     Excess of   Retained     Comprehensive   Stockholders'
      Shares       Amount     Par Value   Earnings     Income, net   Investment
Balance as of September 30, 2015     3,272,804     $ 327     $ 35,005     $ 1,819       $ 51     $ 37,202  
                                                   
Excess tax benefits from exercise of stock options                     171                         171  
Stock-based compensation                     384                         384  
Shares granted to Directors     16,549       2       359                         361  
Net income                             5,705                 5,705  
Actuarial (loss) gain, net                                       123       123  
Balance as of September 30, 2016     3,289,353     $ 329     $ 35,919     $ 7,524       $ 174     $ 43,946  
                                                   
Stock-based compensation                     440                         440  
Shares granted to Directors     14,449       1       367                         368  
Net income                             1,829                 1,829  
Balance as of September 30, 2017     3,303,802     $ 330     $ 36,726     $ 9,353       $ 174     $ 46,583  
                                                   
Exercise of stock options     5,801       1       123                         124  
Stock-based compensation                     221                         221  
Shares granted to Directors     18,863       2       366                         368  
Net income                             5,119                 5,119  
Unrealized loss on investment, net                                       (9 )      (9 ) 
Loss on retiree health, net                                       (32 )      (32 ) 
Tax reform gain on retiree health                                       32       32  
Balance as of September 30, 2018     3,328,466     $ 333     $ 37,436     $ 14,472       $ 165     $ 52,406  

 

17 
 


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.Accounting Policies.

 

DESCRIPTION OF BUSINESS - The business of the Company, conducted through our wholly owned subsidiary, Florida Rock & Tank Lines, Inc., is to transport petroleum and other liquids and dry bulk commodities. We do not own any of the products we haul, rather, we act as a third party carrier to deliver our customer’s products from point A to point B predominately using Company employees driving Company owned tractors and tank trailers. Approximately 86% of our business consists of hauling liquid petroleum products (mostly gas and diesel fuel) from large scale fuel storage facilities to our customers’ retail outlets (e.g. convenience stores, truck stops and fuel depots) where we off-load the product into our customer’s fuel storage tanks for ultimate sale to the retail consumer. The remaining 14% of our business consists of hauling our customer’s dry bulk commodities such as cement, lime and various industrial powder products and liquid chemicals.

 

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts, certain assets, liabilities, and expenses of Patriot and its wholly owned subsidiaries that comprise the Company. All significant intercompany transactions within the consolidated entity have been eliminated.

 

CASH AND CASH EQUIVALENTS –The Company considers all highly liquid debt instruments with maturities of three months or less at time of purchase to be cash equivalents. Bank overdrafts consist of outstanding checks not yet presented to a bank for settlement, net of cash held in accounts with right of offset.

 

TREASURY BILLS AVAILABLE FOR SALE – Consists of maturities of 3 months to 1 year at time of purchase.

 

INVENTORY - Inventory of parts and supplies is valued at the lower of cost (first-in, first-out) or market.

 

TIRES ON EQUIPMENT - The value of tires on tractors and trailers is accounted for as a prepaid expense and amortized over the life of the tires as a function of miles driven.

 

REVENUE AND EXPENSE RECOGNITION - Transportation revenue, including fuel surcharges, is recognized when the services have been rendered to customers or delivery has occurred, the pricing is fixed or determinable and collectibility is reasonably assured. Transportation expenses are recognized as incurred.

 

ACCOUNTS RECEIVABLE - Accounts receivable are recorded net of discounts and provisions for estimated allowances. We estimate allowances on an ongoing basis by considering historical and current trends. We record estimated bad debts expense as a selling, general and administrative expense. We estimate the net collectibility of our accounts receivable and establish an allowance for doubtful accounts based upon this assessment. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. Any trade accounts receivable balances written off are charged against the allowance for doubtful accounts. The Company has not experienced any significant credit-related losses in the past three years.

 

PROPERTY AND EQUIPMENT - 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
Building and improvements     7-39
Revenue equipment     7-10
Other equipment     3-10

 

The Company recorded depreciation expenses for 2018, 2017 and 2016 of $9,298,000, $10,089,000 and $9,487,000,

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respectively.

 

IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews its long-lived assets, which include property and equipment and purchased intangible assets subject to amortization, 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.

 

GOODWILL – Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is tested for impairment annually and when events or changes in circumstances indicate that the fair value of a reporting unit with goodwill has been reduced below carrying value. The impairment test requires allocating goodwill and other assets and liabilities to reporting units. The fair value of each reporting unit is determined and compared to the book value of the reporting unit. If the fair value of the reporting unit is less than the book value, including goodwill, then the recorded goodwill is impaired to its implied fair value with a charge to operating expense.

 

INSURANCE - The Company has a $250,000 to $500,000 self-insured retention per occurrence in connection with certain of its workers’ compensation, automobile liability, and general liability insurance programs (“risk insurance”). The Company is also self-insured for its employee health insurance benefits and carries stop loss coverage for losses over $250,000 per covered participant per year plus a $84,500 aggregate. The Company has established an accrued liability for the estimated cost in connection with its portion of its risk and health insurance losses incurred and reported. Claims paid by the Company are charged against the liability. Additionally, the Company maintains an accrued liability for incurred but not reported claims based on historical analysis of such claims. Payments made under a captive agreement for each year’s loss 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. The method of calculating the accrual liability is subject to inherent uncertainty. If actual results are less favorable than the estimates used to calculate the liabilities, the Company would have to record expenses in excess of what has been accrued.

  

INCOME TAXES - Deferred tax assets and liabilities are recognized based on differences between financial statement and tax bases of assets and liabilities using presently enacted tax rates. Deferred income taxes result from temporary differences between pre-tax income reported in the financial statements and taxable income. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the amounts rely upon the determination of the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law and expiration of statutes of limitations, effectively settled issues under audit, and audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. It is the Company’s policy to recognize as additional income tax expense the items of interest and penalties directly related to income taxes.

 

STOCK BASED COMPENSATION – The Company accounts for compensation related to share based plans by recognizing the grant date fair value of stock options and other equity-based compensation issued to Company employees in Patriot’s income statement over the requisite employee service period using the straight-line attribution model. In addition, compensation expense must be recognized for the change in fair value of any awards modified, repurchased or cancelled after the grant date. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. The assumptions used in the model and related impact are discussed in Footnote 6.

 

PENSION PLAN - The Company accounts for its pension plan following the requirements of FASB ASC Topic 715,

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“Compensation – Retirement Benefits”, which requires an employer to: (a) recognize in its statement of financial position the funded status of a benefit plan; (b) measure defined benefit plan assets and obligations as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise but are not recognized as components of net periodic benefit costs pursuant to prior existing guidance.

 

EARNINGS PER COMMON SHARE - Basic earnings per common share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per common share are based on the weighted average number of common shares and potential dilution of securities that could share in earnings. The differences between basic and diluted shares used for the calculation are the effect of employee and director stock options and restricted stock.

 

USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Certain accounting policies and estimates are of more significance in the financial statement preparation process than others. The most critical accounting policies and estimates include the economic useful lives and salvage values of our vehicles and equipment, provisions for uncollectible accounts receivable, estimates of exposures related to our insurance claims plans, and estimates for taxes. To the extent that actual, final outcomes are different than these estimates, or that additional facts and circumstances result in a revision to these estimates, earnings during that accounting period will be affected.

 

ENVIRONMENTAL - Environmental expenditures that benefit future periods are capitalized. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded for the estimated amount of expected environmental assessments and/or remedial efforts. Estimation of such liabilities includes an assessment of engineering estimates, continually evolving governmental laws and standards, and potential involvement of other potentially responsible parties.

 

COMPREHENSIVE INCOME – Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) refers to expenses, gains, and losses that are not included in net income, but rather are recorded directly in shareholder’s equity.

 

RECENTLY ISSUED ACCOUNTING STANDARDS – In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which replaces existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date. Management has identified that a legally enforceable contract with its customers is executed by both parties at the point of pickup of the shipper’s product, as evidenced by the bill of lading. Although the Company may have master agreements with its customers, these master agreements only establish terms. There is no financial obligation to the shipper until the Company takes possession of the load. Revenue is recognized for each individual load and the amount of revenue in progress at the end of each quarter is insignificant. There is no significant amount of judgment or uncertainty in recording revenue. The new standard is effective for the Company on October 1, 2018, the beginning of the first quarter of fiscal 2019. The Company’s adoption of this guidance did not result in a material impact on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize

20 
 

an asset and liability for leases with a term of twelve months or less. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. The new standard will become effective for the Company beginning with the first quarter 2020 and requires a modified retrospective transition approach and includes a number of practical expedients. Early adoption of the standard is permitted. The Company is currently evaluating the impacts the adoption of this accounting guidance will have on the consolidated financial statements. The Company has relatively few leases extending over 12 months, primarily the corporate office and 30 leased tractors. The total gross contractual obligation for leases with commitments greater than 12 months at September 30, 2018 was $3,875,000.

 

2.Related Party Agreements.

 

The Company provides FRP Holdings, Inc. (FRP) certain services including the services of certain shared executive officers. A written agreement exists outlining the terms of such services and the boards of the respective companies amended and extended this agreement for one year effective October 1, 2018.

 

The consolidated statements of income reflect charges and/or allocation to FRP Holdings, Inc. for these services of $1,441,000, $1,606,000, and $1,542,000 for fiscal 2018, 2017 and 2016, respectively. Included in the charges above are amounts recognized for corporate executive stock-based compensation expense. These charges are reflected as a reduction to corporate expenses.

 

We employ an allocation method to allocate said expenses and thus we believe that the allocations to FRP are a reasonable approximation of the costs related to FRP’s operations but any such related-party transactions cannot be presumed to be carried out on an arm’s-length basis.

 

Patriot provided information technology services and previously subleased office space to Bluegrass Materials Company, LLC (“Bluegrass”). Mr. John Baker, brother of Edward L. Baker and uncle of Thompson S. Baker II, serves as Chairman of Bluegrass, and his son, Edward L. Baker II, serves as its Chief Executive Officer. Messrs. John Baker and Edward L. Baker II have a beneficial ownership interest in Bluegrass. Bluegrass paid $16,000 and $599,000 to the Company for fiscal 2017 and 2016, respectively, for such information technology services and office space. The services to Bluegrass ceased on December 31, 2016. Patriot paid $7,000 to Bluegrass for information technology services for fiscal 2017.

 

 

3.Debt.

 

The Company had no long-term debt outstanding at September 30, 2018 and September 30, 2017. On January 30, 2015, the Company entered into a $25 million, five year, revolving credit agreement with Wells Fargo Bank, N.A. and assumed and refinanced $5.1 million then outstanding. As of September 30, 2018, we had no outstanding debt borrowed on this revolver, $3,043,000 in commitments under letters of credit and $21,957,000 available for additional borrowings. The letter of credit fee is 1% and the applicable interest rate on borrowings would have been 3.242% on September 30, 2018.

 

The credit agreement contains certain conditions, affirmative financial covenants and negative covenants including limitations on paying cash dividends. The Company was in compliance with all of its loan covenants as of September 30, 2018.

 

 

4.Operating Leases.

 

The Company leases certain assets under operating leases, which primarily consist of real estate leases for the corporate office and some of our terminal locations and 30 full-service leased 2019 model year tractors located in key areas without Company maintenance shops. Certain operating leases provide for renewal options, which can vary by lease and are typically offered at their fair rental value. The Company has not made any residual value guarantees related to its operating leases; therefore, there is no corresponding liability recorded on the Balance Sheets.

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Future minimum annual lease payments for assets under operating leases as of September 30, 2018 are as follows (in thousands):

 

Fiscal Year   Total  
2019   1,021    
2020   808    
2021   807    
2022   740    
2023   597    
Thereafter   51    
Total minimum lease payments   $ 4,024    
           

 

Aggregate expense under operating leases was $1,274,000, $1,198,000 and $1,656,000 for 2018, 2017 and 2016, respectively. Certain operating leases include rent escalation provisions, which are recognized as expense on a straight-line basis.

 

5. Earnings Per Share.

 

Basic earnings per common share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per common share are based on the weighted average number of common shares and potential dilution of securities that could share in earnings. The differences between basic and diluted shares used for the calculation are the effect of employee and director stock options.

 

The following details the computations of the basic and diluted earnings per common share. (dollars and shares in thousands, except per share amounts.)

    Years Ended September 30
    2018   2017   2016
Common shares:            
             
Weighted average common shares                        
 outstanding during the period -                        
 shares used for basic earnings                        
 per common share     3,318       3,299       3,283  
                         
Common shares issuable under share                        
 based payment plans which are                        
 potentially dilutive     2       3       2  
                         
Common shares used for diluted                        
 earnings per common share     3,320       3,302       3,285  
                         
Net income   $ 5,119       1,829       5,705  
Earnings per common share                        
 Basic   $ 1.54       .55       1.74  
 Diluted   $ 1.54       .55       1.74  

 

For 2018 and 2017, 147,909 and 121,449 shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

 

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6. Stock-Based Compensation Plans.

 

Participation in FRP Plans

Prior to January 2015, The Company's directors, officers and key employees previously were eligible to participate in FRP's 2000 Stock Option Plan and the 2006 Stock Option Plan under which options for shares of common stock were granted to directors, officers and key employees. All related compensation expense has been fully allocated to the Company (rather than FRP) and included in corporate expenses.

 

Patriot Incentive Stock Plan

In January 2015, the Board of Directors of the Company adopted the Patriot Transportation Holding, Inc. Incentive Stock Plan. Grants were issued based upon all outstanding FRP options held by company directors, officers and key employees on January 30, 2015 with the same remaining terms. The number of common shares available for future issuance was 38,507 at September 30, 2018.

 

Patriot utilizes the Black-Scholes valuation model for estimating fair value of stock compensation for options awarded to officers and employees. Each grant is evaluated based upon assumptions at the time of grant. The assumptions are no dividend yield, expected volatility between 26% and 46%, risk-free interest rate of .3 to 3.9% and expected life of 3.0 to 7.0 years.

 

The dividend yield of zero is based on the fact that Patriot does not pay cash dividends and has no present intention to pay cash dividends. Expected volatility is estimated based on historical experience over a period equivalent to the expected life in years. The risk-free interest rate is based on the U.S. Treasury constant maturity interest rate at the date of grant with a term consistent with the expected life of the options granted. The expected life calculation is based on the observed and expected time to exercise options by the employees.

 

The realized tax benefit pertaining to options exercised and the remaining compensation cost of options previously granted are recognized by FRP or Patriot based on the employment location of the related employee or director.

 

In December 2016, the Company approved and issued a long-term performance incentive to an officer in the form of stock appreciation rights. The Company granted 80,000 stock appreciation rights. The market price was $23.13 on the date of grant and the executive will get a cash award at age 65 based upon the stock price at that date compared to the stock price at the date of grant but in no event will the award be less than $500,000. The Company plans to expense the fair value of the award over the 9.1 year vesting period to the officer’s attainment of age 65. The accrued liability under this plan as of September 30, 2018 and 2017 was $161,000 and $71,000, respectively.

 

In March 2017, in recognition of Thompson S. Baker II's outstanding service to FRP, the Board approved the vesting of all of Mr. Baker's outstanding FRP stock options, which expired 90 days following the termination of his employment. The vesting of Mr. Baker’s outstanding FRP options that were issued prior to the spin-off required modification stock compensation expense of $150,000. FRP reimbursed Patriot for this cost.

 

The annual director stock grant was 18,863 shares in fiscal 2018 at $19.53, 14,449 shares in fiscal 2017 at $25.50, and 16,549 shares in fiscal 2016 at $21.81 based on the market prices indicated on the date of the grants.

 

The Company recorded the following stock compensation expense in its consolidated statements of income (in thousands):

    Years Ended September 30
    2018   2017   2016
Stock option grants   $ 221       440       384  
Annual director stock award     368       368       361  
    $ 589       808       745  

 

A summary of Company stock options is presented below (in thousands, except share and per share amounts):

 

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      Weighted   Weighted   Weighted
  Number   Average   Average   Average
  Of   Exercise   Remaining   Grant Date
Options Shares   Price   Term (yrs)   Fair Value(000's)
               
Outstanding at                              
  October 1, 2015   75,315     $ 21.95       5.8     $ 666  
    Granted   38,794       23.78               362  
    Forfeited   (3,298 )     24.24               (29 )
Outstanding at                              
  September 30, 2016   110,811     $ 22.52       6.2     $ 999  
    Granted   40,780       21.25               272  
Outstanding at                              
  September 30, 2017   151,591     $ 22.18       6.3     $ 1,271  
    Granted   33,960       18.57               240  
    Exercised   (5,801 )     21.44               (53 )
    Forfeited   (4,199 )     21.44               (39 )
Outstanding at                              
  September 30, 2018   175,551     $ 21.52       6.3     $ 1,419  
Exercisable at                              
  September 30, 2018   100,816     $ 22.05       4.9     $ 809  
Vested during                              
  twelve months ended                              
  September 30, 2018   25,891                     $ 188  

 

The following table summarizes information concerning stock options outstanding at September 30, 2018:

 

        Shares      Weighted     Weighted  
Range of Exercise       Under     Average     Average  
Prices per Share       Option     Exercise Price   Remaining Life
                             
Non-exercisable:                            
$16.50 – $20.63       33,960         18.57       9.1  
$20.64 - $25.78       36,600         22.08       7.8  
$25.79-32.23       4,175         28.01       5.9  
        74,735       $ 20.81       8.3  Years
Exercisable:                            
$16.50 - $20.63       40,062         18.55       2.5  
$20.64 - $25.78       45,711         22.89       6.7  
$25.79 - $32.23       15,043         28.83       5.7  
        100,816       $ 22.05       4.9  Years
Total       175,551       $ 21.52       6.3  Years

 

 

The aggregate intrinsic value of exercisable Company options was $31,000 and the aggregate intrinsic value of all outstanding in-the-money options was $57,000 based on the Company’s market closing price of $19.23 on September 28, 2018 less exercise prices.

 

The realized tax benefit from option exercises during fiscal 2018 was $261,000 including $259,000 which pertained to FRP options exercised that were granted prior to the Spin-off to persons employed by Patriot. The unrecognized compensation expense of Patriot options granted as of September 30, 2018 was $490,000, which is expected to be recognized over a weighted-average period of 3.1 years.

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7. Income Taxes.

 

Fiscal 2018 net income included $3,444,000 due to a deferred tax benefit resulting from revaluing the company’s net deferred tax liabilities per the Tax Cuts and Jobs Act of 2017. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 24.28% for our fiscal year ending September 30, 2018, and 21% for subsequent fiscal years. The effective tax rate including the effect of state income taxes, but not including excess tax benefits from stock option exercises, is projected to decrease from 39.5% to 30.5% for fiscal 2018 and 27.5% for subsequent years. The tax rate for any year could be higher due to the impact of net worth taxes, permanent differences, and penalties and interest on lower than projected book income.

 

The provision for or benefit from income taxes for continuing operations for fiscal years ended September 30 consists of the following (in thousands):

 

          2018       2017       2016  
  Current:                          
    Federal     $ 865       739       1,247  
    State       304       164       334  
          1,169       903       1,581  
  Deferred       (4,091 )     (434 )      2,067  
                             
  Total     $ (2,922 )      469       3,648  

 

A reconciliation between the amount of tax shown above and the amount computed at the statutory Federal income tax rate follows (in thousands):

 

      2018       2017       2016  
Amount computed at statutory                        
  Federal rate   $ 532       781       3,180  
State income taxes (net of Federal                        
  income tax benefit)     131       108       440  
Excess tax benefits from stock option exercises     (170 )     (427 )     —    
Gain on rate change due to Tax Cut and Jobs                             
  Act of 2017     (3,444 )     —         —    
Other, net     29       7       28  
Provision for income taxes   $ (2,922 )      469       3,648  

 

In this reconciliation, the category “Other, net” consists of changes in permanent tax differences related to non-deductible expenses, goodwill tax amortization, interest and penalties, and adjustments to prior year estimates.

 

The types of temporary differences and their related tax effects that give rise to deferred tax assets and deferred tax liabilities at September 30, are presented below (in thousands):

 

      2018       2017
Deferred tax liabilities:              
 Property and equipment   $ 6,849       11,568
 Prepaid expenses     478       121
  Gross deferred tax liabilities     7,327       11,689
Deferred tax assets:              
 Insurance liabilities     448       159
 Employee benefits and other     939       1,485
Gross deferred tax assets     1,387       1,644
Net deferred tax liability   $ 5,940       10,045
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The Company has no unrecognized tax benefits.

 

Patriot tax returns in the U.S. and various states that include the Company are subject to audit by taxing authorities. As of September 30, 2018, the earliest tax year that remains open for audit in the Unites States is 2013.

 

8. Accrued Insurance.

 

The Company has established an accrued liability for the estimated cost in connection with its portion of its risk and health insurance losses incurred and reported. Payments made under a captive agreement for each year’s risk loss fund are scheduled in advance using actuarial methodology. Captive insurance assets available to us to settle risk insurance liabilities are not reported on our balance sheet as we do not control or consolidate the captive.

 

The accrued insurance liability at September 30 is summarized as follows (in thousands):

 

      2018       2017  
Accrued insurance, current portion   $ 1,896       558  
Prepaid insurance claims     (1,235 )      (501 ) 
Accrued insurance, non-current     204       193  
Total accrued insurance   $ 865       250  
Captive agreement assets     3,644       4,506  
Gross accrued insurance   $ 4,509       4,756  

 

9. Employee Benefits.

 

The Company and certain subsidiaries and related entities (FRP) have a savings/profit sharing plan for the benefit of qualified employees. The savings feature of the plan incorporates the provisions of Section 401(k) of the Internal Revenue Code under which an eligible employee may elect to save a portion (within limits) of their compensation on a tax deferred basis. Patriot contributes to a participant’s account an amount equal to 50% (with certain limits) of the participant’s contribution. Additionally, the Company may make an annual discretionary contribution to the plan as determined by the Board of Directors, with certain limitations. The plan provides for deferred vesting with benefits payable upon retirement or earlier termination of employment. The Company’s cost was $784,000 in 2018, $768,000 in 2017 and $792,000 in 2016.

 

The Company has a Management Security Plan (MSP) for certain key employees. The accruals for future benefits are based upon the remaining years to retirement of the participating employees and other actuarial assumptions. The expense for fiscal 2018, 2017 and 2016 was $22,000, $23,000 and $25,000, respectively. The accrued benefit related to the Company under this plan as of September 30, 2018 and 2017 was $613,000 and $658,000, respectively.

 

The Company provides certain health benefits for retired employees. Employees may become eligible for those benefits if they were employed by the Company prior to December 10, 1992, meet the service requirements and reach retirement age while working for Patriot. The plan is contributory and unfunded. The Company accrues its allocated estimated cost of retiree health benefits over the years that the employees render service. The accrued postretirement benefit obligation for this plan related to the Company as of September 30, 2018 and 2017 was $204,000 and $192,000, respectively. The net periodic postretirement benefit credit or cost allocated to the Company was ($32,000), ($33,000) and $16,000 for fiscal 2018, 2017 and 2016, respectively. The discount rate used in determining the Net Periodic Postretirement Benefit Cost was 3.7% for 2018, 3.7% for 2017 and 3.7% for 2016. The discount rate used in determining the Accumulated Postretirement Benefit Obligation (APBO) was 3.73% for 2018, 3.73% for 2017, and 4.25% for 2016. No medical trend is applicable because the Company’s share of the cost is frozen.

 

10. Fair Value Measurements.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to

26 
 

valuation techniques used to measure fair value into three broad levels. Level 1 means the use of quoted prices in active markets for identical assets or liabilities. Level 2 means the use of values that are derived principally from or corroborated by observable market data. Level 3 means the use of inputs are those that are unobservable and significant to the overall fair value measurement

 

During the quarter ending September 30, 2018 the Company invested in treasury bills with maturities at time of purchase of 3 months to 1 year. The unrealized loss on these investments of $13,000 was recorded as part of comprehensive income and was based on the market value (Level 1). The amortized cost of the investments was $17,311,000 and the carrying amount and fair value was $17,298,000 as of September 30, 2018.

 

11. Contingent Liabilities.

 

The Company is involved in litigation on a number of matters and is subject to certain claims which arise in the normal course of business. The Company has retained certain self-insurance risks with respect to losses for third party liability and property damage. There is a reasonable possibility that the Company’s estimate of vehicle and workers’ compensation liability may be understated or overstated but the possible range cannot be estimated. The liability at any point in time depends upon the relative ages and amounts of the individual open claims. In the opinion of management none of these matters are expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

12. Concentrations.

 

Market: The Company primarily serves customers in the petroleum industry in the Southeastern U.S. Significant economic disruption or downturn in this geographic region or within these industries could have an adverse effect on our financial statements.

Customers: During fiscal 2018, the Company’s ten largest customers accounted for approximately 59.1% of our revenue and one of these customers accounted for 17.3% of our revenue. Accounts receivable from the ten largest customers was $4,875,000 and $4,070,000 at September 30, 2018 and September 30, 2017 respectively. The loss of any one of these ten customers could have a material adverse effect on the Company’s revenues and income.

Deposits: Cash and cash equivalents are comprised of cash at Wells Fargo Bank, N.A. and a BB&T Money Market Fund. The balances may exceed FDIC limits.

 

13. Unusual or Infrequent Items Impacting Results.

 

On September 30, 2016, the Company received $1,330,000 for an easement granted to the state of Florida over the Company's 25.2 acre terminal facility in Tampa, Florida resulting in a $1,277,000 gain. The easement prohibits residential development on the site and prohibits hotel development on a portion of the site.

 

On October 20, 2015, the Company received notice from the Claims Administrator for the Deepwater Horizon Economic and Property Damages Settlement Program that the Company’s claim in the amount of $2,106,281 qualifies for payment under the terms of the Economic and Property Damages Settlement Agreement.  On December 18, 2015 BP accepted the Company’s proposal of $2,047,651.  The Company received payment of $1,687,085 on January 6, 2016 net of all contingency fees. This amount is included in other income.

 

First quarter 2018 net income included $3,041,000, or $.92 per share, due to a deferred tax benefit resulting from revaluing the company’s net deferred tax liabilities per the Tax Cuts and Jobs Act of 2017. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 24.28% for our fiscal year ending September 30, 2018, and 21% for subsequent fiscal years. The effective tax rate including the effect of state income taxes, but not including excess tax benefits from stock option exercises, is projected to decrease from 39.5% to 30.5% for fiscal 2018 and 27.5% for subsequent years.

 

Fourth quarter 2018 net income included $403,000, or $.12 per share, due to a deferred tax benefit resulting from finalizing the revaluation of the company’s net deferred tax liabilities per the Tax Cuts and Jobs Act of 2017.

 

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14. Goodwill and Intangible Assets.

 

The changes in gross carrying amounts of goodwill are as follows (in thousands):

    Goodwill  
October 1, 2015   $ 3,431  
No activity     —    
September 30, 2016     3,431  
No activity     —    
September 30, 2017     3,431  
No activity     —    
September 30, 2018   $ 3,431  

 

The Company assesses goodwill for impairment on an annual basis in the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

 

The Company reviews intangible assets, including customer value, trade name and non-compete agreements, for impairment, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset group to the future undiscounted net cash flows expected to be generated by those assets. If such assets are considered to be impaired, the impairment charge recognized is the amount by which the carrying amounts of the assets exceeds the fair value of the assets.

 

The gross amounts and accumulated amortization (including impairment) of identifiable intangible assets are as follows (in thousands):

    September 30, 2018     September 30, 2017  
      Gross     Accumulated       Gross     Accumulated      
      Amount     Amortization       Amount     Amortization      
Amortizable intangible assets:                                
  Customer value (useful life 10.5 years)     4,004     3,150        4,004     2,997      
  Trade name (useful life 3.5 years)     72     72       72     72      
  Non-compete (useful life 5 years)     62     61       62     48      
    $ 4,138   $ 3,283     $ 4,138   $ 3,117      

 

 

Amortization expense for intangible assets was $165,000 for 2018 and it is included in sales, general and administrative expense. Estimated amortization expense for the five succeeding years follows (in thousands): 

    Amount
  2019     $ 154  
  2020       153  
  2021       153  
  2022       153  
  2023       153  
  Total     $ 766  

 

 

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Report of Management

 

Management's Responsibility for the Financial Statements

 

Management of the Company is responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report on Form 10-K. The financial statements were prepared in conformity with accounting principles generally accepted in the United States appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates. Financial information in this Annual Report on Form 10-K is consistent with that in the financial statements.

 

Management of the Company is responsible for establishing and maintaining a system of internal controls and procedures to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Our internal control system is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel, and a written Code of Business Conduct adopted by our Company's Board of Directors, applicable to all officers and employees of our Company and subsidiaries.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management's Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 ("Exchange Act"). Management assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2017 Framework) ("COSO") in Internal Control—Integrated Framework. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of September 30, 2018.

 

The Company's independent auditors, Hancock Askew& Co., LLP, a registered public accounting firm, are appointed by the Audit Committee of the Company's Board of Directors, subject to ratification by our Company's shareowners. Hancock Askew & Co., LLP has audited and reported on the consolidated financial statements of Patriot Transportation Holding, Inc. The report of the independent auditors is contained in this annual report.

 

Audit Committee's Responsibility

 

The Audit Committee of our Company's Board of Directors, composed solely of Directors who are independent in accordance with the requirements of the Nasdaq Stock Market listing standards, the Exchange Act, and the Company's Corporate Governance Guidelines, meets with the independent auditors, management and internal auditors periodically to discuss internal controls and auditing and financial reporting matters. The Audit Committee reviews with the independent auditors the scope and results of the audit effort. The Audit Committee also meets periodically with the independent auditors and the chief internal auditor without management present to ensure that the independent auditors and the chief internal auditor have free access to the Audit Committee. Our Audit Committee's Report can be found in the Company's Proxy Statement.

 

 

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Report of Independent Registered Certified Public Accounting Firm

The Shareholders and Board of Directors

Patriot Transportation Holding, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Patriot Transportation Holding, Inc. (the “Company”) as of September 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years ended September 30, 2018,2017 and 2016, and the related notes to the consolidated financial statements (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of their operations and their cash flows for the years ending September 30, 2018, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

Hancock Askew & Co., LLP

 

We have served as the Company’s auditor since 2006.

 

Savannah, Georgia

December 11, 2018

 

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DIRECTORS AND OFFICERS

 

Directors

 

Thompson S. Baker II (1)

Chairman of the Board of the Company

Senior Vice President, Vulcan Materials

 

Edward L. Baker (1)

Chairman Emeritus

 

John E. Anderson (2)(3)(4)

Former President and Chief Executive

Officer of Patriot Transportation Holding, Inc.

 

Luke E. Fichthorn III (2)(3)(4)

Private Investment Banker,

Twain Associates

 

Charles D. Hyman (2)(3)(4)

President/Founder

Charles D. Hyman & Company

________________

(1) Member of the Executive Committee

(2) Member of the Audit Committee

(3) Member of the Compensation Committee

(4) Member of the Nominating Committee

 

 

Officers

 

 

Robert E. Sandlin

President and Chief Executive Officer

 

Matthew C. McNulty

Vice President and Chief Financial Officer

 

John D. Milton, Jr.

Executive Vice President, General Counsel,

Treasurer, and Secretary

 

John D. Klopfenstein

Controller and Chief Accounting Officer

 

James N. Anderson IV

Vice President of Safety and Risk Management

 

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Patriot Transportation Holding, Inc.

200 West Forsyth Street, 7th Floor

Jacksonville, Florida, 32202

Telephone: (904) 396-5733

 

Annual Meeting

Shareholders are cordially invited to attend the Annual Shareholders Meeting which will be held at 10 a.m. local time, on Wednesday, January 30, 2019, at the River Club, Florida Room, on the 34th Floor of the Wells Fargo Building, One Independent Drive, Jacksonville, Florida 32202.

 

Transfer Agent

American Stock Transfer & Trust Company

59 Maiden Lane

Plaza Level

New York, NY 10038

Telephone: 1-800-937-5449

 

General Counsel

Nelson Mullins Riley & Scarborough LLP

Jacksonville, Florida

 

 

Independent Registered Certified Public Accounting Firm

Hancock Askew & Co., LLP

Savannah, Georgia

 

 

Common Stock Listed

The Nasdaq Stock Market

(Symbol: PATI)

 

 

Form 10-K

Shareholders may receive without charge a copy of Patriot Transportation Holding, Inc.’s annual report on Form 10-K for the fiscal year ended September 30, 2018 as filed with the Securities and Exchange Commission by writing to the Treasurer at 200 West Forsyth Street, 7th Floor, Jacksonville, Florida 32202. The most recent certifications by our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to our Form 10-K.

 

 

Company Website

The Company’s website may be accessed at www.patriottrans.com. All of our filings with the Securities and Exchange Commission can be accessed through our website promptly after filing. This includes annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports filed or furnished on Form 8-K and all related amendments.

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