UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30September 30, 2006, 2007
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________to_______________
Commission File Number: 0-24806
(Exact name of registrant as specified in its charter)
Nevada | | 62-1378182 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
4080 Jenkins Road | | |
Chattanooga, Tennessee | | 37421 |
(Address of principal executive offices) | | (Zip Code) |
(423) 510-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filerx | Non-accelerated filero |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Nox
As of October 31, 2006, 12,262,450August 1, 2007, 12,130,098 shares of the registrant’s Class A common stock, par value $.01 per share, and 3,040,262 shares of the registrant’s Class B common stock, par value $.01 per share, were outstanding.
PART I | | PAGE NO. |
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Item 2. | | 13 |
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Item 3. | | 2524 |
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Item 4. | | 2524 |
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PART II. | | |
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Item 1A. | | 25 |
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Item 2. | | 26 |
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Item 4. | | 26 |
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Item 5. | Other Information | 27 |
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Item 6. | | 2627 |
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(1)
| U.S. XPRESS ENTERPRISES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)thousands, except per share data)
(Unaudited)
| | | Three Months Ended | | | | Nine Months Ended | | |
| | | September 30, | | | | September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
Operating Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue, before fuel surcharge | | $ | 334,815 | | | $ | 262,623 | | | | $ | 929,257 | | | $ | 763,605 | | | $ | 344,286 | | | $ | 331,976 | | | $ | 660,838 | | | $ | 594,441 | |
Fuel surcharge | | | 61,768 | | | | 34,617 | | | | 156,497 | | | | 82,663 | | | | 56,061 | | | | 57,486 | | | | 100,382 | | | | 94,730 | |
Total operating revenue | | | 396,583 | | | | 297,240 | | | | 1,085,754 | | | | 846,268 | | | | 400,347 | | | | 389,462 | | | | 761,220 | | | | 689,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries, wages and benefits | | | 129,700 | | | | 100,756 | | | | 359,695 | | | | 295,928 | | | | 133,578 | | | | 127,141 | | | | 260,676 | | | | 229,995 | |
Fuel and fuel taxes | | | 90,395 | | | | 60,680 | | | | 245,928 | | | | 161,790 | | | | 92,920 | | | | 89,196 | | | | 173,017 | | | | 155,533 | |
Vehicle rents | | | 18,441 | | | | 17,140 | | | | 56,172 | | | | 51,608 | | | | 24,620 | | | | 19,333 | | | | 47,605 | | | | 37,731 | |
Depreciation and amortization, net of gain on sale | | | 16,123 | | | | 12,015 | | | | 43,792 | | | | 34,545 | | |
Depreciation and amortization, net of gain/loss on sale | | | | 19,441 | | | | 15,794 | | | | 38,971 | | | | 27,668 | |
Purchased transportation | | | 62,287 | | | | 49,041 | | | | 170,556 | | | | 147,130 | | | | 60,397 | | | | 61,304 | | | | 115,020 | | | | 107,813 | |
Operating expense and supplies | | | 25,166 | | | | 18,524 | | | | 69,267 | | | | 57,048 | | |
Operating expenses and supplies | | | | 24,569 | | | | 25,233 | | | | 48,206 | | | | 44,557 | |
Insurance premiums and claims | | | 16,556 | | | | 12,756 | | | | 46,109 | | | | 34,329 | | | | 15,971 | | | | 16,285 | | | | 30,922 | | | | 29,553 | |
Operating taxes and licenses | | | 4,338 | | | | 3,614 | | | | 12,329 | | | | 10,348 | | | | 4,544 | | | | 4,328 | | | | 8,821 | | | | 7,991 | |
Communications and utilities | | | 3,313 | | | | 2,600 | | | | 9,791 | | | | 8,203 | | | | 2,884 | | | | 3,606 | | | | 5,765 | | | | 6,478 | |
General and other operating | | | 10,853 | | | | 10,625 | | | | 32,016 | | | | 33,492 | | |
General and other operating expenses | | | | 10,905 | | | | 11,312 | | | | 21,397 | | | | 21,164 | |
Loss on sale and exit of business | | | 177 | | | | - | | | | 577 | | | | 2,787 | | | | - | | | | 400 | | | | - | | | | 400 | |
Total operating expenses | | | 377,349 | | | | 287,751 | | | | 1,046,232 | | | | 837,208 | | | | 389,829 | | | | 373,932 | | | | 750,400 | | | | 668,883 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from Operations | | | 19,234 | | | | 9,489 | | | | 39,522 | | | | 9,060 | | | | 10,518 | | | | 15,530 | | | | 10,820 | | | | 20,288 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Expense, net | | | 4,977 | | | | 2,071 | | | | 12,766 | | | | 5,856 | | |
Early extinguishment of debt | | | - | | - | | - | | | | 201 | | |
Equity in loss (income) of affiliated companies | | | (132 | ) | | | (557 | ) | | | 427 | | | | (1,808 | ) | |
Interest expense, net | | | | 5,482 | | | | 4,690 | | | | 10,964 | | | | 7,789 | |
Equity in (income) loss of affiliated companies | | | | (242 | ) | | | 341 | | | | (366 | ) | | | 559 | |
Minority interest | | | 508 | | | | - | | | | 1,011 | | | | - | | | | 61 | | | | 365 | | | | 10 | | | | 503 | |
| | | 5,353 | | | | 1,514 | | | | 14,204 | | | | 4,249 | | | | 5,301 | | | | 5,396 | | | | 10,608 | | | | 8,851 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 13,881 | | | | 7,975 | | | | 25,318 | | | | 4,811 | | | | 5,217 | | | | 10,134 | | | | 212 | | | | 11,437 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax provision | | | 6,609 | | | | 3,976 | | | | 11,587 | | | | 2,457 | | | | 2,482 | | | | 4,410 | | | | 106 | | | | 4,978 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | $ | 7,272 | | | $ | 3,999 | | | $ | 13,731 | | | $ | 2,354 | | | $ | 2,735 | | | $ | 5,724 | | | $ | 106 | | | $ | 6,459 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings Per Share - basic | | $ | 0.48 | | | $ | 0.25 | | | $ | 0.90 | | | $ | 0.15 | | | $ | 0.18 | | | $ | 0.37 | | | $ | 0.01 | | | $ | 0.42 | |
Weighted average shares - basic | | | 15,314 | | | | 15,908 | | | | 15,320 | | | | 16,117 | | | | 15,155 | | | | 15,321 | | | | 15,215 | | | | 15,323 | |
Earnings Per Share - diluted | | $ | 0.47 | | | $ | 0.25 | | | $ | 0.88 | | | $ | 0.14 | | | $ | 0.18 | | | $ | 0.37 | | | $ | 0.01 | | | $ | 0.42 | |
Weighted average shares - diluted | | 15,599 | | | | 15,983 | | | | 15,578 | | | | 16,286 | | |
Weighted average shares – diluted | | | | 15,318 | | | | 15,614 | | | | 15,407 | | | | 15,559 | |
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Assets | | | September 30, 2006 | | | December 31, 2005 | | |
ASSETS | | | June 30, 2007 | | | December 31, 2006 | |
| | | (Unaudited) | | | | | | (Unaudited) | | | | |
Current Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,687 | | $ | 9,488 | | | $ | 300 | | | $ | 913 | |
Customer receivables, net of allowance | | | 177,763 | | | 140,263 | | | | 180,087 | | | | 168,079 | |
Other receivables | | | 12,338 | | | 14,552 | | | | 11,709 | | | | 15,398 | |
Prepaid insurance and licenses | | | 11,556 | | | 14,701 | | | | 13,943 | | | | 25,777 | |
Operating and installation supplies | | | 5,365 | | | 3,693 | | | | 7,658 | | | | 7,767 | |
Deferred income taxes | | | 12,603 | | | 9,046 | | | | 25,545 | | | | 25,545 | |
Other current assets | | | 11,863 | | | 11,227 | | | | 12,091 | | | | 10,665 | |
Total current assets | | | 235,175 | | | 202,970 | | | | 251,333 | | | | 254,144 | |
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Property and Equipment, at cost: | | | | | | | | | | | | | | | |
Land and buildings | | | 69,121 | | | 53,129 | | | | 74,045 | | | | 67,358 | |
Revenue and service equipment | | | 498,069 | | | 319,118 | | | | 554,668 | | | | 537,570 | |
Furniture and equipment | | | 36,288 | | | 31,006 | | | | 36,180 | | | | 35,441 | |
Leasehold improvements | | | 29,091 | | | 25,223 | | | | 27,668 | | | | 29,857 | |
Computer software | | | 38,107 | | | 31,620 | | | | 41,437 | | | | 39,584 | |
| | | 670,676 | | | 460,096 | | | | 733,998 | | | | 709,810 | |
Less accumulated depreciation and amortization | | | (169,394 | ) | | (153,275 | ) | | | (204,569 | ) | | | (180,813 | ) |
Net property and equipment | | | 501,282 | | | 306,821 | | | | 529,429 | | | | 528,997 | |
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Other Assets: | | | | | | | | | | | | | | | |
Goodwill, net | | | 91,051 | | | 72,143 | | | | 95,694 | | | | 94,307 | |
Other | | | 25,388 | | | 25,450 | | | | 27,099 | | | | 25,919 | |
Total other assets | | | 116,439 | | | 97,593 | | | | 122,793 | | | | 120,226 | |
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Total Assets | | $ | 852,896 | | $ | 607,384 | | | $ | 903,555 | | | $ | 903,367 | |
U.S. XPRESS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Liabilities and Stockholders' Equity | | September 30, 2006 | | | December 31, 2005 | |
| | (Unaudited) | | | | |
Current Liabilities: | | | | | | |
Accounts payable | $ | 51,464 | | $ | 28,172 | |
Book overdraft | | 5,616 | | | 11,789 | |
Accrued wages and benefits | | 22,976 | | | 14,328 | |
Claims and insurance accruals | | 47,245 | | | 36,071 | |
Other accrued liabilities | | 10,529 | | | 12,375 | |
Securitization facility | | 47,000 | | | 45,000 | |
Current maturities of long-term debt | | 49,516 | | | 17,111 | |
Total current liabilities | | 234,346 | | | 164,846 | |
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Long-Term Debt, net of current maturities | | 233,586 | | | 115,044 | |
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Deferred Income Taxes | | 90,499 | | | 54,618 | |
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Other Long-Term Liabilities | | 3,161 | | | 2,499 | |
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Claims and Insurance Accruals, long-term | | 42,710 | | | 37,965 | |
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Minority Interest | | 3,289 | | | - | |
| | | | | | |
Stockholders' Equity: | | | | | | |
| | | | | | |
Preferred stock, $.01 par value, 2,000,000 shares authorized, no shares issued | | - | | | - | |
Common stock Class A, $.01 par value, 30,000,000 shares authorized, 15,945,525 and 15,870,006 shares issued at September 30, 2006 and December 31, 2005, respectively | | 159 | | | 159 | |
Common stock Class B, $.01 par value, 7,500,000 shares authorized, 3,040,262 shares issued and outstanding at September 30, 2006 and December 31, 2005 | | 30 | | | 30 | |
Additional paid-in capital | | 161,181 | | | 159,547 | |
Retained earnings | | 124,000 | | | 110,269 | |
Treasury stock Class A, at cost (3,683,075 and 3,543,075 shares at September 30, 2006 and December 31, 2005, respectively) | | (40,048 | ) | | (37,576 | ) |
Notes receivable from stockholders | | (17 | ) | | (17 | ) |
Total stockholders' equity | | 245,305 | | | 232,412 | |
Total Liabilities and Stockholders' Equity | $ | 852,896 | | $ | 607,384 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | June 30, 2007 | | | December 31, 2006 | |
| | (Unaudited) | | | | |
Current Liabilities: | | | | | | |
Accounts payable | | $ | 66,101 | | | $ | 47,770 | |
Book overdraft | | | 2,039 | | | | 19,368 | |
Accrued wages and benefits | | | 21,301 | | | | 22,562 | |
Claims and insurance accruals, current | | | 51,307 | | | | 49,928 | |
Other accrued liabilities | | | 8,434 | | | | 9,137 | |
Securitization facility | | | 20,000 | | | | 37,000 | |
Current maturities of long-term debt | | | 59,010 | | | | 51,221 | |
Total current liabilities | | | 228,192 | | | | 236,986 | |
| | | | | | | | |
Long-term debt, net of current maturities | | | 258,580 | | | | 252,313 | |
| | | | | | | | |
Deferred income taxes | | | 122,512 | | | | 114,679 | |
| | | | | | | | |
Other long-term liabilities | | | 2,720 | | | | 3,186 | |
| | | | | | | | |
Claims and insurance accruals, long-term | | | 38,152 | | | | 40,125 | |
| | | | | | | | |
Minority interest | | | 3,589 | | | | 3,579 | |
| | | | | | | | |
Stockholders’ Equity: | | | | | | | | |
| | | | | | | | |
Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued | | | - | | | | - | |
Common Stock Class A, $.01 par value, 30,000,000 shares authorized, 16,013,173 and 15,958,837 shares issued at June 30, 2007 and December 31, 2006, respectively | | | 160 | | | | 160 | |
Common Stock Class B, $.01 par value, 7,500,000 shares authorized, 3,040,262 shares issued and outstanding at June 30, 2007 and December 31, 2006 | | | 30 | | | | 30 | |
Additional paid-in capital | | | 163,074 | | | | 162,001 | |
Retained earnings | | | 130,329 | | | | 130,373 | |
Treasury Stock, Class A, at cost (3,883,075 and 3,683,075 shares at June 30, 2007 and December 31, 2006, respectively) | | | (43,766 | ) | | | (40,048 | ) |
Notes receivable from stockholders | | | (17 | ) | | | (17 | ) |
Total stockholders’ equity | | | 249,810 | | | | 252,499 | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 903,555 | | | $ | 903,367 | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | Nine Months Ended | | |
| | September 30, | | | Six Months Ended June 30, | |
| | | 2006 | | | | 2005 | | | 2007 | | | 2006 | |
Cash Flows from Operating Activities: | | | | | | | | | | | | | |
Net income | | $ | 13,731 | | | | $ | 2,354 | | | $ | 106 | | | $ | 6,459 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | |
Equity in (income) loss of affiliated companies | | | | (366 | ) | | | 559 | |
Deferred income tax provision | | | 5,794 | | | 1,228 | | | | 106 | | | | 2,489 | |
Tax benefit realized from stock options | | | (161 | ) | | 704 | | |
Provision for losses on receivables | | | 1,163 | | | 1,967 | | | | 281 | | | | 1,041 | |
Depreciation and amortization | | | 46,370 | | | 36,957 | | | | 38,757 | | | | 29,398 | |
Stock-based compensation expense | | | 549 | | | 21 | | | | 787 | | | | 301 | |
Gain on sale of equipment | | | (2,578 | ) | | | (2,413 | ) | |
Tax benefit realized from stock option plans | | | | (18 | ) | | | (159 | ) |
Loss (gain) on sale of equipment | | | | 214 | | | | (1,730 | ) |
Loss on sale and exit of business | | | 577 | | | | 2,787 | | | | - | | | | 400 | |
Minority interest | | | 1,011 | | | | - | | |
Equity in loss (income) of affiliated companies | | | 427 | | | | (1,808 | ) | |
Change in operating assets and liabilities, net of acquisitions: | | | | | | | | | |
Minority interest expense | | | | 10 | | | | 503 | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | |
Receivables | | | 27 | | | | (3,974 | ) | | | (9,896 | ) | | | 10,858 | |
Prepaid insurance and licenses | | | 5,846 | | | | 4,563 | | | | 11,833 | | | | 8,410 | |
Operating and installation supplies | | | (129 | ) | | | 1,421 | | | | 232 | | | | 168 | |
Other assets | | | 2,806 | | | | (5,473 | ) | | | (2,444 | ) | | | 792 | |
Accounts payable and other accrued liabilities | | | 13,871 | | | 4,013 | | | | 25,288 | | | | (4,963 | ) |
Accrued wages and benefits | | | 4,123 | | | 1,521 | | | | (1,384 | ) | | | 983 | |
Net cash provided by operating activities | | | 93,427 | | | 43,868 | | | | 63,506 | | | | 55,509 | |
Cash Flows from Investing Activities: | | | | | | | | | | | | | | | |
Payments for purchase of property and equipment | | | (166,700 | ) | | | (83,308 | ) | |
Payments for purchases of property and equipment | | | | (67,573 | ) | | | (102,105 | ) |
Proceeds from sales of property and equipment | | | 50,051 | | | | 40,883 | | | | 33,577 | | | | 34,353 | |
Repayment of notes receivable from stockholders | | | - | | | | 30 | | |
Acquisition of business, net of cash acquired | | | (6,806 | ) | | | (327 | ) | |
Acquisition of businesses, net of cash acquired | | | | (5,655 | ) | | | (6,806 | ) |
Investment in affiliate company | | | (2,965 | ) | | | (3,975 | ) | | | (739 | ) | | | - | |
Proceeds from sale and exit of airport-to-airport business | | | - | | | | 12,750 | | |
Net cash used in investing activities | | | (126,420 | ) | | | (33,947 | ) | | | (40,390 | ) | | | (74,558 | ) |
Cash Flows from Financing Activities: | | | | | | | | | | | | | | | | |
Net borrowings on line of credit | | | 1,500 | | | 45,300 | | |
Net borrowings under lines of credit | | | | 1,950 | | | | - | |
Net (payments) borrowings under securitization facility | | | | (17,000 | ) | | | 22,000 | |
Borrowings under long-term debt | | | 77,312 | | | | 26,575 | | | | 42,896 | | | | 32,720 | |
Payments of long-term debt, net | | | (43,419 | ) | | | (50,595 | ) | |
Payments of long-term debt | | | | (30,790 | ) | | | (32,578 | ) |
Additions to deferred financing costs | | | (613 | ) | | | - | | | | - | | | | (613 | ) |
Tax benefit realized from stock options | | | 161 | | | - | | |
Book overdraft | | | (6,174 | ) | | | (5,010 | ) | | | (17,329 | ) | | | (7,804 | ) |
Purchase of Class A common stock | | | (2,472 | ) | | | (11,914 | ) | |
Proceeds from issuance of common stock | | | 179 | | | | 55 | | |
Purchase of Class A Common Stock | | | | (3,718 | ) | | | (1,601 | ) |
Proceeds from exercise of stock options | | | 718 | | | | 966 | | | | 60 | | | | 707 | |
Net cash provided by financing activities | | | 27,192 | | | | 5,377 | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | (5,801 | ) | | | 15,298 | | |
Tax benefit from stock options | | | | 18 | | | | 159 | |
Proceeds from issuance of common stock, net | | | | 184 | | | | 179 | |
Net cash (used in) provided by financing activities | | | | (23,729 | ) | | | 13,169 | |
Net Change in Cash and Cash Equivalents | | | | (613 | ) | | | (5,880 | ) |
Cash and Cash Equivalents, beginning of period | | | 9,488 | | | | 66 | | | | 913 | | | | 9,488 | |
Cash and Cash Equivalents, end of period | | $ | 3,687 | | | | $ | 15,364 | | | $ | 300 | | | $ | 3,608 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | | |
Cash paid during the period for interest, net of capitalized interest | | $ | 12,382 | | | | $ | 4,564 | | | $ | 10,692 | | | $ | 7,569 | |
Cash paid during the period for income taxes | | $ | 12,334 | | | | $ | 577 | | |
Cash (refunded) paid during the period for income taxes, net | | | $ | (11,391 | ) | | $ | 9,208 | |
U.S. XPRESS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Condensed Consolidated Financial Statements
The interim consolidated financial statements contained herein reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the financial condition and results of operations for the periods presented. They have been prepared by U.S. Xpress Enterprises, Inc. (the "Company"), without audit, in accordance with the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission and do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
Operating results for the ninethree and six months ended SeptemberJune 30, 20062007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.2007. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of items that are of a normal recurring nature.
These interim consolidated financial statements should be read in conjunction with the Company’s latest annual consolidated financial statements (which are included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2006)2007).
2. Organization and Operations
The Company provides transportation services through two business segments: (i) truckload, comprised of U.S. Xpress, Inc. ("(“U.S. Xpress"Xpress”), Arnold Transportation, Inc. ("Arnold"(“Arnold”), and Total Transportation of Mississippi LLC ("Total," and, collectively with U.S. Xpress and Arnold, "Truckload"(“Total”), comprise our truckload segment, (“Truckload”); and (ii) Xpress Global Systems, Inc. ("(“Xpress Global Systems"Systems”). U.S. Xpress, Arnold, and Total are truckload carriers serving the continental United States and parts of Canada and Mexico. Xpress Global Systems provides transportation, warehousing, and distribution services primarily to the floorcovering industry.
Financial Accounting Standard 131, “Disclosures about Segments of an Enterprise and Related Information”, permits for the aggregation of separate operating segments into one reporting segment if they have similar economic characteristics and if the segments are similar in each of the following areas: a) the nature and products of the services, b) the nature of the production process, c) the type or class of customer for their products and services, d) the methods used to distribute their products or provide their services, and e) if applicable, the nature of the regulatory environment. The Company notes U.S. Xpress, Arnold, and Total have these similarities and are consolidated into one reporting segment “Truckload”, while Xpress Global Systems is reported separately.
3. Earnings Per Share
The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding stock options and unvested restricted stock. The computation of basic and diluted earnings per share is as follows:
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2006 | | | | 2005 | | | | 2006 | | 2005 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
Net Income | $ | 7,272 | | | $ | 3,999 | | | $ | 13,731 | | | $ | 2,354 | | | $ | 2,735 | | | $ | 5,724 | | | $ | 106 | | | $ | 6,459 | |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding (in thousands) | | 15,314 | | | | 15,908 | | | | 15,320 | | | | 16,117 | | | | 15,155 | | | | 15,321 | | | | 15,215 | | | | 15,323 | |
Equivalent shares issuable upon exercise of stock options and conversion of unvested restricted stock (in thousands) | | 285 | | | | 75 | | | | 258 | | | | 169 | | | | 163 | | | | 293 | | | | 192 | | | | 236 | |
Diluted shares (in thousands) | | 15,599 | | | | 15,983 | | | | 15,578 | | | | 16,286 | | | | 15,318 | | | | 15,614 | | | | 15,407 | | | | 15,559 | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | $ | .48 | | | $ | .25 | | | $ | .90 | | | $ | .15 | | | $ | 0.18 | | | $ | 0.37 | | | $ | 0.01 | | | $ | 0.42 | |
Diluted | $ | .47 | | | $ | .25 | | | $ | .88 | | | $ | .14 | | | $ | 0.18 | | | $ | 0.37 | | | $ | 0.01 | | | $ | 0.42 | |
During the second quarter of 2007, the Company issued 215,600 restricted shares vesting over the next five years.
4.4.Stock-Based Compensation
In December, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment ("SFAS 123R"), a revision of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. In accordance with SFAS 123R this cost will be recognized over the period for which an employee is required to provide service in exchange for the award. Effective January 1, 2006, the Company adopted SFAS 123R utilizing the modified prospective method, and, therefore, did not restate prior period results.
In October 2005, the Company accelerated the vesting of substantially all of the outstanding stock options previously granted under the Company’s 2002 Stock Incentive Plan. As a result of the acceleration, unvested options to purchase 231,440 shares of the Company’s Class A Common Stock, which otherwise would have vested from time to time over the next ten months, became fully vested and immediately exercisable as of October 25, 2005. The Company would have recognized compensation expense in the amounts of $850, $166, and $3 in 2006, 2007, and 2008, respectively. The Company’s adoption of SFAS 123R had minimal impact and the expense associated with this adoption in the consolidated statements of operations for the third quarter of 2006 was approximately $15, included in salaries, wages, and benefits.
The Company adopted the 2003 U.S. Xpress Enterprises, Inc. Employee Stock Purchase Plan (the “2003 Plan”), effective July 1, 2003, through which employees meeting certain eligibility criteria may purchase shares of the Company’s Class A common stock at a 15.0% discount of the fair market value, as defined in the 2003 plan. Such common stock is purchased for employees in January and July of each year, and employees may not purchase more than 1,250 shares in any six-month period or purchase stock having a fair market value of more than $25 per calendar year. The Company has reserved 500,000 shares of Class A common stock under the terms of the 2003 Plan. In December and June 2006, employees purchased 9,057 and 5,937 shares, respectively, of the Company’s Class A common stock at $10.12 and $14.79 per share, respectively.
The Company awarded 10,000 shares of restricted stock in 2005, 40,466 shares in the three months ended March 31, 2006, 140,729 shares in the three months ended June 30, 2006, and 6,000 shares in the three months ended September 30, 2006. These restricted shares have various vesting schedules ranging from four to five years. The Company recognized approximately $227 and $471 in compensation expense during the three and nine months ended September 30, 2006, respectively, related to restricted stock.
The fair value of each employee stock option grant was estimated using the Black-Scholes option pricing model as of the date of grant using the following assumptions:
| | Nine Months Ended
September 30,
| | |
| | 2006
| | | | 2005
| | |
Risk-free interest rate | | 5.0
| %
| | | 3.25 | % | |
Expected dividend yield | | -
| %
| | | - | % | |
Expected volatility | | 46.5
| %
| | | 58.5 | % | |
Expected term (in years) | | 6.5
| | | | 5.0 | | |
Prior to January 1, 2006, the Company applied the intrinsic value based method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. No stock-based compensation cost was reflected in net income (loss), as all options granted under the plans had a grant price equal to the fair market value of the underlying common stock on the date of grant.
Had compensation expense for stock option grants been determined based on fair value at the grant dates consistent with the method prescribed by SFAS 123R,the Company's net income and earnings per share would have been adjusted to the pro forma amounts for the three and nine months ended September 30, 2005 as indicated below:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, 2005 | | | September 30, 2005 | |
Net Income, as reported | $ | 3,999 | | $ | 2,354 | |
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | (150 | ) | | (499 | ) |
Net Income, pro forma | $ | 3,849 | | $ | 1,855 | |
Earnings per share: | | | | | | |
Basic - as reported | $ | .25 | | $ | .15 | |
Basic - pro forma | $ | .24 | | $ | .12 | |
Diluted - as reported | $ | .25 | | $ | .14 | |
Diluted - pro forma | $ | .24 | | $ | .11 | |
The following tables summarize our stock option and restricted stock awards for the nine months ended September 30, 2006:
Stock Options
| | Number of Shares | | Weighted Average Exercise Price | | Weighted Aggregate Contractual Term | | Remaining Intrinsic Value | |
| | | | | | | (in years) | | | (in thousands) | |
Outstanding at December 31, 2005 | | 622,746 | | $ | 10.80 | | 6.0 | | $ | ─ | |
| | | | | | | | | | | |
Granted | | 3,600 | | | 19.92 | | | | | | |
Exercised | | (59,111 | ) | | 11.18 | | | | | | |
Forfeited | | (12,750 | ) | | 6.79 | | | | | | |
Outstanding at September 30, 2006 | | 554,485 | | $ | 12.51 | | 5.6 | | $ | 5,900 | |
| | | | | | | | | | | |
Exercisable at September 30, 2006 | | 528,885 | | $ | 12.47 | | 5.4 | | $ | 5,700 | |
Restricted Shares
| | Number of Shares | | Weighted Average Grant Date Fair Value | |
Unvested at December 31, 2005 | | 10,000 | | $ | 11.15 | |
Granted | | 187,195 | | | 19.59 | |
Vested | | ─ | | | ─ | |
Forfeited | | (706 | ) | | 20.27 | |
Unvested at September 30, 2006 | | 196,489 | | $ | 19.16 | |
As of September 30, 2006, the Company had $.2 million and $3.3 million in unrecognized compensation expense related to stock options and restricted stock, respectively, which is expected to be recognized over a weighted average period of approximately 3 years for stock options and 4 years for restricted stock.
The Company is party to certain legal proceedings incidental to its business. The ultimate disposition of these matters, in the opinion of management, based in part upon the advice of legal counsel, is not expected to have a materially adverse effect on the Company’s financial position or results of operations.
The Company had letters of credit of $60,775$91,036 outstanding at SeptemberJune 30, 2006.2007. The letters of credit are maintained primarily to support the Company’s insurance program.
The Company currently has commitments outstanding to acquire revenue and communications equipment and development of terminals for approximately $182,073 in 2006 and $176,802 in 2007.$84,439 over the next 12 months. These revenue equipment commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits. These purchase commitments are expected to be financed by operating leases, long-term debt, proceeds from sales of existing equipment, and cash flows from operations.
6.5. Business Acquisitions
In January of 2007, the Company acquired certain assets of a truckload carrier for a purchase price of $5.6 million in cash. The assets acquired of approximately $4.8 million related primarily to revenue equipment and other assets. The excess of the purchase price over the fair value of the assets acquired was recorded as goodwill. The purchase price allocation is preliminary as the Company is still reviewing the valuations of certain assets.
In the fourth quarter of 2004, the Company acquired 49% of the outstanding stock of ATS Acquisition Holding Co. ("ATS"), the parent company of Arnold. In the second quarter of 2005, the Company acquired 49% of the outstanding stock of Transportation Investments Inc. ("TII"), the parent company of Total, and certain affiliated companies (together with TII, the "Total Companies"). Certain members of Arnold’s current management team controlled the remaining 51% interest as well as a majority of the board of directors of ATS, and certain members of the Total management team controlled the remaining 51% interest and a majority of the boards of directors of each of the Total Companies. The Company did not guarantee any of ATS' or the Total Companies' debt and did not have any obligation to provide funding, services, or assets. The Company accounted for ATS' and the Total Companies' operating results using the equity method of accounting.
In connection with increasing its investments in ATS and the Total Companies, the Company issued an aggregate of 40,466 shares of restricted stock to key employees of those companies under its 2002 Stock Incentive Plan. The restricted shares vest over timeperiods up to four years contingent upon continued employment. These shares vest over periods up to four years. The Company recorded compensation expense in accordance with SFAS 123R in relation to these shares.
The acquisition isabove acquisitions are accounted for under the rules of FASB Statement No. 141, Business Combinations.SFAS 141. The Company’s investment to date in ATS and the above mentionedTotal companies totals $21.1 million. The allocation of the purchase cost consisted of $182.7$181.5 million in assets, of which $120.1$119.9 million is property plant and equipment, and $180.5$182.9 million in liabilities, of which $118.5 million is current and long-term debt. Currently, $18.9$22.4 million of this investment has been allocated to goodwill. The allocation$1.1 million of cash was acquired as of the investment is preliminary asdate of the Company is still reviewing the valuations of certain assets.increased investment.
The primary reasons for the acquisitions and the principal factors that contributed to the recognition of goodwill are as follows: 1) ATS and the Total Companies compliment the Company’s current presence in the United States by creating a denser capacity of revenue equipment and drivers and 2) Cost savings are expected through the sharing of best practices within the three companies in addition to increased purchasing power.
· | ATS and the Total Companies compliment the Company’s current presence in the United States by creating a denser capacity of revenue equipment and drivers |
· | Cost savings are expected through the sharing of best practices within the three companies in addition to increased purchasing power |
Commencing March 1, 2006, the Company has accounted for its investments in ATS and the Total Companies on a consolidated basis.
The following unaudited pro forma financial information presents a summary of the Company’s consolidated results of operations for the three and nine month periods ended SeptemberJune 30, 20062007 and 20052006 had the acquisitions of ATS and the Total Companies taken place as of January 1, 2005 and 2006.
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2006 | | | 2005 | | 2006 | | | 2005 |
Revenue, net of fuel surcharge | $ | 334,815 | | $ | 342,354 | $ | 977,751 | | $ | 994,553 |
Net Income | | 7,272 | | | 4,792 | | 13,803 | | | 5,308 |
Earnings per share - Basic | | .48 | | | .30 | | .90 | | | .33 |
Earnings per share - Diluted | | .47 | | | .30 | | .89 | | | .33 |
| | Six Months Ended June 30, | |
| | 2007 | | | 2006 | |
Revenue, net of fuel surcharge | | $ | 660,838 | | | $ | 642,936 | |
Net income (loss) | | | 106 | | | | 6,531 | |
Earnings (loss) per share - Basic | | $ | 0.01 | | | $ | 0.43 | |
Earnings (loss) per share - Diluted | | $ | 0.01 | | | $ | 0.42 | |
In the transactions that increased the Company’s ownership to 80%, the Company also obtained the right to elect a majority of the members of the board of directors of ATS and Total Companies.ATS. The Company retains options to purchase the remaining 20% of each of ATS and the Total Companies through December 8, 2007 and October 1, 2008, respectively. If the Company fails to exercise such options prior to such dates, the members of the current Arnold and Total management teams will have similar options to repurchase the Company’s interests in ATS and the Total Companies, respectively.
7.6. Equity InvestmentsInvestment
In August 2006,June 2007, the Company indirectly acquired a 49%40% interest in Abilene Motor Express, Inc.C&C Trucking of Duncan (“Abilene”C&C Trucking”) for approximately $3.0 million. Certain members of the Abilene management team control the remaining 51% interest and a majority of the board of directors. We have not guaranteed any of Abilene’s debt and have no obligation to provide funding, services or assets.$739. Under the agreement, with the Abilene management team, the Company has a four-year option to acquire 100% of Abilene by purchasing management’s interest at a specified price plus an agreed upon annual return, and the Abilene management team has the right tocan acquire the Abilene stock held by the Company in the subsequent four years following the expiration of the four-year USX option.remaining 60% interest from 2008 to 2012. We have accounted for Abilene’sC&C Trucking operating results using the equity method of accounting.
In connection with this investment, the Company issued an aggregate of 6,000 shares of restricted stock to key employees under its 2002 Stock Incentive Plan. The restricted shares vest over time contingent upon continued employment.
8.7. Operating Segments
The Company has two reportable segments based on the types of services it provides to its customers: Truckload (U.S. Xpress, Arnold, and Total), which provides truckload operations throughout the continental United States and parts of Canada and Mexico; and Xpress Global Systems, which provides transportation, warehousing, and distribution services to the floorcovering industry. Substantially all intersegment sales prices are market based. The Company evaluates performance based on operating income of the respective business units.
| | Truckload | | | Xpress Global Systems | | | Consolidated | |
Three Months Ended June 30, 2007 | | | | | | | | | |
Revenue - external customers | | $ | 374,500 | | | $ | 25,847 | | | $ | 400,347 | |
Intersegment revenue | | | 1,173 | | | | - | | | | 1,173 | |
Operating income | | | 8,526 | | | | 1,992 | | | | 10,518 | |
Total assets | | | 882,222 | | | | 21,333 | | | | 903,555 | |
Three Months Ended June 30, 2006 | | | | | | | | | | | | |
Revenue - external customers | | $ | 363,855 | | | $ | 25,607 | | | $ | 389,462 | |
Intersegment revenue | | | 1,544 | | | | - | | | | 1,544 | |
Operating income | | | 13,836 | | | | 1,694 | | | | 15,530 | |
Total assets | | | 782,077 | | | | 24,299 | | | | 806,376 | |
Six Months Ended June 30, 2007 | | | | | | | | | | | | |
Revenue - external customers | | $ | 712,817 | | | $ | 48,403 | | | $ | 761,220 | |
Intersegment revenue | | | 2,369 | | | | - | | | | 2,369 | |
Operating income | | | 7,289 | | | | 3,531 | | | | 10,820 | |
Total assets | | | 882,222 | | | | 21,333 | | | | 903,555 | |
Six Months Ended June 30, 2006 | | | | | | | | | | | | |
Revenue - external customers | | $ | 641,131 | | | $ | 48,040 | | | $ | 689,171 | |
Intersegment revenue | | | 2,819 | | | | - | | | | 2,819 | |
Operating income | | | 18,225 | | | | 2,063 | | | | 20,288 | |
Total assets | | | 782,077 | | | | 24,299 | | | | 806,376 | |
| | | | | | | | | | | | |
| | Truckload | | Xpress Global Systems | | Consolidated | |
Three Months Ended September 30, 2006 | | | | | | | |
Revenue - external customers | | $ | 372,461 | | $ | 24,122 | | $ | 396,583 | |
Intersegment revenue | | | 1,271 | | | - | | | 1,271 | |
Operating income | | | 17,736 | | | 1,498 | | | 19,234 | |
Total assets | | | 831,930 | | | 20,966 | | | 852,896 | |
Three Months Ended September 30, 2005 | | | | | | | | | | |
Revenue - external customers | | $ | 273,171 | | $ | 24,069 | | $ | 297,240 | |
Intersegment revenue | | | 2,593 | | | - | | | 2,593 | |
Operating income (loss) | | | 11,697 | | | (2,208 | ) | | 9,489 | |
Total assets | | | 551,358 | | | 31,165 | | | 582,523 | |
Nine Months Ended September 30, 2006 | | | | | | | | | | |
Revenue - external customers | | $ | 1,013,592 | | $ | 72,162 | | $ | 1,085,754 | |
Intersegment revenue | | | 4,090 | | | - | | | 4,090 | |
Operating income | | | 35,961 | | | 3,561 | | | 39,522 | |
Total assets | | | 831,930 | | | 20,966 | | | 852,896 | |
Nine Months Ended September 30, 2005 | | | | | | | | | | |
Revenue - external customers | | $ | 743,341 | | $ | 102,927 | | $ | 846,268 | |
Intersegment revenue | | | 18,017 | | | - | | | 18,017 | |
Operating income (loss) | | | 20,360 | | | (11,300 | )(1) | | 9,060 | |
Total assets | | | 551,358 | | | 31,165 | | | 582,523 | |
| | | | | | | | | | |
(1)
| Includes the one-time pre-tax charge of $2.8 million related to the loss on sale and exit of the airport-to-airport business. See Footnote 11, “Loss on Sale and Exit of Business.” |
The difference in consolidated operating income, as shown above, and consolidated income before income tax provisiontaxes on the consolidated statements of operations for the three months ended SeptemberJune 30, 20062007 and 2005,2006, respectively, consists of net interest expense of $4,977$5,482 and $2,071,$4,690, equity in income(income) loss of affiliated companies of $132$(242) and $557$341 and minority interest of $508$61 and $0.$365.
The difference in consolidated operating income, as shown above, and consolidated income before income tax provision on the consolidated statementsstatement of operations for the ninesix months ended SeptemberJune 30, 20062007 and 2005,2006, respectively, consists of net interest expense of $12,766$10,964 and $5,856, early extinguishment of debt of $0 and $201,$7,789, equity in (income) loss (income) of affiliated companies of $427$(366) and $(1,808),$559, and minority interest of $1,011$10 and $0.$503.
Long-term debt at SeptemberJune 30, 20062007 and December 31, 20052006 consisted of the following:
| | September 30, 2006 | | December 31, 2005 | |
Obligation under line of credit with a group of banks, maturing March 2011 at September 30, 2006 and October 2009 at December 31, 2005 | | $ | 1,400 | | $ | 1,900 | |
Revenue equipment installment notes with finance companies, weighted average interest rate of 5.88% and 5.53% at September 30, 2006 and December 31, 2005, respectively, due in monthly installments with final maturities at various dates through August 2013, secured by related revenue equipment | | | 242,435 | | | 100,904 | |
Mortgage note payable, interest rate of 6.73% at September 30, 2006 and December 31, 2005, due in monthly installments through October 2010, with final payment of $6.3 million, secured by real estate | | | 7,867 | | | 8,112 | |
Mortgage note payable, interest rate of 6.26% at September 30, 2006 and December 31, 2005, maturing December 2030, secured by real estate | | | 16,783 | | | 17,000 | |
Mortgage note payable, interest rate of 6.98% at September 30, 2006, maturing August, 2031, secured by real estate | | | 10,455 | | | - | |
Mortgage notes payable, interest rate ranging from 5.00% to 7.25% maturing at various dates through April 2009, secured by real estate | | | 1,855 | | | - | |
Capital lease obligations maturing through September 2008 | | | 1,858 | | | 2,661 | |
Note payable maturing July 2006 | | | - | | | 1,475 | |
Other | | | 449 | | | 103 | |
| | | 283,102 | | | 132,155 | |
Less: current maturities of long-term debt | | | (49,516 | ) | | (17,111 | ) |
| | $ | 233,586 | | $ | 115,044 | |
| | June 30, 2007 | | | December 31, 2006 | |
Obligation under line of credit with a group of banks, maturing March 2011 | | $ | 3,650 | | | $ | 1,700 | |
Revenue equipment installment notes with finance companies, weighted average interest rate of 6.04% and 5.99% at June 30, 2007 and December 31, 2006, respectively, due in monthly installments with final maturities at various dates through August 2013, secured by related revenue equipment with a net book value of $275.3 million at June 30, 2007 and $265.8 million at December 31, 2006 | | | 277,436 | | | | 263,953 | |
Mortgage note payable, interest rate of 6.73% at June 30, 2007 and December 31, 2006, due in monthly installments through October 2010, with final payment of $6.3 million, secured by real estate with a net book value of $12.8 million at June 30, 2007 and $12.9 million at December 31, 2006 | | | 7,609 | | | | 7,782 | |
Mortgage note payable, interest rate of 6.26% at June 30, 2007 and December 31, 2006, due in monthly installments through December 2030, secured by real estate with a net book value of $15.7 million at June 30, 2007 and $15.9 million at December 31, 2006 | | | 16,556 | | | | 16,709 | |
Mortgage note payable, interest rate of 6.98% at June 30, 2007, maturing August, 2031, secured by real estate with a net book value of $13.5 million at June 30, 2007 and $13.7 million at December 31, 2006 | | | 10,336 | | | | 10,416 | |
Mortgage notes payable, interest rate ranging from 5.0% to 7.25% maturing at various dates through January 2009, secured by real estate with a net book value of $2.9 million at June 30, 2007 and $2.4 million at December 31, 2006 | | | 1,109 | | | | 1,204 | |
Capital lease obligations maturing through September 2008 | | | 838 | | | | 1,510 | |
Other | | | 56 | | | | 260 | |
| | | 317,590 | | | | 303,534 | |
Less: current maturities of long-term debt | | | (59,010 | ) | | | (51,221 | ) |
| | $ | 258,580 | | | $ | 252,313 | |
On October 14, 2004, theThe Company entered intois party to a $100,000$130,000 senior secured revolving credit facility and letter of credit sub-facility with a group of banks which replaced the prior $100,000 credit facility that was set to maturewith a maturity date in March 2007.2011. The credit facility is secured by revenue equipment and certain other assets and bears interest at the base rate, as defined, plus an applicable margin of 0.00% to 0.25%, or LIBOR plus an applicable margin of 0.88% to 2.00%, based on the Company's lease-adjusted leverage ratio.
On March 31, 2006, the Company amended the revolving credit facility and letter of credit sub-facility with a group of banks increasing the $100,000 senior secured revolving credit facility to $130,000. The amendment did not change the applicable margin for base rate loans or LIBOR loans, nor did it modify the fees for letter of credit transactions or quarterly commitment fees on the unused portion of the loan commitment. The amendment extended the maturity date of the credit facility from October 2009 to March 2011.
At SeptemberJune 30, 2006,2007, the applicable margin was 0.00%0.25% for base rate loans and 1.25%2.00% for LIBOR loans. The credit facility also prescribes additional fees for letter of credit transactions and a quarterly commitment fee on the unused portion of the loan commitment (1.25 %(2.00% and .25%0.35%, respectively, at SeptemberJune 30, 2006)2007).
At SeptemberJune 30, 2006, $60,7752007, $91,036 in letters of credit werewas outstanding under the credit facility with $67,825$34,601 available to borrow. The credit facility is secured by substantially all assets of the Company, other than real estate and assets securing other debt of the Company.
The credit facility requires, among other things, maintenance by the Company of prescribed minimum amounts of consolidated tangible net worth, fixed charge and asset coverage ratios, and a leverage ratio. Subject to certain defined exceptions, it also restricts the ability of the Company and its subsidiaries, without the approval of the lenders, to engage in sale-leaseback transactions, transactions with affiliates, investment transactions, acquisitions of the Company’s own capital stock or the payment of dividends on such stock, future asset dispositions (except in the ordinary course of business), or other business combination transactions, and to incur liens and future indebtedness. As of SeptemberJune 30, 2006,2007, the Company was in compliance with the credit facility covenants.
In October 2004, theThe Company entered intois party to a $100,000$140,000 accounts receivable securitization facility (the "Securitization Facility"). On a revolving basis, the Company sells accounts receivable as part of a two-step securitization transaction that provides the Company with funding similar to a revolving credit facility. To facilitate this transaction, Xpress Receivables, LLC ("Xpress Receivables"), a bankruptcy-remote, special purpose entity, purchases accounts receivable from U.S. Xpress, Arnold, Total, and Xpress Global Systems. Xpress Receivables funds these purchases with money borrowed under the Securitization Facility through Three Pillars Funding, LLC.
On March 31, 2006, the Company amended the Securitization Facility, increasing the existing $100,000 maximum thereunder to $140,000. Pursuant to the Securitization Facility amendment, Arnold and Total joined as additional originators, permitting Xpress Receivables to purchase accounts receivable from them in addition to U.S. Xpress and Xpress Global Systems.
The borrowings are secured by, and paid down through collections on, the accounts receivable. The Company can borrow up to $140,000 under the Securitization Facility, subject to eligible receivables, and pays interest on borrowings based on commercial paper interest rates, plus an applicable margin, and a commitment fee on the daily, unused portion of the Securitization Facility. The Securitization Facility is reflected as a current liability in the consolidated financial statements because its term, subject to annual renewals, expires October 11, 2007. As of SeptemberJune 30, 2006,2007, the Company’s borrowings under the Securitization Facility were $47,000,$20,000, with $93,000$116,961 available to borrow.
The Securitization Facility requires that certain performance ratios be maintained with respect to accounts receivable and that Xpress Receivables preserve its bankruptcy-remote nature. As of SeptemberJune 30, 2006,2007, the Company was in compliance with the Securitization Facility covenants.
On May 31, 2005, Xpress Global Systems exited the unprofitable airport-to-airport business and conveyed its customer list and a non-compete agreement to a company in exchange for $12,750 in cash. Following the transaction, Xpress Global Systems continues to provide transportation, warehousing, and distribution services to the floorcovering industry. In connection with the sale and exit of the airport-to-airport business, Xpress Global Systems incurred costs related to the shutdown of certain facilities, including employee severance, the write-off of certain intangible assets, and losses related to the disposal and liquidation of certain assets of the airport-to-airport business. The following table is a summary of components related to the sale and exit of the airport-to-airport business and the remaining amounts included in the Company’s consolidated balance sheet in other accrued liabilities and other long-term liabilities as of SeptemberJune 30, 2006.2007.
| | December 31, 2005 Reserve | | 2006 Reserve Additions | | 2006 Reserve Payments | | September 30, 2006 Reserve | |
Future lease commitments | | $ | 1,492 | | $ | 124 | (1) | $ | (519 | ) | $ | 1,097 | |
Other related exit costs | | | 165 | | | - | | | (30 | ) | | 135 | |
Minimum contractual amounts | | | 1,838 | | | 113 | (1) | | (476 | ) | | 1,475 | |
| | Severance | | | Future Lease Commitments | | | Other Related Exit Costs | | | Minimum Contractual Amounts | | | Total | |
May 31, 2005 Reserve | | $ | 400 | | | $ | 5,287 | | | $ | 962 | | | $ | 5,033 | | | $ | 11,682 | |
2005 Reserve Additions | | | 15 | | | | (15 | )(1) | | | - | | | | 73 | (1) | | | 73 | |
2005 Payments | | | (415 | ) | | | (3,780 | ) | | | (797 | ) | | | (3,268 | ) | | | (8,260 | ) |
December31, 2005 Reserve | | | - | | | | 1,492 | | | | 165 | | | | 1,838 | | | | 3,495 | |
2006 Reserve Additions | | | - | | | | 305 | (1) | | | - | | | | 148 | (1) | | | 453 | |
2006 Payments | | | - | | | | (795 | ) | | | (30 | ) | | | (476 | ) | | | (1,301 | ) |
December 31, 2006 Reserve | | | - | | | | 1,002 | | | | 135 | | | | 1,510 | | | | 2,647 | |
2007 Reserve Additions | | | - | | | | 39 | (1) | | | - | | | | 50 | (1) | | | 89 | |
2007 Payments | | | - | | | | (245 | ) | | | - | | | | (1,177 | ) | | | (1,422 | ) |
June 30, 2007 Reserve | | $ | - | | | $ | 796 | | | $ | 135 | | | $ | 383 | | | $ | 1,314 | |
(1) | The component of the minimum contractual amounts liability and future lease commitments liability represents interest accretion as of September 30, 2006.and adjustments made to the existing provision. |
For the three and nine months ending September 30, 2006,11
11. Income Taxes
Effective January 1, 2007, the Company increased its provision for the estimated loss on liquidation of receivables from $2,425 to $2,602 and 2,025 to 2,602, respectively.
12. Recent Accounting Pronouncements
In July 2006,adopted FASB issued Interpretation No. 48, (“FIN 48”), “AccountingAccounting for Uncertainty in Income Taxes” which clarifies, (“FIN 48”). The impact upon adoption was to decrease retained earnings by approximately $169 and to increase our accruals for uncertain tax positions and related interest by a corresponding amount. After recognizing these impacts at adoption of FIN 48, the accountingtotal unrecognized tax benefits were approximately $2.7 million. Of this amount, approximately $1.2 million would impact our effective tax rate if recognized. The difference results from federal and state tax items that would impact goodwill and would not impact the effective rate if it were subsequently determined that such liability were not required and the indirect deferred tax benefit associated with uncertain tax positions of $0.8 million and $0.7 million, respectively.
The Company regularly evaluates the legal organizational structure and filing requirements of our entities and adjusts tax attributes to enhance planning opportunities. While we are evaluating certain transactions that could reduce the need for uncertainty incertain accruals during fiscal year 2007, those considerations are not yet sufficiently developed to allow further adjustment to existing balances.
The Company files income taxes recognizedtax returns in the financial statementsU.S. federal and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations for years before 2003. In July 2007, the Company was notified by the Internal Revenue Service that its fiscal 2005 and 2006 consolidated federal income tax returns would be audited. Management believes that all loss exposures are properly accrued in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. condensed consolidated balance sheets.
The Company is currently evaluatingrecognizes interest related to unrecognized tax benefits in the impactprovision for income taxes. The Company had approximately $540 accrued for the payment of this standard oninterest as of the Consolidated Financial Statements.
13.12. Related Party Transaction
13. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements; however, for some entities, the application of this Statement will change current practice. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, of SFAS 157 on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS 159 on our financial statements.
14. Subsequent Events
On October 27, 2006, the Company entered into a Fifth Amendment to the Revolving Credit and Letter of Credit Loan Agreement, dated October 27, 2006 (the "Credit Facility Amendment"), with SunTrust Bank, Bank of America, N.A., LaSalle Bank National Association, Branch Banking and Trust Company, National City Bank, and Regions Financial Corporation, as lenders (the "Lenders"), amending the Company's revolving credit facility. Pursuant to the Credit Facility Amendment, the Lenders temporarily eased the lease adjusted leverage ratio that the Company is required to maintain by increasing the maximum permissible lease adjusted leverage ratio from 3.00 to 1.00 to 3.50 to 1.00 for the two fiscal quarters ending March 31, 2007, capping the same ratio at 3.25 to 1.00 for the fiscal quarter ending June 30, 2007, and returning the lease adjusted leverage ratio to 3.00 to 1.00 in the third fiscal quarter of 2007. As part of the Credit Facility Amendment, the Lenders also agreed to a $10 million increase in the aggregate dollar value of miscellaneous investments that the Company may make during the term of the credit facility and eased restrictions on the Company's ability to redeem its own stock by increasing the dollar value of permitted redemptions from $15 million to $30 million.
On October 20, 2006, the Board of Directors extended the expiration date of outstanding option grants set to expire in 2007. The expiration date was extended five years from the original expiration date. The company will record a one-time charge of approximately $.3 million in the fourth quarter in connection with the extension.
15. Reclassifications
Certain reclassifications have been made to the 20052006 financial statements to conform to the 20062007 presentation.
The consolidated financialThis Quarterly Report on Form 10-Q contains certain statements include the accounts of U.S. Xpress Enterprises, Inc., a Nevada holding company, and its consolidated subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to U.S. Xpress Enterprises, Inc. and its consolidated subsidiaries.
Except for certain historical information contained herein, the following discussion contains "forward-looking 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 Section 27A of the Securities Act of 1933, as amended, that involve risks, assumptions, and uncertainties which are difficult to predict.amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. WordsSuch statements may be identified by their use of terms or phrases such as "believe," "may," "will," "could," "should," "likely," "expects," "estimates," "anticipates," "projects," "plans,"believes," "anticipates," "intends," "hopes," "potential," "continue," and "future"similar terms and variationsphrases. Forward-looking statements are inherently subject to risks and uncertainties, some of these words,which cannot be predicted or similar expressions, are intendedquantified, which could cause future events and actual results to identify such forward-looking statements. Actual events or results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Readers should review and consider the factors discussed in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those referred to in the section entitled "Item 1A. Risk Factors" set forthin our Form 10-K for the year ended December 31, 2006, as supplemented in Part II below.below, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.
All such forward-looking statements speak only as of the date of this Form 10-Q. 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 the Company’sCompany's expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.
Business Overview
We are the fifthfourth largest publicly traded truckload carrier in the United States, measured by revenue, according to Transport Topics, a publication of the American Trucking Associations.Associations, or ATA. Our primary business is offering a broad range of truckload services to customers throughout the United States and in portions of Canada and Mexico. We also offer transportation, warehousing, and distribution services to the floorcovering industry. Since becoming a public company, we have increased our operating revenue to $1.2$1.5 billion in 20052006 from $215.4 million in 1994, a compounded annual growth rate of 16.6%17.4%. Our growth has come through expansion of business with new and existing customers and complementary acquisitions. Our operating revenue increased 33%2.8% to $396.6$400.3 million in the thirdsecond quarter of 20062007 from $297.2$389.5 million in the thirdsecond quarter of 2005. Net2006. We generated net income for the third quarter increased 81.9% to $7.3of $2.7 million, or $0.47$0.18 per diluted share, compared with net income of $4.0$5.7 million, or $0.25$0.37 per diluted share, in the prior-year period. For the first six months of 2007, the Company reported net income of $0.1 million, or $0.01 per diluted share, compared with net income of $6.5 million, or $0.42 per diluted share, for the prior year period.
13In 2006 and continuing into the second quarter of 2007, our Xpress Global Systems segment positively impacted the results of operations by continued improvement in pricing and yield management, operational efficiencies and reduced overhead expenditures. The divestiture of our unprofitable airport-to-airport business in 2005 also positively impacted our operating results.
Our Truckload Segment
Our truckload segment, U.S. Xpress, Inc. (“U.S. Xpress”), Arnold Transportation, Inc. (“Arnold”), and Total Transportation of Mississippi LLC (“Total”), which comprised approximately 94% of our total operating revenue in the thirdsecond quarter of 2006,2007, includes the following six strategic business units, each of which is significant in its market:
●U.S. Xpress dedicated | Our approximately 1,6501,400 tractor dedicated unit offers our customers dedicated equipment, drivers, and on-site personnel to address customers’ needs for committed capacity and service levels, while affording us consistent equipment utilization during the contract term. |
●U.S. Xpress regional and solo over-the-road | Our approximately 2,8003,400 tractor regional and solo over-the-road unit offers our customers a high level of service in dense freight markets of the Southeast, Midwest, and West, in addition to providing nationwide coverage. |
●U.S. Xpress expedited intermodal rail | Our railroad contracts for high-speed train service enable us to provide our customers incremental capacity and transit times comparable to solo-driver service in medium-to-long haul markets, while lowering our costs. |
●U.S. Xpress expedited team | Our approximately 750700 team driver unit offers our customers a service advantage over medium-to-long haul rail and solo-driver truck service at a much lower cost than airfreight, while affording us premium rates and improved utilization of equipment. |
●Arnold | Arnold is a dry van truckload carrier headquartered in Florida with approximately 1,5001,600 trucks, and offers regional, dedicated, and medium length-of-haul service primarily in the Northeast, Southeast, and Southwest United States. |
●Total | Total is a dry van truckload carrier headquartered in Mississippi with approximately 600 trucks, and offers regional, dedicated, and medium length-of-haul services primarily in the easternEastern United States. |
Our Xpress Global Systems segment, which comprised approximately 6% of our total operating revenue inDuring the thirdsecond quarter of 2006, offers transportation, warehousing, and distribution services to the floorcovering industry. During the third quarter of 2006,2007, our Xpress Global Systemstruckload segment experienced an operating income of $1.5$8.5 million compared to an operating lossincome of $2.2$13.8 million in the same period in 2005.
Revenue and Expenses
2006. The primary measure we use to evaluatereason for the decrease in earnings was a decline in asset utilization, evidenced by a 4.0% decline in average freight revenue per tractor per week. Lower freight demand and a difficult pricing environment negatively impacted our profitability is operating ratio (operating expenses, net of fuel surcharge, as a percentage of revenue, before fuel surcharge). truckload business.
Our operating ratio was 94.3% in the third quarter of 2006, compared to 96.4% in the third quarter of 2005.
Our Truckload Segment
Wetruckload segment primarily generategenerates revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that affect our truckload revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of shipments and miles we generate. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability. Our primary measures of revenue generation for our truckload business are average revenue per loaded mile and average revenue per tractor per week, in each case excluding fuel surcharge revenue. Average revenue per loaded mile, before fuel surcharge revenue, increaseddecreased slightly to $1.65$1.612 during the thirdsecond quarter of 20062007 from $1.64$1.616 in the thirdsecond quarter of 2005.2006. Average revenue per tractor per week, before fuel surcharge revenue, decreased to $3,028$2,996 during the thirdsecond quarter of 20062007 from $3,168$3,121 in the thirdsecond quarter of 20052006 (excluding rail revenue).
The main factors that impact our profitability in terms of expenses are the variable costs of transporting freight for our customers. These costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and purchased transportation expenses, which include compensating independent contractors and providers of expedited intermodal rail services. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. Our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities, and the compensation of non-driver personnel.
Our Xpress Global Systems Segment
WeOur Xpress Global Systems segment, which comprised approximately 6% of our total operating revenue in the second quarter of 2007, offers transportation, warehousing, and distribution services to the floorcovering industry. During the second quarter of 2007, our Xpress Global Systems segment experienced operating income of $2.0 million, compared to $1.7 million in the same period in 2006.
Xpress Global Systems primarily generategenerates revenue by transporting less-than-truckload freight for our customers. Generally, we are paid a predetermined rate per square yard for carpet and per pound for all other commodities. The rates vary based on miles, type of service and type of freight we are hauling. We enhance our less-than-truckload revenue by charging for storage, warehousing and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that affect our less-than-truckload revenue are the revenue per pound we receive from our customers, the average weight per shipment we haul and the number of shipments we generate. These factors relate, among other things, to the general level of economic activity in the United States, especially in the housing industry, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability. Our primary measures of revenue generation for our less-than-truckload business are average revenue per pound (excluding fuel surcharge revenue), total tonnage and number of loads hauled per day.
The main factors that impact our profitability in terms of expenses are the variable costs of transporting the freight for our customers. These costs include purchased transportation, fuel expense and the cost paid to our agents to deliver the freight. Expenses that have both fixed and variable components include driver and dock related expenses, such as wages, benefits, training, and recruitment, maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel and the tonnage of freight we handle, but also have a controllable component based on load factor, safety, fleet age, efficiency and other factors. Our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities and the compensation of non-driver and non-dock worker personnel.
Revenue and Expenses
The primary measure we use to evaluate our profitability is operating ratio (operating expenses, net of fuel surcharge, as a percentage of revenue, before fuel surcharge). Our operating ratio was 97.0% in the second quarter of 2007, compared to 95.3% in the second quarter of 2006.
Revenue Equipment
At SeptemberJune 30, 2006,2007, we had a truckload fleet of 7,4047,698 tractors including the tractors at Arnold and Total and 9511,016 owner-operator tractors. We also operated 22,40322,289 trailers in our truckload fleet and approximately 330200 tractors dedicated to local and drayage services. At Xpress Global Systems, we operated 186188 pickup and delivery tractors and 415429 trailers.
Consolidated Results of Operations
The following table sets forth the percentage relationships of expense items to total operating revenue, and revenue, excluding fuel surcharge, for each of the periods indicated below. Fuel and fuel taxes as a percentage of revenue, before fuel surcharge, is calculated using fuel and fuel taxes, net of fuel surcharge. Management believes that eliminating the impact of this source of revenue provides a more consistent basis for comparing results of operations from period to period.
| | (Total operating revenue) | | (Revenue, before fuel surcharge) | | (Total operating revenue) | | (Revenue, before fuel surcharge) | | |
| | Three Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Nine Months Ended September 30, | | | (Total operating revenue) Three Months Ended June 30, | | | (Revenue, before fuel surcharge) Three Months Ended June 30, | | | (Total operating revenue) Six Months Ended June 30, | | | (Revenue, before fuel surcharge) Six Months Ended June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
Operating Revenue | | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries, wages and benefits | | 32.8 | | 33.9 | | 38.8 | | 38.3 | | 33.2 | | 34.9 | | 38.6 | | 38.7 | | | | 33.4 | | | | 32.6 | | | | 38.8 | | | | 38.3 | | | | 34.2 | | | | 33.4 | | | | 39.5 | | | | 38.7 | |
Fuel and fuel taxes | | 22.8 | | 20.4 | | 8.6 | | 9.9 | | 22.7 | | 19.1 | | 9.6 | | 10.3 | | | | 23.2 | | | | 22.9 | | | | 10.7 | | | | 9.5 | | | | 22.7 | | | | 22.6 | | | | 11.0 | | | | 10.2 | |
Vehicle rents | | 4.6 | | 5.8 | | 5.5 | | 6.5 | | 5.2 | | 6.1 | | 6.0 | | 6.7 | | | | 6.2 | | | | 5.0 | | | | 7.2 | | | | 5.8 | | | | 6.3 | | | | 5.5 | | | | 7.2 | | | | 6.4 | |
Depreciation and amortization, net of gain on sale | | 4.1 | | 4.0 | | 4.8 | | 4.6 | | 4.0 | | 4.1 | | 4.7 | | 4.5 | | | | 4.9 | | | | 4.1 | | | | 5.7 | | | | 4.8 | | | | 5.1 | | | | 4.0 | | | | 5.9 | | | | 4.7 | |
Purchased transportation | | 15.7 | | 16.5 | | 18.6 | | 18.7 | | 15.7 | | 17.4 | | 18.4 | | 19.3 | | | | 15.1 | | | | 15.8 | | | | 17.6 | | | | 18.6 | | | | 15.1 | | | | 15.7 | | | | 17.4 | | | | 18.2 | |
Operating expense and supplies | | 6.3 | | 6.2 | | 7.5 | | 7.1 | | 6.4 | | 6.7 | | 7.5 | | 7.5 | | | | 6.1 | | | | 6.4 | | | | 7.1 | | | | 7.5 | | | | 6.3 | | | | 6.4 | | | | 7.3 | | | | 7.4 | |
Insurance premiums and claims | | 4.2 | | 4.3 | | 4.9 | | 4.9 | | 4.2 | | 4.1 | | 5.0 | | 4.5 | | | | 4.0 | | | | 4.2 | | | | 4.6 | | | | 4.9 | | | | 4.1 | | | | 4.3 | | | | 4.7 | | | | 5.0 | |
Operating taxes and licenses | | 1.1 | | 1.2 | | 1.3 | | 1.4 | | 1.1 | | 1.2 | | 1.3 | | 1.4 | | | | 1.1 | | | | 1.1 | | | | 1.3 | | | | 1.3 | | | | 1.2 | | | | 1.2 | | | | 1.3 | | | | 1.3 | |
Communications and utilities | | 0.8 | | 0.9 | | 1.0 | | 1.0 | | 0.9 | | 1.0 | | 1.1 | | 1.1 | | | | 0.7 | | | | 0.9 | | | | 0.8 | | | | 1.1 | | | | 0.8 | | | | 0.9 | | | | 0.9 | | | | 1.1 | |
General and other operating | | 2.7 | | 3.6 | | 3.2 | | 4.0 | | 2.9 | | 4.0 | | 3.4 | | 4.4 | | | | 2.7 | | | | 2.9 | | | | 3.2 | | | | 3.4 | | | | 2.8 | | | | 3.0 | | | | 3.2 | | | | 3.5 | |
Loss on sale and exit of business | | 0.1 | | 0.0 | | 0.1 | | 0.0 | | 0.1 | | 0.3 | | 0.1 | | 0.4 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | |
Total operating expenses | | 95.2 | | 96.8 | | 94.3 | | 96.4 | | 96.4 | | 98.9 | | 95.7 | | 98.8 | | | | 97.4 | | | | 96.0 | | | | 97.0 | | | | 95.3 | | | | 98.6 | | | | 97.1 | | | | 98.4 | | | | 96.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from Operations | | 4.8 | | 3.2 | | 5.7 | | 3.6 | | 3.6 | | 1.1 | | 4.3 | | 1.2 | | | | 2.6 | | | | 4.0 | | | | 3.0 | | | | 4.7 | | | | 1.4 | | | | 2.9 | | | | 1.6 | | | | 3.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net | | 1.2 | | 0.7 | | 1.5 | | 0.8 | | 1.2 | | 0.7 | | 1.4 | | 0.8 | | | | 1.4 | | | | 1.2 | | | | 1.6 | | | | 1.4 | | | | 1.4 | | | | 1.1 | | | | 1.7 | | | | 1.3 | |
Early extinguishment of debt | | 0.0 | | 0.0 | | 0.0 | | 0.0 | | 0.0 | | 0.0 | | 0.0 | | 0.0 | | |
Equity in loss (income) of affiliated companies | | 0.0 | | (0.2 | ) | 0.0 | | (0.2 | ) | 0.0 | | (0.2 | ) | 0.1 | | (0.2 | ) | |
Equity in (income) loss of affiliated companies | | | | (0.1 | ) | | | 0.1 | | | | (0.1 | ) | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | (0.1 | ) | | | 0.1 | |
Minority interest | | 0.1 | | 0.0 | | 0.1 | | 0.0 | | 0.1 | | 0.0 | | 0.1 | | 0.0 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | |
| | | | 1.3 | | | | 1.4 | | | | 1.5 | | | | 1.6 | | | | 1.4 | | | | 1.3 | | | | 1.6 | | | | 1.5 | |
| | 1.3 | | 0.5 | | 1.6 | | 0.6 | | 1.3 | | 0.5 | | 1.6 | | 0.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | 3.5 | | 2.7 | | 4.1 | | 3.0 | | 2.3 | | 0.6 | | 2.7 | | 0.6 | | | | 1.3 | | | | 2.6 | | | | 1.5 | | | | 3.1 | | | | 0.0 | | | | 1.6 | | | | 0.0 | | | | 1.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax provision | | 1.7 | | 1.3 | | 2.0 | | 1.5 | | 1.1 | | 0.3 | | 1.2 | | 0.3 | | | | 0.6 | | | | 1.1 | | | | 0.7 | | | | 1.3 | | | | 0.0 | | | | 0.7 | | | | 0.0 | | | | 0.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | 1.8 | % | 1.4 | % | 2.1 | % | 1.5 | % | 1.2 | % | 0.3 | % | 1.5 | % | 0.3 | % | | | 0.7 | % | | | 1.5 | % | | | 0.8 | % | | | 1.8 | % | | | 0.0 | % | | | 0.9 | % | | | 0.0 | % | | | 1.1 | % |
There are minor rounding differences in the above table.
Comparison of the Three Months Ended Septemberended June 30, 20062007 to the Three Months Ended SeptemberJune 30, 20052006
Total operating revenue increased 33.4%2.8% to $396.6$400.3 million during the three months ended SeptemberJune 30, 20062007 compared to $297.2$389.5 million during the same period in 2005.2006. The increase resulted primarily from $90.6 millionan increase in average number of seated trucks to 7,676 in the second quarter of 2007 compared to 6,943 in the second quarter of 2006 offset by 4.0% reduction in revenue from Arnoldper tractor and Total and higher fuel surcharges.decreased rail volumes.
Revenue, before fuel surcharge, increased 27.5%3.7% to $334.8$344.3 million during the three months ended SeptemberJune 30, 20062007 compared to $262.6$332.0 million during the same period in 2005.2006. Truckload revenue, before fuel surcharge, increased 3.8% to $312.0$319.6 million during the three months ended SeptemberJune 30, 2006,2007, compared to $241.1$307.9 million during the same period in 2005, due primarily2006 as a result of an increase in average seated trucks to 7,676 in the additionsecond quarter of Arnold2007 compared to 6,943 in the second quarter of 2006 partially offset by 4.0% reduction in revenue per tractor and Total.decreased rail volumes. Xpress Global Systems’ revenue remained essentially constant at $24.1 million. Intersegment revenue decreasedincreased 0.8% to $1.3$25.8 million during the three months ended SeptemberJune 30, 2006,2007, compared to $2.6$25.6 million during the same period in 2005.
Salaries, wages, and benefits increased 28.7%2006. Intersegment revenue decreased to $129.7$1.2 million during the three months ended SeptemberJune 30, 20062007, compared to $100.8$1.5 million during the same period in 2005.2006.
Salaries, wages and benefits increased 5.1% to $133.6 million during the three months ended June 30, 2007 compared to $127.1 million during the same period in 2006. The increase iswas primarily due to the inclusionan increase of 7.6% in U.S. Xpress driver wages for Arnolddue to a 6.5% increase in U.S. Xpress company miles and Totala decrease in the amount of $26.5 million.expedited rail volume partially offset by a decrease in local driver wages due to a reduction in tractors dedicated to local and drayage services. Tractors dedicated to local and drayage services will fluctuate consistent with rail volumes. As a percentage of revenue, before fuel surcharge, salaries, wages, and benefits remained essentially constant atincreased to 38.8% for the three months ended SeptemberJune 30, 2006,2007, compared to 38.3% forduring the three months ended September 30, 2005.same period in 2006.
Fuel and fuel taxes, net of fuel surcharge, increased 9.6%16.4% to $28.6$36.9 million during the three months ended SeptemberJune 30, 20062007 compared to $26.1$31.7 million during the same period in 2005. The2006. Such increase is mainly due primarilyto a 6.5% increase in U.S. Xpress company miles combined with decreased expedited rail volumes during the second quarter of 2007 compared to the inclusion of net fuel and fuel tax expense for Arnold and Totalsame period in the amount of $6.7 million offset by the increased fuel2006. Fuel surcharges paid to railroads and owner-operatorsthe railroad are reflected in purchased transportation, combined with a 13.8% decline in fuel prices during the month of September 2006.transportation. As a percentage of revenue, before fuel surcharge, fuel and fuel taxesnet of fuel surcharge, declined increased to 8.6% during10.7% for the three months ended SeptemberJune 30, 20062007, compared to 9.9%9.5% during the same period in 2005. Such decrease is mainly due to higher fuel surcharge billed to our customers. We maintain a fuel surcharge program to assist us in recovery of increased fuel costs. Customer fuel surcharges in our truckload operations amounted to $61.8 million and $34.6 million for the three months ended September 30, 2006 and 2005, respectively.2006.
Vehicle rentsincreased 7.6%27.5% to $18.4$24.6 million during the three months ended SeptemberJune 30, 20062007 compared to $17.1$19.3 million during the same period in 2005. The2006. This increase is due primarily to the inclusion of vehicle rents for Arnold and Total in the amount of $3.4 million. This increase is partially offset by the decrease in the average number of tractors financed under operating leases to 2,808 from 3,3624,160 during the second quarter of 2007 compared to 3,200 for the same period in U.S. Xpress truckload operations.2006. As a percentage of revenue, before fuel surcharge, vehicle rents declinedincreased to 5.5% during7.2% for the three months ended SeptemberJune 30, 20062007, compared to 6.5%5.8% during the same period in 2005.2006.
Depreciation and amortizationincreased 34.2%22.8% to $16.1$19.4 million during the three months ended SeptemberJune 30, 20062007 compared to $12.0$15.8 million during the same period in 2005.2006. Gains/losses realized on the sale of revenue equipment are included in depreciation and amortization for reporting purposes. Depreciation and amortization excluding gains/gain/losses, increased to $17.0$19.2 million during the three months ended SeptemberJune 30, 20062007 compared to $12.8$16.6 million during the same period in 2005. The2006. This increase is due primarilyin part to increased equipment costs, an increase in owned tractors, and the inclusionamortization of depreciation and amortization for Arnold and Total in the amount of $4.1 million.communication equipment. As a percentage of revenue, before fuel surcharge, depreciation and amortization increased to 4.8% during5.7% for the three months ended SeptemberJune 30, 20062007, compared to 4.6%4.8% during the same period in 2005.2006, primarily due to lower revenue per tractor per week less effectively covering these costs.
Purchased transportationincreased 27.1% decreased 1.5% to $62.3$60.4 million during the three months ended SeptemberJune 30, 20062007 compared to $49.0$61.3 million during the same period in 20052006. This decrease is primarily due to the inclusiona decrease of purchased transportation amounts for Arnold and Totalapproximately 22% in the amount of $16.6 million and increased fuel surcharges paidrail volumes compared to the railroads and owner-operators. This increase is partially offset by the reduction of the owner-operator fleet within U.S. Xpress truckload operations by approximately 20%.same period in 2006. As a percentage of revenue, before fuel surcharge, purchased transportation decreased to 17.6% in the 2007 period from 18.6% in the 2006 period from 18.7% in the 2005 period.
Operating expense and supplies increased 36.2% to $25.2 million during the three months ended September 30, 2006 compared to $18.5 million during the same period in 2005. This is primarily the result of the inclusion of operating expense and supplies amounts for Arnold and Total in the amount of $5.8 million. As a percentage of revenue, before fuel surcharge, operating expense and supplies increased to 7.5% during the three months ended September 30, 2006 compared to 7.1% during the same period in 2005.
Insurance premiums and claims, consisting primarily of premiums and deductible amounts for liability (personal injury and property damage), physical damage, and cargo damage insurance and claims, increased 29.7%decreased 1.8% to $16.6$16.0 million during the three months ended SeptemberJune 30, 20062007 compared to $12.8$16.3 million during the same period in 2005. The increase is due primarily to the inclusion of insurance premium and claims expenses for Arnold and Total in the amount of $3.9 million. Excluding Arnold and Total amounts, insurance premiums and claims decreased 1.0% to $12.7 million compared to $12.8 million during the same period in 2005.2006. This decrease is due primarily to a reduction in liability claims expense partially offset by an increase in cargo claims expense.physical damage claims. As a percentage of revenue, before fuel surcharge, insurance and claims remained essentially constant atdecreased to 4.6% during the three months ended June 30, 2007, compared to 4.9% for both periods.during the same period in 2006. We are self-insured up to certain limits for cargo loss, physical damage, and liability. We have adopted an insurance program with higher deductible exposure to offset the industry-wide increase in insurance premium rates. Refer to "Critical Accounting Policies and Estimates—Claims Reserves and Estimates" below for our various retention levels. We maintain insurance with licensed insurance companies above amounts for which we are self-insured for cargo and liability. We accrue for pending claims, plus any incurred but not reported claims. The accruals are estimated based on our evaluation of the type and severity of individual claims and future development based on historical trends. Insurance premiums and claims expense will fluctuate based on claims experience, premium rates, and self-insurance retention levels.
Operating taxes and licenses increased 19.4%4.7% to $4.3$4.5 million during the three months ended SeptemberJune 30, 20062007 compared to $4.3 million during the same period in 2006. This increase is primarily the result of increased number of company tractors. As a percentage of revenue, before fuel surcharge, operating taxes and licenses remained essentially constant at 1.3% for both periods.
Communications and utilities decreased 19.4% to $2.9 during the three months ended June 30, 2007 compared to $3.6 million during the same period in 2005.2006. This decrease is primarily the result of replacing leased units with purchased units. The associated expense with the amounts for Arnoldpurchased units is located in depreciation and Total in the amount of $1.0 million.amortization. As a percentage of revenue, operating taxesbefore fuel surcharge, communications and licenseutilities decreased to 1.3%0.8% in the 2007 period from 1.1% in the 2006 period from 1.4% in the 2005 period.
Communications and utilities increased 26.9% to $3.3 million during the three months ended September 30, 2006 compared to $2.6 million during the same period in 2005. This is primarily the result of the amounts for Arnold and Total in the amount of $0.8 million. As a percentage of revenue, communications and utilities remained constant at 1.0% for both periods.
General and other operatingincreased 2.8% decreased 3.5% to $10.9 million during the three months ended SeptemberJune 30, 20062007 compared to $10.6$11.3 million during the same period in 2005.2006. This decrease is primarily the result of the inclusion of general and other operating amounts for Arnold and Totalattributed to a small reduction in the amount of $1.3 million, partially offset by the elimination of certain general and other operating expenses related to the airport-to-airport business.several areas. As a percentage of revenue, before fuel surcharge, general and other operating decreased slightly to 3.2% in the 20062007 period from 4.0%3.4% in the 20052006 period.
Loss on sale and exit of business of $.2 million for the three months ended September 30, 2006 related to the Company increasing its provision for the estimated loss on liquidation of receivables from $2,425 to $2,602. See Footnote 11, “Loss on Sale and Exit of Business”.
Interest expenseincreased 138.1%17.0% to $5.0$5.5 million during the three months ended SeptemberJune 30, 20062007 compared to $2.1$4.7 million during the same period in 2005. The increase is due primarily to the inclusion of interest expense for Arnold and Total in the amount of $1.9 million, increased debt, and higher interest rates. Interest expense is expected to increase in future periods because of the consolidation of the borrowings of Arnold and Total as of March 2006. As of September 30, 2006, we increased our debt by $152.9 million as compared to December 31, 2005. This increase is primarily due to the inclusiona result of Arnoldhigher interest rates and Total debt, which amounted to $107.0 million at September 30, 2006.increased debt.
Minority interest of $0.5 million$61 for the three months ended SeptemberJune 30, 20062007 is representative of the 20.0%20% minority shareholders interest in the net income of Arnold and Total.
The effective tax rate was 47.6%47.5% for the three months ended SeptemberJune 30, 2006.2007. The rate was higher than the federal statuarystatutory rate of 35.0%35%, primarily as a result of per diems paid to drivers at U.S. Xpress and Total which are not fully deductible for federal income tax purposes.
Comparison of the NineSix Months Ended SeptemberJune 30, 20062007 to the NineSix Months Ended SeptemberJune 30, 20052006
Total operating revenue increased 30.0%10.4% to $1.1 billion$761.2 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $846.3$689.2 million during the same period in 2005.2006. The increase resulted primarily from $214.8the inclusion of $180.6 million in revenuesrevenue from Arnold and Total for six months ended June 30, 2007 compared to $124.2 million for the four months ended June 30, 2006 and higher fuel surcharges,an approximate 550 truck increase in the average number of seated trucks in the U.S. Xpress fleet partially offset by a 5.3% reduction in revenue per tractor and decreased rail volumes for the sale and exit ofsix months ended June 30, 2007 compared to the airport-to-airport business.same period in 2006.
Revenue, before fuel surcharge, increased 21.7%11.2% to $929.3$660.8 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $763.6$594.4 million during the same period in 2005.2006. Truckload revenue, before fuel surcharge, increased 11.9% to $861.2$614.8 million during the ninesix months ended SeptemberJune 30, 2006,2007, compared to $678.7$549.2 million during the same period in 2005,2006, due primarily to the addition of six months of Arnold and Total.Total revenues in the amount of $157.4 million in the second quarter of 2007 compared to four months in the amount of $107.4 million in the second quarter of 2006. U.S. Xpress Global Systems’ revenue decreased 30%revenues increased 3.5% to $72.2$457.4 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $102.9$441.8 million during the same period in 2005, due primarily2006 as a result of an increase in average trucks by approximately 550 partially offset by a 5.3% reduction in revenue per tractor and a decrease in rail volume compared to the sale and exit of the airport-to-airport business in the second quarter of 2005. Intersegment2006. Xpress Global Systems’ revenue decreasedincreased 0.8% to $4.1$48.4 million during the ninesix months ended SeptemberJune 30, 2006,2007, compared to $18.0$48.0 million during the same period in 2005, due primarily2006. Intersegment revenue decreased to $2.4 million during the sale and exit ofsix months ended June 30, 2007, compared to $2.8 million during the airport-to-airport business.same period in 2006.
Salaries, wages, and benefits increased 21.6%13.3% to $359.7$260.7 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $295.9$230.0 million during the same period in 2005. The2006. This increase is primarily due in part to the inclusionaddition of wages forsix months of Arnold and Total salaries, wages and benefits in the amount of $63.5 million.$55.8 million compared to four months in the amount of $37.1 million and a 5.4% increase in U.S. Xpress company driver miles offset by an approximate 4.7% decrease in U.S. Xpress office employees. As a percentage of revenue, before fuel surcharge, salaries, wages, and benefits decreasedincreased to 38.6% during39.5% for the ninesix months ended SeptemberJune 30, 20062007, compared to 38.7% during the same period in 2005.2006.
Fuel and fuel taxes, net of fuel surcharge, increased 13.0%19.4% to $89.4$72.6 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $79.1$60.8 million during the same period in 2005.2006. The increase is due primarily to the inclusionaddition of netArnold and Total fuel and fuel tax expense for Arnold and Totaltaxes in the amount of $17.7 million. This$18.2 million for six months ended June 30, 2007 compared to $11.0 million for the four months ended June 30, 2006, a 5.4% increase is partially offset byin U.S. Xpress company miles, and decreased expedited rail volumes during the increased fuelsix months ended June 30, 2007 compared to the same period in 2006. Fuel surcharges paid to railroads and owner-operatorsthe railroad are reflected in purchased transportation. As a percentage of revenue before fuel surcharge, fuel and fuel taxes net of fuel surcharge, decreasedincreased slightly to 9.6%11.0% during the ninesix months ended SeptemberJune 30, 20062007 compared to 10.3%10.2% during the same period in 2005. Customer fuel surcharges in our truckload operations amounted to $156.5 million and $82.7 million for the nine months ended September 30, 2006 and 2005, respectively.2006.
Vehicle rents increased 8.9%26.3% to $56.2$47.6 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $51.6$37.7 million during the same period in 2005. The2006. This increase is due primarily to the inclusionaddition of vehicle rents for Arnold and Total in the amount of $8.1 million. This$10.6 million for six months ended June 30, 2007 compared to $4.6 million for four months ended June 30, 2006 and an increase is partially offset by the decrease in the average number of tractors financed under operating leases to 2,996 from 3,390 for4,130 compared to 3,247 during the same period in U.S. Xpress truckload operations.2006. As a percentage of revenue, before fuel surcharge, vehicle rents decreasedincreased to 6.0%7.2% during the six months ended June 30, 2007 compared to 6.4% during the same period in the 2006 period from 6.7% in 2005 period.2006.
Depreciation and amortization increased 27.0%40.8% to $43.8$39.0 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $34.5$27.7 million during the same period in 2005.2006. Gains/losses realized on the sale of revenue equipment are included in depreciation and amortization for reporting purposes. Depreciation and amortization, excluding gains/losses, increased to $46.4$38.8 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $36.9$29.4 million during the same period in 2005. The2006. This increase is due primarilyin part to increased equipment costs, an increase in owned tractors, and the inclusionamortization of depreciation and amortization for Arnold and Total in the amount of $11.3 million. This increase is partially offset by the decrease in the average number of owned trailers to 6,419 from 7,967 in the same period in U.S. Xpress truckload operations.communication equipment. As a percentage of revenue, before fuel surcharge, depreciation and amortization increased to 5.9% during the six months ended June 30, 2007 compared to 4.7% during the same period in 2006, primarily due to lower revenue per tractor per week less effectively covering these costs, an increase in the 2006 from 4.5% in the 2005 periodpercentage of our fleet consisting of purchased equipment, and higher prices of new equipment.
Purchased transportation increased 16.0%6.7% to $170.6$115.0 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $147.1$107.8 million during the same period in 20052006 primarily due to the inclusionincrease of purchased transportation amounts for Arnold and Total in the amount of $38.9$11.3 million and increased fuel surcharges paidfor six months ended June 30, 2007 compared to the railroads and owner-operators.four months ended June 30, 2006. This increase is partially offset by decreased expenditures to the railroads due to the sale and exit of the airport-to-airport business and thea reduction of the owner-operator fleet within U.S. Xpress truckload operations by approximately 20%.in rail volumes. As a percentage of revenue, before fuel surcharge, purchased transportation decreased to 18.4%17.4% during the six months ended June 30, 2007 compared to 18.2% during the same period in the 2006 period from 19.3% in the 2005 period.2006.
Operating expense and supplies increased 21.6%8.1% to $69.3$48.2 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $57.0$44.6 million during the same period in 2005.2006. This is primarily the result of the inclusionincrease of operating expense and supplies amounts for Arnold and Total in the amount of $13.9 million.$3.5 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. As a percentage of revenue, before fuel surcharge, operating expense and supplies remained essentially constant at 7.5% for both periods.decreased slightly to 7.3% during the six months ended June 30, 2007 compared to 7.4% during the same period in 2006.
Insurance premiums and claims, consisting primarily of premiums and deductible amounts for liability (personal injury and property damage), physical damage, and cargo damage insurance and claims, increased 34.4%4.4% to $46.1$30.9 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $34.3$29.6 million during the same period in 2005.2006. The increase is due primarily to the inclusionincrease of insurance premium and claims expenses for Arnold and Total in the amount of $9.5 million.$1.6 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. Excluding Arnold and Total amounts, insurance premiums and claims increased 6.7%decreased 0.8% to $36.6$23.8 million compared to $34.3$24.0 million during the same period in 2005.2006. This increasedecrease is due primarily to a reduction in liability claims expense partially offset by an increase in liability claims expense.physical damage claims. As a percentage of revenue, before fuel surcharge, insurance and claims increaseddecreased to 5.0%4.7% during the ninesix months ended SeptemberJune 30, 20062007, compared to 4.5%5.0% during the same period in 2005.2006. We are self-insured up to certain limits for cargo loss, physical damage, and liability. We have adopted an insurance program with higher deductible exposure to offset the industry-wide increase in insurance premium rates. Refer to "Critical Accounting Policies and Estimates—Claims Reserves and Estimates" below for our various retention levels. We maintain insurance with licensed insurance companies above amounts for which we are self-insured for cargo and liability. We accrue for pending claims, plus any incurred but not reported claims. The accruals are estimated based on our evaluation of the type and severity of individual claims and future development based on historical trends. Insurance premiums and claims expense will fluctuate based on claims experience, premium rates, and self-insurance retention levels.
Operating taxes and licenses increased 19.4%10.0% to $12.3$8.8 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $10.3$8.0 million during the same period in 2005.2006. This is primarily the result of the increase for Arnold and Total in the amount of $0.9 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. As a percentage of revenue, operating taxes and license remained essentially constant at 1.3% for both periods.
Communications and utilities decreased 10.8% to $5.8 during the six months ended June 30, 2007 compared to $6.5 million during the same period in 2006. This decrease is primarily the result of replacing leased units with purchased units. The associated expense with the purchased units is located in depreciation and amortization. This decrease is partially offset by the increase of communications and utilities amounts for Arnold and Total in the amount of $2.4 million.$0.6 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. As a percentage of revenue, operating taxesbefore fuel surcharge, communications and licenseutilities decreased to 1.3%0.9% during the six months ended June 30, 2007 compared to 1.1% during the same period in the 2006 period from 1.4% in the 2005 period.2006.
CommunicationsGeneral and utilitiesother operating increased 19.5%0.9% to $9.8$21.4 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $8.2$21.2 million during the same period in 2005.2006. This is primarily the result of the amounts for Arnold and Total in the amount of $1.9 million. As a percentage of revenue, communications and utilities remained essentially constant at 1.1% for both periods.
General and other operating decreased 4.5% to $32.0 million during the nine months ended September 30, 2006 compared to $33.5 million during the same period in 2005. The is primarily the result of the elimination of certain general and other operating expenses related to the airport-to-airport business partially offset by the inclusionincrease of general and other operating amounts for Arnold and Total in the amount of $3.9 million.$0.9 million for six months ended June 30, 2007 compared to four months ended June 30, 2006 partially offset by small reductions in several areas. As a percentage of revenue, before fuel surcharge, general and other operating decreased to 3.4% in3.2% during the 2006 period from 4.4% in the 2005 period.
Loss on sale and exit of business of $2.8 million for the ninesix months ended June 30, 2005 related2007, compared to 3.5% during the exit of the airport-to-airport business by Xpress Global Systems. Xpress Global Systems provided $15.6 million for costs related to the shutdown and received $12.8 millionsame period in cash. During 2006, the Company increased its provision for the estimated loss on liquidation of receivables from $2,025 to $2,602. See Footnote 11, “Loss on Sale and Exit of Business”.2006.
Interest expense increased 116.9%41.0% to $12.8$11.0 million during the ninesix months ended SeptemberJune 30, 20062007 compared to $5.9$7.8 million during the same period in 2005.2006. The increase is due primarily to the inclusionincrease of interest expense for Arnold and Total in the amount of $4.4$2.2 million for six months ended June 30, 2007 compared to four months ended June 30, 2006, increased debt, and higher interest rates. Interest expense is expected to increase in future periods because of the consolidation of the borrowings of Arnold and Total as of March 2006. As of September 30, 2006, we increased our debt by $152.9 million as compared to December 31, 2005. This increase is primarily due to the inclusion of Arnold and Total debt, which amounted to $107.0 million at September 30, 2006.
Minority interest of $1.0 million$10 for the ninesix months ended SeptemberJune 30, 20062007 is representative of the 20% minority shareholders interest in the net incomeloss of Arnold and Total.
The effective tax ratewas 45.8%50.0% for the ninesix months ended SeptemberJune 30, 2006.2007. The rate was higher than the federal statutory rate of 35.0%35%, primarily as a result of per diems paid to drivers at U.S. Xpress and Total which are not fully deductible for federal income tax purposes.
Primarily as a result of the factors described above, we experienced net incomeof $13.7 million during the nine months ended September 30, 2006 compared to a net income of $2.4 million during the same period in 2005.
Liquidity and Capital Resources
Our business requiresis expected to require significant capital investments.investments over the short-term and long-term. Our primary sources of liquidity at SeptemberJune 30, 20062007 were funds provided by operations, borrowing under our revolving credit facility, proceeds of our accounts receivable securitization facility, and long-term equipment debt and operating leases of revenue equipment. Our revolving credit facility has maximum available borrowings of $130$130.0 million and our accounts receivable securitization facility has maximum available borrowings, subject to eligible receivables, of $140$140.0 million. We believe that funds provided by operations, borrowings under our revolving credit facility and securitization facility, equipment installment loans and long-term equipment debt, and operating lease financing will be sufficient to fund our cash needs and anticipated capital expenditures for the next twelve months.
Although changes in economic conditions, credit and leasing markets, and our financial condition and results of operations, over time may cause fluctuations in the terms and conditions and amounts of available financing, we believe that these same sources of liquidity will be available to us over a longer-term and we, therefore, do not expect to experience significant liquidity constraints in the foreseeable future.
Cash Flows
Net cash provided by operating activities was $93.4$63.5 million and $43.9$55.5 million during the ninesix months ended SeptemberJune 30, 20062007 and 2005,2006, respectively. The increase in net cash provided by operating activities is primarily due to increased depreciation and accounts payable partially offset by decreased earnings and an increase in earnings and depreciationof accounts receivable for the ninesix months ended SeptemberJune 30, 2006,2007, as compared to the same period in 2005.2006.
Net cash used in investing activities was $126.4$40.4 million and $33.9$74.6 million during the ninesix months ended SeptemberJune 30, 20062007 and 20052006 respectively. The increasedecrease in cash used in investing activities is primarily the result of $74.2$33.8 million moreless in net additionsrevenue equipment purchases, due to property and equipment, combined with the acquisitionswinding down of Arnold and Total, and investmenta large tractor purchase commitment in Abilene2006 ahead of new engine requirements in 2007.
Net cash used in financing activities was $23.7 million during the ninesix months ended SeptemberJune 30, 2006, as2007, compared to the same period in 2005. During the nine months ended September 30, 2005, the company received $12.8$13.2 million in proceeds from the sale and exit of the airport-to-airport business.
Net cash provided by financing activities was $27.2 million during the nine months ended September 30, 2006, compared to $5.4 million during the same period in 2005.2006. The increasedecrease in cash provided by financing activities is the result of increased borrowings relatednet reduction of debt during the period due to the purchasefewer purchases of revenue equipment and fewer shares of stock being repurchased for the ninesix months ending Septemberended June 30, 20062007 as compared to the same period in 2005.2006.
Debt
On October 14, 2004, we entered intoThe Company is party to a $100.0 million$130,000 senior secured revolving credit facility and letter of credit sub-facility with a group of banks which replaced the prior $100.0 million credit facility that was set to maturewith a maturity date in March 2007.2011. The credit facility is secured by revenue equipment and certain other assets and bears interest at the base rate, as defined, plus an applicable margin of 0.0%0.00% to 0.25%, or LIBOR plus an applicable margin of .88%0.88% to 2.00%, based on ourthe Company's lease-adjusted leverage ratio.
On March 31, 2006, we amended the revolving credit facility and letter of credit sub-facility with a group of banks increasing the $100.0 million senior secured revolving credit facility to $130.0 million. The amendment did not change the applicable margin for base rate loans or LIBOR loans, nor did it modify the fees for letter of credit transactions or quarterly commitment fees on the unused portion of the loan commitment. The amendment extended the maturity date of the credit facility from October 2009 to March 2011.
At SeptemberJune 30, 2006,2007, the applicable margin was 0.0%0.25% for base rate loans and 1.25%2.00% for LIBOR loans. The credit facility also prescribes additional fees for letter of credit transactions and a quarterly commitment fee on the unused portion of the loan commitment (1.25 %(2.00% and .25%0.35%, respectively, at SeptemberJune 30, 2006)2007). At June 30, 2007, $91,036 in letters of credit was outstanding under the credit facility with $34,601 available to borrow. The credit facility is secured by substantially all assets of the Company, other than real estate and assets securing other debt of the Company.
The credit facility requires, among other things, maintenance by usthe Company of prescribed minimum amounts of consolidated tangible net worth, fixed charge and asset coverage ratios, and a leverage ratio. Subject to certain defined exceptions, itthe credit facility also restricts ourthe ability of the Company and its subsidiaries, without the approval of the lenders, to engage in certain sale-leaseback transactions, transactions with affiliates, investment transactions, acquisitions of ourthe Company’s own capital stock or the payment of dividends on such stock, future asset dispositions (except in the ordinary course of business), or other business combination transactions, and to incur liens and future indebtedness. As of SeptemberJune 30, 2006, we were2007, the Company was in compliance with the revolving credit facility covenants.
In October 2004, we entered into19
The Company is party to a $100.0 million$140,000 accounts receivable securitization facility (the "Securitization Facility"). On a revolving basis, we sellthe Company sells accounts receivable as part of a two-step securitization transaction that provides usthe Company with funding similar to a revolving credit facility. To facilitate this transaction, Xpress Receivables, LLC ("Xpress Receivables"), a bankruptcy-remote, special purpose entity, purchases accounts receivable from U.S. Xpress, Arnold, Total, and Xpress Global Systems. Xpress Receivables funds these purchases with money borrowed under the Securitization Facility through Three Pillars Funding, LLC.
On March 31, 2006, we amended the Securitization Facility, increasing the existing $100.0 million maximum thereunder to $140.0 million. Pursuant to the Securitization Facility amendment, Arnold and Total joined as additional originators, permitting Xpress Receivables to purchase accounts receivable from them in addition to U.S. Xpress and Xpress Global Systems.
The borrowings are secured by, and paid down through collections on, the accounts receivable. WeThe Company can borrow up to $140.0 million$140,000 under the Securitization Facility, subject to eligible receivables, and paypays interest on borrowings based on commercial paper interest rates, plus an applicable margin, and a commitment fee on the daily, unused portion of the Securitization Facility. The Securitization Facility is reflected as a current liability in the consolidated financial statements because its term, subject to annual renewals, expires October 11, 2007. As of June 30, 2007, the Company’s borrowings under the Securitization Facility were $20,000, with $116,961 available to borrow.
The Securitization Facility requires that certain performance ratios be maintained with respect to accounts receivable and that Xpress Receivables preserve its bankruptcy-remote nature. As of SeptemberJune 30, 2006, we were2007, the Company was in compliance with the Securitization Facility covenants.
At SeptemberJune 30, 2006,2007, we had $330.1$337.6 million of borrowings, of which $233.6$258.6 million was long-term, $49.5$59.0 million was current maturities, and $47.0$20.0 million consisted of borrowings under the Securitization Facility. We also had approximately $60.8$91.0 million in unused letters of credit. At SeptemberJune 30, 2006,2007, we had an aggregate of approximately $160.8$151.6 million of available borrowing remaining under our revolving credit facility and the Securitization Facility.
Equity
In July 2005,January 2007, the Board of Directors authorized us to repurchase up to $15.0 million of our Class A common stock. The stock could be repurchased on the open market or in privately negotiated transactions at any time until July 31, 2006.January 26, 2008. The repurchased shares may be used for issuances under our incentive stock plan or for other general corporate purposes, as the Board may determine. InNo shares were repurchased during the thirdsecond quarter of 2006, we repurchased 40,0002007.
On June 22, 2007, Max Fuller and Pat Quinn, co-founders of the Company (“Co-Founders”), announced their intention to commence a tender offer through an entity controlled by the Co-Founders, pursuant to which the Co-Founders will offer to purchase for cash any and all of the outstanding shares of Class A common stock of the Company not presently owned by the Co-Founders and certain affiliated entities at an offer price of $20.00 per share.
The tender offer price represents a premium of 44% over the $13.88 per share average reported closing price of the Company’s Class A common stock for approximately $0.9 millionthe 30 trading days ended on June 21, 2007, the last trading day before the announcement of the tender offer, and a 41% premium over the $14.23 per share reported closing price on June 21, 2007. The announcement stated that the tender offer is expected to be conditioned on, among other things, there having been validly tendered and not withdrawn prior to July 31, 2006.the expiration date of the tender offer at least that number of shares of the Company’s common stock currently owned by the Co-Founders and certain affiliated entities, represent at least 90% of all the Company’s Class A and Class B common stock then outstanding, and (2) that represent at least a majority of the total number of shares of the Company’s Class A and Class B common stock outstanding on such date that are not held by Co-Founders, their affiliates, or the directors and executive officers of the Company. The announcement further stated that, promptly following the completion of the tender offer, the Co-Founders expect to cause a "short form" merger in which they would acquire at $20.00 per share any Class A common stock of the Company that was not acquired in the tender offer.
The Co-Founders have advised our board of directors that they and certain of their affiliated entities do not intend to tender their shares in the offer, nor would they consider any offer to purchase their shares. Currently, the Co-Founders and their affiliated entities together beneficially own approximately 28% of the outstanding Class A common stock of the Company, as well as 100% of the Company’s outstanding Class B common stock, for an aggregate of approximately 42% of the outstanding Class A and Class B common shares. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to two votes per share. Accordingly, the shares owned by the Co-Founders and their affiliated entities represent over 50% of the voting power of all of the Company’s outstanding common stock. Co-Founders founded the Company in 1985 and serve as Co-Chairmen of the Board. Mr. Fuller is the Company’s Chief Executive Officer and Mr. Quinn is the Company’s President.
In response to this June 22, 2007 announcement, our board of directors appointed a special committee comprised solely of independent directors to evaluate the offer. The special committee has engaged an independent legal adviser and an independent financial adviser to assist the special committee in its review. The Co-Founders also informed us that parties have been proceeding diligently with the preparation of offer materials, definitive financing arrangements, and regulatory filings.
Business Acquisitions
In January of 2007, the fourth quarterCompany acquired certain assets of 2004, wea truckload carrier for a purchase price of $5.6 million in cash. The assets acquired 49%of approximately $4.8 million related primarily to revenue equipment and other assets. The excess of the outstanding stock of ATS Acquisition Holding Co. ("ATS"),purchase price over the parent company of Arnold. In the second quarter of 2005, we acquired 49%fair value of the outstanding stockassets acquired was recorded as goodwill. The purchase price allocation is preliminary as the Company is still reviewing the valuations of Transportation Investments Inc. ("TII"),certain assets.
In June 2007, the parent companyCompany indirectly acquired a 40% interest in C&C Trucking of Total, and certain affiliated companies (together with TII,Duncan (“C&C Trucking”) for $739. Under the "Total Companies"). Certain members of Arnold’s current management team controlledagreement, the Company can acquire the remaining 51%60% interest as well as a majority of the board of directors of ATS, and certain members of the Total management team controlled the remaining 51% interest and a majority of the boards of directors of each of the Total Companies.from 2008 to 2012. We did not guarantee any of ATS' or the Total Companies' debt and did not have any obligation to provide funding, services, or assets. We accounted for ATS' and the Total Companies'C&C Trucking operating results using the equity method of accounting.
On February 28, 2006, we increased our ownership interest in both ATS and the Total Companies for approximately $7.9 million in cash. In the transactions, we increased our holdings to 80% of the outstanding stock of ATS and the Total Companies through the purchase of stock owned by the current management teams of Arnold and Total. The Arnold and Total management teams continue to hold 20% of the outstanding stock of ATS and the Total Companies, respectively. In connection with these transactions, ATS and the Total Companies became parties to, and guarantors of, our revolving credit facility.
In connection with increasing our investments in ATS and the Total Companies, we issued an aggregate of 40,466 shares of restricted stock to key employees of those companies under our 2002 Stock Incentive Plan. The restricted shares vest over time contingent upon continued employment. We recorded compensation expense in accordance with SFAS 123R in relation to these shares. Commencing March 1, 2006, we have accounted for our investments in ATS and the Total Companies on a consolidated basis.
In the transactions, we also obtained the right to elect a majority of the members of the board of directors of ATS. We retain options to purchase the remaining 20% of each of ATS and the Total Companies through December 8, 2007 and October 1, 2008, respectively. If we fail to exercise such options prior to such dates, the members of the current Arnold and Total management teams will have similar options to repurchase our interests in ATS and the Total Companies.
Equity Investment
In August 2006, the Company acquired a 49% interest in Abilene Motor Express, Inc. (“Abilene”) for approximately $3.0 million. Certain members of the Abilene management team control the remaining 51% interest and a majority of the board of directors. We have not guaranteed any of Abilene’s debt and have no obligation to provide funding, services or assets. Under the agreement with the Abilene management team, the Company has a four-year option to acquire 100% of Abilene by purchasing management’s interest at a specified price plus an agreed upon annual return, and the Abilene management team has the right to acquire the Abilene stock held by the Company in the years following the expiration of the four-year Company option. We have accounted for Abilene’s operating results using the equity method of accounting.
In connection with this investment, the Company issued an aggregate of 6,000 shares of restricted stock to key employees of Abilene under the Company's 2002 Stock Incentive Plan. The restricted shares vest over time contingent upon continued employment.
Off-Balance Sheet Arrangements
We use non-cancelable operating leases as a source of financing for revenue and service equipment, office and terminal facilities, automobiles, and airplanes. In making the decision to finance through long-term debt or by entering into non-cancelable lease agreements, we consider interest rates, capital requirements, and the tax advantages of leasing versus owning. At SeptemberJune 30, 2006,2007, a substantial portion of our off-balance sheet arrangements related to non-cancelable leases for revenue equipment and office and terminal facilities with termination dates ranging from October 2006July 2007 to August 2013.March 2014. Lease payments on office and terminal facilities, automobiles, and airplanes are included in general and other operating expenses, lease payments on service equipment are included in operating expense and supplies, and lease payments on revenue equipment are included in vehicle rents in the consolidated statements of operations, respectively. Rental expense related to our off-balance sheet arrangements was $20.1$26.9 million for the three months ended SeptemberJune 30, 2006.2007. The remaining lease obligations as of SeptemberJune 30, 20062007 were $248.6$284.5 million, with $84.4$96.9 million due in the next twelve months.
Certain equipment leases provide for guarantees by us of a portion of the residual amount under certain circumstances at the end of the lease term. The maximum potential amount of future payments (undiscounted) under these guarantees is approximately $32.2$30.9 million at SeptemberJune 30, 2006.2007. The residual value of a portion of the leased revenue equipment is covered by repurchase or trade agreements in principle between the equipment manufacturer and us. Management estimates the fair value of the guaranteed residual values for leased revenue equipment to be immaterial. Accordingly, we have no guaranteed liabilities accrued in the accompanying consolidated balance sheets.
Cash Requirements
The following table presents our outstanding contractual obligations at September 30, 2006, excluding letters of credit of $60.8 million. The letters of credit are maintained primarily to support our insurance program and are renewed on an annual basis.
| | Payments Due By Period (Dollars in thousands) | |
Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years | |
Securitization facility(1) | $ | 47,000 | $ | 47,000 | $ | - | $ | - | $ | - | |
Long-term debt, including interest (1) | | 349,050 | | 63,391 | | 116,351 | | 101,260 | | 68,048 | |
Capital leases, including interest (1) | | 1,950 | | 1,395 | | 555 | | - | | - | |
Operating leases - revenue equipment (2) | | 226,725 | | 74,694 | | 107,883 | | 34,285 | | 9,863 | |
Operating leases - other (3) | | 21,893 | | 9,720 | | 10,935 | | 1,234 | | 4 | |
Purchase obligations (4) | | 358,875 | | 348,520 | | 10,355 | | - | | - | |
Total Contractual Cash Obligations | $ | 1,005,493 | $ | 544,720 | $ | 246,079 | $ | 136,779 | $ | 77,915 | |
(1)
| Represents principal and interest payments owed on revenue equipment installment notes, mortgage notes payable and capital lease obligations at September 30, 2006. The credit facility does not require scheduled principal payments. Approximately 18% of our debt is financed with variable interest rates. In determining future contractual interest obligations for variable rate debt, the interest rate in place at September 30, 2006 was utilized. The table assumes long-term debt is held to maturity. Refer to footnote 9, "Long-Term Debt," and footnote 10, "Accounts Receivable Securitization," in the accompanying consolidated financial statements for further information. |
(2)
| Represents future obligations under operating leases for over-the-road tractors, day-cabs, and trailers. The amounts included are consistent with disclosures required under SFAS No. 13, Accounting for Leases ("SFAS 13"). Substantially all lease agreements for revenue equipment have fixed payment terms based on the passage of time. The tractor lease agreements generally stipulate maximum miles and provide for mileage penalties for excess miles. Lease terms for tractors and trailers range from 36 to 54 months and 60 to 84 months, respectively. Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements" for further information. |
(3)
| Represents future obligations under operating leases for buildings, forklifts, automobiles, computer equipment, and airplanes. The amounts included are consistent with disclosures required under SFAS 13. Substantially all lease agreements, with the exception of building leases, have fixed payment terms based on the passage of time. Lease terms range from 1 to 13 years. |
(4)
| Represents purchase obligations for revenue and communications equipment and development of terminals. The revenue equipment purchase obligations are cancelable, subject to certain adjustments in the underlying obligations and benefits. Refer to footnote 5, "Commitments and Contingencies," in the accompanying consolidated financial statements for disclosure of our purchase commitments. |
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with generally accepted accounting principles. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Recognition of Revenue
We generally recognize revenue and direct costs when shipments are completed. Certain revenue of Xpress Global Systems, representing approximately 6% of consolidated revenues for the ninesix months ended SeptemberJune 30, 2006,2007, is recognized upon manifest, that is, the time when the trailer of the independent carrier is loaded, sealed, and ready to leave the dock. Estimated expenses are recorded simultaneoussimultaneously with the recognition of revenue. Had revenue been recognized using another method, such as completed shipment, the impact would have been insignificant to our consolidated financial statements.
Income Taxes
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 that are expected to apply to taxable income in years in which the temporary differences are expected to be reversed. When it is more likely than not that all or some portion of specific deferred tax assets, such as state tax credit carry-forwards or state net operating loss carry-forwards, will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined to be not realizable. A valuation allowance for deferred tax assets of $178 has not been deemed necessary due to our profitable operations on both a consolidatedat June 30, 2007 and separate legal entity basis. However, ifDecember 31, 2006. If the facts or financial results were to change, impacting the likelihood of the realization of the deferred tax assets, we would use our judgment to determine the amount of the valuation allowance required at that time for that period.
The determination of the combined tax rate used to calculate our provision for income taxes for both current and deferred income taxes also requires significant judgment by management. SFAS No. 109, Accounting for Income Taxes, requires that the net deferred tax asset or liability be valued using enacted tax rates that we believe will be in effect when these temporary differences reverse. We use the combined tax rates in effect at the time the financial statements are prepared since no better information is available. If changes in the federal statutory rate or significant changes in the statutory state and local tax rates occur prior to or during the reversal of these items or if our filing obligations were to change materially, this could change the combined rate and, by extension, our provision for income taxes.
Depreciation
Property and equipment are carried at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets (net of estimated salvage value or trade-in value). We generally use estimated useful lives of 4-5 years and 7-10 years for tractors and trailers, respectively, with estimated salvage values ranging from 25% - 50% of the capitalized cost. The depreciable lives of our revenue equipment represent the estimated usage period of the equipment, which is generally substantially less than the economic lives. The residual value of a substantial portion our equipment is covered by re-purchase or trade agreements between us and the equipment manufacturer.
Periodically, we evaluate the useful lives and salvage values of our revenue equipment and other long-lived assets based upon, but not limited to, our experience with similar assets, including gains or losses upon dispositions of such assets, conditions in the used equipment market, and prevailing industry practices. Changes in useful lives or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material impact on financial results. Further, if our equipment manufacturer does not perform under the terms of the agreements for guaranteed trade-in values, such non-performance could have a materially negative impact on financial results.
Goodwill
The excess of the consideration paid over the estimated fair value of identifiable net assets acquired has been recorded as goodwill.
Effective January 1, 2002, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, ("SFAS 142"). As required by the provisions of SFAS 142, we test goodwill for impairment using a two-step process, based on the reporting unit fair value. The first step is a screen for potential impairment, while the second step measures impairment, if any. We completed the required impairment tests of goodwill and noted no impairment of goodwill in any years.
Goodwill impairment tests are highly subjective. Such tests include estimating the fair value of our reporting units. As required by SFAS 142, we compared the estimated fair value of the reporting units with their respective carrying amounts including goodwill. We define a reporting unit as an operating segment. Under SFAS 142, fair value refers to the amount for which the entire reporting unit could be bought or sold. Our methods for estimating reporting unit values include asset and liability fair values and other valuation techniques, such as discounted cash flows and multiples of earnings, or other financial measures. Each of these methods involve significant estimates and assumptions, including estimates of future financial performance and the selection of appropriate discount rates and valuation multiples.
Claims Reserves and Estimates
Claims reserves consist of estimates of cargo loss, physical damage, liability (personal injury and property damage), employee medical expenses, and workers’ compensation claims within our established retention levels. Claims in excess of retention levels are generally covered by insurance in amounts we consider adequate. Claims accruals represent pending claims including estimates of adverse development of known claims, plus an estimated liability for incurred but not reported claims. Accruals for cargo loss, physical damage, liability, and workers’ compensation claims are estimated based on our evaluation of the type and severity of individual claims and historical information, primarily our own claims experience, along with assumptions about future events combined with the assistance of independent actuaries in the case of workers’ compensation and liability. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near future.
Workers’ compensation and liability claims are particularly subject to a significant degree of uncertainty due to the potential for growth and development of the claims over time. Claims and insurance reserves related to workers’ compensation and liability are estimated by an independent third-party actuary, and we refer to these estimates in establishing the reserve. Liability reserves are estimated based on historical experience and trends, the type and severity of individual claims, and assumptions about future costs. Further, in establishing the workers’ compensation and liability reserves, we must take into account and estimate various factors, including, but not limited to, assumptions concerning the nature and severity of the claim, the effect of the jurisdiction on any award or settlement, the length of time until ultimate resolution, inflation rates in health care and in general, interest rates, legal expenses, and other factors. Our actual experience may be different than our estimates, sometimes significantly. Additionally, changes in assumptions made in actuarial studies could potentially have a material effect on the provision for workers’ compensation and liability claims.
We have experienced significant increases in insurance premiums and claims expense since September 2001, primarily related to workers’ compensation and liability insurance. The increases have resulted from a significant increase in excess insurance premiums, adverse development in prior year losses, unfavorable accident experience, and an increase in retention levels related to liability and workers’ compensation claims. Our insurance and claims expense varies based on the frequency and severity of claims, the premium expense, and the level of self-insured retention. Prior to September 1, 2006, the retention levels for liability insurance at U.S. Xpress, Arnold and Total were $2.0 million, $1.0 million and $2.0 million, respectively. Prior to September 1, 2006, the retention levels for workers’ compensation at U.S. Xpress, Arnold, and Total were $0.5 million, $0.8 million and $0.5 million, respectively. Beginning September 1, 2006, the retention levels for liability and workers’ compensation for all companies is $3.0 million and $1.0 million respectively.
Accounting for Business Combinations
Our consolidated financial statements are inclusive of our accounts and the accounts of majority-owned subsidiaries. We consolidate all of majority-owned subsidiaries and record a minority interest representing the remaining shares held by the minority shareholders. All transactions and balances with and related to our majority owned subsidiaries have been eliminated.
In accordance with business combination accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values. We engaged a third-party appraisal firm to assist management in determining the fair values of certain assets acquired. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates, or actual results.
For business combinations, we must record deferred taxes relating to the book versus tax basis of acquired assets and liabilities. Generally, such business combinations result in deferred tax liabilities as the book values are reflected at fair values where as the tax basis is carried over from the acquired company. Such deferred taxes are initially estimated based on preliminary information and are subject to change as valuations and tax returns are finalized.
Seasonality
In the trucking industry, results of operations generally show a seasonal pattern as customers increase shipments prior to and reduce shipments during and after the winter holiday season. Additionally, shipments can be adversely impacted by winter weather conditions. Our operating expenses have historically been higher in the winter months due primarily to decreased fuel efficiency, increased maintenance costs of revenue equipment in colder weather and increased insurance and claims costs due to adverse winter weather conditions. Revenue can also be affected by bad weather and holidays, since revenue is directly related to available working days of shippers.
Interest Rate Risk
Our market risk is affected by changes in interest rates. Historically, we have used a combination of fixed rate and variable rate obligations to manage our interest rate exposure. Fixed interest rate obligations expose us to the risk that interest rates might fall. Variable interest rate obligations expose us to the risk that interest rates might rise.
We are exposed to variable interest rate risk principally from the Securitization Facility and our revolving credit facility. We are exposed to fixed interest rate risk principally from equipment notes and mortgages. At SeptemberJune 30, 2006,2007, we had borrowings totaling $330.1$337.6 million, comprising $59.2$31.6 million of variable rate borrowings and $270.9$306.0 million of fixed rate borrowings. Holding other variables constant (such as borrowing levels), the earnings impact of a one-percentage point increase/decrease in interest rates would not have a material impact on our consolidated statements of operations.
Commodity Price Risk
Fuel is one of our largest expenditures. The price and availability of diesel fuel fluctuates due to changes in production, seasonality, and other market factors generally outside our control. Many of our customer contracts contain fuel surcharge provisions to mitigate increases in the cost of fuel. Fuel surcharges to customers do not fully recover all of fuel increases due to engine idle time and out-of-route and empty miles not billable to the customer.
As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our controls and procedures were effective as of the end of the period covered by this report. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected or that are reasonably likely to materially affect our internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer as appropriate, to allow timely decisions regarding disclosures.
We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
U.S. XPRESS ENTERPRISES, INC.
While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our Annual Report on Form 10-K for the year ended December 31, 20052006 (“20052006 Form 10-K”), in the section entitled “Item 1A. Risk Factors,” describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. We do not believe there have been any material changesIn addition to the risk factors set forth on our Form 10-K, we believe that the following additional issues, uncertainties, and risks, factors previously disclosedshould be considered in evaluating our business and growth outlook:
We operate in a highly regulated industry and changes in regulations could have a materially adverse effect on our business.
Our operations are regulated and licensed by various government agencies, including the Department of Transportation ("DOT"). The DOT, through the Federal Motor Carrier Safety Administration, or FMCSA, imposes safety and fitness regulations on us and our drivers. New rules that limit driver hours-of-service were adopted effective January 4, 2004, and then modified effective October 1, 2005 (the "2005 Rules"). On July 24, 2007, a federal appeals court vacated portions of the 2005 Rules. Two of the key portions that were vacated include the expansion of the driving day from 10 hours to 11 hours, and the "34 hour restart" requirement that drivers must have a break of at least 34 consecutive hours during each week. The court's decision does not go into effect until September 14, 2007, unless the court orders otherwise, and the FMCSA has until such date to request a hearing on the matter. We understand that the FMCSA is currently analyzing the court's decision, and we are unable to predict whether the order will be appealed or the outcome of any such appeal.
If the court's decision becomes effective, it may have varying effects, in that reducing driving time to 10 hours daily may reduce productivity in some lanes, while eliminating the 34-hour restart may enhance productivity in certain instances. On the whole, however, we would expect the court's decision to reduce productivity and cause some loss of efficiency as our drivers are retrained and some shipping lanes may need to be reconfigured. Additionally, we are unable to predict the effect of any new rules that might be proposed, but any such proposed rules could increase costs in our 2005 Form 10-K.industry or decrease productivity.
The number of shares repurchased and the effects of repurchasing the shares may have an adverse effect on debt, equity, and liquidity of the Company.
Our board of directors has authorized various stock repurchase plans over the years. In January 2007, our board of directors authorized the Company to repurchase up to $15.0 million of Class A Shares on the open market or in privately negotiated transactions at any time until January 26, 2008, unless further extended by our Board (the "Plan"). During the first quarter ended March 31, 2007, the Company purchased 200,000 Class A Shares at an average price per share of $18.59. While the Company did not repurchase any shares during the second quarter ended June 30, 2007, $11,282,399 worth of shares may yet be purchased under the Plan. As any future repurchases would likely be funded from cash flow from operations and/or possible borrowings under the Company’s credit arrangement, such repurchasing of shares could reduce the amount of cash on hand or increase debt, and reduce the Company’s liquidity.
The current trading price for our Class A common stock is above the trading price prior to the Mountain Lake Acquisition Company (“MLAC“) announcement of the contemplated "going private" transaction and above the priceat which the stockmight otherwise trade. There can be no assurance such transaction will close.
According to the announcement by Messrs. Quinn and Fuller on behalf of their company, MLAC, the offer, when and if made, is a “going-private” transaction in which MLAC would obtain 100% ownership of the Company by purchasing all unaffiliated shares for cash at $20.00 per share. This price is substantially higher than the market price existing before the announcement of the proposed tender offer and above the priceat whichthe stock might otherwise trade. The announcement noted that the proposed tender offer is conditioned on, among other things, MLAC’s receipt of proceeds under its financing commitment from SunTrust Bank and SunTrust Capital Markets, Inc., there being validly tendered and not withdrawn a number of shares of Class A common stock constituting a majority of the outstanding shares of Class A common stock not currently owned by the co-founders or their related entities, and there being validly tendered and not withdrawn a number of shares of Class A common stock that, together with shares already owned by the co-founders and their related entities, equals ninety percent (90%) of the issued and outstanding shares of Class A common stock and Class B common stock combined. In addition to several conditions to closing, the financial markets have recently experienced volatility, including tightened credit conditions, which could impact the timing and success of the proposed tender offer. If the proposed tender offer is not completed because the aforementioned or other conditions are not satisfied, or the transaction otherwise fails to close, the trading price of our Class A common stock could decrease to a much lower level.
Any statements by the Company are based solely on repetition of information provided by MLAC in its public filings. The Company has not diligenced MLAC and strongly recommends that the Company's stockholders read the following documents when filed: (i) MLAC’s tender offer statement on Schedule TO and (ii) the Company's solicitation/recommendation statement on Schedule 14D-9 regarding the proposed tender offer when they become available because they will contain important information. Stockholders may obtain a free copy of these materials, which will be filed with the Securities and Exchange Commission, at the Securities and Exchange Commission's web site atwww.sec.gov<http://www.sec.gov/>. Stockholders also may obtain, without charge, a copy of the Company's solicitation/recommendation statement, when available, by directing requests to Debbie Massengale at 423-510-3314.
Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |
April 1, 2007 – April 30, 2007 | | | - | | | $ | - | | | | - | | | $ | 11,282,399 | |
May1, 2007 – May 31, 2007 | | | - | | | | - | | | | - | | | | 11,282,399 | |
June 1, 2007 – June 30, 2007 | | | - | | | | - | | | | - | | | | 11,282,399 | |
Total | | | - | | | $ | - | | | | - | | | $ | 11,282,399 | |
(1) | In January, 2007, our Board of Directors authorized us to repurchase up to $15.0 million of our Class A common stock on the open market or in privately negotiated transactions. This authorization has been approved by the lending group on the credit facility for the same amount. The stock may be repurchased at any time until January 26, 2008, unless further extended by our Board. |
The annual meeting of stockholders of U.S. Xpress Enterprises, Inc. was held on May 11, 2007. Proxies for the meeting were solicited by the Board of Directors pursuant to Section 14(a) of the Exchange Act, and there was no solicitation in opposition to the Board’s proposals.
The stockholders voted on the following matters with the results indicated:
(1) Election of Directors
The stockholders elected each of the five director nominees, as listed in the Definitive Proxy Statement filed with the Securities and Exchange Commission on April 11, 2007 (File No. 0-24806).
The voting tabulation on the election of directors was as follows:
| | Votes FOR | | | Votes WITHHELD | | | ABSTENTIONS | |
Patrick E. Quinn | | | 16,297,346 | | | | 495,495 | | | | 0 | |
Max L. Fuller | | | 16,368,714 | | | | 424,127 | | | | 0 | |
James E. Hall | | | 16,511,715 | | | | 281,126 | | | | 0 | |
John W. Murrey, III | | | 16,429,848 | | | | 362,993 | | | | 0 | |
Robert J. Sudderth, Jr. | | | 16,511,015 | | | | 281,826 | | | | 0 | |
Effective August 9, 2007, the Company approved entering into Indemnification Agreements with each of Max L. Fuller, Patrick E. Quinn, Robert J. Sudderth, James E. Hall, and John W. Murrey, III (individually, a "Director," collectively, the “Directors”).
The Indemnification Agreements provide, among other terms, that: (i) the Company shall indemnify and hold harmless the Director, to the fullest extent permitted by law, against any and all liabilities and assessments arising out of or related to any threatened, pending, or completed action, suit, proceeding, inquiry, or investigation, whether civil, criminal, administrative, or other (an “Action”), including, but not limited to, judgments, fines, penalties, and amounts paid in settlement (whether with or without court approval), and any interest, assessments, excise taxes, or other charges paid or payable in connection with or in respect of any of the foregoing (a “Liability”), incurred by the Director and arising out of his status as a director or member of a committee of the Company’s Board of Directors, or by reason of anything done or not done by the Director in such capacities; (ii) the Company shall also indemnify and hold harmless the Director, to the full extent permitted by law, against any and all attorneys' fees and other costs, expenses, and obligations, and any interest, assessments, excise taxes, or other charges paid or payable in connection with or in respect of any of the foregoing (an “Expense”) arising out of or relating to any Action; (iii) the Company shall not be liable under the Indemnification Agreements for payment of any Liability or Expense incurred by the Director if the Director has not met the standard of conduct for indemnification set forth in Section 78.7502 (or any statutes cross-referenced therein) of the Nevada Revised Statutes; (iv) if the Director is entitled under this Agreement to payment for some or a portion of any Liability or Expense relating to an Action, but not for the total amount thereof, the Company shall pay the Director for the portion thereof to which he is entitled; (v) subject to certain limitations, the Company will advance all Expenses incurred by the Director in connection with any Action; (vi) the indemnification provided by the Indemnification Agreements shall be in addition to any other right which the Director may have pursuant to any other agreement, any resolution of the Company’s Board of Directors, any resolution of the Company’s stockholders, any provision of the Company’s Restated Articles of Incorporation or Restated Bylaws, or any statute or rule of law providing for indemnification; and (vii) the Company will establish an escrow for the benefit of all of the Directors by depositing into escrow an amount in cash equal to $250,000.00 for the payment of sums payable by the Company under the Indemnification Agreements and to cover certain deductible amounts payable under the Company's policy of directors’ and officers’ liability insurance. The indemnification provided under the Indemnification Agreements shall continue for any action taken while serving in an indemnified capacity even though the Director may have ceased to serve as a director.
(1) | 3.1 | Restated Articles of Incorporation of the CompanyCompany. |
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(2) | 3.2 | Restated Bylaws of the CompanyCompany. |
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(1) | 4.1 | Restated Articles of Incorporation of the Company filed as Exhibit 3.1 to this report and incorporated herein by reference |
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(2) | 4.2 | Restated Bylaws of the Company filed as Exhibit 3.2 to this report and incorporated herein by referencereference. |
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(1) | 4.3 | Agreement of Right of First Refusal with regard to Class B Shares of the Company dated May 11, 1994, by and between Max L. Fuller and Patrick E. QuinnQuinn. |
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(3) | 10.1 | Employment Agreement, dated June 20, 2007, by and between Arnold Transportation Services, Inc., a subsidiary of U.S. Xpress Enterprises, Inc., and Michael S. Walters. |
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(1) | Incorporated by reference to the Company's Registration Statement on Form S-1 filed May 20, 1994 (File No. 33-79208). |
(2) | Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed November 9, 2004 (File No. 0-24806). |
(3) | Incorporated by reference to the Company's Current Report on Form 8-K filed June 21, 2007 (File No. 0-24806). |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| U.S. XPRESS ENTERPRISES, INC. |
| (Registrant) |
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Date: NovemberAugust 9, 2007 9, 2006 | By: | /s/Ray M. Harlin |
| | Ray M. Harlin |
| | Chief Financial Officer |