Item 2
.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report
contains
certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and such statements are subject to the safe harbor created by those sections, and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation:
|
●
|
any
projections of earnings, revenue,
costs,
or other financial items;
|
|
●
|
any statement of projected future operations or processes;
|
|
●
|
any statement of plans, strategies, goals, and objectives of management for future operations;
|
|
●
|
any statement concerning proposed new services or developments;
|
|
●
|
any statement regarding future economic conditions or performance; and
|
|
●
|
any statement of belief and any statement of assumptions underlying any of the foregoing.
|
In this Quarterly Report on Form 10
-Q, statements relating to:
|
●
|
future ability to grow market share,
|
|
●
|
future driver and customer-facing employee compensation,
|
|
●
|
future ability
and cost
to recruit and retain drivers and customer-facing employees,
|
|
●
|
future asset utilization,
|
|
●
|
the amount
,
timing
and price
of future acquisitions and dispositions of revenue equipment
, size and age of the Company’
s fleet
and anticipated gains
or
losses resulting from dispositions
,
|
|
●
|
future depreciation and amortization expense,
including useful lives and salvage values of equipment,
|
|
●
|
future
safety
performance
,
|
|
●
|
future industry capacity,
|
|
●
|
future effects
of restructuring actions,
|
|
●
|
future pricing rates
and freight network
,
|
|
●
|
future fuel prices and surcharges
, fuel efficiency and hedging arrangements
,
|
|
●
|
future insurance and claims
and litigation
expense,
|
|
●
|
future
salaries, wages and
employee benefits costs,
|
|
●
|
future purchased transportation use and expense,
|
|
●
|
future operations and maintenance costs,
|
|
●
|
future
USAT Logistics growth
and profitability
,
|
|
●
|
future liquidity and borrowing availability and capacity,
|
|
●
|
the impact of pending and future litigation and claims
,
|
|
●
|
future availability
and compliance with covenants
under our revolving credit facility
,
|
|
●
|
expected amount and timing of capital expenditures,
|
|
●
|
expected
liquidity and sources of capital resources,
|
|
●
|
future size of
our independent contractor fleet
,
and
|
|
●
|
future income tax rates
|
among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as “expects,” “estimates,” “projects,” “believes,” “anticipates,” “intends,” “plans,” “goals,” “may,” “will,” ”would,” “should,” “could,” “potential,” “continue,” “future” and similar terms and phrases. Forward-looking statements are based on currently available operating, financial and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Item 1.A., Risk Factors,” in the Company
’s Annual Report on Form 10-K for the year ended December 31, 2016
, the section entitled “Item 1.A, Risk Factors” in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, the section entitled “Item 1.A, Risk Factors” in this Quarterly Report on Form 10-Q,
and other filings with the Securities and Exchange Commission (the “SEC”).
All such forward-looking statements speak only as of the date of this report. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in management
’s expectations with regard thereto or any change in the events, conditions or circumstances on which any such information is based, except as required by law
.
All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement.
References to the “Company,” “we,” “us,” “our” or similar terms refer to USA Truck, Inc. and its subsidiary.
Overview
The following Management
’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader more fully understand the operations and present business environment of USA Truck, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, the condensed consolidated financial statements and notes thereto and other financial information that appears elsewhere in this report. This overview summarizes the MD&A, which includes the following sections:
Our Business
– a general description of our business, the organization of our operations and the service offerings that comprise our operations.
Results of Operations
– an analysis of the consolidated results of operations for the periods presented in the condensed consolidated financial statements included in this filing and a discussion of seasonality, the potential impact of inflation and fuel availability and cost.
Liquidity and Capital Resources
– an analysis of cash flows, sources and uses of cash, debt, equity and contractual obligations.
Our Business
USA Truck offers a broad range of truckload motor carrier and freight brokerage and logistics services to a diversified customer base that spans a variety of industries.
The Company has two reportable segments: (i) Trucking, consisting of one-way truckload motor carrier services, in which volumes typically are not contractually committed, and dedicated contract motor carrier services, in which a combination of equipment and drivers is contractually committed to a particular customer, typically for a duration of at least one year, subject to certain cancellation rights, and (ii) USAT Logistics, consisting of freight brokerage, logistics,
and rail intermodal service offerings.
The Trucking segment provides
one-way truckload transportation, including dedicated services, of various products, goods and materials. The Trucking segment primarily uses its own purchased or leased tractors and trailers to provide services to customers and is commonly referred to as “asset-based” trucking. The Company’s USAT Logistics services match customer shipments with available equipment of authorized third-party motor carriers and other service providers and provide services that complement the Company’s Trucking operations. USAT Logistics provides these services primarily to existing Trucking customers, many of whom prefer to rely on a single service provider, or a small group of service providers, to provide all their transportation solutions.
Revenue for the Company
’s Trucking segment is substantially generated by transporting freight for customers, and is predominantly affected by the rates per mile received from customers, the number of tractors in operation, and the number of revenue-generating miles per tractor. The Company supplements its Trucking operating revenue by charging for fuel surcharge and ancillary services such as stop-off pay, loading and unloading activities, tractor and trailer detention and other similar services.
Operating expenses that have a major impact on the profitability of the Trucking segment fall into two categories: variable and fixed.
Variable costs, or mostly variable costs, constitute the majority of the costs associated with transporting freight for customers, and include driver wages and benefits, fuel and fuel taxes, payments to independent contractors for purchased transportation, operating and maintenance expense and insurance and claims expense. These costs vary primarily according to miles operated, but also have controllable components based on percentage of compensated miles, shop and dispatch efficiency, safety and claims experience.
The most significant fixed
costs, or mostly fixed costs, include the capital costs of our assets (depreciation, rent and interest), compensation of non-driving employees and portions of insurance and maintenance expenses. These expenses are partially controllable through management of fleet size and facilities infrastructure, headcount efficiency, and operating safely.
Fuel
and fuel tax expense can fluctuate significantly with diesel fuel prices and is one of our most volatile variable expenses. To mitigate the Company’s exposure to fuel price increases, it recovers from its customers fuel surcharges that historically have recouped a majority of the increased fuel costs; however, the Company cannot assure the recovery levels experienced in the past will continue in future periods. Although the Company’s fuel surcharge program mitigates some exposure to rising fuel costs, the Company continues to have exposure to increasing fuel costs related to empty miles, out of route miles, fuel inefficiency due to engine idle time and other factors, including the extent to which the surcharge paid by the customer is insufficient to compensate for higher fuel costs, particularly in times of rapidly increasing fuel prices. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of loaded miles. The fuel surcharge is billed on a lagging basis, meaning the Company typically bills customers in the current week based on the previous week’s applicable United States Department of Energy, or DOE, index. Therefore, in times of increasing fuel prices, the Company does not recover as much in fuel surcharge revenue as it pays for fuel. In periods of declining prices, the opposite is true.
The key statistics used to evaluate Trucking segment performance, net of fuel surcharge revenue, include (i) base Trucking revenue per seated tractor per week, (ii) average base revenue per loaded mile, (iii) average miles per seated tractor per week, (iv) deadhead percentage, (v) average loaded miles per trip, (vi) average number of seated tractors and (vii) adjusted operating ratio. In general, the Company
’s average miles per seated tractor per week, rate per mile and deadhead percentage are affected by industry-wide freight volumes, industry-wide trucking capacity and the competitive environment, which factors are mostly beyond the Company’s control, as well as by its sales and marketing efforts, service levels and efficiency of its operations, over which the Company has significant control.
Unlike the Trucking segment, the USAT Logistics segment is non-asset based and is instead dependent upon qualified employees, information systems and qualified third-party capacity providers. The largest expense related to the USAT Logistics segment is purchased transportation expense. Other operating expenses consist primarily of salaries, wages and employee benefits. The Company evaluates the financial performance
of the USAT Logistics segment by reviewing gross margin (USAT Logistics operating revenue less purchased transportation expense) and the gross margin percentage (USAT Logistics operating revenue less purchased transportation expense expressed as a percentage of USAT Logistics operating revenue). The gross margin can be impacted by the rates charged to customers and the costs of securing third-party capacity. USAT Logistics often achieves better gross margins during periods of imbalance between supply and demand than times of balanced supply and demand, although periods of transition to tight capacity also can compress margins.
We plan to continue our focus on improving results through disciplined network management and pricing, enhanced partnerships with customers, and improved execution in our day-to-day operations, as well as our ongoing safety initiatives.
By focusing on these key objectives, management believes it will make progress on its goals of improving the Company’s operating performance and increasing stockholder value.
Results of Operations
The following table sets forth the condensed consolidated statements of operations and comprehensive
income (loss) in dollars (in thousands) and percentage of consolidated operating revenue and the percentage increase or decrease in the dollar amounts (in thousands) of those items compared to the prior year.
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
201
7
|
|
|
201
6
|
|
|
|
|
|
|
$
|
|
|
%
Operating
Revenue
|
|
|
%
Adjusted
Operating
Ratio (1)
|
|
|
$
|
|
|
%
Operating
Revenue
|
|
|
%
Adjusted
Operating
Ratio (1)
|
|
|
% Change in
Dollar Amounts
|
|
Base revenue
|
|
$
|
102,386
|
|
|
|
89.6
|
%
|
|
|
|
|
|
$
|
94,661
|
|
|
|
89.8
|
%
|
|
|
|
|
|
|
8.2
|
%
|
Fuel surcharge revenue
|
|
|
11,849
|
|
|
|
10.4
|
|
|
|
|
|
|
|
10,797
|
|
|
|
10.2
|
|
|
|
|
|
|
|
9.7
|
|
Operating revenue
|
|
$
|
114,235
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
105,458
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
112,431
|
|
|
|
98.4
|
|
|
|
98.2
|
%
|
|
|
105,416
|
|
|
|
100.0
|
|
|
|
100.0
|
%
|
|
|
6.7
|
|
Operating
income
|
|
|
1,804
|
|
|
|
1.6
|
|
|
|
1.8
|
|
|
|
42
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
4,195.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
970
|
|
|
|
0.8
|
|
|
|
|
|
|
|
913
|
|
|
|
0.9
|
|
|
|
|
|
|
|
6.2
|
|
Other, net
|
|
|
86
|
|
|
|
0.1
|
|
|
|
|
|
|
|
87
|
|
|
|
0.1
|
|
|
|
|
|
|
|
(1.1
|
)
|
Total other expenses, net
|
|
|
1,056
|
|
|
|
0.9
|
|
|
|
|
|
|
|
1,000
|
|
|
|
1.0
|
|
|
|
|
|
|
|
5.6
|
|
Income (loss)
before income taxes
|
|
|
748
|
|
|
|
0.7
|
|
|
|
|
|
|
|
(958
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
178.1
|
|
Income tax
expense (
benefit
)
|
|
|
339
|
|
|
|
0.3
|
|
|
|
|
|
|
|
(224
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
251.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net
income (
loss
)
|
|
$
|
409
|
|
|
|
0.4
|
%
|
|
|
|
|
|
$
|
(734
|
)
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
155.7
|
%
|
|
|
Nine M
onths Ended September 30,
|
|
|
|
|
|
|
|
201
7
|
|
|
201
6
|
|
|
|
|
|
|
$
|
|
|
%
Operating
Revenue
|
|
|
%
Adjusted
Operating
Ratio (1)
|
|
|
$
|
|
|
%
Operating
Revenue
|
|
|
%
Adjusted
Operating
Ratio (1)
|
|
|
% Change in Dollar Amounts
|
|
Base revenue
|
|
$
|
288,252
|
|
|
|
89.2
|
%
|
|
|
|
|
|
$
|
296,191
|
|
|
|
90.9
|
%
|
|
|
|
|
|
|
(2.7
|
)%
|
Fuel surcharge revenue
|
|
|
35,011
|
|
|
|
10.8
|
|
|
|
|
|
|
|
29,773
|
|
|
|
9.1
|
|
|
|
|
|
|
|
17.6
|
|
Operating revenue
|
|
$
|
323,263
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
325,964
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
330,824
|
|
|
|
102.3
|
|
|
|
102.3
|
%
|
|
|
328,842
|
|
|
|
100.9
|
|
|
|
99.0
|
%
|
|
|
0.6
|
|
Operating loss
|
|
|
(7,561
|
)
|
|
|
(2.3
|
)
|
|
|
(2.3
|
)
|
|
|
(2,878
|
)
|
|
|
(0.9
|
)
|
|
|
1.0
|
|
|
|
162.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,922
|
|
|
|
0.9
|
|
|
|
|
|
|
|
2,209
|
|
|
|
0.7
|
|
|
|
|
|
|
|
32.3
|
|
Other, net
|
|
|
311
|
|
|
|
0.1
|
|
|
|
|
|
|
|
423
|
|
|
|
0.1
|
|
|
|
|
|
|
|
(26.5
|
)
|
Total other expenses, net
|
|
|
3,233
|
|
|
|
1.0
|
|
|
|
|
|
|
|
2,632
|
|
|
|
0.8
|
|
|
|
|
|
|
|
22.8
|
|
Loss before income taxes
|
|
|
(10,794
|
)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
(5,510
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
95.9
|
|
Income tax benefit
|
|
|
(3,469
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(1,623
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
113.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net
loss
|
|
$
|
(7,325
|
)
|
|
|
(2.2
|
)%
|
|
|
|
|
|
$
|
(3,887
|
)
|
|
|
(1.2
|
)%
|
|
|
|
|
|
|
88.4
|
%
|
(1)
|
Adjusted
operating ratio is calculated as operating expenses, less
restructuring, impairment and other costs and severance costs included in salaries, wages and employee benefits, net of fuel surcharge revenue, as a percentage of operating revenue excluding fuel surcharge revenue.
See Note 12 of the footnotes in this Form 10-Q for additional information regarding these costs. Adjusted operating ratio is a non-GAAP financial measure. See “Use of Non-GAAP Financial Information”, “Consolidated Reconciliations” and “Segment Reconciliations” below for the uses and limitations associated with adjusted operating ratio and other non-GAAP financial measures.
|
Use of Non-GAAP Financial Information
The Company uses the terms “adjusted operating ratio” and “adjusted
earnings (loss) per diluted share” throughout this Form 10-Q. Adjusted operating ratio and adjusted earnings (loss) per diluted share, as defined here, are non-GAAP financial measures as defined by the SEC. Management uses adjusted operating ratio and adjusted earnings (loss) per diluted share as supplements to the Company’s GAAP results in evaluating certain aspects of its business, as discussed below.
Adjusted operating ratio is calculated as operating
expenses less restructuring, impairment and other costs and severance costs included in salaries, wages and employee benefits, net of fuel surcharge revenue, as a percentage of operating revenue excluding fuel surcharge revenue. Adjusted earnings (loss) per diluted share is defined as net income (loss) per share plus the per share impact of restructuring, impairment and other, and severance costs included in salaries, wages and employee benefits, less the per share tax impact of those adjustments using a statutory income tax rate. The per share impact of each item is determined by dividing it by the weighted average diluted shares outstanding.
The Company
’s chief operating decision-makers focus on adjusted operating ratio and adjusted earnings (loss) per diluted share as indicators of the Company’s performance from period to period.
Management believes removing the impact of
the above described items from the Company’s operating results affords a more consistent basis for comparing results of operations. Management believes its presentation of adjusted operating ratio and adjusted earnings (loss) per diluted share is useful to investors and other users because it provides them the same information that we use internally for purposes of assessing our core operating performance.
Adjusted operating ratio and
adjusted earnings (loss) per diluted share are not substitutes for operating margin or any other measure derived solely from GAAP measures. There are limitations to using non-GAAP measures such as adjusted operating ratio and adjusted earnings (loss) per diluted share. Although management believes that adjusted operating ratio and adjusted earnings (loss) per diluted share can make an evaluation of the Company’s operating performance more consistent because these measures remove items that, in management’s opinion, do not reflect its core operating performance, other companies in the transportation industry may define adjusted operating ratio and adjusted earnings (loss) per diluted share differently. As a result, it may be difficult to use adjusted operating ratio, adjusted earnings (loss) per diluted share or similarly named non-GAAP measures that other companies may use, to compare the performance of those companies to USA Truck’s performance.
Pursuant to the requirements of Regulation S-K, reconciliations of non-GAAP financial measures to GAAP financial measures have been provided in the tables below
(dollar amounts in thousands).
Consolidated Reconciliations
Adjusted
o
perating
r
atio:
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Operating revenue
|
|
$
|
114,235
|
|
|
$
|
105,458
|
|
|
$
|
323,263
|
|
|
$
|
325,964
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel surcharge revenue
|
|
|
11,849
|
|
|
|
10,797
|
|
|
|
35,011
|
|
|
|
29,773
|
|
Base revenue
|
|
|
102,386
|
|
|
|
94,661
|
|
|
|
288,252
|
|
|
|
296,191
|
|
Operating expense
|
|
|
112,431
|
|
|
|
105,416
|
|
|
|
330,824
|
|
|
|
328,842
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other costs
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(5,264
|
)
|
S
everance costs included in salaries, wages and employee benefits
|
|
|
(31
|
)
|
|
|
--
|
|
|
|
(930
|
)
|
|
|
(697
|
)
|
Fuel surcharge revenue
|
|
|
(11,849
|
)
|
|
|
(10,797
|
)
|
|
|
(35,011
|
)
|
|
|
(29,773
|
)
|
Adjusted operating expense
|
|
$
|
100,551
|
|
|
$
|
94,619
|
|
|
$
|
294,883
|
|
|
$
|
293,108
|
|
Operating ratio
|
|
|
98.4
|
%
|
|
|
100.0
|
%
|
|
|
102.3
|
%
|
|
|
100.9
|
%
|
Adjusted operating ratio
|
|
|
98.2
|
%
|
|
|
100.0
|
%
|
|
|
102.3
|
%
|
|
|
99.0
|
%
|
Adjusted
e
arnings
(
l
oss) per
diluted
s
hare:
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Earnings (l
oss) per diluted share
|
|
$
|
0.05
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(0.44
|
)
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S
everance costs included in salaries, wages and employee benefits
|
|
|
--
|
|
|
|
--
|
|
|
|
0.12
|
|
|
|
0.08
|
|
Restructuring, impairment and other costs
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
0.60
|
|
I
ncome tax effect of adjustments
|
|
|
--
|
|
|
|
--
|
|
|
|
(0.04
|
)
|
|
|
(0.26
|
)
|
Adjusted
earnings (loss) per diluted share
|
|
$
|
0.05
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(0.02
|
)
|
Segment
r
econciliations
Trucking
Segment
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Revenue
|
|
$
|
76,811
|
|
|
$
|
73,644
|
|
|
$
|
219,013
|
|
|
$
|
225,430
|
|
Less: intersegment eliminations
|
|
|
361
|
|
|
|
277
|
|
|
|
738
|
|
|
|
857
|
|
Operating revenue
|
|
|
76,450
|
|
|
|
73,367
|
|
|
|
218,275
|
|
|
|
224,573
|
|
Less: fuel surcharge revenue
|
|
|
9,540
|
|
|
|
8,451
|
|
|
|
27,555
|
|
|
|
23,499
|
|
Base revenue
|
|
|
66,910
|
|
|
|
64,916
|
|
|
|
190,720
|
|
|
|
201,074
|
|
Operating expense
|
|
|
77,644
|
|
|
|
74,872
|
|
|
|
231,440
|
|
|
|
233,180
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other costs
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(4,848
|
)
|
S
everance costs included in salaries, wages and employee benefits
|
|
|
(23
|
)
|
|
|
--
|
|
|
|
(665
|
)
|
|
|
(697
|
)
|
Fuel surcharge revenue
|
|
|
(9,540
|
)
|
|
|
(8,451
|
)
|
|
|
(27,555
|
)
|
|
|
(23,499
|
)
|
Adjusted operating expense
|
|
$
|
68,081
|
|
|
$
|
66,421
|
|
|
$
|
203,220
|
|
|
$
|
204,136
|
|
Operating ratio
|
|
|
101.6
|
%
|
|
|
102.1
|
%
|
|
|
106.0
|
%
|
|
|
103.8
|
%
|
Adjusted operating ratio
|
|
|
101.8
|
%
|
|
|
102.3
|
%
|
|
|
106.6
|
%
|
|
|
101.5
|
%
|
USAT Logistics Segment
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Revenue
|
|
$
|
41,907
|
|
|
$
|
33,476
|
|
|
$
|
111,435
|
|
|
$
|
106,473
|
|
Less: intersegment eliminations
|
|
|
4,122
|
|
|
|
1,385
|
|
|
|
6,447
|
|
|
|
5,082
|
|
Operating revenue
|
|
|
37,785
|
|
|
|
32,091
|
|
|
|
104,988
|
|
|
|
101,391
|
|
Less: fuel surcharge revenue
|
|
|
2,309
|
|
|
|
2,346
|
|
|
|
7,456
|
|
|
|
6,274
|
|
Base revenue
|
|
|
35,476
|
|
|
|
29,745
|
|
|
|
97,532
|
|
|
|
95,117
|
|
Operating expense
|
|
|
34,787
|
|
|
|
30,544
|
|
|
|
99,384
|
|
|
|
95,662
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other costs
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(416
|
)
|
S
everance costs included in salaries, wages and employee benefits
|
|
|
(8
|
)
|
|
|
--
|
|
|
|
(265
|
)
|
|
|
--
|
|
Fuel surcharge revenue
|
|
|
(2,309
|
)
|
|
|
(2,346
|
)
|
|
|
(7,456
|
)
|
|
|
(6,274
|
)
|
Adjusted operating expense
|
|
$
|
32,470
|
|
|
$
|
28,198
|
|
|
$
|
91,663
|
|
|
$
|
88,972
|
|
Operating ratio
|
|
|
92.1
|
%
|
|
|
95.2
|
%
|
|
|
94.7
|
%
|
|
|
94.3
|
%
|
Adjusted operating ratio
|
|
|
91.5
|
%
|
|
|
94.8
|
%
|
|
|
94.0
|
%
|
|
|
93.5
|
%
|
Key
O
perating
S
tatistics by
S
egment
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Trucking
:
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Operating revenue
(in thousands)
|
|
$
|
76,450
|
|
|
$
|
73,367
|
|
|
$
|
218,275
|
|
|
$
|
224,573
|
|
Operating loss
(in thousands)
(1)
|
|
$
|
(1,194
|
)
|
|
$
|
(1,505
|
)
|
|
$
|
(13,165
|
)
|
|
$
|
(8,607
|
)
|
O
perating ratio (2)
|
|
|
101.6
|
%
|
|
|
102.1
|
%
|
|
|
106.0
|
%
|
|
|
103.8
|
%
|
Adjusted operating ratio (3
)
|
|
|
101.8
|
%
|
|
|
102.3
|
%
|
|
|
106.6
|
%
|
|
|
101.5
|
%
|
Total miles
(in thousands)
(4)
|
|
|
41,081
|
|
|
|
43,365
|
|
|
|
122,365
|
|
|
|
132,216
|
|
Deadhead percentage (5
)
|
|
|
12.3
|
%
|
|
|
13.2
|
%
|
|
|
12.8
|
%
|
|
|
12.8
|
%
|
Base revenue per loaded mile
|
|
$
|
1.856
|
|
|
$
|
1.725
|
|
|
$
|
1.787
|
|
|
$
|
1.743
|
|
Average
number of in-service tractors (6)
|
|
|
1,742
|
|
|
|
1,742
|
|
|
|
1,722
|
|
|
|
1,797
|
|
Aver
age number of seated tractors (7)
|
|
|
1,628
|
|
|
|
1,648
|
|
|
|
1,591
|
|
|
|
1,717
|
|
Average miles per seated tractor per week
|
|
|
1,920
|
|
|
|
2,002
|
|
|
|
1,972
|
|
|
|
1,967
|
|
Base revenue per seated tractor per week
|
|
$
|
3,127
|
|
|
$
|
2,997
|
|
|
$
|
3,074
|
|
|
$
|
2,992
|
|
Average loaded miles per trip
|
|
|
546
|
|
|
|
590
|
|
|
|
561
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USAT Logistics
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
(in thousands)
|
|
$
|
37,785
|
|
|
$
|
32,091
|
|
|
$
|
104,988
|
|
|
$
|
101,391
|
|
Operating income
(in thousands)
(1)
|
|
$
|
2,998
|
|
|
$
|
1,547
|
|
|
$
|
5,604
|
|
|
$
|
5,729
|
|
Gross margin
(in thousands)
(8)
|
|
$
|
7,619
|
|
|
$
|
6,050
|
|
|
$
|
19,598
|
|
|
$
|
19,481
|
|
Gross margin percentage (9)
|
|
|
20.2
|
%
|
|
|
18.9
|
%
|
|
|
18.7
|
%
|
|
|
19.2
|
%
|
(1)
|
Operating income (loss) is calculated by deducting operating expenses from operating revenue.
|
(2)
|
Operating ratio is calculated as operating expenses as a percentage of operating revenue.
|
(3)
|
Adjusted operating ratio is calculated as operating expenses less restructuring, impairment and other costs and severance costs included in salaries, wages and employee benefits, net of fuel surcharge revenue, as a percentage of operating revenue excluding fuel surcharge revenue. See GAAP to non-GAAP reconciliations above
.
|
(4)
|
Total miles include both loaded and empty miles.
|
(5)
|
Deadhead percentage is calculated by dividing empty miles into total miles.
|
(6)
|
Tractors include Company-operated tractors in service, plus tractors operated by independent contractors.
|
(7)
|
Seated tractors are those occupied by drivers.
|
(8)
|
Gross margin is calculated by deducting purchased transportation expense from USAT Logistics operating revenue.
|
(9)
|
Gross margin percentage is calculated as gross margin divided by USAT Logistics operating revenue.
|
Results of Operations
—Segment Review
Trucking operating revenue
During
the three months ended September 30, 2017, Trucking operating revenue increased 4.2% to $76.5 million, compared to $73.4 million for the same period in 2016. Trucking base revenue increased 3.1% to $66.9 million, compared to $64.9 million for the third quarter of 2016. The increase in operating revenue was the result of a 7.6% increase in base revenue per loaded mile, partially offset by a 4.2% decrease in loaded miles.
For
the nine months ended September 30, 2017, Trucking operating revenue decreased 2.8% to $218.3 million, compared to $224.6 million for the same period of 2016. Trucking base revenue decreased 5.1% to $190.7 million, from $201.1 million for the same period in 2016. The decreases in operating revenue and base revenue were attributable to a 7.3% decrease in the average number of seated tractors, and a 4.0% decrease in the number of Trucking shipments, partially offset by a 2.5% increase in base revenue per loaded mile.
While t
he freight market was challenging throughout the first half of 2017, improvements were seen during the third quarter of 2017. Extreme weather paired with increased economic activity in the third quarter resulted in a capacity constrained market, which enabled the Company to capture a higher rate per mile in the spot market and on long-term contracts, but the weather also had unfavorable effects on asset utilization. The Company continues to believe the upcoming changes in Trucking regulations should tighten the capacity market through the remainder of 2017 and into 2018, if implemented as currently scheduled. Also during the third quarter of 2017, the Company continued its strategic review of its current customer base, lanes, pricing and network positions with the goal of further improving rate per loaded mile. Looking ahead, the Company expects year-over-year improvements in rate per mile when compared to those experienced during the fourth quarter of 2016 due to the favorable relationship between industry capacity and demand and the implementation of Company initiatives.
Trucking operating loss
For the third quarter of 2017,
Trucking produced an operating loss of $1.2 million compared to an operating loss of $1.5 million for the same period in 2016, primarily resulting from a 4.3% increase in base revenue per seated tractor per week, offset slightly by a 1.2% decrease in average seated tractor count driving 4.2% fewer loaded miles.
Trucking
operating loss increased to $13.2 million for the nine months ended September 30, 2017, compared to an operating loss of $8.6 million for the 2016 period, primarily the result of a 7.5% decrease in total revenue miles and a 4.0% decrease in number of Trucking shipments, slightly offset by a 2.5% increase in base revenue per loaded mile. Also, during the first quarter 2017, a significant increase in insurance and claims expense resulting from a $4.4 million reserve adjustment stemming from adverse development in prior year claims layers, contributed to the increased loss.
USAT Logistics operating revenue
For the three months ended September 30, 2017, USAT Logistics operating revenue increased 17.7% to $37.8
million compared to $32.1 million for the same period in 2016. For the third quarter of 2017, gross margin increased 130 basis points to 20.2% compared to 18.9% for the comparable 2016 quarter. Additionally, USAT Logistics saw higher quarterly volumes when compared to the same period last year, driven primarily by increased spot market freight due to favorable movement in industry demand relative to capacity. While this market dynamic has been a positive one for USAT Logistics, we remain committed to our plan of building strong long-term customer relationships through superior service and competitive pricing.
USAT Logistics
operating revenue for the nine months ended September 30, 2017, increased 3.5% to $105.0 million from $101.4 million, compared to the corresponding period in 2016, attributable to improved market conditions during the third quarter of 2017.
USAT Logistics operating income
USAT Logistics generated operating income of $3.0
million in the third quarter of 2017, an increase of $1.5 million, or 93.8%, compared to $1.5 million in the third quarter of 2016. Increased operating income was largely due to the 130 basis point improvement in gross margin percentage due to increased spot market freight, as discussed above.
For the
nine months ended September 30, 2017, operating income decreased 2.2% to $5.6 million from $5.7 million in the corresponding period in 2016, primarily resulting from the difficult logistics environment in the first half of 2017, resulting from tighter capacity and associated higher costs to procure capacity for contracted logistics business.
Consolidated Operating Expenses
The following table summarizes the consolidated operating expenses (dollar amounts in thousands) and percentage of consolidated operating revenue, consolidated base revenue and the percentage increase or decrease in the dollar amounts of those items compared to the prior year.
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
% Change
|
|
Operating Expenses:
|
|
$
|
|
|
%
Operating
Revenue
|
|
|
Adjusted Operating
Ratio
(1)
|
|
|
|
$
|
|
|
%
Operating
Revenue
|
|
|
Adjusted
Operating
Ratio
(1)
|
|
|
|
2017 to
2016
|
|
Salaries, wages and employee benefits
|
|
$
|
29,813
|
|
|
|
26.1
|
%
|
|
|
29.1
|
%
|
(1)
|
|
$
|
29,131
|
|
|
|
27.6
|
%
|
|
|
30.8
|
%
|
(1)
|
|
|
2.3
|
%
|
Fuel and fuel taxes
|
|
|
11,759
|
|
|
|
10.3
|
|
|
|
(0.1
|
)
|
(2)
|
|
|
10,932
|
|
|
|
10.4
|
|
|
|
0.1
|
|
(2)
|
|
|
7.6
|
|
Depreciation and amortization
|
|
|
6,790
|
|
|
|
5.9
|
|
|
|
6.6
|
|
|
|
|
7,411
|
|
|
|
7.0
|
|
|
|
7.8
|
|
|
|
|
(8.4
|
)
|
Insurance and claims
|
|
|
5,344
|
|
|
|
4.7
|
|
|
|
5.2
|
|
|
|
|
5,620
|
|
|
|
5.3
|
|
|
|
5.9
|
|
|
|
|
(4.9
|
)
|
Equipment rent
|
|
|
2,703
|
|
|
|
2.4
|
|
|
|
2.6
|
|
|
|
|
1,861
|
|
|
|
1.8
|
|
|
|
2.0
|
|
|
|
|
45.2
|
|
Operations and maintenance
|
|
|
8,259
|
|
|
|
7.2
|
|
|
|
8.1
|
|
|
|
|
8,170
|
|
|
|
7.8
|
|
|
|
8.6
|
|
|
|
|
1.1
|
|
Purchased transportation
|
|
|
42,543
|
|
|
|
37.2
|
|
|
|
41.6
|
|
|
|
|
37,218
|
|
|
|
35.3
|
|
|
|
39.3
|
|
|
|
|
14.3
|
|
Operating taxes and licenses
|
|
|
972
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
|
1,003
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
|
(3.1
|
)
|
Communications and utilities
|
|
|
679
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
|
673
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
|
0.9
|
|
Gain on disposal of assets, net
|
|
|
(215
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
(181
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
|
18.8
|
|
Other
|
|
|
3,784
|
|
|
|
3.3
|
|
|
|
3.7
|
|
|
|
|
3,578
|
|
|
|
3.4
|
|
|
|
3.8
|
|
|
|
|
5.8
|
|
Total operating expenses
|
|
$
|
112,431
|
|
|
|
98.4
|
%
|
|
|
98.2
|
%
|
|
|
$
|
105,416
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
6.7
|
%
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
% Change
|
|
Operating Expenses:
|
|
$
|
|
|
% Operating Revenue
|
|
|
Adjusted Operating Ratio
(1)
|
|
|
|
$
|
|
|
% Operating Revenue
|
|
|
Adjusted Operating Ratio
(1)
|
|
|
|
2017 to
2016
|
|
Salaries, wages and employee benefits
|
|
$
|
89,674
|
|
|
|
27.7
|
%
|
|
|
30.8
|
%
|
(1)
|
|
$
|
92,332
|
|
|
|
28.3
|
%
|
|
|
31.0
|
%
|
(1)
|
|
|
(2.9
|
)%
|
Fuel and fuel taxes
|
|
|
33,012
|
|
|
|
10.2
|
|
|
|
(0.7
|
)
|
(2)
|
|
|
32,512
|
|
|
|
10.0
|
|
|
|
1.0
|
|
(2)
|
|
|
1.5
|
|
Depreciation and amortization
|
|
|
21,313
|
|
|
|
6.6
|
|
|
|
7.4
|
|
|
|
|
22,282
|
|
|
|
6.8
|
|
|
|
7.5
|
|
|
|
|
(4.3
|
)
|
Insurance and claims
|
|
|
19,236
|
|
|
|
6.0
|
|
|
|
6.7
|
|
|
|
|
15,826
|
|
|
|
4.9
|
|
|
|
5.3
|
|
|
|
|
21.5
|
|
Equipment rent
|
|
|
7,449
|
|
|
|
2.3
|
|
|
|
2.6
|
|
|
|
|
5,582
|
|
|
|
1.7
|
|
|
|
1.9
|
|
|
|
|
33.4
|
|
Operations and maintenance
|
|
|
22,780
|
|
|
|
7.1
|
|
|
|
7.9
|
|
|
|
|
27,682
|
|
|
|
8.5
|
|
|
|
9.3
|
|
|
|
|
(17.7
|
)
|
Purchased transportation
|
|
|
120,951
|
|
|
|
37.4
|
|
|
|
41.9
|
|
|
|
|
111,650
|
|
|
|
34.3
|
|
|
|
37.7
|
|
|
|
|
8.3
|
|
Operating taxes and licenses
|
|
|
2,946
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
|
3,384
|
|
|
|
1.0
|
|
|
|
1.2
|
|
|
|
|
(12.9
|
)
|
Communications and utilities
|
|
|
1,943
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
|
2,404
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
|
(19.2
|
)
|
Gain on disposal of assets, net
|
|
|
(551
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
(759
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
|
(27.4
|
)
|
Restructuring, impairment and other costs
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
5,264
|
|
|
|
1.6
|
|
|
|
N/A
|
|
|
|
|
N/A
|
|
Other
|
|
|
12,071
|
|
|
|
3.7
|
|
|
|
4.2
|
|
|
|
|
10,683
|
|
|
|
3.3
|
|
|
|
3.6
|
|
|
|
|
13.0
|
|
Total operating expenses
|
|
$
|
330,824
|
|
|
|
102.3
|
%
|
|
|
102.3
|
%
|
|
|
$
|
328,842
|
|
|
|
100.9
|
%
|
|
|
99.0
|
%
|
|
|
|
0.6
|
%
|
(1)
|
Adjusted operating ratio
is calculated as the applicable
operating expense less
restructuring, impairment and other costs and severance costs included in salaries, wages and employee benefits, net of fuel surcharge revenue, as a percentage of operating revenue excluding fuel surcharge revenue.
See Note 12 of the footnotes in this Form 10-Q for additional information regarding these costs and GAAP and non-GAAP reconciliations above
.
|
(2)
|
Calculated as fuel and fuel taxes, net of fuel surcharge revenue.
|
Salaries, wages and employee benefits
S
alaries, wages and employee benefits expense increased during the third quarter of 2017 by 2.3% to $29.8 million from $29.1 million, when compared to the same quarter in 2016, primarily due to
the driver wage increase instituted during the second quarter 2017.
For the
nine months ended September 30, 2017, the decrease in salaries, wages and employee benefits expense was primarily due to a 4.2% reduction in the Company’s tractor fleet and an increase of approximately 6.0% in the independent contractor fleet, partially offset by a $1.5 million cost recorded by the Company in the first quarter of 2017 associated with an adverse development in prior year layers of workers’ compensation claims. As part of a reduction in force, headcount in both Trucking and USAT Logistics were reduced during the second quarter of 2017 as the Company continued to align the non-driving support staff with the number of seated tractors, which also contributed to the decrease in salaries, wages and employee benefits expense, and is expected to reduce annualized staff wages and employee benefits by approximately $1.6 million. The Company incurred $0.1 million, net-of-tax, in implementing the reduction in force during the second quarter of 2017.
The rate of compensation paid to Company drivers per mile has increased in recent periods and we expect this cost will increase in future periods due to driver pay increases, the most r
ecent of which became effective, during the second quarter of 2017. Management believes that the market for drivers will remain tight, and as such, expects driver wages and hiring expenses, which include recruiting and advertising costs, to continue to increase in order to attract and retain sufficient numbers of qualified drivers to operate the Company’s fleet. This expense item will also be affected by the percentage of Trucking miles operated by independent contractors instead of Company employed drivers and the percentage of revenue generated by USAT Logistics, for which payments are reflected in purchased transportation.
Fuel and fuel taxes
Fuel and fuel taxes consist primarily of diesel fuel expense for Company-owned tractors and fuel taxes. The primary factors affecting the Company
’s fuel expense are the cost of diesel fuel, the fuel economy of Company equipment and the number of miles driven by Company drivers. The increases in fuel and fuel taxes for the three and nine month periods ended September 30, 2017 resulted from a 10.2% and a 14.6% increase in average diesel fuel prices per gallon, as reported by the DOE, offset by a 5.3% and an 7.5% decrease in total revenue miles, compared to the three and nine month periods in 2016, respectively. Fuel efficiency initiatives undertaken, such as installing trailer skirts, idle-control, more fuel-efficient engines and implementing driver training programs, have contributed to improvements in our fuel expense on a cost per Company tractor mile basis.
The Company expects to continue managing its idle time and truck speeds and partnering with customers to adjust fuel surcharge programs to recover a fair portion of rising fuel costs. Going forward, the Company
’s net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, deadhead percentage, the percentage of revenue generated from independent contractors and the success of fuel efficiency initiatives.
D
epreciation and amortization
and
equipment
rent
Depreciation and amortization of property and equipment consists primarily of depreciation for Company-owned tractors and trailers and amortization of those financed with capital leases. The primary factors affecting this expense include the number and age of Company tractors and trailers, the acquisition cost of new equipment and the salvage values and useful lives assigned to the equipment. Equipment rent expenses are those related to revenue equipment under operating leases. These largely fixed costs fluctuate as a percentage of base revenue primarily with increases and decreases in average base revenue per tractor and the percentage of base revenue contributed by Trucking versus USAT Logistics. The
increase in equipment rent expense during both the nine month period ended September 30, 2017, was the result of the Company entering into an operating sale leaseback transaction in March 2017 for 90 tractors and the increased use of operating leases for the acquisition of trailers. The decrease in depreciation and amortization expense in the three and nine month periods ended September 30, 2017, as compared to the same periods in 2016, is primarily attributable to a smaller Company fleet and more equipment being acquired through lease arrangements instead of purchases.
The Company reviews the estimated useful lives
and salvage values of its fixed assets on an ongoing basis, based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. During the third quarter of 2017, the Company reevaluated the estimated useful lives of its trailers, increasing such lives from 10 to 14 years. Additionally, given the soft used equipment market, the Company lowered the salvage values of its tractor fleet to reflect current estimates of the value of such equipment upon its retirement. The Company believes that these changes more accurately reflect the value of the revenue equipment on the accompanying condensed consolidated unaudited balance sheets. These changes are being accounted for as a change in estimate. During the quarter ended September 30, 2017, these changes in estimates resulted in a reduction of depreciation expense on a pre-tax basis of approximately $0.2 million and on a net-of-tax basis of approximately $0.1 million, or $0.01 per diluted share. On an annualized basis, based on the number of used trailers and tractors owned at September 30, 2017, the Company anticipates these changes in estimates will result in approximately $1.0 million lower depreciation each year, or approximately $0.08 per diluted share, net-of-tax, using share count at September 30, 2017.
The Company
intends to continue to focus on improving asset utilization, matching customer demand and strengthening load profitability initiatives. Further, the acquisition costs of new revenue equipment could increase due to the continued implementation of emissions requirements and the inclusion of improved safety and fuel efficiency features. As a result, management expects to see an increase in depreciation and amortization expense from new tractors. The Company expects equipment rent to increase as we anticipate utilizing operating leases for the financing of trailers throughout the remainder of the year.
Insurance and claims
Insurance and claims expense consists of insurance premiums and the accruals the Company makes for estimated payments and expenses for claims for
third party bodily injury, property damage, cargo damage and other casualty events. The primary factors affecting the Company’s insurance and claims expense are the number of miles driven by its Company drivers and independent contractors, the frequency and severity of accidents, trends in the development factors used in the Company’s actuarial accruals, developments in prior-year claims and insurance premiums and self-insured amounts. For the three months ended September 30, 2017, insurance and claims decreased due to fewer accidents during the third quarter of 2017.
Insurance and claims expense increased significantly during the
nine months ended September 30, 2017 due to a $3.0 million actuarial analysis adjustment stemming from an adverse development in our prior year claim layers. The Company expects insurance and claims expense to continue to be volatile over the long-term. In addition, insurance carriers have generally raised premiums for many businesses, including those in the trucking industry, and the Company’s insurance and claims expense could increase if it has a similar experience at renewal or replacement, or the Company could find it necessary to raise its self-insured retention levels or decrease its aggregate coverage limits.
Operations and maintenance
Operations and maintenance expense consists primarily of vehicle repairs and maintenance, general and administrative expenses and other costs. Operating and maintenance expenses are primarily affected by the age of the Company-owned fleet of tractors and trailers, the number of miles driven in a period and, to a lesser extent, by efficiency measures in the Com
pany’s maintenance facilities. Operations and maintenance expense increased slightly for the three month period ended September 30, 2017, primarily due to implementation of additional preventive maintenance initiatives for both tractors and trailers during the third quarter 2017.
For the nine month period ended
September 30, 2017, operations and maintenance expense decreased $4.9 million, primarily as a result of the smaller size of the revenue generating Company tractor fleet, which decreased approximately 7% when compared to the same nine month period in 2016. Additionally, fewer outside repairs contributed to the year-over-year reduction on a cost per mile basis in operations and maintenance spend.
Purchased transportation
Purchased transportation consists of the payments the Company makes to independent contractors, railroads and third
-party carriers that haul loads brokered to them, including fuel surcharge reimbursement paid to such parties. For the third quarter of 2017, purchased transportation expense increased primarily due to a 4.2% increase in the size of the Company’s independent contractor fleet and an increase in USAT Logistics freight volumes compared to the 2016 period.
For the
nine months ended September 30, 2017, the increase in purchased transportation expense was primarily due to the 6.2% growth in the size of the independent contractor fleet compared to the 2016 period and increased freight volumes in USAT Logistics. Moving forward, the Company is continuing to pursue its objective of growing its independent contractor fleet as a percentage of its total fleet and growing USAT Logistics, which, if successful, could further increase purchased transportation expense, particularly if the Company needs to pay independent contractors more to stay with the Company in light of expected regulatory changes. Increasing independent contractor capacity has shifted (and assuming all other factors remain equal, is expected to continue to shift), and growth of USAT Logistics will shift, expenses to the “Purchased transportation” line item with offsetting reductions in employee driver wages and related expenses, net fuel expense (as independent contractors generate fuel surcharge revenue, while the related cost of their fuel is included with their compensation in purchased transportation), maintenance and capital expenditures.
Gain on disposal of assets, net
During the three months ended September 30, 2017, gain on disposal of assets, net, increased slightly
when compared to the same period in 2016. The main reason for the increase was a higher volume of trailers that were sold in higher value markets, offset by lower values on tractors sold.
The decrease in gain on disposal of assets, net, during
the nine months ended September 30, 2017, reflects fewer asset disposals in the 2017 period compared to the 2016 period, when the Company reduced its fleet through the accelerated disposal of older, less efficient tractors and trailers.
Other expenses
During the three months ended September 30, 2017, t
he increase in other expenses was primarily due to increased recruiting and training expenses.
The increase in other expenses for the nine months ended September 30, 2017, was primarily due to a
$1.3 million expense relating to new management hires during the second quarter of 2017 and a change in compensation structure for the board of directors resulting in a $0.3 million increase in expense during the second quarter.
To preserve shares under the Incentive Plan for incentive compensation to key employees, especially in light of the Company’s stock price at the time that required the issuance of more shares when granting equity awards, the board of directors elected to receive their customary annual equity award in cash and each director then used the net-of-tax proceeds to purchase shares in the open market.
Restructuring, impairment and other costs
See
Note 12 to the condensed consolidated financial statements for discussion of restructuring, impairment and other costs, which discussion is incorporated herein by reference.
Interest expense
For both the three and
nine months ended September 30, 2017, interest expense increased primarily due to increased interest rates on outstanding borrowings
.
See Note 7 to the condensed consolidated financial statements for further discussion of the Company’s Credit Facility.
Income tax expense
The Company
’s effective tax rate was 45.3% and 32.1% for the three and nine months ended September 30, 2017, respectively. The effective tax rate for the three and nine months ended September 30, 2016, was 23.4% and 29.5%, respectively. The Company’s effective tax rate, when compared to the federal statutory rate of 35%, is
primarily due to state income taxes and certain expenses that are non-deductible to the Company including a per diem pay structure for drivers. Drivers may elect to receive non-taxable per diem pay in lieu of a portion of their taxable wages. This per diem program increases the Company’s drivers’ net pay per mile, after taxes, while decreasing gross pay, before taxes. Per diem pay is partially non-deductible by the Company under current IRS regulations. As a result, salaries, wages and employee benefits costs are slightly lower and effective income tax rates are higher than the statutory rate. Due to the partially non-deductible effect of per diem pay, the Company’s tax rate will change based on fluctuations in earnings (losses) and in the number of drivers who elect to receive this pay structure. Generally, as pretax income or loss increases, the impact of the driver per diem program on the Company's effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pretax income or loss, while in periods where earnings are at or near breakeven the impact of the per diem program on the Company's effective tax rate is significant. Because the Company was near breakeven during the three month period ended September 30, 2017, the estimated provision calculation was updated to reflect the impact of the non-deductible expenses on the effective tax rate. This resulted in an increase to the effective tax rate during the three months ended September 30, 2017.
Due to the effect of the non-deductible per diem payments, the Company’s tax rate will fluctuate in future periods based on fluctuations in earnings (losses) and in the number of drivers who elect to participate in the per diem program.
When the result of the expected annual effective tax rate is not deemed reliable and distorts the income tax provision for an interim period, the Company calculates the income tax provision or benefit using the cut-off method, which results in an income tax provision or benefit based solely on the year-to-date pretax income or loss as adjusted for permanent differences on a pro rata basis.
Liquidity and Capital Resources
USA Truck
’s business has required, and will continue to require, significant capital investments. In the Company’s Trucking segment, where capital investments are the most substantial, the primary investments are in new revenue equipment and to a lesser extent, in technology and working capital. In the Company’s USAT Logistics segment, where capital investments are generally more modest, the primary investments are in technology and working capital. USA Truck’s primary sources of liquidity have been funds provided by operations, borrowings under the Company’s Credit Facility, sales of used revenue equipment, and capital and operating leases. Based on expected financial conditions, net capital expenditures, results of operations and related net cash flows and other sources of financing, management believes the Company’s sources of liquidity to be adequate to meet current and projected needs.
The Credit Facility contains a single financial covenant, which requires a consolidated fixed charge coverage ratio of at least 1.0 to 1.0, that springs in the event excess availability under the Credit Facility falls below 10% of the lenders
’ total commitments. Management believes the Company’s excess availability will not fall below 10%, or $17.0 million, and expects the Company to remain in compliance with all debt covenants during the next twelve months. The
Company no longer anticipates falling
below $34.0 million in availability, or 20% of the lenders’ commitments under the Credit Facility, during 2017.
Long-term debt, financing notes and capital leases decrea
sed during the third quarter of 2017 by $6.9 million from the second quarter of 2017 to $120.9 million. As of September 30, 2017, the Company had outstanding $5.4 million in letters of credit and had approximately $45.4 million available to borrow under the Credit Facility. Net of cash, debt represented 70.1% of total capitalization. Fluctuations in the outstanding balance and related availability under the Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through other sources of financing, as well as the nature and timing of receipt of proceeds from disposals of property and equipment.
Cash Flows
|
|
Nine
Months Ended
September 30,
|
|
(in thousands)
|
|
201
7
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
20,248
|
|
|
$
|
25,162
|
|
Net cash provided by
(used in) investing activities
|
|
|
12,641
|
|
|
|
(39,871
|
)
|
Net cash
(used in) provided by financing activities
|
|
|
(32,818
|
)
|
|
|
14,764
|
|
Operating Activities
– Net cash provided by operating activities decreased by approximately $4.9 million in the first nine months of 2017, compared to the same period in 2016. This decrease was primarily the result of an approximate $3.4 million increase in net loss and an approximate $8.0 million increase in deferred income tax liability, offset by an approximately $6.1 million increase in accounts payable and other liabilities and a $0.4 million decrease in share-based compensation.
Investing Activities
– For the nine months ended September 30, 2017, net cash provided by investing activities was $12.6 million, compared to $39.9 million used by investing activities during the same period in 2016. The $52.5 million increase in cash provided by investing activities primarily reflects an approximately $54.8 million decrease in capital expenditures, and approximately $11.0 million in proceeds from a sale leaseback transaction that was completed in March 2017 for 90 tractors which the Company owned, offset by an approximately $13.3 million decrease in proceeds from the sale of property and equipment.
Financing Activities
– Cash used in financing activities was $32.8 million for the nine months ended September 30, 2017, compared to $14.8 million provided by financing activities during the same period in 2016. The $47.6 million increase in cash used in financing activities was primarily attributable to an approximately $41.6 million reduced borrowing under the Company’s Credit Facility, an approximately $11.7 million increase in payments on long-term debt and capital lease obligations, and an approximately $2.8 million increase in bank drafts payable, offset by approximately $8.5 million less cash used for the purchase of common stock and less cash proceeds from a sale leaseback. At September 30, 2017, the Company had borrowings of long-term debt, financing notes and capital leases of $120.9 million, down from $127.8 million at June 30, 2017.
Debt and Capitalized Lease Obligations
See
Notes 7 and 8 to the condensed consolidated financial statements for further discussion of the Company’s Credit Facility and capital lease obligations.
Off-Balance Sheet Arrangements
Operating leases have been an important source of financing for equipment used
in operations, office equipment and certain facilities. As of September 30, 2017, the Company leased certain revenue equipment, facilities and information technology software under operating leases. Assets held under operating leases are not carried on the condensed consolidated balance sheets, and lease payments with regard to such assets are reflected in the condensed consolidated statements of operations and comprehensive income (loss) in the “Equipment rent” and, for office equipment, in the “Operations and maintenance” line items. Equipment rent expense related to the Company’s revenue equipment operating leases was $2.7 million and $1.9 million for the three months ended September 30, 2017, and 2016, respectively, and was $7.5 million and $5.6 million for the nine months ended September 30, 2017, and 2016, respectively.
Rent expense related to the other equipment and facilities leases was $
0.5 million and $0.4 million for the three months ended September 30, 2017, and 2016, respectively. Rent expense related to the other equipment and facilities leases was $1.2 million and $1.6 million for the nine months ended September 30, 2017, and 2016, respectively. Other than such operating leases, the Company has no other off-balance sheet arrangements that have or are reasonably likely to have a material effect on the condensed consolidated financial statements.
The following table represents outstanding contractual obligations for rent expense under operating leases as of
September 30, 2017 (in thousands):
|
|
Payments Due By Period
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
Facilities
|
|
$
|
1,604
|
|
|
$
|
410
|
|
|
$
|
648
|
|
|
$
|
328
|
|
|
$
|
218
|
|
Computer hardware rented
|
|
|
156
|
|
|
|
156
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Revenue equipment
|
|
|
26,169
|
|
|
|
10,612
|
|
|
|
14,496
|
|
|
|
780
|
|
|
|
281
|
|
Total rental obligations
|
|
$
|
27,929
|
|
|
$
|
11,178
|
|
|
$
|
15,144
|
|
|
$
|
1,108
|
|
|
$
|
499
|
|
Seasonality
In the trucking industry, revenue typically follows a seasonal pattern for various commodities and customer businesses. Peak freight demand has historically occurred in the months of September, October and November. After the December holiday season and during the remaining winter months, freight volumes are typically lower as many customers reduce shipment levels. Operating expenses have historically been higher in the winter months due primarily to decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs attributed to adverse winter
driving conditions. Revenue can also be impacted by weather, holidays and the number of business days that occur during a given period, as revenue is directly related to the available working days of shippers.
Inflation
Most of the Company
’s operating expenses are inflation sensitive, and as such, are not always able to be offset through increases in revenue per mile and cost control efforts. The effect of inflation-driven cost increases on overall operating costs is not expected to be greater for the Company than for its competitors.
Fuel Availability and Cost
The trucking industry is dependent upon the availability of fuel. In the past, fuel shortages or increases in fuel taxes or fuel costs have adversely affected profitability and may continue to do so. The Company has not experienced difficulty in maintaining necessary fuel supplies, and in the past has generally been able to partially offset increases in fuel costs and fuel taxes through increased freight rates and through a fuel surcharge that increases incrementally as the average price of fuel increases above an agreed upon baseline price per gallon. Typically, the Company is not able to fully recover increases in fuel prices through
freight rate increases and fuel surcharges, primarily because those items are not available with respect to empty and out-of-route miles and idling time, for which the Company generally does not receive compensation from customers. Additionally, most fuel surcharges are based on the average fuel price as published by the DOE for the week prior to the shipment, meaning the Company typically bills customers in the current week based on the previous week’s applicable index. Accordingly, in times of increasing fuel prices, the Company does not recover as much as it is currently paying for fuel. In periods of declining prices, for a short period of time the inverse is true. Overall, average diesel fuel prices per gallon, as reported by the DOE, increased 10.2% and 14.6% for the three and nine months ended September 30, 2017, compared to the prior year periods.
As of
September 30, 2017, the Company did not have any long-term fuel purchase contracts, and has not entered into any fuel hedging arrangements.
Equity
As of
September 30, 2017, the Company had stockholders’ equity of $51.5
million and total debt and capital leases including current maturities, of $120.9
million, resulting in a total debt, less cash, to total capitalization ratio of 70.1% compared to 72.2% as of December 31, 2016
.
Purchases and Commitments
The Company routinely monitors equipment acquisition needs and
adjusts purchase schedules from time to time based on analysis of factors such as new equipment prices, the condition of the used equipment market, demand for freight services, prevailing interest rates, technological improvements, fuel efficiency, equipment durability, equipment specifications, operating performance and the availability of qualified drivers.
As of
September 30, 2017, the Company had $3.3 million in commitments for the acquisition of revenue and non
-
revenue equipment, none of which are cancellable
.
Critical Accounting Policies and 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 amounts reported in the financial statements and accompanying notes.
The Company bases its assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time its condensed consolidated financial statements are prepared. Actual results could differ from those estimates, and such differences could be material. During the nine months ended September 30, 2017, there were no material changes to the Company’s critical accounting policies and estimates, compared to those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.