See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements .

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

USA TRUCK, INC.

Adjusted e arnings ( l oss) per diluted s hare:

Results of Operations—Segment Review

Trucking operating revenue

During the three months ended March 31, 2018, Trucking operating revenue increased 12.0% to $78.7 million, compared to $70.3 million for the same period in 2017. Trucking base revenue increased 10.6% to $67.6 million, compared to $61.1 million for the first quarter of 2017. The increase in operating revenue was the result of a 15.5% increase in base revenue per loaded mile, partially offset by a 4.2% decrease in loaded miles. Looking ahead, the Company expects year-over-year improvements in rate per mile when compared to those experienced during the prior year due to the favorable relationship between industry capacity and demand and the implementation of Company initiatives.

Trucking operating loss

For the first quarter of 2018, Trucking reported an operating loss of $0.5 million compared to an operating loss of $7.1 million for the same period in 2017, primarily resulting from a 12.9% increase in base revenue per available tractor per week, offset slightly by a 2.1% decrease in average available tractor count driving 4.2% fewer loaded miles.

USAT Logistics operating revenue

For the three months ended March 31, 2018, USAT Logistics operating revenue increased 47.4% to $46.3 million compared to $31.4 million for the same period in 2017. The year-over-year change in operating revenue was the result of a 45.3% increase in revenue per load combined with a 1.5% increase in load volume. Additionally, USAT Logistics saw higher volumes when compared to the same period last year, driven primarily by increased spot market participation due to favorable movement in industry demand relative to capacity.

USAT Logistics operating income

USAT Logistics generated operating income of $2.9 million in the first quarter of 2018, an increase of $2.1 million, or 291.8%, compared to $0.7 million in the first quarter of 2017. As mentioned above, the 47.4% increase in operating revenue and 1.5% increase in load volume contributed primarily to the growth in operating income.

Consolidated Operating Expenses

The following table summarizes the consolidated operating expenses (dollar amounts in thousands) and percentage of consolidated operating revenue, consolidated base revenue and the percentage increase or decrease in the dollar amounts of those items compared to the prior year.

Salaries, wages and employee benefits

Salaries, wages and employee benefits expense increased during the first quarter of 2018 by 5.2% to $32.2 million from $30.6 million, when compared to the same quarter in 2017, primarily due to accrual of severance benefits related to the retirement of the Company’s Chief Commercial Officer, Mr. James A. Craig.

The rate of compensation paid to Company drivers per mile has increased in recent periods and we expect this cost will increase in future periods due to driver pay increases, the most recent of which became effective during the second quarter of 2017. Management believes that the market for drivers will remain tight, and as such, expects driver wages and hiring expenses, which include recruiting and advertising costs, to continue to increase in order to attract and retain sufficient numbers of qualified drivers to operate the Company’s fleet. This expense item will also be affected by the percentage of Trucking miles operated by independent contractors instead of Company employed drivers and the percentage of revenue generated by USAT Logistics, for which payments are reflected in purchased transportation.

Fuel and fuel taxes

Fuel and fuel taxes consist primarily of diesel fuel expense for Company-owned tractors and fuel taxes. The primary factors affecting the Company’s fuel expense are the cost of diesel fuel, the fuel economy of Company equipment and the number of miles driven by Company drivers. The increases in fuel and fuel taxes for the three months ended March 31, 2018 resulted from a 17.5% increase in average diesel fuel prices per gallon, as reported by the DOE, offset by a 4.7% decrease in total revenue miles, compared to the same period in 2017. Fuel efficiency initiatives undertaken, such as installing trailer skirts, idle control, more fuel-efficient engines and implementing driver training programs, have contributed to improvements in our fuel expense on a cost per Company tractor mile basis.

The Company expects to continue managing its idle time and truck speeds and partnering with customers to adjust fuel surcharge programs to recover a fair portion of rising fuel costs. Going forward, the Company’s net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, deadhead percentage, the percentage of revenue generated from independent contractors and the success of fuel efficiency initiatives.

D epreciation and amortization and equipment rent

Depreciation and amortization of property and equipment consists primarily of depreciation for Company-owned tractors and trailers and amortization of those financed with capital leases. The primary factors affecting this expense include the number and age of Company tractors and trailers, the acquisition cost of new equipment and the salvage values and useful lives assigned to the equipment. Equipment rent expenses are those related to revenue equipment under operating leases. These largely fixed costs fluctuate as a percentage of base revenue primarily with increases and decreases in average base revenue per tractor and the percentage of base revenue contributed by Trucking versus USAT Logistics. The increase in equipment rent expense during the three month period ended March 31, 2018, was the result of the Company’s increased use of operating leases for the acquisition of trailers. The decrease in depreciation and amortization expense for the three month period ended March 31, 2018, as compared to the same period in 2017, is primarily attributable to a smaller Company fleet and more equipment being acquired through operating lease arrangements instead of purchases.

The Company intends to continue to focus on improving asset utilization, matching customer demand and strengthening load profitability initiatives. Further, the acquisition costs of new revenue equipment could increase due to the continued implementation of emissions requirements and the inclusion of improved safety and fuel efficiency features. As a result, management expects to see an increase in depreciation and amortization expense from new tractors, and expects equipment rent to increase as the use of operating leases increases.

Insurance and claims

Insurance and claims expense consists of insurance premiums and the accruals the Company makes for estimated payments and expenses for claims for third-party bodily injury, property damage, cargo damage and other casualty events. The primary factors affecting the Company’s insurance and claims expense are the number of miles driven by its Company drivers and independent contractors, the frequency and severity of accidents, trends in the development factors used in the Company’s actuarial accruals, developments in prior-year claims and insurance premiums and self-insured amounts. The Company expects insurance and claims expense to continue to be volatile over the long-term. In addition, insurance carriers have generally raised premiums for many businesses, including those in the trucking industry, and the Company’s insurance and claims expense could increase if it has a similar experience at renewal or replacement, or the Company could find it necessary to raise its self-insured retention levels or decrease its aggregate coverage limits. For the three months ended March 31, 2018, insurance and claims decreased year over year, primarily due to the occurrence of fewer accidents during the quarter.

Operations and maintenance

Operations and maintenance expense consists primarily of vehicle repairs and maintenance, general and administrative expenses and other costs. Operating and maintenance expenses are primarily affected by the age of the Company-owned fleet of tractors and trailers, the number of miles driven in a period and, to a lesser extent, by efficiency measures in the Company’s maintenance facilities. Operations and maintenance expense increased for the three months ended March 31, 2018, due to increased cost of repairs for tractors and trailers primarily due to the effects of extended winter weather effects on air brake systems, cranking/starting systems, and aftertreatment devices, combined with implementation of additional preventative maintenance initiatives for both tractors and trailers during the quarter.

Purchased transportation

Purchased transportation consists of the payments the Company makes to independent contractors, railroads and third-party carriers that haul loads brokered to them by the Company, including fuel surcharge reimbursement paid to such parties. For the first quarter of 2018, purchased transportation expense increased primarily due to an increase in USAT Logistics freight volumes when compared to the same period in 2017.

Moving forward, the Company is continuing to pursue its objective of growing its independent contractor fleet as a percentage of its total fleet and growing USAT Logistics, which, if successful, could further increase purchased transportation expense, particularly if the Company needs to pay independent contractors more to stay with the Company in light of expected regulatory changes. Increasing independent contractor capacity has shifted (and assuming all other factors remain equal, is expected to continue to shift), and growth of USAT Logistics will shift, expenses to the “Purchased transportation” line item with offsetting reductions in employee driver wages and related expenses, net fuel expense (as independent contractors generate fuel surcharge revenue, while the related cost of their fuel is included with their compensation in purchased transportation), maintenance and capital expenditures.

Gain on disposal of assets, net

During the three months ended March 31, 2018, gain on disposal of assets, net, decreased when compared to the same period in 2017. Management believes the used equipment market may continue to show volatility in 2018 and beyond.

Other expenses

During the three months ended March 31, 2018, the increase in other expenses was primarily due to increased recruiting and training expenses.

Restructuring, impairment and other costs

See Note 13 to the condensed consolidated financial statements for discussion of restructuring, impairment and other costs, which discussion is incorporated herein by reference.

Interest expense

For the three months ended March 31, 2018, interest expense decreased primarily due to reduced outstanding borrowings. As of March 31, 2018, the Company decreased its debt outstanding on the Credit Facility by approximately $7.5 million, as compared to December 31, 2017. See Note 8 to the condensed consolidated financial statements for further discussion of the Company’s Credit Facility.

Income tax expense

The Company’s effective tax rate was 28.8% and 34.8% for the three months ended March 31, 2018 and 2017, respectively. The Company’s effective tax rate, when compared to the federal statutory rate of 21%, is primarily affected by state income taxes, net of federal income tax effect, and permanent differences, the most significant of which is the effect of the partially non-deductible per diem pay structure for our 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. Due to the effect of the non-deductible per diem payments, the Company’s tax rate will fluctuate in future periods based on fluctuations in earnings (losses) and in the number of drivers who elect to participate in the per diem program.

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.

Seasonality

In the trucking industry, revenue typically follows a seasonal pattern for various commodities and customer businesses. Peak freight demand has historically occurred in the months of September, October and November. After the December holiday season and during the remaining winter months, freight volumes are typically lower as many customers reduce shipment levels. Operating expenses have historically been higher in the winter months due primarily to decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs attributed to adverse winter driving conditions. Revenue can also be impacted by weather, holidays and the number of business days that occur during a given period, as revenue is directly related to the available working days of shippers.

Inflation

Most of the Company’s operating expenses are inflation sensitive, and as such, are not always able to be offset through increases in revenue per mile and cost control efforts. The effect of inflation-driven cost increases on overall operating costs is not expected to be greater for the Company than for its competitors.

Fuel Availability and Cost

The trucking industry is dependent upon the availability of fuel. In the past, fuel shortages or increases in fuel taxes or fuel costs have adversely affected profitability and may continue to do so. The Company has not experienced difficulty in maintaining necessary fuel supplies, and in the past has generally been able to partially offset increases in fuel costs and fuel taxes through increased freight rates and through a fuel surcharge that increases incrementally as the average price of fuel increases above an agreed upon baseline price per gallon. Typically, the Company is not able to fully recover increases in fuel prices through freight rate increases and fuel surcharges, primarily because those items are not available with respect to empty and out-of-route miles and idling time, for which the Company generally does not receive compensation from customers. Additionally, most fuel surcharges are based on the average fuel price as published by the DOE for the week prior to the shipment, meaning the Company typically bills customers in the current week based on the previous week’s applicable index. Accordingly, in times of increasing fuel prices, the Company does not recover as much as it is currently paying for fuel. In periods of declining prices, for a short period of time the inverse is true. Overall, average diesel fuel prices per gallon, as reported by the DOE, increased 17.5% for the three months ended March 31, 2018, compared to the prior year period.

As of March 31, 2018, the Company did not have any long-term fuel purchase contracts, and has not entered into any fuel hedging arrangements.

Equity

As of March 31, 2018, the Company had stockholders’ equity of $67.3 million and total debt and capital leases including current maturities, of $90.9 million, resulting in a total debt, less cash, to total capitalization ratio of 57.4% compared to 61.7% as of December 31, 2017.

Purchases and Commitments

The Company routinely monitors equipment acquisition needs and adjusts purchase schedules from time to time based on analysis of factors such as new equipment prices, the condition of the used equipment market, demand for freight services, prevailing interest rates, technological improvements, fuel efficiency, equipment durability, equipment specifications, operating performance and the availability of qualified drivers.

As of March 31, 2018, the Company had $58.1 million in commitments for the acquisition of revenue equipment, none of which are cancellable.

Liquidity and Capital Resources

USA Truck’s business has required, and will continue to require, significant capital investments. In the Company’s Trucking segment, where capital investments are the most substantial, the primary investments are in new revenue equipment and to a lesser extent, in technology and working capital. In the Company’s USAT Logistics segment, where capital investments are generally more modest, the primary investments are in technology and working capital. USA Truck’s primary sources of liquidity have been funds provided by operations, borrowings under the Company’s Credit Facility, sales of used revenue equipment, and capital and operating leases. Based on expected financial conditions, net capital expenditures, results of operations and related net cash flows and other sources of financing, management believes the Company’s sources of liquidity to be adequate to meet current and projected needs.

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. Also, certain restrictions regarding the Company’s ability to pay dividends, make certain investments, prepay certain indebtedness, execute share repurchase programs and enter into certain acquisitions and hedging arrangements are triggered in the event excess availability under the Credit Facility falls below 20% of the lenders’ total commitments. Management believes the Company’s excess availability will not fall below 20%, or $34.0 million, and expects the Company to remain in compliance with all debt covenants during the next twelve months.  

Long-term debt, financing notes and capital leases decreased during the first quarter of 2018 by $16.6 million from the fourth quarter of 2017 to $90.9 million. As of March 31, 2018, the Company had outstanding $5.4 million in letters of credit and had approximately $73.2 million available to borrow under the Credit Facility. Net of cash, debt represented 57.4% of total capitalization. Fluctuations in the outstanding balance and related availability under the Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through other sources of financing, as well as the nature and timing of receipt of proceeds from disposals of property and equipment.

Operating Activities – Net cash provided by operating activities increased by approximately $7.8 million in the first three months of 2018, compared to the same period in 2017. This increase was primarily the result of an approximate $5.9 million increase in net income and an approximate $2.8 million increase in deferred income tax liability, offset by an approximately $9.1 million increase in accounts payable and accrued liabilities.

Investing Activities – For the three months ended March 31, 2018, net cash provided by investing activities was $1.0 million, compared to $13.4 million provided by investing activities during the same period in 2017. The $12.4 million decrease in cash provided by investing activities primarily reflects an approximately $11.0 million decrease in proceeds from a sale leaseback transaction that was completed in March 2017 for 90 tractors which the Company owned combined with an approximately $3.4 million decrease in the proceeds from the sale of property and equipment, offset by an approximately $2.0 million decrease in capital expenditures.

Financing Activities – Cash used in financing activities was $16.7 million for the three months ended March 31, 2018, compared to $21.2 million used by financing activities during the same period in 2017. The $4.5 million decrease in cash used in financing activities was primarily attributable to an approximately $4.3 million decrease in payments on long-term debt and capital lease obligations. At March 31, 2018, the Company had borrowings of long-term debt, financing notes and capital leases of $90.9 million, down from $107.5 million at December 31, 2017.

Debt and Capitalized Lease Obligations

See Notes 7, 8 and 9 to the condensed consolidated financial statements for further discussion of the Company’s Credit Facility, capital lease obligations and other financing arrangements.

Off-Balance Sheet Arrangements

Operating leases have been an important source of financing for equipment used in operations, office equipment and certain facilities. As of March 31, 2018, the Company leased certain revenue equipment, facilities and information technology software under operating leases. Assets held under operating leases are not carried on the condensed consolidated balance sheets, and lease payments with regard to such assets are reflected in the condensed consolidated statements of operations and comprehensive income (loss) in the “Equipment rent” and, for office equipment, in the “Operations and maintenance” line items. Equipment rent expense related to the Company’s revenue equipment operating leases was $2.7 million and $2.1 million for the three months ended March 31, 2018 and 2017, respectively.

Rent expense related to the other equipment and facilities leases was $0.3 million and $0.4 million for the three months ended March 31, 2018 and 2017, respectively. Other than such operating leases, the Company has no other off-balance sheet arrangements that have or are reasonably likely to have a material effect on the condensed consolidated financial statements.

The following table represents outstanding contractual obligations for rent expense under operating leases as of March 31, 2018 (in thousands):

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time its condensed consolidated financial statements are prepared. Actual results could differ from those estimates, and such differences could be material. During the three months ended March 31, 2018, there were no material changes to the Company’s critical accounting policies and estimates, compared to those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.