DASEKE, INC. Overview Introductory Note Daseke is a leading provider and consolidator of transportation and logistics solutions focused exclusively on flatbed and specialized (open-deck) freight inNorth America . The Company believes it provides one of the most comprehensive transportation and logistics solution offerings in the open-deck industry. The Company delivers a diverse offering of transportation and logistics solutions to approximately 6,300 customers across the continentalUnited States ,Canada andMexico through two reportable segments: Flatbed Solutions and Specialized Solutions. The Flatbed Solutions segment focuses on delivering transportation and logistics solutions that principally require the use of flatbed and retractable-sided transportation equipment, and the Specialized Solutions segment focuses on delivering transportation and logistics solutions that require the use of specialized trailering transportation equipment. Both of the Company's reportable segments operate highly flexible business models comprised of company-owned tractors and trailers and asset-light operations (which consist of owner-operator transportation, freight brokerage and logistics). The Company's asset-based operations have the benefit of providing shippers with certainty of delivery and continuity of operations. Alternatively, the Company's asset-light operations offer flexibility and scalability to meet customers' dynamic needs and have lower capital expenditure requirements and fixed costs.
First Quarter Operational Overview
· Total revenue of
million, a decrease of 12.3%, owner operator freight of
decrease of 2.9% and brokerage freight of
compared to first quarter of 2019;
· Rate per mile for the three months ended
Solutions segment and $3.24 for Specialized Solutions segment;
· Asset impairment charges totaled
31, 2020
· Operating loss of
in first quarter of 2019;
· Net loss of
net loss of
quarter of 2019;
· Total liquidity available at
· Material debt at
from $704.1 at December 31, 2019 .
Recent Developments
On July 30, 2019 , the Company internally announced a plan to integrate three
operating segments with three other operating segments, Project Synchronize
(Phase I or the Plan), which reduced the number of operating segments from 16 to
13. As a result of the Plan, Builders Transportation merged into Hornady
Transportation , Moore Freight Service into E.W. Wylie , and the Schilli Companies
into Lone Star Transportation . The Plan was implemented to streamline and reduce
the Company's cost structure, improve asset utilization and capitalize on
operational synergies. Additionally, the Company announced the implementation of
Business Improvement Plans, which increased profitability by yield management
capacity allocation, right-sizing trailer-to-tractor ratios, and improving
maintenance execution.
On September 4, 2019 , the Company announced a comprehensive restructuring plan
(Project Pivot) to reduce its cost base, right size its organization and
management team and increase and accelerate its previously announced operational
improvement goals.
On March 10, 2020 , the Company announced a plan to integrate three operating
segments with three other operating segments (Phase II of the Plan), which will
further reduce the number of operating segments from 13 to 10.
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Outlook
The novel coronavirus, or COVID-19, which surfaced in late 2019 and declared a
pandemic by the World Health Organization in March 2020 , continues to spread
throughout the United States and around the world. In response to the COVID-19
pandemic, the governments of many countries, states, cities and other geographic
regions have taken and are continuing to take preventative or reactive actions,
such as imposing restrictions on travel and business operations, increasing
border and port controls and closures throughout the United States and other
parts of the world, and advising or requiring individuals to limit or forego
time outside of their homes. The uncertainty regarding the impact of the
COVID-19 pandemic, and various governmental actions taken to mitigate its
impact, have resulted in a severely depressed economic environment.
As an essential business under the guidelines issued by each of the Company's
states of operations, the Company has been allowed to continue to operate its
business through the COVID-19 pandemic. The Company has permitted some personnel
to work from home and has taken additional precautions to ensure the safety of
its workforce, customers and the communities in which it operates. In general,
the Company has experienced limited operational impacts, in the first quarter of
2020, as a result of COVID-19 directly. A substantial majority of its operating
sites have remained open and operating, although some of the nation's ports that
the Company serves have experienced reduced hours of operation and reduced
volumes.
For the three months ended March 31, 2020 , the COVID-19 pandemic and associated
impacts on economic activity had a limited adverse effect on the Company's
results of operations and financial condition. However, the last half of March
saw demand decline, as sectors of the economy began to shut down. The Company
expects that its results of operations and financial condition will be more
significantly impacted in the second quarter of 2020 and in subsequent periods,
as levels of activity in the Company's business have historically been
positively correlated to broad measures of economic activity and to measures of
industrial production since many of the Company's customers are in the
manufacturing and industrial segments. In particular, shelter-in-place mandates,
the closing of manufacturing facilities and the overall depressed economic
environment have significantly affected demand for many of the Company's
customers, including those that manufacture aircraft parts and those in the
energy sector.
The Company believes that a significant portion of its cost structure is
variable, and the Company has taken and will continue to take aggressive actions
to adjust its expenses to reflect changes in demand for its services. These
actions have included reduced use of contractors, reduced employee hours,
furloughs, layoffs and voluntary use of paid time off, consistent with local
regulations. Although the Company does not expect to be able to fully offset the
effects of significantly reduced volumes on its results of operations, the
actions that the Company is taking, combined with the variable components of its
cost structure, should partially mitigate the impact of the pandemic on its
results of operations. The Company also expects to reduce its net capital
expenditures this year. Conversely, however, the Company is taking additional
measures and incurring additional expense to protect the health and safety of
its workforce and its customers. In addition, the Company could incur
restructuring and other costs as it modifies and right-sizes its operations for
declines and/or surges in demand, and may incur incremental interest expense
this year as a result of steps it may take in order to further strengthen its
liquidity.
We currently expect the COVID-19 pandemic to negatively impact the Company for
the quarter ended June 30, 2020 materially more than it impacted the quarter
ended March 31, 2020 . Accordingly, we believe the Company's first quarter of
2020 results and operating trends will not provide any meaningful indication as
to what our financial results may be in the second quarter or remainder of this
year. The effect of the COVID-19 pandemic may remain prevalent for a significant
period of time and may continue to adversely affect the Company's business,
results of operations and financial condition even after the COVID-19 pandemic
has subsided and "stay at home" mandates have been lifted. The extent to which
the COVID-19 pandemic impacts the Company will depend on numerous evolving
factors and future developments that we are not able to predict, including: the
severity and duration of the pandemic; governmental, business and other actions
in response to the pandemic (which could include limitations on the Company's
operations or mandates to provide services in a specified manner); the impact of
the pandemic on economic activity; the response of the overall economy and the
financial markets; the extent and duration of the effect on consumer confidence
and spending; the health of and the effect on our workforce and our ability to
meet staffing needs; any impairment in the value of our tangible or intangible
assets which could be recorded as a result of a weaker economic conditions; and
the potential effects on our internal controls, including those over financial
reporting, as a result of changes in working environments, such as
shelter-in-place and similar orders that are applicable to our employees and
business partners, among others. There are no comparable recent events that
provide guidance as to the effect the COVID-19 global pandemic may have, and as
a result, the ultimate impact of the pandemic is highly uncertain and subject to
change. See "Part II. Item 1A. Risk Factors" in this Report for more information
regarding risks relating to the COVID-19 pandemic.
How The Company Evaluates Its Operations
The Company uses a number of primary indicators to monitor its revenue and
expense performance and efficiency, including Adjusted EBITDA, Free Cash Flow,
Adjusted Operating Ratio and Adjusted Net Income (Loss), and its key drivers of
revenue quality, growth, expense control and operating efficiency. Adjusted
EBITDA, Free Cash Flow, Adjusted Operating Ratio and Adjusted Net Income (Loss)
are not recognized measures under GAAP and should not be considered alternatives
to, or more meaningful than, net income (loss), cash flows from operating
activities, operating income, operating ratio, operating margin or any other
measure derived in accordance with GAAP.
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See "Non-GAAP Financial Measures" for more information on the Company's use of
these non-GAAP measures, as well as a description of the computation and
reconciliation of the Company's Adjusted EBITDA, Free Cash Flow, and Adjusted
Net Income (Loss) to net income (loss) and Adjusted Operating Ratio to operating
ratio.
Revenue
The Company records four types of revenue: freight (company and owner operator),
brokerage, logistics and fuel surcharge. Freight revenue is generated by hauling
freight for the Company's customers using its trucks or its owner-operators'
equipment. Generally, the Company's customers pay for its services based on the
number of miles in the most direct route between pick-up and delivery locations
and other ancillary services the Company provides. Freight revenue is the
product of the number of revenue-generating miles driven and the rate per mile
the Company receives from customers plus accessorial charges, such as loading
and unloading freight for its customers, cargo protection, fees for detaining
its equipment or fees for route planning and supervision. Freight revenue is
affected by fluctuations in North American economic activity as well as changes
in specific customer demand, the level of capacity in the industry and driver
availability.
The Company's brokerage revenue is generated by its use of third-party carriers
when it needs capacity to move its customers' loads. The main factor that
affects brokerage revenue is the availability of the Company's drivers and
owner-operators (and hence the need for third-party carriers) and the rate for
the load. Brokerage revenue is also affected by fluctuations in North American
economic activity as well as changes in the level of capacity in the industry
and driver availability.
Logistics revenue is generated from a range of services, including value-added
warehousing, loading and unloading, vehicle maintenance and repair, preparation
and packaging, fuel management, and other fleet management solutions. Logistics
revenue is primarily driven by specific customer requirements for additional
services and may fluctuate depending on customers' utilization of these services
due to changes in cargo specifications, delivery staging and fluctuations in
North American economic activity.
Fuel surcharges are designed to compensate the Company for fuel costs above a
certain cost per gallon base. Generally, the Company receives fuel surcharges on
the miles for which it is compensated by customers. However, the Company
continues to have exposure to increasing fuel costs related to empty miles, fuel
efficiency due to engine idle time and other factors and to the extent the
surcharge paid by the customer is insufficient. The main factors that affect
fuel surcharge revenue are the price of diesel fuel and the number of loaded
miles. In general, a declining energy and fuel price environment negatively
affects the Company's fuel surcharge revenues, and conversely, an environment
with rising fuel and energy prices benefits its fuel surcharge revenues.
Although the Company's surcharge programs vary by customer, they typically
involve a computation based on the change in national or regional fuel prices.
The Company's fuel surcharges are billed on a delayed basis, meaning it
typically bills customers in the current week based on a previous week's
applicable index. Therefore, 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, the opposite is true. Also, its fuel surcharge programs
typically require a specified minimum change in fuel cost to prompt a change in
fuel surcharge revenue. Therefore, many of these programs have a time lag
between when fuel costs change and when the change is reflected in fuel
surcharge revenue.
Expenses
The Company's most significant expenses vary with miles traveled and include
driver wages, services purchased from owner-operators and other transportation
providers (which are recorded on the "Purchased freight" line of the Company's
consolidated statements of operations and comprehensive loss) and fuel.
Driver-related expenses vary with miles traveled, however the Company currently
expects its expenses relating to driver wages to remain stable in the near-term
as a result of driver wage increases implemented in the second half of 2018 to
address the shortage of qualified drivers in the general trucking industry,
compared to demand at that time. The expectation of stable driver wages paid per
mile are due to current market conditions caused by shippers' downward pressure
on rates resulting in some easing of capacity in the industry.
Maintenance and tire expenses and cost of insurance and claims generally vary
with the miles the Company travels but also have a controllable component based
on safety improvements, fleet age, efficiency and other factors. The Company's
primary fixed costs are depreciation of long-term assets (such as tractors,
trailers and terminals), interest expense, rent and non-driver compensation.
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The Company's fuel surcharge programs help to offset increases in fuel prices
but typically do not offset empty miles, idle time and out of route miles
driven. As discussed above under "Revenue," its fuel surcharge programs have a
time lag between when fuel costs change and when the change is reflected in fuel
surcharge revenue. Due to this time lag, the Company's fuel expense, net of fuel
surcharge, negatively impacts its operating income during periods of sharply
rising fuel costs and positively impacts its operating income during periods of
falling fuel costs. In general, due to the fuel surcharge programs, its
operating income is less negatively affected by an environment with higher,
stable fuel prices than an environment with lower fuel prices. In addition to
its fuel surcharge programs, the Company believes the most effective protection
against fuel cost increases is to maintain a fuel-efficient fleet by
incorporating fuel efficiency measures. Also, the Company has arrangements with
some of its significant fuel suppliers to buy the majority of its fuel at
contracted pricing schedules that fluctuate with the market price of diesel
fuel. The Company has not used derivatives as a hedge against higher fuel costs
in the past but continues to evaluate this possibility.
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Results of Operations
The following table sets forth items derived from the Company's consolidated
statements of operations and comprehensive loss for the three months ended March
31, 2020 and 2019 in dollars and as a percentage of total revenue and the
increase or decrease in the dollar amounts of those items.
Three Months Ended March 31,
2020 2019 Increase (Decrease)(Dollars in millions) $ % $ % $ % REVENUE: Company freight$ 180.9 46.3$ 206.2 47.6$ (25.3) (12.3) Owner operator freight 107.8 27.6 111.0 25.6 (3.2) (2.9) Brokerage 61.7 15.8 71.4 16.5 (9.7) (13.6) Logistics 10.1 2.6 12.4 2.9 (2.3) (18.5) Fuel surcharge 30.5 7.8 32.0 7.4 (1.5) (4.7) Total revenue 391.0 100.0 433.0 100.0 (42.0) (9.7) OPERATING EXPENSES: Salaries, wages and employee benefits 110.4 28.2 119.1 27.5 (8.7) (7.3) Fuel 28.7 7.3 35.0 8.1 (6.3) (18.0) Operations and maintenance 45.6 11.7 54.8 12.7 (9.2) (16.8) Communications 1.0 0.3 1.0 0.2 - - Purchased freight 134.2 34.3 146.6 33.9 (12.4) (8.5) Administrative expenses 20.2 5.2 16.1 3.7 4.1 25.5 Sales and marketing 0.7 0.2 1.2 0.3 (0.5) (41.7) Taxes and licenses 4.5 1.2 4.9 1.1 (0.4) (8.2) Insurance and claims 15.0 3.8 12.5 2.9 2.5 20.0 Depreciation and amortization 26.3 6.7 41.5 9.6 (15.2) (36.6) Gain on disposition of property and equipment (1.2) (0.3) (0.4) (0.1) (0.8) 200.0 Impairment 13.4 3.4 - - 13.4 * Restructuring charges 0.5 0.1 - - 0.5 * Total operating expenses 399.3 102.1 432.3 99.8 (33.0) (7.6) Operating ratio 102.1% 99.8% Adjusted operating ratio(1) 97.2% 97.3% INCOME (LOSS) FROM OPERATIONS (8.3) (2.1) 0.7
0.2 (9.0) (1,285.7)
Other expense (income): Interest income (0.3) (0.1) (0.2) - (0.1) 50.0 Interest expense 12.0 3.1 12.7 2.9 (0.7) (5.5) Other 1.2 0.3 (0.6) (0.1) 1.8 (300.0) Total other expense 12.9 3.3 11.9 2.7 1.0 8.4 Income (loss) before benefit for income taxes (21.2) (5.4) (11.2) (2.6) (10.0) 89.3 Benefit for income taxes (3.9) (1.0) (1.9) (0.4) (2.0) 105.3 Net loss$ (17.3) (4.4)$ (9.3) (2.1)$ (8.0) 86.0 OPERATING STATISTICS: Company miles 67.3 68.8 (1.5) (2.2) Owner operator miles 49.9 48.4 1.5 3.1 Total miles (in millions)(2) 117.2 117.2 - - Company-operated tractors, as of quarter-end 3,558 3,858 (300) (7.8) Owner-operated tractors, as of quarter-end 2,193 2,290 (97) (4.2) Number of trailers, as of quarter-end 12,704 13,646 (942) (6.9) Company-operated tractors, average for the quarter 3,558 3,877 (319) (8.2) Owner-operated tractors, average for the quarter 2,244 2,261 (17) (0.8) Total tractors, average for the quarter 5,802 6,138 (336) (5.5) 29 Table of Contents
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*indicates not meaningful.
(1) Adjusted Operating Ratio is not a recognized measure under GAAP. For a
definition of Adjusted Operating Ratio and reconciliation of Adjusted
Operating
(2) Miles are estimated based on information received as the date of filing.
Miles may change quarter to quarter when final information is received from
each operating segment.
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The following table sets forth the Company's Specialized Solutions segment's
revenue, operating expenses, operating ratio, Adjusted Operating Ratio and
operating income for the three months ended March 31, 2020 and 2019 in dollars
and as a percentage of its Specialized Solutions segment's total revenue and the
increase or decrease in the dollar amounts of those items. The following table
also sets forth certain operating statistics for the Company's Specialized
Solutions segment for the three months ended March 31, 2020 and 2019.
SPECIALIZED SOLUTIONS
Three Months Ended March 31,
2020 2019 Increase (Decrease)(Dollars in millions) $ % $ % $ % REVENUE(1): Company freight$ 132.1 55.0$ 153.9 57.1$ (21.8) (14.2) Owner operator freight 42.8 17.8 43.8 16.2 (1.0) (2.3) Brokerage 42.8 17.8 46.1 17.1 (3.3) (7.2) Logistics 9.1 3.8 11.7 4.3 (2.6) (22.2) Fuel surcharge 13.6 5.7 14.2 5.3 (0.6) (4.2) Total revenue 240.4 100.0 269.7 100.0 (29.3) (10.9) OPERATING EXPENSES(1): Salaries, wages and employee benefits 74.2 30.9 81.0 30.0 (6.8) (8.4) Fuel 18.3 7.6 22.5 8.3 (4.2) (18.7) Operations and maintenance 34.7 14.4 40.4 15.0 (5.7) (14.1) Purchased freight 68.5 28.5 74.0 27.4 (5.5) (7.4) Depreciation and amortization 16.9 7.0 26.7 9.9 (9.8) (36.7) Impairment 13.4 5.6 - - 13.4 * Restructuring 0.5 0.2 - - 0.5 * Other operating expenses 20.4 8.5 17.3 6.4 3.1 17.9 Total operating expenses 246.9 102.7 261.9 97.1 (15.0) (5.7) Operating ratio 102.7% 97.1% Adjusted operating ratio(2) 96.2% 93.8% INCOME (LOSS) FROM OPERATIONS$ (6.5) (2.7)$ 7.8 2.9$ (14.3) (183.3) OPERATING STATISTICS: Company miles 40.7 41.4 (0.7) (1.7) Owner operator miles 13.3 12.3 1.0 8.1 Total miles (in millions)(3) 54.0 53.7 0.3 0.6 Company-operated tractors, at quarter-end 2,341 2,508 (167) (6.7) Owner-operated tractors, at quarter-end 676 663 13 2.0 Number of trailers, at quarter-end 8,110 8,473 (363) (4.3) Company-operated tractors, average for the quarter 2,344 2,506 (162) (6.5) Owner-operated tractors, average for the quarter 680 656 24 3.7 Total tractors, average for the quarter 3,024 3,162 (138)
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*indicates not meaningful.
(1) Includes intersegment revenues and expenses, as applicable, which are
eliminated in the Company's consolidated results.
(2) Adjusted Operating Ratio is not a recognized measure under GAAP. For a
definition of Adjusted Operating Ratio and reconciliation of Adjusted
Operating
(3) Miles are estimated based on information received as the date of filing.
Miles may change quarter to quarter when final information is received from
each operating segment.
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The following table sets forth the Company's Flatbed Solutions segment's
revenue, operating expenses, operating ratio, Adjusted Operating Ratio and
operating income for the three months ended March 31, 2020 and 2019 in dollars
and as a percentage of its Flatbed Solutions segment's total revenue and the
increase or decrease in the dollar amounts of those items. The following table
also sets forth certain operating statistics for the Company's Flatbed Solutions
segment for the three months ended March 31, 2020 and 2019.
FLATBED SOLUTIONS
Three Months Ended March 31,
2020 2019 Increase (Decrease)(Dollars in millions) $ % $ % $ % REVENUE(1): Company freight$ 51.4 33.1$ 55.2 32.9$ (3.8) (6.9) Owner operator freight 66.1 42.6 68.5 40.8 (2.4) (3.5) Brokerage 19.6 12.6 25.3 15.1 (5.7) (22.5) Logistics 0.8 0.5 0.7 0.4 0.1 14.3 Fuel surcharge 17.3 11.2 18.2 10.8 (0.9) (4.9) Total revenue 155.2 100.0 167.9 100.0 (12.7) (7.6) OPERATING EXPENSES(1): Salaries, wages and employee benefits 33.4 21.5 34.4 20.5 (1.0) (2.9) Fuel 10.4 6.7 12.5 7.4 (2.1) (16.8) Operations and maintenance 10.7 6.9 14.2 8.5 (3.5) (24.6) Purchased freight 70.5 45.4 77.2 46.0 (6.7) (8.7) Depreciation and amortization 9.1 5.9 14.7 8.8 (5.6) (38.1) Other operating expenses 12.5 8.1 11.6 6.9 0.9 7.8 Total operating expenses 146.6 94.5 164.6 98.0 (18.0) (10.9) Operating ratio 94.5% 98.0% Adjusted operating ratio(2) 93.9% 96.7% INCOME (LOSS) FROM OPERATIONS$ 8.6 5.5$ 3.3 2.0$ 5.3 160.6 OPERATING STATISTICS: Company miles 26.6 27.4 (0.8) (2.9) Owner operator miles 36.6 36.1 0.5 1.4 Total miles (in millions)(3) 63.2 63.5 (0.3) (0.5) Company-operated tractors, at quarter-end 1,217 1,350 (133) (9.9) Owner-operated tractors, at quarter-end 1,517 1,627 (110) (6.8) Number of trailers, at quarter-end 4,594 5,173 (579) (11.2) Company-operated tractors, average for the quarter 1,214 1,371 (157) (11.5) Owner-operated tractors, average for the quarter 1,564 1,605 (41) (2.6) Total tractors, average for the quarter 2,778 2,976 (198) (6.7)
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*indicates not meaningful.
(1) Includes intersegment revenues and expenses, as applicable, which are
eliminated in the Company's consolidated results.
(2) Adjusted Operating Ratio is not a recognized measure under GAAP. For a
definition of Adjusted Operating Ratio and reconciliation of Adjusted
Operating
(3) Miles are estimated based on information received as the date of filing.
Miles may change quarter to quarter when final information is received from
each operating segment.
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[[Image Removed: Picture 5]]
Revenue. Total revenue decreased 9.7% to $391.0 million for the three months
ended March 31, 2020 from $433.0 million for the three months ended March 31,
2019 , primarily due to the decrease in rate per mile in both the Flatbed
Solutions segment and Specialized Solutions segment. The decrease in total
revenue was due primarily to decreases in company freight, owner operator
freight and brokerage revenue. Company freight revenue decreased $25.3 million ,
or 12.3%, from $206.2 million for the three months ended March 31, 2019 to
$180.9 million for the three months ended March 31, 2020 . Owner operator freight
revenue decreased $3.2 million , or 2.9%, from $111.0 million for the three
months ended March 31, 2019 to $107.8 million for the three months ended March
31, 2020 . Brokerage revenue decreased $9.7 million , or 13.6%, from $71.4 million
for the three months ended March 31, 2019 to $61.7 million for the three months
ended March 31, 2020 due to a decrease in customer volumes. The decreases in
company freight and owner operator freight revenue were primarily a result of a
9.2% decrease in rate per mile. The miles mix shifted with an increase in owner
operator miles to offset a decrease in company miles due to downsizing of the
Company-operated tractors. Logistics decreased $2.3 million , or 18.5%, from
$12.4 million for the three months ended March 31, 2019 to $10.1 million for the
three months ended March 31, 2020 as a result of decreases in logistics
activities. Fuel surcharges, decreased $1.5 million , or 4.7%, from $32.0 million
for the three months ended March 31, 2019 to $30.5 million for the three months
ended March 31, 2020 .
[[Image Removed: Picture 7]]
The Company's Specialized Solutions segment's revenue was $240.4 million for the
three months ended March 31, 2020 as compared to $269.7 million for the three
months ended March 31, 2019 , a decrease of 10.9%, which was primarily due to the
decrease in company freight, brokerage and logistics revenue. Company freight
revenue decreased $21.8 million , or 14.2%, from $153.9 million for the three
months ended March 31, 2019 to $132.1 million for the three months ended March
31, 2020 . Owner operator freight revenue decreased from $43.8 million for the
three months ended March 31, 2019 to $42.8 for the three months ended March 31,
2020 . Brokerage revenue decreased $3.3 million , or 7.2%, from $46.1 million for
the three months ended March 31, 2019 to $42.8 million for the three months
ended March 31, 2020 . The decrease in overall freight revenue was primarily a
result of a 12.0% decrease in rate per mile offset by a 0.6% increase in total
miles driven compared to the same period in 2019. The miles mix shifted with an
increase in owner operator miles to offset a decrease in company miles due to
downsizing of the Company-operated tractors. Logistics decreased 22.2% to $9.1
million from $11.7 million compared to the same period in 2019 as a result of
decreases in logistics activities. Fuel surcharges decreased 4.2% compared to
the same period in 2019.
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[[Image Removed: Picture 9]]
The Company's Flatbed Solutions segment's revenue was $155.2 million for the
three months ended March 31, 2020 as compared to $167.9 million for the three
months ended March 31, 2019 , a decrease of 7.6%, which was primarily due to a
decrease in rate per mile. Company freight revenue decreased $3.8 million , or
6.9%, from $55.2 million for the three months ended March 31, 2019 to $51.4
million for the three months ended March 31, 2020 . Owner operator freight
revenue decreased $2.4 million , or 3.5%, from $68.5 million for the three months
ended March 31, 2019 to $66.1 million for the three months ended March 31, 2020 .
Brokerage revenue decreased $5.7 million , or 22.5%, from $25.3 million for the
three months ended March 31, 2019 to $19.6 million for the three months ended
March 31, 2020 . The decreases in company freight and owner operator freight was
a result of a 4.6% decrease in rate per mile and a 0.5% decrease in total miles
driven compared to the same period in 2019. The miles mix shifted with an
increase in owner operator miles to offset a decrease in company miles due to
downsizing of the Company-operated tractors. Fuel surcharges decreased $0.9
million , or 4.9%, from $18.2 million for the three months ended March 31, 2019
to $17.3 million for the three months ended March 31, 2020 .
Salaries, Wages and Employee Benefits. Salaries, wages and employee benefits
expense, which consists of compensation for all employees, is primarily affected
by the number of miles driven by Company drivers, the rate per mile paid to
Company drivers, employee benefits including, but not limited to, health care
and workers' compensation, and to a lesser extent, the number of, and
compensation and benefits paid to, non-driver employees. In general, the
Specialized Solutions segment drivers receive a higher driver pay per total mile
than Flatbed Solutions segment drivers due to the former requiring a higher
level of training and expertise.
Salaries, wages and employee benefits expense decreased 7.3% to $110.4 million
for the three months ended March 31, 2020 from $119.1 million for the three
months ended March 31, 2019 . The decrease in salaries, wages and employee
benefits expense was primarily due to decreased employee headcount related to
Project Pivot and Project Synchronize and driver pay due to the decrease in
company miles compared to the same period in 2019. Salaries, wages and employee
benefits expense, as a percentage of consolidated revenue (excluding brokerage
revenue), increased 0.6% for the three months ended March 31, 2020 as compared
to the same period in 2019.
The Company's Specialized Solutions segment had a $6.8 million , or 8.4%,
decrease in salaries, wages and employee benefits expense for the three months
ended March 31, 2020 compared to the three months ended March 31, 2019 ,
primarily as a result of the decreased employee headcount related to Project
Synchronize and driver pay due to the decrease in company miles compared to the
same period in 2019. Salaries, wages and employee benefits expense, as a
percentage of Specialized Solutions revenue (excluding brokerage revenue),
increased 1.3% for the three months ended March 31, 2020 as compared to the same
period in 2019.
The Company's Flatbed Solutions segment had a $1.0 million , or 2.9%, decrease in
salaries, wages and employee benefits expense for the three months ended March
31, 2020 compared to the three months ended March 31, 2019 , primarily as a
result of the decreased employee headcount related to Project Synchronize and
driver pay due to the decrease in company miles compared to the same period in
2019. Salaries, wages and employee benefits expense, as a percentage of Flatbed
Solutions revenue (excluding brokerage revenue), increased 0.5% for the three
months ended March 31, 2020 as compared to the same period in 2019.
Fuel. Fuel expense consists primarily of diesel fuel expense for company-owned
tractors and fuel taxes. The primary factors affecting fuel expense are the cost
of diesel fuel, the miles per gallon realized with company equipment and the
number of miles driven by Company drivers.
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Total fuel expense decreased $6.3 million , or 18.0%, to $28.7 million for the
three months ended March 31, 2020 from $35.0 million for the three months ended
March 31, 2019 . This decrease was primarily due to a 4.5% decrease in average
diesel prices period over period. The U.S. national average diesel fuel price,
as published by the U.S. Department of Energy , was $2.882 for the three months
ended March 31, 2020 , compared to $3.018 for the same period in 2019. Total
Company miles driven decreased 2.2% for the three months ended March 31, 2020 as
compared to the three months ended March 31, 2019 .
The Company's Specialized Solutions segment's fuel expense decreased 18.7% to
$18.3 million for the three months ended March 31, 2020 from $22.5 million for
the three months ended March 31, 2019 , primarily as a result of a decrease in
average diesel price and a decrease of 1.7% in Company miles driven for the
three months ended March 31, 2020 as compared to the three months ended March
31, 2019 .
The Company's Flatbed Solutions segment's fuel expense decreased 16.8% to $10.4
million for the three months ended March 31, 2020 from $12.5 million for the
three months ended March 31, 2019 , primarily as a result of a decrease in
average diesel price and a decrease of 2.9% in Company miles driven for the
three months ended March 31, 2020 as compared to the three months ended March
31, 2019 .
Operations and Maintenance. Operations and maintenance expense consists
primarily of ordinary vehicle repairs and maintenance, costs associated with
preparing tractors and trailers for sale or trade-in, driver recruiting,
training and safety costs, permitting and pilot car fees and other general
operations expenses. Operations and maintenance expense is primarily affected by
the age of company-owned tractors and trailers, the number of miles driven in a
period and driver turnover.
Operations and maintenance expense decreased 16.8% to $45.6 million for the
three months ended March 31, 2020 from $54.8 million for the three months ended
March 31, 2019 due to a decrease of $2.5 million in maintenance and $5.9 million
in other operations expenses. Operations and maintenance expense, as a
percentage of consolidated revenue (excluding brokerage revenue), decreased 1.3%
for the three months ended March 31, 2020 as compared to the same period in 2019
due to a reduction in tractors and trailers in the Company's fleet.
The Company's Specialized Solutions segment's operations and maintenance expense
decreased $5.7 million , or 14.1%, for the three months ended March 31, 2020 as
compared to the three months ended March 31, 2019 as a result of a decrease of
$4.1 million in other operations expenses and a decrease of $0.9 million in
maintenance expense due to a reduction of tractors and trailers in the Company's
fleet. Operations and maintenance expense, as a percentage of Specialized
Solutions revenue (excluding brokerage revenue), decreased 0.5% for the three
months ended March 31, 2020 as compared to the same period in 2019.
The Company's Flatbed Solutions segment's operations and maintenance expense
decreased $3.5 million , or 24.6%, for the three months ended March 31, 2020 as
compared to the three months ended March 31, 2019 , primarily as a result of a
decrease of $1.6 million in maintenance expense due to a reduction of tractors
and trailers in the Company's fleet. Operations and maintenance expense, as a
percentage of Flatbed Solutions revenue (excluding brokerage revenue), decreased
2.1% for the three months ended March 31, 2020 as compared to the same period in
2019.
Purchased Freight. Purchased freight expense consists of the payments to owner-operators, including fuel surcharge reimbursements, and payments to third-party capacity providers that haul loads brokered to them. Purchased freight expense generally takes into account changes in diesel fuel prices, resulting in lower payments during periods of declining fuel prices.
Total purchased freight expense decreased$12.4 million or 8.5% from$146.6 million during the three months endedMarch 31, 2019 to$134.2 million during the three months endedMarch 31, 2020 . Purchased freight expense from owner-operators increased 6.0% from$84.5 million during the three months endedMarch 31, 2019 to$89.6 million during the three months endedMarch 31, 2020 as a result of a 3.2% increase in owner operator miles driven. Purchased freight expense from third-party capacity providers decreased 19.1% from$52.2 million during the three months endedMarch 31, 2019 to$42.3 million during the three months endedMarch 31, 2020 , as a result of lower rates and decreased utilization of third-party capacity providers. Purchased freight expense, as a percentage of consolidated revenue, increased 0.5% for the three months endedMarch 31, 2020 as compared to the same period in 2019. 35 Table of Contents The Company's Specialized Solutions segment's purchased freight expense decreased 7.4% to$68.5 million during the three months endedMarch 31, 2020 from$74.0 million during the three months endedMarch 31, 2019 . Purchased freight expense from owner-operators increased 17.1% from$27.7 million during the three months endedMarch 31, 2019 to$32.4 million during the three months endedMarch 31, 2020 , primarily as a result of an increase in the utilization of owner operators. Purchased freight expense from third-party capacity providers decreased 23.2% from$33.5 million during the three months endedMarch 31, 2019 to$25.8 million during the three months endedMarch 31, 2020 , as a result of a decrease in utilization of third-party capacity providers. Purchased freight expense, as a percentage of Specialized Solutions revenue, increased 1.1% for the three months endedMarch 31, 2020 as compared to the same period in 2019. The Company's Flatbed Solutions segment's purchased freight expense decreased 8.7% to$70.5 million for the three months endedMarch 31, 2020 from$77.2 million for the three months endedMarch 31, 2019 . Purchased freight expense from owner-operators increased 0.6% to$57.2 million for the three months endedMarch 31, 2020 from$56.9 million for the three months endedMarch 31, 2019 , as a result of a 2.7% increase in owner operators' miles driven. Purchased freight expense from third-party capacity providers decreased 27.0% from$22.9 million during the three months endedMarch 31, 2019 to$16.7 million during the three months endedMarch 31, 2020 , primarily as a result of decreased utilization of third-party capacity providers. Purchased freight expense, as a percentage of Flatbed Solutions revenue, decreased 0.5% for the three months endedMarch 31, 2020 as compared to the same period in 2019. Depreciation and Amortization. Depreciation and amortization expense consists primarily of depreciation for company-owned tractors and trailers and amortization of those financed with finance leases. The primary factors affecting these expense items include the size and age of company-owned tractors and trailers and the cost of new equipment. Amortization of intangible assets is also included in this expense. Depreciation and amortization expense decreased$15.2 million or 36.6% to$26.3 million during the three months endedMarch 31, 2020 from$41.5 million during the three months endedMarch 31, 2019 as a result of a 8.2% decrease in average tractor count in the Company's fleet and further reduced by the impact of$97.6 million of impairments recorded in the third quarter of 2019 to reduce asset carrying values to fair value. The Company's Specialized Solutions segment's depreciation and amortization expense decreased$9.8 million or 36.7% for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 as a result of a 6.5% decrease in average tractor count in the segment's fleet and further reduced by the impact of$58.6 million of impairments recorded in the third quarter of 2019 to reduce asset carrying values to fair value. The Company's Flatbed Solutions segment's depreciation and amortization expense decreased$5.6 million or 38.1% for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 as a result of a 11.5% decrease in average tractor count in the segment's fleet and further reduced by the impact of a$39.0 million of impairments recorded in the third quarter of 2019 to reduce asset carrying values to fair value. Taxes and Licenses. Operating taxes and licenses expense primarily represents the costs of taxes and licenses associated with the Company's fleet of equipment and will vary according to the size of its equipment fleet. Taxes and license expense decreased$0.4 million for the three months endedMarch 31, 2020 . Operating taxes and license expense, as a percentage of revenue, was 1.2% and 1.1% for the three months endedMarch 31, 2020 and 2019, respectively. 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 bodily injury, property damage, cargo damage and other casualty events. The primary factor affecting the Company's insurance and claims expense is seasonality (the Company typically experiences higher accident frequency in winter months), the frequency and severity of accidents, trends in the development factors used in its accruals and developments in large, prior-year claims. The frequency of accidents tends to increase with the miles the Company travels. Insurance and claims expense increased 20.0% to$15.0 million during the three months endedMarch 31, 2020 from$12.5 million during the three months endedMarch 31, 2019 due to increases in insurance premiums. Insurance and claims, as a percentage of revenue, increased 0.9% for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Impairment. Impairment charges of$13.4 million were recognized in the three months endedMarch 31, 2020 related to Aveda's intangible assets, property and equipment and right-of-use assets. Restructuring Costs. Restructuring costs of$0.5 million were recognized in the three months endedMarch 31, 2020 in connection with Phase I of Project Synchronize, which was completed in the first quarter of 2020, and the closure of certain Aveda terminals. Operating Income (Loss). Operating loss was$8.3 million , or 2.1% of revenue, for the three months endedMarch 31, 2020 compared to operating income$0.7 million , or 0.2% of revenue, for the three months endedMarch 31, 2019 , primarily as a result of impairment and restructuring charges. Excluding these charges operating income was$5.6 million or 1.4% of revenue, an increase of$4.9 million compared to the three months endedMarch 31, 2019 due to a decrease in fuel expense, maintenance expense and depreciation and amortization. 36 Table of Contents The Company's Specialized Solutions segment's operating loss was$6.5 million , or 2.7% of revenue, for the three months endedMarch 31, 2020 compared to operating income of$7.8 million , or 2.9% of revenue, for the three months endedMarch 31, 2019 , primarily as a result of impairment and restructuring charges.
Excluding these charges operating income was
The change in operating income as a percent of revenue is primarily a result of a decrease in fuel expense, maintenance expense and depreciation and amortization.
The Company's Flatbed Solutions segment's operating income was$8.6 million , or 5.5% of revenue, for the three months endedMarch 31, 2020 compared to operating income$3.3 million , or 2.0% of revenue, for the three months endedMarch 31, 2019 , the increase primarily as a result of decreases in salaries and wages, fuel expense, maintenance expense and depreciation and amortization. Interest Expense. Interest expense consists of cash interest, amortization of debt issuance costs, fees and prepayment penalties. Interest expense decreased 5.5% to$12.0 million during the three months endedMarch 31, 2020 from$12.7 million during the three months endedMarch 31, 2019 . This decrease was primarily attributable to lower interest rates on the Term Loan Facility and decreases in equipment term loan and finance lease outstanding balances. Income Tax. Benefit for income taxes increased from$1.9 million for the three months endedMarch 31, 2019 to$3.9 million for the three months endedMarch 31, 2020 . The increase is primarily the result of the tax impact of impairment charges of$13.4 million . The effective tax rate was 18.4% for the three months endedMarch 31, 2020 , compared to 17.3% for the three months endedMarch 31, 2019 . The effective income tax rate varies from the federal statutory rate primarily due to state income taxes and the impact of nondeductible permanent differences, including driver per diems and transaction expenses. 37 Table of Contents Non-GAAP Financial Measures
Adjusted EBITDA, Free Cash Flow, Adjusted Operating Ratio and Adjusted Net Income (Loss)
Adjusted EBITDA, Free Cash Flow, Adjusted Operating Ratio and Adjusted Net Income (Loss) are not recognized measures under GAAP. The Company uses these non-GAAP measures as supplements to its GAAP results in evaluating certain aspects of its business, as described below.
Adjusted EBITDA The Company defines Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, and other fees and charges associated with financings, net of interest income, (iii) income taxes, (iv) acquisition-related transaction expenses (including due diligence costs, legal, accounting and other advisory fees and costs, retention and severance payments and financing fees and expenses), (v) business transformation costs, (vi) non-cash impairment, (vii) restructuring charges, and (viii) non-cash stock and equity-compensation expense. The Company's board of directors and executive management team use Adjusted EBITDA as a key measure of its performance and for business planning. Adjusted EBITDA assists them in comparing its operating performance over various reporting periods on a consistent basis because it removes from the Company's operating results the impact of items that, in their opinion, do not reflect the Company's core operating performance. Adjusted EBITDA also allows the Company to more effectively evaluate its operating performance by allowing it to compare the results of operations against its peers without regard to its or its peers' financing method or capital structure. The Company's method of computing Adjusted EBITDA is substantially consistent with that used in its debt covenants and also is routinely reviewed by its management for that purpose. The Company believes its presentation of Adjusted EBITDA is useful because it provides investors and industry analysts the same information that the Company uses internally for purposes of assessing its core operating performance. However, Adjusted EBITDA is not a substitute for, or more meaningful than, net income (loss), cash flows from operating activities, operating income or any other measure prescribed by GAAP, and there are limitations to using non-GAAP measures such as Adjusted EBITDA. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital, tax structure and the historic costs of depreciable assets. Also, other companies in its industry may define Adjusted EBITDA differently than the Company does, and as a result, it may be difficult to use Adjusted EBITDA or similarly named non-GAAP measures that other companies may use to compare the performance of those companies to its performance. Because of these limitations, Adjusted EBITDA should not be considered a measure of the income generated by the Company's business or discretionary cash available to it to invest in the growth of its business. The Company's management compensates for these limitations by relying primarily on the Company's GAAP results and using Adjusted EBITDA supplementally.
A reconciliation of Adjusted EBITDA to net loss for the three months ended
Three Months Ended March 31,
(Dollars in millions) 2020 2019
Net loss $ (17.3) $ (9.3)
Depreciation and amortization 26.3 41.5
Interest income (0.3) (0.2)
Interest expense 12.0 12.7
Income tax benefit (3.9) (1.9)
Business transformation costs 3.4 -
Impairment 13.4 -
Restructuring 0.5 -
Stock based compensation 0.9 1.0
Adjusted EBITDA $ 35.0 $ 43.8
38
Table of Contents
Free Cash Flow
The Company defines Free Cash Flow as net cash provided by operating activities
less purchases of property and equipment, plus proceeds from sale of property
and equipment as such amounts are shown on the face of the Statement of Cash
Flows. The Company's board of directors and executive management team use Free
Cash Flow to assess the Company's liquidity and ability to repay maturing debt,
fund operations and make additional investments. The Company believes Free Cash
Flow provides useful information to investors because it is an important
indicator of the Company's liquidity, including its ability to reduce net debt,
make strategic investments, pay dividends to common shareholders and repurchase
stock. The Company's measure of Free Cash Flow may not be directly comparable to
similar measures reported by other companies. Furthermore, Free Cash Flow is not
a substitute for, or more meaningful than, net cash provided by operating
activities nor any other measure prescribed by GAAP, and there are limitations
to using non-GAAP measures such as Free Cash Flow. Accordingly, Free Cash Flow
should not be considered a measure of the income generated by the Company's
business or discretionary cash available to the Company to invest in the growth
of its business. The Company's management compensates for these limitations by
relying primarily on the Company's GAAP results and using Free Cash Flow
supplementally.
A reconciliation of Free Cash Flow to cash flows from operating activities for
the three months ended
Three Months Ended March 31,
(Dollars in millions) 2020 2019Net cash provided by operating activities $ 29.7 $
36.4
Purchases of property and equipment (4.5)
(3.9)
Proceeds from sale of property and equipment 5.8 4.6 Free Cash Flow $ 31.0 $ 37.1 Adjusted Operating Ratio The Company uses Adjusted Operating Ratio as a supplement to its GAAP results in evaluating certain aspects of its business, as described below. The Company defines Adjusted Operating Ratio as (a) total operating expenses (i) less, acquisition-related transaction expenses, non-cash impairment charges, unusual or non-regularly recurring expenses or recoveries, (ii) less, business transformation costs, and (iii) further adjusted for the net impact of the step-up in basis (such as increased depreciation and amortization expense) and amortization of identifiable intangible assets resulting from acquisitions, as a percentage of (b) total revenue. The Company's board of directors and executive management team view Adjusted Operating Ratio, and its key drivers of revenue quality, growth, expense control and operating efficiency, as a very important measure of the Company's performance. The Company believes excluding acquisition-related transaction expenses, additional depreciation and amortization expenses as a result of acquisitions, unusual or non-regularly recurring expenses or recoveries and non-cash impairment enhances the comparability of its performance between periods. The Company believes its presentation of Adjusted Operating Ratio is useful because it provides investors and industry analysts the same information that it uses internally for purposes of assessing its core operating profitability. However, Adjusted Operating Ratio is not a substitute for, or more meaningful than, operating ratio, operating margin or any other measure derived solely from GAAP measures, and there are limitations to using non-GAAP measures such as Adjusted Operating Ratio. Although the Company believes that Adjusted OperatingRatio can make an evaluation of its operating performance more accurately because it removes items that, in its opinion, do not reflect its core operations, other companies in its industry may define adjusted operating ratio differently than it does. As a result, it may be difficult to use Adjusted Operating Ratio or similarly named non-GAAP measures that other companies may use to compare the performance of those companies to the Company's performance. The Company's management compensates for these limitations by relying primarily on GAAP measures and using Adjusted Operating Ratio supplementally. 39 Table of Contents
A reconciliation of Adjusted Operating Ratio to operating ratio for each of the
three months ended
Three Months Ended
March 31,
(Dollars in millions) 2020 2019
Revenue $ 391.0 $ 433.0
Salaries, wages and employee benefits 110.4 119.1
Fuel 28.7 35.0
Operations and maintenance 45.6 54.8
Purchased freight 134.2 146.6
Depreciation and amortization 26.3 41.5
Impairment 13.4 -
Restructuring 0.5 -
Other operating expenses 40.2 35.3
Operating expenses 399.3 432.3
Operating ratio 102.1% 99.8%
Business transformation costs 3.4 -
Impairment 13.4 -
Restructuring 0.5 -
Amortization of intangible assets 1.8 4.3
Net impact of step-up in basis of acquired assets - 6.8
Adjusted operating expenses $ 380.2 $ 421.2
Adjusted operating ratio 97.2% 97.3%
A reconciliation of the Company's Specialized Solutions segment's Adjusted
Operating Ratio to operating ratio for the three months ended March 31, 2020 and
2019 is as follows:
Three Months Ended
March 31,
(Dollars in millions) 2020 2019
Revenue(1) $ 240.4 $ 269.7
Salaries, wages and employee benefits 74.2 81.0
Fuel 18.3 22.5
Operations and maintenance 34.7 40.4
Purchased freight 68.5 74.0
Depreciation and amortization 16.9 26.7
Impairment 13.4 -
Restructuring 0.5 -
Other operating expenses 20.4 17.3
Operating expenses 246.9 261.9
Operating ratio 102.7% 97.1%
Business transformation costs 0.7 -
Impairment 13.4 -
Restructuring 0.5 -
Amortization of intangible assets 1.0 2.6
Net impact of step-up in basis of acquired assets - 6.3
Adjusted operating expenses $ 231.3 $ 253.0
Adjusted operating ratio 96.2% 93.8%
--------------------------------------------------------------------------------
(1) Includes intersegment revenues and expenses, as applicable, which are
eliminated in the Company's consolidated results.
40
Table of Contents
A reconciliation of the Company's Flatbed Solutions segment's Adjusted Operating
Ratio to operating ratio for the three months ended March 31, 2020 and 2019 is
as follows:
Three Months Ended March 31,
(Dollars in millions) 2020 2019
Revenue(1) $ 155.2 $ 167.9
Salaries, wages and employee benefits 33.4 34.4
Fuel 10.4 12.5
Operations and maintenance 10.7 14.2
Purchased freight 70.5 77.2
Depreciation and amortization 9.1 14.7
Other operating expenses 12.5 11.6
Operating expenses 146.6 164.6
Operating ratio 94.5% 98.0%
Business transformation costs 0.1 -
Amortization of intangible assets 0.8 1.7
Net impact of step-up in basis of acquired assets - 0.5
Adjusted operating expenses $ 145.7 $ 162.4
Adjusted operating ratio 93.9% 96.7%
--------------------------------------------------------------------------------
(1) Includes intersegment revenues and expenses, as applicable, which are
eliminated in the Company's consolidated results.
Adjusted Net Income (Loss)
The Company defines Adjusted Net Income (Loss) as net income (loss) adjusted for
acquisition related transaction expenses, business transformation costs,
non-cash impairments, restructuring charges, amortization of intangible assets,
the net impact of step-up in basis of acquired assets and unusual or
non-regularly recurring expenses or recoveries.
The Company's board of directors and executive management team use Adjusted Net
Income (Loss) as a key measure of its performance and for business planning.
Adjusted Net Income (Loss) assists them in comparing its operating performance
over various reporting periods on a consistent basis because it removes from
operating results the impact of items that, in its opinion, do not reflect the
Company's core operating performance. Adjusted Net Income (Loss) also allows the
Company to more effectively evaluate its operating performance by allowing it to
compare the results of operations against its peers without regard to its or its
peers' acquisition related items, such as acquisition-related transaction
expenses, non-cash impairments, amortization of intangible assets and the net
impact of the step up in basis of acquired assets, as well as removing the
impact of unusual or non-regularly recurring expenses or recoveries.
The Company believes its presentation of Adjusted Net Income (Loss) is useful
because it provides investors and industry analysts the same information that it
uses internally for purposes of assessing its core operating performance.
However, Adjusted Net Income (Loss) is not a substitute for, or more meaningful
than, net income (loss) or any other measure derived solely from GAAP measures,
and there are limitations to using non-GAAP measures such as Adjusted Net Income
(Loss). Although the Company believes that Adjusted Net Income (Loss) can make
an evaluation of its operating performance more consistent because it removes
items that, in its opinion, do not reflect its core operations, other companies
in its industry may define Adjusted Net Income (Loss) differently than it does.
As a result, it may be difficult to use Adjusted Net Income (Loss) or similarly
named non-GAAP measures that other companies may use to compare the performance
of those companies to the Company's performance. The Company's management
compensates for these limitations by relying primarily on its GAAP results and
using Adjusted Net Income (Loss) supplementally.
41
Table of Contents
A reconciliation of Adjusted Net Income (Loss) to net loss for the three months
ended
Three Months Ended
March 31,
(Dollars in millions) 2020 2019
Net loss $ (17.3) $ (9.3)
Business transformation costs 3.4 -
Impairment 13.4 -
Restructuring 0.5 -
Amortization of intangible assets 1.8 4.3
Net impact of step-up in basis of acquired assets - 6.8
Tax impact of impairments (2.6) -
Adjusted net income (loss) $ (0.8) $ 1.8
Liquidity and Capital Resources
The Company had the following sources of liquidity available atMarch 31, 2020 andDecember 31, 2019 . (Dollars in millions) March 31, 2020 December 31, 2019 Cash $ 107.5 $ 95.7
Working capital surplus 93.9 71.0
Availability under line of credit 84.4
86.8
Total $ 285.8 $ 253.5
The Company's primary sources of liquidity have been provided by operations,
issuances of capital stock and borrowings under its credit facilities. Cash
increased by $11.8 million during the three months ended March 31, 2020 as
compared to December 31, 2019 . This increase primarily resulted from net cash
provided by operating activities. See below for more information.
As of March 31, 2020 and December 31, 2019 , the Company had a working capital
surplus of $93.9 million and $71.0 million , respectively. The increase in
working capital surplus is due primarily to net assets held for sale of $56.7
million , offset by decreased accounts receivable of $31.2 million and decreased
accounts payable and accrued liabilities of $2.6 million .
As of
The Company has from time to time considered the possibility of a private offering of securities, which would not be registered under the Securities Act of 1933, as amended (the Securities Act), and which would be offered only to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons outsidethe United States pursuant to Regulation S under the Securities Act. The proceeds of such an offering may be used for general corporate purposes, including the repayment of all or a portion of the Company's term loan credit facility, repayment of outstanding balances on the ABL facility and to support the Company's acquisition strategy. Also, in connection with such offering, the Company's credit facilities may be amended or refinanced. There can be no assurance that the Company will conduct or complete such an offering. The Company's business requires substantial amounts of cash for operating expenses, including salaries and wages paid to employees, contract payments to independent contractors, insurance and claims payments, tax payments, and others. The Company also uses large amounts of cash and credit for the following activities: 42 Table of Contents Capital Expenditures The Company follows a dual strategy of both owning assets and employing asset-light activities, the latter of which reduces the capital expenditures required to operate the business. Asset-light activities are conducted utilizing tractors and trailers provided by owner-operators and third-party carriers for significant portions of our flatbed and specialized services. Company-owned asset expenditures require substantial cash and financing (including finance and operating leases) to maintain a modern tractor fleet, refresh the trailer fleet, fund replacement and or growth in the revenue equipment fleet, and for the acquisition of real property and improvements to existing terminals and facilities. The Company had net cash capital receipts of approximately$1.3 million and financed$9.8 million of non-cash capital expenditures for the three months endedMarch 31, 2020 . The Company had the following capital assets activity in 2019 and 2018: Three Months Ended March 31, (Dollars in millions) 2020 2019 Net cash capital receipts $ (1.3) $ (0.7) Total financed capital expenditures 9.8 25.1 Property and equipment sold for notes receivable - (0.4) Total net capital assets additions $ 8.5 $ 24.0
The decrease in total net capital assets additions is due to timing of the Company's replacement cycle for revenue equipment.
Additionally, the Company entered into operating leases for revenue equipment with terms of 2 to 5 years and real property with terms of 3 to 4 years having asset values at lease inception of$18.8 million and$0.3 million , respectively, for the three months endedMarch 31, 2020 .
ABL and Term Loan Facilities and Equipment Financing Agreements
As ofMarch 31, 2020 , the Company had (i) a$500.0 million senior secured term loan credit facility, consisting of a$250.0 million term loan, a$150 million tack-on loan and$100.0 million of term loans funded under a delayed draw term loan facility, and (ii) an asset-based senior secured revolving credit facility with an aggregate maximum credit amount equal to$100.0 million (subject to availability under a borrowing base). The delayed draw term loans were used to support the Company's acquisition activities. See Note 9 of Notes to Consolidated Financial Statements for more information regarding the Term Loan Facility and the ABL Facility. The Company had$177.2 million of term loans and$26.0 million of finance leases collateralized primarily by revenue equipment, with terms of 48 to 60 months. Certain of the term loans contain conditions, covenants, representations and warranties, events of default, and indemnification provisions applicable to the Company and certain of its subsidiaries that are customary for equipment financings, including, but not limited to, limitations on the incurrence of additional debt and the prepayment of existing indebtedness, certain payments (including dividends and other distributions to persons not party to its ABL Facility) and transfers of assets. The Company believes it can finance its expected cash needs, including debt repayment, in the short-term with cash flows from operations and borrowings available under the ABL Facility. The Company expects that the ABL Facility will provide sufficient credit availability to support its ongoing operations, fund debt service requirements, capital expenditures, and working capital needs. Over the long-term, the Company will continue to have significant capital requirements, and expects to devote substantial financial resources to grow its operations and fund its acquisition activities. As a result of these funding requirements, the Company likely will need to sell additional equity or debt securities or seek additional financing through additional borrowings, lease financing or equity capital, though it is not likely that the Company will issue any common stock in the near term. The availability of financing or equity capital will depend upon the Company's financial condition and results of operations as well as prevailing market conditions. If such additional borrowings, lease financing or equity capital is not available at the time it needs to incur such expenditures, the Company may be required to extend the maturity of then outstanding indebtedness, rely on alternative financing arrangements or engage in asset sales. Letters of credit - Under the terms of the ABL Facility, lenders may issue up to$20 million of standby letters of credit on our behalf. Outstanding letters of credit reduce the availability on the$100 million ABL Facility. Standby letters of credit are generally issued for the benefit of regulatory authorities, insurance companies and state departments of insurance for the purpose of satisfying certain collateral requirements, primarily related to automobile, workers' compensation, and general insurance liabilities. Business combinations - The Company's strategy has historically been to consolidate the open-deck transportation industry and it has used significant amounts of capital to acquire 20 businesses sinceDaseke Companies, Inc.'s inception in 2008. During 2019, the Company began to focus on organic growth, increasing free cash flow and margins, but will continue to evaluate potential tuck-in transactions of its subsidiaries and any other sources of growth it considers in the best interest of the Company. 43 Table of Contents Material Debt Overview
As of
· the Term Loan Facility and the ABL Facility;
· secured equipment loans and finance lease agreements; and
· bank mortgage secured by real estate.
The amounts outstanding under such agreements were as follows as ofMarch 31, 2020 (in millions): Term Loan Facility$ 487.3 Mortgages 3.1 Equipment term loans 177.2 Finance lease obligations 26.0 Total long-term debt and capital leases
693.6
Less: current portion
(57.7)
Long-term debt and finance leases obligations, less current portion
See Note 2 and Note 9 of the Notes to Consolidated Financial Statements included herein for information regarding the Company's material debt and finance lease obligations, respectively.
Off-Balance Sheet Arrangements
Information about the Company's standby letters of credit and 17,520,329 shares of common stock issuable upon exercise of outstanding warrants is included in Note 14 and Note 11, respectively, of Notes to Consolidated Financial Statements included herein. See also Liquidity and Capital Resources above. Cash Flows
The Company's summary statements of cash flows information for the three months
ended
Three Months Ended March 31,
(Dollars in millions) 2020 2019
Net cash provided by operating activities $ 29.7 $ 36.4 Net cash provided by investing activities $ 1.3 $ 0.7
Net cash used in financing activities
Operating Activities. Cash provided by the Company's operating activities consists of net income or loss adjusted for certain non-cash items, including depreciation and amortization, deferred interest, gain/loss on disposal of property and equipment, deferred income taxes, impairments, restructuring charges, non-cash operating lease expense, stock-based compensation, bad debt expense and the effect of changes in working capital and other activities. Cash provided by operating activities was$29.7 million during the three months endedMarch 31, 2020 and consisted of$17.3 million of net loss plus$40.5 million of non-cash items, consisting primarily of depreciation, amortization, non-cash operating lease expense, impairment and stock-based compensation, plus$6.5 million of net cash provided by working capital and other activities. Cash provided by working capital and other activities during the three months endedMarch 31, 2020 reflect an increase of$1.3 million in accounts receivable,$2.2 million in accounts payable and$7.2 million in accrued expenses and other liabilities; offset by a$4.0 million decrease in prepaid and other current assets and$0.2 million in drivers' advances and other receivables. Cash provided by operating activities was$36.4 million during the three months endedMarch 31, 2019 and consisted of$9.3 million of net loss plus$47.6 million of non-cash items, consisting primarily of depreciation, amortization, non-cash operating lease expense, deferred taxes and stock-based compensation, plus$1.9 million of net cash used for working capital and other activities. Cash used for working capital and other activities during the three months endedMarch 31, 2019 reflect decreases of a$8.9 million in accounts receivable and$2.8 million in drivers' advances and other receivables, offset by a$1.9 million increase in prepaid and other current assets, and a$7.9 million increase in accounts payable and accrued expenses. The$6.7 million decrease in cash provided by operating activities during the three months endedMarch 31, 2020 , as compared with the three months endedMarch 31, 2019 , was primarily the result of an$8.0 million increase in net loss, reduced by decreases of$12.7 million 44
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in depreciation,
Investing Activities. Cash flows from investing activities increased from$0.7 million provided by investing activities for the three months endedMarch 31, 2019 to$1.3 million provided by investing activities for the three months endedMarch 31, 2020 reflecting an increase of$0.6 million in cash equipment purchases and an increase of$1.2 million in cash receipts from sales of revenue equipment for the three months endedMarch 30, 2020 .
Total net cash capital expenditures (receipts) for the three months ended
Three Months Ended March 31,
(Dollars in millions) 2020 2019
Revenue equipment (tractors, trailers and trailer accessories) $
4.0 $ 1.4 Buildings and building improvements 0.1 1.0 Other 0.4 1.5 Total cash capital expenditures 4.5 3.9 Less: Proceeds from sales of property and equipment 5.8 4.6 Net cash capital expenditures (receipts) $ (1.3) $ (0.7) Financing Activities. Cash flows from financing activities decreased from$20.5 million used in financing activities for the three months endedMarch 31, 2019 to$20.0 million used in financing activities for the three months endedMarch 31, 2020 . This decrease was primarily a result of net debt proceeds of$0.5 million . Inflation Inflation can have an impact on the Company's operating costs. A prolonged period of inflation could cause interest rates, fuel, wages and other costs to increase, which would adversely affect the Company's results of operations unless freight rates correspondingly increase. The Company attempts to limit the effects of inflation through increases in freight rates, certain cost control efforts and limiting the effects of fuel prices through fuel surcharges and measures intended to reduce the consumption of fuel. Over the past three fiscal years, the effect of inflation has been immaterial. Seasonality In the transportation industry, results of operations generally show a seasonal pattern. The Company's productivity decreases during the winter season because inclement weather impedes operations, end-users reduce their activity and certain shippers reduce their shipments during winter. At the same time, operating expenses increase and fuel efficiency decreases because of engine idling and harsh weather creating higher accident frequency, increased claims and higher equipment repair expenditures. The Company also may suffer from weather-related or other events such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes and explosions. These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy the Company's assets, increase insurance costs or adversely affect the business or financial condition of its customers, any of which could adversely affect the Company's results of operations or make such results more volatile. Critical Accounting Policies The Company's significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K filed onMarch 10, 2020 . The Company considers certain of these accounting policies to be "critical" to the portrayal of the Company's financial position and results of operations, as they require the application of significant judgment by management. As a result, they are subject to an inherent degree of uncertainty. The Company identifies and discusses these "critical" accounting policies in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's Annual Report on Form 10-K filed onMarch 10, 2020 . Management bases its estimates and judgments on historical experience and on various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, management evaluates its estimates and judgments, including those considered "critical." Management has discussed the development, selection and evaluation of accounting estimates, including those deemed "critical," and the associated disclosures in this Quarterly Report on Form 10-Q with the Audit Committee of the Company's board of directors. 45
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