Knight Transportation: USA Truck Shows Only 'Limited Improvement'

by Lance Turner  on Monday, Nov. 4, 2013 7:15 am  

Knight Transportation Inc. of Phoenix, Ariz., whose buyout offer to USA Truck Inc. of Van Buren has been rejected by USA Truck's board of directors, on Monday continued to press its case for a takeover.

In a news release, Knight said USA Truck's third-quarter financial results show "only limited improvement," and that USA Truck's recent share price surge "is unsupported by either industry or company specific fundamentals."

Knight details those claims and others in a 17-page presentation (PDF) explaining its case for a takeover. Among its criticisms:

  • USA Truck's accounting changes have "enhanced earnings" and "mitigated further erosion to its book value."
  • USA Truck's share price isn't supported by the market or its outlook.
  • USA Truck has "consistently" underinvested in its fleet and equipment. 

Knight also continued to criticize USA Truck's turnaround plan, saying it "remains fraught with significant execution risk."

An administrative assistant to USA Truck CEO John Simone said Monday that the company didn't "have a statement at this time."

Knight revealed in September that it had offered USA Truck $9 per share in cash for the company in August. USA Truck rejected the offering, saying it undervalued the companyKnight's takeover offer is worth $242 million, including an equity value of USA Truck at $95 million and $147 million in company debt. It said the $9 per share price represents a "significant premium" of about 39 percent to USA Truck's closing price the day before the offer was made public.

Since Knight made the offer public, USA Truck's share price (Nasdaq: USAK) has risen 55 percent to $13.64.

USA Truck reported third-quarter earnings on Oct. 17. In an accompanying news release, USA Truck executives touted the firm's progress, citing a narrower third-quarter loss, $602,000, as revenue rose 13.5 percent to $141.8 million.

"The continued, accelerating improvement in our results clearly illustrates the rapid progress we're making in our turnaround," USA Truck President and CEO John Simone said in the earnings news release. "The third quarter of 2013 marked our fourth consecutive quarter of substantially improved operating and bottom-line results. Our increased cash flow enabled us to pay down debt for the first time since the fourth quarter of 2011.

"These achievements are even more impressive given the challenging conditions the truckload industry has been facing and the fact that our third quarter is usually seasonally weaker than our second."

On Monday, Knight criticized USA Truck's turnaround efforts and said that while it still thinks $9 per share is fair, it would consider raising its takeover offer.

"Knight remains confident that its premium proposal is significantly more attractive than USA Truck’s standalone prospects, and Knight remains willing to modestly increase the proposed purchase price if USA Truck can demonstrate value that has not already been identified," the company said.

Outside of required filings with the U.S. Securities and Exchange Commission and news releases, the two companies have had little public comment about the takeover attempt. In its third-quarter earnings conference call a week and a half ago, Knight's chairman and CEO, Kevin P. Knight, briefly reiterated his belief that a Knight takeover of USA Truck would be the best for USA Truck's shareholders. 

"While we are disappointed that USA Truck has rejected our all cash premium proposal, we continue to believe that a combination of Knight and USA Truck would deliver enhanced value for and is in the best interest of all of Knight and USA Truck's stakeholders," he said.

Since announcing the takeover offer, Knight has increased its stake in USA Truck shares to more than 12 percent. But USA Truck is battling to have Knight forfeit those shares, filing a lawsuit against Knight claiming breach of contract and asking that the company to give up the USA Truck shares it has purchased. Knight has denied the lawsuit's allegations. 

USA Truck has another defense against a hostile takeover: a "poison pill" shareholders' rights plan, adopted last year, that will take effect once a company crosses the 15 percent ownership threshold.

When that happens, other USA Truck shareholders will be able to purchase an additional $24 worth of USA Truck shares at a 50 percent discount.

USA Truck has said the plan is designed to protect the company and its shareholders from an unwanted takeover.

Despite the back-and-forth SEC filings and written statements, it is unclear whether the two companies are negotiating. A Knight spokesman would not comment on Monday when asked whether the firms were communicating with each other.

Excerpt of Knight's Statement About USA Truck

"Knight believes that USA Truck’s recent financial results demonstrate only limited improvement and that its recent share price surge is unsupported by either industry or company specific fundamentals. Notably, on a sequential basis, USA Truck’s truckload segment Operating Ratio remains above 100% and improved only modestly from 103.8% in the second quarter of 2013 to 103.6% in the third quarter of 2013. Knight continues to believe that USA Truck’s turnaround plan remains fraught with significant execution risk and notes that USA Truck’s limited cash flow generation has constrained its fleet investment, such that USA Truck now operates one of the oldest fleets among its publicly traded peer group, with an average tractor age of 2.5 years and average trailer age of 6.4 years.

"Knight continues to believe that its $9.00 per share, all-cash proposal fully and fairly values USA Truck, especially in light of USA Truck’s consistent underperformance, including nine consecutive quarters of losses totaling approximately $30 million. Knight remains confident that its premium proposal is significantly more attractive than USA Truck’s standalone prospects, and Knight remains willing to modestly increase the proposed purchase price if USA Truck can demonstrate value that has not already been identified."

(Marty Cook contributed to this report.)



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