Truckload Segment
During the second quarter of 2007,In our truckloadTruckload segment, experienced an operating income of $8.5 million compared to operating income of $13.8 million in the same period in 2006. The primary reason for the decrease in earnings was a decline in asset utilization, evidenced by a 4.0% decline in average freight revenue per tractor per week. Lower freight demand and a difficult pricing environment negatively impacted our truckload business.
Our truckload segment primarily generateswe 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 and prior to the divesture of our Mexico business, cross border into and out of Mexico. 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. Generally, we
We are typically paid a predetermined rate per load or per mile for our truckloadTruckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities and other specialized services,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 37.5% of our Truckload operating revenue, and approximately 38.0% of our Truckload revenue, before fuel surcharge, for 2018, 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 throughto the collectionextent 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 to mitigate the impact of increasesare billed on a lagging basis, meaning we typically bill customers in the costcurrent week based on a previous week’s applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as 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 truckloadoperating revenue in our Truckload segment are the average revenue per mile we receive from our customers, the percentage of miles for which we are compensated and the number of shipments and miles we generate. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability. Our primary measures of revenue generation for our truckload businessTruckload segment are average revenue per loaded mile and average revenue per tractor per week,period, in each case excluding fuel surcharge revenue. Average revenue per loaded mile, beforeand revenue and miles from services in Mexico.
In our Truckload segment, our most significant operating expenses vary with miles traveled and include (i) fuel, surcharge revenue, decreased slightly to $1.612 during the second quarter of 2007 from $1.616 in the second quarter of 2006. Average revenue per tractor per week, before fuel surcharge revenue, decreased to $2,996 during the second quarter of 2007 from $3,121 in the second quarter of 2006 (excluding rail revenue).
The main factors that impact our profitability in terms of expenses are the variable costs of transporting freight for our customers. These costs include fuel expense, driver-related(ii) driver related expenses, such as wages, benefits, training and recruitment and purchased transportation expenses, which include compensating(iii) costs associated with independent contractors and providers of expedited intermodal rail services.(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 rentalsvehicle rent and depreciation of long-termlong term assets, such as revenue equipment and terminalservice center facilities, and the compensation of non-driver personnel.
Our Xpress Global Systems Segment
non driver personnel and other general and administrative expenses.
Our Xpress Global SystemsTruckload 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 comprised approximately 6%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 26.4% of our total tractor fleet was operated by independent contractors at March 31, 2019. 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 second quarter“Purchased transportation” line item. When independent contractors increase as a percentage of 2007, offersour 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 warehousing,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 distribution servicescarriers.
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 floorcovering industry. Duringcost of third‑party carriers, and we cannot assure that our results of operations will not be adversely impacted in the second quarterfuture if our ability to obtain third‑party carriers changes or the rates of 2007,such providers increase.
The most significant expense of our Xpress Global SystemsBrokerage segment, experiencedwhich 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 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.
Use of Non‑GAAP Financial Information
In addition to our net income and operating ratio determined in accordance with GAAP, we evaluate operating performance using certain non-GAAP measures, including Adjusted Operating Income We define Adjusted Operating Income as revenue less operating expenses, net of Mexico transition costs. We believe our presentation of Adjusted Operating Income is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance.
The non-GAAP information provided is used by our management and may not be comparable to similar measures disclosed by other companies, because of differing methods used by other companies in calculating Adjusted Operating Income. The non-GAAP measures used herein have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Management compensates for these limitations by relying primarily on GAAP results and using non-GAAP financial measures on a supplemental basis.
The table below compares our GAAP operating income to our non‑GAAP Adjusted Operating Income.
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
Consolidated GAAP Presentation | | (dollars in thousands) | |
Total operating revenue | | $ | 415,363 | | | $ | 425,708 | |
Total operating expenses | | | 402,725 | | | | 410,854 | |
Operating Income | | $ | 12,638 | | | $ | 14,854 | |
| | | | | | | | |
| | | | | | | | |
Consolidated Non-GAAP Presentation | | | | | | | | |
Total operating revenue | | $ | 415,363 | | | $ | 425,708 | |
Fuel Surcharge | | | (40,051 | ) | | | (42,850 | ) |
Revenue, before fuel surcharge | | | 375,312 | | | | 382,858 | |
Total operating expenses | | | 402,725 | | | | 410,854 | |
Adjusted for: | | | | | | | | |
Fuel Surcharge | | | (40,051 | ) | | | (42,850 | ) |
Mexico transition costs | | | (3,400 | ) | | | – | |
Adjusted total operating expenses | | | 359,274 | | | | 368,004 | |
Adjusted Operating Income | | $ | 16,038 | | | $ | 14,854 | |
Results of $2.0 million, compared to $1.7 million in the same period in 2006.Operations
Revenue
Xpress Global Systems primarily generatesWe generate revenue byfrom two primary sources: transporting less-than-truckload freight for our customers. Generally, wecustomers (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 paid a predetermined rate per square yard for carpetprimarily generated through trucking services provided by our two Truckload service offerings (OTR and per pound for all other commodities. The rates vary based on miles, type of service and type ofdedicated contract). Brokerage revenue is primarily generated through brokering freight we are hauling. We enhance our less-than-truckloadto third‑party carriers.
Our total operating revenue is affected by charging for storage, warehousing and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The maincertain factors that affect our less-than-truckload revenue are the revenue per pound we receive from our customers, the average weight per shipment we haul and the number of shipments we generate. These factors relate to, among other things, to the general level of economic activity in the United States, especially in the housing industry,customer inventory levels, specific customer demand, the level of capacity in the truckingtruckload and brokerage industry, the success of our marketing and driver availability. Our primary measures of revenue generation for our less-than-truckload business are average revenue per pound (excluding fuel surcharge revenue), total tonnage and number of loads hauled per day.
The main factors that impact our profitability in terms of expenses are the variable costs of transporting the freight for our customers. These costs include purchased transportation, fuel expensesales efforts and the cost paid toavailability of drivers, independent contractors and third‑party carriers.
A summary of our agents to deliverrevenue generated by type for the freight. Expenses that have both fixedthree months ended March 31, 2019 and variable components include driver and dock related expenses, such2018 is as wages, benefits, training, and recruitment, maintenance and tire expense andfollows:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Revenue before fuel surcharge | | $ | 375,312 | | | $ | 382,858 | |
Fuel surcharge | | | 40,051 | | | | 42,850 | |
Total operating revenue | | $ | 415,363 | | | $ | 425,708 | |
For the quarter ended March 31, 2019, our total cost of insuranceoperating revenue decreased by $10.3 million, or 2.4%, compared to the same quarter in 2018, and claims. These expenses generally vary with the miles we travel and the tonnage of freight we handle, but also have a controllable component based on load factor, safety, fleet age, efficiency and other factors. Our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities and the compensation of non-driver and non-dock worker personnel.
Revenue and Expenses
The primary measure we use to evaluate our profitability is operating ratio (operating expenses, net of fuel surcharge, as a percentage of revenue, before fuel surcharge)surcharge decreased by $7.5 million, or 2.0%. OurExcluding our Mexico operations, our total operating ratio was 97.0% in the second quarter of 2007,revenue remained essentially constant compared to 95.3%the same quarter in 2018 and our revenue excluding fuel surcharge increased $2.9 million or 0.8% compared to the secondsame quarter of 2006.
Revenue Equipment
At June 30, 2007, we had a truckload fleet of 7,698 tractors including 1,016 owner-operator tractors. We also operated 22,289 trailers in our truckload fleet and approximately 200 tractors dedicated to local and drayage services. At Xpress Global Systems, we operated 188 pickup and delivery tractors and 429 trailers.
Consolidated Results of Operations
2018. The following table sets forthprimary factors driving the percentage relationships of expense items toincreases in total operating revenue and revenue, excludingbefore fuel surcharge, excluding our Mexico operations, were improved pricing in our Truckload segment combined with increased miscellaneous revenues, partially offset by decreased volumes and pricing in our Brokerage segment and decreased fuel surcharge revenues. While we are not seeing the same opportunities in the spot market in 2019 compared to 2018, we expect contract rates to continue to increase sequentially during the remainder of 2019 and to outpace cost inflation, absent changes in the macroeconomic environment.
A summary of our revenue generated by segment for eachthe three months ended March 31, 2019 and 2018 is as follows:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Truckload revenue, before fuel surcharge | | $ | 329,068 | | | $ | 328,317 | |
Fuel surcharge | | | 40,051 | | | | 42,850 | |
Total Truckload revenue | | | 369,119 | | | | 371,167 | |
Brokerage revenue | | | 46,244 | | | | 54,541 | |
Total operating revenue | | $ | 415,363 | | | $ | 425,708 | |
The following is a summary of our key Truckload segment performance indicators, before fuel surcharge and excluding miles from services in Mexico, for the three months ended March 31, 2019 and 2018. Average tractors, average company‑owned tractors and average independent contractor tractors exclude tractors in Mexico.
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
Over the road | | | | | | |
Average revenue per tractor per week | | $ | 3,616 | | | $ | 3,850 | |
Average revenue per mile | | $ | 1.985 | | | $ | 1.972 | |
Average revenue miles per tractor per week | | | 1,822 | | | | 1,952 | |
Average tractors | | | 3,617 | | | | 3,622 | |
Dedicated | | | | | | | | |
Average revenue per tractor per week | | $ | 3,961 | | | $ | 3,544 | |
Average revenue per mile | | $ | 2.337 | | | $ | 2.183 | |
Average revenue miles per tractor per week | | | 1,695 | | | | 1,623 | |
Average tractors | | | 2,658 | | | | 2,623 | |
Consolidated | | | | | | | | |
Average revenue per tractor per week | | $ | 3,762 | | | $ | 3,721 | |
Average revenue per mile | | $ | 2.128 | | | $ | 2.051 | |
Average revenue miles per tractor per week | | | 1,768 | | | | 1,814 | |
Average tractors | | | 6,275 | | | | 6,245 | |
For the quarter ended March 31, 2019, our Truckload revenue, before fuel surcharge increased by $0.8 million, or 0.2%, compared to the same quarter in 2018. Excluding our Mexico operations, Truckload revenue before fuel surcharge increased $11.2 million or 3.6%. The primary factors driving the increase in Truckload revenue were a 3.8% increase in revenue per loaded mile due to increased contract rates, a slight increase in average available tractors, an increase of $8.5 million in miscellaneous revenue, partially offset by 2.5% decrease in average revenue miles per tractor. Fuel surcharge revenue decreased by $2.8 million, or 6.5%, to $40.1 million, compared with $42.9 million in the same quarter in 2018. The Department of Energy (“DOE”) national weekly average fuel price per gallon remained essentially constant for the quarter ended March 31, 2019 compared to the same quarter in 2018. The decrease in fuel surcharge revenue primarily relates to decreased revenue miles of 2.7% compared to the same quarter in 2018.
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 months ended March 31, 2019 and 2018.
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
Gross margin percentage | | | 17.5 | % | | | 14.0 | % |
For the quarter ended March 31, 2019, our Brokerage revenue decreased by $8.3 million, or 15.2%, compared to the same quarter in 2018. The primary factors driving the decrease in Brokerage revenue were a 13.8% decrease in load count combined with a 1.6% decrease in average revenue per load. Average revenue per load decreased due to non-contracted spot rates declining more than 20.0%. We experienced an increase in our gross margin to 17.5% in the first quarter of 2019 compared to 14.0% in the same period of the periods indicated below. prior year as a result of sourcing third party capacity more efficiently.
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.
The following is a summary of our salaries, wages and benefits for the three months ended March 31, 2019 and 2018:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Salaries, wages and benefits | | $ | 124,563 | | | $ | 132,924 | |
% of total operating revenue | | | 30.0 | % | | | 31.2 | % |
% of revenue, before fuel surcharge | | | 33.2 | % | | | 34.7 | % |
For the quarter ended March 31, 2019, salaries, wages and benefits decreased $8.4 million, or 6.3%, compared with the same quarter in 2018. This decrease in absolute dollar terms was due primarily to $4.5 million of lower driver wages as our company driver miles decreased 12.6% as compared to the same quarter in 2018, due primarily to independent contractor miles comprising a greater percentage of our miles. Our OTR driver pay on a per mile basis increased as a result of higher incentive-based pay as compared to the same quarter in 2018. Our office wages decreased primarily due to the divesture of our Mexico business. During the three months ended March 31, 2019, our workers’ compensation expense and group health claims expense decreased approximately 21.4%, due to positive trends in our workers’ compensation claims, partially offset by increased group health claims expense as compared to the same quarter in 2018. In the near term, we believe salaries, wages and benefits will increase as a result of a tight driver market, wage inflation and higher healthcare costs. As a percentage of revenue, we expect salaries, wages and benefits will fluctuate based on our ability to generate offsetting increases in average revenue per total mile and the percentage of revenue generated by independent contractors and brokerage operations, for which payments are reflected in the “Purchased transportation” line item.
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 months ended March 31, 2019 and 2018:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Fuel and fuel taxes | | $ | 46,904 | | | $ | 58,389 | |
% of total operating revenue | | | 11.3 | % | | | 13.7 | % |
% of revenue, before fuel surcharge | | | 12.5 | % | | | 15.3 | % |
For the quarter ended March 31, 2019, fuel and fuel taxes decreased $11.5 million, or 19.7%, compared with the same quarter in 2018. The decrease in fuel and fuel taxes was primarily the result of a 12.6% decrease in company driver miles, a $2.5 million decrease due to the divesture of our Mexico business, and a 2.9% increase in our average miles per gallon compared to the same quarter in 2018. The average DOE fuel price per gallon remained essentially constant for the quarter ended March 31, 2019, compared to the same quarter in 2018.
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 calculated usingaffected by the cost of diesel fuel and fuel taxes, net of fuel surcharge. Management believes that eliminatingsurcharge collection, the impactpercentage of this sourcemiles driven by company tractors and our percentage of non‑revenue provides a more consistent basisgenerating miles, for comparing results of operations from period to period.
| | (Total operating revenue) Three Months Ended June 30, | | | (Revenue, before fuel surcharge) Three Months Ended June 30, | | | (Total operating revenue) Six Months Ended June 30, | | | (Revenue, before fuel surcharge) Six Months Ended June 30, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
Operating Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries, wages and benefits | | | 33.4 | | | | 32.6 | | | | 38.8 | | | | 38.3 | | | | 34.2 | | | | 33.4 | | | | 39.5 | | | | 38.7 | |
Fuel and fuel taxes | | | 23.2 | | | | 22.9 | | | | 10.7 | | | | 9.5 | | | | 22.7 | | | | 22.6 | | | | 11.0 | | | | 10.2 | |
Vehicle rents | | | 6.2 | | | | 5.0 | | | | 7.2 | | | | 5.8 | | | | 6.3 | | | | 5.5 | | | | 7.2 | | | | 6.4 | |
Depreciation and amortization, net of gain on sale | | | 4.9 | | | | 4.1 | | | | 5.7 | | | | 4.8 | | | | 5.1 | | | | 4.0 | | | | 5.9 | | | | 4.7 | |
Purchased transportation | | | 15.1 | | | | 15.8 | | | | 17.6 | | | | 18.6 | | | | 15.1 | | | | 15.7 | | | | 17.4 | | | | 18.2 | |
Operating expense and supplies | | | 6.1 | | | | 6.4 | | | | 7.1 | | | | 7.5 | | | | 6.3 | | | | 6.4 | | | | 7.3 | | | | 7.4 | |
Insurance premiums and claims | | | 4.0 | | | | 4.2 | | | | 4.6 | | | | 4.9 | | | | 4.1 | | | | 4.3 | | | | 4.7 | | | | 5.0 | |
Operating taxes and licenses | | | 1.1 | | | | 1.1 | | | | 1.3 | | | | 1.3 | | | | 1.2 | | | | 1.2 | | | | 1.3 | | | | 1.3 | |
Communications and utilities | | | 0.7 | | | | 0.9 | | | | 0.8 | | | | 1.1 | | | | 0.8 | | | | 0.9 | | | | 0.9 | | | | 1.1 | |
General and other operating | | | 2.7 | | | | 2.9 | | | | 3.2 | | | | 3.4 | | | | 2.8 | | | | 3.0 | | | | 3.2 | | | | 3.5 | |
Loss on sale and exit of business | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | |
Total operating expenses | | | 97.4 | | | | 96.0 | | | | 97.0 | | | | 95.3 | | | | 98.6 | | | | 97.1 | | | | 98.4 | | | | 96.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from Operations | | | 2.6 | | | | 4.0 | | | | 3.0 | | | | 4.7 | | | | 1.4 | | | | 2.9 | | | | 1.6 | | | | 3.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | 1.4 | | | | 1.2 | | | | 1.6 | | | | 1.4 | | | | 1.4 | | | | 1.1 | | | | 1.7 | | | | 1.3 | |
Equity in (income) loss of affiliated companies | | | (0.1 | ) | | | 0.1 | | | | (0.1 | ) | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | (0.1 | ) | | | 0.1 | |
Minority interest | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | | | | 0.0 | | | | 0.1 | |
| | | 1.3 | | | | 1.4 | | | | 1.5 | | | | 1.6 | | | | 1.4 | | | | 1.3 | | | | 1.6 | | | | 1.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 1.3 | | | | 2.6 | | | | 1.5 | | | | 3.1 | | | | 0.0 | | | | 1.6 | | | | 0.0 | | | | 1.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax provision | | | 0.6 | | | | 1.1 | | | | 0.7 | | | | 1.3 | | | | 0.0 | | | | 0.7 | | | | 0.0 | | | | 0.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | | 0.7 | % | | | 1.5 | % | | | 0.8 | % | | | 1.8 | % | | | 0.0 | % | | | 0.9 | % | | | 0.0 | % | | | 1.1 | % |
There are minor rounding differences in the above table.
Comparison of the Three Months ended June 30, 2007 to the Three Months Ended June 30, 2006
Total operating revenue increased 2.8% to $400.3 million during the three months ended June 30, 2007 compared to $389.5 million during the same period in 2006. The increase resulted primarily from an increase in average number of seated trucks to 7,676 in the second quarter of 2007 compared to 6,943 in the second quarter of 2006 offset by 4.0% reduction in revenue per tractor and decreased rail volumes.
Revenue, beforewhich we do not receive fuel surcharge, increased 3.7% to $344.3 million during the three months ended June 30, 2007 compared to $332.0 million during the same period in 2006. Truckload revenue, before revenues. Net fuel surcharge, increased 3.8% to $319.6 million during the three months ended June 30, 2007, compared to $307.9 million during the same period in 2006expense as a result of an increase in average seated trucks to 7,676 in the second quarter of 2007 compared to 6,943 in the second quarter of 2006 partially offset by 4.0% reduction in revenue per tractor and decreased rail volumes. Xpress Global Systems’ revenue increased 0.8% to $25.8 million during the three months ended June 30, 2007, compared to $25.6 million during the same period in 2006. Intersegment revenue decreased to $1.2 million during the three months ended June 30, 2007, compared to $1.5 million during the same period in 2006.
Salaries, wages and benefits increased 5.1% to $133.6 million during the three months ended June 30, 2007 compared to $127.1 million during the same period in 2006. The increase was primarily due to an increase of 7.6% in U.S. Xpress driver wages due to a 6.5% increase in U.S. Xpress company miles and a decrease in expedited rail volume partially offset by a decrease in local driver wages due to a reduction in tractors dedicated to local and drayage services. Tractors dedicated to local and drayage services will fluctuate consistent with rail volumes. As a percentage of revenue, before fuel surcharge, salaries, wages,is shown below:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Fuel surcharge revenue | | $ | 40,051 | | | $ | 42,850 | |
Less: fuel surcharge revenue reimbursed to independent contractors | | | 10,480 | | | | 7,956 | |
Company fuel surcharge revenue | | | 29,571 | | | | 34,894 | |
Total fuel and fuel taxes | | $ | 46,904 | | | $ | 58,389 | |
Less: company fuel surcharge revenue | | | 29,571 | | | | 34,894 | |
Net fuel expense | | $ | 17,333 | | | $ | 23,495 | |
% of total operating revenue | | | 4.2 | % | | | 5.5 | % |
% of revenue, before fuel surcharge | | | 4.6 | % | | | 6.1 | % |
For the quarter ended March 31, 2019, net fuel expense decreased $6.2 million, or 26.2%, compared with the same quarter in 2018. During the quarter ended March 31, 2019, the decrease in net fuel expenses was primarily the result of a $2.5 million decrease due to the divesture of our Mexico business, 2.9% increase in average miles per gallon, and benefits increaseda decrease in the fuel surcharge per mile paid to 38.8%independent contractors. Independent contractors accounted for 25.4% of the three months ended June 30, 2007,average tractors available compared to 38.3% during17.5% in the same period in 2006.
Fuel and fuel taxes, net of fuel surcharge, increased 16.4% to $36.9 million during the three months ended June 30, 2007 compared to $31.7 million during the same period in 2006. Such increase is mainly due to a 6.5% increase in U.S. Xpress company miles combined with decreased expedited rail volumes during the second quarter of 2007 compared2018. In the near term, our net fuel expense is expected to the same period in 2006. Fuel surcharges paid to the railroad are reflected in purchased transportation. Asfluctuate 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 taxes increased to 10.7% for the three months ended June 30, 2007, compared to 9.5% during the same period in 2006.cost as a percentage of revenue).
Vehicle Rents and Depreciation and Amortization
Vehicle rents increased 27.5% to $24.6 million during consist primarily of payments for tractors and trailers financed with operating leases. The primary factors affecting this expense item include the three months ended June 30, 2007 compared to $19.3 million duringsize and age of our tractor and trailer fleets, the same period in 2006. This increase is duecost of new equipment and the relative percentage of owned versus leased equipment.
Depreciation and amortization consists primarily toof depreciation for owned tractors and trailers. The primary factors affecting these expense items include the increase insize and age of our tractor and trailer fleets, the average numbercost of tractors financed undernew 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 4,160 during the second quarter of 2007 compared to 3,200 for the same period in 2006. As a percentage offinance our revenue before fuel surcharge, vehicle rents increased to 7.2% for the three months ended June 30, 2007, compared to 5.8% during the same period in 2006.
Depreciationequipment with individual decisions being based on competitive bids and amortization increased 22.8% to $19.4 million during the three months ended June 30, 2007 compared to $15.8 million during the same period in 2006. Gains/tax projections. Gains or losses realized on the sale of owned revenue equipment are included in depreciation and amortization for reporting purposes. Depreciation
Vehicle rents and depreciation and amortization excluding gain/losses, increased to $19.2 million duringare 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 months ended June 30, 2007March 31, 2019 and 2018:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Vehicle Rents | | $ | 18,976 | | | $ | 20,022 | |
Depreciation and amortization, net of (gains) losses on sale of property | | | 23,062 | | | | 24,706 | |
Vehicle Rents and Depreciation and amortization of property and equipment | | $ | 42,038 | | | $ | 44,728 | |
% of total operating revenue | | | 10.1 | % | | | 10.5 | % |
% of revenue, before fuel surcharge | | | 11.2 | % | | | 11.7 | % |
For the quarter ended March 31, 2019, vehicle rents decreased $1.0 million, or 5.2%, compared to $16.6 million during the same periodquarter in 2006. This increase2018. The decrease in vehicle rents was primarily due to a decrease in the short term trailer rentals and the divesture of our Mexico business as compared to the same quarter in 2018. Depreciation and amortization, net of (gains) losses on sale of property and equipment decreased $1.6 million, or 6.6%, compared to the same quarter in 2018. Over the balance of 2019, we currently plan to replace owned tractors with new owned tractors as they reach approximately 475,000 miles, and a portion of our leased tractors with owned equipment when their respective lease terminates. As a result of our 2019 replacement cycle, which is above normalized levels due to a large purchase of more fuel efficient tractors approximately four years ago, we expect the average age of our company tractor fleet will reduce from 28 months as of December 31, 2018 to approximately 18 months as we exit 2019. Our mix of owned and leased equipment may vary over time due to tax, financing and flexibility, among other factors.
Purchased Transportation
Purchased transportation consists of the payments we make to independent contractors, including fuel surcharge reimbursements paid to independent contractors, in partour Truckload segment, and payments to third‑party carriers in our Brokerage segment.
The following is a summary of our purchased transportation for the three months ended March 31, 2019 and 2018:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Purchased transportation | | $ | 114,005 | | | $ | 101,776 | |
% of total operating revenue | | | 27.4 | % | | | 23.9 | % |
% of revenue, before fuel surcharge | | | 30.4 | % | | | 26.6 | % |
For the quarter ended March 31, 2019, purchased transportation increased equipment costs, an$12.2 million, or 12.0%, compared to the same quarter in 2018. The increase in owned tractors,purchased transportation was primarily due to a 45.9% increase in average independent contractors, a $2.5 million increase in fuel surcharge reimbursement to independent contractors, partially offset by an $8.3 million decrease in Brokerage revenue as compared to the same quarter in 2018.
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 the amortization of communication equipment. Asas a percentage of revenue, before fuel surcharge, depreciationas shown below:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Purchased transportation | | $ | 114,005 | | | $ | 101,776 | |
Less: fuel surcharge revenue reimbursed to independent contractors | | | 10,480 | | | | 7,956 | |
Purchased transportation, net of fuel surcharge reimbursement | | $ | 103,525 | | | $ | 93,820 | |
| | | | | | | | |
% of total operating revenue | | | 24.9 | % | | | 22.0 | % |
% of revenue, before fuel surcharge | | | 27.6 | % | | | 24.5 | % |
For the quarter ended March 31, 2019, purchased transportation, net of fuel surcharge reimbursement, increased $9.7 million, or 10.3%, compared to the same quarter in 2018. This increase was primarily due to the 45.9% increase in average independent contractors, partially offset by the $8.3 million decrease in Brokerage revenue compared to the same quarter in 2018. This expense category will fluctuate with the number and amortizationpercentage of loads hauled by independent contractors and third‑party carriers, as well as the amount of fuel surcharge revenue passed through to independent contractors. If industry‑wide trucking capacity continues to tighten in relation to freight demand, we may need to increase the amounts we pay to third‑party carriers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of total operating revenue and revenue, before fuel surcharge, absent an offsetting increase in revenue. Our recent success in growing our lease-purchase program and independent contractor drivers have contributed to increased purchased transportation expense. If we are successful in continuing these efforts, we would expect this line item to 5.7%increase as a percentage of total operating revenue and revenue, before fuel surcharge.
Operating Expenses and Supplies
Operating expenses and supplies consist primarily of ordinary vehicle repairs and maintenance costs, driver on‑the‑road expenses, tolls and advertising expenses related to driver recruiting. 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.
The following is a summary of our operating expenses and supplies for the three months ended June 30, 2007, compared to 4.8% duringMarch 31, 2019 and 2018:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Operating expenses and supplies | | $ | 27,945 | | | $ | 29,791 | |
% of total operating revenue | | | 6.7 | % | | | 7.0 | % |
% of revenue, before fuel surcharge | | | 7.4 | % | | | 7.8 | % |
For the same period in 2006, primarily due to lower revenue per tractor per week less effectively covering these costs.
Purchased transportationquarter ended March 31, 2019, operating expenses and supplies decreased 1.5% to $60.4$1.8 million, during the three months ended June 30, 2007 compared to $61.3 million during the same period in 2006. This decrease is primarily due to a decrease of approximately 22% in rail volumesor 6.2%, compared to the same periodquarter in 2006. As2018. The decrease was primarily due to decreased tractor maintenance expense as a percentageresult of revenue, before fuel surcharge, purchased transportation decreasedincreased independent contractors and the divesture of our Mexico business, partially offset by increased driver hiring costs compared to 17.6%the same quarter in 2018. Independent contractors are responsible for the maintenance of their tractor and now account for 25.4% of the total average tractors compared to 17.5% in the 2007 period from 18.6% in the 2006 period.prior year quarter.
Insurance Premiums and Claims Insurance premiums and claims, consisting consists primarily of premiums and deductibleretained 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. We renewed our liability insurance policies on September 1, 2018 and reduced our deductible to $3.0 million per occurrence.
The following is a summary of our insurance premiums and claims expense for the three months ended March 31, 2019 and 2018:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Insurance premiums and claims | | $ | 24,353 | | | $ | 20,170 | |
% of total operating revenue | | | 5.9 | % | | | 4.7 | % |
% of revenue, before fuel surcharge | | | 6.5 | % | | | 5.3 | % |
For the quarter ended March 31, 2019, insurance premiums and claims increased $4.2 million, or 20.7%, compared to the same quarter in 2018. Insurance premiums and claims increased primarily due to increased physical damage and liability claims primarily as a result of adverse weather in the first quarter of 2019 as compared to the same quarter in 2018. We do not expect our insurance and claims experience in the first quarter of 2019 to be ongoing. During the fourth quarter of 2017, we began installing event recorders on our tractors, and we had installed event recorders in substantially all of our tractors in our fleet as of the second quarter of 2018. We believe event recorders will give us the ability to better train our drivers with respect to safe driving behavior, which in turn may help reduce insurance costs over time. We expect to begin seeing measurable results from the event recorder installation in the second half of 2019.
Interest
Interest expense consists of cash interest, amortization of original issuance discount and deferred financing fees and purchase commitment interest related to our obligation to acquire the remaining equity interest in Xpress Internacional.
The following is a summary of our interest expense for the three months ended March 31, 2019 and 2018:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Interest expense, excluding non-cash items | | | 5,444 | | | | 11,835 | |
Original issue discount and deferred financing amortization | | | 159 | | | | 871 | |
Purchase commitment interest | | | - | | | | (48 | ) |
Interest expense, net | | $ | 5,603 | | | $ | 12,658 | |
For the quarter ended March 31, 2019, interest expense decreased 1.8%$7.1 million, primarily due to $16.0decreased equipment and revolver borrowings combined with lower interest rates related to our term loan compared to the same quarter in 2018. Based on the repayment of our prior credit arrangements in connection with the IPO, along with the entry into our existing Credit Facility, we expect our interest expense to approximate $22.0 million for 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, 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.
At March 31, 2019, we had approximately $31.7 million of outstanding letters of credit, $0 in outstanding borrowings and $118.3 million of availability under our $150.0 million revolving credit facility.
Sources of Liquidity
Credit Facility
In June 2018, we entered into a new credit facility (the “Credit Facility”) that contains a $150.0 million revolving component (the “Revolving Facility”) and a $200.0 million term loan component (the “Term Facility”). The Credit Facility contains an accordion feature that, so long as no event of default exists, allows us to request an increase in the borrowing amounts under the Revolving Facility or the Term Facility by a combined maximum amount of $75.0 million. 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 agent’s prime rate plus an applicable margin that was set at 1.25% through September 30, 2018 and adjusted quarterly thereafter between 0.75% and 1.50% based on our consolidated net leverage ratio. Eurodollar rate loans will accrue interest at London Interbank Offered Rate, or a comparable or successor rate approved by the administrative agent, plus an applicable margin that was set at 2.25% through September 30, 2018 and adjusted quarterly thereafter between 1.75% and 2.50% based on our consolidated net leverage ratio. The Credit Facility requires payment of a commitment fee on the unused portion of the Revolving Facility commitment of between 0.25% and 0.35% based on our consolidated net leverage ratio. In addition, the Revolving Facility includes, within its $150.0 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 $15.0 million. The Term Facility has scheduled quarterly principal payments between 1.25% and 2.50% of the original face amount of the Term Facility plus any additional amount borrowed pursuant to the accordion feature of the Term Facility, with the first such payment occurring on the last day of our fiscal quarter ending September 30, 2018. The Credit Facility will mature on June 18, 2023.
Borrowings under the Credit Facility are prepayable at any time without premium and are subject to mandatory prepayment from the net proceeds of certain asset sales and other borrowings. The Credit Facility is secured by a pledge of substantially all of our assets, excluding, among other things, certain real estate and revenue equipment financed outside the Credit Facility.
The Credit Facility contains restrictive covenants including, among other things, restrictions on our ability to incur additional indebtedness or issue guarantees, to create liens on our assets, to make distributions on or redeem equity interests, to make investments, to transfer or sell properties or other assets and to engage in mergers, consolidations, or acquisitions. In addition, the Credit Facility requires us to meet specified financial ratios and tests.
At March 31, 2019, the Revolving Facility had issued collateralized letters of credit in the face amount of $31.7 million, with $0 borrowings outstanding and $118.3 million available to borrow and the Term Facility had $192.5 million outstanding.
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. At March 31, 2019, the Company was in compliance with all financial covenants prescribed by the Credit Facility.
Cash Flows
Our summary statements of cash flows for the three months ended March 31, 2019 and 2018 are set forth in the table below:
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
| | (dollars in thousands) | |
Net cash provided by (used in) operating activities | | $ | 25,479 | | | $ | (1,863 | ) |
Net cash used in investing actitivies | | $ | (32,491 | ) | | $ | (18,695 | ) |
Net cash provided by (used in) financing activities | | $ | (12,569 | ) | | $ | 15,496 | |
Operating Activities
For the three months ended March 31, 2019, we generated cash flows from operating activities of $25.5 million, an increase of $27.3 million compared to the same period in 2018. The increase was due primarily to a $2.5 million increase in net income adjusted for noncash items, and a $24.9 million decrease in our operating assets and liabilities. The increase in net income adjusted for noncash items was primarily attributable to a 3.8% increase in revenue per loaded mile, improved operating performance at our Brokerage segment and lower interest expense in the three months ended March 31, 2019 as compared to the same period in 2018, partially offset by increased insurance premiums and claims expense. Our operating assets and liabilities decreased $24.9 million during the three months ended June 30, 2007March 31, 2019 as compared to $16.3 million during the same period in 2006. This decrease is2018, due primarilyin part to a reduction in liability claims expense partially offset by an increase in physical damage claims. As a percentageincreased accounts receivable collections, and decreased payments for accounts payable and other accrued liabilities related to timing of revenue, before fuel surcharge, insurance and claims decreased to 4.6% duringpayments.
Investing Activities
For the three months ended
June 30, 2007,March 31, 2019, net cash flows used in investing activities were $32.5 million, an increase of $13.8 million compared to
4.9% during the same period in
2006. We are self-insured up to certain limits for cargo loss, physical damage, and liability. We have adopted an insurance program with higher deductible exposure to offset the industry-wide increase in insurance premium rates. Refer to "Critical Accounting Policies and Estimates—Claims Reserves and Estimates" below for our various retention levels. We maintain insurance with licensed insurance companies above amounts for which we are self-insured for cargo and liability. We accrue for pending claims, plus any incurred but not reported claims. The accruals are estimated based on our evaluation of the type and severity of individual claims and future development based on historical trends. Insurance premiums and claims expense will fluctuate based on claims experience, premium rates, and self-insurance retention levels. Operating taxes and licenses increased 4.7% to $4.5 million during the three months ended June 30, 2007 compared to $4.3 million during the same period in 2006.2018. This increase is primarily the result of increased number of company tractors. As a percentage of revenue, before fuel surcharge, operating taxes and licenses remained essentially constant at 1.3% for both periods.
Communications and utilities decreased 19.4% to $2.9 during the three months ended June 30, 2007 compared to $3.6 million during the same period in 2006. This decrease is primarily the result of replacing leased units with purchased units. The associated expense with the purchased units is located in depreciation and amortization. As a percentage of revenue, before fuel surcharge, communications and utilities decreased to 0.8% in the 2007 period from 1.1% in the 2006 period.
General and other operating decreased 3.5% to $10.9 million during the three months ended June 30, 2007 compared to $11.3 million during the same period in 2006. This decrease is attributed to a small reduction in several areas. As a percentage of revenue, before fuel surcharge, general and other operating decreased slightly to 3.2% in the 2007 period from 3.4% in the 2006 period.
Interest expense increased 17.0% to $5.5 million during the three months ended June 30, 2007 compared to $4.7 million during the same period in 2006. This increase is a result of higher interest rates and increased debt.
Minority interest of $61 for the three months ended June 30, 2007 is representative of the 20% minority shareholders interest in the net income of Arnold and Total.
The effective tax rate was 47.5% for the three months ended June 30, 2007. The rate was higher than the federal statutory rate of 35%, primarilyequipment purchases as a result of per diems paid to drivers at U.S. Xpress and Total which are not fully deductible for federal income tax purposes.
Comparison of the Six Months Ended June 30, 2007 to the Six Months Ended June 30, 2006
Total operating revenue increased 10.4% to $761.2 million during the six months ended June 30, 2007 compared to $689.2 million during the same period in 2006. The increase resulted primarily from the inclusion of $180.6 million in revenue from Arnold and Total for six months ended June 30, 2007 compared to $124.2 million for the four months ended June 30, 2006 and an approximate 550 truck increase in the average number of seated trucks in the U.S. Xpress fleet partially offset by a 5.3% reduction in revenue per tractor and decreased rail volumes for the six months ended June 30, 2007 compared to the same period in 2006.2018, combined with the cash disposed in conjunction with the sale of our Mexico subsidiary. We expect our net capital expenditures for calendar year 2019 will approximate $170.0 million to $190.0 million to execute our equipment replacement strategy and will be financed with cash from operations, borrowings on our line of credit and secured debt financing.
Revenue, before fuel surcharge, increased 11.2% to $660.8 million duringFor the sixthree months ended June 30, 2007 compared to $594.4March 31, 2019, net cash flows used in financing activities were $12.6 million, during the same period in 2006. Truckload revenue, before fuel surcharge, increased 11.9% to $614.8 million during the six months ended June 30, 2007, compared to $549.2 million during the same period in 2006, due primarily to the addition of six months of Arnold and Total revenues in the amount of $157.4 million in the second quarter of 2007 compared to four months in the amount of $107.4 million in the second quarter of 2006. U.S. Xpress revenues increased 3.5% to $457.4 million during the six months ended June 30, 2007 compared to $441.8 million during the same period in 2006 as a result of an increase in average trucks by approximately 550 partially offset by a 5.3% reduction in revenue per tractor and a decrease in rail volume compared to the second quarter of 2006. Xpress Global Systems’ revenue increased 0.8% to $48.4$28.1 million during the six months ended June 30, 2007, compared to $48.0 million during the same period in 2006. Intersegment revenue decreased to $2.4 million during the six months ended June 30, 2007, compared to $2.8 million during the same period in 2006.
Salaries, wages, and benefits increased 13.3% to $260.7 million during the six months ended June 30, 2007 compared to $230.0 million during the same period in 2006. This increase is due in part to the addition of six months of Arnold and Total salaries, wages and benefits in the amount of $55.8 million compared to four months in the amount of $37.1 million and a 5.4% increase in U.S. Xpress company driver miles offset by an approximate 4.7% decrease in U.S. Xpress office employees. As a percentage of revenue, before fuel surcharge, salaries, wages, and benefits increased to 39.5% for the six months ended June 30, 2007, compared to 38.7% during the same period in 2006.
Fuel and fuel taxes, net of fuel surcharge, increased 19.4% to $72.6 million during the six months ended June 30, 2007 compared to $60.8 million during the same period in 2006. The increase is due primarily to the addition of Arnold and Total fuel and fuel taxes in the amount of $18.2 million for six months ended June 30, 2007 compared to $11.0 million for the four months ended June 30, 2006, a 5.4% increase in U.S. Xpress company miles, and decreased expedited rail volumes during the six months ended June 30, 2007 compared to the same period in 2006. Fuel surcharges paid2018. The increase is primarily due to the railroad are reflected in purchased transportation. As a percentagedecreased revenue equipment borrowings and net borrowings under our revolving line of revenue before fuel surcharge, fuel and fuel taxesincreased slightly to 11.0% during the six months ended June 30, 2007credit as compared to 10.2% during the same period in 2006.2018.
Vehicle rents increased 26.3% to $47.6
Working Capital
As of March 31, 2019, we had a working capital deficit of $41.6 million, during the six months ended June 30, 2007 compared to $37.7representing an $8.0 million during the same period in 2006. This increase is due primarily to the addition of vehicle rents for Arnold and Total in the amount of $10.6 million for six months ended June 30, 2007 compared to $4.6 million for four months ended June 30, 2006 and an increase in the average number of tractors financed under operating leases to 4,130 compared to 3,247 during the same period in 2006. As a percentage of revenue, before fuel surcharge, vehicle rents increased to 7.2% during the six months ended June 30, 2007 compared to 6.4% during the same period in 2006.
Depreciation and amortization increased 40.8% to $39.0 million during the six months ended June 30, 2007 compared to $27.7 million during the same period in 2006. Gains/losses realized on the sale of revenue equipment are included in depreciation and amortization for reporting purposes. Depreciation and amortization, excluding gains/losses, increased to $38.8 million during the six months ended June 30, 2007 compared to $29.4 million during the same period in 2006. This increase is due in part to increased equipment costs, an increase in owned tractors, and the amortization of communication equipment. As a percentage of revenue, before fuel surcharge, depreciation and amortization increased to 5.9% during the six months ended June 30, 2007 compared to 4.7% during the same period in 2006,our working capital from March 31, 2018, primarily due to lower revenue per tractor per week less effectively covering these costs, an increase in the percentage of our fleet consisting of purchased equipment, and higher prices of new equipment.
Purchased transportation increased 6.7% to $115.0 million during the six months ended June 30, 2007 compared to $107.8 million during the same period in 2006 primarily due to the increase of purchased transportation amounts for Arnold and Total in the amount of $11.3 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. This increase is partially offset byresulting from decreased expenditures to the railroads due to a reduction in rail volumes. As a percentage of revenue, before fuel surcharge, purchased transportation decreased to 17.4% during the six months ended June 30, 2007 compared to 18.2% during the same period in 2006.
Operating expense and supplies increased 8.1% to $48.2 million during the six months ended June 30, 2007 compared to $44.6 million during the same period in 2006. This is primarily the result of the increase of operating expense and supplies amounts for Arnold and Total in the amount of $3.5 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. As a percentage of revenue, before fuel surcharge, operating expense and supplies decreased slightly to 7.3% during the six months ended June 30, 2007 compared to 7.4% during the same period in 2006.
Insurance premiums and claims, consisting primarily of premiums and deductible amounts for liability (personal injury and property damage), physical damage, and cargo damage insurance and claims, increased 4.4% to $30.9 million during the six months ended June 30, 2007 compared to $29.6 million during the same period in 2006. The increase is due primarily to the increase of insurance premium and claims expenses for Arnold and Total in the amount of $1.6 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. Excluding Arnold and Total amounts, insurance premiums and claims decreased 0.8% to $23.8 million compared to $24.0 million during the same period in 2006. This decrease is due primarily to a reduction in liability claims expense partially offset by an increase in physical damage claims. As a percentage of revenue, before fuel surcharge, insurance and claims decreased to 4.7% during the six months ended June 30, 2007, compared to 5.0% during the same period in 2006. We are self-insured up to certain limits for cargo loss, physical damage, and liability. We have adopted an insurance program with higher deductible exposure to offset the industry-wide increase in insurance premium rates. Refer to "Critical Accounting Policies and Estimates—Claims Reserves and Estimates" below for our various retention levels. We maintain insurance with licensed insurance companies above amounts for which we are self-insured for cargo and liability. We accrue for pending claims, plus any incurred but not reported claims. The accruals are estimated based on our evaluation of the type and severity of individual claims and future development based on historical trends. Insurance premiums and claims expense will fluctuate based on claims experience, premium rates, and self-insurance retention levels.Operating taxes and licenses increased 10.0% to $8.8 million during the six months ended June 30, 2007 compared to $8.0 million during the same period in 2006. This is primarily the result of the increase for Arnold and Total in the amount of $0.9 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. As a percentage of revenue, operating taxes and license remained essentially constant at 1.3% for both periods.
Communications and utilities decreased 10.8% to $5.8 during the six months ended June 30, 2007 compared to $6.5 million during the same period in 2006. This decrease is primarily the result of replacing leased units with purchased units. The associated expense with the purchased units is located in depreciation and amortization. This decrease is partially offset by the increase of communications and utilities amounts for Arnold and Total in the amount of $0.6 million for six months ended June 30, 2007 compared to four months ended June 30, 2006. As a percentage of revenue, before fuel surcharge, communications and utilities decreased to 0.9% during the six months ended June 30, 2007 compared to 1.1% during the same period in 2006.
General and other operating increased 0.9% to $21.4 million during the six months ended June 30, 2007 compared to $21.2 million during the same period in 2006. This is primarily the result of the increase of general and other operating amounts for Arnold and Total in the amount of $0.9 million for six months ended June 30, 2007 compared to four months ended June 30, 2006 partially offset by small reductions in several areas. As a percentage of revenue, before fuel surcharge, general and other operating decreased to 3.2% during the six months ended June 30, 2007, compared to 3.5% during the same period in 2006.
Interest expense increased 41.0% to $11.0 million during the six months ended June 30, 2007 compared to $7.8 million during the same period in 2006. The increase is due primarily to the increase of interest expense for Arnold and Total in the amount of $2.2 million for six months ended June 30, 2007 compared to four months ended June 30, 2006, increased debt, and higher interest rates.
Minority interest of $10 for the six months ended June 30, 2007 is representative of the 20% minority shareholders interest in the net loss of Arnold and Total.
The effective tax rate was 50.0% for the six months ended June 30, 2007. The rate was higher than the federal statutory rate of 35%, primarily as a result of per diems paid to drivers at U.S. Xpress and Total which are not fully deductible for federal income tax purposes.
Liquidity and Capital Resources
Our business is expected to require significant capital investments over the short-term and long-term. Our primary sources of liquidity at June 30, 2007 were funds provided by operations, borrowing under our revolving credit facility, proceeds of our accounts receivable securitization facility, and long-term equipment debt and operating leases of revenue equipment. Our revolving credit facility has maximum available borrowings of $130.0 million and our accounts receivable securitization facility has maximum available borrowings, subject to eligible receivables, of $140.0 million. We believe that funds provided by operations, borrowings under our revolving credit facility and securitization facility, equipment installment loans and long-term equipment debt, and operating lease financing will be sufficient to fund our cash needs and anticipated capital expenditures for the next twelve months. Although changes in economic conditions, credit and leasing markets, and our financial condition and results of operations, over time may cause fluctuations in the terms and conditions and amounts of available financing, we believe that these same sources of liquidity will be available to us over a longer-term and we, therefore, do not expect to experience significant liquidity constraints in the foreseeable future.
Cash Flows
Net cash provided by operating activities was $63.5 million and $55.5 million during the six months ended June 30, 2007 and 2006, respectively. The increase in net cash provided by operating activities is primarily due to increased depreciationaccrued liabilities and accounts payable, partially offset by decreased earnings and an increase of accounts receivable for the six months ended June 30, 2007,customer receivables. Our current liabilities increased by $56.9 million as compared to the same period in 2006.
Net cash used in investing activities was $40.4 million and $74.6 million during the six months ended June 30, 2007 and 2006 respectively. The decrease in cash used in investing activities is primarily thea result of $33.8the adoption of the new lease standard. When we analyze our working capital, we typically exclude balloon payments in the current maturities of long-term debt 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 the current portion of our operating lease liability as of March 31, 2019, we had a working capital surplus of $60.3 million, lesscompared with a working capital deficit of $2.3 million at March 31, 2018. Excluding only the balloon payments included in current maturities of debt, we had a working capital surplus of $3.4 million at March 31, 2019.
Working capital deficits are common to many trucking companies that operate by financing revenue equipment purchases due to the winding down of a large tractor purchase commitment in 2006 ahead of new engine requirements in 2007.
Net cash used in financing activities was $23.7 million during the six months ended June 30, 2007, compared to $13.2 million provided by financing activities during the same period in 2006. The decrease in cash provided by financing activities is the result of net reduction of debt during the period due to fewer purchases ofthrough 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 sixnext twelve months, ended June 30, 2007 as compared to the same period in 2006.
Debt
The Company is party to a $130,000 senior secured revolving credit facility and letter of credit sub-facility with a group of banks with a maturity date in March 2011. The credit facility is secured by revenue equipment and certain other assets and bears interest at the base rate, as defined, plus an applicable margin of 0.00% to 0.25%, or LIBOR plus an applicable margin of 0.88% to 2.00%, based on the Company's lease-adjusted leverage ratio.
At June 30, 2007, the applicable margin was 0.25% for base rate loans and 2.00% for LIBOR loans. The credit facility also prescribes additional fees for letter of credit transactions and a quarterly commitment fee on the unused portion of the loan commitment (2.00% and 0.35%, respectively, at June 30, 2007). At June 30, 2007, $91,036 in letters of credit was outstanding under the credit facility with $34,601 available to borrow. The credit facility is secured by substantially all assets of the Company, other than real estate and assets securing other debt of the Company.
The credit facility requires, among other things, maintenance by the Company of prescribed minimum amounts of consolidated tangible net worth, fixed charge and asset coverage ratios, and a leverage ratio. Subject to certain defined exceptions, the credit facility also restricts the ability of the Company and its subsidiaries, without the approval of the lenders, to engage in sale-leaseback transactions, transactions with affiliates, investment transactions, acquisitions of the Company’s own capital stock or the payment of dividends on such stock, future asset dispositions (except in the ordinary course of business), or other business combination transactions, and to incur liens and future indebtedness. As of June 30, 2007, the Company was in compliance with the credit facility covenants.
The Company is party to a $140,000 accounts receivable securitization facility (the "Securitization Facility"). On a revolving basis, the Company sells accounts receivable as part of a two-step securitization transaction that provides the Company with funding similar to a revolving credit facility. To facilitate this transaction, Xpress Receivables, LLC ("Xpress Receivables"), a bankruptcy-remote, special purpose entity, purchases accounts receivable from U.S. Xpress, Arnold, Total, and Xpress Global Systems. Xpress Receivables funds these purchases with money borrowed under the Securitization Facility through Three Pillars Funding, LLC.
The borrowings are secured by, and paid down through collections on, the accounts receivable. The Company can borrow up to $140,000 under the Securitization Facility, subject to eligible receivables, and pays interest on borrowings based on commercial paper interest rates, plus an applicable margin, and a commitment fee on the daily, unused portion of the Securitization Facility. The Securitization Facility is reflectedcategorized as a current liability, inalthough the consolidated financial statements because its term, subject to annual renewals, expires October 11, 2007. As of June 30, 2007, the Company’s borrowings under the Securitization Facility were $20,000, with $116,961 available to borrow.
The Securitization Facility requires that certain performance ratios be maintained with respect to accounts receivable and that Xpress Receivables preserve its bankruptcy-remote nature. As of June 30, 2007, the Company was in compliance with the Securitization Facility covenants.
At June 30, 2007, we had $337.6 million of borrowings, of which $258.6 million was long-term, $59.0 million was current maturities, and $20.0 million consisted of borrowings under the Securitization Facility. We also had approximately $91.0 million in unused letters of credit. At June 30, 2007, we had an aggregate of approximately $151.6 million of available borrowing remaining under our revolving credit facility and the Securitization Facility.
Equity
In January 2007, the Board of Directors authorized us to repurchase up to $15.0 million of our Class A common stock. The stock could be repurchased on the open market or in privately negotiated transactions at any time until January 26, 2008. The repurchased shares may be used for issuances under our incentive stock plan or for other general corporate purposes, as the Board may determine. No shares were repurchased during the second quarter of 2007.
On June 22, 2007, Max Fuller and Pat Quinn, co-founders of the Company (“Co-Founders”), announced their intention to commence a tender offer through an entity controlled by the Co-Founders, pursuant to which the Co-Founders will offer to purchase for cash any and all of the outstanding shares of Class A common stock of the Company not presently owned by the Co-Founders and certain affiliated entities at an offer price of $20.00 per share.
The tender offer price represents a premium of 44% over the $13.88 per share average reported closing price of the Company’s Class A common stock for the 30 trading days ended on June 21, 2007, the last trading day before the announcement of the tender offer, and a 41% premium over the $14.23 per share reported closing price on June 21, 2007. The announcement stated that the tender offer is expected to be conditioned on, among other things, there having been validly tendered and not withdrawn prior to the expiration date of the tender offer at least that number of shares of the Company’s common stock currently owned by the Co-Founders and certain affiliated entities, represent at least 90% of all the Company’s Class A and Class B common stock then outstanding, and (2) that represent at least a majority of the total number of shares of the Company’s Class A and Class B common stock outstanding on such date that are not held by Co-Founders, their affiliates, or the directors and executive officers of the Company. The announcement further stated that, promptly following the completion of the tender offer, the Co-Founders expect to cause a "short form" merger in which they would acquire at $20.00 per share any Class A common stock of the Company that was not acquired in the tender offer.
The Co-Founders have advised our board of directors that they and certain of their affiliated entities do not intend to tender their shares in the offer, nor would they consider any offer to purchase their shares. Currently, the Co-Founders and their affiliated entities together beneficially own approximately 28% of the outstanding Class A common stock of the Company, as well as 100% of the Company’s outstanding Class B common stock, for an aggregate of approximately 42% of the outstanding Class A and Class B common shares. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to two votes per share. Accordingly, the shares owned by the Co-Founders and their affiliated entities represent over 50% of the voting power of all of the Company’s outstanding common stock. Co-Founders founded the Company in 1985 and serve as Co-Chairmen of the Board. Mr. Fuller is the Company’s Chief Executive Officer and Mr. Quinn is the Company’s President.
In response to this June 22, 2007 announcement, our board of directors appointed a special committee comprised solely of independent directors to evaluate the offer. The special committee has engaged an independent legal adviser and an independent financial adviser to assist the special committee in its review. The Co-Founders also informed us that parties have been proceeding diligently with the preparation of offer materials, definitive financing arrangements, and regulatory filings.
Business Acquisitions
In January of 2007, the Company acquired certain assets of a truckload carrier for a purchase price of $5.6 million in cash. The assets acquired of approximately $4.8 million related primarily to revenue equipment and 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 assets. The excesssources 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 purchase price over the fair value of the assets acquired was recorded as goodwill. The purchase price allocation is preliminary as the Company is still reviewing the valuations of certain assets.foreseeable future.
In June 2007, the Company indirectly acquired a 40% interest in C&C Trucking of Duncan (“C&C Trucking”) for $739. Under the agreement, the Company can acquire the remaining 60% interest from 2008 to 2012. We have accounted for C&C Trucking operating results using the equity method of accounting.
Off-Balance SheetOperating Lease Arrangements
We use non-cancelableleased approximately 2,100 tractors and 7,900 trailers under operating leases as aat March 31, 2019. Operating leases have been an important source of financing for our revenue and service equipment, office and terminal facilities, automobiles, and airplanes. In making the decision to finance through long-term debt or by entering into non-cancelable lease agreements, we consider interest rates, capital requirements, and the tax advantages of leasing versus owning. At June 30, 2007, a substantial portion of our off-balance sheet arrangements related to non-cancelable leases for revenue equipment and office and terminal facilities with termination dates ranging from July 2007 to March 2014.equipment. Lease payments on office and terminal facilities, automobiles, and airplanes are included in general and other operating expenses, lease payments on servicerespect of such equipment are includedreflected in operating expense and supplies, and lease payments on revenue equipment are included in vehicle rents in theour unaudited condensed consolidated statements of operations, respectively. Rental expense related to our off-balance sheet arrangements was $26.9 million for the three months ended June 30, 2007. The remaining lease obligations as of June 30, 2007 were $284.5 million, with $96.9 million duecomprehensive income in the next twelve months.
line item “Vehicle rents.” Our revenue equipment rental expense including short term rentals was $19.0 million in the first quarter of 2019, compared with $20.0 million in the first quarter of 2018. The lease terms 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 of the specified residual amount under certain circumstancesvalue at the end of the lease term. The maximum potential amount of future payments (undiscounted) under these guarantees is approximately $30.9$27.6 million at June 30, 2007.as of March 31, 2019. The residual value of a portion of the related leased revenuetractor equipment is covered by repurchase or trade agreements in principle between theus and equipment manufacturer and us. Management estimatesmanufacturers. We expect the fair market value of the guaranteedequipment at the end of the lease term will be approximately equal to the residual values for leased revenue equipment to be immaterial. Accordingly, we have no guaranteed liabilities accrued in the accompanying consolidated balance sheets.value.
Critical Accounting Policies and EstimatesPage 34
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with generally accepted accounting principles. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Recognition of Revenue
We generally recognize revenue and direct costs when shipments are completed. Certain revenue of Xpress Global Systems, representing approximately 6% of consolidated revenues for the six months ended June 30, 2007, is recognized upon manifest, that is, the time when the trailer of the independent carrier is loaded, sealed, and ready to leave the dock. Estimated expenses are recorded simultaneously with the recognition of revenue. Had revenue been recognized using another method, such as completed shipment, the impact would have been insignificant to our consolidated financial statements.
Income Taxes
Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in years in which the temporary differences are expected to be reversed. When it is more likely than not that all or some portion of specific deferred tax assets, such as state tax credit carry-forwards or state net operating loss carry-forwards, will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined to be not realizable. A valuation allowance for deferred tax assets of $178 has been deemed necessary at June 30, 2007 and December 31, 2006. If the facts or financial results were to change, impacting the likelihood of the realization of the deferred tax assets, we would use our judgment to determine the amount of the valuation allowance required at that time for that period.
The determination of the combined tax rate used to calculate our provision for income taxes for both current and deferred income taxes also requires significant judgment by management. SFAS No. 109, Accounting for Income Taxes, requires that the net deferred tax asset or liability be valued using enacted tax rates that we believe will be in effect when these temporary differences reverse. We use the combined tax rates in effect at the time the financial statements are prepared since no better information is available. If changes in the federal statutory rate or significant changes in the statutory state and local tax rates occur prior to or during the reversal of these items or if our filing obligations were to change materially, this could change the combined rate and, by extension, our provision for income taxes.
Depreciation
Property and equipment are carried at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets (net of estimated salvage value or trade-in value). We generally use estimated useful lives of 4-5 years and 7-10 years for tractors and trailers, respectively, with estimated salvage values ranging from 25% - 50% of the capitalized cost. The depreciable lives of our revenue equipment represent the estimated usage period of the equipment, which is generally substantially less than the economic lives. The residual value of a portion our equipment is covered by re-purchase or trade agreements between us and the equipment manufacturer.
Periodically, we evaluate the useful lives and salvage values of our revenue equipment and other long-lived assets based upon, but not limited to, our experience with similar assets, including gains or losses upon dispositions of such assets, conditions in the used equipment market, and prevailing industry practices. Changes in useful lives or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material impact on financial results. Further, if our equipment manufacturer does not perform under the terms of the agreements for guaranteed trade-in values, such non-performance could have a materially negative impact on financial results.
Goodwill
The excess of the consideration paid over the estimated fair value of identifiable net assets acquired has been recorded as goodwill.
Effective January 1, 2002, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, ("SFAS 142"). As required by the provisions of SFAS 142, we test goodwill for impairment using a two-step process, based on the reporting unit fair value. The first step is a screen for potential impairment, while the second step measures impairment, if any. We completed the required impairment tests of goodwill and noted no impairment of goodwill in any years.
Goodwill impairment tests are highly subjective. Such tests include estimating the fair value of our reporting units. As required by SFAS 142, we compared the estimated fair value of the reporting units with their respective carrying amounts including goodwill. We define a reporting unit as an operating segment. Under SFAS 142, fair value refers to the amount for which the entire reporting unit could be bought or sold. Our methods for estimating reporting unit values include asset and liability fair values and other valuation techniques, such as discounted cash flows and multiples of earnings, or other financial measures. Each of these methods involve significant estimates and assumptions, including estimates of future financial performance and the selection of appropriate discount rates and valuation multiples.
Claims Reserves and Estimates
Claims reserves consist of estimates of cargo loss, physical damage, liability (personal injury and property damage), employee medical expenses, and workers’ compensation claims within our established retention levels. Claims in excess of retention levels are generally covered by insurance in amounts we consider adequate. Claims accruals represent pending claims including estimates of adverse development of known claims, plus an estimated liability for incurred but not reported claims. Accruals for cargo loss, physical damage, liability, and workers’ compensation claims are estimated based on our evaluation of the type and severity of individual claims and historical information, primarily our own claims experience, along with assumptions about future events combined with the assistance of independent actuaries in the case of workers’ compensation and liability. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near future.
Workers’ compensation and liability claims are particularly subject to a significant degree of uncertainty due to the potential for growth and development of the claims over time. Claims and insurance reserves related to workers’ compensation and liability are estimated by an independent third-party actuary, and we refer to these estimates in establishing the reserve. Liability reserves are estimated based on historical experience and trends, the type and severity of individual claims, and assumptions about future costs. Further, in establishing the workers’ compensation and liability reserves, we must take into account and estimate various factors, including, but not limited to, assumptions concerning the nature and severity of the claim, the effect of the jurisdiction on any award or settlement, the length of time until ultimate resolution, inflation rates in health care and in general, interest rates, legal expenses, and other factors. Our actual experience may be different than our estimates, sometimes significantly. Additionally, changes in assumptions made in actuarial studies could potentially have a material effect on the provision for workers’ compensation and liability claims.
Our insurance and claims expense varies based on the frequency and severity of claims, the premium expense, and the level of self-insured retention. Prior to September 1, 2006, the retention levels for liability insurance at U.S. Xpress, Arnold and Total were $2.0 million, $1.0 million and $2.0 million, respectively. Prior to September 1, 2006, the retention levels for workers’ compensation at U.S. Xpress, Arnold, and Total were $0.5 million, $0.8 million and $0.5 million, respectively. Beginning September 1, 2006, the retention levels for liability and workers’ compensation for all companies is $3.0 million and $1.0 million respectively.
Accounting for Business Combinations
Our consolidated financial statements are inclusive of our accounts and the accounts of majority-owned subsidiaries. We consolidate all of majority-owned subsidiaries and record a minority interest representing the remaining shares held by the minority shareholders. All transactions and balances with and related to our majority owned subsidiaries have been eliminated.
In accordance with business combination accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values. We engaged a third-party appraisal firm to assist management in determining the fair values of certain assets acquired. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates, or actual results.
For business combinations, we must record deferred taxes relating to the book versus tax basis of acquired assets and liabilities. Generally, such business combinations result in deferred tax liabilities as the book values are reflected at fair values where as the tax basis is carried over from the acquired company. Such deferred taxes are initially estimated based on preliminary information and are subject to change as valuations and tax returns are finalized.
Seasonality
In the trucking industry, results of operations generally show a seasonal patternrevenue has historically decreased as customers increase shipments prior to and reduce shipments during and afterfollowing the winter holiday season. Additionally, shipments can be adversely impacted by winterseason and as inclement weather conditions. Ourimpedes operations. At the same time, operating expenses have historically been higher in the winter months due primarily to decreasedgenerally increased, with fuel efficiency increased maintenance costsdeclining because of revenueengine 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 colder weathereach of the other three quarters of the year. Over the past several years, we have seen increases in demand at varying times, including surges between Thanksgiving and increased insurancethe year‑end holiday season.
Contractual Obligations
During the three months ended March 31, 2019, there were no material changes in our commitments or contractual obligations.
Critical Accounting Policies
We have reviewed our critical accounting policies and claims costs dueconsidered whether any new critical accounting estimates or other significant changes to adverse winter weather conditions. Revenue can also be affected by bad weather and holidays,our accounting policies require any additional disclosures. We adopted ASC 842, Leases, on January 1, 2019. See Note 2, Summary of Significant Accounting Policies, to our condensed consolidated financial statements included under Part 1, Item 1 of this report. There have been no other significant changes to our accounting policies since revenue is directly related to available working days of shippers.
the disclosures made in our Annual Report on Form 10-K for the year ended December 31, 2018.
Interest Rate RiskITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk is affected by changes in interest rates. Historically, werisks have used a combination of fixed rate and variable rate obligations to manage our interest rate exposure. Fixed interest rate obligations expose us to the risk that interest rates might fall. Variable interest rate obligations expose us to the risk that interest rates might rise.
We are exposed to variable interest rate risk principallynot changed materially from the Securitization Facilitymarket risks reported in our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer (“CEO”) and our revolving credit facility. We are exposed to fixed interest rate risk principally from equipment notes and mortgages. At June 30, 2007, we had borrowings totaling $337.6 million, comprising $31.6 million of variable rate borrowings and $306.0 million of fixed rate borrowings. Holding other variables constant (such as borrowing levels)Chief Financial Officer (“CFO”), the earnings impact of a one-percentage point increase/decrease in interest rates would not have a material impact on our consolidated statements of operations.
Commodity Price Risk
Fuel is one of our largest expenditures. The price and availability of diesel fuel fluctuates due to changes in production, seasonality, and other market factors generally outside our control. Many of our customer contracts contain fuel surcharge provisions to mitigate increases in the cost of fuel. Fuel surcharges to customers do not fully recover all of fuel increases due to engine idle time and out-of-route and empty miles not billable to the customer.
As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation ofhas evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.March 31, 2019. This evaluation was carried outis 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 supervision,Exchange Act is accumulated and with the participation of, ourcommunicated to management, including our Chief Executive OfficerCEO and Chief Financial Officer. Based uponCFO, 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 weaknesses described below and the Company’s evaluation, our Chief Executive Officerthe CEO and Chief Financial OfficerCFO have concluded that our disclosure controls and procedures were not effective as of March 31, 2019.
Material Weaknesses in Internal Control over Financial Reporting as of December 31, 2018
As described in our Annual Report on Form 10-K for the endyear ended December 31, 2018, during the course of preparing for our IPO, we identified material weaknesses in our internal control over financial reporting, some of which continue to exist as of March 31, 2019. 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 a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We did not maintain effective internal control over financial reporting related to the control activities component of Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the period coveredTreadway Commission, the COSO framework. The control activities material weakness contributed to the following additional material weaknesses: (i) ineffective design of information technology general computer controls with respect to program development, change management, computer operations, and user access; (ii) ineffective design of controls over income tax accounting; and (iii) insufficient evidential matter to support design of our controls. These deficiencies did not result in a material misstatement to our annual or interim consolidated financial statements. However, there is a risk that these deficiencies could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected.
Remediation of a Component of a Previously Disclosed Material Weakness
The material weakness related to the ineffective design of information technology general controls with respect to program management, change management computer operations and user access also included a component related to inappropriate segregation of duties with respect to creating and posting journal entries. We have remediated the component of the material weakness related to segregation of duties over creating and posting journal entries by this report. Theredesigning, implementing, and testing controls to ensure that journal entries posted into the general ledger are reviewed by a separate individual, thus resulting in proper segregation of duties.
Changes in Internal Control Over Financial Reporting
We are currently in the process of remediating the above material weaknesses and have taken numerous steps to enhance our internal control environment and address the underlying causes of the material weaknesses. These efforts include designing and implementing the appropriate information technology general controls and controls over income tax accounting. In addition, we are enhancing our process to retain evidential matter that supports the design and implementation of our controls. We are committed to maintaining a strong internal control environment, and we expect to continue our efforts to ensure the material weaknesses described above are remediated. While we intend to complete our remediation process as quickly as possible, we cannot estimate a time when the remediation will be complete. Other than the implementation of these additional controls and new controls related to our adoption of ASC 842, Leases, there were no changes in our internal control over financial reporting that occurred during the period covered by this reportquarter ended March 31, 2019 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
DisclosureLimitations on Controls
Our disclosure controls and procedures are controls and other procedures thatinternal control over financial reporting are designed to ensure that information required to be disclosed in our reports filed or submitted underprovide reasonable assurance of achieving the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated todesired control objectives. Our management, including our Chief Executive Officer as appropriate, to allow timely decisions regarding disclosures.
We have confidence in our internal controlsCEO and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expectCFO, recognize that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internalany control system, no matter how well-conceivedwell designed and operated, canis based upon certain judgments and assumptions and cannot provide only reasonable, not absolute assurance that theits objectives of such internal controls arewill be met. Further, the design ofSimilarly, an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls cancannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected.
PART II OTHER INFORMATION
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 7 to our unaudited condensed consolidated financial statements, and is incorporated herein by reference.