| MARTEN TRANSPORT LTD ITEM 1A RISK FACTORS The following factors are important and should be considered carefully in connection with any evaluation of our business, financial condition, results of operations, prospects, or an investment in our common stock |
| The risks and uncertainties described below are those that we currently believe may materially affect our company or our financial results |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations or affect our financial results |
| Our business is subject to general economic and business factors that are largely out of our control, any of which could have a materially adverse effect on our operating results |
| Our business is dependent on a number of general economic and business factors that may have a materially adverse effect on our results of operations, many of which are beyond our control |
| These factors include excess capacity in the trucking industry, strikes or other work stoppages, and significant increases or fluctuations in interest rates, fuel taxes, and license and registration fees |
| We are affected by recessionary economic cycles and downturns in 5 ______________________________________________________________________ customers’ business cycles, particularly in market segments and industries where we have a significant concentration of customers |
| Economic conditions may adversely affect our customers and their ability to pay for our services |
| It is not possible to predict the effects of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against any foreign state, heightened security requirements, or other related events and the subsequent effects on the economy or on consumer confidence in the United States, or the impact, if any, on our future results of operations |
| We operate in a highly competitive and fragmented industry, and numerous competitive factors could impair our ability to maintain our current profitability |
| We compete with many other truckload carriers that provide temperature-sensitive service of varying sizes and, to a lesser extent, with less-than-truckload carriers, railroads and other transportation companies, many of which have more equipment, a wider range of services and greater capital resources than we do or have other competitive advantages |
| In particular, several of the largest truckload carriers that offer primarily dry-van service also offer temperature-sensitive service, and these carriers could attempt to increase their business in the temperature-sensitive market |
| Many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase freight rates or maintain significant growth in our business |
| In addition, many customers reduce the number of carriers they use by selecting so-called “core carriers” as approved service providers, or conduct bids from multiple carriers for their shipping needs, and in some instances we may not be selected as a core carrier or to provide service under such bids |
| In addition, the trend toward consolidation in the trucking industry may create other large carriers with greater financial resources and other competitive advantages relating to their size |
| Competition from freight logistics and brokerage companies may negatively impact our customer relationships and freight rates |
| Furthermore, economies of scale that may be passed on to smaller carriers by procurement aggregation providers may improve such carriers’ ability to compete with us |
| We derive a significant portion of our revenue from our major customers, the loss of one or more of which could have a materially adverse effect on our business |
| A significant portion of our revenue is generated from our major customers |
| For 2005, our top 30 customers, based on revenue, accounted for approximately 76prca of our revenue; our top ten customers accounted for approximately 51prca of our revenue; our top five customers accounted for approximately 40prca of our revenue; and our top two customers accounted for approximately 24prca of our revenue |
| Generally, we enter into one-year contracts with our major customers, the majority of which do not contain any firm obligations to ship with us |
| We cannot assure you that, upon expiration of existing contracts, these customers will continue to use our services or that, if they do, they will continue at the same levels |
| Many of our customers periodically solicit bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in loss of business to our competitors |
| A reduction in or termination of our services by one or more of our major customers could have a materially adverse effect on our business and operating results |
| Increased prices, reduced productivity, and restricted availability of new revenue equipment could cause our financial condition, results of operations and cash flows to suffer |
| We have experienced higher prices for new tractors over the past few years, primarily as a result of higher commodity prices, better pricing power among equipment manufacturers, and government regulations applicable to newly manufactured tractors and diesel engines |
| We expect to continue to pay increased prices for revenue equipment and incur additional expenses and related financing costs for the foreseeable future |
| Our business could be harmed if we are unable to continue to obtain an adequate supply of new tractors and trailers or if we have to pay increased prices for new revenue equipment |
| The EPA adopted revised emissions control regulations, which require progressive reductions in exhaust emissions from diesel engines through 2010, for engines manufactured in October 2002, and thereafter |
| The revised regulations decrease the amount of emissions that can be released by tractor engines and affect tractors produced after the effective date of the regulations |
| Compliance with these regulations has increased the cost of our new tractors, lowered fuel mileage and increased our operating expenses |
| Some 6 ______________________________________________________________________ manufacturers have significantly increased new equipment prices, in part to meet new engine design requirements imposed by the EPA, and eliminated or sharply reduced the price of repurchase commitments |
| These adverse effects combined with the uncertainty as to the reliability of the vehicles equipped with the newly designed diesel engines and the residual values that will be realized from the disposition of these vehicles could increase our costs or otherwise adversely affect our business or operations |
| The next round of restrictions will take effect in 2007 |
| Compliance with the 2007 EPA standards is expected to result in further declines in fuel economy, and may result in further increases in the cost of new tractors |
| We have significant ongoing capital requirements that could harm our financial condition, results of operations and cash flows if we are unable to generate sufficient cash from our operations |
| The truckload industry is capital intensive, and our policy of operating newer equipment requires us to expend significant amounts annually |
| If we elect to expand our fleet in future periods, our capital needs would increase |
| We expect to pay for projected capital expenditures with cash flows from operations and borrowings under our revolving credit facility |
| If we are unable to generate sufficient cash from operations and obtain financing on favorable terms in the future, we may have to limit our growth, enter into less favorable financing arrangements, or operate our revenue equipment for longer periods, any of which could have a materially adverse effect on our profitability |
| Ongoing insurance and claims expenses could significantly affect our earnings |
| Our future insurance and claims expense might exceed historical levels, which could reduce our earnings |
| We self-insure for a portion of our claims exposure resulting from workers’ compensation, auto liability, general liability, cargo and property damage claims, as well as employees’ health insurance |
| We also are responsible for our legal expenses relating to such claims |
| We reserve currently for anticipated losses and expenses |
| We periodically evaluate and adjust our claims reserves to reflect our experience |
| However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts |
| We maintain insurance above the amounts for which we self-insure with licensed insurance carriers |
| Although we believe the aggregate insurance limits should be sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed our aggregate coverage limits |
| Insurance carriers have raised premiums for many businesses, including trucking companies |
| If these expenses increase, or if we experience a claim in excess of our coverage limits, or we experience a claim for which coverage is not provided, results of our operations and financial condition could be materially and adversely affected |
| Increases in compensation or difficulty in attracting drivers could affect our profitability and ability to grow |
| In recent years the transportation industry has experienced substantial difficulty in attracting and retaining qualified drivers, including independent contractors, with competition for drivers being increasingly intense |
| With the increased competition for drivers, we have experienced greater difficulty in attracting sufficient numbers of qualified drivers |
| In addition, due in part to current economic conditions, including the cost of fuel and insurance, the available pool of independent contractor drivers is smaller than it has been historically |
| Accordingly, we may face difficulty in attracting and retaining drivers for all of our current tractors and for those we may add |
| Additionally, we may face difficulty in increasing the number of our independent contractor drivers |
| In addition, our industry suffers from high turnover rates of drivers |
| Our turnover rate requires us to recruit a substantial number of drivers |
| Moreover, our turnover rate could increase |
| If we are unable to continue to attract drivers and contract with independent contractors, we could be required to continue adjusting our driver compensation package beyond the norm or let trucks sit idle |
| Effective January 1, 2005, we increased the amount paid to company drivers by 1 cent per mile and increased the incentives paid to independent contractors |
| We also instituted a second pay increase of 2 cents per mile for company drivers effective April 1, 2005 |
| Our compensation of drivers and independent contractors is subject to market forces, and we may increase their compensation further in future periods |
| An increase in our expenses or in the number of tractors without drivers could materially and adversely affect our growth and profitability |
| 7 ______________________________________________________________________ Fluctuations in the price or availability of fuel may increase our cost of operation, which could materially and adversely affect our profitability |
| We require large amounts of diesel fuel to operate our tractors and to power the temperature-control units on our trailers |
| Fuel prices tend to fluctuate, and prices and availability of all petroleum products are subject to political, economic and market factors that are beyond our control |
| We depend primarily on fuel surcharges, volume purchasing arrangements with truck stop chains and bulk purchases of fuel at our terminals to control our fuel expenses |
| There can be no assurance that we will be able to collect fuel surcharges, enter into volume purchase agreements, or execute successful hedges in the future |
| The absence of meaningful fuel price protection through these measures, fluctuations in fuel prices, or a shortage of diesel fuel, could materially and adversely affect our results of operations |
| Seasonality and the impact of weather can affect our profitability |
| Our tractor productivity generally decreases during the winter season because inclement weather impedes operations and some shippers reduce their shipments |
| At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and harsh weather creating higher accident frequency, increased claims and more equipment repairs |
| We can also suffer short-term impacts from weather-related events such as hurricanes, blizzards, ice-storms, and floods that could harm our results or make our results more volatile |
| We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on our business |
| The DOT and various state and local agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety and insurance requirements |
| Our company drivers and independent contractors also must comply with the safety and fitness regulations promulgated by the DOT, including those relating to drug and alcohol testing and hours-of-service |
| In response, we negotiated delay time charges with the majority of our customers |
| In July 2004, the United States Court of Appeals for the District of Columbia vacated the new hours-of-service regulations in their entirety and remanded the matter to the Federal Motor Carriers Safety Administration, or FMCSA, for reconsideration |
| In August 2005, in response to the Surface Transportation Extension Act of 2004 (Part V) temporarily extending the hours-of-service regulations, the FMCSA issued a revised set of hours-of-service regulations effective October 1, 2005 |
| The regulations did not have a significant impact on our operations or financial results for 2005 or 2004 |
| However, uncompensated shortfalls in our utilization due to compliance with the regulations could adversely impact our profitability |
| Service instability in the railroad industry could increase our operating costs and reduce our ability to offer intermodal services, which could adversely affect our revenue, results of operations, and customer relationships |
| In most markets, rail service is limited to a few railroads or even a single railroad |
| Any reduction in service by the railroads with which we have, or in the future may have, relationships is likely to increase the cost of the rail-based services we provide and reduce the reliability, timeliness, and overall attractiveness of our rail-based services |
| Furthermore, railroads are relatively free to adjust shipping rates up or down as market conditions permit |
| Price increases could result in higher costs to our customers and reduce or eliminate our ability to offer intermodal services |
| In addition, we cannot assure you that we will be able to negotiate additional contracts with railroads to expand our capacity, add additional routes, or obtain multiple providers, which could limit our ability to provide this service |
| Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties |
| We are subject to various environmental laws and regulations dealing with the handling of hazardous materials, fuel storage tanks, air emissions from our vehicles and facilities, engine idling, and discharge and retention of storm water |
| We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination have occurred |
| Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others |
| Although we have instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations, if we are involved in a spill or other accident involving hazardous substances or if we are found to be in violation of applicable laws or regulations, we could be subject to liabilities, including substantial fines or penalties or civil 8 ______________________________________________________________________ and criminal liability, any of which could have a materially adverse effect on our business and operating results |
| Our management information systems may prove inadequate |
| We depend upon our management information systems for many aspects of our business |
| Some of our key software has been developed internally by our programmers or by adapting purchased software to our needs and this software may not be easily modified or integrated with other software and systems |
| Our business will be materially and adversely affected if our management information systems are disrupted or if we are unable to improve, upgrade, integrate or expand our systems as we continue to execute our growth strategy, including our new logistics and intermodal services |