US XPRESS ENTERPRISES INC - Quarter Report: 2006 September (Form 10-Q)

Quarter Ended 9/30/2006 10-Q

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 September 30, 2006

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 No o

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 filer o

Accelerated filer x

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of October 31, 2006, 12,262,450 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.

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U.S. XPRESS ENTERPRISES, INC.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	PAGE NO.

Item 1.	Financial Statements

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005 (Unaudited)	3

	Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (Unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	26

Item 6.	Exhibits	26

	SIGNATURES	27

⁽¹⁾

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PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

U.S. XPRESS ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006		2005
Operating Revenue:
Revenue, before fuel surcharge	$	334,815		$	262,623		$	929,257	$	763,605
Fuel surcharge		61,768			34,617			156,497		82,663
Total operating revenue		396,583			297,240			1,085,754		846,268

Operating Expenses:
Salaries, wages and benefits		129,700			100,756			359,695		295,928
Fuel and fuel taxes		90,395			60,680			245,928		161,790
Vehicle rents		18,441			17,140			56,172		51,608
Depreciation and amortization, net of gain on sale		16,123			12,015			43,792		34,545
Purchased transportation		62,287			49,041			170,556		147,130
Operating expense and supplies		25,166			18,524			69,267		57,048
Insurance premiums and claims		16,556			12,756			46,109		34,329
Operating taxes and licenses		4,338			3,614			12,329		10,348
Communications and utilities		3,313			2,600			9,791		8,203
General and other operating		10,853			10,625			32,016		33,492
Loss on sale and exit of business		177			-			577		2,787
Total operating expenses		377,349			287,751			1,046,232		837,208

Income from Operations		19,234			9,489			39,522		9,060

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	)
Minority interest		508			-			1,011		-
		5,353			1,514			14,204		4,249

Income before income taxes		13,881			7,975			25,318		4,811

Income tax provision		6,609			3,976			11,587		2,457

Net Income	$	7,272		$	3,999		$	13,731	$	2,354

Earnings Per Share - basic	$	0.48		$	0.25		$	0.90	$	0.15
Weighted average shares - basic		15,314			15,908			15,320		16,117
Earnings Per Share - diluted	$	0.47		$	0.25		$	0.88	$	0.14
Weighted average shares - diluted		15,599			15,983			15,578		16,286

(See Accompanying Notes to Consolidated Financial Statements)

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U.S. XPRESS ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

Assets		September 30, 2006			December 31, 2005
		(Unaudited)
Current Assets:
Cash and cash equivalents	$	3,687		$	9,488
Customer receivables, net of allowance		177,763			140,263
Other receivables		12,338			14,552
Prepaid insurance and licenses		11,556			14,701
Operating and installation supplies		5,365			3,693
Deferred income taxes		12,603			9,046
Other current assets		11,863			11,227
Total current assets		235,175			202,970

Property and Equipment, at cost:
Land and buildings		69,121			53,129
Revenue and service equipment		498,069			319,118
Furniture and equipment		36,288			31,006
Leasehold improvements		29,091			25,223
Computer software		38,107			31,620
		670,676			460,096
Less accumulated depreciation and amortization		(169,394	)		(153,275	)
Net property and equipment		501,282			306,821

Other Assets:
Goodwill, net		91,051			72,143
Other		25,388			25,450
Total other assets		116,439			97,593

Total Assets	$	852,896		$	607,384

(See Accompanying Notes to Consolidated Financial Statements)

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U.S. XPRESS ENTERPRISES, INC. AND SUBSIDIARIES

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

Long-Term Debt, net of current maturities		233,586			115,044

Deferred Income Taxes		90,499			54,618

Other Long-Term Liabilities		3,161			2,499

Claims and Insurance Accruals, long-term		42,710			37,965

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

(See Accompanying Notes to Consolidated Financial Statements)

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U.S. XPRESS ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
		2006			2005
Cash Flows from Operating Activities:
Net income	$	13,731		$	2,354
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax provision		5,794			1,228
Tax benefit realized from stock options		(161	)		704
Provision for losses on receivables		1,163			1,967
Depreciation and amortization		46,370			36,957
Stock-based compensation expense		549			21
Gain on sale of equipment		(2,578	)		(2,413	)
Loss on sale and exit of business		577			2,787
Minority interest		1,011			-
Equity in loss (income) of affiliated companies		427			(1,808	)
Change in operating assets and liabilities, net of acquisitions:
Receivables		27			(3,974	)
Prepaid insurance and licenses		5,846			4,563
Operating and installation supplies		(129	)		1,421
Other assets		2,806			(5,473	)
Accounts payable and other accrued liabilities		13,871			4,013
Accrued wages and benefits		4,123			1,521
Net cash provided by operating activities		93,427			43,868
Cash Flows from Investing Activities:
Payments for purchase of property and equipment		(166,700	)		(83,308	)
Proceeds from sales of property and equipment		50,051			40,883
Repayment of notes receivable from stockholders		-			30
Acquisition of business, net of cash acquired		(6,806	)		(327	)
Investment in affiliate company		(2,965	)		(3,975	)
Proceeds from sale and exit of airport-to-airport business		-			12,750
Net cash used in investing activities		(126,420	)		(33,947	)
Cash Flows from Financing Activities:
Net borrowings on line of credit		1,500			45,300
Borrowings under long-term debt		77,312			26,575
Payments of long-term debt, net		(43,419	)		(50,595	)
Additions to deferred financing costs		(613	)		-
Tax benefit realized from stock options		161			-
Book overdraft		(6,174	)		(5,010	)
Purchase of Class A common stock		(2,472	)		(11,914	)
Proceeds from issuance of common stock		179			55
Proceeds from exercise of stock options		718			966
Net cash provided by financing activities		27,192			5,377
Net (Decrease) Increase in Cash and Cash Equivalents		(5,801	)		15,298
Cash and Cash Equivalents, beginning of period		9,488			66
Cash and Cash Equivalents, end of period	$	3,687		$	15,364
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	12,382		$	4,564
Cash paid during the period for income taxes	$	12,334		$	577

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U.S. XPRESS ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

1. 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 nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. 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).

2. Organization and Operations

The Company provides transportation services through two business segments: (i) truckload, comprised of U.S. Xpress, Inc. ("U.S. Xpress"), Arnold Transportation, Inc. ("Arnold"), and Total Transportation of Mississippi LLC ("Total," and, collectively with U.S. Xpress and Arnold, "Truckload"); and (ii) Xpress Global Systems, Inc. ("Xpress Global 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 to the floorcovering industry.

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,
		2006		2005		2006		2005
Net Income	$	7,272	$	3,999	$	13,731	$	2,354
Denominator:
Weighted average common shares outstanding (in thousands)		15,314		15,908		15,320		16,117
Equivalent shares issuable upon exercise of stock options and conversion of unvested restricted stock (in thousands)		285		75		258		169
Diluted shares (in thousands)		15,599		15,983		15,578		16,286
Earnings per share:
Basic	$	.48	$	.25	$	.90	$	.15
Diluted	$	.47	$	.25	$	.88	$	.14

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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:

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		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.

5. Commitments and Contingencies

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.

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The Company had letters of credit of $60,775 outstanding at September 30, 2006. 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. 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. Business Acquisitions

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.

On February 28, 2006, the Company increased its ownership interest in both ATS and the Total Companies for approximately $7.9 million in cash. In the transactions, the Company increased its 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, the Company's revolving credit facility.

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 time 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 is accounted for under the rules of FASB Statement No. 141, Business Combinations. The Company’s investment to date in the above mentioned companies totals $21.1 million. The allocation of the purchase cost consisted of $182.7 million in assets, of which $120.1 million is property, plant and equipment, and $180.5 million in liabilities, of which $118.5 million is current and long-term debt. Currently, $18.9 million of this investment has been allocated to goodwill. The allocation of the investment is preliminary as the Company is still reviewing the valuations of certain assets.

The primary reasons for the acquisitions and the principal factors that contributed to the recognition of goodwill are as follows:

·	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 September 30, 2006 and 2005 had the acquisitions 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

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In the transactions, the Company also obtained the right to elect a majority of the members of the board of directors of ATS and Total Companies. 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. Equity Investments

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 subsequent four years following the expiration of the four-year USX 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 under its 2002 Stock Incentive Plan. The restricted shares vest over time contingent upon continued employment.

8. 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 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 provision on the consolidated statements of operations for the three months ended September 30, 2006 and 2005, respectively, consists of net interest expense of $4,977 and $2,071, equity in income of affiliated companies of $132 and $557 and minority interest of $508 and $0.

The difference in consolidated operating income, as shown above, and consolidated income before income tax provision on the consolidated statements of operations for the nine months ended September 30, 2006 and 2005, respectively, consists of net interest expense of $12,766 and $5,856, early extinguishment of debt of $0 and $201, equity in loss (income) of affiliated companies of $427 and $(1,808), and minority interest of $1,011 and $0.

9. Long-Term Debt

Long-term debt at September 30, 2006 and December 31, 2005 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

On October 14, 2004, the Company entered into a $100,000 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 mature in March 2007. 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 September 30, 2006, the applicable margin was 0.00% for base rate loans and 1.25% 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 % and .25%, respectively, at September 30, 2006).

At September 30, 2006, $60,775 in letters of credit were outstanding under the credit facility with $67,825 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 September 30, 2006, the Company was in compliance with the credit facility covenants.

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10. Accounts Receivable Securitization

In October 2004, the Company entered into a $100,000 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 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 September 30, 2006, the Company’s borrowings under the Securitization Facility were $47,000, with $93,000 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 September 30, 2006, the Company was in compliance with the Securitization Facility covenants.

11. Loss on Sale and Exit of Business

On May 31, 2005, Xpress Global Systems exited the 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 September 30, 2006.

	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

⁽¹⁾	The component of the minimum contractual amounts liability and future lease commitments liability represents interest accretion as of September 30, 2006.

For the three and nine months ending September 30, 2006, 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, FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements 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. The Company is currently evaluating the impact of this standard on the Consolidated Financial Statements.

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13. Related Party Transaction

The two principal stockholders of the Company own 100% of the outstanding stock of Innovative Processing Solutions LLC (“IPS”), which owns 30% of the outstanding stock of DriverTech, a leading provider of onboard computers for the trucking industry. During the third quarter of 2006, the Company paid DriverTech $2.0 million for DriverTech DT4000 TruckPC units with Tri-Mode communications (satellite, cellular, and Wi-Fi). This product is designed specifically for in-cab use on a Windows platform to enhance communications with the driver.

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 2005 financial statements to conform to the 2006 presentation.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The consolidated financial 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" within the meaning of 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. 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. Words such as "believe," "may," "will," "could," "should," "likely," "expects," "estimates," "anticipates," "projects," "plans," "intends," "hopes," "potential," "continue," and "future" and variations of these words, or similar expressions, are intended to identify such forward-looking statements. Actual events or results could differ materially from those 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 forth in Part II below.

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’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 fifth largest publicly traded truckload carrier in the United States, measured by revenue, according to Transport Topics, a publication of the American Trucking Associations. 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 billion in 2005 from $215.4 million in 1994, a compounded annual growth rate of 16.6%. Our growth has come through expansion of business with new and existing customers and complementary acquisitions. Our operating revenue increased 33% to $396.6 million in the third quarter of 2006 from $297.2 million in the third quarter of 2005. Net income for the third quarter increased 81.9% to $7.3 million, or $0.47 per diluted share, compared with net income of $4.0 million, or $0.25 per diluted share, in the prior-year period.

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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 third quarter of 2006, includes the following six strategic business units, each of which is significant in its market:

● U.S. Xpress dedicated	Our approximately 1,650 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 2,800 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 750 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 1,500 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 eastern United States.

Our Xpress Global Systems Segment

Our Xpress Global Systems segment, which comprised approximately 6% of our total operating revenue in the third quarter of 2006, offers transportation, warehousing, and distribution services to the floorcovering industry. During the third quarter of 2006, our Xpress Global Systems segment experienced operating income of $1.5 million, compared to an operating loss of $2.2 million in the same period in 2005.

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 94.3% in the third quarter of 2006, compared to 96.4% in the third quarter of 2005.

Our Truckload Segment

We primarily generate 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, increased to $1.65 during the third quarter of 2006 from $1.64 in the third quarter of 2005. Average revenue per tractor per week, before fuel surcharge revenue, decreased to $3,028 during the third quarter of 2006 from $3,168 in the third quarter of 2005 (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.

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Our Xpress Global Segment

We primarily generate 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 Equipment

At September 30, 2006, we had a truckload fleet of 7,404 tractors including the tractors at Arnold and Total and 951 owner-operator tractors. We also operated 22,403 trailers in our truckload fleet and approximately 330 tractors dedicated to local and drayage services. At Xpress Global Systems, we operated 186 pickup and delivery tractors and 415 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,
	2006		2005		2006		2005		2006		2005		2006		2005
Operating Revenue	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
Fuel and fuel taxes	22.8		20.4		8.6		9.9		22.7		19.1		9.6		10.3
Vehicle rents	4.6		5.8		5.5		6.5		5.2		6.1		6.0		6.7
Depreciation and amortization, net of gain on sale	4.1		4.0		4.8		4.6		4.0		4.1		4.7		4.5
Purchased transportation	15.7		16.5		18.6		18.7		15.7		17.4		18.4		19.3
Operating expense and supplies	6.3		6.2		7.5		7.1		6.4		6.7		7.5		7.5
Insurance premiums and claims	4.2		4.3		4.9		4.9		4.2		4.1		5.0		4.5
Operating taxes and licenses	1.1		1.2		1.3		1.4		1.1		1.2		1.3		1.4
Communications and utilities	0.8		0.9		1.0		1.0		0.9		1.0		1.1		1.1
General and other operating	2.7		3.6		3.2		4.0		2.9		4.0		3.4		4.4
Loss on sale and exit of business	0.1		0.0		0.1		0.0		0.1		0.3		0.1		0.4
Total operating expenses	95.2		96.8		94.3		96.4		96.4		98.9		95.7		98.8

Income from Operations	4.8		3.2		5.7		3.6		3.6		1.1		4.3		1.2

Interest expense, net	1.2		0.7		1.5		0.8		1.2		0.7		1.4		0.8
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	)
Minority interest	0.1		0.0		0.1		0.0		0.1		0.0		0.1		0.0
	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

Income tax provision	1.7		1.3		2.0		1.5		1.1		0.3		1.2		0.3

Net Income	1.8	%	1.4	%	2.1	%	1.5	%	1.2	%	0.3	%	1.5	%	0.3	%

There are minor rounding differences in the above table.

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Comparison of the Three Months Ended September 30, 2006 to the Three Months Ended September 30, 2005

Total operating revenue increased 33.4% to $396.6 million during the three months ended September 30, 2006 compared to $297.2 million during the same period in 2005. The increase resulted primarily from $90.6 million in revenue from Arnold and Total and higher fuel surcharges.

Revenue, before fuel surcharge, increased 27.5% to $334.8 million during the three months ended September 30, 2006 compared to $262.6 million during the same period in 2005. Truckload revenue, before fuel surcharge, increased to $312.0 million during the three months ended September 30, 2006, compared to $241.1 million during the same period in 2005, due primarily to the addition of Arnold and Total. Xpress Global Systems’ revenue remained essentially constant at $24.1 million. Intersegment revenue decreased to $1.3 million during the three months ended September 30, 2006, compared to $2.6 million during the same period in 2005.

Salaries, wages, and benefits increased 28.7% to $129.7 million during the three months ended September 30, 2006 compared to $100.8 million during the same period in 2005. The increase is primarily due to the inclusion of wages for Arnold and Total in the amount of $26.5 million. As a percentage of revenue, before fuel surcharge, salaries, wages, and benefits remained essentially constant at 38.8% for the three months ended September 30, 2006, compared to 38.3% for the three months ended September 30, 2005.

Fuel and fuel taxes, net of fuel surcharge, increased 9.6% to $28.6 million during the three months ended September 30, 2006 compared to $26.1 million during the same period in 2005. The increase is due primarily to the inclusion of net fuel and fuel tax expense for Arnold and Total in the amount of $6.7 million offset by the increased fuel surcharges paid to railroads and owner-operators reflected in purchased transportation, combined with a 13.8% decline in fuel prices during the month of September 2006. As a percentage of revenue, before fuel surcharge, fuel and fuel taxes, net of fuel surcharge, declined to 8.6% during the three months ended September 30, 2006 compared to 9.9% 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.

Vehicle rents increased 7.6% to $18.4 million during the three months ended September 30, 2006 compared to $17.1 million during the same period in 2005. The 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 3,362 for the same period in U.S. Xpress truckload operations. As a percentage of revenue, before fuel surcharge, vehicle rents declined to 5.5% during the three months ended September 30, 2006 compared to 6.5% during the same period in 2005.

Depreciation and amortization increased 34.2% to $16.1 million during the three months ended September 30, 2006 compared to $12.0 million during the same period in 2005. 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 $17.0 million during the three months ended September 30, 2006 compared to $12.8 million during the same period in 2005. The increase is due primarily to the inclusion of depreciation and amortization for Arnold and Total in the amount of $4.1 million. As a percentage of revenue, before fuel surcharge, depreciation and amortization increased to 4.8% during the three months ended September 30, 2006 compared to 4.6% during the same period in 2005.

Purchased transportation increased 27.1% to $62.3 million during the three months ended September 30, 2006 compared to $49.0 million during the same period in 2005 primarily due to the inclusion of purchased transportation amounts for Arnold and Total in the amount of $16.6 million and increased fuel surcharges paid 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%. As a percentage of revenue, before fuel surcharge, purchased transportation decreased to 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.

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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% to $16.6 million during the three months ended September 30, 2006 compared to $12.8 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. This decrease is due primarily to a reduction in liability claims expense partially offset by an increase in cargo claims expense. As a percentage of revenue, before fuel surcharge, insurance and claims remained essentially constant at 4.9% for both periods. 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% to $4.3 million during the three months ended September 30, 2006 compared to $3.6 million during the same period in 2005. This is primarily the result of the amounts for Arnold and Total in the amount of $1.0 million. As a percentage of revenue, operating taxes and license decreased to 1.3% 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 operating increased 2.8% to $10.9 million during the three months ended September 30, 2006 compared to $10.6 million during the same period in 2005. This is primarily the result of the inclusion of general and other operating amounts for Arnold and Total 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. As a percentage of revenue, before fuel surcharge, general and other operating decreased to 3.2% in the 2006 period from 4.0% in the 2005 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 expense increased 138.1% to $5.0 million during the three months ended September 30, 2006 compared to $2.1 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 inclusion of Arnold and Total debt, which amounted to $107.0 million at September 30, 2006.

Minority interest of $0.5 million for the three months ended September 30, 2006 is representative of the 20.0% minority shareholders interest in the net income of Arnold and Total.

The effective tax rate was 47.6% for the three months ended September 30, 2006. The rate was higher than the federal statuary rate of 35.0%, 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 Nine Months Ended September 30, 2006 to the Nine Months Ended September 30, 2005

Total operating revenue increased 30.0% to $1.1 billion during the nine months ended September 30, 2006 compared to $846.3 million during the same period in 2005. The increase resulted primarily from $214.8 million in revenues from Arnold and Total and higher fuel surcharges, partially offset by the sale and exit of the airport-to-airport business.

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Revenue, before fuel surcharge, increased 21.7% to $929.3 million during the nine months ended September 30, 2006 compared to $763.6 million during the same period in 2005. Truckload revenue, before fuel surcharge, increased to $861.2 million during the nine months ended September 30, 2006, compared to $678.7 million during the same period in 2005, due primarily to the addition of Arnold and Total. Xpress Global Systems’ revenue decreased 30% to $72.2 million during the nine months ended September 30, 2006 compared to $102.9 million during the same period in 2005, due primarily to the sale and exit of the airport-to-airport business in the second quarter of 2005. Intersegment revenue decreased to $4.1 million during the nine months ended September 30, 2006, compared to $18.0 million during the same period in 2005, due primarily to the sale and exit of the airport-to-airport business.

Salaries, wages, and benefits increased 21.6% to $359.7 million during the nine months ended September 30, 2006 compared to $295.9 million during the same period in 2005. The increase is primarily due to the inclusion of wages for Arnold and Total in the amount of $63.5 million. As a percentage of revenue, before fuel surcharge, salaries, wages, and benefits decreased to 38.6% during the nine months ended September 30, 2006 compared to 38.7% during the same period in 2005.

Fuel and fuel taxes, net of fuel surcharge, increased 13.0% to $89.4 million during the nine months ended September 30, 2006 compared to $79.1 million during the same period in 2005. The increase is due primarily to the inclusion of net fuel and fuel tax expense for Arnold and Total in the amount of $17.7 million. This increase is partially offset by the increased fuel surcharges paid to railroads and owner-operators reflected in purchased transportation. As a percentage of revenue, before fuel surcharge, fuel and fuel taxes, net of fuel surcharge, decreased to 9.6% during the nine months ended September 30, 2006 compared to 10.3% 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.

Vehicle rents increased 8.9% to $56.2 million during the nine months ended September 30, 2006 compared to $51.6 million during the same period in 2005. The increase is due primarily to the inclusion of vehicle rents for Arnold and Total in the amount of $8.1 million. This increase is partially offset by the decrease in the average number of tractors financed under operating leases to 2,996 from 3,390 for the same period in U.S. Xpress truckload operations. As a percentage of revenue, before fuel surcharge, vehicle rents decreased to 6.0% in the 2006 period from 6.7% in 2005 period.

Depreciation and amortization increased 27.0% to $43.8 million during the nine months ended September 30, 2006 compared to $34.5 million during the same period in 2005. 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 million during the nine months ended September 30, 2006 compared to $36.9 million during the same period in 2005. The increase is due primarily to the inclusion 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. As a percentage of revenue, before fuel surcharge, depreciation and amortization increased to 4.7% in the 2006 from 4.5% in the 2005 period

Purchased transportation increased 16.0% to $170.6 million during the nine months ended September 30, 2006 compared to $147.1 million during the same period in 2005 primarily due to the inclusion of purchased transportation amounts for Arnold and Total in the amount of $38.9 million and increased fuel surcharges paid to the railroads and owner-operators. This increase is partially offset due to the sale and exit of the airport-to-airport business and the reduction of the owner-operator fleet within U.S. Xpress truckload operations by approximately 20%. As a percentage of revenue, before fuel surcharge, purchased transportation decreased to 18.4% in the 2006 period from 19.3% in the 2005 period.

Operating expense and supplies increased 21.6% to $69.3 million during the nine months ended September 30, 2006 compared to $57.0 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 $13.9 million. As a percentage of revenue, before fuel surcharge, operating expense and supplies remained essentially constant at 7.5% for both periods.

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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% to $46.1 million during the nine months ended September 30, 2006 compared to $34.3 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 $9.5 million. Excluding Arnold and Total amounts, insurance premiums and claims increased 6.7% to $36.6 million compared to $34.3 million during the same period in 2005. This increase is due primarily to an increase in liability claims expense. As a percentage of revenue, before fuel surcharge, insurance and claims increased to 5.0% during the nine months ended September 30, 2006 compared to 4.5% during the same period in 2005. 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% to $12.3 million during the nine months ended September 30, 2006 compared to $10.3 million during the same period in 2005. This is primarily the result of the amounts for Arnold and Total in the amount of $2.4 million. As a percentage of revenue, operating taxes and license decreased to 1.3% in the 2006 period from 1.4% in the 2005 period.

Communications and utilities increased 19.5% to $9.8 million during the nine months ended September 30, 2006 compared to $8.2 million during the same period in 2005. 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 inclusion of general and other operating amounts for Arnold and Total in the amount of $3.9 million. As a percentage of revenue, before fuel surcharge, general and other operating decreased to 3.4% in the 2006 period from 4.4% in the 2005 period.

Loss on sale and exit of business of $2.8 million for the nine months ended June 30, 2005 related to 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 million 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”.

Interest expense increased 116.9% to $12.8 million during the nine months ended September 30, 2006 compared to $5.9 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 $4.4 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 inclusion of Arnold and Total debt, which amounted to $107.0 million at September 30, 2006.

Minority interest of $1.0 million for the nine months ended September 30, 2006 is representative of the 20% minority shareholders interest in the net income of Arnold and Total.

The effective tax rate was 45.8% for the nine months ended September 30, 2006. The rate was higher than the federal statutory rate of 35.0%, 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 income of $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 requires significant capital investments. Our primary sources of liquidity at September 30, 2006 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 million and our accounts receivable securitization facility has maximum available borrowings, subject to eligible receivables, of $140 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.

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Cash Flows

Net cash provided by operating activities was $93.4 million and $43.9 million during the nine months ended September 30, 2006 and 2005, respectively. The increase in net cash provided by operating activities is primarily due to an increase in earnings and depreciation for the nine months ended September 30, 2006, as compared to the same period in 2005.

Net cash used in investing activities was $126.4 million and $33.9 million during the nine months ended September 30, 2006 and 2005 respectively. The increase in cash used in investing activities is primarily the result of $74.2 million more in net additions to property and equipment, combined with the acquisitions of Arnold and Total, and investment in Abilene in the nine months ended September 30, 2006, as compared to the same period in 2005. During the nine months ended September 30, 2005, the company received $12.8 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. The increase in cash provided by financing activities is the result of increased borrowings related to the purchase of revenue equipment and fewer shares of stock being repurchased for the nine months ending September 30, 2006 as compared to the same period in 2005.

Debt

On October 14, 2004, we entered into a $100.0 million 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 mature in March 2007. 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% to 0.25%, or LIBOR plus an applicable margin of .88% to 2.00%, based on our 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 September 30, 2006, the applicable margin was 0.0% for base rate loans and 1.25% 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 % and .25%, respectively, at September 30, 2006).

The credit facility requires, among other things, maintenance by us 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 our ability to engage in certain sale-leaseback transactions, transactions with affiliates, investment transactions, acquisitions of our own capital stock, the payment of dividends, future asset dispositions (except in the ordinary course of business), or other business combination transactions, and to incur liens and future indebtedness. As of September 30, 2006, we were in compliance with the revolving credit facility covenants.

In October 2004, we entered into a $100.0 million accounts receivable securitization facility (the "Securitization Facility"). On a revolving basis, we sell accounts receivable as part of a two-step securitization transaction that provides us 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 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. We can borrow up to $140.0 million under the Securitization Facility, subject to eligible receivables, and pay 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 because its term, subject to annual renewals, expires October 11, 2007.

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 September 30, 2006, we were in compliance with the Securitization Facility covenants.

At September 30, 2006, we had $330.1 million of borrowings, of which $233.6 million was long-term, $49.5 million was current maturities, and $47.0 million consisted of borrowings under the Securitization Facility. We also had approximately $60.8 million in unused letters of credit. At September 30, 2006, we had an aggregate of approximately $160.8 million of available borrowing remaining under our revolving credit facility and the Securitization Facility.

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Equity

In July 2005, 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. The repurchased shares may be used for issuances under our incentive stock plan or for other general corporate purposes, as the Board may determine. In the third quarter of 2006, we repurchased 40,000 shares for approximately $0.9 million prior to July 31, 2006.

Business Acquisitions

In the fourth quarter of 2004, we acquired 49% of the outstanding stock of ATS Acquisition Holding Co. ("ATS"), the parent company of Arnold. In the second quarter of 2005, we 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. 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' 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 September 30, 2006, 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 2006 to August 2013. 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 million for the three months ended September 30, 2006. The remaining lease obligations as of September 30, 2006 were $248.6 million, with $84.4 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 million at September 30, 2006. 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.

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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.

Critical Accounting Policies and Estimates

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 nine months ended September 30, 2006, 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 simultaneous 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.

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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 has not been deemed necessary due to our profitable operations on both a consolidated and separate legal entity basis. However, 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.

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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.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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 September 30, 2006, we had borrowings totaling $330.1 million, comprising $59.2 million of variable rate borrowings and $270.9 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.

Item 4.

Controls and Procedures

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.

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U.S. XPRESS ENTERPRISES, INC.

PART II - OTHER INFORMATION

Item 1A.

Risk Factors

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, 2005 (“2005 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 changes to the risks factors previously disclosed in our 2005 Form 10-K.

Item 6.

Exhibits

(a)

Exhibits

⁽¹⁾	3.1	Restated Articles of Incorporation of the Company

⁽²⁾	3.2	Restated Bylaws of the Company

⁽¹⁾	4.1	Restated Articles of Incorporation of the Company filed as Exhibit 3.1 to this report and incorporated herein by reference

⁽²⁾	4.2	Restated Bylaws of the Company filed as Exhibit 3.2 to this report and incorporated herein by reference

⁽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. Quinn

^#	31.1	Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

^#	31.2	Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

^#	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

^#	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

⁽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).

#	Filed herewith.

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SIGNATURES

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)


Date: November 9, 2006	By:	/s/Ray M. Harlin
		Ray M. Harlin
		Chief Financial Officer