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PAM TRANSPORTATION SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 9, 2014

FORWARD-LOOKING INFORMATION

Certain information included in this Quarterly Report on Form 10-Q constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to expected future financial and operating results or events, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, excess capacity in the trucking industry; surplus inventories; recessionary economic cycles and downturns in customers' business cycles; increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, tolls, license and registration fees; the resale value of the Company's used equipment and the price of new equipment; increases in compensation for and difficulty in attracting and retaining qualified drivers and owner-operators; increases in insurance premiums and deductible amounts relating to accident, cargo, workers' compensation, health, and other claims; unanticipated increases in the number or amount of claims for which the Company is self insured; inability of the Company to continue to secure acceptable financing arrangements; seasonal factors such as harsh weather conditions that increase operating costs; competition from trucking, rail, and intermodal competitors including reductions in rates resulting from competitive bidding; the ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations; a significant reduction in or termination of the Company's trucking service by a key customer; and other factors, including risk factors, included from time to time in filings made by the Company with the Securities and Exchange Commission ("SEC"). The Company undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES



There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the fiscal year ended December 31, 2013.

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BUSINESS OVERVIEW



The Company's administrative headquarters are in Tontitown, Arkansas. From this location we manage operations conducted through wholly owned subsidiaries based in various locations around the United States, Mexico, and Canada. The operations of these subsidiaries can generally be classified into either truckload services or brokerage and logistics services. Truckload services include those transportation services in which we utilize company owned trucks or owner-operator owned trucks. Brokerage and logistics services consist of services such as transportation scheduling, routing, mode selection, transloading and other value added services related to the transportation of freight which may or may not involve the usage of company owned or owner-operator owned equipment. Both our truckload operations and our brokerage/logistics operations have similar economic characteristics and are impacted by virtually the same economic factors as discussed elsewhere in this Report. All of the Company's operations are in the motor carrier segment.

For both operations, substantially all of our revenue is generated by transporting freight for customers and is predominantly affected by the rates per mile received from our customers, equipment utilization, and our percentage of non-compensated miles. These aspects of our business are carefully managed and efforts are continuously underway to achieve favorable results. Truckload services revenues, excluding fuel surcharges, represented 92.7% and 91.1% of total revenues, excluding fuel surcharges for the three months ended March 31, 2014 and 2013, respectively. The remaining revenues, excluding fuel surcharges, were generated from brokerage and logistics services.

The main factors that impact our profitability on the expense side are costs incurred in transporting freight for our customers. Currently our most challenging costs include fuel, driver recruitment, training, wage and benefit costs, independent broker costs (which we record as purchased transportation), insurance, and maintenance and capital equipment costs.

In discussing our results of operations we use revenue, before fuel surcharge, (and fuel expense, net of surcharge), because management believes that eliminating the impact of this sometimes volatile source of revenue allows a more consistent basis for comparing our results of operations from period to period. During the three months ended March 31, 2014 and 2013, approximately $22.9 million and $22.2 million, respectively, of the Company's total revenue was generated from fuel surcharges. We may also discuss certain changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the variable cost nature of certain expenses makes a comparison of changes in expenses as a percentage of revenue more meaningful than absolute dollar changes.

RESULTS OF OPERATIONS - TRUCKLOAD SERVICES

The following table sets forth, for truckload services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Fuel costs are shown net of fuel surcharges.

Three Months Ended March 31, 2014 2013 (percentages)



Operating revenues, before fuel surcharge 100.0 100.0

Operating expenses: Salaries, wages and benefits (1) 37.3 38.5 Fuel expense, net of fuel surcharge 2.7 6.8 Rents and purchased transportation (1) 22.6 19.2 Depreciation 13.1 14.2 Operating supplies and expenses 11.9 12.5 Operating taxes and licenses 1.7 1.8 Insurance and claims 5.4 4.8 Communications and utilities 0.9 0.8 Other 2.5 2.3 Gain on sale or disposal of property (1.9 ) (0.2 ) Total operating expenses 96.2 100.7 Operating income (loss) 3.8 (0.7 ) Non-operating income 0.3 0.4 Interest expense (1.1 ) (1.1 ) Income (loss) before income taxes 3.0 (1.4 )



(1) In order to conform to industry practice, the Company began to classify

payments to third-party owner operator drivers as purchased transportation rather than as salaries, wages and benefits as had been presented in reports prior to the period ended September 30, 2013. This reclassification has no effect on operating income, net income or earnings per share. The Company has made corresponding reclassifications to comparative periods shown. 16



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THREE MONTHS ENDED MARCH 31, 2014 VS. THREE MONTHS ENDED MARCH 31, 2013

During the first quarter of 2014, truckload services revenue, before fuel surcharges, decreased 2.1% to $69.4 million as compared to $70.9 million during the first quarter of 2013. The decrease was primarily due to a decrease in the number of miles traveled and a decrease in the average rate charged to customers which was partially offset by a reduction in uncompensated miles. The number of miles traveled decreased from 51.7 million miles during the first quarter of 2013 to 51.0 million miles during the first quarter of 2014 primarily as a result of severe winter conditions in areas in which we operate. The average rate charged per total mile during the first quarter of 2014 decreased $0.01 as compared to the average rate charged during the first quarter of 2013. Uncompensated miles decreased from 8.0% of total miles for the first quarter of 2013 to 6.9% of total miles for the first quarter of 2014.

Salaries, wages and benefits decreased from 38.5% of revenues, before fuel surcharges, during the first quarter of 2013 to 37.3% of revenues, before fuel surcharges, during the first quarter of 2014. The decrease related primarily to a decrease in Company driver wages paid during the first quarter of 2014 as compared to Company driver wages paid during the first quarter of 2013. Our driver pool consists of both company drivers and third-party owner operators. Company drivers are employees of the Company and perform services in company-owned equipment while owner-operator drivers provide services, under contract, using their own equipment. While each group is generally compensated on a per-mile basis, owner-operator payments are classified in the Company's financial statements under the Rents and purchased transportation category. The percentage-based decrease in Salaries, wages and benefits resulted from a decrease in the proportion of total miles driven by company drivers during the first quarter of 2014 in comparison to the proportion of total miles driven by company drivers during the first quarter of 2013. This proportional decrease was the result of an increase in the average number of owner operators under contract from 257 during the first quarter of 2013 to 352 during the first quarter of 2014 and a corresponding decrease in the average number of company drivers. On a dollar basis, total salaries, wages and benefits decreased from $27.2 million during the first quarter of 2013 to $25.9 million during the first quarter of 2014. Also contributing to the decrease was a decrease of $0.7 million in costs associated with workers' compensation benefits during the first quarter of 2014 as compared to the first quarter of 2013.

Fuel expense, net of fuel surcharge, decreased from 6.8% of revenues, before fuel surcharges, during the first quarter of 2013 to 2.7% of revenues, before fuel surcharges, during the first quarter of 2014. The decrease relates primarily to a decrease in the average surcharge-adjusted fuel price paid per gallon of diesel fuel and to an increase in the average miles-per-gallon ("mpg") experienced. The average surcharge-adjusted fuel price paid per gallon of diesel fuel decreased as a result of more favorable fuel surcharge arrangements made with customers and to an increase in the number of owner operators in our fleet. Fuel surcharge collections can fluctuate significantly from period to period as they are generally based on changes in fuel prices from period to period so that during periods of rising fuel prices fuel surcharge collections increase while fuel surcharge collections decrease during periods of falling fuel prices. Fuel surcharge revenue generated from transportation services performed by owner operators is reflected as a reduction in net fuel expense, while fuel surcharges paid to owner operators for their services is reported along with their base rate of pay in the Rents and purchased transportation category. These categorizations have the effect of reducing our net fuel expense while increasing the Rents and purchased transportation category, as discussed above. The average mpg experienced increased during the first quarter of 2014 as compared to the mpg experienced during the first quarter of 2013 as a result of replacing older trucks with newer trucks, which are more fuel efficient.

Rents and purchased transportation increased from 19.2% of revenues, before fuel surcharges, during the first quarter of 2013 to 22.6% of revenues, before fuel surcharges, during the first quarter of 2014. The increase relates primarily to an increase in driver lease expense as the average number of owner operators under contract increased from 257 during the first quarter of 2013 to 352 during the first quarter of 2014. The increase in costs in this category, as they relate to the increase in owner operators, are partially offset by a decrease in other cost categories, such as repairs and fuel, which are generally borne by the owner operator. Also contributing to the increase were lease payments associated with the lease of 147 trucks, as discussed below.

Depreciation decreased from 14.2% of revenues, before fuel surcharges, during the first quarter of 2013 to 13.1% of revenues, before fuel surcharges, during the first quarter of 2014. The decrease relates primarily to a decrease in the average number of company-owned trucks. While the total size of our operating truck fleet has grown slightly, the number of company-owned trucks has decreased as a result of a sale-leaseback transaction entered into during the first quarter of 2014 and to an increase in the number of owner operators under contract. During the first quarter of 2014, the Company entered into lease agreements for the lease of 147 trucks, including 97 company-owned trucks which were sold to a third party and then leased back to the Company. The lease payments associated with these leases are reported in the Rents and purchased transportation category. The number of owner operators increased from an average of 257 under contract during the first quarter of 2013 to 352 under contract during the first quarter of 2014.

Operating supplies and expenses decreased from 12.5% of revenues, before fuel surcharges, during the first quarter of 2013 to 11.9% of revenues, before fuel surcharges, during the first quarter of 2014. The decrease relates primarily to a decrease in amounts paid for driver training schools and driver layover pay during the first quarter of 2014 as compared to amounts paid during the first quarter of 2013. The decrease also relates to a decrease in amounts paid for equipment maintenance costs during the first quarter of 2014 as compared to amounts paid during the first quarter of 2013 as a result of replacing older equipment with new equipment.

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Insurance and claims increased from 4.8% of revenues, before fuel surcharges, during the first quarter of 2013 to 5.4% of revenues, before fuel surcharges, during the first quarter of 2014. The increase relates primarily to increases in the amount paid for physical damage insurance due to an increase in the value of the equipment covered as a result of replacing older equipment with new equipment and to obtaining physical damage coverage on our trailers effective during the fourth quarter of 2013.

Gains on sale or disposal of property increased from 0.2% during the first quarter of 2013 to 1.9% during the first quarter of 2014. The increase relates primarily to both an increase in the number of trailers sold and to a more favorable used equipment market. The number of trailers sold increased from 62 units sold during the first quarter of 2013 to 238 units sold during the first quarter of 2014.

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, decreased from 100.7% for the first quarter 2013 to 96.2% for the first quarter of 2014.

RESULTS OF OPERATIONS - LOGISTICS AND BROKERAGE SERVICES

The following table sets forth, for logistics and brokerage services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Brokerage service operations occur specifically in certain divisions; however, brokerage operations occur throughout the Company in similar operations having substantially similar economic characteristics.

Three Months Ended March 31, 2014 2013 (percentages)



Operating revenues, before fuel surcharge 100.0 100.0

Operating expenses: Salaries, wages and benefits 2.9 2.2 Rents and purchased transportation 93.0 93.7 Communications and utilities 0.2 0.2 Other 0.4 0.3 Total operating expenses 96.5 96.4 Operating income 3.5 3.6 Non-operating income 0.1 0.0 Interest expense (0.3 ) (0.2 ) Income before income taxes 3.3 3.4



THREE MONTHS ENDED MARCH 31, 2014 VS. THREE MONTHS ENDED MARCH 31, 2013

During the first quarter of 2014, logistics and brokerage services revenue, before fuel surcharges, decreased 21.3% to $5.4 million as compared to $6.9 million during the first quarter of 2013. The decrease relates to a decrease in the number of brokered loads during the first quarter of 2014 as compared to the first quarter of 2013.

Salaries, wages and benefits increased from 2.2% of revenues, before fuel surcharges, in the first quarter of 2013 to 2.9% of revenues, before fuel surcharges, during the first quarter of 2014. The increase relates to an increase in the number of employees assigned to the logistics and brokerage services division and to the interaction of the fixed-cost characteristic of salaries expense with a decrease in revenues for the periods compared.

Rents and purchased transportation decreased from 93.7% of revenues, before fuel surcharges, during the first quarter of 2013 to 93.0% of revenues, before fuel surcharges during the first quarter of 2014. The decrease relates to a decrease in amounts paid to third party logistics and brokerage service providers.

The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased from 96.4% for the first quarter of 2013 to 96.5% for the first quarter of 2014.

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RESULTS OF OPERATIONS - COMBINED SERVICES

THREE MONTHS ENDED MARCH 31, 2014 VS. THREE MONTHS ENDED MARCH 31, 2013

Net income for all divisions was approximately $1.4 million, or 1.8% of revenues, before fuel surcharge for the first quarter of 2014 as compared to a net loss of $0.5 million or 0.6% of revenues, before fuel surcharge for the first quarter of 2013. The increase in income resulted in diluted earnings per share of $0.17 for the first quarter of 2014 as compared to diluted loss per share of $0.05 for the first quarter of 2013.

LIQUIDITY AND CAPITAL RESOURCES

Our business has required, and will continue to require, a significant investment in new revenue equipment. Our primary sources of liquidity have been funds provided by operations, proceeds from the sales of revenue equipment, issuances of equity securities, and borrowings under our lines of credit, installment notes, and investment margin account.

During the first three months of 2014, we generated $5.5 million in cash from operating activities. Investing activities provided $10.9 million in cash in the first three months of 2014. Financing activities used $17.1 million in cash in the first three months of 2014.

Our primary use of funds is for the purchase of revenue equipment. We typically use installment notes, our existing line of credit on an interim basis, proceeds from the sale or trade of equipment, and cash flows from operations to finance capital expenditures and repay long-term debt. During the first three months of 2014, we utilized cash on hand, installment notes, and our lines of credit to finance revenue equipment purchases of approximately $6.5 million.

Occasionally, we finance the acquisition of revenue equipment through installment notes with fixed interest rates and terms ranging from 36 to 60 months. During the first three months of 2014, the Company's subsidiary, P.A.M. Transport, Inc. entered into installment obligations totaling approximately $5.7 million for the purpose of purchasing revenue equipment. These obligations are payable in 60 monthly installments at interest rates ranging from 2.46% to 2.55%.

During the remainder of 2014, we expect to purchase approximately 300 new trucks and 540 new trailers while continuing to sell or trade older equipment, which we expect to result in net capital expenditures of approximately $30.8 million. Management believes we will be able to finance our near term needs for working capital over the next twelve months, as well as any planned capital expenditures during such period, with cash balances, cash flows from operations, and borrowings believed to be available from financing sources. We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek additional equity capital. The availability of additional capital will depend upon prevailing market conditions, the market price of our common stock and several other factors over which we have limited control, as well as our financial condition and results of operations. Nevertheless, based on our recent operating results, current cash position, anticipated future cash flows, and sources of financing that we expect will be available to us, we do not expect that we will experience any significant liquidity constraints in the foreseeable future.

We currently intend to retain our future earnings to finance our growth and do not anticipate paying additional cash dividends in the foreseeable future.

During the first three months of 2014 we maintained a $35.0 million revolving line of credit. Amounts outstanding under the line of credit bear interest at LIBOR (determined as of the first day of each month) plus 1.75% (1.91% at March 31, 2014), are secured by our accounts receivable and mature on June 1, 2015. At March 31, 2014 outstanding advances on the line of credit were approximately $11.6 million, including letters of credit totaling $1.1 million, with availability to borrow $23.4 million.

Trade accounts receivable increased from $58.5 million at December 31, 2013 to $64.1 million at March 31, 2014. The increase relates to a general increase in freight revenue and fuel surcharge revenue, which flows through the accounts receivable account, during the first quarter of 2014 as compared to the last quarter of 2013.

Prepaid expenses and deposits increased from $6.6 million at December 31, 2013 to $8.4 million at March 31, 2014. The increase relates to prepaid tractor and trailer license fees. The 2014 license fees of approximately $2.3 million were paid during the first quarter of 2014. These prepaid expenses will continue to be amortized to expense through the remainder of the year.

Marketable equity securities increased from $21.0 million at December 31, 2013 to $21.7 million at March 31, 2014. The $0.7 million increase was related to an increase in the market value of the Company's investments during the first three months of 2014.

Revenue equipment, at March 31, 2014, which generally consists of trucks, trailers, and revenue equipment accessories such as Qualcomm™ satellite tracking units and auxiliary power units, decreased approximately $16.4 million as compared to December 31, 2013. The decrease relates primarily to a decrease in the number of company-owned trucks due to the sale of 178 trucks during the first quarter of 2014 without a corresponding company-owned replacement.

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Accounts payable decreased from $28.0 million at December 31, 2013 to $16.4 million at March 31, 2014. The $11.6 million decrease was primarily related to the payment for treasury stock through a Dutch Auction in the amount of $13.9 million which was partially offset by an increase in amounts accrued for revenue equipment at March 31, 2014 as compared to December 31, 2013.

Accrued expenses and other liabilities increased from $22.5 million at December 31, 2013 to $24.1 million at March 31, 2014. The increase was primarily related to a $1.7 million increase in amounts accrued at the end of the period which were payable to company drivers and third-party owner-operator drivers which can vary significantly throughout the year depending on the timing of the actual date of payment in relation to the last day of the reporting period. This increase was offset by a $0.2 million reduction in margin account borrowings which are secured by the Company's investments in marketable equity securities. The Company periodically uses this margin account for the purchase of marketable equity securities and as a source of short-term liquidity.

Current maturities of long term-debt and long-term debt fluctuations are reviewed on an aggregate basis as the classification of amounts in each category are typically affected merely by the passage of time. Current maturities of long-term debt and long-term debt, on an aggregate basis, decreased from $110.5 million at December 31, 2013 to $107.6 million at March 31, 2014. The decrease was primarily related to the net effect of additional borrowings made during the first three months of 2014 and installment note payments made during the first three months of 2014.

NEW ACCOUNTING PRONOUNCEMENTS

See Note B to the condensed consolidated financial statements for a description of the most recent accounting pronouncements and their impact, if any, on the Company.


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