USA TRUCK INC - Quarter Report: 2015 September (Form 10-Q)

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		September 30,				December 31,
		2015				2014
						(Recast)
Assets
Current assets:
Cash		$	2,132			$	205
Accounts receivable, net of allowance for doubtful accounts of $974 and $1,020, respectively			56,752				71,186
Other receivables			5,268				5,604
Inventories			1,426				1,863
Assets held for sale			11,343				3,536
Deferred income taxes			6,878				7,707
Prepaid expenses and other current assets			3,883				5,197
Total current assets			87,682				95,298
Property and equipment:
Land and structures			32,360				31,596
Revenue equipment			281,706				348,251
Service, office and other equipment			21,783				18,812
Property and equipment, at cost			335,849				398,659
Accumulated depreciation and amortization			(138,897	)			(182,964	)
Property and equipment, net			196,952				215,695
Other assets			1,470				658
Total assets		$	286,104			$	311,651
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	33,582			$	23,582
Current portion of insurance and claims accruals			13,516				10,230
Accrued expenses			20,757				8,252
Current maturities of long-term debt and capital leases			7,231				24,048
Total current liabilities			75,086				66,112
Deferred gain			1,024				589
Long-term debt and capital leases, less current maturities			66,764				93,464
Deferred income taxes			34,013				42,771
Insurance and claims accruals, less current portion			6,322				9,647
Total liabilities			183,209				212,583
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; none issued			--				--
Common Stock, $.01 par value; 30,000,000 shares authorized; issued 11,936,040 shares, and 11,873,071 shares, respectively			119				119
Additional paid-in capital			67,195				65,850
Retained earnings			61,934				54,802
Less treasury stock, at cost (1,578,849 shares, and 1,340,438 shares, respectively)			(26,353	)			(21,703	)
Total stockholders’ equity			102,895				99,068
Total liabilities and stockholders’ equity		$	286,104			$	311,651

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
						(Recast)								(Recast)
Revenue:
Operating revenue		$	123,490			$	153,618			$	389,950			$	452,405
Operating expenses:
Salaries, wages and employee benefits			32,028				39,388				105,536				113,930
Fuel expense			12,960				28,449				47,195				92,156
Depreciation and amortization			8,702				10,792				29,951				33,395
Insurance and claims			5,405				6,466				17,502				18,353
Operations and maintenance			11,533				10,649				34,083				35,999
Purchased transportation			40,613				43,755				122,029				129,543
Operating taxes and licenses			1,439				1,414				4,221				4,215
Communications and utilities			989				1,026				2,732				3,159
Gain on disposal of assets, net			(3,008	)			(302	)			(5,766	)			(824	)
Restructuring, severance and related charges			2,893				--				2,893				--
Other			4,477				4,469				13,775				12,412
Total operating expenses			118,031				146,106				374,151				442,338
Operating income			5,459				7,512				15,799				10,067
Other expenses:
Interest expense, net			493				816				1,672				2,271
Defense costs			--				65				--				2,593
Loss on extinguishment of debt			--				--				750				--
Other, net			78				4				650				52
Total other expenses, net			571				885				3,072				4,916
Income before income taxes			4,888				6,627				12,727				5,151
Income tax expense			2,161				2,621				5,595				2,418
Net income and comprehensive income		$	2,727			$	4,006			$	7,132			$	2,733
Net income per share information:
Average shares outstanding (basic)			10,442				10,357				10,439				10,350
Basic earnings per share		$	0.26			$	0.39			$	0.68			$	0.26
Average shares outstanding (diluted)			10,470				10,476				10,515				10,482
Diluted earnings per share		$	0.26			$	0.38			$	0.68			$	0.26

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		Common Stock								Additional
						Par					Paid-in			Retained				Treasury
		Shares				Value					Capital			Earnings				Stock				Total
Balance at December 31, 2014			11,873			$	119			$	65,850			$	61,082			$	(21,703	)		$	105,348
Revision due to accounting principle change (see note 10)			--				--				--				(6,280	)			--				(6,280	)
Balance at December 31, 2014, recast			11,873				119				65,850				54,802				(21,703	)			99,068
Exercise of stock options			32				--				168				--				--				168
Excess tax benefit from exercise of stock options			--				--				837				--				--				837
Purchase of common stock			--				--				(52	)			--				(4,650	)			(4,702	)
Share-based compensation			--				--				802				--				--				802
Restricted stock award grant			131				1				(2	)			--				--				(1	)
Forfeited restricted stock			(84	)			(1	)			1				--				--				--
Net share settlement related to restricted stock vesting			(16	)			--				(409	)			--				--				(409	)
Net income			--				--				--				7,132				--				7,132
Balance at September 30, 2015			11,936			$	119			$	67,195			$	61,934			$	(26,353	)		$	102,895

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		Nine Months Ended
		September 30,
		2015				2014
						(Recast)
Operating activities:
Net income		$	7,132			$	2,733
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			29,951				33,395
Provision for doubtful accounts			360				798
Deferred income taxes, net			(7,931	)			(3,625	)
Share-based compensation			802				246
Gain on disposal of assets, net			(5,766	)			(824	)
Loss on extinguishment of debt			750				--
Change in vacation policy			(1,383	)			--
Asset valuation reserve			281				(35	)
Other			(6	)			--
Changes in operating assets and liabilities:
Accounts receivable			14,077				(10,066	)
Inventories and prepaid expenses			1,132				(2,013	)
Accounts payable and accrued liabilities			18,513				16,264
Insurance and claims accruals			1,248				1,203
Other long-term assets and liabilities			(374	)			--
Net cash provided by operating activities			58,786				38,076
Investing activities:
Capital expenditures			(45,000	)			(34,577	)
Proceeds from sale of property and equipment			31,212				12,882
Proceeds from operating sale leaseback			7,975				--
Change in other assets, net			--				19
Net cash used by investing activities			(5,813	)			(21,676	)
Financing activities:
Borrowings under long-term debt			112,237				48,938
Payments on long-term debt			(132,356	)			(49,560	)
Payments on capitalized lease obligations			(25,658	)			(12,840	)
Net change in bank drafts payable			(3,422	)			(1,860	)
Excess tax benefit from exercise of stock options			837				--
Principal payments on note payable			(896	)			(1,023	)
Purchase of common stock			(4,702	)			--
Proceeds from capital sale leaseback			3,156				--
Net (payments) or proceeds on stock based awards			(242	)			18
Net cash used in financing activities			(51,046	)			(16,327	)
Increase in cash			1,927				73
Cash:
Beginning of period			205				14
End of period		$	2,132			$	87
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	1,623			$	2,574
Income taxes			2,996				407
Supplemental disclosure of non-cash investing activities:
Purchases of revenue equipment included in accounts payable			8,422				3,635

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Note 1 – Basis of Presentation

 

In the opinion of the management of USA Truck, Inc., the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted. All normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These financial statements should be read in conjunction with the financial statements, and footnotes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Certain previously reported amounts have been reclassified to conform to the current year presentation. Additionally, financial statements and notes to the financial statements previously reported in prior periods have been recast to reflect the change in accounting principle for tires. Refer to note 10 of the footnotes to the Company’s condensed consolidated financial statements for further discussion regarding the change in accounting principle.

 

NOTE 2 – NOTE RECEIVABLE

 

During November 2010, the Company sold its terminal facility in Shreveport, Louisiana. In connection with this sale, the buyer gave the Company cash in the amount of $0.2 million and a note receivable, collateralized by the property, in the amount of $2.1 million. The note receivable bears interest at an annual rate of 7.0% and has scheduled principal and interest payments based on a 30-year amortization schedule. A balloon payment in the approximate amount of $1.9 million is payable to the Company when the note matures in November 2015. Accordingly, the Company deferred the approximate $0.7 million of gain on the sale of this facility, and records this gain into earnings as payments on the note receivable are received. All principal payments have been received, except for the balloon payment due at maturity. The Company has not recorded any valuation allowance against the note receivable, which is included in other receivables in the accompanying condensed consolidated balance sheet. For the three months ended September 30, 2015 and 2014, the Company recognized approximately $2,100 and $2,000, respectively, of this gain. For the nine months ended September 30, 2015 and 2014, the Company recognized approximately $6,200 and $5,800, respectively, of this gain.

NOTE 3 – SHARE-BASED COMPENSATION

 

In May 2014, the Company’s stockholders approved the USA Truck, Inc. 2014 Omnibus Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the granting of incentive or nonqualified options or other equity-based awards covering up to 500,000 shares of common stock to directors, officers and other key employees and consultants. As of September 30, 2015, 374,408 shares were available for future options or other equity awards under the Incentive Plan.

 

In January 2015, the Executive Compensation Committee approved a Long-Term Incentive Plan (the “2015 LTIP”) under which participants, including executives and other key management personnel, are eligible to receive long-term equity awards in the form of restricted stock. In January 2015, the 2015 LTIP participants received grants of restricted stock, a portion of which are subject to time-based vesting, in 25% increments over four years beginning on the first anniversary of the grant date, and a portion of which are subject to performance-based vesting upon achievement of certain levels of return on invested capital determined on a cumulative basis over a three-year performance period.

NOTE 4 – REPURCHASE OF EQUITY SECURITIES

 

In July 2015, the Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company’s common stock over a three-year period ending July 28, 2018. Share repurchases, if any, will be made using a variety of methods, which may include open market purchases, privately negotiated transactions or block trades, or any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. During the quarter ended September 30, 2015, the Company, through a Rule 10b5-1 plan, repurchased a total of 245,979 shares at a weighted average price of $19.11 per share for an aggregate total cost of approximately $4.7 million. As of September 30, 2015, the repurchase authorization had approximately 0.8 million shares remaining. The specific number of shares the Company ultimately repurchases, and the actual timing and amount of share repurchases, will depend on market conditions and other factors, as well as the applicable requirements of federal securities law. In addition, the stock repurchase program may be suspended, extended or terminated by the Company at any time without prior notice, and the Company is not obligated to purchase a specific number of shares.

 

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NOTE 5 – SEGMENT REPORTING

 

The Company’s two reportable segments are Trucking and Strategic Capacity Solutions (“SCS”).

 

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.

 

In determining its reportable segments, the Company focuses on financial information, such as operating revenues, operating expense categories, operating ratios, operating income and key operating statistics, which the Company’s management uses to make operating decisions.

 

Assets are not allocated to SCS, as those operations provide truckload freight services to customers through arrangements with third party carriers who utilize their own equipment. To the extent rail intermodal operations require the use of Company-owned assets; they are obtained from the Company’s trucking segment on an as-needed basis. Depreciation and amortization expense is allocated to SCS based on the assets specifically utilized to generate revenue. All intercompany transactions between segments reflect rates similar to those that would be negotiated with independent third parties. All other expenses for SCS are specifically identifiable direct costs or are allocated to SCS based on relevant drivers.

 

A summary of operating revenue by segment is as follows (in thousands):

 

 

(1)

Includes foreign revenue of $10.7 million and $32.5 million for the three and nine months ended September 30, 2015, respectively, and $14.6 million and $45.0 million for the three and nine months ended September 30, 2014, respectively. All foreign revenue is paid in US dollars.

 

A summary of operating income (loss) by segment is as follows (in thousands):

 

 

 

A summary of depreciation and amortization by segment is as follows (in thousands):

 

 

NOTE 6 – Assets Held for sale

 

Assets held for sale as of September 30, 2015 and December 31, 2014 were as follows (in thousands):

 

 

Assets held for sale are carried at the lower of depreciated cost or estimated fair value less expected selling costs. The Company expects to sell these assets within the next twelve months.

Note 7 – Accrued Expenses

 

Accrued expenses consisted of the following (in thousands):

 

 

(1)

Refer to note 15 of the footnotes to the Company’s condensed consolidated financial statements for additional information regarding the restructuring, severance and related charges.

 

(2)

As of September 30, 2015 and December 31, 2014, no single item included within other accrued expenses exceeded 5.0% of our total current liabilities.

 

Note 8 – LONG-TERM DEBT

 

Long-term debt consisted of the following (in thousands):

 

 

CREDIT FACILITY

 

In February 2015, the Company entered into a new senior secured revolving credit facility (the “Credit Facility”) with a group of lenders and Bank of America, N.A., as agent (“Agent”). Contemporaneously with the funding of the Credit Facility, the Company paid off the obligations under its prior credit facility and terminated such facility.

 

 

The Credit Facility is structured as a $170.0 million revolving credit facility, with an accordion feature that, so long as no event of default exists, allows the Company to request an increase in the revolving credit facility of up to $80.0 million, exercisable in increments of $20.0 million. The Credit Facility is a five-year facility scheduled to terminate on February 5, 2020. Borrowings under the Credit Facility are classified as either “base rate loans” or “LIBOR loans”. Base rate loans accrue interest at a base rate equal to the Agent’s prime rate plus an applicable margin that is set at 0.50% through May 31, 2016 and adjusted quarterly thereafter between 0.25% and 1.00% based on the Company’s consolidated fixed charge coverage ratio. LIBOR loans accrue interest at LIBOR plus an applicable margin that is set at 1.50% through May 31, 2016 and adjusted quarterly thereafter between 1.25% and 2.00% based on the Company’s consolidated fixed charge coverage ratio. The Credit Facility includes, within its $170.0 million revolving credit facility, a letter of credit sub-facility in an aggregate amount of $15.0 million and a swing line sub-facility in an aggregate amount of $20.0 million. An unused line fee of 0.25% is applied to the average daily amount by which the lenders’ aggregate revolving commitments exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The Credit Facility is secured by a pledge of substantially all of the Company’s assets, with the notable exclusion of any real estate or revenue equipment financed outside the Credit Facility. Additionally, the Company recognized charges in the first quarter of 2015 of $0.8 million resulting from the replacement of its previous credit facility representing the write-off of unamortized deferred financing fees.

 

Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $170.0 million; or (B) the sum of (i) 90% of eligible investment grade accounts receivable (reduced to 85% in certain situations), plus (ii) 85% of eligible non-investment grade accounts receivable, plus (iii) the lesser of (a) 85% of eligible unbilled accounts receivable and (b) $10.0 million, plus (iv) the product of 85% multiplied by the net orderly liquidation value percentage applied to the net book value of eligible revenue equipment, plus (v) 85% multiplied the net book value of otherwise eligible newly acquired revenue equipment that has not yet been subject to an appraisal. The borrowing base is reduced by an availability reserve, including reserves based on dilution and certain other customary reserves. The Credit Facility contains a single springing financial covenant, which requires a consolidated fixed charge coverage ratio of at least 1.0 to 1.0. The financial covenant springs only in the event excess availability under the Credit Facility drops below 10% of the lenders’ total commitments under the Credit Facility.

 

The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the lenders’ commitments may be terminated. The Credit Facility contains certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions and dispositions, affiliate transactions, and other indebtedness.

 

The Company had no overnight borrowings under the Credit Facility as of September 30, 2015. The average interest rate including all borrowings made under the Credit Facility as of September 30, 2015 was 1.74%. As debt is repriced on a monthly basis, the borrowings under the Credit Facility approximate fair value. As of September 30, 2015, the Company had outstanding $4.3 million in letters of credit and had approximately $114.7 million available under the Credit Facility.

 

Note 9 – LEASES AND Commitments

 

CAPITAL LEASES

 

USA Truck leases certain equipment under capital leases with terms ranging from 15 to 60 months. Balances related to these capitalized leases are included in property and equipment in the accompanying condensed consolidated balance sheets and are set forth in the table below for the periods indicated (in thousands).

 

 

The Company has capitalized lease obligations relating to revenue equipment of $23.0 million, of which $7.2 million represents the current portion. Such leases have various termination dates extending through September 2019 and contain renewal or fixed price purchase options. The effective interest rates on the leases range from 1.88% to 3.11% as of September 30, 2015. The lease agreements require payment of property taxes, maintenance and operating expenses. Amortization of capital leases was $1.8 million and $7.0 million for the three and nine months ended September 30, 2015, respectively, and $3.1 million and $9.7 million for the three and nine months ended September 30, 2014, respectively.

 

During September 2015, the Company completed a sale-leaseback transaction under which it sold certain owned tractors to an unrelated party for net proceeds of $3.1 million and entered into a 48 month capital lease agreement with the buyer. At September 30, 2015, the Company recorded a liability of approximately $0.1 million representing the total gain on the sale and will amortize such amount to earnings ratably over the lease term. The deferred gain is included in the deferred gain line item on the accompanying condensed consolidated balance sheet

 

 

OPERATING LEASES

 

Rent expense associated with operating leases was $1.7 million and $4.5 million for the three and nine months ended September 30, 2015, respectively, and $1.4 million and $3.9 million for the three and nine months ended September 30, 2014, respectively. Rent expense relating to tractors, trailers and other operating equipment is included in operations and maintenance expense, while rent expense relating to office equipment is included in other operating expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

 

As of September 30, 2015, the Company has entered into leases with lessors who do not participate in the Credit Facility. Currently, such leases do not contain cross-default provisions with the Credit Facility.

 

In August 2015, the Company completed two sale-leaseback transactions under which it sold certain owned tractors to an unrelated party for net proceeds of $8.0 million and entered into two operating leases with terms of 58 and 59 months, respectively, with the buyer. During September 2015, the Company recorded a liability of approximately $0.3 million representing the total gain on the sale and will amortize such amount to earnings ratably over the lease term. The deferred gain is included on the deferred gain line item in the accompanying condensed consolidated balance sheet.

 

As of September 30, 2015, the future minimum payments including interest under capitalized leases with initial terms of one year or more and future rentals under operating leases for certain facilities, office equipment and revenue equipment with initial terms of one year or more were as follows for the years indicated (in thousands).

 

  

OTHER COMMITMENTS

 

As of September 30, 2015, the Company had commitments of approximately $0.03 million for purchases of non-revenue equipment and commitments of approximately $22.3 million for purchases of revenue equipment, of which none is cancellable. The Company anticipates taking delivery of these purchases throughout the remainder of 2015.

 

NOTE 10 – CHANGE IN ACCOUNTING PRINCIPLE

 

During the third quarter of 2015, the Company changed its accounting policy for tires. Prior to this change, the cost of the replacement tires placed in service was reported as prepaid tires and amortized based on estimated usage of the tires. Under the new policy, the cost of tires mounted on purchased revenue equipment is capitalized as part of the total equipment cost and is depreciated over the useful life of the related equipment. Subsequent replacement tires are expensed at the time those tires are placed in service. Management believes this new policy is preferable under the circumstances because it provides a more precise method for recognizing expenses related to tires consistent with industry practice. Comparative financial statements for all prior periods have been recast to apply the new policy retrospectively, and are reflected under columns marked “Recast”.

 

The following tables present the line items on the statements of operations, balance sheets and statements of cash flows that were impacted by the accounting change at December 31, 2014, and for the three and nine month periods ended September 30, 2014 (in thousands, except per share amounts).

 

  

 

 

 

 

 

The following is a summary of the adjusted quarterly results of operations through September 30, 2015 (amounts in thousands).

 

 

 

 

Under ASC 205-45-5, “Accounting Changes and Error Corrections,” the Company is required to report a change in accounting principle by retrospectively applying the new principle to all prior periods presented, unless it is impractical to determine the prior-period effect. Accordingly, the Company has adjusted previously reported financial information for all periods presented.

 

NOTE 11 – INCOME tAXES

 

During the three months ended September 30, 2015 and 2014, the Company’s effective tax rates were 44.2% and 39.6%, respectively. During the nine months ended September 30, 2015 and 2014, the Company’s effective tax rates were 44.0% and 46.9%, respectively. Income tax expense varies from the amount computed by applying the statutory 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 the Company’s drivers. Drivers may elect to receive non-taxable per diem pay in lieu of a portion of their taxable wages. This per diem program increases the Company’s drivers’ net pay per mile, after taxes, while decreasing gross pay, before taxes. As a result, salaries, wages and employee benefits costs are slightly lower, and effective income tax rates are higher than the statutory rate. Generally, as pre-tax income increases, the impact of the driver per diem program on the effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in periods where earnings are at or near breakeven, the impact of the per diem program on the Company’s effective tax rate is significant. Due to the partially nondeductible effect of per diem pay, the Company’s tax rate will fluctuate in future periods based on fluctuations in earnings and in the number of drivers who elect to receive this pay structure.

 

The Company accounts for any uncertainty in income taxes by determining whether it is more likely than not that a tax position taken in a tax return will be sustained upon examination by the appropriate taxing authority based on the technical merits of the position. In that regard, the Company has analyzed filing positions in its federal and applicable state tax returns as well as in all open tax years. Periods subject to examination for the Company’s federal returns are the 2011, 2012, 2013 and 2014 tax years. Management believes that the Company’s income tax filing positions and deductions will be sustained on examination and does not anticipate any adjustments that will result in a material change to its consolidated financial position, results of operations and cash flows. In conjunction with the foregoing, the Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. No unrecognized tax benefits have been recorded as of September 30, 2015.

 

Note 12 – EARNINGS Per Share

 

Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by adjusting the weighted average number of shares of common stock outstanding by common stock equivalents attributable to dilutive stock options and restricted stock. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on income per share.

 

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):