USA TRUCK INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read together with the Business section in Part 1, Item 1, as well as the consolidated financial statements and accompanying footnotes in Part II, Item 8, of this Form 10-K. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A "Risk Factors," Part I "Cautionary Note Regarding Forward-Looking Statements," and elsewhere in this report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed herein. MD&A summarizes the financial statements from management's perspective with respect to the Company's financial condition, results of operations, liquidity and other factors that may affect actual results.
The management report is organized according to the following sections:
? Business Overview ? Results of Operations
? Cash and capital resources
? Significant Accounting Policies and Estimates
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. 37
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 primarily fixed expenses, include the capital costs of our assets (depreciation, amortization, rent and interest), compensation for non-driver employees, and a portion of insurance and maintenance costs. These expenses are partially controllable through managing fleet size and facility infrastructure, workforce efficiency and safety.
Fuel and fuel tax expenses 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 applicable
United 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 and (vii) 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 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 38 Table of Contents compress margins. COVID-19 The COVID-19 outbreak, and its variants, have resulted in government authorities in the United Statesand 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 some of these measures have been relaxed or rolled back, we continue to monitor the situation as government authorities modify their restrictive measures in response to surges in infections in the United Statesand around the world. Local, state and national governments continue to emphasize the importance of transportation and have designated it an essential service. We endeavor to follow governmental requirements and have put the following safety measures in place in response: institution of work from home for administrative employees, social distancing rules, restrictions on visitors into the corporate offices, suggested use of personal protective equipment by employees, and enhanced sanitation. We continue to evaluate and implement new measures as deemed appropriate. We believe we have sufficient liquidity to satisfy our cash needs, and we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these challenging and uncertain times. The overall impact of COVID-19 on our consolidated results of operations for the year ended December 31, 2021was not significant, however the impact that COVID-19 will have 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 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. Year Ended December 31, 2021 2020 Adjusted Adjusted Change Operating Operating Operating Operating in Dollar Revenue Ratio (1) Revenue Ratio (1) Amounts $ % % $ % % % (dollars in thousands) Base revenue
$ 641,20490.3 % $ 505,72091.8 % 26.8 % Fuel surcharge revenue 69,183 9.7 45,418 8.2 52.3 Operating revenue 710,387 100.0 551,138 100.0 28.9 Total operating expenses 673,068 94.7 94.0 538,280 97.7 97.2 25.0 Operating income 37,319 5.3 12,858 2.3 190.2 Other expenses: Interest expense 3,929 0.6 5,605 1.0 (29.9) Other, net 334 0.0 298 0.1 12.1 Total other expenses, net 4,263 0.6 5,903 1.1 (27.8) Income before income taxes 33,056 4.7 6,955 1.3 375.3 Income tax expense 8,288 1.2 2,209 0.4 275.2 Consolidated net income $ 24,7683.5 % $ 4,7460.9 % 421.9 %
Core earnings and adjusted operating ratio are non-GAAP financial measures.
See “Use of Non-GAAP Financial Information”, “Consolidated Reconciliations”
1) and “Segment Reconciliations” below for associated uses and limitations
with base revenue, adjusted operating ratio and other non-GAAP financial measures. 39 Table of Contents
Key Operating Statistics by Segment
December 31, Trucking: 2021
Operating revenue (before intersegment
eliminations) (in thousands) Operating income (1) (in thousands)
Adjusted operating income (2) (in thousands)
Operating factor (3)
94.9 % 97.6 % Adjusted operating ratio (4) 93.9 % 97.0 % Total miles (5) (in thousands) 165,349
179,444 Deadhead percentage (6) 11.5 % 12.6 % Base revenue per loaded mile $ 2.687
Average number of seated tractors 1,770
Average number of available tractors (7) 1,887
Average number of in-service tractors (8) 1,917
Loaded miles per tractor available per week $1,487
Basic income per tractor available per week $3,995
3,373 Average loaded miles per trip 505 506 USAT Logistics:
Operating revenue (before intersegment
eliminations) (in thousands) Operating income (1) (in thousands)
Adjusted operating income (2) (in thousands)
Gross margin (9) (in thousands)
23,904 Gross margin percentage (10) 12.2 % 12.5 % Load count (in thousands) 147.2 125.3
Operating profit is calculated by deducting operating expenses (before
1) inter-segment eliminations) of operating income (before
Adjusted operating income is calculated by deducting operating expenses
2) (before inter-segment eliminations) excluding acquisition amortization
related intangible assets, net of fuel surcharge revenue from operating revenue
(before inter-segment eliminations), net of fuel surcharge income.
The cost to income ratio is calculated as operating expenses (before
3) disposals) as a percentage of revenue (before
Adjusted cost/income ratio is calculated as operating expenses (before
4) intersegment eliminations) excluding amortization of acquisitions
intangible assets, net of fuel surcharge income, as a percentage of
revenue (before inter-segment eliminations) excluding fuel surcharge revenue.
5) Total kilometers include loaded and empty kilometres.
6) Deadhead percentage is calculated by dividing empty miles by total miles.
The available tractors are a) all Company tractors available to be
7) shipped, including tractors without seats available, and b) all tractors in the
fleet of independent contractors.
Tractors in service include all tractors in the company’s fleet
8) (Company Operated Tractors) and all Independent Contractor Tractors
Gross margin is calculated by deducting USAT Logistics purchased
9) transportation costs from USAT Logistics operating revenue (before
10) Gross Margin Percentage is calculated as USAT Logistics Gross Margin divided
by USAT Logistics operating revenue (before intersegment eliminations). 40 Table of Contents Consolidated Reconciliation 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 adjusted operating revenue, adjusted operating ratio, and adjusted operating income:
Core revenue, adjusted operating ratio and adjusted operating income
December 31, 2021 2020 (dollars in thousands) Operating revenue
$ 710,387 $ 551,138Less: Fuel surcharge revenue (69,183) (45,418) Base revenue $ 641,204 $ 505,720Operating expense $ 673,068 $ 538,280Adjusted for: Amortization of acquisition related intangibles (1) (1,290) (1,348) Fuel surcharge revenue (69,183) (45,418) Adjusted operating expense $ 602,595 $ 491,514Operating income $ 37,319 $ 12,858Adjusted operating income $ 38,609 $ 14,206Operating ratio 94.7 % 97.7 % Adjusted operating ratio 94.0 % 97.2 %
During 2021 and 2020, the Company recognized
1) intangible assets related to the acquisition. See “Item 8. Financial Statements and
Supplementary Data - Note 4: Intangible assets" in this Form 10-K for further discussion. Segment Reconciliations Trucking Segment December 31, 2021 2020 (dollars in thousands) Operating revenue
$ 440,346 $ 381,589Intersegment activity 770 2,667 Operating revenue (before intersegment eliminations) 441,116
Less: fuel surcharge revenue (before intersegment eliminations) (48,038)
Operating expense (before intersegment eliminations)
Adjusted for: Amortization of acquisition related intangibles (1,290) (1,348) Fuel surcharge revenue (48,038) (35,049) Adjusted operating expense
$ 369,179 $ 338,562Operating income $ 22,609 $ 9,297Adjusted operating income $ 23,899 $ 10,645Operating ratio 94.9 % 97.6 % Adjusted operating ratio 93.9 % 97.0 % 41 Table of Contents USAT Logistics Segment December 31, 2021 2020 (dollars in thousands) Operating revenue $ 270,041 $ 169,549Intersegment activity 53,315 22,402 Operating revenue (before intersegment eliminations) 323,356
Less: fuel surcharge revenue (before intersegment eliminations) (22,572)
Operating expense (before intersegment eliminations)
$ 308,646 $ 188,390Adjusted for: Fuel surcharge revenue (22,572) (11,366) Adjusted operating expense $ 286,074 $ 177,024Operating income $ 14,710 $ 3,561Adjusted operating income $ 14,710 $ 3,561Operating ratio 95.5 % 98.1 % Adjusted operating ratio 95.1 % 98.0 %
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 the
U.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 defined as operating income 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 to USA Truck'sperformance. 42 Table of Contents Trucking operating revenue
During the year ended
December 31, 2021, Trucking operating revenue (before intersegment eliminations) increased 14.8% to $441.1 million, compared to $384.3 millionfor the same period of 2020. Trucking base revenue increased 12.6% to $393.1 million, from $349.2 millionfor the same period in 2020. The positive changes in operating revenue and base revenue were primarily attributable to an 18.4% increase in base revenue per available tractor per week, offset by a 7.9% decrease in total miles and a 4.7% decrease in average seated tractors.
Trucking operating profit
For the year ended
compared to the operating result of
USAT Logistics operating revenue
During the year ended
USAT Logistics operating income
USAT Logistics generated operating income of
$14.7 millionfor the year ended December 31, 2021, an increase of $11.1 million, or 313.1%, compared to $3.6 millionfor 2020. This change was the result of the increases in revenue per load and load volume discussed above.
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. Year Ended December 31, % 2021 2020 change Base Base 2021 to Operating Revenue Revenue (1) Operating Revenue Revenue (1) 2020 $ % % $ % % % Operating Expenses: (dollars in thousands) Salaries, wages and employee benefits
$ 155,35221.8 % 24.2 % $ 141,59025.7 % 28.0 % 9.7 % Fuel and fuel taxes 50,244 7.1 (3.0) (2) 38,804 7.1 (1.3) (2) 29.5 Depreciation and amortization 35,865 5.0 5.4 41,359 7.5 7.9 (13.3) Insurance and claims 21,704 3.1 3.4 19,855 3.6 3.9 9.3 Equipment rent 7,891 1.1 1.2 7,349 1.3 1.5 7.4 Operations and maintenance 33,491 4.7 5.2 37,234 6.7 7.4 (10.1) Purchased transportation 343,989 48.4 53.7 226,716 41.1 44.8 51.7 Operating taxes and licenses 4,833 0.7 0.8 4,795 0.9 0.9 0.8 Communications and utilities 2,984 0.4 0.5 3,470 0.6 0.7 (14.0) (Gain) loss on disposal of assets, net (811) (0.1) (0.1) 427 0.1 0.1 (289.9) Other 17,526 2.5 2.7 16,681 3.1 3.3 5.1 Total operating expenses $ 673,06894.7 % 94.0 % (3) $ 538,28097.7 % 97.2 % (3) 25.0 %
1) Base revenue is calculated as operating revenue minus 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 intangible assets, net of fuel surcharge
revenue, as a percentage of operating revenue excluding fuel surcharge revenue. 43 Table of Contents
Salaries, wages and 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 its 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 both performance-based compensation and driver pay. Management believes that 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. This expense item will also be affected by the percentage of Trucking miles operated by independent contractors instead of Company employed drivers.
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 year ended
December 31, 2021resulted from a 28.4% increase in average diesel fuel prices per gallon year over year, as reported by the DOE, offset by an 11.5% decrease in total miles driven by Company drivers for the year ended December 31, 2021when compared to 2020. The Company continues to pursue fuel efficiency initiatives, including the acquisition of newer, more fuel-efficient revenue equipment and implementing focused driver training programs, which have contributed to improvements in our fuel expense to offset diesel price increases. The Company expects to continue managing its idle time and truck speeds and partnering with customers to align fuel surcharge programs to recover a fair portion of its fuel costs. The Company's net fuel expense may 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 rental of equipment
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. In addition, the mix of finance and operating leases will cause fluctuations on a line item basis between equipment rent expense and depreciation and amortization expense. For the year ended
December 31, 2021, equipment rent expense increased in terms of dollars spent, but decreased as a percentage of operating revenue compared to 2020 primarily due to the use of operating leases for recent purchases of revenue equipment. Depreciation and amortization expense decreased for the year ended December 31, 2021, when compared to 2020 primarily due to use of operating leases for recent purchases of revenue equipment, as mentioned above, paired with decreased purchases of revenue equipment. During the first quarter of 2020, the Company lowered the salvage value of its tractor fleet from 30% to 25% to better reflect then-current estimates of the value of such equipment upon its retirement. 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 increase in the near term due to the ongoing supply chain issues. Currently, tractor and trailer manufacturers are experiencing significant 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, higher prices, and lengthened trade cycles, which could have a material adverse effect on our business, financial condition, and results of operations, particularly our maintenance expense and driver retention. 44 Table of Contents 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 year ended December 31, 2021, insurance and claims expense increased compared to the prior year periods, largely due to increased insurance premiums.
As the trucking industry continues to experience major auto liability verdicts and settlements, resulting in a decline in the number of carriers and underwriters who purchase insurance policies or are willing to provide business insurance trucking industry, the Company expects insurance and claims costs to continue to be volatile over the long term. These factors caused the Company’s insurance premiums to increase during
renewal. For the most recent renewal, the Company maintained a
self-assured retention level. In 2020, the Company formed a captive insurance company, SRRG, to mitigate some of the increased insurance costs. The Company continues to evaluate options to prevent further expense increases, including the formation of additional captive insurance companies.
Operations and maintenance
Operations and maintenance expense consists primarily of vehicle repairs and maintenance, general and administrative expenses, and other 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. For the year ended
December 31, 2021, operations and maintenance expense decreased both in terms of dollars spent and as a percentage of operating revenue. Overall, this change was the result of lower operational costs and decreased direct repair and tire costs. Looking ahead, management believes delays in the receipt of new tractors and the overall age of our Company-owned fleet will effect our maintenance costs in future periods.
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 year ended
December 31, 2021, purchased transportation expense increased when compared to 2020, primarily due to an increase in the volume of brokered loads through our USAT Logistics segment. 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.
(Gain) loss on disposal of assets, net
During the year ended
December 31, 2021, the Company experienced gains on disposal of assets, net compared to losses in 2020. For both periods, the changes were due primarily to continued fluctuations in the used equipment market, stemming from challenging supply and demand dynamics arising from the pandemic shutdowns and slowdowns in 2020 and 2021. Management believes this variability will likely continue for the foreseeable future.
During the year ended
December 31, 2021, the increase in other expenses was primarily due to increased recruiting and training expenses as we have refocused our efforts on pursuing more qualified applicants, offset by decreases in bad debt expense and certain general and administrative costs.
Consolidated non-operating expenses
45 Table of Contents Interest expense, net For the year ended
December 31, 2021, the decrease in interest expense, net, was primarily due to decreases in the interest rate on our outstanding borrowing and decreases in outstanding borrowings.
income tax expense
The Company's effective tax rate for the years ended
December 31, 2021and 2020 was 25.1% and 31.8%, respectively. The effective rates for 2021 and 2020 varied from the statutory federal tax rate primarily due to state income taxes and certain non-deductible expenses including a per diem pay structure for our drivers. During 2021, the Company benefited from The Consolidated Appropriations Act, 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 IRSissued further guidance that confirmed such benefit applies to the meal portion of 2021 and 2022 per diem rates or allowances, which allowed the Company to fully deduct its per diem pay in 2021. Historically, due to the partially nondeductible effect of per diem pay, the Company's tax rate would change based on fluctuations in earnings and in the number of drivers who elect to receive this pay structure. Generally, as pretax income or loss increases, the impact of the driver per diem program on our effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pretax income or loss, while in periods where earnings are at or near breakeven the impact of the per diem program on our effective tax rate can be significant. We did not experience such an impact from per diem in 2021, and do not expect to experience such an impact in 2022, given the full deductibility allowance mentioned above. Additionally, during 2021 the Company's 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; however, this was more than offset by non-deductible officer compensation, resulting in an increase to tax expense and impacting the effective tax rate.
CASH AND CAPITAL RESOURCES
USA Truck'sbusiness 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. The Company'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. On January 31, 2022, the Company entered into the Credit Facility. The Credit Facility is structured as a $130.0 millionrevolving 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 millionrevolving credit facility, is a letter of credit sub-facility in an aggregate amount of $15.0 millionand 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 trigger financial covenant, which requires a consolidated fixed charge coverage ratio of at least 1.0 to 1.0.
the financial commitment only becomes effective in the event that the excess availability under the credit facility falls below (i) 10.0% of the lenders’ total commitments under the credit facility and (ii)
As of the closing, the Company had
$7.9 millionin letters of credit outstanding and had approximately $122.1 millionavailable to borrow under the Credit Facility, taking into account borrowing base availability. 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. 46 Table of Contents 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 December 31, 2021, the Company had $62.4 millionin purchase commitments for the acquisition of revenue equipment, of which approximately $10.2 millionis cancellable until the end of first quarter 2022. 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.
The following table summarizes the sources (uses) of cash for each of the periods presented: Cash Flow Year Ended December 31, Category 2021 2020 Sources of cash: (in thousands) Operating activities - net Operating
$ 31,237 $ 37,556Proceeds from sale of property and equipment Investing 7,302
Borrowings under long-term debt Financing 62,762
Proceeds from capital sale leaseback Financing 24,498 - Net change in bank drafts payable Financing -
3,157 Uses of cash: Capital expenditures Investing (8,365) (10,716) Payments of long-term debt Financing (99,307) (65,456) Principal payments on financing lease obligations Financing (1,672)
Payments on obligation under finance lease Financing (12,838)
Net change in bank drafts payable Financing (2,582) - Other uses - net Financing (8)
Increase in cash and restricted cash
$ 228Operating activities
Our net cash provided by operating activities in 2021 decreased compared to 2020 primarily due to increases in accounts and other receivables, depreciation and amortization, and accounts payable, offset by increases to net income.
Debts and rental obligations
See "Item 8. Financial Statements and Supplementary Data - Note 6: Long-term Debt" and " - Note 7: Leases" in this Form 10-K for a discussion of the Company's revolving Credit Facility, finance and operating lease obligations and insurance financing, which is incorporated by reference herein. 47 Table of Contents 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.
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.
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 Truckhas 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 the DOEfor 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, the U.S.National Average Diesel Fuel price increased by 28.4% for year ended December 31, 2021when compared to 2020.
December 31, 2021, USA Truckhad total stockholders' equity of $111.4 millionand total debt including current maturities of $144.8 million, resulting in a total debt, less cash, to total capitalization ratio of 56.4% compared to 64.5% as of December 31, 2020. 48
Significant Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in
the United Statesrequires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time its consolidated financial statements are prepared. Actual results could differ from those estimates, and such differences could be material. A summary of the significant accounting policies followed in preparation of the Company's financial statements is contained in "Item 8. Financial Statements and Supplementary Data - Note 1: Description of Business and Summary of Significant Accounting Policies" of this Form 10-K. The most critical accounting policies and estimates that affect the Company's financial statements include the following: Estimated useful lives and salvage values for purposes of depreciating tractors and trailers. USA Truckoperates a significant number of tractors and trailers in connection with its business. The Company may purchase this equipment or acquire it under leases. Purchased equipment is depreciated on the straight-line method over the estimated useful life down to an estimated salvage or trade-in value. Equipment acquired under financing leases is recorded at the net present value of the minimum lease payments and is amortized on the straight-line method over the lease term. Depreciable lives of tractors and trailers range from five years to fourteen years. Salvage value is estimated at the expected date of trade-in or sale based on the expected market values of equipment at the time of disposal. During the first quarter of 2020, the Company lowered the salvage value of its tractor fleet from 30% to 25% to better reflect then-current estimates of the value of such equipment upon its retirement. This change was accounted for as a change in estimate, and resulted in an increase to depreciation and amortization expense of approximately $2.7 million. Estimates of accrued liabilities for claims involving bodily injury, physical damage losses, employee health benefits and workers' compensation. The primary claims arising against the Company consist of cargo, liability, personal injury, property damage, workers' compensation, and employee medical costs. The Company's insurance programs typically involve self-insurance with high risk-retention levels. Due to its significant self-insured retention amounts, the Company has exposure to fluctuations in the number and severity of claims and to variations between its estimated and actual ultimate payouts. The Company accrues the estimated cost of the uninsured portion of pending claims and an estimate for allocated loss adjustment expenses including legal and other direct costs associated with a claim. Estimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages, future medical costs, inflation estimates of future claims development, and the legal and other costs to settle or defend the claims. USA Truckrecords both current and long-term claims accruals at the estimated ultimate payment amounts based on information such as individual case estimates, historical claims experience and an estimate of claims incurred but not reported. The current portion of the accrual reflects the anticipated claims amounts expected to be paid in the next twelve months. Accounting for income taxes. The Company's deferred tax assets and liabilities represent items that will result in taxable income or tax deductions in future years for which we have already recorded the related tax expense or benefit in our consolidated income statements. Deferred tax accounts arise as a result of timing differences between when items are recognized in our consolidated financial statements compared to when they are recognized in our tax returns. Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We periodically assess the likelihood that all or some portion of deferred tax assets will be recovered from future taxable income. To the extent we believe the likelihood of recovery is not sufficient, a valuation allowance is established for the amount determined not to be realizable.
We believe that we have adequately anticipated our future tax consequences based on current facts and circumstances and applicable tax laws. However, if our tax positions were to come into question, different results could result and could materially affect the amounts presented in our consolidated statements of earnings.
49 Table of Contents New Accounting Pronouncements
See “Item 8. Financial Statements and Supplementary Data – Note 1: Description of Business and Summary of Significant Accounting Policies”.
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