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US XPRESS ENTERPRISES INC - Quarter Report: 2020 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

or

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: 001-38528

Graphic

U.S. Xpress Enterprises, Inc.

(Exact name of registrant as specified in its charter)

Nevada

62-1378182

(State or other jurisdiction of incorporation

(I.R.S. Employer Identification No.)

or organization)

4080 Jenkins Road

Chattanooga, Tennessee

37421

(Address of principal executive offices)

(Zip Code)

(423) 510-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value

USX

The New York Stock Exchange

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

No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer

Non-accelerated filer   

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

Yes

No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date October  27, 2020.

Class A Common Stock, $0.01 par value: 33,936,199

Class B Common Stock, $0.01 par value: 15,647,095

Table of Contents

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

Page
Number

Item 1.

Unaudited Condensed Consolidated Financial Statements Three and Nine Months Ended September 30, 2020 and 2019

Unaudited Condensed Consolidated Balance Sheets

3

Unaudited Condensed Consolidated Statements of Comprehensive Income

4

Unaudited Condensed Consolidated Statements of Cash Flows

5

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

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

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37

Item 4.

Controls and Procedures

37

PART II
OTHER INFORMATION

Page
Number

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults Upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

39

Page 2

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U.S. Xpress Enterprises, Inc.

Unaudited Condensed Consolidated Balance Sheets

September 30, 2020 and December 31, 2019

September 30, 

December 31, 

(in thousands, except share amounts)

    

2020

    

2019

Assets

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

7,422

$

5,687

Customer receivables, net of allowance of $185 and $63 at September 30, 2020 and December 31, 2019, respectively

 

190,644

 

183,706

Other receivables

 

16,345

 

15,253

Prepaid insurance and licenses

 

23,073

 

11,326

Operating supplies

 

8,249

 

7,193

Assets held for sale

 

25,623

 

17,732

Other current assets

 

16,405

 

15,831

Total current assets

 

287,761

 

256,728

Property and equipment, at cost

 

900,719

 

880,101

Less accumulated depreciation and amortization

 

(397,263)

 

(388,318)

Net property and equipment

 

503,456

 

491,783

Other assets

 

  

 

  

Operating lease right of use assets

 

280,687

 

276,618

Goodwill

 

59,221

 

57,708

Intangible assets, net

 

25,938

 

27,214

Other

 

33,979

 

30,058

Total other assets

 

399,825

 

391,598

Total assets

$

1,191,042

$

1,140,109

Liabilities and Stockholders' Equity

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

77,646

$

68,918

Book overdraft

 

 

1,313

Accrued wages and benefits

 

32,095

 

24,110

Claims and insurance accruals, current

 

51,571

 

51,910

Other accrued liabilities

 

7,483

 

9,127

Current portion of operating lease liabilities

 

74,357

 

69,866

Current maturities of long-term debt and finance leases

 

111,232

 

80,247

Total current liabilities

 

354,384

 

305,491

Long-term debt and finance leases, net of current maturities

 

282,453

 

315,797

Less unamortized discount and debt issuance costs

 

(325)

 

(1,223)

Net long-term debt and finance leases

 

282,128

 

314,574

Deferred income taxes

 

22,236

 

20,692

Other long-term liabilities

 

18,710

 

5,249

Claims and insurance accruals, long-term

 

55,174

 

56,910

Noncurrent operating lease liabilities

 

206,190

 

206,357

Commitments and contingencies (Note 6)

 

 

Stockholders' equity

Common stock Class A, $.01 par value, 140,000,000 shares authorized at September 30, 2020 and December 31, 2019, respectively, 33,967,774 and 33,314,141 issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

339

 

333

Common stock Class B, $.01 par value, 35,000,000 authorized at September 30, 2020 and December 31, 2019, respectively, 15,647,095 and 15,687,101 issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

157

 

157

Additional paid-in capital

 

260,365

 

250,700

Accumulated deficit

 

(10,004)

 

(20,982)

Stockholders' equity

 

250,857

 

230,208

Noncontrolling interest

 

1,363

 

628

Total stockholders' equity

 

252,220

 

230,836

Total liabilities and stockholders' equity

$

1,191,042

$

1,140,109

See Notes to Unaudited Condensed Consolidated Financial Statements

Page 3

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U.S. Xpress Enterprises, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2020 and 2019

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands, except per share amounts)

    

2020

    

2019

    

2020

    

2019

Operating revenue

 

  

 

  

 

  

 

  

Revenue, before fuel surcharge

$

403,679

$

386,666

$

1,190,463

$

1,133,162

Fuel surcharge

 

27,790

 

41,837

 

96,051

 

124,566

Total operating revenue

 

431,469

 

428,503

 

1,286,514

 

1,257,728

Operating expenses

 

  

 

  

 

  

 

  

Salaries, wages, and benefits

 

137,541

 

134,862

 

412,889

 

389,907

Fuel and fuel taxes

 

33,208

 

47,315

 

103,265

 

141,252

Vehicle rents

 

20,956

 

19,470

 

64,168

 

57,025

Depreciation and amortization, net of (gain) loss on sale of property

 

25,785

 

26,684

 

77,871

 

74,498

Purchased transportation

 

125,997

 

122,433

 

373,117

 

349,017

Operating expenses and supplies

 

33,927

 

36,147

 

101,249

 

104,744

Insurance premiums and claims

 

17,835

 

19,570

 

65,141

 

63,189

Operating taxes and licenses

 

3,359

 

3,533

 

10,756

 

10,112

Communications and utilities

 

2,187

 

2,209

 

6,895

 

6,659

General and other operating expenses

 

14,783

 

12,998

 

42,663

 

37,288

Gain on sale of subsidiary

(670)

Total operating expenses

 

415,578

 

425,221

 

1,258,014

 

1,233,021

Operating income

 

15,891

 

3,282

 

28,500

 

24,707

Other expense (income)

 

  

 

  

 

  

 

  

Interest expense, net

 

4,381

 

5,467

 

14,664

 

16,366

Loss on sale of equity method investment

2,000

Equity in loss of affiliated companies

 

 

91

 

 

270

Other, net

 

 

 

 

26

 

4,381

 

5,558

 

16,664

 

16,662

Income (loss) before income tax provision

 

11,510

 

(2,276)

 

11,836

 

8,045

Income tax provision (benefit)

 

1,337

 

(813)

 

1,867

 

1,503

Net total and comprehensive income (loss)

 

10,173

 

(1,463)

 

9,969

 

6,542

Net total and comprehensive income (loss) attributable to noncontrolling interest

 

(523)

 

(17)

 

(1,009)

 

595

Net total and comprehensive income (loss) attributable to controlling interest

$

10,696

$

(1,446)

$

10,978

$

5,947

Earnings (loss) per share

 

  

 

  

 

  

 

  

Basic earnings (loss) per share

$

0.22

$

(0.03)

$

0.22

$

0.12

Basic weighted average shares outstanding

 

49,667

 

48,984

 

49,462

 

48,709

Diluted earnings (loss) per share

$

0.20

$

(0.03)

$

0.20

$

0.12

Diluted weighted average shares outstanding

 

51,194

 

48,984

 

50,493

 

49,289

See Notes to Unaudited Condensed Consolidated Financial Statements

Page 4

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U.S. Xpress Enterprises, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2020 and 2019

Nine Months Ended

September 30, 

(in thousands)

    

2020

    

2019

Operating activities

 

  

 

  

Net income

$

9,969

$

6,542

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

Deferred income tax provision

 

1,543

 

1,018

Depreciation and amortization

 

68,104

 

68,813

Losses on sale of equipment

 

9,767

 

5,685

Share based compensation

 

3,421

 

2,810

Other

 

3,186

 

783

Gain on sale of subsidiary

(670)

Changes in operating assets and liabilities, net of acquisitions:

 

 

  

Receivables

 

(8,354)

 

(5,650)

Prepaid insurance and licenses

 

(11,747)

 

(12,189)

Operating supplies

 

(204)

 

(443)

Other assets

 

(3,047)

 

(4,800)

Accounts payable and other accrued liabilities

 

21,413

 

22,076

Accrued wages and benefits

 

7,863

 

(729)

Net cash provided by operating activities

 

101,914

 

83,246

Investing activities

 

  

 

  

Payments for purchases of property and equipment

 

(129,582)

 

(127,899)

Proceeds from sales of property and equipment

 

36,192

 

33,301

Other

(1,880)

(2,000)

Sale of subsidiary, net of cash

 

 

(6,432)

Net cash used in investing activities

 

(95,270)

 

(103,030)

Financing activities

 

  

 

  

Borrowings under lines of credit

 

231,254

 

56,200

Payments under lines of credit

 

(231,254)

 

(53,300)

Borrowings under long-term debt

 

228,981

 

78,803

Payments of long-term debt and finance leases

 

(231,340)

 

(73,472)

Payments of financing costs

 

(1,391)

 

(170)

Payments of long-term consideration for business acquisition

 

(1,000)

 

(990)

Tax withholding related to net share settlement of restricted stock awards

 

(135)

 

(44)

Proceeds from issuance of common stock under ESPP

851

349

Purchase of noncontrolling interest

(8,659)

Proceeds from long-term consideration for sale of subsidiary

 

438

 

Book overdraft

 

(1,313)

 

3,833

Net cash (used in) provided by financing activities

 

(4,909)

 

2,550

Cash included in assets held for sale

 

 

11,784

Net change in cash and cash equivalents

 

1,735

(5,450)

Cash and cash equivalents

 

 

  

Beginning of year

 

5,687

 

9,892

End of period

$

7,422

$

4,442

Supplemental disclosure of cash flow information

 

  

 

  

Cash paid during the year for interest

$

13,479

$

16,102

Cash paid during the year for income taxes

 

497

 

311

Supplemental disclosure of significant noncash investing and financing activities

 

  

 

  

Subsidiary stock issued in business combination

$

7,278

$

Debt obligations relieved in conjunction with the divesture of Xpress Internacional

7,109

Uncollected proceeds from asset sales

1,607

Property and equipment amounts accrued in accounts payable

1,252

1,622

See Notes to Unaudited Condensed Consolidated Financial Statements

Page 5

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U.S. Xpress Enterprises, Inc.

Unaudited Condensed Consolidated Statement of Stockholders' Equity

Three and Nine Months Ended September 30, 2020 and 2019

Additional

Non

Total

Class A

Class B

Paid

Accumulated

Controlling

Stockholders'

(in thousands, except share amounts)

    

Stock

    

Stock

    

In Capital

    

Deficit

    

Interest

    

Equity

Balances at December 31, 2019

$

333

$

157

$

250,700

$

(20,982)

$

628

$

230,836

Share based compensation

 

 

 

836

 

 

 

836

Vesting of restricted units

 

1

 

1

 

(93)

 

 

 

(91)

Issuance of common stock under ESPP

1

419

420

Net loss

 

 

 

 

(9,216)

 

(16)

 

(9,232)

Balances at March 31, 2020

335

158

251,862

(30,198)

612

222,769

Share based compensation

 

1,164

 

1,164

Vesting of restricted units

 

1

(3)

 

(2)

Issuance of subsidiary shares in business combination

 

5,534

1,744

 

7,278

Net income (loss)

9,498

(470)

9,028

Balances at June 30, 2020

336

158

258,557

(20,700)

1,886

240,237

Share based compensation

 

1,421

 

1,421

Vesting of restricted units

 

1

(43)

 

(42)

Conversion of Class B stock to Class A stock

 

1

(1)

 

Issuance of common stock under ESPP

1

430

431

Net income (loss)

10,696

(523)

10,173

Balances at September 30, 2020

$

339

$

157

$

260,365

$

(10,004)

$

1,363

$

252,220

Additional

Non

Total

Class A

Class B

Paid

Accumulated

Controlling

Stockholders'

(in thousands, except share amounts)

    

Stock

    

Stock

    

In Capital

    

Deficit

    

Interest

    

Equity

Balances at December 31, 2018

$

329

$

155

$

251,742

$

(17,335)

$

3,496

$

238,387

Share based compensation

 

 

 

856

 

 

 

856

Vesting of restricted units

 

 

1

 

(39)

 

 

 

(38)

Net income

 

 

 

 

4,721

 

298

 

5,019

Balances at March 31, 2019

329

156

252,559

(12,614)

3,794

244,224

Share based compensation

 

1,024

 

1,024

Vesting of restricted stock

3

1

(10)

(6)

Purchase of noncontrolling interest

(5,187)

(3,472)

(8,659)

Net income

 

2,672

314

 

2,986

Balances at June 30, 2019

332

157

248,386

(9,942)

636

239,569

Share based compensation

 

 

 

930

 

 

 

930

Issuance of common stock under ESPP

1

349

350

Net loss

(1,446)

(17)

(1,463)

Balances at September 30, 2019

$

333

$

157

$

249,665

$

(11,388)

$

619

$

239,386

See Notes to Unaudited Condensed Consolidated Financial Statements

Page 6

Table of Contents

U.S. Xpress Enterprises, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

1.        Organization and Operations

U.S. Xpress Enterprises, Inc. and its consolidated subsidiaries (collectively, the “Company”, “we”, “us”, “our”, and similar expressions) provide transportation services throughout the United States, with a focus in the densely populated and economically diverse eastern half of the United States. The Company offers its customers a broad portfolio of services using its own asset-based truckload fleet and third-party carriers through our non-asset-based truck brokerage network. The Company has two reportable segments, Truckload and Brokerage. Our Truckload segment offers asset-based truckload services, including over-the-road (“OTR”) trucking and dedicated contract services. Our Brokerage segment is principally engaged in non-asset-based freight brokerage services, where loads are contracted to third-party carriers.

Under our Articles of Incorporation, our authorized capital stock consists of 140,000,000 shares of Class A common stock, par value $0.01 per share, 35,000,000 shares of Class B common stock, par value $0.01 per share, and 9,333,333 shares of preferred stock, the rights and preferences of which may be designated by the Board of Directors.

2.        Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with Article 10 of Regulation S-X promulgated under the Securities Act of 1933, as amended. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material. In the opinion of management, the accompanying financial statements include all adjustments that are necessary for a fair statement of the results of the interim periods presented, such adjustments being of a normal recurring nature.

Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 2019 balance sheet was derived from our audited balance sheet as of that date. The Company’s operating results are subject to seasonal trends when measured on a quarterly basis; therefore operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current presentation.

Page 7

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Recently Issued Accounting Standards

On December 18, 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12, which modifies Accounting Standards Codification (“ASC”) 740 to simplify the accounting for income taxes. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company believes the adoption of this guidance will not have a material impact on its financial statements.

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326) amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. We adopted ASU 2016-13 effective January 1, 2020 and the application of this guidance did not have a material impact on our financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 from the goodwill impairment testing process. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. Under the new standard, a goodwill impairment loss is measured as the excess of the carrying value of a reporting unit over its fair value. We adopted ASU 2017-04 effective January 1, 2020 and the application of this guidance did not have a material impact on our financial statements.

3.        Income Taxes

The Company’s provision for income taxes for the three and nine months ended September 30, 2020 and 2019 is based on the estimated annual effective tax rate, plus discrete items. The following table presents the provision for income taxes and the effective tax rates for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

 

    

2020

    

2019

    

2020

    

2019

 

Income before income tax provision

$

11,510

$

(2,276)

$

11,836

$

8,045

Income tax provision

 

1,337

 

(813)

 

1,867

 

1,503

Effective tax rate

11.6

%  

35.7

%  

15.8

%  

 

18.7

%  

The difference between the Company’s effective tax rate for the three and nine months ended September 30, 2020 and 2019 and the US statutory rate of 21% primarily relates to nondeductible expenses, federal income tax credits, state income taxes (net of federal benefit), a net increase in valuation allowances and certain discrete items.

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4.        Long-Term Debt

Long-term debt at September 30, 2020 and December 31, 2019 consists of the following (in thousands):

    

September 30, 2020

    

December 31, 2019

Line of credit, maturing January 2025

$

$

Term loan agreement, interest rate of 4.3% at December 31, 2019, terminated January 2020

150,000

Revenue equipment installment notes with finance companies, weighted average interest rate of 4.2% and 4.7% at September 30, 2020 and December 31, 2019, due in monthly installments with final maturities at various dates through March 2027, secured by related revenue equipment with a net book value of $344.5 million and $220.4 million at September 30, 2020 and December 31, 2019

344,281

208,252

Mortgage note payables, interest rates ranging from 4.17% to 6.99% at September 30, 2020 and December 31, 2019 due in monthly installments with final maturities at various dates through September 2031, secured by real estate with a net book value of $32.2 million and $20.2 million at September 30, 2020 and December 31, 2019

 

26,312

 

17,776

Other

 

15,851

 

8,795

 

386,444

 

384,823

Less: Debt issuance costs

 

(325)

 

(1,223)

Less: Current maturities of long-term debt

 

(107,165)

 

(75,596)

$

278,954

$

308,004

Credit Facility

On January 28, 2020, we entered into a new credit facility (the “Credit Facility”) and contemporaneously with the funding of the Credit Facility paid off obligations under our then existing credit facility and terminated such facility. The Credit Facility is a $250.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows the Company to request an increase in the revolving credit facility of up to $75.0 million.

The Credit Facility is a five-year facility scheduled to terminate on January 28, 2025.  Borrowings under the Credit Facility are classified as either “base rate loans” or “eurodollar rate loans”.  Base rate loans accrue interest at a base rate equal to the highest of (A) the Federal Funds Rate plus 0.50%, (B) the Agent’s prime rate, and (C) LIBOR plus 1.00% plus an applicable margin that is set at 0.50% through June 30, 2020 and adjusted quarterly thereafter between 0.25% and 0.75% based on the ratio of the daily average availability under the Credit Facility to the daily average of the lesser of the borrowing base or the revolving credit facility.  Eurodollar rate loans accrue interest at LIBOR plus an applicable margin that is set at 1.50% through June 30, 2020 and adjusted quarterly thereafter between 1.25% and 1.75% based on the ratio of the daily average availability under the Credit Facility to the daily average of the lesser of the borrowing base or the revolving credit facility.  The Credit Facility includes, within its $250.0 million revolving credit facility, a letter of credit sub-facility in an aggregate amount of $75.0 million and a swingline sub-facility in an aggregate amount of $25.0 million.  An unused line fee of 0.25% is applied to the average daily amount by which the lenders’ aggregate revolving commitments exceed the outstanding principal amount of revolver loans and aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility.  The Credit Facility is secured by a pledge of substantially all of the Company’s assets, excluding, among other things, any real estate or revenue equipment financed outside the Credit Facility.

Borrowings under the new Credit Facility are subject to a borrowing base limited to the lesser of (A) $250.0 million; or (B) the sum of (i) 87.5% of eligible billed accounts receivable, plus (ii) 85.0% of eligible unbilled accounts receivable (less than 30 days), plus (iii) 85.0% of the net orderly liquidation value percentage applied to the net book value of eligible revenue equipment, plus (iv) the lesser of (a) 80.0% the fair market value of eligible real estate or (b) $25.0 million. The Credit Facility contains a single springing financial covenant, which requires a

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consolidated fixed charge coverage ratio of at least 1.0 to 1.0. The financial covenant is tested only in the event excess availability under the Credit Facility is less than the greater of (A) 10.0% of the lesser of the borrowing base or revolving credit facility or (B) $20.0 million

The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the lenders’ commitments may be terminated.  The Credit Facility contains certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions and dispositions, affiliate transactions, and other indebtedness.

At September 30, 2020, the Credit Facility had issued collateralized letters of credit in the face amount of $32.7 million, with $0 borrowings outstanding and $147.5 million available to borrow.

At September 30, 2020, the Company was in compliance with the financial covenant prescribed by the Credit Facility.

5.        Leases

We have operating and finance leases with terms of 1 year to 15 years for certain revenue and service equipment and office and terminal facilities.

The table below presents the lease-related assets and liabilities recorded on the balance sheet (in thousands):

Leases

    

Classification

    

September 30, 2020

Assets

 

  

 

  

Operating

 

Operating lease right-of-use assets

$

280,687

Finance

 

Property and equipment, net

 

8,095

Total leased assets

 

  

$

288,782

Liabilities

 

  

 

  

Current

 

  

 

  

Operating

 

Current portion of operating lease liabilities

$

74,357

Finance

 

Current maturities of long-term debt and finance leases

 

4,067

Noncurrent

 

  

 

Operating

 

Noncurrent operating lease liabilities

 

206,190

Finance

 

Long-term debt and finance leases, net of current maturities

 

3,174

Total lease liabilities

 

  

$

287,788

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The table below presents certain information related to the lease costs for finance and operating leases (in thousands):

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

Lease Cost

    

Classification

    

2020

    

2019

 

2020

    

2019

Operating lease cost

 

Vehicle rents and General and other operating

$

20,902

$

19,917

$

64,445

$

59,156

Finance lease cost:

 

  

 

  

 

  

 

  

 

  

Amortization of finance lease assets

 

Depreciation and amortization

 

439

 

760

 

1,319

 

2,365

Interest on lease liabilities

 

Interest expense

 

138

 

252

 

452

 

848

Short-term lease cost

 

Vehicle rents and General and other operating

 

2,358

 

1,250

 

6,156

 

2,353

Total lease cost

 

  

$

23,837

$

22,179

$

72,372

$

64,722

Nine Months Ended

September 30, 

Cash Flow Information

    

2020

 

2019

Cash paid for operating leases included in operating activities

$

64,445

$

59,156

Cash paid for finance leases included in operating activities

$

452

$

848

Cash paid for finance leases included in financing activities

$

3,746

$

5,624

Operating lease right-of-use assets obtained in exchange for lease obligations

$

66,526

$

116,222

Operating lease right-of-use assets and liabilities relieved in conjunction with divesture of Xpress Internacional

$

$

2,018

September 30, 2020

WeightedAverage

Weighted-

 

Remaining Lease

Average

 

Lease Term and Discount Rate

    

Term (years)

    

Discount Rate

 

Operating leases

 

4.7

4.1

%

Finance leases

 

2.9

5.4

%

September 30, 2019

WeightedAverage

Weighted-

 

Remaining Lease

Average

 

Lease Term and Discount Rate

    

Term (years)

    

Discount Rate

 

Operating leases

 

4.0

 

5.3

%

Finance leases

 

3.3

 

4.6

%

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As of September 30, 2020, future maturities of lease liabilities were as follows (in thousands):

September 30, 2020

    

Finance

    

Operating 

2020

$

771

$

21,163

2021

 

4,081

 

82,414

2022

 

1,423

 

74,085

2023

 

1,423

 

58,524

2024

 

296

 

29,288

Thereafter

 

 

46,493

 

7,994

 

311,967

Less: Amount representing interest

 

(753)

 

(31,420)

Total

$

7,241

$

280,547

6.        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 on the advice of legal counsel, is not expected to have a materially adverse effect on the Company’s financial position or results of operations.

For the cases described below, management is unable to provide a meaningful estimate of the possible loss or range of loss because, among other reasons, (1) the proceedings are in various stages; (2) damages have not been sought; (3) damages are unsupported and/or exaggerated; (4) there is uncertainty as to the outcome of the proceedings, including pending appeals; and/or (5) there are significant factual issues to be resolved. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

California Wage and Hour Class Action Litigation

On December 23, 2015, a class action lawsuit was filed against the Company and its subsidiary U.S. Xpress, Inc. in the Superior Court of California, County of San Bernardino. The Company removed the case from state court to the U.S. District Court for the Central District of California. The plaintiff’s initial proposed class certification (any employee driver who has driven in California at any time since December 23, 2011) was denied by the district court under Rule 26 due to lack of commonality amongst the putative class members.  The Court granted the plaintiff’s revised Motion for Class Certification, and the certified class now consists of all employee drivers who resided in California and who have driven in the State of California on behalf of U.S. Xpress at any time since December 23, 2011. The case alleges that class members were not paid for off-the-clock work, were not provided duty free meal or rest breaks, and were not paid premium pay in their absence, were not paid the California minimum wage for all hours worked in that state, were not provided accurate and complete itemized wage statements and were not paid all accrued wages at the end of their employment, all in violation of California law. The class seeks a judgment for compensatory damages and penalties, injunctive relief, attorney fees, costs and pre- and post-judgment interest. On May 2, 2019, the district court dismissed on grounds of preemption the claims alleging failure to provide duty free meal and rest breaks or to pay premium pay for failure to provide such breaks under California law. The parties also filed cross-motions for summary judgment on the remaining claims, and the Company filed a motion to decertify the class. The court recently issued it ruling on the pending cross-motions: (1) the court denied the Company’s motion to decertify the class; (2) the court granted the Company’s motion for summary judgment on the plaintiff’s minimum wage claim for non-driving duties such as pre-trip and post-trip inspection, fueling, receiving dispatches, waiting to load or unload, and handling paperwork for the loads for January 1, 2013 forward (leaving the minimum wage claim only for the approximate one-year time period from December 23, 2011 to December 31, 2012); (3) the court granted the plaintiff’s motion for summary judgment for the time spent taking Department of Transportation-required 10-hour breaks while hauling high value loads in California for solo drivers and for the designated team driver responsible for the load; and (4) the court denied the balance of cross-motions.

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The plaintiff filed a petition for permission to file an interlocutory appeal of the court’s decision on the minimum wage claim, which the district court and the Ninth Circuit both granted. We anticipate the appeal will be fully-briefed by approximately the end of February 2021.The parties have agreed to request the district court to stay the trial presently scheduled for February 16, 2021 until after the appeal is decided. The district court will still need to decide the scope of the stay as to whether the case will be completely stayed or whether the parties will complete expert discovery over the next several months. We are currently not able to predict the probable outcome or to reasonably estimate a range of potential losses, if any. We intend to vigorously defend the merits of these claims.

Stockholder Claims

As set forth below, between November 2018 and April 2019, eight substantially similar putative securities class action complaints were filed against the Company and certain other defendants: five in the Circuit Court of Hamilton County, Tennessee (“Tennessee State Court Cases”), two in the U.S. District Court for the Eastern District of Tennessee (“Federal Court Cases”), and one in the Supreme Court of the State of New York (“New York State Court Case”). All of these matters are in preliminary stages of litigation. We are currently not able to predict the probable outcome or to reasonably estimate a range of potential losses, if any. We believe the allegations made in the complaints are without merit and intend to defend ourselves vigorously in these matters.

As to the Tennessee State Court Cases, two of five complaints were voluntarily dismissed and the remaining three were consolidated with a Consolidated Amended Class Action Complaint filed on May 10, 2019 in the Circuit Court of Hamilton County, Tennessee against the Company, five of our current and former officers or directors, and the seven underwriters who participated in our June 2018 initial public offering (“IPO”), alleging violations of Sections 11, 12(a)(2)  and 15 of the Securities Act of 1933 (the “Securities Act”). The putative class action lawsuit is based on allegations that the Company made false and/or misleading statements in the registration statement and prospectus filed with the Securities and Exchange Commission (“SEC”) in connection with the IPO. The lawsuit is purportedly brought on behalf of a putative class of all persons or entities who purchased or otherwise acquired the Company’s Class A common stock pursuant and/or traceable to the IPO, and seeks, among other things, compensatory damages, costs and expenses (including attorneys’ fees) on behalf of the putative class.

On June 28, 2019, the defendants filed a Motion to Dismiss the Tennessee State Court Cases for failure to allege facts sufficient to support a violation of Section 11, 12 or 15 of the Securities Act, which motion remains pending. Discovery is currently stayed pending a decision on the Motion to Dismiss.

As to the Federal Court Cases, the operative amended complaint was filed on October 8, 2019 (“Amended Federal Complaint”), which named the same defendants as the Tennessee State Court Cases. The Amended Federal Complaint is made on behalf of a putative class that consists of all persons who purchased or otherwise acquired the Class A common stock of the Company between June 14, 2018 and November 1, 2018 and who were allegedly damaged thereby. In addition to claims for alleged violations of Section 11 and 15 of the Securities Act, the Amended Federal Complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) against the Company, its Chief Executive Officer and its Chief Financial Officer. On December 23, 2019, the defendants filed a Motion to Dismiss the Amended Federal Complaint in its entirety for failure to allege facts sufficient to state a claim under either the Securities Act or the Exchange Act. The plaintiffs filed their Opposition to that Motion on March 9, 2020, and the defendants filed their Reply brief on April 23, 2020.

On June 30, 2020, the court presiding over the Federal Court Cases issued its ruling granting in part and denying in part the defendants’ Motions to Dismiss the Amended Federal Complaint. The court dismissed entirely the plaintiffs’ claims for alleged violations of the Exchange Act and further held that the plaintiffs failed to state a claim for violation of the Securities Act with respect to the majority of statements challenged as false or misleading in the Amended Federal Complaint. The court, however, held that the Federal Amended Complaint sufficiently alleged violations of the Securities Act with respect to two statements from the June 2018 IPO registration statement and prospectus that the plaintiffs alleged to be false or misleading, both on theories of alleged misrepresentations and material omissions. Accordingly, the court allowed this action to proceed beyond the pleading stage, but only with respect to the statements deemed sufficient to support a Securities Act claim when assuming the truth of the

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plaintiffs’ allegations. The Federal Court Cases are currently in discovery . On September 11, 2020, the plaintiffs filed a Motion for Class Certification, which remains pending.

As to the New York State Case, on March 14, 2019, a substantially similar putative class action complaint was filed in the Supreme Court of the State of New York, County of New York, by a different plaintiff alleging claims under Sections 11 and 15 of the Securities Act against the same defendants as in the Tennessee State Court Cases. The parties have stipulated to extend the time for the defendants to respond to the complaint in this matter pending resolution of the Motions to Dismiss filed in the remaining of the Tennessee State Court Cases and the Federal Court Cases.

Stockholder Derivative Action

On June 7, 2019, a stockholder derivative lawsuit was filed in the District Court for Clark County, Nevada against five of our executives and all five of our independent board members (collectively, the “Individual Defendants”), and naming the Company as a nominal defendant. The complaint alleges that the Company made false and/or misleading statements in the registration statement and prospectus filed with the SEC in connection with the IPO and that the Individual Defendants breached their fiduciary duties by causing or allowing the Company to make such statements. The complaint alleges that the Company has been damaged by the alleged wrongful conduct as a result of, among other things, being subjected to the time and expense of the securities class action lawsuits that have been filed relating to the IPO. In addition to a claim for alleged breach of fiduciary duties, the lawsuit alleges claims against the Individual Defendants for unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The parties have stipulated to a stay of this proceeding pending entry of a final judgment in the  Tennessee State Court Cases, Federal Court Case, and the New York State Case. This matter is in the preliminary stages of litigation. We are currently not able to predict the probable outcome or to reasonably estimate a range of potential losses, if any. We believe the allegations made in the complaint are without merit and intend to defend ourselves vigorously in this matter.

Independent Contractor Class Action

On March 26, 2019, a putative class action complaint was filed in the U.S. District Court for the Eastern District of Tennessee against the Company and its subsidiaries U.S. Xpress, Inc. and U.S. Xpress Leasing, Inc. The putative class includes all individuals who performed work for U.S. Xpress, Inc. or U.S. Xpress Leasing, Inc. as lease drivers from March 26, 2016 to present. The complaint alleges that independent contractors are improperly designated as such and should be designated as employees and thus subject to the Fair Labor Standards Act (“FLSA”). The complaint further alleges that U.S. Xpress, Inc.’s pay practices for the putative class members violated the minimum wage provisions of the FLSA for the period from March 26, 2016 to present. The complaint further alleges that the Company violated the requirements of the Truth in Leasing Act with regard to the independent contractor agreements and lease purchase agreements it entered into with the putative class members. The complaint further alleges that the Company failed to comply with the terms of the independent contractor agreements and lease purchase agreements entered into with the putative class members, that it violated the provisions of the Tennessee Consumer Protection Act in advertising, describing and marketing the lease purchase program to the putative class members, and that it was unjustly enriched as a result of the foregoing allegations. We filed a Motion to Compel Arbitration on October 18, 2019. On January 17, 2020, the court granted that motion, in part, compelling arbitration on all of the plaintiff’s claims and denying the plaintiff’s motion for conditional certification of a collective action. The court further stayed the matter pending arbitration, rather than dismissing it entirely. On March 6, 2020, the plaintiff petitioned the court to certify the decision for an interlocutory appeal. The Company filed an opposition to plaintiff’s motion on March 20, 2020, and plaintiff filed her reply on April 3, 2020, purportedly relying, in part, on a recent case from Massachusetts. In response to that newly cited case, the Company was granted leave to file a surreply, which it filed on April 13, 2020. On September 3, 2020, the district court denied Plaintiff’s petition. The plaintiff has not yet initiated arbitration on the claims. There has been no discovery in this matter, and we are currently not able to predict the probable outcome or to reasonably estimate a range of potential losses, if any. We believe the allegations made in the complaint are without merit and intend to defend ourselves vigorously against the complaints relating to such actions.

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On June 25, 2020, a second putative collective and class action complaint was filed against the Company and its subsidiaries U.S. Xpress, Inc. and U.S. Xpress Leasing, Inc. in the U.S. District Court for the Eastern District of Tennessee. The putative class and collective action includes all current and former over-the-road truck drivers classified as independent contractors and employed by us during the applicable statute of limitations. The complaint alleges that independent contractors are improperly designated as such and should be designated as employees subject to the FLSA. The complaint alleges that U.S. Xpress, Inc.’s pay practices for the putative collective and class members violated the minimum wage provisions of the FLSA for the period from June 25, 2017 to the present. The complaint further alleges that we failed to pay the plaintiff and members of the class for all miles they drove and breached the contract between the parties and that we were unjustly enriched as a result of the foregoing allegations. The plaintiff agreed to submit his claim to individual arbitration. There has been no discovery in this matter, and we are currently not able to predict the probable outcome or to reasonably estimate a range of potential losses, if any. We believe the allegations made in the complaint are without merit and intend to defend ourselves vigorously against the complaints relating to such actions.

Independent Contractor Class Action

On June 5, 2020, a putative class action lawsuit was filed against the Company in the U.S. District Court for the Eastern District of Tennessee arising out of a September 2019 phishing attack on the Company. Plaintiffs alleged their personally identifiable information (“PII”) was compromised. Plaintiffs further allege that the Company failed to implement adequate security measures to prevent the phishing attack and failed to provide individuals whose PII was potentially impacted with timely and accurate notice. Plaintiffs bring the lawsuit on behalf of themselves and a putative class of “[a]ll persons residing in the United States whose PII was exposed” as a result of the phishing attack. Plaintiffs also asserted a Florida-specific subclass. Plaintiffs asserted claims for negligence, negligence per se, breach of confidence, and breach of implied contract. We believed all of the counts in the complaint were without merit and defended ourselves vigorously in this matter.

The Company reached settlements with both Plaintiffs on an individual (not class) basis.  The settlements resolve the litigation, which was terminated in its entirety as of September 21, 2020.

Other

The Company had letters of credit of $32.7 million outstanding as of September 30, 2020. The letters of credit are maintained primarily to support the Company’s insurance program.

The Company had cancelable commitments outstanding at September 30, 2020 to acquire revenue equipment for approximately $61.4 million during the remainder of 2020. These purchase commitments are expected to be financed by operating leases, long-term debt and proceeds from sales of existing equipment.

7.        Share-based Compensation

2018 Omnibus Incentive Plan

In June 2018, the Board approved the 2018 Omnibus Incentive Plan (the “Incentive Plan”) to become effective in connection with the initial public offering. The Company had reserved an aggregate of 3.2 million shares of its Class A common stock for issuance of awards under the Incentive Plan. In May 2020, the stockholders approved the Amended and Restated Omnibus Plan which, among other things, increased the number of shares remaining to issue to 5.8 million shares. Participants in the Incentive Plan will be selected by the Compensation Committee from the executive officers, directors, employees and consultants of the Company. Awards under the Incentive Plan may be made in the form of stock options, stock appreciation rights, stock awards, restricted stock units, performance awards, performance units, and any other form established by the Compensation Committee pursuant to the Incentive Plan.

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The following is a summary of the Incentive Plan restricted stock and restricted stock unit activity for the nine months ended September 30, 2020:

Weighted

Number of

Average Grant

    

Units

    

Date Fair Value

Unvested at December 31, 2019

 

908,088

$

8.73

Granted

 

1,014,912

5.03

Vested

 

(221,752)

 

8.96

Forfeited

 

(65,832)

 

7.05

Unvested at September 30, 2020

 

1,635,416

$

6.47

Service based restricted stock grants vest over periods of one to five years and account for 1,387,416 of the unvested shares. Performance based awards account for 248,000 of the unvested shares and vest based upon achievement of certain performance goals, as defined by the Company. During the three and nine months ended September 30, 2020, the Company recognized $0.4 million and $0.5 million in compensation expense related to performance based awards. The Company recognized compensation expense related to service based awards of $0.8 million and $2.2 million during the three and nine months ended September 30, 2020 and $0.6 million and $1.8 million during the three and nine months ended September 30, 2019, respectively. At September 30, 2020, the Company had $6.8 million in unrecognized compensation expense related to the service based restricted stock awards which is expected to be recognized over a weighted average period of approximately 2.8 years.

The following is a summary of the Incentive Plan stock option activity from December 31, 2019 to September 30, 2020:

Weighted

Number of

Average Grant

    

Units

    

Date Fair Value

Unvested at December 31, 2019

 

359,259

$

4.95

Vested

(87,476)

5.05

Forfeited/Canceled

(42,515)

5.00

Unvested at September 30, 2020

 

229,268

$

4.90

The stock options vest over a period of four years and expire ten years from the date of grant. The Company recognized compensation expense of $0.1 million and $0.2 million during the three and nine months ended September 30, 2020 and $0.1 million and $0.4 million during the three and nine months ended September 30, 2019, respectively. The fair value of the stock options granted was estimated using the Black-Scholes method as of the grant date.

At September 30, 2020, the Company had $0.8 million in unrecognized compensation expense related to the stock option awards which is expected to be recognized over a weighted average period of approximately 2.1 years. As of September 30, 2020, 120,644 options were exercisable with a weighted average exercise price of $13.03 and a weighted average remaining contractual life of 8.1 years.

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Pre-IPO Restricted Stock Units

The following is a summary of the activity related to restricted stock units issued prior to the IPO for the nine months ended September 30, 2020:

Number of

Weighted

    

Units

    

Average

Unvested at December 31, 2019

 

842,888

$

2.14

Vested

(216,304)

2.12

Unvested at September 30, 2020

626,584

$

2.15

The vesting schedule for these restricted unit grants range from 3 to 7 years. The Company recognized compensation expense of $0.1 million and $0.3 million during the three and nine months ended September 30, 2020 and $0.1 million and $0.4 million during the three and nine months ended September 30, 2019, respectively. At September 30, 2020, the Company had approximately $1.2 million in unrecognized compensation expense related to restricted units, which is expected to be recognized over a weighted average period of approximately 3.4 years. The fair value of the restricted units and corresponding compensation expense was determined using the income approach.

Employee Stock Purchase Plan

In June 2018, our Employee Stock Purchase Plan became effective. The Company has reserved an aggregate of 2.3 million shares of its Class A common stock for issuance under the ESPP. Eligible employees may elect to purchase shares of our Class A common stock through payroll deductions up to 15% of eligible compensation. The purchase price of the shares during each offering period will be 85% of the lower of the fair market value of our Class A common stock on the first trading day of each offering period or the last trading day of the offering period. The common stock will be purchased in January and July of each year. The Company recognized compensation expense of $0.1 million and $0.2 million for the three and nine months ended September 30, 2020, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2019, respectively, associated with the plan.

8.      Earnings per Share

Basic earnings per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average shares of common stock outstanding during the period, without consideration for common stock equivalents. The Company excluded 420,480 and 702,074 equity awards for the three and nine months ended September 30, 2020, respectively and 1,639,577 and 643,988 for the three and nine months ended September 30, 2019, respectively as inclusion would be anti-dilutive.

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The basic and diluted earnings per share calculations for the three and nine months ended September 30, 2020 and 2019, respectively, are presented below (in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Numerator - Basic

Net income (loss)

$

10,173

$

(1,463)

$

9,969

$

6,542

Net income (loss) attributable to noncontrolling interest

 

(523)

 

(17)

 

(1,009)

 

595

Net income (loss) attributable to common stockholder

$

10,696

$

(1,446)

$

10,978

$

5,947

Numerator - Dilutive

Net income (loss)

$

10,173

$

(1,463)

$

9,969

$

6,542

Net income (loss) attributable to noncontrolling interest

 

(16)

 

(17)

 

(52)

 

595

Net income (loss) attributable to common stockholder

$

10,189

$

(1,446)

$

10,021

$

5,947

Basic weighted average of outstanding shares of common stock

 

49,667

 

48,984

 

49,462

 

48,709

Dilutive effect of equity awards

 

1,049

 

 

764

 

580

Dilutive effect of assumed subsidiary share conversion

478

267

Diluted weighted average of outstanding shares of common stock

 

51,194

 

48,984

 

50,493

 

49,289

Basic earnings (loss) per share

$

0.22

$

(0.03)

$

0.22

$

0.12

Diluted earnings (loss) per share

$

0.20

$

(0.03)

$

0.20

$

0.12

9.      Segment Information

The Company’s business is organized into two reportable segments, Truckload and Brokerage. The Truckload segment offers asset-based truckload services, including OTR trucking and dedicated contract services. These services are aggregated because they have similar economic characteristics and meet the aggregation criteria described in the accounting guidance for segment reporting. The Company’s OTR service offering provides solo and expedited team services through one-way movements of freight over routes throughout the United States. The Company’s dedicated contract service offering devotes the use of equipment to specific customers and provides services through long-term contracts. The Company’s dedicated contract service offering provides similar freight transportation services, but does so pursuant to agreements where it makes equipment, drivers and on-site personnel available to a specific customer to address needs for committed capacity and service levels.

The Company’s Brokerage segment is principally engaged in non-asset-based freight brokerage services, where it outsources the transportation of loads to third-party carriers. For this segment, the Company relies on brokerage employees to procure third-party carriers, as well as information systems to match loads and carriers.

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The following table summarizes our segment information (in thousands):

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Revenues

 

  

 

  

 

  

 

  

Truckload

$

375,499

$

382,467

$

1,134,039

$

1,125,991

Brokerage

 

55,970

 

46,036

 

152,475

 

131,737

Total Operating Revenue

$

431,469

$

428,503

$

1,286,514

$

1,257,728

Operating Income

 

  

 

  

 

  

 

  

Truckload

$

20,407

$

3,345

$

42,035

$

20,689

Brokerage

 

(4,516)

 

(63)

 

(13,535)

 

4,018

Total Operating Income

$

15,891

$

3,282

$

28,500

$

24,707

A measure of assets is not applicable, as segment assets are not regularly reviewed by the Chief Operating Decision Maker for evaluating performance or allocating resources.

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ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The unaudited condensed consolidated financial statements include the accounts of U.S. Xpress Enterprises, Inc., a Nevada corporation, 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. All significant intercompany transactions and accounts have been eliminated in consolidation.

This report contains certain statements that may be considered 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 (the “Securities Act”) and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues or other financial items; any statement of plans, strategies, outlook, growth prospects or objectives of management for future operations; our operational and financial targets; general economic trends, performance or conditions and trends in the industry and markets; the competitive environment in which we operate; any statements concerning proposed new services, technologies or developments; and any statement of belief and any statements of assumptions underlying any of the foregoing. In this Form 10-Q, statements relating to the impact of new accounting standards, future tax rates, expenses, and deductions, expected freight demand, capacity, and volumes, potential results of a default under our Credit Facility or other debt agreements, expected sources of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), expected capital expenditures, expected fleet age and mix of owned versus leased equipment, expected impact of technology, including the impact of event recorders, our strategic initiatives, and our digital fleet,Variant, future customer relationships, future growth of dedicated contract services, future fluctuations in purchased transportation expense and fuel surcharge reimbursement, future driver market conditions and driver turnover and retention rates, any projections of earnings, revenues, cash flows, dividends, capital expenditures, operating ratio, or other financial items, expected cash flows, expected operating improvements, any statements regarding future economic conditions or performance, any statement of plans, strategies, programs and objectives of management for future operations, including the anticipated impact of such plans, strategies, programs and objectives, future rates and prices, future utilization, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation, future insurance and claims expense, including the impact of the installation of event recorders, driver training, hair follicle testing, and renewal rates, future fluctuations in fuel costs and fuel surcharge revenue, including the future effectiveness of our fuel surcharge program, strategies for managing fuel costs, political conditions and regulations, including trade regulation, quotas, duties or tariffs, and any future changes to the foregoing, future fleet size and management, the market value of used equipment, including gain on sale, any statements concerning proposed acquisition plans, new services or developments, the anticipated impact of legal proceedings on our financial position and results of operations, expected progress on internal control remediation efforts,  the anticipated effect of the COVID-19 pandemic, among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as “believe,” “may,” “could,” “should,” “expects,” “estimates,” “projects,” “anticipates,” “plans,” “intends,” “outlook,” “strategy,” “target,” “optimistic,” “focus,” “continue,” “will” and similar terms and phrases.  Such statements are based on currently available operating, financial and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled “Item 1A. Risk Factors,” set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. Readers should review and consider the factors discussed in “Item 1A. Risk Factors,” set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, along with various disclosures in our press releases, stockholder reports, and other filings with the SEC.

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. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

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Overview

We are the fifth largest asset-based truckload carrier in the United States by revenue, generating over $1.7 billion in total operating revenue in 2019. We provide services primarily throughout the United States, with a focus in the densely populated and economically diverse eastern half of the United States. We offer customers a broad portfolio of services using our own truckload fleet and third-party carriers through our non-asset-based truck brokerage network. As of September 30, 2020, our fleet consisted of approximately 6,500 tractors and approximately 13,500 trailers, including approximately 1,900 tractors provided by independent contractors. All of our tractors have been equipped with electronic logs since 2012, and our systems and network are engineered for compliance with the recent federal electronic log mandate. Our terminal network and information technology infrastructure are established and capable of handling significantly larger volumes without meaningful additional investment.

COVID – 19 Business Update

Operational Update

Given the rapid on-set and spread of COVID-19, we moved quickly to enable our office employees to work remotely starting March 16th and during that week transitioned more than 1,400 employees, or over 95% of our corporate office staff, to a work from home environment. Since then, non-remote personnel have largely been limited to employees working on-site at customer locations and shop technicians working in our facilities, all of whom are following strict protocols to ensure their safety.

We have instituted policies to facilitate effective communication in this environment.  For non-driving employees, we ensure multiple daily contacts with direct reports and have developed key performance indicators, facilitated by our digital capabilities, to measure our operational effectiveness. We have also implemented a hotline and support staff to ensure employees have access to necessary medical services as well as ensuring an adequate supply of safety equipment, including masks and gloves, for our workers who are on the frontlines, and providing regular cleaning and disinfecting of our facilities. U.S. Xpress’ employees are playing an essential role in the country’s fight against COVID-19 as they work to keep critical supplies moving and store shelves stocked. We are working daily with our drivers to keep them informed and safe in this rapidly changing environment.  

For new drivers, we have leveraged our new driver training program as well as created a virtual orientation program that allows drivers to complete work remotely and, therefore, avoiding a majority of classroom work. This is an attractive innovation for drivers and has positively contributed to our recruiting efforts.

Market and Customer Update

We have a strong and diversified customer base with our top 25 customers representing 71% of 2019 revenues. Our volumes through the third quarter remained consistent primarily as a result of our customer mix. The fluctuations in volume in the general freight market and in specific industries related to COVID-19 have not negatively impacted the volumes of the Company’s major Dedicated accounts, which are concentrated in the discount retail and grocery market sectors.

Liquidity and Capital Resources

Due to uncertainties regarding the depth and duration of the economic impact of the COVID-19 crisis, as well as the impact of re-starting various components of the global supply chain at different times, we have considered many different scenarios.

We do not anticipate material liquidity constraints or any issues with our ongoing ability to remain in compliance with our Credit Facility.

Executive Summary

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For much of our history, we focused primarily on scaling our fleet and expanding our service offerings to support sustainable, multi-faceted relationships with customers. More recently, we have focused on our core service offerings and refined our network to focus on shorter, more profitable lanes with more density, which we believe are more attractive to drivers. We believe we have the strategy, management team, revenue base, modern fleet, and capital structure that position us very well to execute upon our initiatives, drive further operational gains, and deliver long term value for our stockholders. For 2020, we are focused on three main priorities. The first is optimizing our Truckload network and resulting average revenue per tractor per week through repositioning equipment and allocating capacity to our Dedicated service offering and Variant, our digital fleet, from certain underperforming portions of our Over-the-Road (“OTR”) service offering. The second is improving the experience of our professional truck drivers, including their safety and security. And, the third is advancing our technology initiatives centered on digitization of our loads and business, automated load acceptance and prioritization, and our goal of achieving a frictionless order. During the third quarter, we continued to see tangible, financial benefits of our strategic initiatives focused on utilizing technology to improve our processes, accelerate the velocity of our business, reduce the number of our preventable accidents, improve our customers’ and drivers’ satisfaction, and lower our costs.

Total revenue for the third quarter of 2020 increased by $3.0 million to $431.5 million as compared to the third quarter of 2019. The increase was primarily a result of a 21.6% increase in Brokerage revenue to $56.0 million, a 2.9% increase in average revenue per mile, a 0.7% increase in average revenue miles per tractor per week, partially offset by a 2.1% decrease in average tractors and a $14.0 million decrease in fuel surcharge revenue. Excluding the impact of fuel surcharge revenue, third quarter revenue increased $17.0 million to $403.7 million, an increase of 4.4% as compared to the prior year quarter.

Operating income for the third quarter of 2020 was $15.9 million compared to operating income of $3.3 million in the third quarter of 2019. We delivered a 96.3% operating ratio for the quarter which is an improvement relative to the 99.2% operating ratio reported in the third quarter of 2019. Our profitability increased largely as a result of a 2.9% increased revenue per mile combined with lower claims expense and other costs, offset by a higher percentage of unseated trucks in our legacy OTR fleet and a decrease in our Brokerage segment gross margin to 6.7% compared to 12.0% in the prior year quarter.

We are continuing to focus on our driver centric initiatives, such as increased miles and modern equipment, to both retain the professional drivers who have chosen to partner with us and attract new professional drivers to our team. During the second quarter of 2020 we launched our digital fleet, since branded as Variant, which is a fleet that is largely recruited, planned, dispatched and managed using artificial intelligence and digital platforms. Variant is a completely new paradigm for operating trucks in an OTR environment that is provided to the driver through a proprietary app-based driver experience. We developed the concept as a hypothesis in 2018 based in part on the business models of the digital freight brokerages. As venture capital backed, digital brokers began to enter the market utilizing cutting edge technology and a new operating model, we believed there was an opportunity to take this approach and apply it to our asset based business in order to drive improved profitability and growth. During 2019, we began building our technology leadership and teams to construct the necessary databases, applications, and processes to launch a pilot fleet with a small number of trucks in the fourth quarter of 2019.  The test was successful and we expanded the pilot fleet to approximately 100 trucks in the first quarter of 2020. Given the positive results of the first quarter pilot we moved to a full production model, scaling the business to approximately 400 trucks in the second quarter of 2020 and adding approximately 100 trucks during the third quarter. Phase one of our plan is to convert a total of 900 OTR solo trucks, with the lowest returns, to our Variant platform over the next few quarters. Phase two of our plan will be to potentially convert an additional 1,200 trucks over the next four to six quarters.  While the conversion will not be linear, we expect our margins to expand further. Within our Variant fleet during the third quarter, we continued to experience an approximate 20% improvement in utilization per truck, a dramatic decrease in driver turnover of approximately 70%, improved safety, and a higher level of on-time service. We believe that we can further scale this platform while maintaining these positive results and continuing to further enhance the capabilities of this new technology. We will continue to focus on implementing and executing our initiatives that we expect will continue to drive sustainable improved performance over time.

As we look to the fourth quarter of 2020, we expect our driver recruiting in Variant to pick up, which we are already beginning to see through October.  This increase is expected to deliver improved results, which should effectively offset the turnover that we have experienced in our legacy OTR fleet and slightly improve our profitability for the fourth

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quarter of 2020 as we expect to experience improved spot and contract pricing.  As we continue to scale Variant into the first quarter of 2021, we then expect to experience sustainable margin expansion over the course of the next year.

In regards to the market, our baseline assumptions for the balance of 2020 include a general sequential economic recovery that may be volatile at times, increasing inventory re-stocking, tight trucking capacity, and relatively benign cost inflation outside of driver-related and insurance premium expenses.  These conditions combined with a continued shortage of drivers are expected to be supportive of the market and rates through next year which will have to support significant increases in driver pay, some of which are already in place.  As a result, we expect contract rates in 2021 to increase on average by 10-15% with the driver shortage likely extending the cycle as we believe there will be up to 200,000 fewer drivers compared to the beginning of the year.

Reportable Segments

Our business is organized into two reportable segments, Truckload and Brokerage. Our Truckload segment offers truckload services, including OTR trucking and dedicated contract services. Our OTR service offering transports a full trailer of freight for a single customer from origin to destination, typically without intermediate stops or handling pursuant to short-term contracts and spot moves that include irregular route moves without volume and capacity commitments. Tractors are operated with a solo driver or, when handling more time-sensitive, higher-margin freight, a team of two drivers. Our dedicated contract service offering provides similar freight transportation services, but with contractually assigned equipment, drivers and on-site personnel to address customers’ needs for committed capacity and service levels pursuant to multi-year contracts with guaranteed volumes and pricing. Our Brokerage segment is principally engaged in non-asset-based freight brokerage services, where loads are contracted to third-party carriers.

Truckload Segment

In our Truckload segment, we generate revenue by transporting freight for our customers in our OTR and dedicated contract service offerings. Our OTR service offering provides solo and expedited team services through one way movements of freight over routes throughout the United States. Our Variant fleet is included within our OTR service offering. Our dedicated contract service offering devotes the use of equipment to specific customers and provides services through long term contracts. Our Truckload segment provides services that are geographically diversified but have similar economic and other relevant characteristics, as they all provide truckload carrier services of general commodities and durable goods to similar classes of customers.

We are typically paid a predetermined rate per load or per mile for our Truckload services. We enhance our revenue by charging for tractor and trailer detention, loading and unloading activities and other specialized services. Consistent with industry practice, our typical customer contracts (other than those contracts in which we have agreed to dedicate certain tractor and trailer capacity for use by specific customers) do not guarantee load levels or tractor availability. This gives us and our customers a certain degree of flexibility to negotiate rates up or down in response to changes in freight demand and trucking capacity. In our dedicated contract service offering, which comprised approximately 41.3% of our Truckload operating revenue, and approximately 42.1% of our Truckload revenue, before fuel surcharge, for 2019, we provide service under contracts with fixed terms, volumes and rates. Dedicated contracts are often used by our customers with high service and high priority freight, sometimes to replace private fleets previously operated by them.

Generally, in our Truckload segment, we receive fuel surcharges on the miles for which we are compensated by customers. Fuel surcharge revenue mitigates the effect of price increases over a negotiated base rate per gallon of fuel; however, these revenues may not fully protect us from all fuel price increases. Our fuel surcharges to customers may not fully recover all fuel increases due to engine idle time, out of route miles and non-revenue generating miles that are not generally billable to the customer, as well as to the extent the surcharge paid by the customer is insufficient. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of revenue miles we generate. Although our surcharge programs vary by customer, we generally attempt to negotiate an additional penny per mile charge for every five cent increase in the U.S. Department of Energy’s (the “DOE”) national average diesel fuel index over an agreed baseline price. Our fuel surcharges are billed on a lagging basis, meaning we typically bill customers in the current week based on a previous week’s applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as

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we are currently paying for fuel. In periods of declining prices, the opposite is true. Based on the current status of our empty miles percentage and the fuel efficiency of our tractors, we believe that our fuel surcharge recovery is effective.

The main factors that affect our operating revenue in our Truckload segment are the average revenue per mile or load we receive from our customers, the percentage of miles for which we are compensated and the number of shipments and miles we generate. Our primary measures of revenue generation for our Truckload segment are average revenue per loaded mile and average revenue per tractor per period, in each case excluding fuel surcharge revenue.

In our Truckload segment, our most significant operating expenses vary with miles traveled and include (i) fuel, (ii) driver related expenses, such as wages, benefits, training and recruitment and (iii) costs associated with independent contractors (which are primarily included in the “Purchased transportation” line item). 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 vehicle rent and depreciation of long term assets, such as revenue equipment and service center facilities, the compensation of non-driver personnel and other general and administrative expenses.

Our Truckload segment requires substantial capital expenditures for purchase of new revenue equipment. We use a combination of operating leases and secured financing to acquire tractors and trailers, which we refer to as revenue equipment. When we finance revenue equipment acquisitions with operating leases, we record an operating lease right of use asset and an operating lease liability on our consolidated balance sheet, and the lease payments in respect of such equipment are reflected in our consolidated statement of comprehensive income in the line item “Vehicle rents.” When we finance revenue equipment acquisitions with secured financing, the asset and liability are recorded on our consolidated balance sheet, and we record expense under “Depreciation and amortization” and “Interest expense.” Typically, the aggregate monthly payments are similar under operating lease financing and secured financing. We use a mix of finance leases and operating leases with individual decisions being based on competitive bids, tax projections and contractual restrictions. Because of the inverse relationship between vehicle rents and depreciation and amortization, we review both line items together.

Approximately 26.6% of our total tractor fleet was operated by independent contractors at September 30, 2020. Independent contractors provide a tractor and a driver and are responsible for all of the costs of operating their equipment and drivers, including interest and depreciation, vehicle rents, driver compensation, fuel and other expenses, in exchange for a fixed payment per mile or percentage of revenue per invoice plus a fuel surcharge pass through. Payments to independent contractors are recorded in the “Purchased transportation” line item. When independent contractors increase as a percentage of our total tractor fleet, our “Purchased transportation” line item typically will increase, with offsetting reductions in employee driver wages and related expenses, net of fuel (assuming all other factors remain equal). The reverse is true when the percentage of our total fleet operated by company drivers increases.

Brokerage Segment

In our Brokerage segment, we retain the customer relationship, including billing and collection, and we outsource the transportation of the loads to third-party carriers. For this segment, we rely on brokerage employees to procure third-party carriers, as well as information systems to match loads and carriers.

Our Brokerage segment revenue is mainly affected by the rates we obtain from customers, the freight volumes we ship through our third-party carriers and our ability to secure third-party carriers to transport customer freight. We generally do not have contracted long-term rates for the cost of third-party carriers, and we cannot assure that our results of operations will not be adversely impacted in the future if our ability to obtain third-party carriers changes or the rates of such providers increase.

The most significant expense of our Brokerage segment, which is primarily variable, is the cost of purchased transportation that we pay to third-party carriers, and is included in the “Purchased transportation” line item. This expense generally varies depending upon truckload capacity, availability of third-party carriers, rates charged to customers and current freight demand and customer shipping needs. Other operating expenses are generally fixed and primarily include

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the compensation and benefits of non-driver personnel (which are recorded in the “Salaries, wages and benefits” line item) and depreciation and amortization expense.

The key performance indicator in our Brokerage segment is gross margin percentage (which is calculated as Brokerage revenue less purchased transportation expense expressed as a percentage of total operating revenue). Gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party carriers.

Our Brokerage segment does not require significant capital expenditures and is not asset intensive like our Truckload segment.

Results of Operations

Revenue

We generate revenue from two primary sources: transporting freight for our customers (including related fuel surcharge revenue) and arranging for the transportation of customer freight by third-party carriers. We have two reportable segments: our Truckload segment and our Brokerage segment. Truckload revenue, before fuel surcharge and truckload fuel surcharge are primarily generated through trucking services provided by our two Truckload service offerings (OTR and dedicated contract). Brokerage revenue is primarily generated through brokering freight to third-party carriers.

Our total operating revenue is affected by certain factors that relate to, among other things, the general level of economic activity in the United States, customer inventory levels, specific customer demand, the level of capacity in the truckload and brokerage industry, the success of our marketing and sales efforts and the availability of drivers, independent contractors and third-party carriers.

A summary of our revenue generated by type for the three and nine months ended September 30, 2020 and 2019 is as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

    

(dollars in thousands)

(dollars in thousands)

Revenue, before fuel surcharge

$

403,679

$

386,666

$

1,190,463

$

1,133,162

Fuel surcharge

 

27,790

 

41,837

 

96,051

 

124,566

Total operating revenue

$

431,469

$

428,503

$

1,286,514

$

1,257,728

For the quarter ended September 30, 2020, our total operating revenue increased by $3.0 million, or 0.7%, compared to the same quarter in 2019, and our revenue, before fuel surcharge increased by $17.0 million, or 4.4%. The primary factors driving the increases in total operating revenue and revenue, before fuel surcharge, were increased pricing in our Truckload and Brokerage segment and increased volumes in our Brokerage segment offset partially by decreased utilization in our Truckload segment.

For the nine months ended September 30, 2020, our total operating revenue increased by $28.8 million, or 2.3%, compared to the same period in 2019, and our revenue, before fuel surcharge increased by $57.3 million, or 5.1%. The primary factors driving the increases in total operating revenue and revenue, before fuel surcharge, were increased volumes in our Truckload and Brokerage segment, offset partially by decreased pricing.

As a result of our customer mix we did not experience a decline in overall freight volumes during this COVID-19 pandemic as the majority of our customers did not shutdown. However, our spot rates did suffer a decline early in the second quarter due to capacity from other verticals becoming available as their customer base saw a reduction in volumes.  During the third quarter, we saw spot market rates exceed contract rates for the first time in seven quarters, and we expect contract rates in 2021 to increase on average 10-15%.

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A summary of our revenue generated by segment for the three and nine months ended September 30, 2020 and 2019 is as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

(dollars in thousands)

(dollars in thousands)

Truckload revenue, before fuel surcharge

$

347,709

$

340,630

$

1,037,988

$

1,001,425

Fuel surcharge

 

27,790

 

41,837

 

96,051

 

124,566

Total Truckload operating revenue

 

375,499

 

382,467

 

1,134,039

 

1,125,991

Brokerage operating revenue

 

55,970

 

46,036

 

152,475

 

131,737

Total operating revenue

$

431,469

$

428,503

$

1,286,514

$

1,257,728

The following is a summary of our key Truckload segment performance indicators, before fuel surcharge for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Over the road

 

  

 

  

 

  

 

  

Average revenue per tractor per week

$

3,680

$

3,479

$

3,566

$

3,572

Average revenue per mile

$

2.047

$

1.910

$

1.921

$

1.949

Average revenue miles per tractor per week

 

1,798

 

1,821

 

1,856

 

1,832

Average tractors

 

3,684

 

3,785

 

3,781

 

3,671

Dedicated

 

  

 

  

 

  

 

  

Average revenue per tractor per week

$

4,065

$

4,011

$

4,085

$

3,998

Average revenue per mile

$

2.353

$

2.408

$

2.360

$

2.367

Average revenue miles per tractor per week

 

1,728

 

1,666

 

1,731

 

1,689

Average tractors

 

2,710

 

2,748

 

2,717

 

2,693

Consolidated

 

  

 

  

 

  

 

  

Average revenue per tractor per week

$

3,843

$

3,703

$

3,783

$

3,752

Average revenue per mile

$

2.173

$

2.109

$

2.097

$

2.118

Average revenue miles per tractor per week

 

1,768

 

1,756

 

1,804

 

1,772

Average tractors

 

6,394

 

6,533

 

6,498

 

6,364

For the quarter ended September 30, 2020, our Truckload revenue, before fuel surcharge increased by $7.1 million, or 2.1%, compared to the same quarter in 2019. The primary factors driving the changes in Truckload revenue, were a 2.9% increase in average revenue per mile, a 0.7% increase in average revenue miles per tractor per week partially offset by a 2.1% decrease in average available tractors. During the quarter ended September 30, 2020, our OTR rates increased 7.2% due primarily to an increase in spot rates offset by an approximate 2.9% decline in our contract rates compared to the same quarter in 2019. Our Dedicated revenue per tractor per week increased 1.4% during the quarter ended September 30, 2020 as compared to the same period in 2019. Fuel surcharge revenue decreased by $14.0 million, or 33.6%, to $27.8 million, compared with $41.8 million in the same quarter in 2019. The Department of Energy (“DOE”) national weekly average fuel price per gallon averaged approximately $0.598 per gallon lower for the quarter ended September 30, 2020 compared to the same quarter in 2019. The decrease in fuel surcharge revenue primarily relates to decreased fuel prices combined with a slight decrease in revenue miles compared to the same quarter in 2019.

For the nine months ended September 30, 2020, our Truckload revenue, before fuel surcharge increased by $36.6 million, or 3.7%, compared to the same period in 2019. The primary factors driving the changes in Truckload revenue, were a 2.1% increase of average available tractors, a 1.8% increase in average revenue miles per tractor per week partially offset by a 1.0% decrease in average revenue per mile. During the nine months ended September 30, 2020, our OTR rates decreased 1.4% due primarily to a decline of in our contract rates of approximately 4.3% compared to the same period in 2019. Our Dedicated revenue per tractor per week increased 2.2% during the nine months ended September 30, 2020 due primarily to a 2.5% increase in average revenue miles per tractor per week as compared to the same period in 2019. Fuel

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surcharge revenue decreased by $28.5 million, or 22.9%, to $96.1 million, compared with $124.6 million in the same period in 2019. The Department of Energy (“DOE”) national weekly average fuel price per gallon averaged approximately $0.464 per gallon lower for the nine months ended September 30, 2020 compared to the same period in 2019. The decrease in fuel surcharge revenue primarily relates to decreased fuel prices partially offset by a 4.4% increase in revenue miles compared to the same period in 2019.

The key performance indicator of our Brokerage segment is gross margin percentage (Brokerage revenue less purchased transportation expense expressed as a percentage of total operating revenue). Gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party carriers. The following table lists the gross margin percentage for our Brokerage segment for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

    

Gross margin percentage

 

6.7

%  

12.0

%

 

6.1

%  

15.2

%

 

For the quarter ended September 30, 2020, our Brokerage revenue increased by $9.9 million, or 21.6%, compared to the same quarter in 2019. The primary factor driving the increase in Brokerage revenue was a 14.9% increase in average revenue per load and a 5.9% increase in load count. We experienced a decrease in our gross margin to 6.7% in the third quarter of 2020 compared to 12.0% in the same quarter of 2019, due to a $241 increase in cost per load caused by tightened truckload capacity partially offset by a $187 increase in average revenue per load compared to the same quarter in 2019. During the third quarter of 2020, 76.0% of our freight was contracted while 24.0% was sourced through the spot market.  We are currently working to increase the percentage of freight sourced through the spot market and increasing the contractual rates to better match current market conditions.

For the nine months ended September 30, 2020, our Brokerage revenue increased by $20.7 million, or 15.7%, compared to the same period in 2019. The primary factor driving the increase in Brokerage revenue was a 23.0% increase in load count partially offset by a 5.9% decrease in average revenue per load. We experienced a decrease in our gross margin to 6.1% in the nine months ended September 30, 2020 compared to 15.2% in the same period of 2019, due to a $78 decrease in revenue per load combined with a $46 increase in cost per load compared to the same period in 2019. We continue to work on improving our operating margin in this segment and expect the operating ratio to improve approximately 500 basis points for the fourth quarter.

Operating Expenses

For comparison purposes in the discussion below, we use total operating revenue and revenue, before fuel surcharge when discussing changes as a percentage of revenue. As it relates to the comparison of expenses to revenue, before fuel surcharge, we believe that removing fuel surcharge revenue, which is sometimes a volatile source of revenue affords a more consistent basis for comparing the results of operations from period-to-period.

Individual expense line items as a percentage of total operating revenue also are affected by fluctuations in the percentage of our revenue generated by independent contractor and brokerage loads.

Salaries, Wages and Benefits

Salaries, wages and benefits consist primarily of compensation for all employees. Salaries, wages and benefits are primarily affected by the total number of miles driven by company drivers, the rate per mile we pay our company drivers, employee benefits such as health care and workers’ compensation, and to a lesser extent by the number of, and compensation and benefits paid to, non-driver employees.

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The following is a summary of our salaries, wages and benefits for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

Nine Months Ended

 

September 30, 

 

September 30, 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

Salaries, wages and benefits

$

137,541

 

$

134,862

$

412,889

 

$

389,907

% of total operating revenue

 

31.9

%  

31.5

%

 

32.1

%  

31.0

%

% of revenue, before fuel surcharge

 

34.1

%  

34.9

%

 

34.7

%  

34.4

%

For the quarter ended September 30, 2020, salaries, wages and benefits increased $2.7 million, or 2.0%, compared with the same quarter in 2019. The increases in absolute dollar terms were due primarily to a $5.2 million increase in office wages due in part to a 7.8% increase in headcount as we continue to invest in our ongoing initiatives. During the quarter ended September 30, 2020, our workers’ compensation expense and group health claims expense decreased approximately 16.3%, due to decreased workers compensation and group health claims expense as compared to the same quarter in 2019.

For the nine months ended September 30, 2020, salaries, wages and benefits increased $23.0 million, or 5.9%, compared with the same period in 2019. The increases in absolute dollar terms were due primarily to $11.7 million of higher driver wages due in part to a 4.7% increase in company driver miles and a $12.8 million increase in office wages due in part to a 6.9% increase in headcount as we continue to invest in our ongoing initiatives. During the nine months ended September 30, 2020, our workers’ compensation expense and group health claims expense decreased approximately 2.6%, due to decreased workers compensation and group health claims expense as compared to the same period in 2019.

In the near term, we believe salaries, wages and benefits will increase as a result of significant driver pay increases, some of which are already in place, due to a shortage of qualified drivers.

Fuel and Fuel Taxes

Fuel and fuel taxes consist primarily of diesel fuel expense and fuel taxes for our company-owned and leased tractors. The primary factors affecting our fuel and fuel taxes expense are the cost of diesel fuel, the miles per gallon we realize with our equipment and the number of miles driven by company drivers.

We believe that the most effective protection against net fuel cost increases in the near term is to maintain an effective fuel surcharge program and to operate a fuel-efficient fleet by incorporating fuel efficiency measures, such as auxiliary heating units, installation of aerodynamic devices on tractors and trailers and low-rolling resistance tires on our tractors, engine idle limitations and computer-optimized fuel-efficient routing of our fleet.

The following is a summary of our fuel and fuel taxes for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

Fuel and fuel taxes

$

33,208

$

47,315

$

103,265

$

141,252

% of total operating revenue

 

7.7

%  

11.0

%

 

8.0

%  

11.2

%

% of revenue, before fuel surcharge

 

8.2

%  

12.2

%

 

8.7

%  

12.5

%

For the quarter ended September 30, 2020, fuel and fuel taxes decreased $14.1 million, or 29.8%, compared with the same quarter in 2019. The decrease in fuel and fuel taxes was primarily the result of a 25.4% decrease in the average fuel price per gallon, a 5.4% increase in average miles per gallon, partially offset by a slight increase in company driver miles compared to the same quarter in 2019.

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For the nine months ended September 30, 2020, fuel and fuel taxes decreased $38.0 million, or 26.9%, compared with the same period in 2019. The decrease in fuel and fuel taxes was primarily the result of a 24.5% decrease in the average fuel price per gallon and a 5.6% increase in average miles per gallon, partially offset by a 4.7% increase in company driver miles compared to the same period in 2019.

To measure the effectiveness of our fuel surcharge program, we calculate “net fuel expense” by subtracting fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors, which is included in purchased transportation) from our fuel expense. Our net fuel expense as a percentage of revenue, before fuel surcharge, is affected by the cost of diesel fuel net of surcharge collection, the percentage of miles driven by company tractors and our percentage of non-revenue generating miles, for which we do not receive fuel surcharge revenues. Net fuel expense as a percentage of revenue, before fuel surcharge, is shown below:

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

Total fuel surcharge revenue

$

27,790

$

41,837

$

96,051

$

124,566

Less: fuel surcharge revenue reimbursed to independent contractors

 

6,838

 

11,874

 

25,360

 

34,587

Company fuel surcharge revenue

 

20,952

 

29,963

 

70,691

 

89,979

Total fuel and fuel taxes

$

33,208

$

47,315

$

103,265

$

141,252

Less: company fuel surcharge revenue

 

20,952

 

29,963

 

70,691

 

89,979

Net fuel expense

$

12,256

$

17,352

$

32,574

$

51,273

% of total operating revenue

 

2.8

%  

4.0

%

 

2.5

%  

4.1

%

% of revenue, before fuel surcharge

 

3.0

%  

4.5

%

 

2.7

%  

4.5

%

For the quarter ended September 30, 2020, net fuel expense decreased $5.1 million, or 29.4%, compared with the same quarter in 2019. During the quarter ended September 30, 2020, the decrease in net fuel expenses was primarily the result of a 25.4% decrease in the average fuel price per gallon, a 5.4% increase in average miles per gallon, partially offset by a $9.0 million decrease in company fuel surcharge revenue as compared to the same quarter in 2019.

For the nine months ended September 30, 2020, net fuel expense decreased $18.7 million, or 36.5%, compared with the same period in 2019. During the nine months ended September 30, 2020, the decrease in net fuel expenses was primarily the result of a 24.5% decrease in the average fuel price per gallon, a 5.6% increase in average miles per gallon, partially offset by a 4.7% increase in company driver miles and a $19.3 million decrease in company fuel surcharge revenue compared to the same period in 2019.

In the near term, our net fuel expense is expected to fluctuate as a percentage of total operating revenue and revenue, before fuel surcharge, based on factors such as diesel fuel prices, the percentage recovered from fuel surcharge programs, the percentage of uncompensated miles, the percentage of revenue generated by independent contractors, the percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue).

Vehicle Rents and Depreciation and Amortization

Vehicle rents consist primarily of payments for tractors and trailers financed with operating leases. The primary factors affecting this expense item include the size and age of our tractor and trailer fleets, the cost of new equipment and the relative percentage of owned versus leased equipment.

Depreciation and amortization consists primarily of depreciation for owned tractors and trailers. The primary factors affecting these expense items include the size and age of our tractor and trailer fleets, the cost of new equipment and the relative percentage of owned equipment and equipment acquired through debt or finance leases versus equipment leased through operating leases. We use a mix of finance leases and operating leases to finance our revenue equipment with individual decisions being based on competitive bids and tax projections. Gains or losses realized on the sale of owned revenue equipment are included in depreciation and amortization for reporting purposes.

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Vehicle rents and depreciation and amortization are closely related because both line items fluctuate depending on the relative percentage of owned equipment and equipment acquired through finance leases versus equipment leased through operating leases. Vehicle rents increase with greater amounts of equipment acquired through operating leases, while depreciation and amortization increases with greater amounts of owned equipment and equipment acquired through finance leases. Because of the inverse relationship between vehicle rents and depreciation and amortization, we review both line items together.

The following is a summary of our vehicle rents and depreciation and amortization for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

Vehicle rents

$

20,956

$

19,470

$

64,168

$

57,025

Depreciation and amortization, net of (gains) losses on sale of property

 

25,785

 

26,684

 

77,871

 

74,498

Vehicle rents and depreciation and amortization of property and equipment

$

46,741

$

46,154

$

142,039

$

131,523

% of total operating revenue

 

10.8

%  

10.8

%

 

11.0

%  

10.5

%

% of revenue, before fuel surcharge

 

11.6

%  

11.9

%

 

11.9

%  

11.6

%

For the quarter ended September 30, 2020, vehicle rents increased $1.5 million or 7.6% compared to the same quarter in 2019. The increase in vehicle rents was primarily due to increased trailers financed under operating leases compared to the same quarter in 2019. Depreciation and amortization, net of (gains) losses on sale of property and equipment decreased $0.9 million, or 3.4%, compared to the same quarter in 2019. The decrease in depreciation and amortization is primarily due to decreased owned tractors combined with lower depreciation per tractor partially offset by increased software amortization as compared to the same quarter in 2019.

For the nine months ended September 30, 2020, vehicle rents increased $7.1 million or 12.5% compared to the same period in 2019. The increase in vehicle rents was primarily due to increased trailers and tractors financed under operating leases compared to the same period in 2019. Depreciation and amortization, net of (gains) losses on sale of property and equipment increased $3.4 million, or 4.5%, compared to the same period in 2019. The increase in depreciation and amortization is primarily due to increased software amortization as compared to the same period in 2019.

We continue to evaluate our planned capital expenditures and estimate 2020 net capital expenditures to approximate $100.0 to $120.0 million, which includes an approximate $20.0 million transaction that carried over from the fourth quarter of 2019.

Purchased Transportation

Purchased transportation consists of the payments we make to independent contractors, including fuel surcharge reimbursements paid to independent contractors, in our Truckload segment, and payments to third-party carriers in our Brokerage segment.

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The following is a summary of our purchased transportation for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

Purchased transportation

$

125,997

$

122,433

$

373,117

$

349,017

% of total operating revenue

 

29.2

%  

28.6

%

 

29.0

%  

27.7

%

% of revenue, before fuel surcharge

 

31.2

%  

31.7

%

 

31.3

%  

30.8

%

For the quarter ended September 30, 2020, purchased transportation increased $3.6 million, or 2.9%, compared to the same quarter in 2019. The increase in purchased transportation reflected a 5.9% increase in our Brokerage load count, a 21.8% increase in cost per Brokerage load partially offset by a 7.2% decrease in independent contractor miles and a 42.4% decrease in fuel surcharge paid to independent contractors as compared to the same quarter in 2019.

For the nine months ended September 30, 2020, purchased transportation increased $24.1 million, or 6.9%, compared to the same period in 2019. The increase in purchased transportation reflected a 23.0% increase in our Brokerage load count, a 4.1% increase in our cost per Brokerage load combined with a 4.6% increase in independent contractor miles partially offset by a 26.7% decrease in fuel surcharge paid to independent contractors as compared to the same period in 2019.

Because we reimburse independent contractors for fuel surcharges we receive, we subtract fuel surcharge revenue reimbursed to them from our purchased transportation. The result, referred to as purchased transportation, net of fuel surcharge reimbursements, is evaluated as a percentage of total operating revenue and as a percentage of revenue, before fuel surcharge, as shown below:

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

Purchased transportation

$

125,997

$

122,433

$

373,117

$

349,017

Less: fuel surcharge revenue reimbursed to independent contractors

 

6,838

 

11,874

 

25,360

 

34,587

Purchased transportation, net of fuel surcharge reimbursement

$

119,159

$

110,559

$

347,757

$

314,430

% of total operating revenue

 

27.6

%  

 

25.8

%

 

27.0

%  

 

25.0

%

% of revenue, before fuel surcharge

 

29.5

%  

 

28.6

%

 

29.2

%  

 

27.7

%

For the quarter ended September 30, 2020, purchased transportation, net of fuel surcharge reimbursement, increased $8.6 million, or 7.8%, compared to the same quarter in 2019. The increase in purchased transportation reflected a 5.9% increase in our Brokerage load count, a 21.8% increase in cost per Brokerage load partially offset by a 7.2% decrease in independent contractor miles as compared to the same quarter in 2019.

For the nine months ended September 30, 2020, purchased transportation, net of fuel surcharge reimbursement, increased $33.3 million, or 10.6%, compared to the same period in 2019. The increase in purchased transportation reflected a 23.0% increase in our Brokerage load count, a 4.1% increase in our cost per Brokerage load combined with a 4.6% increase in independent contractor miles as compared to the same period in 2019.

Operating Expenses and Supplies

Operating expenses and supplies consist primarily of ordinary vehicle repairs and maintenance costs, driver on-the-road expenses, tolls and driver recruiting costs. Operating expenses and supplies are primarily affected by the age of our company-owned and leased fleet of tractors and trailers, the number of miles driven in a period and driver turnover.

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The following is a summary of our operating expenses and supplies expense for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

Operating expenses and supplies

$

33,927

$

36,147

$

101,249

$

104,744

% of total operating revenue

 

7.9

%  

8.4

%

 

7.9

%  

8.3

%

% of revenue, before fuel surcharge

 

8.4

%  

9.3

%

 

8.5

%  

9.2

%

For the quarter ended September 30, 2020, operating expenses and supplies decreased $2.2 million, or 6.1%, compared to the same quarter in 2019. The decrease in operating expenses and supplies is primarily due to decreased costs associated with the student driver training program suspended during the second quarter of 2020.

For the nine months ended September 30, 2020, operating expenses and supplies decreased $3.5 million, or 3.3%, compared to the same period in 2019. The decrease in operating expenses and supplies is primarily due to decreased driver hiring related costs and costs associated with the student driver training program as compared to the same period in 2019.

Insurance Premiums and Claims

Insurance premiums and claims consists primarily of retained amounts for liability (personal injury and property damage), physical damage and cargo damage, as well as insurance premiums. The primary factors affecting our insurance premiums and claims are the frequency and severity of accidents, trends in the development factors used in our actuarial accruals and developments in large, prior year claims. The number of accidents tends to increase with the miles we travel. With our significant retained amounts, insurance claims expense may fluctuate significantly and impact the cost of insurance premiums and claims from period-to-period, and any increase in frequency or severity of claims or adverse loss development of prior period claims would adversely affect our financial condition and results of operations.

The following is a summary of our insurance premiums and claims expense for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

Insurance premiums and claims

$

17,835

$

19,570

$

65,141

$

63,189

% of total operating revenue

 

4.1

%  

4.6

%

 

5.1

%  

5.0

%

% of revenue, before fuel surcharge

 

4.4

%  

5.1

%

 

5.5

%  

5.6

%

For the quarter ended September 30, 2020, insurance premiums and claims decreased $1.7 million, or 8.9%, compared to the same quarter in 2019. This decrease is primarily due to decreased physical damage and liability claims expense partially offset by increased excess liability premiums as compared to the same quarter in 2019. Effective September 1, 2020 we renewed our auto liability excess insurance policies increasing our annual premiums by approximately $5.0 million due to a challenging reinsurance market.

For the nine months ended September 30, 2020, insurance premiums and claims increased $2.0 million, or 3.1%, compared to the same period in 2019. This increase is primarily due to increased liability claims and excess premium expense partially offset by decreased physical damage claims expense as we did not experience the same frequency of physical damage claims as compared to the same period in 2019.

Since the second quarter of 2018, substantially all of the tractors in our fleet have been equipped with event recorders. We continue to believe we have an opportunity to reduce our claims expense over time as a result of (1) having completed the installation of event recorders in 2018, (2) the successful launch of our redeveloped driver training facilities,

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(3) our decision to implement hair follicle testing for all of our drivers in the fourth quarter of 2019, and (4) the successful launch of Variant, our digital fleet, which is currently experiencing fewer preventable accidents per million miles than our OTR legacy fleet combined with the suspension of our OTR student program. In the third quarter of 2020 we experienced over 30% fewer preventable accidents than we did in the prior year quarter which we believe contributed greatly to our lower insurance and claims expense despite higher premiums.  Although a decrease in frequency in claims reduced our expense during the quarter, to the extent we have an increase in severity these savings could be partially or fully offset.

General and Other Operating Expenses

General and other operating expenses consist primarily of legal and professional services fees, general and administrative expenses and other costs.

The following is a summary of our general and other operating expenses for the periods indicated:

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

(dollars in thousands)

 

(dollars in thousands)

 

General and other operating expenses

$

14,783

$

12,998

$

42,663

$

37,288

% of total operating revenue

 

3.4

%  

3.0

%

 

3.3

%  

3.0

%

% of revenue, before fuel surcharge

 

3.7

%  

3.4

%

 

3.6

%  

3.3

%

For the quarter ended September 30, 2020, general and other operating expenses increased $1.8 million, or 13.7%, compared to the same quarter in 2019. General and other expenses increased primarily due to increased terminal rents due to the sale leaseback transaction in the fourth quarter of 2019 combined with increased other professional and administrative expenses partially offset by reduced travel and entertainment expenses as compared to the same quarter in 2019.

For the nine months ended September 30, 2020, general and other operating expenses increased $5.4 million, or 14.4%, compared to the same period in 2019. General and other expenses increased primarily due to increased terminal rents due to the sale leaseback transaction in the fourth quarter of 2019 combined with slight increases in other professional and administrative expenses offset by reduced travel and entertainment expenses as compared to the same period in 2019.

Liquidity and Capital Resources

Overview

Our business requires substantial amounts of cash to cover operating expenses as well as to fund capital expenditures, working capital changes, principal and interest payments on our obligations, lease payments, letters of credit to support insurance requirements and tax payments when we generate taxable income. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operating activities, direct equipment financing, finance leases, operating leases and proceeds from equipment sales.

We believe we can fund our expected cash needs, including debt repayment, in the short-term with projected cash flows from operating activities, borrowings under our Credit Facility and direct debt and lease financing we believe to be available for at least the next 12 months. Over the long-term, we expect that we will continue to have significant capital requirements, which may require us to seek additional borrowings, lease financing or equity capital. We have obtained a significant portion of our revenue equipment under operating leases, which are not reflected as net capital expenditures. The availability of financing and equity capital will depend upon our financial condition and results of operations as well as prevailing market conditions.

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At September 30, 2020, we had approximately $32.7 million of outstanding letters of credit, $0 million in outstanding borrowings and $147.5 million of availability under our $250.0 million Credit Facility.

Sources of Liquidity

Credit Facility

On January 28, 2020, we entered into the Credit Facility and contemporaneously with the funding of the Credit Facility paid off obligations under our then existing credit facility and terminated such facility. The Credit Facility is a $250.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows the Company to request an increase in the revolving credit facility of up to $75.0 million.

The Credit Facility is a five-year facility scheduled to terminate on January 28, 2025.  Borrowings under the Credit Facility are classified as either “base rate loans” or “eurodollar rate loans”.  Base rate loans accrue interest at a base rate equal to the highest of (A) the Federal Funds Rate plus 0.50%, (B) the Agent’s prime rate, and (C) LIBOR plus 1.00% plus an applicable margin that is set at 0.50% through June 30, 2020 and adjusted quarterly thereafter between 0.25% and 0.75% based on the ratio of the daily average availability under the Credit Facility to the daily average of the lesser of the borrowing base or the revolving credit facility.  Eurodollar rate loans accrue interest at LIBOR plus an applicable margin that is set at 1.50% through June 30, 2020 and adjusted quarterly thereafter between 1.25% and 1.75% based on the ratio of the daily average availability under the Credit Facility to the daily average of the lesser of the borrowing base or the revolving credit facility.  The Credit Facility includes, within its $250.0 million revolving credit facility, a letter of credit sub-facility in an aggregate amount of $75.0 million and a swingline sub-facility in an aggregate amount of $25.0 million.  An unused line fee of 0.25% is applied to the average daily amount by which the lenders’ aggregate revolving commitments exceed the outstanding principal amount of revolver loans and aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility.  The Credit Facility is secured by a pledge of substantially all of the Company’s assets, excluding, among other things, any real estate or revenue equipment financed outside the Credit Facility.

Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $250.0 million; or (B) the sum of (i) 87.5% of eligible billed accounts receivable, plus (ii) 85.0% of eligible unbilled accounts receivable (less than 30 days), plus (iii) 85.0% of the net orderly liquidation value percentage applied to the net book value of eligible revenue equipment, plus (iv) the lesser of (a) 80.0% the fair market value of eligible real estate or (b) $25.0 million. The Credit Facility contains a single springing financial covenant, which requires a consolidated fixed charge coverage ratio of at least 1.0 to 1.0.  The financial covenant is tested only in the event excess availability under the Credit Facility is less than the greater of (A) 10.0% of the lesser of the borrowing base or revolving credit facility or (B) $20.0 million.

The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the lenders’ commitments may be terminated.  The Credit Facility contains certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions and dispositions, affiliate transactions, and other indebtedness.

At September 30, 2020, the Credit Facility had issued collateralized letters of credit in the face amount of $32.7 million, with $0 million borrowings outstanding and $147.5 million available to borrow. We do not anticipate material liquidity constraints or any issues with our ongoing ability to remain in compliance with our Credit Facility.

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Cash Flows

Our summary statements of cash flows for the nine months ended September 30, 2020 and 2019 are set forth in the table below:

Nine Months Ended

September 30, 

    

2020

    

2019

(dollars in thousands)

Net cash provided by operating activities

$

101,914

$

83,246

Net cash used in investing activities

$

(95,270)

$

(103,030)

Net cash (used in) provided by financing activities

$

(4,909)

$

2,550

Operating Activities

For the nine months ended September 30, 2020, we generated cash flows from operating activities of $101.9 million, an increase of $18.7 million compared to the same period in 2019. The increase was due primarily to a $11.0 million increase in net income adjusted for noncash items combined with a $7.9 million increase in our operating liabilities partially offset by increased operating assets. Our operating liabilities increased $7.9 million during the nine months ended September 30, 2020 as compared to the same period in 2019, due in part to increased accrued wages and benefits related to timing of payments, increased long-term liabilities as a result of deferred payroll taxes in conjunction with the Coronavirus Aid, Relief and Economic Security Act enacted March 2020, partially offset by decreased accounts payable and other accrued liabilities related to timing of payments. Our increase in net income adjusted for noncash items was due in part to increased average revenue miles per tractor, decreased interest expense offset by decreases in our Brokerage gross margin.

Investing Activities

For the nine months ended September 30, 2020, net cash flows used in investing activities were $95.3 million, a decrease of $7.8 million compared to the same period in 2019. This decrease is primarily the result of decreased proceeds from sale of subsidiary during the nine months ended September 30, 2020. Our net capital expenditures during the nine months ended September 30, 2020 were $93.4 million compared to $94.6 million in the same period of 2019. We expect our net capital expenditures for calendar year 2020 will approximate $100.0 million to $120.0 million and will be 100% financed with secured equipment notes or finance leases and will not require any use of cash or borrowings under our Credit Facility.

Financing Activities

For the nine months ended September 30, 2020, net cash flows used in financing activities were $4.9 million, an increase of $7.5 million compared to the same period in 2019. The increase is primarily due to increased debt repayments as we are generating more operating cash flows as compared to the same period in 2019.

Working Capital

As of September 30, 2020, we had a working capital deficit of $66.6 million, representing a $14.3 million decrease in our working capital from September 30, 2019. When we analyze our working capital, we typically exclude balloon payments in the current maturities of long-term debt and current portion of operating lease liabilities as these payments are typically either funded with the proceeds from equipment sales or addressed by extending the maturity of such payments. We believe this facilitates a more meaningful analysis of our changes in working capital from period-to-period. Excluding balloon payments included in current maturities of long-term debt and current portion of operating lease liabilities as of September 30, 2020, we had a working capital deficit of $32.3 million, compared with a working capital deficit of $10.7 million at September 30, 2019. The decrease in working capital was primarily the result of increased accounts payable and current maturities of long-term debt combined with decreased receivables partially offset by increased assets held for sale.

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Working capital deficits are common to many trucking companies that operate by financing revenue equipment purchases through borrowing, or lease arrangements. When we finance revenue equipment through borrowing or lease arrangements, the principal amortization or, in the case of operating leases, the present value of the lease payments scheduled for the next twelve months, is categorized as a current liability, although the revenue equipment and operating lease right of use assets are classified as long-term assets. Consequently, each acquisition of revenue equipment financed with borrowing, or lease arrangements decreases working capital. We believe a working capital deficit has little impact on our liquidity. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future.

Off-Balance Sheet Arrangements

The Company had letters of credit of $32.7 million outstanding as of September 30, 2020. The letters of credit are maintained primarily to support the Company’s insurance program.

The Company had cancelable commitments outstanding at September 30, 2020 to acquire revenue equipment for approximately $61.4 million during the remainder of 2020. These purchase commitments are expected to be financed by operating leases, long-term debt and proceeds from sales of existing equipment.

Seasonality

In the trucking industry, revenue has historically decreased as customers reduce shipments following the winter holiday season and as inclement weather impedes operations. At the same time, operating expenses have generally increased, with fuel efficiency declining because of engine idling and weather, causing more physical damage equipment repairs and insurance claims and costs. For the reasons stated, first quarter results historically have been lower than results in each of the other three quarters of the year. However, cyclical changes in the trucking industry, including imbalances in supply and demand, can override the seasonality faced in the industry. Over the past several years, we have seen increases in demand at varying times, including surges between Thanksgiving and the year-end holiday season.

Contractual Obligations

The table below summarizes our contractual obligations as of September 30, 2020.

Payments Due by Period

    

Less than

    

    

    

More than

    

1 year

 3 years

 5 years

5 years

Total

(in thousands)

Long‑term debt obligations(1)

$

121,233

$

209,140

$

54,459

$

40,884

$

425,716

Finance lease obligations(2)

 

4,468

 

2,874

 

652

 

 

7,994

Operating lease obligations(3)

 

84,330

 

141,629

 

51,397

 

34,608

 

311,964

Purchase obligations(4)

 

61,389

 

 

 

 

61,389

Total contractual obligations(5)

$

271,420

$

353,643

$

106,508

$

75,492

$

807,063

(1)

Including interest obligations on long-term debt, excluding fees. The table assumes long-term debt is held to maturity and does not reflect events subsequent to September 30, 2020.

(2)

Including interest obligations on finance lease obligations.

(3)

We lease certain revenue and service equipment and office and service center facilities under long-term, non-cancelable operating lease agreements expiring at various dates through December 2034. Revenue equipment lease terms are generally three to five years for tractors and five to eight years for trailers. The lease terms and any subsequent extensions generally represent the estimated usage period of the equipment, which is generally substantially less than the economic lives. Certain revenue equipment leases provide for guarantees by us of a portion

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of the specified residual value at the end of the lease term. The maximum potential amount of future payments (undiscounted) under these guarantees is approximately $113.0 million at September 30, 2020. The residual value of a portion of the related leased revenue equipment is covered by repurchase or trade agreements between us and the equipment manufacturer.

(4)

We had commitments outstanding at September 30, 2020 to acquire revenue equipment. The 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 operating activities.

(5)

Excludes deferred taxes and long or short-term portion of self-insurance claims accruals.

Critical Accounting Policies

We have reviewed our critical accounting policies and considered whether any new critical accounting estimates or other significant changes to our accounting policies require any additional disclosures. There have been no significant changes to our accounting policies since the disclosures made in our Annual Report on Form 10-K for the year ended December 31, 2019.

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks have not changed materially from the market risks reported in our Annual Report on Form 10-K for the year ended December 31, 2019.

ITEM 4.           CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020. This evaluation is performed to determine if our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s  rules and forms. Due to the material weakness described below and the Company’s evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were not effective to provide reasonable assurance as of September 30, 2020.

Material Weakness in Internal Control over Financial Reporting

As described in our Annual Report on Form 10-K for the year ended December 31, 2019, during the course of preparing for our IPO, we identified material weaknesses in our internal control over financial reporting, one of which continues to exist as of September 30, 2020. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We did not design effective information technology general computer controls with respect to program development, change management, computer operation, and user access to programs and data. This deficiency did not result in a material misstatement to our annual or interim consolidated financial statements.  However, this deficiency could result in misstatements potentially impacting all financial statement accounts and disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.

Remediation Efforts and Status of Remaining Material Weakness

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During 2019, we implemented new or enhanced existing controls governing program development, change management, computer operations, and user access to programs and data. However, we believe additional time is needed to demonstrate the sustainability and effectiveness of the established controls before concluding on remediation.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended September 30, 2020, there were no material changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II           OTHER INFORMATION

ITEM 1.            LEGAL PROCEEDINGS

We are involved in various other litigation and claims primarily arising in the normal course of business, which include claims for personal injury or property damage incurred in the transportation of freight. Our insurance program for liability, physical damage and cargo damage involves varying risk retention levels. Claims in excess of these risk retention levels are covered by insurance in amounts that management considers to be adequate. Based on its knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of claims and pending litigation, taking into account existing reserves, will not have a materially adverse effect on us. Information relating to legal proceedings is included in Note 6 to our unaudited condensed consolidated financial statements, and is incorporated herein by reference.

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, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, in the sections entitled "Item 1A. Risk Factors," describe 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.

ITEM 2.           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended September 30, 2020, we did not engage in unregistered sales of securities or any other transactions required to be reported under this Item 2 of Part II on Form 10-Q.

The payment of cash dividends is currently limited by our financing arrangements, including certain covenants under the Credit Facility.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.           MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.           OTHER INFORMATION

Not applicable.

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ITEM 6.           EXHIBITS

Exhibit
Number

Description

3.1

Third Amended and Restated Articles of Incorporation of U.S. Xpress Enterprises, Inc. (incorporated by reference to Exhibit 3.1 filed with the Company’s Current Report on Form 8-K filed on June 2, 2020).

3.2

Third Amended and Restated Bylaws of U.S. Xpress Enterprises, Inc., (incorporated by reference to Exhibit 3.2 filed with the Company’s Current Report on Form 8-K filed on filed on June 2, 2020).

31.1#

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Eric Fuller, the Company’s Principal Executive Officer

31.2#

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Eric Peterson, the Company’s Principal Financial Officer

32.1##

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Eric Fuller, the Company’s Chief Executive Officer

32.2##

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Eric Peterson, the Company’s Chief Financial Officer

101.INS#

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH#

XBRL Taxonomy Extension Schema Document

101.CAL#

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF#

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB#

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE#

XBRL Taxonomy Extension Presentation Linkbase Document

104#

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

#     Filed herewith.

##   Furnished herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

U.S. XPRESS ENTERPRISES, INC.

Date: October 30, 2020

By:

/s/ Eric Peterson

Eric Peterson

Chief Financial Officer

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