U.S. Xpress is making its IPO tomorrow at $16/share

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U.S. Xpress is coming into the public equity markets this week, and the privately-held company is doing so with recent gains in several performance benchmarks.

The initial public offering on Thursday, June 14, will be for a total of 18,056,000 million shares in a company that has operating profits but net losses. 16,668,000 of those shares will be offered by the company itself, at $16/share, while individual shareholders--all members of the company's founding families--are selling 1,388,000 shares. The corporation expects to raise, after expenses, a total of $250M from the offering, while the individual shareholders hope to receive $22M. The total value of the equity being sold is an estimated $832M. Shares of U.S. Xpress will trade under the USX symbol.

In its S-1 filing with the Securities & Exchange Commission, the Chattanooga based truckload carrier describes itself as the fifth largest truckload carrier in the U.S. measured by revenue, which last year was more than $1.5 billion. As a private company, these figures for U.S. Xpress would not have been widely known prior to the release of its SEC filings.

The operating revenue of $1.55 billion last year was up about $10 million from the prior year. But U.S. Xpress, like so many other trucking companies, had a strong first quarter, with revenue of $425 million up about 17% from the corresponding quarter of 2017.

In reviewing the company's financial data, a few things jump out:

  • U.S. Xpress had operating income of $28.6 million in 2017, and that was up about $900,000 from the prior year. But in the first quarter of this year, its operating income was $14.8 million, meaning that it recorded more than 50% of the prior year's full-year operating income in just three months.
  • It had a net loss for the year of $3.9 million, which was a sharp improvement over its loss of $15.9 million in 2016. The biggest cause of that red ink was net interest expense of $49.7 million for the full year, which was up about $1.6 million from 2016. Interest expenses in the first quarter of this year were $12.6 million, up from $10.5 million the year before.

Lowering those interest expenses will be a goal of changes in the company's capitalization planned post-IPO. U.S. Xpress, in its SEC filing, spelled out significant changes it is planning in its credit facilities.

The filing refers to the debt levels as "significant," though the requirements of such SEC filings all but demand that apocalyptic language be used so that risks to shareholders are not minimized. But the report notes U.S. Xpress did have negative working capital at the end of the first quarter, and that after the changes in capital structure, the company "will continue to have significant amounts of indebtedness outstanding."

The document spells out changes to be made in both the company's revolving credit facility as well as its term debt obligations, which stand at $192.5 million. The term loans carry hefty double-digit interest rates. But after the changes in the capital structure are made—including using some proceeds from the IPO to pay down debt--U.S. Xpress said its interest expenses will be reduced. But as it does in several other parts of the S-1--which is standard procedure until the results of the IPO are determined--it does not say by how much those interest expenses will be cut.

The nature of S-1 filings is that they tend to focus on the negative. The management discussion of risks to the business, page after page of it, is so apocalyptic that one gets the sense after reading it that for anybody to make even a dollar of profit in the trucking business is nothing short of miraculous. While it is attributed to management, it’s clearly a document written by attorneys.

That is not unique to U.S. Xpress. The management of necessarily follows that wording in the S-1. But its most optimistic projection comes in discussing recent changes in the company's management and direction.

"These changes, which are ongoing, helped us to maintain relatively stable profitability during the weak truckload market of 2016 and early 2017, and drive significant improvements to profitability during the strong truckload market beginning in the second half of 2017," the company says in the upbeat section. "This momentum was reflected in our first quarter of 2018, which produced a 300 basis point improvement in our operating ratio, compared to our first quarter of 2017, and a 330 basis point improvement in our Adjusted Operating Ratio for the same period."

Under GAAP standards, U.S. Xpress saw its operating ratio fall to 96.5% in the first quarter of this year compared to 99.5% in the first quarter of 2017. Under non-GAAP standards, which are mostly different in how they treat fuel surcharge expenses and revenues, the operating ratio went to 96.1% from 99.4%. Changes in operating ratios are by definition hard-earned, and a 300 basis point swing is significant.

Virtually all other key metrics for U.S. Xpress showed a positive direction between 2016 and 2017. Consolidated truckload figures show average revenue per tractor per week rose to $3,539 from $3,429; revenue per loaded mile, $1,940 vs. $1,895; and average revenue miles per tractor per week, $1,824 vs. $1,809.

Consolidated truckload figures for 2018's first quarter--which is a combination of OTR and dedicated business--moved significantly higher in the key category of average revenue per tractor per week, to $3,721 from $3,383.

The management discussion spelled out a recent change in strategy that is similar to what many trucking companies, in presentations and earnings calls with analysts, have been saying about their own businesses. “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,” the S-1 said. “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.”

Some other statistical nuggets in the 275-page document:

  • The company's compensation costs rose 6.5% in 2017 compared to 2016. A year before, that increase was up a meree 0.4% from 2015.
  • Like many other companies in the first quarter, it paid a lot more for purchased transportation. First quarter purchased transport was $101 million, compared to $69 million in the first quarter of 2016. But that hasn't soured U.S. Xpress on brokerage: "We continue to actively attempt to expand our Brokerage segment and recruit independent contractors."
  • It has no current plan to pay dividends, citing the need for investment.
  • As of March 31, U.S. Xpress had about 6,800 tractors and about 16,000 trailers, including about 1,300 tractors owned by independent owner/operators. They have all had ELDs since 2012. An analyst on the website Seeking Alpha from a company called Wilsonville Capital, reviewing the S-1 document, noted that “(i)n 2016, the number of tractors owned was equal to 27.8%, and in 2017, this figure was equal to 61.4%. This means that the company is making more investments, which, in my view, will be appreciated by new shareholders.”