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PATRIOT TRANSPORTATION HOLDING INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

February 3, 2014

CONDITION AND RESULTS OF OPERATIONS Overview - Patriot Transportation Holding, Inc. (the Company) is a holding company engaged in the transportation and real estate businesses. The Company's transportation business, Florida Rock & Tank Lines, Inc. is engaged in hauling primarily petroleum and other liquids and dry bulk commodities in tank trailers. The Company's transportation segment acquired certain assets of Pipeline Transportation, Inc. on November 7, 2013 for $10,023,000 . Pipeline's operations have been conducted in the Florida and Alabama markets also served by Florida Rock and Tank Lines, Inc. For the twelve month period ending June 30, 2013 , Pipeline had gross revenues of just over $16,500,000 . The Company has accounted for this acquisition in accordance with the provisions of ASC 805, Business Combinations (ASC 805). The Company has allocated the purchase price of the business, through the use of a third party valuations and management estimates, based upon the fair value of the assets acquired and liabilities assumed. In connection with the Pipeline acquisition, the Company assumed certain vehicle leases. These non-cancellable operating leases will require minimum annual rentals approximating $3,034,000 over the next 4 fiscal years. The Company's real estate operations consist of two reportable segments. The Mining royalty land segment owns real estate including construction aggregate royalty sites and parcels held for investment. The Developed property rentals segment acquires, constructs, leases, operates and manages office/warehouse buildings primarily in the Baltimore / Northern Virginia / Washington area, and holds real estate for future development or related to its developments. Substantially all of the real estate operations are conducted within the Southeastern and Mid-Atlantic United States. 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, regulations regarding driver qualifications and hours of service, petroleum product usage in the Southeast which is driven in part by tourism and commercial aviation, fuel costs, construction activity, aggregates sales by lessees from the Company's mining properties, interest rates, market conditions and attendant prices for casualty insurance, demand for commercial warehouse space in the Baltimore-Washington-Northern Virginia area, and ability to obtain zoning and entitlements necessary for property development. Internal factors include revenue mix, capacity utilization, auto and workers' compensation accident frequencies and severity, other operating factors, administrative costs, group health claims experience, and construction costs of 15 new projects. There is a reasonable possibility that the Company's estimate of vehicle and workers' compensation liability for the transportation group may be understated or overstated but the possible range can not be estimated. The liability at any point in time depends upon the relative ages and amounts of the individual open claims. Financial results of the Company for any individual quarter are not necessarily indicative of results to be expected for the year. Comparative Results of Operations for the Three months ended December 31, 2013 and 2012 Consolidated Results - Net income for the first quarter of fiscal 2014 was $2,341,000 compared to $3,123,000 for the same period last year. Diluted earnings per common share for the first quarter of fiscal 2014 were $.24 compared to $.33 for the same quarter last year. The first quarter of the prior year included a gain of $681,000 after income taxes on the sale of investment land. Transportation segment results were lower due to higher health and risk insurance costs, acquisition and organic growth related expenses, and lower gains on equipment sales and losses on wrecked equipment. The Company incurred increased costs related to the acquisition and organic growth. These growth related costs include one-time equipment costs, professional fees and the cost of sending drivers from their home based terminals to other terminals to help capture growth opportunities which will continue to some extent until the growth is fully stabilized. The mining royalty land segment's results were lower due to a shift in production at one location decreasing the share of mining on property owned by the Company. The Developed property rentals segment's results were higher due to higher occupancy and new buildings added partially offset by higher property taxes and professional fees. Transportation Results Three months ended December 31 (dollars in thousands) 2013 % 2012 % Transportation revenue $ 26,490 84 % 21,991 83 % Fuel surcharges 5,101 16 % 4,648 17 % Revenues 31,591 100 % 26,639 100 % Compensation and benefits 11,596 37 % 9,434 35 % Fuel expenses 7,283 23 % 6,256 24 % Insurance and losses 2,475 8 % 1,888 7 % Depreciation expense 1,968 6 % 1,707 6 % Other, net 3,920 12 % 3,005 11 % Sales, general & administrative 2,386 7 % 2,307 9 % Allocated corporate expenses 492 2 % 471 2 % Loss (gain) on equipment sales 15 0 % (226 ) -1 % Cost of operations 30,135 95 % 24,842 93 % Operating profit $ 1,456 5 % 1,797 7 % 16 Transportation segment revenues were $31,591,000 in the first quarter of 2014, an increase of $4,952,000 over the same quarter last year. Revenue miles in the current quarter were up 22.4% compared to the first quarter of fiscal 2013 due to business growth and a longer average haul length. The Pipeline Transportation, Inc. business acquisition on November 7, 2013 comprised less than half of that growth. Revenue per mile decreased 3.3% over the same quarter last year due to a longer average haul length. Fuel surcharge revenue increased $453,000 due to the increase in miles offset by the lower cost of fuel. The average price paid per gallon of diesel fuel decreased by $.14 over the same quarter in fiscal 2013. There is a time lag between changes in fuel prices and surcharges and often fuel costs change more rapidly than the market indexes used to determine fuel surcharges. Excluding fuel surcharges, revenue per mile decreased 1.6% over the same quarter last year. The Transportation segment's cost of operations was $30,135,000 in the first quarter of 2014, an increase of $5,293,000 over the same quarter last year. The Transportation segment's cost of operations in the first quarter of 2014 as a percentage of revenue was 95% compared to 93% in the first quarter of 2013. Compensation and benefits increased $2,162,000 or 22.9% compared to the same quarter last year primarily due to the increase in miles driven, a driver pay increase, increased new driver training pay and acquisition and organic growth related extra pay for out of town drivers. Fuel cost increased by $1,027,000 due to the increase in miles driven partially offset by the lower cost per gallon. Insurance and losses increased $587,000 compared to the same quarter last year primarily due to higher health and risk insurance costs. Depreciation expense increased $261,000 due to more trucks in service. Other expense increased $915,000 due to increased miles driven, acquisition and organic growth related expenses and additional trucks in service. Sales, general, and administrative costs increased $79,000 or 3.4% compared to the same quarter last year. Allocated corporate expenses increased $21,000 . Gains on equipment sales decreased $241,000 due to decreased sales of tractors and losses on wrecked equipment. The Company incurred increased costs related to the acquisition and organic growth. These growth related costs include one-time equipment costs, professional fees and the cost of sending drivers from their home based terminals to other terminals to help capture growth opportunities which will continue to some extent until the growth is fully stabilized. 17 Mining Royalty Land Results Three months ended December 31 (dollars in thousands) 2013 % 2012 % Mining royalty land revenue $ 1,268 100 % 1,331 100 % Property operating expenses 118 9 % 112 8 % Depreciation and depletion 28 2 % 25 2 % Management Company indirect (6 ) 0 % (5 ) 0 % Allocated corporate expenses 189 15 % 176 13 % Cost of operations 329 26 % 308 23 % Operating profit $ 939 74 % 1,023 77 % Mining royalty land segment revenues for the first quarter of fiscal 2014 were $1,268,000 , a decrease of $63,000 or 4.7% over the same quarter last year due to a shift in production at one location decreasing the share of mining on property owned by the Company. The mining royalty land segment's cost of operations was $329,000 in the first quarter of 2014, an increase of $21,000 over the same quarter last year due primarily to higher property taxes and an increase in allocated corporate expenses. Developed Property Rentals Results Three months ended December 31 (dollars in thousands) 2013 % 2012 % Developed property rentals revenue $ 5,961 100 % 5,087 100 % Property operating expenses 1,609 27 % 1,117 22 % Depreciation and amortization 1,599 27 % 1,430 28 % Management Company indirect 387 6 % 425 9 % Allocated corporate expenses 283 5 % 264 5 % Cost of operations 3,878 65 % 3,236 64 % Operating profit $ 2,083 35 % 1,851 36 % Developed property rentals segment revenues for the first quarter of fiscal 2014 were $5,961,000 , an increase of $874,000 or 17.2% due to higher occupancy and revenue on the 117,600 square foot build to suit building completed and occupied during the quarter ending March 2013 and revenue on the 5 new buildings added June 2013 related to the purchase of Transit Business Park . Occupancy at December 31, 2013 was 89.2% as compared to 86.2% at December 31, 2012 . Developed property rentals segment's cost of operations was $3,878,000 in the first quarter of 2014, an increase of $642,000 or 19.8% over the same quarter last year. Property operating expenses increased $492,000 due to higher occupancy, property taxes, snow removal costs and professional fees and the new buildings placed in service. Depreciation and amortization increased $169,000 primarily due to the newly completed build to suit building and the purchase of Transit Business Park reduced by certain tenant improvements 18 becoming fully depreciated. Management Company indirect expenses (excluding internal allocations for lease related property management and construction fees) decreased $38,000 due to lower health insurance costs partially offset by higher professional fees and property taxes. Allocated corporate expenses increased $19,000 . Consolidated Results Operating Profit - Consolidated operating profit was $4,124,000 in the first quarter of fiscal 2014, a decrease of $284,000 or 6.4% compared to $4,408,000 in the same period last year. Operating profit in the transportation segment decreased $341,000 or 19.0% due to higher health and risk insurance costs, acquisition and organic growth related expenses, and lower gains on sales of equipment and losses on wrecked equipment. The Company incurred increased costs related to the acquisition and organic growth. These growth related costs include one-time equipment costs, professional fees and the cost of sending drivers from their home based terminals to other terminals to help capture growth opportunities which will continue to some extent until the growth is fully stabilized. Operating profit in the mining royalty land segment decreased $84,000 or 8.2% primarily due a shift in production at one location decreasing share of mining on property owned by the Company. Operating profit in the Developed property rentals segment increased $232,000 or 12.5% due to higher occupancy, the 117,600 square foot build to suit building completed and occupied during the second quarter 2013, the addition of Transit Business Park partially offset by higher property taxes and professional fees. Consolidated operating profit includes corporate expenses not allocated to any segment in the amount of $354,000 in the first quarter of fiscal 2014, an increase of $91,000 compared to the same period last year. Gain on investment land sold - Gain on investment land sold for the first quarter of fiscal 2014 included $56,000 of deferred profits on prior year land sales. Gain on investment land sold for the first quarter of fiscal 2013 included a gain on the sale of the developed property rentals Commonwealth property of $1,116,000 before income taxes. The book value of the property was $723,000 . Interest income and other (expense) income, net - Interest income and other (expense) income, net decreased $31,000 over the same quarter last year due to funds received in consideration for the conveyance of easement property in the prior year. Interest expense - Interest expense decreased $117,000 over the same quarter last year due to a declining mortgage principal balance offset by lower capitalized interest. The amount of interest capitalized on real estate projects under development was $75,000 lower than the same quarter in fiscal 2013. Income taxes - Income tax expense decreased $500,000 over the same quarter last year due to lower earnings compared to the same quarter last year. 19 Net income - Net income for the first quarter of fiscal 2014 was $2,341,000 compared to $3,123,000 for the same period last year. Diluted earnings per common share for the first quarter of fiscal 2014 were $.24 compared to $.33 for the same quarter last year. The first quarter of the prior year included a gain of $681,000 after income taxes on the sale of investment land. Transportation segment results were lower due to higher health and risk insurance costs, acquisition and organic growth related expenses, and lower gains on equipment sales and losses on wrecked equipment. The Company incurred increased costs related to the acquisition and organic growth. These growth related costs include one-time equipment costs, professional fees and the cost of sending drivers from their home based terminals to other terminals to help capture growth opportunities which will continue to some extent until the growth is fully stabilized. The mining royalty land segment's results were lower due to a shift in production at one location decreasing the share of mining on property owned by the Company. The Developed property rentals segment's results were higher due to higher occupancy and new buildings added partially offset by higher property taxes and professional fees. Liquidity and Capital Resources. The growth of the Company's businesses requires significant cash needs. The Company expects to meet short-term liquidity requirements generally through working capital, net cash provided by operations, and, if necessary, borrowings on its unsecured revolving credit facility. The Company intends to meet long-term funding requirements for transportation equipment and acquisitions, property acquisitions and development, debt service, and share repurchases through net cash from operations, long-term secured and unsecured indebtedness, including borrowings under its unsecured revolving credit facility, and proceeds from sales of strategically identified assets. For the first three months of fiscal 2014, the Company used cash provided by operating activities of $4,079,000 , borrowings of $16,745,000 under its Revolver, proceeds from the sale of plant, property and equipment of $230,000 , proceeds from the exercise of employee stock options of $183,000 , excess tax benefits from the exercise of stock options of $143,000 , and cash balances to purchase $5,334,000 in transportation equipment, to expend $3,769,000 in real estate development, to invest $10,023,000 in the Pipeline Transportation business acquisition, to invest $125,000 in joint ventures, to make $1,051,000 in payments on long-term debt, and to make payments of $1,000,000 under the Revolver. Cash held in escrow increased $1,000 . Cash increased $77,000 . Cash flows from operating activities for the first three months of fiscal 2014 were $231,000 higher than the same period last year primarily due to increased receivables resulting from transportation revenue increases offset by higher insurance liability payments in the prior year. Accrued insurance liabilities 20 were higher in the prior year due to payment in settlement of three unusually large prior year liability and health claims. Cash flows used in investing activities for the first three months of fiscal 2014 were $10,241,000 higher primarily due to the acquisition of Pipeline Transportation, Inc. in November 2013 . The prior year included larger sales of equipment and land while the current year included lower purchases of transportation equipment exclusive of the Pipeline Transportation, Inc. acquisition. Cash flows provided by financing activities for the first three months of fiscal 2014 were $15,360,000 higher than the same period last year due to borrowing on the Revolver. On December 21, 2012 , the Company entered into a five year credit agreement with Wells Fargo Bank, N.A. with a maximum facility amount of $55 million (the "Credit Agreement"). The Credit Agreement provides a revolving credit facility (the "Revolver") with a maximum facility amount of $40 million , with a $20 million sublimit for standby letters of credit, and a term loan facility of $15 million . As of December 31, 2013 , $15,745,000 was borrowed under the Revolver, $7,000,000 in letters of credit was outstanding, and $32,255,000 was available for additional borrowing. The letters of credit were issued for insurance retentions and to guarantee certain obligations to state agencies related to real estate development. Most of the letters of credit are irrevocable for a period of one year and typically are automatically extended for additional one-year periods. The Revolver bears interest at a rate of 1.0% over the selected LIBOR , which may change quarterly based on the Company's ratio of Consolidated Total Debt to Consolidated Total Capital , as defined. A commitment fee of 0.15% per annum is payable quarterly on the unused portion of the commitment. The commitment fee may also change quarterly based upon the ratio described above. The Credit Agreement contains certain conditions, affirmative financial covenants and negative covenants including limitations on paying cash dividends. As of December 31, 2013 , $68,444,000 of consolidated retained earnings would be available for payment of dividends. The Company was in compliance with all covenants as of December 31, 2013 . The Board of Directors has authorized Management to repurchase shares of the Company's common stock from time to time as opportunities arise. During the first three months of fiscal 2014 the Company did not repurchase any shares of stock. As of December 31, 2013 , $3,682,000 was authorized for future repurchases of common stock. The Company does not currently pay any cash dividends on common stock. 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. 21 Summary and Outlook. Transportation revenues for the first quarter of fiscal 2014 increased $4,952,000 or 18.6% over the first quarter of 2013. The bottom line contribution of these additional revenues was not achieved as duplicate expense of temporarily transferred drivers and extra driving and training pay nullified any return on the added revenues. The company has been adding approximately five net new drivers a month, exclusive of the Pipeline acquisition, for the last nine months and anticipates continuing a similar addition of drivers. As permanent drivers are added to our employment rolls the company expects that the added revenues will become contributory to our profitability. Developed property rentals occupancy has increased from 86.2% to 89.2% over December 31, 2012 as the market for new tenants has improved and traffic for vacant space has increased. Occupancy at December 31, 2013 and 2012 included 13,450 square feet or .4% and 25,660 square feet or .9% respectively for temporary leases under a less than full market lease rate. The Company's second build to suit lease at Patriot Business Park for a 125,500 square foot building was completed in January 2014 . In November 2013 the Company signed an agreement to sell 4.4 acres at Patriot Business Park for $2,000,000 . The book value of the property at December 31, 2013 was $1,316,000 . The sale is expected to close in the second half of calendar 2014. The Company anticipates commencement of construction of the first phase of the four phase Anacostia development in mid 2014 with lease up scheduled between late 2015 and all of 2016.


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Source: Edgar Glimpses


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