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10-Q: US XPRESS ENTERPRISES INC

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The unaudited condensed consolidated financial statements include the accounts of U.S. Xpress Enterprises, Inc., a Nevada corporation, and its consolidated subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to U.S. Xpress Enterprises, Inc. and its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues or other financial items; any statement of plans, strategies, outlook, growth prospects or objectives of management for future operations; our operational and financial targets; general economic trends, performance or conditions and trends in the industry and markets; the competitive environment in which we operate; any statements concerning proposed new services, technologies or developments; and any statement of belief and any statements of assumptions underlying any of the foregoing. In this Form 10-Q, statements relating to the impact of new accounting standards, future tax rates, expenses, and deductions, expected freight demand, capacity, and volumes, potential results of a default under our Credit Facility or other debt agreements, expected sources of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), expected capital expenditures, expected fleet age and mix of owned versus leased equipment, expected impact of technology, including the impact of event recorders and our strategic initiatives, future customer relationships, future growth of dedicated contract services, future growth in independent contractors and related purchased transportation expense and fuel surcharge reimbursement, future growth of our lease-purchase program, future driver market conditions and driver turnover and retention rates, any projections of earnings, revenues, cash flows, dividends, capital expenditures, or other financial items, expected cash flows, expected operating improvements, any statements regarding future economic conditions or performance, any statement of plans, strategies, programs and objectives of management for future operations, including the anticipated impact of such plans, strategies, programs and objectives, future rates and prices, future utilization, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation, future insurance and claims expense, including the impact of the installation of event recorders, driver training and hair follicle testing, future fluctuations in fuel costs and fuel surcharge revenue, including the future effectiveness of our fuel surcharge program, strategies for managing fuel costs, political conditions and regulations, including trade regulation, quotas, duties or tariffs, and any future changes to the foregoing, future fluctuations in operating expenses and supplies, future fleet size and management, the market value of used equipment, including gain on sale, any statements concerning proposed acquisition plans, new services or developments, the anticipated impact of legal proceedings on our financial position and results of operations, expected progress on internal control remediation efforts, the anticipated effect of the COVID-19 pandemic, among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as "believe," "may," "could," "should," "expects," "estimates," "projects," "anticipates," "plans," "intends," "outlook," "strategy," "target," "optimistic," "focus," "continue," "will" and similar terms and phrases. Such statements are based on currently available operating, financial and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Item 1A. Risk Factors," set forth in this Form 10-Q and our Annual Report on Form 10�K for the year ended December 31, 2019. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in this Form 10-Q and our Annual Report on Form 10�K for the year ended December 31, 2019, along with various disclosures in our press releases, stockholder reports, and other filings with the SEC.

All such forward-looking statements speak only as of the date of this Form 10�Q.

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Overview

We are the fifth largest asset�based truckload carrier in the United States by revenue, generating over $1.7 billion in total operating revenue in 2019. We provide services primarily throughout the United States, with a focus in the densely populated and economically diverse eastern half of the United States. We offer customers a broad portfolio of services using our own truckload fleet and third�party carriers through our non�asset�based truck brokerage network. As of March 31, 2020, our fleet consisted of approximately 6,800 tractors and approximately 15,000 trailers, including approximately 2,000 tractors provided by independent contractors. All of our tractors have been equipped with electronic logs since 2012, and our systems and network are engineered for compliance with the recent federal electronic log mandate. Our terminal network and information technology infrastructure are established and capable of handling significantly larger volumes without meaningful additional investment.

COVID - 19 Business Update

Operational Update

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

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

To further ensure the safety of our drivers' and staff, we have instituted mandatory temperature checks for drivers prior to entering our facilities. For new drivers, we have leveraged our new driver training program as well as created a virtual orientation program that allows drivers to complete work remotely and, therefore, avoiding a majority of classroom work. This is an attractive innovation for drivers and has positively contributed to our recruiting efforts.

Market and Customer Update

We have a strong and diversified customer base with our top 25 customers representing 71% of 2019 revenues. At the peak of the COVID-19 crisis, customers representing 96% of our pre-COVID-19 revenues remained operational, and incremental volumes from those customers more than made up for the non-operational customers. We have not seen a drop in total load volume through April; however, we have experienced a sequential decline in spot rates in April compared with the first quarter of 2020.

Liquidity and Capital Resources

Due to uncertainties regarding the depth and duration of the economic impact of the COVID-19 crisis, as well as the impact of re-starting various components of the global supply chain at different times, we have considered many different scenarios, including those that would entail a significant multi-quarter degradation of business conditions across our customer base. Based on this analysis, we are managing the business to prudently control expenses and to ensure adequate liquidity even if operating and financial results are significantly and negatively impacted for an extended period.

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

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Executive Summary

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

Total revenue for the first quarter of 2020 increased by $17.2 million to $432.6 million as compared to the first quarter of 2019. The increase was primarily a result of a 4.2% increase in average tractors, a 9.2% increase in Brokerage revenue to $50.5 million offset by a 2.7% decrease in average revenue per mile. Excluding the impact of fuel surcharge revenue, first quarter revenue increased $17.5 million to $392.8 million, an increase of 4.7% as compared to the prior year quarter.

Operating loss for the first quarter of 2020 was $3.7 million compared to operating income of $12.6 million in the first quarter of 2020. We delivered a 100.8% operating ratio for the quarter which is an increase relative to the 97.0% operating ratio reported in the first quarter of 2019. Our profitability declined largely as a result of our OTR fleet revenue per tractor per week declining 4.2% in the first quarter from $3,616 in 2019 to $3,463 in 2020. This degradation was partially offset by progress in our Dedicated fleet which saw revenue per tractor per week increase 2.7% in the first quarter to $4,068 in 2020 from $3,961 in 2019. In addition, our Brokerage segment saw a decrease in gross margin to 3.7% compared to 17.5% in the prior year quarter.

We are continuing to focus on our driver centric initiatives, such as increased miles and modern equipment, to both retain the professional drivers who have chosen to partner with us and attract new professional drivers to our team. In an effort to improve driver satisfaction we created a new driver development program. This program provides continuous learning opportunities for our drivers with the goal of providing the knowledge, skills and abilities necessary for a successful career. While still early in its implementation, we are seeing positive results from those drivers who have completed this training versus those who have not. We are optimistic that, over time, this training will improve our drivers' satisfaction and retention while also reducing their accident rate and the Company's insurance and claims expense. COVID-19 has allowed us to start upgrading our driver fleet as drivers seek out larger and more stable companies like U.S. Xpress. We will continue to focus on implementing and executing our initiatives that we expect will continue to drive sustainable improved performance over time.

Reportable Segments

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

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Truckload Segment

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

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

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

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

In our Truckload segment, our most significant operating expenses vary with miles traveled and include (i) fuel, (ii) driver related expenses, such as wages, benefits, training and recruitment and (iii) costs associated with independent contractors (which are primarily included in the "Purchased transportation" line item). Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency and other factors. Our main fixed costs include vehicle rent and depreciation of long term assets, such as revenue equipment and service center facilities, the compensation of non-driver personnel and other general and administrative expenses.

Our Truckload segment requires substantial capital expenditures for purchase of new revenue equipment. We use a combination of operating leases and secured financing to acquire tractors and trailers, which we refer to as revenue equipment. When we finance revenue equipment acquisitions with operating leases, we record an operating lease right of use asset and an operating lease liability on our consolidated balance sheet, and the lease payments in respect of such equipment are reflected in our consolidated statement of comprehensive income in the line item "Vehicle rents." When we finance revenue equipment acquisitions with secured financing, the asset and liability are recorded on our consolidated balance sheet, and we record expense under "Depreciation and amortization" and "Interest expense." Typically, the aggregate monthly payments are similar under operating lease financing and secured financing. We use a mix of finance

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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 27.1% of our total tractor fleet was operated by independent contractors at March 31, 2020. Independent contractors provide a tractor and a driver and are responsible for all of the costs of operating their equipment and drivers, including interest and depreciation, vehicle rents, driver compensation, fuel and other expenses, in exchange for a fixed payment per mile or percentage of revenue per invoice plus a fuel surcharge pass through. Payments to independent contractors are recorded in the "Purchased transportation" line item. When independent contractors increase as a percentage of our total tractor fleet, our "Purchased transportation" line item typically will increase, with offsetting reductions in employee driver wages and related expenses, net of fuel (assuming all other factors remain equal). The reverse is true when the percentage of our total fleet operated by company drivers increases.

Brokerage Segment

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

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

The most significant expense of our Brokerage segment, which is primarily variable, is the cost of purchased transportation that we pay to third�party carriers, and is included in the "Purchased transportation" line item. This expense generally varies depending upon truckload capacity, availability of third�party carriers, rates charged to customers and current freight demand and customer shipping needs. Other operating expenses are generally fixed and primarily include the compensation and benefits of non�driver personnel (which are recorded in the "Salaries, wages and benefits" line item) and depreciation and amortization expense.

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

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

Results of Operations

Revenue

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

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

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A summary of our revenue generated by type for the three months ended March 31, 2020 and 2019 is as follows:







                                                           Three Months Ended
                                                               March 31,
                                                           2020           2019
                                                         (dollars in thousands)
                     Revenue, before fuel surcharge    $    392,820     $ 375,312
                     Fuel surcharge                          39,748        40,051
                     Total operating revenue           $    432,568     $ 415,363
        


For the quarter ended March 31, 2020, our total operating revenue increased by $17.2 million, or 4.1%, compared to the same quarter in 2019, and our revenue, before fuel surcharge increased by $17.5 million, or 4.7%. The primary factors driving the increases in total operating revenue and revenue, before fuel surcharge, were increased volumes in our Truckload and Brokerage segment, offset partially by decreased pricing.

To date volumes have remained above 30,000 per week, however we are seeing a sequential reduction in our spot market rates and we are uncertain as to when the market will recover as a result of the COVID-19 pandemic.

A summary of our revenue generated by segment for the three months ended March 31, 2020 and 2019 is as follows:







                                                                Three Months Ended
                                                                    March 31,
                                                                2020           2019
                                                              (dollars in thousands)
                Truckload revenue, before fuel surcharge    $    342,344     $ 329,068
                Fuel surcharge                                    39,748        40,051
                Total Truckload operating revenue                382,092       369,119
                Brokerage operating revenue                       50,476        46,244
                Total operating revenue                     $    432,568     $ 415,363
        


The following is a summary of our key Truckload segment performance indicators, before fuel surcharge for the three months ended March 31, 2020 and 2019.







                                                                 Three Months Ended
                                                                     March 31,
                                                                  2020         2019
                 Over the road
                 Average revenue per tractor per week          $    3,463     $ 3,616
                 Average revenue per mile                      $    1.871     $ 1.985
                 Average revenue miles per tractor per week         1,851       1,822
                 Average tractors                                   3,835       3,617
                 Dedicated
                 Average revenue per tractor per week          $    4,068     $ 3,961
                 Average revenue per mile                      $    2.376     $ 2.337
                 Average revenue miles per tractor per week         1,712       1,695
                 Average tractors                                   2,703       2,658
                 Consolidated
                 Average revenue per tractor per week          $    3,713     $ 3,762
                 Average revenue per mile                      $    2.070     $ 2.128
                 Average revenue miles per tractor per week         1,794       1,768
                 Average tractors                                   6,538       6,275
        


For the quarter ended March 31, 2020, our Truckload revenue, before fuel surcharge increased by $13.3 million, or 4.0%, compared to the same quarter in 2019. The primary factors driving the changes in Truckload revenue, were a

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. . .

May 06, 2020

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