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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 driver pay, future ability to recruit and retain drivers, future acquisitions and dispositions of revenue equipment, future profitability, future pricing rates, future fuel efficiency, future ability to execute the turnaround strategy, future fuel prices, future ability to recover costs through the fuel surcharge program, future employee benefits costs, future purchased transportation expense, future operations and maintenance costs, future legal and defense related costs, future depreciation and amortization expense, 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 the Company's 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. 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. 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 words of similar terms refer to USA Truck, Inc. and its subsidiary. 15 --------------------------------------------------------------------------------Use of Non-GAAP Financial Information In addition to GAAP results, this quarterly report on Form 10-Q also includes certain non-GAAP financial measures as defined by the Securities and Exchange Commission. The Company defines adjusted earnings (loss) per share as earnings (loss) per share, excluding certain adjustments more specifically outlined in the table below. The Company defines EBITDA as net income, plus interest expense net of interest income, provision for income taxes, depreciation and amortization. The Company defines Adjusted EBITDA as these items plus the legal and related defense costs incurred in connection with the unsolicited proposal from Knight Transportation to acquire USA Truck and related litigation, pretax. EBITDA and Adjusted EBITDA are measures used by management to evaluate ongoing operations and as a general indicator of its operating cash flow (in conjunction with a cash flow statement that also includes, among other items, changes in working capital and the effect of non-cash charges), and adjusted earnings (loss) per share is a measure used by management to evaluate operating performance. Management believes these measurements are useful to investors because they are frequently used by securities analysts, investors and other interested parties in the comparative evaluation of companies. Because not all companies use identical calculations, USA Truck's presentation of adjusted earnings (loss) per share, EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Adjusted earnings (loss) per share, EBITDA and Adjusted EBITDA are not recognized terms under GAAP, do not purport to be alternatives to, and should be considered in addition to, and not as a substitute for or superior to, net income (loss) as a measure of operating performance or to cash flows from operating activities or any other performance measures derived in accordance with GAAP as a measure of liquidity. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management's discretionary use as they do not reflect certain cash requirements, such as interest payments, tax payments and debt service requirements. Pursuant to the requirements of Regulation G, a reconciliation of EBITDA and Adjusted EBITDA to GAAP net income (loss) and adjusted earnings (loss) per share to GAAP earnings (loss) per share has been provided in the tables below. RECONCILIATION OF GAAP NET INCOME (LOSS) TO EBITDA (UNAUDITED) (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 GAAP net income (loss) $ 2,717 $ (602) $ 1,850 $ (4,474) Add: Income tax expense (benefit) 1,817 42 1,867 (1,542) Interest, net 816 967 2,271 2,752 Depreciation and amortization 10,671 11,633 33,274 33,399 EBITDA $ 16,021 $ 12,040 $ 39,262 $ 30,135 Add: Defense costs, pretax 65 -- 2,593 -- Adjusted EBITDA $ 16,086 $ 12,040 $ 41,855 $ 30,135 16-------------------------------------------------------------------------------- RECONCILIATION OF EARNINGS (LOSS) PER SHARE TO ADJUSTED EARNINGS (LOSS) PER SHARE (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 GAAP diluted earnings (loss) per share $ 0.26 $ (0.06) $ 0.18 $ (0.43) Adjusted for: Income tax expense 0.17 (0.00) 0.17 (0.15) Income before income taxes 0.43 (0.06) 0.35 (0.58) Defense costs 0.00 (0.00) 0.25 (0.00) Adjusted income before taxes 0.43 (0.06) 0.60 (0.58) Provision for income tax expense 0.17 (0.00) 0.27 (0.15) Adjusted diluted earnings (loss) per share $ 0.26 $ (0.06) $ 0.33 $ (0.43) 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 USA Truck's business, the organization of its operations and the service offerings that comprise its operations. Results of Operations - an analysis of the consolidated results of operations for the periods presented in the Company's, condensed consolidated financial statements 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. Off-Balance Sheet Arrangements - a discussion of significant financial arrangements, if any, that are not reflected on the Company's balance sheet. Critical Accounting Policies - a discussion of accounting policies that require critical judgment and estimates. 17 --------------------------------------------------------------------------------Our Business USA Truck operates primarily in the for-hire truckload segment of the trucking industry. Customers in a variety of industries engage the Company to haul truckload quantities of freight, with the trailer used to haul that freight being assigned exclusively to that customer's freight until delivery. The Company has two reportable segments: (i) Trucking, consisting of Truckload and Dedicated Freight and (ii) Strategic Capacity Solutions ("SCS"), consisting of freight brokerage and rail intermodal service offerings. USA Truck's base revenue is substantially generated by transporting, or arranging for the transportation of, freight for customers and is predominantly affected by the rates per mile received from customers and other ancillary services. SCS provides services which complement Trucking services, primarily to existing customers of the Trucking operating segment. USA Truck generally charges customers for services on a per-mile basis. Expenses which have a major impact on the Company's profitability are primarily the variable costs of transporting freight for customers. Variable costs include fuel expense, insurance and claims and driver-related expenses, such as wages and benefits. Trucking. Trucking is comprised of Truckload and Dedicated Freight services. Truckload provides services as a medium- to long-haul common carrier. USA Truck has provided Truckload services since its inception, and derives the largest portion of its revenue from these services. Dedicated Freight provides truckload services to specific customers for shipments over particular routes at particular times utilizing Company revenue equipment. Strategic Capacity Solutions. SCS consists of freight brokerage and rail intermodal services. Both of these service offerings match customer shipments with available equipment of authorized carriers and provide services that complement the Company's Trucking operations. USA Truck provides these services primarily to existing Trucking customers, many of whom prefer to rely on a single carrier, or a small group of carriers, to provide all their transportation solutions. These segments also derive revenue from fuel surcharges and other accessorial services. Revenue is measured before fuel surcharges, or "base revenue," because management believes that fuel surcharges tend to be a volatile source of revenue. Management believes the exclusion of fuel surcharges affords a more consistent basis for comparing the results of operations from period to period. Nonetheless, freight revenue represents a non-GAAP financial measure. Accordingly, undue reliance should not be placed on discussion of freight revenue, and discussions of freight revenue should be considered in combination with discussions of total revenue. The Company's primary measure of profitability is operating ratio, which is defined as operating expenses, net of fuel surcharge revenue, divided by total revenue, less fuel surcharge revenue, or base revenue. 18--------------------------------------------------------------------------------Results of Operations The following table sets forth the consolidated statements of operations and comprehensive income (loss) in dollars (amounts in thousands) and percentage of total consolidated GAAP operating revenue and the percentage increase or decrease in the dollar amounts of those items compared to the prior year. Three Months Ended % Nine Months Ended % September 30, 2014 September 30, 2013 Change September 30, 2014 September 30, 2013 Change $ % $ % (%) $ % $ % (%) Total base revenue $ 125,947 82.0 % $ 113,856 80.3 % $ 368,527 81.5 % $ 330,206 79.8 % Total fuel surcharge 27,671 18.0 27,966 19.7 83,878 18.5 83,381 20.2 GAAP operating revenue $ 153,618 100.0 % $ 141,822 100.0 % 8.3 % $ 452,405 100.0 % $ 413,587 100.0 % 9.4 % Operating expenses: Salaries, wages and employee benefits 39,388 25.6 34,771 24.5 13.3 113,930 25.2 105,001 25.4 8.5 Fuel expense 28,449 18.5 33,224 23.4 (14.4) 92,156 20.4 101,837 24.6 (9.5) Depreciation and amortization 10,671 6.9 11,633 8.2 (8.3) 33,274 7.4 33,399 8.1 (0.4) Insurance and claims 6,466 4.2 6,807 4.8 (5.0) 18,353 4.1 19,220 4.6 (4.5) Operations and maintenance 12,863 8.4 12,319 8.7 4.4 37,554 8.3 37,476 9.1 0.2 Purchased transportation 43,755 28.5 37,470 26.4 16.8 129,543 28.6 103,677 25.1 24.9 Operating taxes and licenses 1,414 0.9 1,400 1.0 1.0 4,215 0.9 4,104 1.0 2.7 Communications and utilities 1,026 0.7 1,014 0.7 1.2 3,159 0.7 3,084 0.7 2.4 Other 4,167 2.8 3,388 2.4 23.0 11,588 2.5 9,764 2.4 18.7 Total operating expenses 148,199 96.5 142,026 100.1 4.3 443,772 98.1 417,562 101.0 6.3 Operating income (loss) 5,419 3.5 (204) (0.1) 2,756.4 8,633 1.9 (3,975) (1.0) 317.2 Other expenses (income): Interest expense 816 0.5 967 0.7 (15.6) 2,271 0.5 2,752 0.7 (17.5) Defense costs 65 -- -- -- -- 2,593 0.6 -- -- -- Other, net 4 -- (611) (0.4) (100.7) 52 -- (711) (0.2) (107.3) Total other expenses, net 885 0.5 356 0.3 148.6 4,916 1.1 2,041 0.5 140.9 Income (loss) before income taxes 4,534 3.0 (560) (0.4) (909.6) 3,717 0.8 (6,016) (1.5) (161.8) Income tax expense (benefit) 1,817 (1.2) 42 0.0 4,226.2 1,867 0.4 (1,542) (0.4) (221.1) Net income (loss) $ 2,717 1.8 % $ (602) (0.4) % (551.3) % $ 1,850 0.4 % $ (4,474) (1.1) % (141.4) % Results of Operations-Consolidated Total GAAP operating revenue increased 8.3% to $153.6 million for the quarter ended September 30, 2014, from $141.8 million for the same quarter of 2013. The Company's SCS business was the significant contributor to the quarter's results. Consolidated net income was $2.7 million, or $0.26 per diluted share, for the third quarter of 2014 compared to a net loss of ($0.6) million, or ($0.06) per share, for the same quarter of 2013. Total GAAP operating revenue increased 9.4% to $452.4 million for the nine months ended September 30, 2014, from $413.6 million for the same period of 2013. The Company's SCS segment accounted for almost one-third of the consolidated operating GAAP revenue. Consolidated net income was $1.9 million, or $0.18 per diluted share, for the nine months ended September 30, 2014, compared to a net loss of ($4.5) million, or ($0.43) per share, for the same period of 2013. 19-------------------------------------------------------------------------------- Key Operating Statistics: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (unaudited) Trucking: Operating revenue (in thousands) $ 108,318 $ 104,904 $ 317,230 $ 311,744 Base revenue (in thousands) (1) $ 86,076 $ 81,761 $ 249,489 $ 242,988 Operating income (loss) (in thousands) (2) $ 83 $ (2,968) $ (7,772) $ (10,054) Operating ratio (3) 99.9 % 103.6 % 103.1 % 104.1 % Total miles (in thousands) (4) 54,600 55,516 163,009 166,844 Empty mile factor (5) 13.3 % 11.4 % 12.7 % 11.4 % Base revenue per loaded mile $ 1.819 $ 1.663 $ 1.753 $ 1.645 Average number of in-service tractors (6) 2,179 2,250 2,205 2,232 Percentage of in-service tractors unseated 5.2 % 6.2 % 7.1 % 5.3 % Average number of seated tractors (7) 2,066 2,111 2,049 2,114 Average miles per seated tractor per week 2,011 2,001 2,040 2,024 Base Trucking revenue per seated tractor per week $ 3,170 $ 2,948 $ 3,122 $ 2,947 Average loaded miles per trip 615 602 617 596 Strategic Capacity Solutions (8): Operating revenue (in thousands) $ 49,359 $ 38,650 $ 144,507 $ 107,510 Intercompany revenue (in thousands) $ 4,059 $ 1,732 $ 9,332 $ 5,667 Net revenue (in thousands) (9) $ 45,300 $ 36,918 $ 135,175 $ 101,843 Base revenue (in thousands) (1) $ 39,872 $ 32,095 $ 119,037 $ 87,218 Operating income (in thousands) (2) $ 5,336 $ 2,764 $ 16,405 $ 6,079 Gross margin (10) 17.3 % 14.0 % 17.8 % 14.0 % (1) Base revenue represents operating revenue excluding fuel surcharge revenue. (2) Operating income or loss is calculated by deducting total operating expenses from operating revenues. (3) Operating ratio is calculated by dividing total operating expenses, net of fuel surcharge reveue, by base revenue. (4) Total miles include both loaded and empty miles. (5) Empty mile factor 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) Includes results of our rail intermodal operating segment. (9) Net revenue represents SCS operating revenue less intercompany revenue. (10) Gross margin is calculated by taking operating revenue less purchased transportation expense and dividing that amount by operating revenue. This calculation includes intercompany revenues and expenses. Results of Operations-Segment Review Trucking operating revenues When comparing the three months ended September 30, 2014 to the corresponding period in 2013, Trucking operating revenue increased $3.4 million, or 3.3%. Trucking base revenue increased $4.3 million, or 5.3% from the three months ended September 30, 2013 to the three months ended September 30, 2014. These increases were primarily due to a 9.4% increase in average base revenue per loaded mile and a 2.2% increase in average loaded miles per trip. Pricing strength was somewhat offset by a 3.2% decrease in the average number of in-service tractors and a 2.1% decrease in the average number of seated tractors. 20 -------------------------------------------------------------------------------- During the nine months ended September 30, 2014, Trucking operating revenue increased 1.8%, to $317.2 million, compared to the same period of 2013. Trucking base revenue increased $6.5 million, or 2.7%, when compared to the same period in 2013. These increases were primarily due to a 6.6% increase in our average base revenue per loaded mile and a 3.5% increase in average loaded miles per trip, offset by a 3.1% decrease in the average number of seated tractors and a 1.2% decrease in the average number of in-service tractors. Trucking operating income (loss) Trucking operating income increased $3.1 million from the third quarter of 2013 to the third quarter of 2014, which resulted in the Trucking segment operating ratio improving 370 basis points to 99.9% during the three months ended September 30, 2014. This improvement of operating ratio was primarily driven by the increase in average base revenue per loaded mile noted above, a continued focus on controlling costs, and a 10.5% improvement in the fuel economy (measured by miles per gallon) in the Company tractors due to specific ongoing initiatives targeted at improving the fuel efficiency, as well as, the addition of more fuel efficient tractors in the Company's fleet. For the nine months ended September 30, 2014, Trucking operating loss decreased $2.3 million, or 22.7% to $7.8 million due in part to improvement in fuel expense. These improvements were offset by an 8.1% increase in salaries, wages, and employee benefits costs, driven by increased non-driver labor costs, employee benefits costs and the driver pay increases implemented in July 2014 given the competitive driver market. SCS operating revenues In comparing results for the three months ended September 30, 2014 to the same period in 2013, total net revenue from SCS increased 22.7% to $45.3 million from $36.9 million. Increased revenues were primarily related to a 10.2% increase in load volumes. For the three months ended September 30, 2014, total revenue per employee increased 14.9% compared to the same period in 2013. SCS total net revenue increased 32.7% for the nine months ended September 30, 2014, compared to the corresponding period in 2013. Growth in net revenue resulted primarily from higher load volumes and 14.3% increase in revenue productivity per employee. For the nine months ended September 30, 2014, total revenue per employee increased 36.4% compared to the same period in 2013. SCS operating income SCS operating income nearly doubled in the third quarter of 2014 compared to the same quarter in 2013, increasing 93.1%. Increased operating income was largely due to increased revenue discussed above, partially offset by a 16.7% increase in purchased transportation expense due to increased transportation costs and increased volumes in our operating segments. Additionally, gross profit per employee grew 47.4% in the three months ended September 30, 2014, compared to the same period in 2013. SCS operating income increased 169.9% during the nine months ended September 30, 2014, compared to the same period in 2013, due to improved gross margin, as net revenue increased 32.7%, while operating expenses increased at the slower pace of 24.0%. For the nine months ended September 30, 2014, total gross profit per employee increased 75.1% compared to the same period in 2013. 21 --------------------------------------------------------------------------------Consolidated Operating Expense Salaries, wages and employee benefits Salaries, wages and employee benefits expense increased 1.1 percentage points of total GAAP operating revenue and 0.8 percentage points of consolidated base revenue for the three months ended September 30, 2014, compared to the same period in 2013. These increases were predominantly due to the continuation of increased driver labor costs in a tight market for drivers, as well as associated payroll taxes and increased workers' compensation and employee medical benefit costs. For the nine months ended September 30, 2014, salaries, wages and employee benefits expense increased by $8.9 million, or 8.5% compared to the same period in 2013. When comparing the nine months ended September 30, 2014 to the comparable period year over year, salaries, wages and employee benefits expense decreased 0.2 percentage points of total GAAP operating revenue and 0.9 percentage points of consolidated base revenue primarily due to the 9.4% revenue growth. Fuel expense Fuel expense decreased during the quarter, decreasing 4.9 percentage points of total GAAP operating revenue, and 4.0 percentage points of consolidated base revenue for the three months ended September 30, 2014, when compared to the same period in 2013. The overall positive experience with fuel expense during the quarter reflected primarily increased efficiency, and lower pricing. Improved fuel efficiency in the Company's fleet resulted in savings of $3.2 million for the quarter. Overall fuel pricing reflected approximately 2.0%, or $1.7 million, lower fuel price than reflected in the same quarter of the prior year. For the nine months ended September 30, 2014 fuel expense decreased 4.2 percentage points of total GAAP operating revenue, and 5.8 percentage points of consolidated base revenue compared to the same period in 2013. These decreases were due to more favorably priced fuel, reduced idle times, and the addition of more fuel efficient models into the fleet. Fuel costs will continue to be affected by price fluctuations, the terms and collectability of fuel surcharge revenue and the percentage of total miles driven by independent contractors. Depreciation and amortization For the three months ended September 30, 2014, depreciation and amortization expense decreased by $1.0 million, or 8.3%, compared to the same period in 2013. As a percentage of total GAAP operating revenue, such expenses decreased to 6.9% compared to 8.2%, and as a percentage of consolidated base revenue, such expenses decreased to 8.5%, compared to 10.2% for the same period in 2013. These decreases primarily reflected a 4.5% reduction in the number of Company tractors. For the nine months ended September 30, 2014, depreciation and amortization expense decreased $0.1 million, or 0.4%, compared with the same period in 2013. As a percentage of total GAAP operating revenue, such expenses decreased to 7.4% compared with 8.1%, and as a percentage of consolidated base revenue, such expenses decreased to 9.0%, compared to 10.1% for the same period in 2013. The slight decrease overall was due to fewer Company tractors during the comparable nine-month period. Insurance and claims For the three months ended September 30, 2014, insurance and claims expense decreased $0.3 million, or 5% compared to the same period in 2013. As a percentage of total GAAP operating revenue, insurance and claims expense decreased to 4.2%, compared to 4.8% for the same period in 2013. These decreases were primarily due to improved experience for auto liability losses reflecting improvement in both new and existing claims. For the nine months ended September 30, 2014, insurance and claims expense decreased $0.9 million to $18.4 million compared to $19.2 million during the same period in 2013. As a percentage of total GAAP operating revenue, insurance and claims expense decreased 4.1%, compared to 4.6% for the same period in 2013. These decreases were primarily due to improved experience for auto liability losses for both new and existing claims and the continued improvement of the Company's Department of Transportation recordable accident frequency rate. 22 --------------------------------------------------------------------------------Operations and maintenance Operations and maintenance expense increased $0.5 million during the three months ended September 30, 2014, compared to same period in 2013. As a percentage of total GAAP operating revenue, operations and maintenance expense decreased slightly, from 8.7% in the third quarter of 2013, to 8.4% in the third quarter of 2014. As a percentage of consolidated base revenue, this expense decreased 0.6 percentage points, from 10.8% in the third quarter 2013 to 10.2% in the third quarter of 2014. Increases were primarily due to the Company's strict adherence to its overall maintenance strategy which requires more frequent preventive maintenance. For the nine months ended September 30, 2014, operations and maintenance expense was flat compared to the same period in 2013. While fluctuations in repair costs are anticipated moving forward, management believes maintenance costs may trend downward overall as ongoing maintenance strategies, which focus on increased routine maintenance in an effort to avoid more extensive repairs, are producing expected results for the Company and will likely continue to be a factor as our fleet is updated with newer tractors and trailers. Purchased transportation Purchased transportation expense increased 2.1 and 1.7 percentage points of total GAAP operating revenue and of base revenue, respectively, for the three months ended September 30, 2014 compared to the same period in 2013. These increases were primarily the result of the 22.7% total gross revenue growth in SCS and the 19.4% increase in the size of the Company's owner-operator fleet. For the nine months ended September 30, 2014, purchased transportation expense increased $25.9 million, or 24.9% compared to the same period in 2013. This year-over-year dollar increase was primarily due to the higher SCS volumes and increases in the size of the owner-operator fleet. As a percentage of total GAAP operating revenue, purchased transportation increased 3.5 percentage points year-over-year, primarily due to the 32.7% revenue growth in our SCS segment. Other expenses Other expenses, while increasing slightly for the three months ended September 30, 2014, remained flat for the nine months ended September 30, 2014, each when compared to the same periods in the prior year. This quarter's increase primarily reflects an upward adjustment in the Company's bad debt reserve associated with a few specific customer accounts, and increased expenses related to driver retention and recruiting. Interest expense Interest expense decreased 15.7% and 17.5% for the three and nine months ended September 30, 2014, respectively, compared to the prior year periods primarily due to net repayments on the Company's revolving line of credit and capital leases. During the twelve months ended September 30, 2014, the Company reduced its debt outstanding by $26.5 million. Defense costs For the three and nine months ended September 30, 2014, approximately $0.1 million and $2.6 million was recorded, respectively, in legal and defense costs, or $0.25 per diluted share for the nine months ended September 30, 2014. 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). Material additional costs related to the above matters are not anticipated during the remainder of 2014. 23--------------------------------------------------------------------------------Income tax expense The effective tax rate was 40.1% and 50.2% for the three and nine months ended September 30, 2014, respectively. The effective tax rate for the three and nine months ended September 30, 2013 was (7.6%) and 25.6% respectively. 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, the tax rate may vary in future periods based on fluctuations in earnings and in the number of drivers who elect to receive this pay structure. Liquidity and Capital Resources The trucking industry is capital intensive. Recently, the Company has financed its capital requirements with borrowings under the Revolver, cash flows from operations, operating leases, capital leases and proceeds from the sale of used revenue equipment. Primary sources of liquidity at September 30, 2014, were funds provided by operations, borrowings under the Revolver, capital leases 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 and the Company does not expect to experience any material liquidity constraints in the foreseeable future. Debt decreased during the third quarter by $10.7 million sequentially to $114.4 million. Net of cash, debt represented 53.1% of total capitalization. Year to date, the Company's debt is down $14.5 million. The Company had approximately $38.9 million available under the Revolver (net of the required minimum availability of approximately $18.8 million) as of September 30, 2014. Fluctuations in the outstanding balance and related availability under the 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 expected to be financed with operating leases, the Company expects capital expenditures for tractors and trailers to increase from the level experienced in 2013 as replacement and upgrade of the fleet continues. The Company may change the amount of the capital expenditures based on operating performance. Should capital expenditures be decreased for tractors and trailers, the Company would expect the age of the fleet to increase. Cash Flows (in thousands) Nine Months Ended September 30, 2014 2013 Net cash provided by $ $ 26,696 operating activities 38,076 Net cash (used in) provided 453 by investing activities (21,676) Net cash used in financing (28,883) activities (16,327) Cash generated from operations increased $11.4 million in the first nine months of 2014 as compared to the same period in 2013. This was primarily a result of generating higher operating income during the nine months ended September 30, 2014, compared to the corresponding period in 2013. This increase was largely due to improved working capital management during the first nine months of 2014. This has been offset by an increase in cash used of $5.0 million relating to higher receivable balances generated from the 32.7% increase in SCS receivables. For the nine months ended September 30, 2014, net cash used in investing activities was $21.7 million, compared to $0.5 million of cash provided by investing activities during the same period in 2013. The $22.1 million increase in cash used by investing activities primarily reflected from a $24.5 million increase in capital expenditures, offset by $2.4 million in proceeds from the sale of equipment. Cash used in financing activities was $16.3 million for the first nine months of 2014 compared to $28.9 million during the same period in 2013. During the nine months ended September 30, 2014, the Company made net repayments of long-term debt, financing notes and capital leases of $14.5 million. 24 --------------------------------------------------------------------------------Debt and Capitalized Lease Obligations See notes 7 and 8 of the footnotes to the Company's condensed consolidated financial statements included in Part I, Item 1, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 for further discussion of the revolving credit agreement and capital lease obligations. Off-Balance Sheet Arrangements Operating leases have been an important source of financing for equipment used by operations, office equipment, and certain facilities. At September 30, 2014, the Company financed 149 tractors and certain information technology hardware under operating leases. Vehicles and hardware held under operating leases are not carried on the condensed consolidated balance sheets, and lease payments, with regard to such vehicles, are reflected in the condensed consolidated statements of operations and comprehensive income (loss). Remaining payments under operating leases as of September 30, 2014 was approximately $16.3 million. Other than the aforementioned operating leases, no other off-balance sheet arrangements have or are reasonably likely to have a material effect on the condensed consolidated financial statements. 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 customers have closed their plants for maintenance or other reasons during January and July. Typically, the Company's performance is seasonally strongest during the second quarter followed by the third, fourth and first quarter. 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 USA Truck 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. Fuel prices have fluctuated widely, and fuel prices and fuel taxes have generally trended upwards in recent years. USA Truck 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 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 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 the Company generally does not receive compensation from customers. Additionally, most fuel surcharges are based on the average fuel price as published by the United States Department of Energy ("DOE") for the week prior to the shipment, meaning the Company typically bill 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, the opposite is true. Overall, the market fuel prices per gallon were approximately 2.0% lower during third quarter of 2014 than they were in the same period in 2013, as reported by the DOE. As of September 30, 2014, the Company did not have any long-term fuel purchase contracts, and has not entered into any hedging arrangements. Equity As of September 30, 2014, USA Truck had stockholders' equity of $101.0 million and total debt including current maturities of $114.4 million, resulting in a total debt, less cash, to total capitalization ratio of 53.1% compared to 56.2% as of December 31, 2013. 25--------------------------------------------------------------------------------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. 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. As of September 30, 2014, none of this authorization has been utilized. As of September 30, 2014, for the remainder of 2014, the Company had approximately $0.4 million in commitments for the acquisition of non-revenue equipment and commitments for the acquisition of revenue equipment in the amount of approximately $23.1 million. It is anticipated that the Company will be taking delivery of these acquisitions throughout the remainder of 2014 and 2015. In the current year, three operating leases have been entered into to finance the acquisition of tractors and trailers 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 outstanding contractual obligations for rental expense under operating leases at September 30, 2014 (in thousands): Payments Due By Period Less than More than 5 Total 1 year 1-3 years 3-5 years years Facilities $ 2,156 $ 997 $ 987 $ 8 $ 164 Computer hardware rented 901 255 646 -- -- Equipment obligations 13,215 3,303 9,147 765 -- Total rental obligations $ 16,272 $ 4,555 $ 10,780 $ 773 $ 164 During the quarter ended September 30, 2014, net capital expenditures of $6.0 million were incurred, of which, $5.7 million was for the purchase of revenue equipment and the remaining $0.3 million was for other expenditures. During the nine months ended September 30, 2014, the Company received proceeds from the sale of property and equipment of approximately $12.9 million and purchased approximately $38.2 million of property and equipment. Critical Accounting Policies During the three month period ended September 30, 2014, there were no material changes to the Company's critical accounting policies. |