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USA TRUCK INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. In this Item 2, statements relating to future insurance and claims experience, future driver market, future ability to recruit and retain drivers, future acquisitions and dispositions of revenue equipment, future profitability, future ability to execute our turnaround strategy, future fuel prices, our ability to recover costs through our fuel surcharge program, future purchased transportation expense, future operations and maintenance costs, future legal and defense related costs, future depreciation and amortization, future effects of inflation, expected capital resources and sources of liquidity, future indebtedness, expected capital expenditures, 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," "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 our Annual Report on Form 10-K for the year ended December 31, 2013. Readers should review and consider the factors that may affect future results and other disclosures by the Company in its press releases, Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. 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. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such information is based. 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" and words of similar import refer to USA Truck, Inc. and its subsidiary. The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto and other financial information that appears elsewhere in this report. Overview The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand USA Truck, Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our 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: 17 -------------------------------------------------------------------------------- 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 our consolidated results of operations for the periods presented in our condensed consolidated financial statements and a discussion of seasonality, the potential impact of inflation and fuel availability and cost. Off-Balance Sheet Arrangements - a discussion of significant financial arrangements, if any, that are not reflected on our balance sheet. Liquidity and Capital Resources - an analysis of cash flows, sources and uses of cash, debt, equity and contractual obligations. Critical Accounting Policies - a discussion of accounting policies that require critical judgment and estimates. Our Business We operate primarily in the for-hire truckload segment of the trucking industry. Customers in a variety of industries engage us to haul truckload quantities of freight, with the trailer we use to haul that freight being assigned exclusively to that customer's freight until delivery. Our three operating segments are classified into two reportable segments: (i) Trucking, consisting of our Truckload and Dedicated Freight and (ii) Strategic Capacity Solutions ("SCS"), consisting of our freight brokerage service offering and our rail intermodal service offering. We previously reported each operating segment separately; however, during the second quarter of 2013, based on several factors including the relatively small size of Intermodal and the interrelationship of SCS and Intermodal operations, we aggregated Intermodal with the SCS operating segment. Substantially all of our base revenue is generated by transporting, or arranging for the transportation of, freight for customers and is predominantly affected by the rates per mile received from our customers and similar operating costs. Our SCS and Intermodal operating segments are intended to provide services which complement our Trucking services, primarily to existing customers of our Trucking operating segment. A majority of the customers using our SCS and Intermodal services are also customers of our Trucking operating segment. The following tables describe the base revenue of our two reportable segments. Trucking: Three Months Ended Six Months Ended, June 30, June 30, 2014 2013 2014 2013 Base revenue (in thousands) 83,208 81,434 163,414 161,227 Percent of revenue 66.6 % 73.1 % 67.4 % 74.5 % SCS: Three Months Ended Six Months Ended, June 30, June 30, 2014 2013 2014 2013 Base revenue (in thousands) 41,761 30,028 79,166 55,123 Percent of revenue 33.4 % 26.9 % 32.6 % 25.5 % 18-------------------------------------------------------------------------------- We generally charge customers for our services on a per-mile basis. The expenses which have a major impact on our profitability are the variable costs of transporting freight for our customers. The variable costs include fuel expense, insurance and claims and driver-related expenses, such as wages and benefits. Trucking. Trucking includes the following primary service offerings provided to our customers: · Truckload. Our Truckload service offering provides truckload freight services as a medium- to long-haul common carrier. We have provided Truckload services since our inception, and we derive the largest portion of our revenues from these services. · Dedicated Freight. Our Dedicated Freight service offering is a variation of our Truckload service, whereby we agree to make our equipment and drivers available to a specific customer for shipments over particular routes at specified times. In addition to serving specific customer needs, our Dedicated Freight service offering also aids in driver recruitment and retention. Strategic Capacity Solutions. Our SCS reportable segment consists of our freight brokerage service offering and our rail intermodal service offering, both of which match customer shipments with available equipment of authorized carriers and provide services that complement our Trucking operations. Additionally, our rail intermodal service offering provides our customers cost savings over Truckload with a slightly slower transit speed. We provide these services primarily to our existing Trucking customers, many of whom prefer to rely on a single carrier, or a small group of carriers, to provide all their transportation needs. Results of Operations Executive Overview We posted our first quarter of positive net income in three years. While continuing the work of implementing our turnaround plan, the progress we are making is evident in many areas of our business. Despite the harsh winter that impacted the trucking industry as the year began, our results, on an adjusted basis, for the first six months of 2014 are also positive, with adjusted earnings per share of $0.07 compared to a loss of ($0.38) in last year's period. Our improved second-quarter performance was driven by a 12.1% increase in base revenue, while operating expenses net of fuel surcharge collections increased only 7.4%, yielding a 410-basis point improvement in operating margin - a testament to the multiple revenue growth, operational and cost-efficiency initiatives we have implemented. Our asset-light Strategic Capacity Solutions (SCS) business was an especially important contributor, turning in a second consecutive record quarter. Base revenue increased 39.1% to $41.8 million and operating margin expanded by 700 basis points. This performance was made possible by strong execution within this highly efficient service against the backdrop of a market characterized by strengthening demand and tight capacity. Our SCS segment accounted for over one-third of our consolidated base revenue during the quarter, substantially strengthening and diversifying our integrated business model. Trucking continued to improve its performance, with base revenue growth of 2.2% and a 170-basis-point improvement in operating ratio. In the quarter, we increased revenue per total mile by 5.7% and grew miles per seated tractor per week by 1.3% to their highest level in more than three years. Although fixed costs were pressured during the quarter by elevated employee medical benefit plan costs, we achieved improvements in critical areas such as insurance and claims, fuel and maintenance costs. We also took steps we believe will increase our seated truck count, which remains one of management's top priorities as the availability of qualified drivers continues to be problematic across the truckload industry. We are encouraged by the accomplishments made possible by the disciplined execution of our strategic plan. Although the shortage of drivers and more restrictive hours-of-service rules continue to present challenges for our industry, the demand and pricing environment in the truckload marketplace is healthy and we believe our 2014 goals of positive consolidated operating income and adjusted EPS are achievable. 19 -------------------------------------------------------------------------------- Financial Results Total base revenue increased 12.1% to $125.0 million for the quarter ended June 30, 2014, from $111.5 million for the same quarter of 2013. Trucking revenue, excluding fuel surcharge, increased 2.2% to $83.2 million, while SCS revenue rose 39.1% to $41.8 million. Net income was $0.7 million, or $0.07 per diluted share, for the second quarter of 2014 compared to a net loss of ($1.4) million, or ($0.14) per share, for the same quarter of 2013. Adjusted net income, excluding defense costs, was $2.1 million, or $0.20 per diluted share, for the second quarter of 2014. Total base revenue increased 12.1% to $242.6 million for the six months ended June 30, 2014, from $216.3 million for the same period of 2013. Net loss was ($0.9) million, or ($0.08) per diluted share, for the six months ended June 30, 2014, compared to a net loss of ($3.9) million, or ($0.38) per share, for the same period of 2013. Adjusted net income, excluding defense costs, was $0.7 million, or $0.07 per diluted share, for the six months ended June 30, 2014. A reconciliation of net income (loss) to adjusted net income (loss) is provided in the Use of Non-GAAP Financial Information below. Defense Costs In the second quarter of 2014, we recorded approximately $2.2 million, or $0.13 per diluted share, in defense costs. For the six month period ended June 30, 2014, we recorded approximately $2.5 million, or $0.15 per diluted share, in defense costs. These costs were incurred primarily in connection with Knight Transportation's unsolicited proposal to acquire USA Truck, the related litigation and the February 2014 Settlement Agreement. These unusual non-operating costs have been recorded in "Other expenses (income)" in the accompanying condensed consolidated statement of operations and comprehensive income (loss). We do not expect significant additional costs related to the above matters in the second half of 2014. Balance Sheet and Liquidity Our debt increased modestly during the second quarter, rising by $0.6 million sequentially to $125.1 million as we continued to refresh our tractor and trailer fleet. Net of cash, this represented 56.0% of our total capitalization. Year to date, however, our debt is down $3.8 million. At quarter end, we had $31.7 million of net borrowing availability on our revolving credit facility (net of the minimum availability we are required to maintain of approximately $18.8 million). Use of Non-GAAP Financial Information In addition to our GAAP results, this quarterly report on Form 10-Q also includes certain non-GAAP financial measures as defined by the Securities and Exchange Commission. We define adjusted net income (loss) as net income (loss), excluding certain adjustments more specifically outlined in the table below. Management believes this measurement is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the comparative evaluation of companies. Because not all companies use identical calculations, our presentation of adjusted net income (loss) may not be comparable to similarly titled measures of other companies. Adjusted net income (loss) is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. 20 -------------------------------------------------------------------------------- Pursuant to the requirements of Regulation G, we have provided a reconciliation of adjusted net income (loss) to GAAP net income (loss) in the table below. (in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2013 Other expenses, net $ (2,891) $ (901) $ (4,031) $ (1,685) Defense costs 2,163 -- 2,528 -- Adjusted other expenses, net (728) (901) (1,503) (1,685) Pretax income (loss) 1,366 (1,846) (817) (5,456) Defense costs adjustment 2,163 -- 2,528 -- Adjusted pretax income (loss) 3,529 (1,846) 1,711 (5,456) Income tax expense (benefit) 644 (448) 50 (1,584) Tax effect adjustment 831 -- 971 -- Adjusted income tax expense (benefit) 1,475 (448) 1,021 (1,584) Net income (loss) 722 (1,398) (867) (3,872) Defense costs adjustment, net of tax 1,332 -- 1,557 -- Adjusted net income (loss) $ 2,054 $ (1,398) $ 690 $ (3,872) Income (loss) per share $ 0.07 $ (0.14) $ (0.08) $ (0.38) Per share effect of adjustment 0.13 -- 0.15 -- Adjusted income (loss) per share $ 0.20 $ (0.14) $ 0.07 $ (0.38) 21-------------------------------------------------------------------------------- Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Results of Operations - Combined Services Total revenue increased 9.7% from $139.7 million to $153.3 million. Total base revenue increased 12.1% from $111.5 million to $125.0 million. We reported net income for all service offerings of $0.7 million or $0.07 earnings per share, for the quarter ended June 30, 2014 as compared to a net loss of ($1.4) million, or ($0.14) per share, for the comparable prior year period. Our effective tax rate was 47.1% for the quarter ended June 30, 2014, compared to 24.3% for the same quarter of 2013. Income tax expense varies from the amount computed by applying the federal tax rate to income before income taxes primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Due to the partially nondeductible effect of per diem payments, our tax rate will vary in future periods based on fluctuations in earnings and in the number of drivers who elect to receive this pay structure. Results of Operations - Trucking Relationship of Certain Items to Total Trucking Revenue The following table sets forth the percentage relationship of certain items to total revenue of our Trucking operating segment for the periods indicated. Three Months Ended June 30, 2014 2013 Total revenue 100.0 % 100.0 % Operating expenses and costs: Salaries, wages and employee benefits 33.8 30.9 Fuel and fuel taxes 28.9 31.5 Operations and maintenance 10.8 12.7 Depreciation and amortization 10.5 10.3 Purchased transportation 6.2 5.7 Insurance and claims 5.5 6.7 Operating taxes and licenses 1.3 1.6 Communications and utilities 1.0 0.8 Gain on disposal of revenue equipment, net (0.2) (0.4) Other 3.8 3.3 Total operating expenses and costs 101.6 103.1 Operating loss (1.6) % (3.1) % 22-------------------------------------------------------------------------------- Relationship of Certain Items to Base Trucking Revenue The following table sets forth the percentage relationship of certain items to base revenue of our Trucking operating segment for the periods indicated. Fuel and fuel taxes are shown net of fuel surcharges. Three Months Ended June 30, 2014 2013 Base revenue 100.0 % 100.0 % Operating expenses and costs: Salaries, wages and employee benefits 43.1 39.7 Operations and maintenance 13.8 16.3 Depreciation and amortization 13.3 13.2 Fuel and fuel taxes 9.3 11.8 Purchased transportation 7.9 7.3 Insurance and claims 7.0 8.6 Operating taxes and licenses 1.6 2.1 Communications and utilities 1.2 1.1 Gain on disposal of revenue equipment, net (0.2) (0.5) Other 5.1 4.2 Total operating expenses and costs 102.1 103.8 Operating loss (2.1) % (3.8) % Key Operating Statistics: Three Months Ended June 30, 2014 2013 (unaudited) Trucking: Operating loss (in thousands) (1) $ (1,734) $ (3,108) Operating ratio (2) 102.1 % 103.8 % Total miles (in thousands) (3) 54,796 56,715 Empty mile factor 13.0 % 11.8 % Base Trucking revenue per loaded mile $ 1.745 $ 1.629 Average number of in-service tractors (4) 2,196 2,241 Unseated tractor percentage 8.1 % 5.6 % Average number of seated tractors (5) 2,019 2,116 Average miles per seated tractor per week 2,088 2,062 Base Trucking revenue per seated tractor per week $ 3,170 $ 2,961 Average loaded miles per trip 614 597 (1) Operating income or loss is calculated by deducting total operating expenses and costs from total revenues. (2) Operating ratio is calculated by dividing total operating expenses, net of fuel surcharge revenue, by base revenue. (3) Total miles include both loaded and empty miles. (4) Tractors include Company-operated tractors in service, plus tractors operated by independent contractors. (5) Seated tractors are those occupied by drivers. In comparing our second quarter 2014 results to the 2013 second quarter, our base Trucking revenue increased 2.2% from $81.4 million to $83.2 million and our operating loss decreased 44.2% from $3.1 million to $1.7 million. The increase in our base Trucking revenue resulted primarily from a 7.1% increase in our average revenue per loaded mile, and a 1.3% increase in miles per seated tractor per week. These improvements were suppressed by a 4.6% decrease in the average number of seated tractors. 23 -------------------------------------------------------------------------------- Overall, our operating ratio for the second quarter improved by 1.7 percentage points of base Trucking revenue to 102.1% from 103.8%, and by 1.5 percentage points of total Trucking revenue to 101.6% from 103.1% as a result of the net effect of the following factors: · Salaries, wages and employee benefits expense increased 2.9 percentage points of total Trucking revenue, and 3.4 percentage points of base Trucking revenue. Increases were predominately due to higher non-driver labor costs and associated payroll taxes and increased workers' compensation and employee medical benefit costs resulting from an increase in claims activity. In July 2014, we implemented a limited pay increase for drivers, which could result in an upward trend in this expense in the future. · Fuel and fuel taxes expense decreased 2.6 percentage points of total Trucking revenue, and 2.5 percentage points of base Trucking revenue, primarily due to the recovery of a greater percentage of our fuel costs through fuel surcharge revenue programs with our customers, more favorable fuel pricing discounts from our suppliers and 6.8% better fuel economy within our fleet. Fuel costs will continue to be affected in the future by price fluctuations, the terms and collectability of fuel surcharge revenue and the percentage of total miles driven by independent contractors. · Operations and maintenance expense decreased 1.9 percentage points of total Trucking revenue and 2.5 percentage points of base Trucking revenue, primarily due to a $2.1 million decrease in direct repair costs on tractors and trailers, which is the result of our strategy of performing more maintenance in our own facilities and less work at outside vendors where repair costs are considerably higher. While we anticipate some fluctuation in repair costs in the future, we believe we are experiencing the expected results of our equipment maintenance strategy. · Depreciation and amortization changed slightly, increasing by 0.2 percentage points of total Trucking revenue, and 0.1 percentage points of base Trucking revenue, primarily due to increased purchase prices on new tractors, trailers and mobile communications systems. · Purchased transportation expenses increased 0.5 percentage points of total Trucking revenue, and 0.6 percentage points of base Trucking revenue. The increase was primarily the result of a 21.7% increase in the size of our owner-operator fleet from 115 to 140, and 3.3% growth in our cross-border Mexico revenue in which we compensate Mexican carriers for the transportation of our customers' freight within Mexico. · Insurance and claims expense decreased 1.2 percentage points of total Trucking revenue, and 1.6 percentage points of base Trucking revenue, primarily due to improved experience on auto liability losses for both new and existing claims. Our Department of Transportation recordable accident frequencies continue to improve and we expect insurance and claims expense to decrease over the long-term, but they will remain volatile from period-to-period. · Other expenses increased 0.5 percentage points of total Trucking revenue, and 0.9 percentage points of base Trucking revenue. Among other things, other expenses include an upward adjustment in our bad debt reserve based on an increase in accounts receivable and write-offs, expenses relating to driver retention, employee recruiting and relocation. 24-------------------------------------------------------------------------------- Results of Operations - Strategic Capacity Solutions The following table sets forth certain information relating to our SCS reportable segment for the periods indicated: Three Months Ended June 30, 2014 2013 Total SCS revenue (1) $ 49,896 $ 36,695 Intercompany revenue (2,744) (1,781) Total net revenue $ 47,152 $ 34,914 Operating income (in thousands) $ 5,991 $ 2,163 Gross margin (2) 18.4 % 14.0 % (1) Includes fuel surcharge revenue. (2) Gross margin is calculated by taking total revenue less purchased transportation and dividing that amount by total revenue. This calculation includes intercompany revenue and expenses. In comparing our second quarter 2014 results to the 2013 second quarter, total net revenue from SCS increased 35.0% to $47.2 million from $34.9 million, while operating income increased 176.9% to $6.0 million from $2.2 million. The increased operating income was due to improved gross margin in our SCS brokerage service. Net revenue increased 35.0% while operating expenses increased 25.7%. Our efforts to focus on delivering customized solutions to our diverse customer base while controlling costs continues to result in greater load volumes and load margins for our SCS segment. Revenue productivity per employee increased 13.8% and revenue per load increased 19.2% for our brokerage services. Those factors were partially offset by a decrease in net revenue for our Intermodal service. Other Expenses In the second quarter of 2014, we recorded approximately $2.2 million, or $0.13 per diluted share, in defense costs, consisting of financial advisory and legal fees. These costs were incurred primarily in connection with Knight Transportation's unsolicited proposal to acquire USA Truck, the related litigation and the February 2014 Settlement Agreement. We do not expect significant additional costs related to the above matters in the second half of 2014. Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 Results of Operations - Combined Services Total base revenue increased 12.1% to $242.6 million for the six months ended June 30, 2014 from $216.3 million for the same quarter of 2013. We reported a net loss of ($0.9) million, or ($0.08) per share, for the six months ended June 30, 2014 as compared to a net loss of ($3.9) million, or ($0.38) per share, for the comparable prior year period. Our effective tax rate was (6.1%) for the six months ended June 30, 2014 compared to 29.0% for the same period of 2013. Income tax expense varies from the amount computed by applying the federal tax rate to income before income taxes primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Due to the partially nondeductible effect of per diem payments, our tax rate will vary in future periods based on fluctuations in earnings and in the number of drivers who elect to receive this pay structure. 25 -------------------------------------------------------------------------------- Results of Operations - Trucking Relationship of Certain Items to Total Trucking Revenue The following table sets forth the percentage relationship of certain items to total revenue of our Trucking operating segment for the periods indicated. Six Months Ended June 30, 2014 2013 Total revenue 100.0 % 100.0 % Operating expenses and costs: Salaries, wages and employee benefits 33.1 31.6 Fuel and fuel taxes 30.5 33.1 Operations and maintenance 11.7 11.8 Depreciation and amortization 10.8 10.5 Purchased transportation 6.3 5.3 Insurance and claims 5.6 6.0 Operating taxes and licenses 1.3 1.3 Communications and utilities 1.0 0.9 Gain on disposal of revenue equipment, net (0.2) (0.4) Other 3.7 3.4 Total operating expenses and costs 103.8 103.5 Operating loss (3.8) % (3.5) % Relationship of Certain Items to Base Revenue The following table sets forth the percentage relationship of certain items to base revenue of our Trucking operating segment for the periods indicated. Fuel and fuel taxes are shown net of fuel surcharges. Six Months Ended June 30, 2014 2013 Base Trucking revenue 100.0 % 100.0 % Operating expenses and costs: Salaries, wages and employee benefits 42.4 40.5 Operations and maintenance 15.0 15.1 Fuel and fuel taxes 11.1 14.2 Depreciation and amortization 13.8 13.4 Purchased transportation 8.0 6.8 Insurance and claims 7.2 7.6 Operating taxes and licenses 1.7 1.7 Communications and utilities 1.2 1.1 Gain on disposal of revenue equipment, net (0.3) (0.5) Other 4.7 4.5 Total operating expenses and costs 104.8 104.4 Operating loss (4.8) % (4.4) % 26-------------------------------------------------------------------------------- Key Operating Statistics: Six Months Ended June 30, 2014 2013 (unaudited) Trucking: Operating loss (in thousands) (1) $ (7,855) $ (7,086) Operating ratio (2) 104.8 % 104.4 % Total miles (in thousands) (3) 108,409 111,333 Empty mile factor 12.3 % 11.4 % Base Trucking revenue per loaded mile $ 1.720 $ 1.635 Average number of in-service tractors (4) 2,218 2,223 Unseated tractor percentage 8.0 % 4.9 % Average number of seated tractors (5) 2,040 2,115 Average miles per seated tractor per week 2,055 2,036 Base Trucking revenue per seated tractor per week $ 3,098 $ 2,948 Average loaded miles per trip 618 593 (1) Operating income or loss is calculated by deducting total operating expenses and costs from total revenues. (2) Operating ratio is calculated by dividing total operating expenses, net of fuel surcharge revenue, by base revenue. (3) Total miles include both loaded and empty miles. (4) Tractors include Company-operated tractors in service, plus tractors operated by independent contractors. (5) Seated tractors are those occupied by drivers. In comparing our results for the first six months of 2014 to the same period of 2013, our base Trucking revenue increased 1.4% from $161.2 million to $163.4 million and our Trucking operating loss increased from $7.1 million to $7.8 million. The increase in our base Trucking revenue resulted from a 0.9% increase in miles per seated tractor per week and a 4.1% increase in base Trucking revenue per total mile, partially offset by 3.5% fewer seated trucks. Our operating ratio for the first six months of the year deteriorated by 0.4 percentage points of base Trucking revenue to 104.8% from 104.4% and by 0.3 percentage points of total Trucking revenue to 103.8% from 103.5% as a result of the following factors: · Salaries, wages and employee benefits expense increased by 1.5 percentage points of total Trucking revenue, and 1.9 percentage points of base Trucking revenue, primarily due to increased non-driver labor costs and associated payroll taxes and increased workers' compensation and employee benefit costs resulting from an increase in claims activity. In July 2014, we implemented a limited pay increase for drivers, which could result in an upward trend in this expense in the future. · Fuel and fuel taxes expense decreased 2.6 percentage points of total Trucking revenue and 3.1 percentage points of base Trucking revenue. The decrease was primarily due to the recovery of a greater percentage of our fuel costs through fuel surcharge revenue programs with our customers, more favorable fuel pricing discounts with our suppliers and 4.7% better fuel economy within our fleet. Fuel costs will continue to be affected in the future by price fluctuations, the terms and collectability of fuel surcharge revenue and the percentage of total miles driven by independent contractors. · Operations and maintenance expense decreased 0.1 percentage points of total Trucking revenue, as well as base Trucking revenue, primarily due to a $1.2 million decrease in direct repair costs on tractors and trailers due to a more disciplined preventive maintenance program implemented in 2013, resulting from us performing more maintenance work in our own facilities and less work at outside vendors where repair costs are considerably higher. While we anticipate some fluctuation of repair costs in the future, we expect to continue seeing lower repair costs as a result of our equipment maintenance strategy. 27-------------------------------------------------------------------------------- · Depreciation and amortization changed slightly, increasing 0.3 percentage points of total Trucking revenue, and 0.4 percentage points of base Trucking revenue primarily due to increased acquisition costs on new tractors, trailers and mobile communications systems. · Insurance and claims expense decreased 0.4 percentage points of total Trucking revenue and base Trucking revenue. For the first six months of 2014, our auto liability losses for both new and existing claims improved while we experienced adverse loss developments on cargo and general liability claims. Our Department of Transportation recordable accident frequencies continue to improve and we would expect insurance and claims expense to decrease over the long term, but they will remain volatile from period-to-period. Results of Operations - Strategic Capacity Solutions The following table sets forth certain information relating to our SCS reportable segment for the periods indicated: Six Months Ended June 30, 2014 2013 Total SCS revenue (1) $ 95,148 $ 68,860 Intercompany revenue (5,274) (3,935) Total net revenue $ 89,874 $ 64,925 Operating income (in thousands) $ 11,069 $ 3,315 Gross margin (2) 18.0 % 14.5 % (1) Includes fuel surcharge revenue. (2) Gross margin is calculated by taking total revenue less purchased transportation and dividing that amount by total revenue. This calculation includes intercompany revenue and expenses. In comparing our results for the first six months of 2014 to the same period of 2013, total net revenue from SCS increased 38.4% to $89.9 million from $64.9 million, while operating income more than tripled, increasing to $11.1 million from $3.3 million. The increased operating income was due to improved gross margin in our SCS brokerage service. Net revenue increased 38.4% while operating expenses increased 27.9%. Revenue productivity per employee increased 20.3% and revenue per load increased 23.7% for our brokerage services. Those factors were partially offset by a decrease in net revenue for our Intermodal service. Other Expenses During the first six months of 2014, we recorded approximately $2.5 million, or $0.15 per diluted share, in defense costs, consisting of financial advisory and legal fees. These costs were incurred primarily in connection with Knight Transportation's unsolicited proposal to acquire USA Truck, the related litigation and the February 2014 Settlement Agreement. We do not expect significant additional costs related to the above matters in the second half of 2014. 28 -------------------------------------------------------------------------------- Seasonality In the trucking industry, revenue generally decreases as customers reduce shipments during the winter holiday season and as inclement weather impedes operations. At the same time, operating expenses increase due primarily to decreased fuel efficiency and increased maintenance costs. Future revenue could be impacted if customers, particularly those with manufacturing operations, reduce shipments due to temporary plant closings. Historically, many of our customers have closed their plants for maintenance or other reasons during January and July. Typically, our performance is seasonally strongest during the second quarter followed by the third, fourth and first quarters, respectively. Inflation Most of our operating expenses are inflation sensitive, and we have not always been able to offset inflation-driven cost increases through increases in our revenue per mile and our cost control efforts. The effect of inflation-driven cost increases on our overall operating costs is not expected to be greater for us than for our competitors. Fuel Availability and Cost The motor carrier industry is dependent upon the availability of fuel. Fuel shortages or increases in fuel taxes or fuel costs have adversely affected our profitability and will continue to do so. Fuel prices have fluctuated widely, and fuel prices and fuel taxes have generally increased in recent years. We have not experienced difficulty in maintaining necessary fuel supplies, and in the past we generally have 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 price of fuel increases above an agreed upon baseline price per gallon. Typically, we are not able to fully recover increases in fuel prices through rate increases and fuel surcharges, primarily because those items do not provide any benefit with respect to empty and out-of-route miles, for which we typically do not receive compensation from customers. Overall, the market fuel prices per gallon were approximately 1.4% higher during second quarter than they were in the same period of 2013. At June 30, 2014, we did not have any long-term fuel purchase contracts, and we have not entered into any other hedging arrangements that protect us against fuel price increases. Off-Balance Sheet Arrangements Operating leases, which are not reflected in our balance sheet, have been an important source of financing for our revenue equipment, office equipment, and certain facilities. At June 30, 2014, we had financed 149 tractors and certain information technology hardware under operating leases. Vehicles and hardware held under operating leases are not carried on our condensed consolidated balance sheets, and lease payments, in respect of such vehicles, are reflected in our condensed consolidated statements of operations and comprehensive income (loss). The total present value of remaining payments under operating leases as of June 30, 2014 was approximately $13.3 million. Other than the above-mentioned operating leases, we do not currently have any other off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our consolidated financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. See "Liquidity and Capital Resources - Purchases and Commitments" below for additional information. 29 -------------------------------------------------------------------------------- Liquidity and Capital Resources Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our $125.0 million revolving credit agreement (the "Revolver"), cash flows from operations, operating leases, capital leases and proceeds from the sale of our used revenue equipment. Our primary sources of liquidity at June 30, 2014, were funds provided by operations, borrowings under our Revolver, capital leases and operating leases. Based on our expected financial condition, net capital expenditures, results of operations and related net cash flows and other sources of financing, we believe our sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future. We had approximately $31.7 million available under the Revolver (net of the minimum availability we are required to maintain of approximately $18.8 million) as of June 30, 2014. Fluctuations in the outstanding balance and related availability under our Revolver 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. Including equipment we expect to finance with operating leases, we expect capital expenditures for our revenue equipment to increase from the level we experienced in 2013 as we continue to replace and upgrade our fleet. We may change the amount of the capital expenditures based on our operating performance. Should we decrease our capital expenditures for tractors and trailers, we would expect the age of our equipment to increase. Cash Flows (in thousands) Six Months Ended June 30, 2014 2013Net cash provided by operating activities $ 18,518 $ 18,832 Net cash used in investing activities (13,638) (2,028) Net cash used in financing activities (4,855) (17,679) Cash generated from operations decreased $0.3 million in the first six months of 2014 as compared to the same period of 2013, primarily due to the net effect of the following factors: · ($0.9) million net loss was reported for the six months ended June 30, 2014, compared to a ($3.9) million net loss for the comparable prior year period. · A $0.8 million increase in depreciation and amortization due to increased acquisition costs on new tractors, trailers and mobile communications systems. · An $11.6 million increase in cash used related to an increase in accounts receivable resulting from the 39.1% base revenue growth in our SCS operations. · A $0.7 million increase in inventories as a part of our move to handle more preventive maintenance internally at our maintenance facilities as opposed to third parties over the road. · A $7.8 million increase in trade accounts payable and accrued expenses primarily due to the increase in carrier expense associated with the 39.1% base revenue growth in our SCS operations, as well as increased maintenance expenditures and the timing of payment to vendors. · The change in insurance and claims accruals decreased $1.3 million primarily due to a reduction in the reserve required for auto liability losses. This decrease was partially offset by a slight increase in the change in workers compensation reserves and claim payments. 30-------------------------------------------------------------------------------- For the six months ended June 30, 2014, net cash used by investing activities was $13.6 million, compared to $2.0 million of cash used in investing activities during the same period of 2013. The $11.6 million increase in cash used by investing activities primarily resulted from a $15.3 million increase in purchases of property and equipment. Through the first six months of 2014, we purchased 156 tractors (excluding 50 tractors purchased under a fair market value lease, which is deemed to be an operating lease, and accordingly this equipment is not recorded on the balance sheet) compared to 201 tractors we took delivery of for the comparable prior year period and had purchased in prior periods. Additionally, we purchased 150 trailers through the first six months of 2014, compared to 250 trailers for the comparable prior year period. Proceeds from the sale of equipment increased $3.8 million primarily due to an increase in the number of tractors that were sold. During the first six months of 2014, we sold 229 tractors and 101 trailers compared to 112 tractors and 239 trailers during the comparable period of 2013. Cash used in financing activities was $4.9 million for the first six months of 2014 compared to $17.7 million during the same period in 2013. We had net borrowings on our Revolver of $6.6 million in 2014 compared to $3.2 million in net repayments in the comparable period of 2013. Principal payments on capitalized lease obligations decreased $0.8 million during the first six months of 2014 compared to the same period of 2013, primarily due to a balloon payment related to a lease reaching the end of its contractual term. The increase of approximately $2.1 million in bank drafts payable was primarily due to the timing of payments to vendors. Debt and Capitalized Lease Obligations See notes 7 and 8 of the notes to our condensed consolidated financial statements included in Part I, Item 1, in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 for further discussion of the revolving credit agreement and capital lease obligations. Equity At June 30, 2014, we had stockholders' equity of $98.2 million and total debt including current maturities of $125.1 million, resulting in a total debt, less cash, to total capitalization ratio of 56.0% compared to 58.0% at June 30, 2013. Purchases and Commitments As of June 30, 2014, our forecasted capital expenditures, net of proceeds from the sale or trade of revenue equipment, is $26.2 million for the remainder of 2014, approximately $25.1 million of which relates to revenue equipment, compared to approximately $23.5 million in 2013, approximately $22.1 million of which related to revenue equipment. We may change the amount of the capital expenditures based on our operating performance or other factors. Should we decrease our capital expenditures for tractors and trailers, we would expect the age of our equipment to increase. To the extent further capital expenditures are feasible based on our financial covenants and operating cash requirements, we would use the balance of approximately $1.2 million primarily for property acquisitions, facility construction and improvements and maintenance and office equipment. We routinely monitor our equipment acquisition needs and adjust our purchase schedule from time to time based on our analysis of factors such as new equipment prices, the condition of the used equipment market, demand for our freight services, prevailing interest rates, technological improvements, fuel efficiency, equipment durability, equipment specifications, our operating performance and the availability of qualified drivers. In February 2014, the Board of Directors authorized the use of up to $20.0 million in new capital leases under existing facilities through 2014 and we have not utilized any of this authorization as of June 30, 2014. As of June 30, 2014, for the remainder of 2014, we had approximately $1.2 million in commitments for purchases of non-revenue equipment and commitments for purchases of revenue equipment in the amount of approximately $16.0 million. We anticipate taking delivery of these purchases throughout the remainder of 2014. 31 -------------------------------------------------------------------------------- We have entered into three operating leases to finance the acquisition of revenue equipment and one fair market value lease to finance the acquisition of computer hardware. Accordingly, this equipment and hardware is not recorded on the condensed consolidated balance sheet. The following table represents our outstanding contractual obligations for rental expense under operating leases at June 30, 2014: (in thousands) Payments Due By Period Less than More than 5 Total 1 year 1-3 years 3-5 years years Other rental obligations $ 3,362 $ 1,293 $ 1,162 $ 741 $ 166 Revenue equipment -- obligations 13,978 3,303 9,148 1,527 Total rental obligations $ 17,340 $ 4,596 $ 10,310 $ 2,268 $ 166 During the quarter ended June 30, 2014, we incurred net capital expenditures of $12.9 million, of which, $12.6 million were for the purchase of revenue equipment and the remaining $0.3 million was for other expenditures. During 2014, we received proceeds from the sale of property and equipment of approximately $8.9 million and purchased approximately $22.5 million of property and equipment. Critical Accounting Policies 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. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our condensed consolidated financial statements are prepared. Although these estimates are based on management's best knowledge of current events and actions that may impact us in the future, actual results could differ from those estimates, and such differences could be material. Our critical accounting policies are those that affect, or could affect, our condensed consolidated financial statements materially and involve a significant level of judgment by management. During the three month period ended June 30, 2014, there were no material changes to our critical accounting policies. |