USA TRUCK INC - Quarter Report: 2017 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

September 30, 2017

or

 

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from - to - .

 

Commission File Number: 1-35740

 

 

 

USA TRUCK, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		71-0556971
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)
3200 Industrial Park Road
Van Buren, Arkansas		72956
(Address of principal executive offices)		(Zip Code)

 

479-471-2500

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]

No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]

No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ]		Accelerated filer [X]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)		Smaller reporting company [  ]
		Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]

No [X]

 

The number of shares outstanding of the registrant’s common stock, as of October 25, 2017, was 8,297,879.

 

 

 

USA TRUCK, INC.

TABLE OF CONTENTS 

 

Item No.		Caption		Page
		PART I – FINANCIAL INFORMATION
1.		Financial Statements
		Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2017 and December 31, 2016		2
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) –Three and nine months ended September 30, 2017 and September 30, 2016		3
		Condensed Consolidated Statement of Stockholders’ Equity (unaudited) – Nine months ended September 30, 2017		4
		Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2017 and September 30, 2016		5
		Notes to Condensed Consolidated Financial Statements (unaudited)		6
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
3.		Quantitative and Qualitative Disclosures About Market Risk		26
4.		Controls and Procedures		27
		PART II – OTHER INFORMATION
1.		Legal Proceedings		27
1A.		Risk Factors		27
2.		Unregistered Sales of Equity Securities and Use of Proceeds		28
3.		Defaults Upon Senior Securities		28
4.		Mine Safety Disclosures		28
5.		Other Information		28
6.		Exhibits		29
		Signatures		30

 

 

		September 30,				December 31,
		2017				2016
Assets
Current assets:
Cash		$	193			$	122
Accounts receivable, net of allowance for doubtful accounts of $1,047 and $608, respectively			58,814				55,127
Other receivables			3,509				6,986
Inventories			427				413
Assets held for sale			622				4,661
Prepaid expenses and other current assets			3,451				6,187
Total current assets			67,016				73,496
Property and equipment:
Land and structures			32,493				31,500
Revenue equipment			254,462				269,953
Service, office and other equipment			25,256				25,295
Property and equipment, at cost			312,211				326,748
Accumulated depreciation and amortization			(117,206	)			(106,465	)
Property and equipment, net			195,005				220,283
Other assets			1,024				1,189
Total assets		$	263,045			$	294,968
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	29,399			$	18,779
Current portion of insurance and claims accruals			11,736				10,665
Accrued expenses			7,665				7,533
Current maturities of capital leases			15,021				16,742
Insurance premium financing			--				3,943
Total current liabilities			63,821				57,662
Deferred gain			531				652
Long-term debt			77,500				96,600
Capital leases, less current maturities			28,382				35,133
Deferred income taxes			31,890				37,775
Insurance and claims accruals, less current portion			9,424				8,558
Total liabilities			211,548				236,380
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 12,149,376 shares, and 12,156,376 shares, respectively			121				122
Additional paid-in capital			68,498				68,375
Retained earnings			50,638				57,963
Less treasury stock, at cost (3,853,064 shares, and 3,849,815 shares, respectively)			(67,760	)			(67,872	)
Total stockholders’ equity			51,497				58,588
Total liabilities and stockholders’ equity		$	263,045			$	294,968

---

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Revenue
Operating revenue		$	114,235			$	105,458			$	323,263			$	325,964
Operating expenses
Salaries, wages and employee benefits			29,813				29,131				89,674				92,332
Fuel and fuel taxes			11,759				10,932				33,012				32,512
Depreciation and amortization			6,790				7,411				21,313				22,282
Insurance and claims			5,344				5,620				19,236				15,826
Equipment rent			2,703				1,861				7,449				5,582
Operations and maintenance			8,259				8,170				22,780				27,682
Purchased transportation			42,543				37,218				120,951				111,650
Operating taxes and licenses			972				1,003				2,946				3,384
Communications and utilities			679				673				1,943				2,404
Gain on disposal of assets, net			(215	)			(181	)			(551	)			(759	)
Restructuring, impairment and other costs			--				--				--				5,264
Other			3,784				3,578				12,071				10,683
Total operating expenses			112,431				105,416				330,824				328,842
Operating income (loss)			1,804				42				(7,561	)			(2,878	)
Other expenses
Interest expense, net			970				913				2,922				2,209
Other, net			86				87				311				423
Total other expenses, net			1,056				1,000				3,233				2,632
Income (loss) before income taxes			748				(958	)			(10,794	)			(5,510	)
Income tax expense (benefit)			339				(224	)			(3,469	)			(1,623	)
Consolidated net income (loss) and comprehensive income (loss)		$	409			$	(734	)		$	(7,325	)		$	(3,887	)
Net earnings (loss) per share
Average shares outstanding (basic)			8,027				8,069				8,029				8,736
Basic income (loss) per share		$	0.05			$	(0.09	)		$	(0.91	)		$	(0.44	)
Average shares outstanding (diluted)			8,039				8,069				8,029				8,736
Diluted loss per share		$	0.05			$	(0.09	)		$	(0.91	)		$	(0.44	)

---

 

		Common
		Stock								Additional
						Par				Paid-in				Retained				Treasury
		Shares				Value				Capital				Earnings				Stock				Total
Balance at December 31, 2016			12,156			$	122			$	68,041			$	58,172			$	(67,872	)		$	58,463
Effect of adoption of share-based payment pronouncement ASU 2016-09 (see note 2)			--				--				334				(209	)			--				125
Balance at December 31, 2016, as recast			12,156			$	122			$	68,375			$	57,963			$	(67,872	)		$	58,588
Issuance of treasury stock			--				--				(170	)			--				112				(58	)
Stock-based compensation			--				--				289				--				--				289
Restricted stock award grant			197				1				(2	)			--				--				(1	)
Forfeited restricted stock			(204	)			(2	)			2				--				--				--
Net share settlement related to restricted stock vesting			--				--				4				--				--				4
Net loss			--				--				--				(7,325	)			--				(7,325	)
Balance at September 30, 2017			12,149			$	121			$	68,498			$	50,638			$	(67,760	)		$	51,497

---

 

		Nine Months Ended
		September 30,
		2017				2016
Operating activities:
Net loss		$	(7,325	)		$	(3,887	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			21,313				22,282
Provision for doubtful accounts			--				458
Deferred income tax (benefit) provision, net			(5,885	)			2,139
Share-based compensation			289				695
Gain on disposal of assets, net			(551	)			(759	)
Impairment of property and equipment			--				1,070
Other			(121	)			(49	)
Changes in operating assets and liabilities:
Accounts receivable			(1,766	)			(3,257	)
Inventories and prepaid expenses			2,722				1,575
Accounts payable and accrued liabilities			9,471				3,418
Insurance and claims accruals			1,937				1,315
Other long-term assets and liabilities			164				162
Net cash provided by operating activities			20,248				25,162
Investing activities:
Capital expenditures			(7,645	)			(62,435	)
Proceeds from sale of property and equipment			9,306				22,564
Proceeds from operating sale leaseback			10,980				--
Net cash provided by (used in) investing activities			12,641				(39,871	)
Financing activities:
Borrowings under long-term debt			20,755				62,341
Payments on long-term debt			(44,065	)			(33,041	)
Payments on capitalized lease obligations			(8,205	)			(7,530	)
Net change in bank drafts payable			(1,249	)			1,595
Excess tax benefit from exercise of stock options			--				(75	)
Purchase of common stock			--				(28,372	)
Proceeds from capital sale leaseback			--				19,927
Net payments on stock-based awards			4				(81	)
Proceeds from issuance of treasury stock			(58	)			--
Net cash (used in) provided by financing activities			(32,818	)			14,764
(Decrease) increase in cash			71				55
Cash:
Beginning of period			122				87
End of period		$	193			$	142
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	2,908			$	2,199
Income taxes			138				158

---

 

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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

 

References to the “Company,” “we,” “us,” “our” or similar terms refer to USA Truck, Inc. and its subsidiary.

 

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to implement this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard provides for using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts with Customers – Deferral of the Effective Date, which delayed the effectiveness of ASU 2014-09 to annual periods beginning after December 15, 2017, and interim periods therein. The Company believes our transportation revenue recognized under the new standard will change our revenue recognition within our USAT Logistics segment. We expect to transition from recognition of revenue at completion to recognizing USAT Logistics transportation revenue proportionately as the transportation services are performed.  The Company does not expect this change to materially impact our operations or IT infrastructure. In our Trucking segment, where revenue is recognized as services are provided, we expect revenue recognition to remain the same. The Company expects to adopt ASU 2014-09 using the full retrospective method.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Lessor accounting under the new standard is substantially unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. The new standard, which will become effective for the Company beginning with the first quarter 2019, requires a modified retrospective transition approach and includes a number of practical expedients. Early adoption of the standard is permitted. The Company is currently evaluating the impacts the adoption of this accounting guidance will have on the condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The Company adopted the provisions of ASU 2016-09 as of January 1, 2017. As a result, the Company changed its accounting policy to recognize forfeitures as they occur. Accordingly, the Company recognized a net cumulative adjustment of $0.1 million for the adoption of the impact of removing forfeitures, net of income taxes, charged to stockholder’s equity at December 31, 2016. The requirement to recognize excess tax benefits and deficiencies as income tax expense or benefit in the income statement was applied prospectively, with no material impact on the financial statements for the three and nine months ended September 30, 2017.

 

 

 

NOTE 3 – NOTE RECEIVABLE

 

During 2010, the Company sold its terminal facility in Shreveport, Louisiana. In connection with this sale, the Company received cash in the amount of $0.2 million and a note receivable in the amount of $2.1 million which was recorded in the line item “Other Receivables” in the accompanying condensed consolidated balance sheets at December 31, 2016. The purchaser-debtor was to make monthly payments to the Company, with interest, until the balance of the note receivable was paid through a lump sum payment due in November 2015. The Company had previously deferred $0.7 million of gain on the sale of the property, with the gain recognized into earnings only as monthly payments on the note receivable were received.

 

The purchaser-debtor defaulted on the note receivable in November 2015, at which time the Company began legal action to collect the remaining balance. The foreclosure sale was held on April 26, 2017, and a successful bid was placed by a third party for $1.6 million, which exceeded the $1.4 million carrying value of the note. During the second quarter of 2017, the Company received cash from the foreclosure sale and recognized a $0.2 million gain.

 

NOTE 4 – EQUITY COMPENSATION AND EMPLOYEE BENEFIT PLANS

 

The Company adopted the 2014 Omnibus Incentive Plan (the “Incentive Plan”) in May 2014. The Incentive Plan replaced the 2004 Equity Incentive Plan and provided for the granting of up to 500,000 shares of common stock through equity-based awards to directors, officers and other key employees and consultants. The First Amendment to the Incentive Plan was adopted in May 2017, which, among other things, increased the number of shares of common stock available for issuance under the Incentive Plan by an additional 500,000 shares. As of September 30, 2017, 590,969 shares remain available under the Incentive Plan for the issuance of future equity-based compensation awards.

 

NOTE 5 – SEGMENT REPORTING

 

The Company’s two reportable segments are Trucking and USAT Logistics.

 

Trucking. Trucking is comprised of one-way truckload and dedicated freight motor carrier services. Truckload provides motor carrier services as a medium to long-haul common and contract carrier. USA Truck has provided truckload motor carrier services since its inception, and continues to derive the largest portion of its gross revenue from these services. Dedicated freight provides truckload motor carrier services to specific customers for movement of freight over particular routes at specified times.

 

USAT Logistics. USAT Logistics’ service offerings consist of freight brokerage, logistics, and rail intermodal services. Each of these service offerings match customer shipments with available equipment of authorized third-party motor carriers and other service providers and provide services that complement the Company’s Trucking operations. The Company provides these services primarily to existing Trucking customers, many of whom prefer to rely on a single service provider, or a small group of service providers, to provide all their transportation solutions.

 

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

 

Revenue equipment assets are not allocated to USAT Logistics because USAT Logistics brokers freight services for customers through arrangements with third party motor 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 USAT Logistics based on the Company-owned assets specifically utilized to generate USAT Logistics revenue. All intercompany transactions between segments reflect rates similar to those that would be negotiated with independent third parties. All other expenses for USAT Logistics are specifically identifiable direct costs or are allocated to USAT Logistics based on relevant cost drivers, as determined by management.

 

 

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

 

 

(1)

Includes foreign revenue of $9.6 million and $27.2 million for the three and nine months ended September 30, 2017, respectively, and $9.4 million and $28.7 million for the three and nine months ended September 30, 2016, respectively. All foreign revenue is collected in U.S. dollars.

(2)

USAT Logistics de Mexico was established on March 4, 2017. Foreign revenue for the three and nine months ended September 30, 2017 was $0.7 million and $0.9 million, respectively. All foreign revenue is collected in U.S. 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 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following (in thousands):

 

 

(1)

Refer to Note 12 for additional information regarding the restructuring, impairment and other costs.

(2)

As of September 30, 2017 and December 31, 2016, no single item included within other accrued expenses exceeded 5.0% of our total current liabilities.

 

 

 

NOTE 7 – LONG-TERM DEBT

 

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

 

 

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 and terminated its prior credit 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 between 0.25% and 1.00% that is adjusted quarterly based on the Company’s consolidated fixed charge coverage ratio. LIBOR loans accrue interest at the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.25% and 2.00% that is adjusted two days prior to each 30-day interest period for a term equivalent to such period 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 swingline sub-facility (the “Swingline”) 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, except for any real estate or revenue equipment financed outside the Credit Facility.

 

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 by 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 financial covenant, which requires a consolidated fixed charge coverage ratio of at least 1.0 to 1.0, that springs in the event excess availability under the Credit Facility falls below 10% of the lenders’ total commitments.  Management believes the Company’s excess availability will not fall below 10%, or $17.0 million, and expects the Company to remain in compliance with all debt covenants during the next twelve months.  The Company no longer anticipates falling below $34.0 million in availability, or 20% of the lenders’ commitments under the Credit Facility, during 2017.

 

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 Swingline as of September 30, 2017. The average interest rate including all borrowings made under the Credit Facility as of September 30, 2017, was 3.05%. As debt is repriced on a monthly basis, the borrowings under the Credit Facility approximate fair value. As of September 30, 2017, the Company had outstanding $5.4 million in letters of credit and had approximately $45.4 million available under the Credit Facility.

 

 

 

Note 8 – LEASES AND Commitments

 

As of September 30, 2017, 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).

 

 

CAPITAL LEASES

 

The Company 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 as of September 30, 2017 of $43.4 million, of which $15.0 million represents the current portion. Such leases have various termination dates extending through October 2020 and contain renewal or fixed price purchase options. The effective interest rates on the leases range from nil to 3.11% as of September 30, 2017. The lease agreements require payment of property taxes, maintenance and operating and non-operating expenses. Amortization of capital leases was $1.6 million and $5.2 million for the three and nine months ended September 30, 2017, respectively, and $1.8 million and $4.3 million for the three and nine months ended September 30, 2016, respectively.

 

OPERATING LEASES

 

Rent expense associated with operating leases was $3.2 million and $8.7 million for the three and nine months ended September 30, 2017, respectively, and $2.3 million and $7.2 million for the three and nine months ended September 30, 2016, respectively. Rent expense relating to tractors, trailers and other operating equipment is included in the “Equipment rent,” line item while rent expense relating to office equipment is included in the “Operations and maintenance” line item in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

 

During the first quarter of 2017, the Company completed a sale-leaseback transaction under which it sold certain owned tractors to an unrelated party for net proceeds of $11.0 million and entered into an operating lease with the buyer for a term of 41 months. The Company recorded a deferred gain of approximately $0.03 million on the sale, which will be amortized to earnings ratably over the lease term. The deferred gain is included in the “Deferred gain” line item in the accompanying condensed consolidated balance sheets.

 

OTHER COMMITMENTS

 

As of September 30, 2017, the Company had $3.3 million in commitments for purchases of revenue and non-revenue equipment, of which none are cancellable.

 

NOTE 9 – INCOME tAXES

 

During the three months ended September 30, 2017 and 2016, the Company’s effective tax rate was 45.3% and 23.4%, respectively. During the nine months ended September 30, 2017 and 2016, the Company’s effective tax rate was 32.1% and 29.5%, 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 and certain non-deductible expenses including a per diem pay structure for 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. Per diem pay is partially non-deductible by the Company under current IRS regulations. As a result, salaries, wages and employee benefits costs are slightly lower and effective income tax rates are higher than the statutory rate. Due to the partially non-deductible effect of per diem pay, the Company’s tax rate will change based on fluctuations in earnings (losses) and in the number of drivers who elect to receive this pay structure. Generally, as pretax income or loss increases, the impact of the driver per diem program on the Company's effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pretax income or loss, 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.

 

 

When the result of the expected annual effective tax rate is not deemed reliable and distorts the income tax provision for an interim period, the Company calculates the income tax provision or benefit using the cut-off method, which results in an income tax provision or benefit based solely on the year-to-date pretax income or loss as adjusted for permanent differences on a pro rata basis.

 

NOTE 10 – EARNINGS (LOSS) PER SHARE

 

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

 

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

 

 

 

 

NOTE 11 – LEGAL PROCEEDINGS

 

The Company is party to routine litigation incidental to its business, primarily involving claims for personal injury and property damage incurred in the transportation of freight. The Company maintains insurance to cover liabilities in excess of certain self-insured retention levels. Though management believes these claims to be immaterial to the Company’s long-term financial position, adverse results of one or more of these claims could have a material adverse effect on the Company’s financial position or results of operations in any given reporting period.

 

NOTE 12 – RESTRUCTURING, IMPAIRMENT AND OTHER COSTS

 

During 2016, the Company took steps to streamline and simplify its operations to better align its cost structure. The Company closed a total of four facilities, and reduced headcount across multiple departments. Expenses incurred in implementing the restructuring plan included cancellation penalties for certain contracts with independent contractors, costs related to involuntary terminations, facility lease termination costs, costs associated with the development, communication and administration of these initiatives and asset write-offs.

 

 

The following tables summarize the Company’s liabilities, charges, and cash payments related to the restructuring plan made during the nine months ended September 30, 2017 (in thousands):

 

 

 

The following tables summarize the Company’s liabilities, charges, and cash payments related to executive severance agreements made during the nine months ended September 30, 2017 (in thousands):

 

 

 

In May 2016, the Company’s board of directors unanimously approved a separation agreement between Michael K. Borrows and the Company and accepted Mr. Borrows’ resignation as Executive Vice President and Chief Financial Officer. The Company recognized severance costs associated with Mr. Borrows’ departure of approximately $0.7 million, which were recorded in the “Salaries, wages and employee benefits” line item in the condensed consolidated statements of operations and comprehensive income (loss) for the Company’s Form 10-Q for the quarter ended September 30, 2016. At September 30, 2017, the Company had approximately $43,000 accrued for severance benefits remaining to be paid to Mr. Borrows.

 

In January 2017, the Company’s board of directors unanimously approved separation agreements between John R. Rogers (the “Rogers Separation Agreement”), the Company’s former President and Chief Executive Officer, and Christian C. Rhodes (the “Rhodes Separation Agreement”), the Company’s former Chief Information Officer. Per the material terms of the Rogers Separation Agreement, Mr. Rogers received (i) severance pay in the form of salary continuation payments equal to his base salary at the time his employment ended ($425,000) for a period of twelve months, subject to ongoing compliance with certain non-competition, non-solicitation, non-disparagement and confidentiality covenants in favor of the Company, (ii) a lump sum separation payment of $120,000 and (iii) a lump sum payment of $30,000 for moving and transition expenses. Per the material terms of the Rhodes Separation Agreement, Mr. Rhodes received a lump sum payment of $171,125. The Company recognized severance costs associated with the departures of Messrs. Rogers and Rhodes of approximately $0.6 million and $0.2 million, respectively, which were recorded in the “Salaries, wages and employee benefits” line item in the accompanying condensed consolidated statements of operations and comprehensive income (loss). At September 30, 2017, the Company had approximately $142,000 and nil accrued for severance benefits remaining to be paid to Mr. Rogers and Mr. Rhodes, respectively.

 

 

 

NOTE 13 – CHANGE IN ESTIMATE

 

The Company reviews the estimated useful lives and salvage values of its fixed assets on an ongoing basis, based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice.  During the third quarter of 2017, the Company reevaluated the estimated useful lives of its trailers, increasing such lives from 10 to 14 years.  Additionally, given the soft used equipment market, the Company lowered the salvage values of its tractor fleet to reflect current estimates of the value of such equipment upon its retirement.  The Company believes that these changes more accurately reflect the value of the revenue equipment on the accompanying condensed consolidated balance sheets.  These changes are being accounted for as a change in estimate.  During the quarter ended September 30, 2017, these changes in estimates resulted in a reduction of depreciation expense on a pre-tax basis of approximately $0.2 million and on a net-of-tax basis of approximately $0.1 million, or $0.01 per diluted share.  On an annualized basis, based on the number of used trailers and tractors owned at September 30, 2017, the Company anticipates these changes in estimates will result in approximately $1.0 million lower depreciation each year, or approximately $0.08 per diluted share, net-of-tax, using share count at September 30, 2017.

 

NOTE 14 – SUBSEQUENT EVENT

 

On October 1, 2017, the Company entered into an unsecured note payable of $4.2 million to a third party financing company for a portion of the Company’s annual insurance premiums.  The note, which is payable in quarterly installments of principal and interest of approximately $1.4 million, bears interest at 3.0%, and matures in October 2018. 

 

---

---

---

---

---