USA TRUCK, INC. Forward-Looking Statements
This report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and such statements are subject to the safe harbor created by those sections, and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation:
any statement about the expected impact, evolution, duration or severity of the
? novel coronavirus ("COVID-19") global pandemic, including our anticipated
actions and responses thereto and the potential impact on our business,
operations, customers, employees, financial results and financial condition;
? any projections of earnings, revenue, costs, or other financial items;
? any statement of projected future operations or processes;
? any statement of plans, strategies, goals, and objectives of management for
future operations;
? any statement concerning acquisitions, or proposed new services or
developments;
? any statement regarding future economic conditions or performance; and
? any statement of belief and any statement of assumptions underlying any of the
foregoing.
In this Quarterly Report on Form 10-Q, statements relating to:
? the impact of public health crises, including COVID-19,
? future driver market,
? future strategy and strategic initiatives,
? future ability to grow market share,
? future driver and customer-facing employee compensation,
? future ability and cost to recruit and retain drivers,
? future asset utilization,
the amount, timing and price of future acquisitions and dispositions of revenue
? equipment, size and age of the Company's fleet, mix of fleet between
Company-owned and independent contractors and anticipated gains or losses
resulting from dispositions,
? future depreciation and amortization expense, including useful lives and
salvage values of equipment,
? future safety performance, ? future profitability, ? future industry capacity,
? future deployment of technology,
? future pricing rates and freight network,
? future fuel prices and surcharges, fuel efficiency and hedging arrangements,
future insurance and claims expense, including trends in cost, coverage and
? retention levels, as well as the formation of additional captive insurance
companies,
? future salaries, wages and employee benefits costs,
? future efforts to expand our use of independent contractors, purchased
transportation use and expense,
? future operations and maintenance costs,
? future USAT Logistics growth and profitability,
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? future trends in operating expenses expected to result from growing our USAT
Logistics business and increasing independent contractors,
? future impact of regulations,
? future use of derivative financial instruments,
? the impact of inflation and supply chain shortages,
? future indebtedness,
? future liquidity and borrowing availability and capacity,
? the impact of pending and future litigation and claims,
? future availability and compliance with covenants under our revolving credit
facility,
? expected amount and timing of capital expenditures,
? future equipment market,
? expected liquidity and sources of capital resources, including the mix of
financing and operating leases,
? future size of the independent contractor fleet, and
? future income tax rates
among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as "expects," "estimates," "projects," "believes," "anticipates," "focus," "intends," "plans," "goals," "may," "if," "will," "would," "should," "could," "potential," "continue," "designed," "likely," "foresee," "seek," "target," "forecast," "intends," "hopes," "strategy," "objective," "mission," "outlook," "future" and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1.A, Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , and other filings with theSEC . All such forward-looking statements speak only as of the date of this report. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in management's expectations with regard thereto or any change in the events, conditions or circumstances on which any such information is based, except as required by law.
All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement.
References to the "Company," "we," "us," "our" or similar terms refer to
Overview
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader more fully
understand the operations and present business environment of
MD&A is provided as a supplement to, and should be read in conjunction with, the condensed consolidated financial statements and notes thereto and other financial information that appears elsewhere in this report. This overview summarizes the MD&A, which includes the following sections:
Business Overview - a general description of our business, the organization of our operations and the service offerings that comprise our operations.
Results of Operations - an analysis of the consolidated results of operations for the periods presented in the condensed consolidated financial statements included in this filing and a discussion of seasonality, the potential impact of inflation and fuel availability and cost.
Liquidity and Capital Resources - an analysis of cash flows, sources and uses of cash, debt, equity and contractual obligations.
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Business Overview
The Company has two reportable segments: (i) Trucking, consisting of one-way
truckload motor carrier services, in which volumes typically are not
contractually committed, and dedicated contract motor carrier services, in which
a combination of equipment and drivers is contractually committed to a
particular customer, typically for a duration of at least one year, subject to
certain cancellation rights, and (ii) USAT Logistics, consisting of freight
brokerage, logistics, and rail intermodal service offerings.
The Trucking segment provides one-way truckload transportation, including
dedicated services, of various products, goods and materials. The Trucking
segment primarily uses its own purchased or leased tractors and trailers or
capacity provided by independent contractors to provide services to customers
and is commonly referred to as "asset-based" trucking. The Company's USAT
Logistics segment provides services that match customer shipments with available
equipment of authorized third-party motor carriers and other service providers
and provide services that complement the Company's Trucking segment.
Revenue for the Company's Trucking segment is substantially generated by
transporting freight for customers, and is predominantly affected by rates per
mile, the number of tractors in operation, and the number of revenue-generating
miles per tractor. The Company also generates revenue through fuel surcharge
and ancillary services such as stop-off pay, loading and unloading activities,
tractor and trailer detention, expediting charges, repositioning charges and
other similar services.
Operating expenses fall into two categories: variable and fixed. Variable
expenses, or mostly variable expenses, constitute the majority of the expenses
associated with transporting freight for customers, and include driver wages and
benefits, fuel and fuel taxes, payments to independent contractors, operating
and maintenance expense and insurance and accident claims expense. These
expenses vary primarily based upon miles operated, but also have controllable
components based on percentage of compensated miles, shop and dispatch
efficiency, and safety and claims experience.
Fixed expenses, or mostly fixed expenses, include the capital costs of our assets (depreciation, amortization, rent and interest), compensation of non-driving employees and portions of insurance and maintenance expenses. These expenses are partially controllable through management of fleet size and facilities infrastructure, headcount efficiency, and safety.
Fuel and fuel tax expense can fluctuate significantly with diesel fuel prices.
To mitigate the Company's exposure to fuel price increases, it recovers from its customers fuel surcharges that historically have recouped a majority of the increased fuel costs; however, the Company cannot assure the recovery levels experienced in the past will continue in future periods. Although the Company's fuel surcharge program mitigates some exposure to rising fuel costs, the Company continues to have exposure to increasing fuel costs related to deadhead miles, out of route miles, fuel inefficiency due to engine idle time and other factors, including the extent to which the surcharges paid by customers are insufficient to compensate for higher fuel costs, particularly in times of rapidly increasing fuel prices. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of loaded miles. The fuel surcharge is billed on a lagging basis, meaning the Company typically bills customers in the current week based on the previous week's applicableUnited States Department of Energy (the "DOE") Diesel Fuel index. Therefore, in times of increasing fuel prices, the Company does not recover as much in fuel surcharge revenue as it pays for fuel. In periods of declining prices, the opposite is experienced. The key statistics used to evaluate Trucking segment performance, in each case net of fuel surcharge revenue, include (i) base revenue per available tractor per week, (ii) base revenue per loaded mile, (iii) loaded miles per available tractor per week, (iv) deadhead percentage, (v) average loaded miles per trip, (vi) average number of available tractors, (vii) operating ratio, and (viii) adjusted operating ratio. In general, the Company's average miles per available tractor per week, rate per mile and deadhead percentages are affected by industry-wide freight volumes and industry-wide trucking capacity, which are mostly beyond the Company's control. Factors over which the Company has significant control are its sales and marketing efforts, service levels and operational efficiency. The USAT Logistics segment is non-asset based and is dependent upon skilled employees, reliable information systems and qualified third-party capacity providers. The largest expense related to the USAT Logistics segment is purchased transportation expense. Other operating expenses consist primarily of salaries, wages and employee benefits. The Company evaluates the financial performance of the USAT Logistics segment by reviewing gross margin (USAT Logistics operating revenue less USAT Logistics purchased transportation expense) and the gross margin percentage (USAT Logistics operating revenue less USAT Logistics purchased transportation expense expressed 15
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as a percentage of USAT Logistics operating revenue). Gross margin can be impacted by the rates charged to customers and the costs of securing third-party capacity. USAT Logistics often achieves better gross margins during periods of imbalance between supply and demand than times of balanced supply and demand, although periods of transition to tight capacity also can compress margins.
COVID-19
The COVID-19 outbreak, and its variants, have resulted in government authorities inthe United States and around the world implementing numerous measures to try to reduce its spread, such as travel bans and restrictions, social distancing, quarantines, shelter in place or total lock-down orders, business limitations and shutdowns, and vaccine, testing, and mask mandates. While many of these measures have been relaxed or rolled back, we continue to monitor the situation and implement new measures as deemed appropriate. The overall impact of COVID-19 on our consolidated results of operations for the three months endedMarch 31, 2022 was not significant, however the impact of COVID-19 on our consolidated results of operations in future periods remains uncertain. Based on the duration and severity of COVID-19, we may experience decreases in the demand for our services. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources.
Results of Operations
The following tables summarize the condensed consolidated statements of income
and comprehensive income in dollars and percentage of consolidated operating
revenue and the percentage increase or decrease in the dollar amounts of those
items compared to the prior year.
Three Months Ended March 31,
2022 2021
Adjusted Adjusted Change
Operating Operating Operating Operating in Dollar
Revenue Ratio (1) Revenue Ratio (1) Amounts
$ % % $ % % %
(dollars in thousands)
Base revenue $ 176,405 87.7 % $ 144,265 91.0 % 22.3 %
Fuel surcharge
revenue 24,658 12.3 14,240 9.0 73.2
Operating revenue 201,063 100.0 158,505 100.0 26.8
Total operating
expenses 182,380 90.7 89.2 152,459 96.2 95.6 19.6
Operating income 18,683 9.3 6,046 3.8 209.0
Other expenses:
Interest expense 1,417 0.7 1,025 0.6 38.2
Other, net 68 0.0 61 0.0 11.5
Total other
expenses, net 1,485 0.7 1,086 0.7 36.7
Income before income
taxes 17,198 8.6 4,960 3.1 246.7
Income tax expense 4,087 2.0 1,363 0.9 199.9
Consolidated net
income $ 13,111 6.5 % $ 3,597 2.3 % 264.5 %
Base revenue and adjusted operating ratio are non-GAAP financial measures.
See "Use of Non-GAAP Financial Information", "Consolidated Reconciliations"
1) and "Segment Reconciliations" below for the uses and limitations associated
with base revenue, adjusted operating ratio and other non-GAAP financial
measures.
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Use of Non-GAAP Financial Information
The Company uses the terms "base revenue", "adjusted operating ratio" and "adjusted operating income" throughout this MD&A. Adjusted operating ratio and adjusted operating income, as defined here, are non-GAAP financial measures as defined by theU.S. Securities and Exchange Commission ("SEC"). Management uses adjusted operating ratio and adjusted operating income as supplements to the Company's GAAP results in evaluating certain aspects of its business, as discussed below. Base revenue is calculated as operating revenue less fuel surcharge revenue and intercompany eliminations. Adjusted operating ratio is calculated as operating expenses excluding amortization of acquisition related intangibles, net of fuel surcharge revenue, as a percentage of operating revenue excluding fuel surcharge revenue. Adjusted operating income is calculated by deducting operating expenses excluding amortization of acquisition related intangibles, net of fuel surcharge revenue, from operating revenue, net of fuel surcharge revenue. The Company's chief operating decision-maker focuses on base revenue, adjusted operating ratio and adjusted operating income as indicators of the Company's performance from period to period. Management believes removing the impact of the above described items from the Company's operating results affords a more relevant basis for comparing results of operations. Management believes its presentation of these measures is useful to investors and other users because it provides them the same information that we use internally for purposes of assessing our core operating performance. Base revenue, adjusted operating ratio and adjusted operating income are not substitutes for operating revenue, operating ratio, operating income, or any other measure derived solely from GAAP measures. There are limitations to using non-GAAP measures. Although management believes that base revenue, adjusted operating ratio and adjusted operating income can make an evaluation of the Company's operating performance more relevant because these measures remove items that, in management's opinion, do not reflect its core operating performance, other companies in the transportation industry may define base revenue, adjusted operating ratio and adjusted operating income differently. As a result, it may be difficult to use base revenue, adjusted operating ratio and adjusted operating income or similarly named non-GAAP measures that other companies may use, to compare the performance of those companies toUSA Truck's performance.
Consolidated Reconciliations
Pursuant to the requirements of Regulation S-K, Item 10(e) and Regulation G, reconciliations of non-GAAP financial measures to GAAP financial measures have been provided in the tables below for base revenue, adjusted operating ratio, and adjusted operating income:
Base Revenue, Adjusted Operating Ratio, and Adjusted Operating Income
Three Months Ended
March 31,
2022 2021
(in thousands)
Operating revenue $ 201,063 $ 158,505
Less: Fuel surcharge revenue (24,658) (14,240)
Base revenue $ 176,405 $ 144,265
Operating expense $ 182,380 $ 152,459
Adjusted for:
Amortization of acquisition related intangibles (322) (323)
Fuel surcharge revenue (24,658) (14,240)
Adjusted operating expense $ 157,400 $ 137,896
Operating income $ 18,683 $ 6,046
Adjusted operating income $ 19,005 $ 6,369
Operating ratio 90.7 % 96.2 %
Adjusted operating ratio 89.2 % 95.6 %
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Segment Reconciliations
Three Months Ended
Trucking Segment March 31,
2022 2021
(in thousands)
Operating revenue $ 116,028 $ 102,776
Intersegment activity 43 327
Operating revenue (before intersegment
eliminations) 116,071 103,103
Less: fuel surcharge revenue (before intersegment eliminations) (16,224)
(10,319)
Base revenue$ 99,847 $
92,784
Operating expense (before intersegment eliminations)$ 103,443 $
99,583
Adjusted for: Amortization of acquisition related intangibles (322) (323) Fuel surcharge revenue (16,224) (10,319) Adjusted operating expense$ 86,897 $ 88,941 Operating income$ 12,628 $ 3,520 Adjusted operating income$ 12,950 $ 3,843 Operating ratio 89.1 % 96.6 % Adjusted operating ratio 87.0 % 95.9 % Three Months Ended USAT Logistics Segment March 31, 2022 2021 (in thousands) Operating revenue$ 85,035 $ 55,729 Intersegment activity 12,409 12,652 Operating revenue (before intersegment eliminations) 97,444
68,381
Less: fuel surcharge revenue (before intersegment eliminations) (8,440)
(4,296)
Base revenue$ 89,004 $
64,085
Operating expense (before intersegment eliminations)$ 91,389 $ 65,855 Adjusted for: Fuel surcharge revenue (8,440) (4,296) Adjusted operating expense$ 82,949 $ 61,559 Operating income$ 6,055 $ 2,526 Adjusted operating income$ 6,055 $ 2,526 Operating ratio 93.8 % 96.3 % Adjusted operating ratio 93.2 % 96.1 % 18 Table of Contents
Key Operating Statistics by Segment
Three Months Ended
March 31,
Trucking: 2022 2021
Operating revenue (before intersegment eliminations) $ 116,071 $ 103,103
(in thousands)
Operating income (1) (in thousands) $ 12,628 $ 3,520
Adjusted operating income (2) (in thousands)$ 12,950 $
3,843
Operating ratio (3) 89.1 % 96.6 % Adjusted operating ratio (4) 87.0 % 95.9 % Total miles (5) (in thousands) 38,487
42,148 Deadhead percentage (6) 10.8 % 11.6 % Base revenue per loaded mile$ 2.907 $ 2.490
Average number of seated tractors 1,716
1,782
Average number of available tractors (7) 1,821
1,892
Average number of in-service tractors (8) 1,858
1,923
Loaded miles per available tractor per week 1,467
1,532
Base revenue per available tractor per week$ 4,265 $
3,814 Average loaded miles per trip 496 520 USAT Logistics:
Operating revenue (before intersegment eliminations)$ 97,444 $ 68,381 (in thousands) Operating income (1) (in thousands)$ 6,055 $
2,526
Adjusted operating income (2) (in thousands)$ 6,055 $
2,526
Gross margin (9) (in thousands)$ 13,259 $
8,224 Gross margin percentage (10) 13.6 % 12.0 % Load count (in thousands) 41.3 33.1
Operating income is calculated by deducting operating expenses (before
1) intersegment eliminations) from operating revenue (before intersegment
eliminations).
Adjusted operating income is calculated by deducting operating expenses
2) (before intersegment eliminations) excluding amortization of acquisition
related intangibles, net of fuel surcharge revenue, from operating revenue
(before intersegment eliminations), net of fuel surcharge revenue.Operating ratio is calculated as operating expenses (before intersegment
3) eliminations) as a percentage of operating revenue (before intersegment
eliminations).
Adjusted operating ratio is calculated as operating expenses (before
4) intersegment eliminations) excluding amortization of acquisition related
intangibles, net of fuel surcharge revenue, as a percentage of operating
revenue (before intersegment eliminations) excluding fuel surcharge revenue.
5) Total miles include both loaded and empty miles.
6) Deadhead percentage is calculated by dividing empty miles by total miles.
Available tractors are a) all Company tractors that are available to be
7) dispatched, including available unseated tractors, and b) all tractors in the
independent contractor fleet.
In-service tractors include all of the tractors in the Company fleet
8) (Company-operated tractors) and all the tractors in the independent contractor
fleet.
Gross margin is calculated by deducting USAT Logistics purchased
9) transportation expense from USAT Logistics operating revenue (before
intersegment eliminations).
10)Gross margin percentage is calculated as USAT Logistics gross margin divided by USAT Logistics operating revenue (before intersegment eliminations).
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Results of Operations-Segment Review
Trucking operating revenue
During the three months endedMarch 31, 2022 , Trucking operating revenue (before intersegment eliminations) increased 12.6% to$116.1 million , compared to$103.1 million for the same period in 2021. Trucking base revenue (before intersegment eliminations) increased 7.6% to$99.8 million compared to$92.8 million for the first quarter of 2021. The increase in operating revenue (before intersegment eliminations) resulted primarily from a 16.7% increase in base revenue per loaded mile offset by a 4.2% decrease in loaded miles per available tractor
per week. Trucking operating income For the three months endedMarch 31, 2022 , Trucking reported operating income of$12.6 million compared to operating income of$3.5 million for the same period in 2021. This improvement was primarily driven by the 12.6% increase in operating revenue (before intersegment eliminations) discussed above while controlling the segment's fixed cost structure, paired with a$6.2 million increase in gains from the sale of used revenue equipment.
USAT Logistics operating revenue
For the three months endedMarch 31, 2022 , USAT Logistics operating revenue (before intersegment eliminations) increased 42.5% to$97.4 million compared to$68.4 million for the same period in 2021. The year-over-year increase in operating revenue (before intersegment eliminations) was the result of an 14.2% increase in revenue per load and a 24.8% increase in load volume.
USAT Logistics operating income
USAT Logistics reported operating income of$6.1 million for the three months endedMarch 31, 2022 , an increase of$3.5 million , compared to operating income of$2.5 million for the comparable quarter in 2021. This increase was driven largely by the 42.5% increase in operating revenue (before intersegment eliminations) discussed above and a 160 basis point improvement in gross margin.
Consolidated Operating Expenses
The following table summarizes the consolidated operating expenses
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.
Three Months Ended March 31,
2022 2021 % change
Base Base 2022 to
Operating Revenue Revenue (1) Operating Revenue Revenue (1) 2021
$ % % $ % % %
Operating Expenses: (dollars in
thousands)
Salaries, wages and employee benefits$ 41,887 20.8 % 23.7 %$ 36,555 23.0 % 25.3 % 14.6 % Fuel and fuel taxes 17,037 8.5 (4.3) (2) 11,444 7.2 (1.9) (2) 48.9 Depreciation and amortization 8,024 4.0 4.4 9,570 6.0 6.4 (16.2) Insurance and claims 6,623 3.3 3.8
5,809 3.7 4.0 14.0 Equipment rent 1,834 0.9 1.0 1,949 1.2 1.3 (5.9) Operations and maintenance 8,515 4.3 4.8 7,066 4.5 4.9 20.5
Purchased transportation 98,319 48.9 55.7
74,103 46.8 51.4 32.7 Operating taxes and licenses 1,260 0.6 0.7 1,272 0.8 0.9 (0.9) Communications and utilities 1,006 0.5 0.6 804 0.5 0.6 25.1 Gain on disposal of assets, net (6,401) (3.2) (3.6) (177) (0.1) (0.1) - Other 4,276 2.1 2.4 4,064 2.6 2.8 5.2
Total operating expenses$ 182,380 90.7 % 89.2 % (3)$ 152,459 96.2 % 95.6 % (3) 19.6 %
1) Base revenue is calculated as operating revenue less fuel surcharge revenue
and intercompany eliminations.
2) Calculated as fuel and fuel taxes, net of fuel surcharge revenue.
Adjusted operating ratio is calculated as operating expenses excluding
3) amortization of acquisition related intangibles, net of fuel surcharge
revenue, as a percentage of operating revenue excluding fuel surcharge
revenue.
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Salaries, wages and employee benefits
Salaries, wages and employee benefits consist primarily of compensation for all employees and are primarily affected by the total number of miles driven by Company drivers, the rate per mile paid to Company drivers, employee benefits, and compensation and benefits paid to non-driver employees. The increase in salaries, wages and employee benefits expense was primarily due to increases in performance-based compensation and driver and administrative pay, driven higher by a tight driver market and inflation arising during the latter half of 2021 and into the current year. Management believes the market for drivers will remain tight, and as such, expects driver wages to continue to increase in order to attract and retain sufficient numbers of qualified drivers to operate the Company's fleet. Fuel and fuel taxes Fuel and fuel taxes relate primarily to 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 increase in fuel and fuel taxes for the three months endedMarch 31, 2022 is primarily due to increases in the price per gallon of diesel fuel compared to the same period in 2021. For the three months endedMarch 31, 2022 , the average diesel fuel prices per gallon as reported by theDOE , increased 48.2% when compared to the same period in 2021. This increase was largely offset by a 73.1% increase in fuel surcharge revenue which increased from$14.2 million for the three months endedMarch 31, 2021 to$24.7 million for the three months endedMarch 31, 2022 , and a 7.5% decrease in total miles driven by Company drivers for the three months endedMarch 31, 2022 . The Company continues to pursue fuel efficiency initiatives, including the acquisition of newer, more fuel-efficient revenue equipment and implementing focused driver training programs. The Company expects to continue to manage its idle time and truck speeds and partner with customers to align fuel surcharge programs to recover a fair portion of its fuel costs. The Company's net fuel expense will likely continue to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, empty mile percentage, the percentage of revenue generated from independent contractors and the success of fuel efficiency initiatives.
Depreciation and amortization and equipment rent
Depreciation and amortization of property and equipment consists primarily of depreciation for Company-owned tractors and trailers, amortization of revenue equipment financed with finance leases, depreciation of facilities, and amortization of intangible assets. 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 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. For the three months endedMarch 31, 2022 , equipment rent expense remained flat when compared to the 2021 period. The decrease in depreciation and amortization expense over the three months endedMarch 31, 2022 , when compared to the same period in 2021 was primarily due to the change in tractor salvage values that occurred during the first quarter of 2022 to better reflect current estimates of the value of such equipment upon its retirement, and the timing of revenue equipment replacements. The Company believes these changes will more accurately reflect the value of the revenue equipment on the accompanying condensed consolidated balance sheets. While the Company intends to continue its focus on improving asset utilization, matching customer demand and strengthening load profitability initiatives, management expects acquisition costs of new revenue equipment to continue to increase in the near term due to the ongoing supply chain issues. Currently, tractor and trailer manufacturers are experiencing shortages of semiconductor chips and other component parts and supplies, forcing many to curtail or suspend production, which has led to a lower supply of tractors and trailers and higher prices, which could have a material adverse effect on our business, financial condition, and results of operations, particularly our maintenance expense
and
driver retention.
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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. For the three months ended March
31, 2022 , insurance and claims expense increased compared to the prior year
period, largely due to increased insurance premiums.
Because the trucking industry continues to experience large auto liability
verdicts and settlements, causing a decline in the number of carriers and
underwriters that write insurance policies or that are willing to provide
insurance for trucking companies, the Company expects insurance and claims
expense to continue to be volatile. These factors have caused the Company's
insurance premiums to increase during the October 2021 renewal. The Company
continues to evaluate options to prevent further expense increases, including
the continued use of and the formation of additional captive insurance
companies.
Operations and maintenance
Operations and maintenance expense consists primarily of vehicle repairs and maintenance, tolls and weight tickets, and other related costs. Operations and maintenance expenses are primarily affected by the age of the Company-operated 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. However, a portion of operations and maintenance expenses are comprised of fixed costs, such as travel expenses, facility lease payments and property taxes. The increase in operations and maintenance expense for the three months endedMarch 31, 2022 when compared to the same period in 2021, was the result of increased direct repair and tire expenses paired with the resumption of corporate travel, partially offset by lower tolls. Although we are beginning to see improved delivery schedules, management continues to believe that delays in the receipt of new tractors, paired with the overall age of our Company-owned fleet will likely affect our maintenance costs in future periods.
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 three months endedMarch 31, 2022 , purchased transportation expense increased significantly when compared to the 2021 period, primarily due to the continued increase in volume of brokered loads through our USAT Logistics segment and increased third-party capacity costs in a tight capacity market. The Company is endeavoring to grow its independent contractor fleet and 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 regulatory changes. In periods of increasing independent contractor capacity, increases in driver wages are shifted from employee driver wages and related expenses to the "Purchased transportation" line item, net of their fuel expense, maintenance and capital expenditures.
Gain on disposal of assets, net
The increase in gain on disposal of assets, net during the three months endedMarch 31, 2022 when compared to the same quarter in 2021, was due primarily to continued strength in the used equipment market. Management expects that the strong used equipment market will continue through the remainder of this year; however, the first quarter adjustment to salvage values is expected to reduce the magnitude of these gains in future periods. 22 Table of Contents Interest expense, net
The increase in interest expense, net for the three months endedMarch 31, 2022 , was primarily due to the$0.3 million write-off of unamortized debt issuance costs associated with the Company's previous credit facility. See Note 6 to the condensed consolidated financial statements for further discussion of the Company's Credit Facility.
Income tax expense
During the three months endedMarch 31, 2022 and 2021, the Company's effective tax rate was 23.8% and 27.5%, respectively. The effective rate varied from the statutory federal tax rate primarily due to state income taxes and certain non-deductible expenses. The fiscal 2022 tax rate was affected by vesting of equity-based compensation at a higher stock price than the price at which it was granted, which resulted in a decrease to tax expense. Additionally, in fiscal 2022, the Company benefited from The Consolidated Appropriations Act of 2021 that increased the deduction for the cost of food or beverage provided by a restaurant to be 100% deductible in 2021 and 2022. The three months endedMarch 31, 2021 , however, did not benefit from The Consolidated Appropriations Act of 2021 because the legislation was not passed untilDecember 2021 .
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. Weather-related events, such as tornadoes, hurricanes, blizzards, ice storms, floods, and fires, could increase in frequency and severity due to climate change.
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. A prolonged period of inflation could cause interest rates, fuel, wages and other operating costs to increase, which could 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 revenue per mile, certain cost control efforts and limiting the effects of fuel prices through fuel surcharges and measures intended to reduce the consumption of fuel. Management also believes that inflation-driven cost increases on overall operating costs would not be materially different for the Company than for its competitors. Additionally, a prolonged period of inflation could reduce overall economic activity and may reduce overall demand for our services. 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.USA Truck 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 unable 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 theDOE 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, for the three months endedMarch 31, 2022 , the average diesel fuel prices per gallon as reported by theDOE , increased 48.2% when compared to the same period in 2021.
As of
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Equity
As of
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 and availability, 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
It is anticipated that these purchase commitments will be funded first through cash provided by operations and proceeds from the sale of used revenue equipment and secondarily from borrowings under the Credit Facility.
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 revenue equipment and to a lesser extent, in technology and working capital. In the Company's USAT Logistics segment, 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 the use of finance and operating leases. Based on expected financial conditions, net capital expenditures, forecasted 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 for the foreseeable future. OnJanuary 31, 2022 , the Company entered into the Credit Facility. The Credit Facility is structured as a$130.0 million revolving credit facility, with an accordion feature that, so long as no event of default exists, allows the Company to request an increase in the revolving credit facility of up to$60 million , exercisable in increments of$20 million . Included within its$130.0 million revolving credit facility, is a letter of credit sub-facility in an aggregate amount of$15.0 million and a swing line sub-facility in an aggregate amount of$25.0 million . The Credit Facility is secured by a pledge of certain of the Company's assets, with the notable exclusions of any real estate or revenue equipment financed outside the Credit Facility.
The Credit Facility contains a single springing financial covenant, which requires a consolidated fixed charge coverage ratio of at least 1.0 to 1.0.
The
financial covenant springs only in the event excess availability under the
Credit Facility drops below (i) 10.0% of the lenders' total commitments under
the Credit Facility and (ii)
Fluctuations in the outstanding balance and related availability under the Credit Facility are driven primarily by cash flows from operations, bi-annual appraisals of revenue equipment, the timing and nature of property and equipment additions that are not funded through other sources of financing, and the nature and timing of receipt of proceeds from disposals of property and equipment. Since closing, the Company has not borrowed on the Credit Facility and had full availability of$130.0 million as ofMarch 31, 2022 . The Company expects some reduction in availability in the second quarter as the existing letters of credit are transitioned and collateralized by the Credit Facility. 24
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