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USAK > SEC Filings for USAK > Form 10-K on 22-Mar-2013All Recent SEC Filings

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Form 10-K for USA TRUCK INC


22-Mar-2013

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K 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, 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. 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," set forth above. Readers should review and consider the factors discussed under the heading "Risk Factors" in Item 1A of this Annual Report on Form 10-K, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

All such forward-looking statements speak only as of the date of this Annual Report on Form 10-K. 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.

Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (or 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 three years 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 Truckload 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. For the years ended December 31, 2012 and 2011, Trucking base revenue represented 72.8% and 78.2% of total base revenue, respectively, with the remaining base revenue being generated by our SCS and Intermodal operating segments.

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. For the years ended December 31, 2012 and 2011, our SCS operating segment represented approximately 22.0% and 16.3%, respectively, of our consolidated revenue. For the years ended December 31, 2012 and 2011, our Intermodal operating segment represented approximately 5.2% and 5.5%, respectively, of our consolidated revenue.

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 operating segment consists 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 of 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. Intermodal shipping is a method of transporting freight using multiple modes of transportation between origin and destination, with the freight remaining in a trailer or special container throughout the trip. Our rail Intermodal service offering provides our customers cost savings over Truckload with a slightly slower transit speed, while allowing us to reposition our equipment to maximize our freight network yield. During August 2010, we entered into a long-term agreement with BNSF Railway to lease 53' domestic intermodal containers. Prior to the agreement, the majority of Intermodal's revenue was derived from trailer-on-flat-car service. Because of the lack of lane density, we reduced the number of our leased containers from 500 to approximately 125. Our container contract with BNSF expired on December 31, 2012. Accordingly, we are scheduled to return the remaining leased containers to BNSF during the first quarter and plan to transition profitable intermodal freight to other sources of capacity throughout 2013.


Results of Operations

On January 31, 2013, we issued a news release announcing our preliminary revenues and results of operations for the fourth quarter of 2012. Subsequent to the issuance of this news release, and in conjunction with the completion of normal quarter- and year-end closing and audit procedures, we recorded additional adjustments to operating and other expenses that increased our reported net loss by approximately $0.1 million, or $0.01 per share.

Executive Overview

Asset-Based Trucking Operations

We experienced improving operating fundamentals toward the end of the third quarter and into the fourth quarter. The improvement is reflected in our financial results as we narrowed our loss per share in the fourth quarter of 2012 by 26.2% to $0.31, compared to a $0.42 loss in the fourth quarter of 2011. Sequentially, we nearly cut in half the third quarter's $0.59 loss per share in what has historically been a seasonally weaker quarter for us.

Fourth quarter improvement was most evident in our Trucking segment, where we produced year-over-year revenue growth for the first time since the second quarter of 2011. Base Trucking revenue grew 3.4% despite a 3.1% reduction in the average fleet size. Base revenue per tractor per week improved 6.7% to $2,720 on an improved freight mix and a substantially larger seated tractor count.

Our yield management activities during the third quarter, which adversely impacted volumes during that quarter as we re-priced underperforming freight, began to produce results during the fourth quarter. We replaced volumes lost during the third quarter with better-performing freight, as evidenced by the combination of a 2.2% improvement in rate per loaded mile and a 6.7% increase in loaded length-of-haul. Pricing typically falls at longer lengths-of-haul, so the fact that we grew both simultaneously indicates improving lane flow (directionality, density, and market selection). We realigned our customer base during the fourth quarter, including the replacement of four of our top 25 Trucking shippers, while reducing concentration with our largest shippers. We expect some of our new customers to grow into our top 25 customer list in the first half of 2013.

The improved freight mix and the better operational execution helped us to increase miles per seated tractor per week by 1.3% to 1,931 miles. The heightened empty mile factor (up 92 basis points to 12.0%) suggests that we still need additional freight volume to better utilize our equipment. We are executing a detailed strategy that we believe will grow volumes in specific markets and lanes during this winter's freight bidding season.

Perhaps our largest accomplishment during the fourth quarter involved cutting our unseated tractor count by more than 50%, to 92 from 213 sequentially versus the third quarter of 2012. The seated tractor count growth was made possible primarily by lower driver turnover, which improved throughout the fourth quarter to an annualized rate of 83% in December 2012, compared to 107% in December 2011. We attribute the improvement to enhanced Company-wide focus on driver retention, freight better suited to our network, and more consistent miles. The combination of our seated tractor count and greater miles per seated tractor led to a 5.5% improvement in overall tractor utilization to 1,850 miles per in-service tractor per week.

The key operating metric charts below (Miles per Seated Tractor per Week, Loaded Revenue per Mile, Unseated Tractors, and Base Revenue per Tractor per Week) reflect the results we have experienced for the periods indicated.


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Our SCS segment continued to deliver strong performance, growing base revenue by 17.6% and operating income by 13.4% in the fourth quarter. Gross margin expanded by 30 basis points on slightly improved market conditions during the fourth quarter. SCS represented 21.2% of our total base revenue during the fourth quarter and is continuing to deliver profitable results with minimal capital investment. Intermodal operations experienced better gross margins on less revenue and were immaterial to our financial results.

Balance Sheet and Liquidity

At December 31, 2012, our outstanding debt, less cash, represented 55.1% of our balance sheet capitalization, compared to 47.4% at December 31, 2011. At December 31, 2012, we were in compliance with the covenants of our Revolver and had approximately $19.9 million of available borrowing capacity (net of the minimum availability we are required to maintain of approximately $18.8 million). For the twelve months ended December 31, 2012, we incurred net capital expenditures (purchases of property and equipment plus liability incurred for leases on revenue equipment less proceeds from the sale of property and equipment) of approximately $32.2 million. Our 2013 operating plan anticipates capital expenditures greater than those for 2012. We believe our balance sheet and sources of liquidity are adequate to support our operating needs for the next twelve months. Despite this adequacy, we can make no assurance, however, that our sources of liquidity will be sufficient to fund our operations and all expansion plans either for the remainder of this year or for the next several years, or that any necessary additional financing will be available, if at all, in amounts required or on terms satisfactory to us, especially in light of our net loss for 2012.


Note Regarding Presentation

By agreement with our customers, and consistent with industry practice, we add a graduated surcharge to the rates we charge our customers as diesel fuel prices increase above an agreed upon baseline price per gallon. The surcharge is designed to approximately offset increases in fuel costs above the baseline. Fuel prices are volatile, and the fuel surcharge increases our revenue at different rates for each period. We believe that comparing operating costs and expenses to total revenue, including the fuel surcharge, could provide a distorted comparison of our operating performance, particularly when comparing results for current and prior periods. Therefore, we have used base revenue, which excludes the fuel surcharge revenue, and instead taken the fuel surcharge as a credit against the fuel and fuel taxes and purchased transportation line items in the table setting forth the percentage relationship of certain items to base revenue below.

We do not believe that a reconciliation of the information presented on this basis and corresponding information comparing operating costs and expenses to total revenue would be meaningful. Data regarding both total revenue, which includes the fuel surcharge, and base revenue, which excludes the fuel surcharge, is included in the consolidated statements of operations included in this report.

Base revenues from our SCS operating segment, consisting entirely of base revenues from our freight brokerage service offering, have fluctuated in recent periods. This service offering typically does not involve the use of our tractors and trailers. Therefore, an increase in these revenues tends to cause expenses related to our operations that do involve our equipment-including fuel expense, depreciation and amortization expense, operations and maintenance expense, salaries, wages and employee benefits and insurance and claims expense-to decrease as a percentage of base revenue, and a decrease in these revenues tends to cause those expenses to increase as a percentage of base revenue with a related change in purchased transportation expense. Since changes in SCS revenues generally affect all such expenses, as a percentage of base revenue, we do not specifically mention it as a factor in our discussion of increases or decreases in the other expenses presented in the consolidated statements of operations in the period-to-period comparisons below.

Fiscal Year Ended December 31, 2012 Compared to Fiscal Year Ended December 31, 2011

Results of Operations - Combined Services

Total base revenue decreased 0.6% from $411.0 million to $408.7 million. We reported a net loss for all service offerings of $17.7 million ($1.71 per share), as compared to a net loss of $10.8 million ($1.05 per share).

Our effective tax rate increased from 31.5% to 35.2%. 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 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.

                                          Year Ended December 31,
                                            2012            2011
Base revenue                                 100.0 %         100.0 %
Operating expenses and costs:
Salaries, wages and employee benefits         44.1            40.4
Fuel and fuel taxes                           15.6            15.6
Purchased transportation                       6.7             8.3
Depreciation and amortization                 15.0            15.2
Operations and maintenance                    13.6            12.3
Insurance and claims                           6.8             6.9
Operating taxes and licenses                   1.8             1.6
Communications and utilities                   1.3             1.3
Gain on disposal of revenue equipment,       (0.7)           (1.1)
net
Other                                          5.8             5.5
Total operating expenses and                 110.0           106.0
costs
Operating loss                              (10.0) %         (6.0) %



Key Operating Statistics:

                                              Year Ended December 31,
                                                2012            2011
Operating loss (in thousands)               $  (29,848)     $ (18,762)
Total miles (in thousands) (1)                  205,776        221,765
Empty mile factor (2)                              11.4 %         11.0 %
Weighted average number of tractors (3)           2,184          2,313
Average miles per tractor per period             94,220         95,878
Average miles per tractor per week                1,802          1,839
Average miles per trip (4)                          542            532
Base Trucking revenue per tractor per week  $     2,606     $    2,664
Number of tractors at end of period (3)           2,184          2,235
Operating ratio (5)                               110.0 %        106.0 %

(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 is 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.

Base revenue from our Trucking operating segment decreased from $321.3 million to $297.6 million. The decrease was primarily the result of:

Our total miles and our average miles per tractor per week decreased 7.2% and 2.0%, respectively.

The size of our fleet decreased 5.6%.

The total number of loads dispatched decreased 9.1%.

Our empty mile factor increased 3.6%.


The operating ratio for our Trucking operating segment deteriorated by 4.0 percentage points of base Trucking revenue to 110.0% due to the following factors:

Salaries, wages and employee benefits increased 3.7 percentage points of base Trucking revenue due in large part to a 7.4% reduction in base Trucking revenue and a 28.9% reduction in the percentage of our tractor fleet comprised of independent contractors. As the percentage of our fleet comprised of independent contractors decreases, the percentage of our fleet comprised of Company drivers increases, along with the associated salaries, wages and benefits for such Company drivers. During 2012, we continued to see evidence of a tightening market of eligible drivers related to the implementation of CSA, which caused our total driver compensation costs to increase 4.2% on a per mile basis as we needed to offer sign-on bonuses to attract new drivers, we increased non-mileage pay to help us retain drivers, and we raised driver pay for new drivers with less than one year experience. New hours-of-service rules scheduled to go into effect in 2013 may further reduce the pool of eligible drivers and may lead to 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 have increased by approximately $2.0 million or 69.1%. In addition to the above, medical payments made under our employee benefits plan increased approximately $1.1 million or 23.7%.

Fuel and fuel taxes expense, net of fuel surcharge, remained flat as a percentage of base Trucking revenue. Tractor utilization was 2.0% lower during 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 generally have been higher in 2012, improved fuel purchasing and fuel surcharge collections as compared to 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 1.2% 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, which is comprised of independent contractors' compensation and fees paid to Mexican carriers, decreased 1.6 percentage points of base Trucking revenue. This decrease was the result of a reduction of 43 independent contractors, or 28.9%, included in our fleet. Over the longer term, we expect our purchased transportation expense to increase if we achieve our goal to grow our independent contractor fleet and our cross-border Mexico business. 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 decreased 0.2 percentage points of base Trucking revenue primarily due to an overall decrease in the size of our tractor and trailer fleets. As of December 31, 2012, we reduced our total tractor count by 42 units as compared to December 31, 2011, representing units shut down due to high mileage and trade life cycles. We also reduced our trailer count by 227 year over year as part of our plan to reduce the number of trailers because of our investment in trailer tracking devices. As a result of our plan to reduce the age of our fleet and the increased costs of new equipment, we expect depreciation and amortization expense to increase as a percentage of base Trucking revenue in future periods. Absent offsetting improvements in average revenue per tractor or growth in our independent contractor fleet and non-asset based operations, our expense in this category as a percentage of revenue could increase going forward if equipment prices continue to inflate.

Operations and maintenance expense increased 1.3 percentage points of base Trucking revenue primarily due to a 10.0% increase in direct repair costs related to new engine emissions requirements mandated by the EPA, various requirements imposed by California's Air Resources Board, the higher mileage equipment remaining in our fleet and the increase in the cost of parts and tires. Our average tractor age at December 31, 2012 was 32 months compared to 28 months at December 31, 2011, whereas our average trailer age was 77 months and 71 months, respectively. Operations and maintenance expense may increase in the future if we delay the purchase of new equipment and the age of our equipment continues to increase.

Insurance and claims expense decreased 0.1 percentage points of base Trucking revenue year over year; however, the actual amount of insurance and claims expense decreased by approximately $2.0 million. The mild winter during the first quarter along with the continuing education of our drivers regarding accident prevention assisted us in reducing insurance and claims expense. If we are able 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 expense increased 0.3 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 we refinanced in August 2012. This expense category decreased approximately $0.4 million as compared to 2011; however, lower tractor utilization resulted in this item increasing as a percentage of revenue.

Gain on the disposal of equipment decreased 0.4 percentage points of base Trucking revenue as a result of fewer sales of our tractors and trailers due to a reduced level of equipment inventory to sell. If the used equipment market was to soften 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 operating
segment for the periods indicated:

                                                Year Ended December 31,
                                                 2012            2011
Total SCS revenue (1)                         $   128,135     $   93,118
Intercompany revenue                             (24,761)       (12,094)
Total SCS revenue, less intercompany revenue  $   103,374     $   81,024

Operating income (in thousands)               $     7,788     $    7,100
Gross margin (2)                                     13.9 %         15.1 %

. . .

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