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USAK > SEC Filings for USAK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for USA TRUCK INC

Form 10-Q for USA TRUCK INC


9-Nov-2012

Quarterly Report


ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains 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. These statements generally may be identified by their use of terms or phrases such as "expects," "estimates," "anticipates," "projects," "believes," "plans," "intends," "may," "will," "should," "could," "potential," "continue," "future" and terms or phrases of similar substance. Forward-looking statements are based upon the current beliefs and expectations of our management and 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. Accordingly, actual results may differ from those set forth in the forward-looking statements. 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. Additional risks associated with our operations are discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 under the heading "Risk Factors" in Item 1A of that report and updates, if any, to that information are included in Item 1A of Part II of this report. We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.

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 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 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 our consolidated results of operations for the periods presented in our 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 Estimates - 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 business is classified into three operating and reportable segments: our Trucking operating segment consisting primarily of our General Freight and Dedicated Freight service offerings; our SCS operating segment consisting entirely of our freight brokerage service offering; and our rail Intermodal operating segment.

Substantially all of our base revenue from the three reportable segments 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 present the base revenue of our three segments, net of intercompany transactions:

                                                   Trucking
                                Three Months Ended          Nine Months Ended
                                  September 30,               September 30,
                                2012          2011         2012          2011
Base revenue (in thousands)   $ 71,951     $ 77,790     $ 219,733     $ 245,974
Percent of revenue                71.7 %       75.8 %        72.8 %        79.2 %

                                                    SCS
                                Three Months Ended         Nine Months Ended
                                  September 30,              September 30,
                                2012          2011         2012         2011
Base revenue (in thousands)   $ 23,336     $ 18,389     $ 67,185     $ 47,829
Percent of revenue                23.3 %       17.9 %       22.3 %       15.4 %




                                                 Intermodal
                                Three Months Ended         Nine Months Ended
                                  September 30,              September 30,
                                 2012         2011         2012         2011
Base revenue (in thousands)   $  5,037      $ 6,464     $ 14,749     $ 16,966
Percent of revenue                 5.0 %        6.3 %        4.9 %        5.4 %

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:

General Freight. Our General Freight service offering provides truckload freight services as a short- to medium-haul common carrier. We have provided General Freight services since our inception and we derive the largest portion of our revenue from these services.

Dedicated Freight. Our Dedicated Freight service offering is a variation of our General Freight 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 operating segment consists entirely of our freight brokerage service offering which matches customer shipments with available equipment of authorized carriers and provides services that complement our Trucking operations. 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. To date, a majority of the customers of SCS have also engaged us to provide services through one or more of our Trucking service offerings.

Intermodal. Our rail Intermodal service offering provides our customers cost savings over General Freight with a slightly slower transit speed, while allowing us to reposition our equipment.


Results of Operations

Executive Overview

Financial Results

Base revenue of $100.3 million for the quarter ended September 30, 2012, decreased 2.3% from $102.6 million for the same quarter of 2011. We incurred a net loss of $6.1 million ($0.59 per share) for the quarter ended September 30, 2012, compared to a net loss of $4.3 million ($0.42 per share) for the same quarter of 2011.

Base revenue decreased 2.9% to $301.7 million for the nine months ended September 30, 2012, from $310.8 million for the same period of 2011. We incurred a net loss of $14.4 million ($1.40 per share) for the nine months ended September 30, 2012, compared to a net loss of $6.4 million ($0.62 per share) for the same period of 2011.

Net loss for the third quarter of 2012 was impacted by the following items: $0.11 per share relating to increases in accrued reserves for workers' compensation and health claims and $0.03 per share relating to the write off of deferred debt issuance costs associated with our prior credit facility that was replaced during the quarter.

Operating Environment

Freight demand was relatively weak overall for a third quarter and we did not experience the level of increase in freight volumes during the quarter that we normally expect. We attribute this to slower growth in the United States economy, a slight contraction in manufacturing activity, and one fewer business day than in the 2011 quarter. In addition to tepid demand, fuel prices increased for much of the quarter negatively impacting our results both sequentially and year-over-year. Shippers remain concerned about adequate truckload capacity over the medium to longer term, but the short-term environment was less supportive of rate increases than in recent quarters. Drivers remain difficult to attract and retain, requiring increased expense and focus despite the somewhat slower demand environment. In response to the more difficult environment, we maintained our fleet at 160 fewer trucks compared with the third quarter of 2011, increased the percentage of our business conducted through our SCS segment, refinanced into a more flexible credit facility, and concentrated on seating trucks and refining our freight network.

Business Units Results and Operating Data

Our SCS segment continued its strong performance, growing base revenue by 26.9% and operating income by 2.2%. SCS revenues accounted for 23.3% of total base revenue during the quarter, and SCS has been consistently profitable with very little capital investment. Gross margin, down 1.6 percentage points, was pressured by the lackluster demand environment.

Our Intermodal operations decreased as planned, as we reduced the number of leased containers allocated to this unit. We believe we are on schedule to recalibrate our intermodal model in 2013 to pave the way for future profitability.

Our Truckload operations produced an operating ratio of 114.1%. These results included approximately $2.3 million related to the items listed under Financial Results above. Excluding these items, our operating ratio would have been 110.8%, which was relatively consistent with our Truckload operating ratio for the third quarter of last year.

From an operating perspective, per-truck productivity was approximately the same as in the 2011 quarter. However, intra-quarter operations improved and remain at a higher level during October as a result of progress made since changing the leadership of our operations personnel in the second quarter of 2012. The areas of focus during the third quarter included seating more trucks, improving miles per tractor, and improving freight mix.

During the quarter, we engaged an experienced truckload executive to assist us in assessing and improving our operations activities. We determined that the percentage of our business comprised of very short haul loads (under 300 miles) was too high, which was negatively impacting equipment utilization and the ability of drivers to earn adequate compensation. We also re-evaluated customer profitability on a lane-by-lane basis. As a result of this re-evaluation, we accelerated the exit and replacement of specific lanes and loads that failed to meet our new criteria. The timing was not optimal given the weak freight environment, but we believed the overall benefits to our drivers, customers, and future financial results justified the timeline.

On a year-over-year basis, full quarter key operating metrics are not meaningfully different from the third quarter of 2011. On an intra-quarter basis, unmanned tractors improved from over 11.5% of the fleet in July to 5.7% of the fleet at the end of September. The percentage of loads with a length of haul under 300 miles dropped by approximately 26.1%, while base revenue per loaded mile improved by four cents per mile and our average length of haul expanded. Base revenue per manned tractor per week trended upward during the quarter. Although some of the effect may be seasonal, we are encouraged by the ability to increase our number of manned tractors while improving revenue per manned tractor in a weak freight environment.


The key operating metric charts below (Miles per Manned Tractor per Week, Loaded Revenue per Mile, Unmanned Tractors, and Base Revenue per Manned Tractor per Week) reflect the results we have experienced for the periods indicated, as well as for the first two weeks of October. We are presenting weekly results beginning in July to provide a view into intra-quarter progress.

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Balance Sheet and Liquidity

We believe our balance sheet and sources of liquidity remain solid and adequate to support our business for the foreseeable future. At September 30, 2012, our outstanding debt, less cash, represented 54.6% of our balance sheet capitalization, compared to 47.4% at December 31, 2011. At September 30, 2012, we were in compliance with our new, five-year $125.0 million revolving credit facility and had approximately $23.0 million of available borrowing capacity (net of the minimum availability we are required to maintain of approximately $18.75 million). For the nine months ended September 30, 2012, we incurred net capital expenditures of approximately $28.6 million and we anticipate proceeds from the sale of property and equipment to exceed property and equipment purchases by approximately $1.5 million for the remainder of 2012.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Results of Operations - Combined Services

Total base revenue decreased 2.3% to $100.3 million for the quarter ended September 30, 2012 from $102.6 million for the same quarter of 2011. We reported a net loss of $6.1 million ($0.59 per share) for the quarter ended September 30, 2012 as compared to a net loss of $4.3 million ($0.42 per share) for the comparable prior year period.

Our effective tax rate was 36.3% for the quarter ended September 30, 2012 compared to 34.4% for the same quarter of 2011. 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 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.

                                             Three Months Ended
                                               September 30,
                                              2012         2011
Base Trucking revenue                         100.0  %    100.0 %
Operating expenses and costs:
Salaries, wages and employee benefits          46.7        41.7
Depreciation and amortization                  15.5        15.7
Operations and maintenance                     14.0        14.0
Fuel and fuel taxes                            15.4        15.3
Purchased transportation                        6.6         8.1
Insurance and claims                            7.3         7.2
Operating taxes and licenses                    1.7         1.5
Communications and utilities                    1.2         1.3
Gain on disposal of revenue equipment, net    (0.7)       (0.8)
Other                                           6.4         5.8
Total operating expenses and costs            114.1       109.8
Operating loss                               (14.1)  %    (9.8) %




Key Operating Statistics:

                                               Three Months Ended
                                                 September 30,
                                               2012          2011
Operating loss (in thousands)              $ (10,111)     $ (7,572)
Total miles (in thousands) (1)                 49,855        53,640
Empty mile factor (2)                            10.7 %        12.4 %
Weighted average number of tractors (3)         2,157         2,317
Average miles per tractor per period           23,113        23,151
Average miles per tractor per week              1,759         1,761
Average miles per trip (4)                        557           507
Base Trucking revenue per tractor per week $    2,538     $   2,555
Number of tractors at end of period (3)         2,156         2,258
Operating ratio (5)                             114.1 %       109.8 %

(1) Total miles include both loaded and empty miles.

(2) The empty mile factor is the number of miles traveled for which we are not typically compensated by any customer as a percent of total miles traveled.

(3) Tractors include Company-operated tractors in-service plus tractors operated by independent contractors.

(4) Average miles per trip are based upon loaded miles divided by the number of Trucking shipments.

(5) Operating ratio is based upon total operating expenses, net of fuel surcharge revenue, as a percentage of base revenue.

Our base Trucking revenue decreased 7.5% from $77.8 million to $72.0 million and our operating loss was $10.1 million compared to an operating loss of $7.6 million for the same quarter of 2011. This decrease in base trucking revenue was a result of the 160 reduction in the weighted average number of tractors as compared to the third quarter of 2011. During the third quarter our unmanned tractor count remained stubbornly high as drivers remain difficult to attract and retain, requiring increased expense and focus. We sold some of these unmanned tractors, which reduced our average tractor count. Additionally, our independent contractor count has fallen as we also have experienced higher than normal turnover in this area and we have had difficulty recruiting replacement independent contractors.


Overall, our operating ratio deteriorated by 4.3 percentage points of base revenue to 114.1% from 109.8% as a result of the following factors:

Salaries, wages and employee benefits expense increased by 5.0 percentage points of base Trucking revenue. During the third quarter of 2012, we continued to see evidence of a tightening market of eligible drivers related to the continued impact of the Department of Transportation's ("DOT") Compliance, Safety, Accountability ("CSA") program, which was implemented in December 2010, accompanied by seasonal job alternatives for drivers that made driver retention more difficult. We expect new hours-of-service rules being reviewed by the DOT, through the Federal Motor Carrier Safety Administration ("FMCSA"), would further reduce the pool of eligible drivers if implemented. In July 2012, we raised driver pay for new drivers with less than one year experience by over $0.02 per mile in order to retain and attract drivers and we continue to offer sign-on bonuses to attract new drivers. These circumstances and changes may continue to cause increases in driver related expenses that would increase salaries, wages and employee benefits. We also have experienced an increase in the frequency and severity of workers' compensation claims, which increased costs approximately $1.5 million in the third quarter of 2012. In addition to the above, medical payments made under the Company's employee benefits plan increased approximately $0.5 million.

Fuel and fuel taxes expense increased 0.1 percentage points of base Trucking revenue. Tractor utilization was slightly lower in the third quarter of 2012 as compared to 2011, which caused fuel and fuel taxes as a percentage of revenue to increase as trucks spent more time idling. While fuel costs were increasing for most of the quarter, improved fuel purchasing and fuel surcharge collections, as compared to the third quarter of 2011, lowered our net fuel cost per gallon (fuel cost per gallon minus fuel surcharge collections per gallon) by approximately $0.06. Additionally our fuel economy improved by 2.3% as we added new, more fuel efficient trucks to the fleet. We anticipate fuel costs will continue to be affected in the future by price fluctuations, the terms and collectability of fuel surcharge revenue, fuel efficiency, and the percentage of total miles driven by independent contractors.

Purchased transportation expense, which is comprised of independent contractor compensation and fees paid to Mexican carriers decreased by 1.5 percentage points of base Trucking revenue. This decrease is primarily the result of the decrease in the number of independent contractors from 149 to 106. Over the longer term, we expect our purchased transportation expense to increase if we achieve our long-term goal to grow our independent contractor fleet, but in the event that we are unable to recruit and retain independent contractors, this expense could continue to fall causing a corresponding increase in fuel and fuel taxes expense and salaries, wages and employee benefits expense.

Depreciation and amortization expense decreased by 0.2 percentage points of base Trucking revenue. During the quarter, we purchased 110 tractors and 150 trailers and disposed of 84 tractors, 115 trailers and miscellaneous other equipment. As our unmanned tractor count remained high throughout most of the quarter, we delayed in-servicing some of the new equipment while selling some of the older equipment, which resulted in a reduction of our tractor fleet and a related decrease in depreciation and amortization expense. In addition, effective May 1, 2011, the Company changed the time period over which it depreciates its 2005 model year and newer trailers to 14 years from 10 years and we changed the amount of the salvage value to which those trailers are being depreciated from 25.0% of the original purchase price to $500. This change in estimate resulted in a reduction of depreciation expense on a pre-tax basis of approximately $0.6 million and on a net-of-tax basis of approximately $0.3 million ($0.03 per share) during the quarter. Depreciation and amortization expense may be affected in the future as equipment manufacturers change prices and if the prices of used equipment fluctuate.

Insurance and claims expense increased 0.1 percentage points of base Trucking revenue. While our insurance and claims expense decreased by 5.8% in terms of absolute dollars, the decline in revenue offset this improvement. We believe the continuing education of our drivers regarding accident prevention is assisting in reducing insurance and claims expense. If we are able to continue to successfully execute our safety initiatives, we would expect insurance and claims expense to continue to decrease over the long term, though remaining volatile from period-to-period.

Other expenses increased 0.6 percentage points of base Trucking revenue as a result of the write off of approximately $0.5 million of deferred debt issuance costs associated with our prior credit facility which was refinanced on August 24, 2012. Excluding the write off, other expenses would have decreased to 5.7 percent of base Trucking revenue or a decrease of 0.1 percentage points.

Gain on the disposal of equipment decreased 0.1 percentage points of base Trucking revenue in the quarter ended September 30, 2012 as a result of fewer sales of our tractors and trailers. The market for used tractors has softened while the market for used trailers remains strong. If the used equipment market was to worsen or we decided to keep our equipment for a longer period of time, gains on disposal of equipment could decrease.


Results of Operations - Strategic Capacity Solutions

The following table sets forth certain information relating to our SCS segment
for the periods indicated:

                             (in thousands, except gross margin)
                                     Three Months Ended
                                        September 30,
                                2012                    2011
Total SCS base revenue     $        29,339        $        21,144
Intercompany base revenue          (6,003)                (2,755)
Net revenue                $        23,336        $        18,389

Operating income           $         1,916        $         1,873
Gross margin (1)                      13.1  %                14.7 %

(1) Gross margin is calculated by taking total SCS revenue less purchased transportation and dividing that amount by total SCS revenue. This calculation includes intercompany revenue and expenses.

Net revenue from SCS increased 26.9% to $23.3 million from $18.4 million, while operating income increased 2.2% to $1.92 million from $1.87 million. This increase was primarily a result of the continued expansion of our SCS operations as we grew our workforce by 28.6% compared to the same quarter of 2011. This increase was partially offset by a 10.8% decline in gross margin resulting primarily from a softer freight environment and an increase in purchased transportation expense. If we are successful in continuing to build our SCS business, we would expect to see the percentage of our total revenue coming from SCS continue to grow. Our gross margin from our SCS business may continue to decline if the market remains tepid.

Results of Operations - Intermodal Operations

The following table sets forth certain information relating to our Intermodal
operating segment for the periods indicated:

                                      (in thousands, except gross margin)
                                       Three Months Ended September 30,
                                        2012                      2011
Total Intermodal base revenue (1)   $        5,170           $        6,825
. . .
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