What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-05 · 163 added, 145 removed, 301 unchanged (51% of the section changed)

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Our four reportable segments are Expedited, Dedicated, Managed Freight, and Warehousing, each as described under “Reportable Operating Segments and Service Offerings”

in Part I, Item 1 of this Annual Report on Form 10-K. Consistent with our strategic plan, we have been allocating capital toward Dedicated, Managed Freight, and Warehousing, and away from Expedited (particularly non-dedicated, solo-driver refrigerated services) over the past several years and discontinued the solo-driver refrigerated services during 2020.

Within our Dedicated reportable segment we have been reducing our business with less profitable customers while working to grow our relationships with customers that are more profitable.

This approach has resulted in a reduction in revenue from 2019 to 2020, however, as more of that business is replaced, we expect to see improvements in both revenue and profitability.

The table below reflects the total revenue trends in each of these reportable segments:

in Part I, Item 1 of this Annual Report on Form 10-K.

In 2020, we discontinued our solo-driver refrigerated services. Within our Dedicated reportable segment we have continued reducing our business with less profitable customers while working to grow our relationships with customers that are more profitable.

We have a robust pipeline of opportunities for our Dedicated service offering and will continue to transition business to new customers in instances where we are unable to come to terms with existing customers.

Managed Freight produced record performance in 2021 as a result of strong execution and effective coordination with our Expedited and Dedicated segments, while Warehousing grew revenue, but fell short of our 2021 margin goals as a result of start-up rent on a new facility and increased labor costs. The table below reflects the total revenue trends in each of these reportable segments:

Year ended December 31,

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Total revenues

During 2020 we strategically repositioned our enterprise around our reportable segments, reduced our fixed overhead and capital deployed in non-core businesses, flattened our management structure, and improved our margins on an adjusted basis. For perspective, our freight revenue was approximately the same on a fleet that averaged approximately 12% smaller than last year. At the same time, we paid down over $200 million in debt and lease obligations, which we believe will provide us significant flexibility in making future capital allocation decisions.

The changes were not without cost, as for the year we incurred approximately $69 million non-cash restructuring related charges, including an approximately $44 million contingent loss charge in relation to our discontinued TFS factoring business in the fourth quarter of 2020. We exit 2020 more profitable and generating higher return on capital excluding the restructuring costs.

Our mission for 2021 is clear:

seat more of our tractors, continue to control costs, and improve the profitability of certain legacy contracts in our Dedicated segment that generate unacceptable returns.

During 2020 we strategically repositioned our enterprise around our reportable segments, reduced our fixed overhead and capital deployed in non-core businesses, flattened our management structure, and improved our margins on an adjusted basis. At the same time, we paid down over $200 million in debt and lease obligations. As a result of those changes, for 2020 we incurred approximately $69 million non-cash restructuring related charges, including an approximately $44 million contingent loss charge in relation to our discontinued TFS factoring business in the fourth quarter of 2020.

Our results for 2021 exhibited the power of these changes to our operating model and show what our team can accomplish with diligent execution and teamwork.

The following is a summary of infrequent and non-cash transactions that occurred during 2020:

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Our consolidated financial results are summarized as follows:

Total revenue was $838.6 million, compared with $885.4 million for 2019, and freight revenue (which excludes revenue from fuel surcharges) was $776.2 million, compared with $791.3 million for 2019;

Operating loss from continuing operations was $14.0 million, compared with operating income from continuing operations of $8.8 million for 2019;

Net loss was $42.7 million, or $2.46 per diluted share, compared with net income of $8.5 million, or $0.45 per diluted share, for 2019;

Net loss from continuing operations was $14.1 million, or $0.81 per diluted share, for 2020 compared to $5.2 million net income from continuing operations or $0.28 per diluted share in 2019.

Net loss from discontinued operations of $28.6 million, or $1.65 per diluted share, for 2020 compared to net income from discontinued operations of $3.3 million, or $0.18 per diluted share in 2019.

Total revenue was $1,046.0 million, compared with $838.6 million for 2020, and freight revenue (which excludes revenue from fuel surcharges) was $949.9 million, compared with $776.2 million for 2020;

Operating income from continuing operations was $67.2 million, compared with operating loss from continuing operations of $14.0 million for 2020;

Net income was $60.7 million, or $3.57 per diluted share, compared with net loss of $42.7 million, or $2.46 per diluted share, for 2020;

Net income from continuing operations was $79.2 million, or $3.42 per diluted share, for 2021 compared to $16.9 million net loss from continuing operations or $0.81 per diluted share in 2020.

Net income from discontinued operations of $2.5 million, or $0.15 per diluted share, for 2021 compared to net loss from discontinued operations of $28.6 million, or $1.65 per diluted share in 2020;

With available borrowing capacity of $83.6 million under our Credit Facility as of December 31, 2021, we do not expect to be required to test our fixed charge covenant in the foreseeable future;

Our equity investment in TEL provided $3.9 million of pre-tax earnings in 2020, compared to $7.0 million for 2019;

Since December 31, 2019, total indebtedness, net of cash, decreased by $202.1 million to $102.0 million;

Stockholders' equity and tangible book value at December 31, 2020 were $290.6 million and $223.6 million, respectively.

During the second quarter, we increased our reserves for uncollectible accounts receivable by approximately $2.6 million as a result of the bankruptcy of one customer and the heightened risk we have on certain of our retail related customers as a result of COVID-19.

There were no additional COVID-19 related reserves during the remainder of the year.

Local, state and national governments continue to emphasize the importance of transportation and have designated it as an essential service.

Our equity investment in TEL provided $14.8 million of pre-tax earnings in 2021, compared to $3.9 million for 2020;

Since December 31, 2020, total indebtedness, net of cash, decreased by $36.1 million to $65.8 million;

L everage ratio (average total indebtedness, net of cash, divided by the sum of operating income (loss, depreciation and amortization, gain on disposition of property and equipment, net, and impairment of long lived property and equipment) was 0.72 at December 31, 2021, compared to 2.89 at December 31, 2020;

Stockholders' equity at December 31, 2021 was $349.7 million;

Tangible book value per end-of-quarter basic share at December 31, 2021 was $17.10, compared to $13.03 at December 31, 2020. 

The health and safety of our team members and the community is our first priority.

To protect our customers, teammates, and communities, while we continue to operate we:

continue to execute our Infectious Disease Response Plan and Incident Management Crisis Response Protocols as the macro environment moves through the Response, Reopen and Recovery phases of the COVID-19 pandemic;

established a process for the reporting of COVID-19 symptoms, exposures and positive test results of teammates.

continue to execute our Infectious Disease Response Plan and Incident Management Crisis Response Protocols;

follow our established process for the reporting of COVID-19 symptoms, exposures and positive test results of teammates.

This reporting process enables us to follow appropriate quarantine protocols and to communicate to our workforce in a timely and appropriate manner;

increased our communications with teammates through videos, virtual meetings and emails about safety protocols and CDC requirements and recommendations;

increased sanitation protocols to sanitize equipment and common areas multiple times per day in order to mitigate risk and exposure situations;

promoted hygiene practices recommended by the CDC, including social distancing requiring six or more feet between teammates where possible, and staggered work times;

implemented work-from-home routines for teammates whose work duties permit it and are utilizing virtual technology to replace many of our in-person meetings;

developed a comprehensive Return to Office Program of Guidelines to manage a phased, measured approach and to prepare our higher density locations with safety modifications, signage and process changes to promote a safe work environment.

communicate with teammates through videos, virtual meetings and emails about safety protocols and CDC requirements and recommendations;

continue increased sanitation protocols to sanitize equipment and common areas multiple times per day in order to mitigate risk and exposure situations;

promote hygiene practices recommended by the CDC, including social distancing requiring six or more feet between teammates where possible, and staggered work times;

support work-from-home routines for teammates whose work duties permit it and are utilizing virtual technology to replace many of our in-person meetings;

follow a comprehensive Return to Office Program of Guidelines to manage a phased, measured approach and to prepare our higher density locations with safety modifications, signage and process changes to promote a safe work environment.

We believe we have sufficient liquidity to satisfy our cash needs, however we continue to evaluate and act, as necessary, to maintain sufficient liquidity to ensure our ability to operate during these unprecedented times. The extent to which COVID-19 could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and will depend on future developments.

We will continue to evaluate the nature and extent of the potential short-term and long-term impacts to our business.

Going forward, our focus will be continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by Dedicated, Managed Freight, and Warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity.

This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure, improving legacy contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas. The freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan.

While this will take time, we believe our existing pipeline will produce ongoing sequential progress during 2021.

Going into 2021 we are facing cost increases from the end of our short term COVID-19 programs, increased wages, and higher insurance and claims expense. Effective January 4, 2021, we implemented the largest pay increase in the Company’s 35-year history for our Expedited driving force in an effort to increase our team count to targeted levels.

In addition, we have replaced our $9.0 million in excess of $1.0 million layer of auto liability insurance with a new $7.0 million excess of $3.0 million policy that runs from January 28, 2021, through April 1, 2024. While the combination of the increased retention and premiums is forecasted to increase our insurance and claims cost, eliminating the gap in coverage created in the third quarter of 2020 that resulted in a self-insured retention of $10.0 million per claim has been a focus area to minimize forward looking volatility.

Taking into account the commercial and cost environment, we expect results for the first half of 2021 will significantly exceed the prior year’s adjusted results for the comparable period.

Our comparative results for the second half and full year of 2021 will depend on factors such as our ability to reduce driver turnover, the number and significance of auto liability claims, and the outcome of contract negotiations with customers, many of which won’t see a full quarter impact until the third quarter of 2021.

Over the longer term, we expect to be a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.

Going forward, we intend to steadily and intentionally grow the percentage of our revenue generated by Dedicated, Managed Freight, and Warehousing segments, while selectively investing in the Expedited segment to remain a leader in that sector.

At the same time, we will continue to diligently pursue reducing unnecessary overhead, improving our safety, service, and productivity, diversifying our customer base with less seasonal and cyclical exposure, improving customer contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas. Over time, we expect Expedited and Dedicated to generate high single-digit to low double-digit operating margins, and Managed Freight and Warehousing to generate mid-to-high single-digit operating margins. Based on our expected asset intensity, these operating margins should produce double-digit returns on invested capital.

With diligence and accountability, we expect to grow our market share organically and through acquisitions, continue to improve our operations, and be a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation. Based on our anticipated cash flow generation profile, we will be able to continue our cash dividend program and evaluate a full range of capital allocation alternatives, including debt paydown, organic growth, acquisition and disposition opportunities, and stock repurchases.

Our outlook is positive for continued operational progress during 2022.

For at least the first few months of 2022, we anticipate a strong freight market accompanied by constrained capacity due to a national driver and equipment shortage.

During this period, we expect a continuation of significant increases in pricing and operating costs, and we expect to continue to improve the margin expectation in certain Dedicated contracts and the duration of fleet commitments in certain Expedited contracts. Later in the year, we expect demand to become more balanced as supply chains gain fluidity, economic growth potentially slows, and consumer spending on services rebounds. 

We expect cost pressure to persist even if freight demand moderates.

From wages and insurance, to equipment and parts, to fuel prices and interest rates, the cost of our business is increasing. During the first half of 2022, we will have difficult comparisons due to unusually low insurance and claims and overhead expense during the 2021 period. Overall, absent a substantial, near-term deterioration in market forces, we expect a combination of pricing gains, improvement in our Dedicated segment, revenue growth, and continued focus on cost control, to support 2022 operating results similar to those in 2021, although the timing of various market factors and the speed of our execution could cause a range of possible results.

RESULTS OF CONSOLIDATED OPERATIONS

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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Total revenue

The decrease in freight revenue resulted from a $35.1 million and $23.3 million decrease in Dedicated and Expedited freight revenue, respectively, partially offset by a $39.0 million and a $4.4 million increase in revenues from our Managed Freight, and Warehousing reportable segments, respectively.

Our Expedited total revenue decreased $36.3 million, as freight revenue decreased $23.3 million and fuel surcharge revenue decreased $13.0 million. The decrease in 2020 Expedited revenue relates to a 205 (or 15.6%) average tractor decrease partially offset by an increase in average freight revenue per tractor per week of 9.6% compared to 2019.

The increase in average freight revenue per tractor per week is the result of an approximately 16.6% increase in average miles per tractor, partially offset by a 5.7%, or 11.1 cents per mile, decrease in average rate per total mile, when compared to 2019.

Seated team driven tractors increased approximately 10.1% to an average of 836 teams in 2020 from 759 teams in 2019. 

Our Dedicated total revenue decreased $53.8 million, as freight revenue decreased $35.1 million and fuel surcharge revenue decreased $18.7 million. The decrease in 2020 Dedicated freight revenue relates to a 166 (or 9.4%) average tractor decrease, primarily as a result of a shortage of drivers, and a decrease in average freight revenue per tractor per week of 3.3% compared to 2019. The decrease in average freight revenue per tractor per week is the result of 6.7% fewer miles per tractor partially offset by a 3.9%, or 7.1 cents per mile, increase in average rate per total mile.

Our strategic plan for our Dedicated reportable segment involves reducing our business with less profitable customers while working to grow our relationships with customers that are more profitable.

This approach has resulted in a reduction in revenue from 2019 to 2020, however, as more of that business is replaced, we expect to see improvements in revenue.

Managed Freight total revenue increased $39.0 million in 2020 compared to 2019 as the result of additional opportunities in the brokerage market as a result of COVID-19 and handling overflow freight from both our Expedited and Dedicated operations.

The $4.4 million increase in Warehousing revenue is primarily the result of new customer business that began operations during the third quarter of 2020.

The increase in freight revenue resulted from a $143.7 million, $21.4 million, and $10.8 million increase in Managed Freight, Dedicated, and Warehousing freight revenue, respectively, partially offset by a $2.1 million decrease in freight revenue from our Expedited reportable segment.

Our Expedited total revenue increased $16.9 million, as fuel surcharge revenue increased $19.0 million and freight revenue decreased $2.1 million. The decrease in 2021 Expedited freight revenue relates to a 254 (or 22.9%) average tractor decrease partially offset by an increase in average freight revenue per tractor per week of 29.2% compared to 2020.

The increase in average freight revenue per tractor per week is the result of an approximately 19.0% increase in average miles per tractor and an 8.3%, or 15.0 cents per mile, increase in average rate per total mile when compared to 2020.

Seated team driven tractors decreased approximately 6.2% to an average of 784 teams in 2021 from 836 teams in 2020. 

Our Dedicated total revenue increased $35.9 million, as freight revenue increased $21.4 million and fuel surcharge revenue increased $14.5 million. The increase in 2021 Dedicated freight revenue relates to an increase in average freight revenue per tractor per week of 11.5%, partially offset by a 40 (or 2.5%) average tractor decrease, compared to 2020.

The increase in average freight revenue per tractor per week is the result of a 16.6%, or 31.2 cents per mile increase in average rate per total mile, partially offset by 4.7% fewer miles per tractor.

As part of our focus to improve Dedicated profitability we seek to continue to improve revenue per tractor per week in 2022.

Managed Freight total revenue increased $143.7 million in 2021 compared to 2020 as the result of a robust freight market, executing various spot rate opportunities, and handling overflow freight from both our Expedited and Dedicated truckload operations.

The $11.0 million increase in Warehousing revenue is primarily the result of new customer business that began operations during the third quarter of 2020.

For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue.

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% of freight revenue

The change in salaries, wages, and related expenses is primarily due to a decrease in driver pay in 2020 as compared to 2019, as a result of an 8.5% decrease on total miles for the same period, as well as the temporary suspension of the 401(k) discretionary match in 2020, and a decrease in workers' compensation costs compared to 2019.

These decreases were partially offset by an increase in non-driver pay compared to 2019 resulting from higher incentive pay costs as a result of achieving specified targets compared to 2019 when no such targets were achieved.

We believe salaries, wages, and related expenses will increase going forward as a result of higher incentive compensation, wage inflation, higher healthcare costs, reinstatement of the company 401(k) match, and, in certain periods, increased incentive compensation due to better performance.

We believe higher average driver salary costs will be partially offset by fewer drivers as a result of our change in business model and our smaller fleet. In addition to the driver pay increases put into place during the fourth quarter of 2020 for our Dedicated reportable segment, in January 2021 we implemented the largest driver pay increase in our history.

The increase in salaries, wages, and related expenses on a dollars basis is primarily due to substantial cents per mile driver pay increases made throughout 2021, management incentive compensation attributable to favorable 2021 results, and increases in contract labor and workers' compensation costs for 2021 compared to 2020. The increase in driver pay was partially offset by a 7.7% decrease on total miles compared to 2020.

The decreases on a percentage basis are due to increased revenue over which to spread those costs.

We believe salaries, wages, and related expenses will continue to increase going forward as a result of driver pay changes put in place in the tight freight market.

Additionally, we expect salaries, wages, and related expenses to continue to increase as the result of wage inflation, higher healthcare costs, and, in certain periods, increased incentive compensation due to better performance. In addition to the driver pay increases put into place during the fourth quarter of 2020 for our Dedicated reportable segment, in 2021 we implemented the largest driver pay increases in our history.

If freight market rates increase further, we would expect to, as we have historically, pass a portion of those rate increases on to our professional drivers.

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% of freight revenue

The changes in total fuel expense are primarily related to lower fuel prices in 2020, and an 8.5% decrease in total miles.

The changes in total fuel expense are primarily related to higher fuel prices in 2021, partially offset by a 7.7% decrease in total miles.

We receive a fuel surcharge on our loaded miles from most shippers;

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In periods of declining prices, the opposite is true.

Fuel prices as measured by the DOE averaged approximately $0.51 per gallon lower in 2020 than 2019.

Fuel prices as measured by the DOE averaged approximately $0.74 per gallon, or 29.0%,  higher in 2021 than 2020.

To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties, which is included in purchased transportation) from our fuel expense.

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Net fuel expense decreased $7.0 million, or 32.3%, for the year ended December 31, 2021 compared to 2020.

As a percentage of freight revenue, net fuel expense decreased 1.3% for the year ended December 31, 2020, compared to 2019.

These decreases primarily resulted from historically low fuel costs, partially offset by reduced fuel surcharge revenue, and a change in business mix that resulted in less idling and less temperature-controlled freight thus reducing reefer fuel expense. Additionally, $0.3 million and none were reclassified from accumulated other comprehensive loss to our results of operations for the years ended December 31, 2020 and 2019, respectively, as additional fuel expense related to net losses on fuel hedge contracts that expired.

As of December 31, 2020, we have $0.2 million of remaining fuel hedge contracts classified as other assets in our consolidated balance sheet.

These contracts will be reclassified into fuel expense as they mature.

We did not have any fuel hedges in place during the same 2019 period.

As a percentage of freight revenue, net fuel expense decreased 1.3% for the year ended December 31, 2021, compared to 2020.

These decreases primarily resulted from increased fuel surcharge revenue and fewer total miles, partially offset by higher fuel costs.

Also, as a result of the change in our business mix our fleet was more fuel efficient due to less idling and less temperature-controlled freight thus reducing refrigerated trailer fuel expense. Additionally, $0.4 million of gains and $0.3 million of losses were reclassified from accumulated other comprehensive income (loss) to our results of operations for the years ended December 31, 2021 and 2020, respectively, as changes to fuel expense related to the fuel hedge contracts that expired.

As of December 31, 2021, we have no remaining fuel hedge contracts.

We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs.

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% of freight revenue

The decrease in operations and maintenance expense was primarily related to the reduction in our tractors and the timing of the trade cycle for our tractors as compared to the same 2019 periods, as well as decreased maintenance and repair expense on our younger fleet of tractors, reduction in unloading charges and other costs associated with temperature-controlled freight due to a change in business mix, and a planned reduction in outside driver recruiting expense related to improved efficiency of advertising dollars.

Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models.

The increase in operations and maintenance expense on a dollars basis was primarily related to an additional $6.8 million in costs related to the recruitment and onboarding of drivers when compared to 2020, despite having a smaller fleet in 2021.

This increase is attributable to the extremely tight driver market and our focused effort to seat more of our tractors.

Additionally, maintenance costs, including parts and labor, have increased as compared to the 2020 year as a result of the global supply chain disruptions. 

Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, the reliability of new and untested revenue equipment models, and the global disruption of the supply chain.

For 2022, due to the relatively new age of our tractor fleet and remaining unexpired warranty coverage for most of our tractors, we do not expect the percentage of our equipment being operated outside of warranty coverage to increase in any material respect even if delays occur;

however, operations and maintenance costs may increase regardless due to wage and parts inflation.

Revenue equipment rentals and purchased transportation

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% of freight revenue

The increases in revenue equipment rentals and purchased transportation were primarily the result of a more competitive market for sourcing third-party capacity and growth in the Managed Freight reportable segment, partially offset by a reduction in the percentage of the total miles run by independent contractors from 12.5% for 2019 to 11.1% for 2020. 

We expect revenue equipment rentals to decrease going forward as a result of the reduction in our tractor fleet.

We expect purchased transportation to increase as we seek to grow the Managed Freight reportable segment.

The increase in revenue equipment rentals and purchased transportation was primarily the result of a more competitive market for sourcing third-party capacity and growth in the Managed Freight reportable segment, partially offset by a reduction in the percentage of the total miles run by independent contractors from 11.1% for 2020 to 8.2% for 2021. 

We expect revenue equipment rentals to decrease going forward as we transition from tractors held under operating leases to owned equipment in 2022.

However, we expect purchased transportation to fluctuate as volumes in our Managed Freight reportable segment may be volatile.

In addition, if fuel prices increase, it would result in a further increase in what we pay third party carriers and independent contractors.

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% of freight revenue

Insurance and claims per mile cost increased to 17.5 cents per mile for 2020 from 14.3 cents per mile in 2019.

The increases are primarily related to the erosion of our excess insurance coverage layer $9.0 million in excess of $1.0 million, as discussed below, an increase in overall cost per claim, and an increase in fixed premiums expenses, partially offset by a refund of $7.3 million of previously expensed premiums from our commutation of the April 10, 2015 through March 31, 2018 policy for our primary auto liability insurance. 

Insurance and claims per mile cost decreased to 14.2 cents per mile for 2021 from 17.5 cents per mile in 2020.

The decrease is primarily a result of the occurrence and development of large claims in 2020 and additional premium expense during 2020 as a result of the erosion of our excess insurance coverage layer $9.0 million in excess of $1.0 million, partially offset by the 2020 refund of $7.3 million of previously expensed premiums from our commutation of the April 10, 2015 through March 31, 2018 policy for our primary auto liability insurance and a 7.7% reduction in total miles as compared to 2020.

Additionally, incident rates during 2021 decreased as compared to 2020.

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term.

If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower.

For the current policy period (April 1, 2018 to March 31, 2021), the aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million were estimated to be fully eroded based on claims expense accruals.

We have replaced our $9.0 million in excess of $1.0 million layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024.

For the policy period that ran from April 1, 2018 to March 31, 2021, the aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million were estimated to be fully eroded based on claims expense accruals.

We replaced our $9.0 million in excess of $1.0 million layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024.

Due to the erosion of the $9.0 million in excess of $1.0 million layer, any adverse developments in claims filed between April 1, 2018 and March 31, 2021, could result in additional expense accruals.

Effective April 1, 2020, consistent with an extremely difficult insurance market for the industry, our insurance renewal terms include a higher fixed premium expense of approximately $0.5 million per quarter, greater self-insured retention, and lower aggregate limits than prior coverage. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. 

In addition, in future periods, insurance and claims costs may be more volatile depending on our future accident experience, which could have a material adverse effect on our business, financial condition, and results of operations.

Effective April 1, 2021, consistent with an extremely difficult insurance market for the industry, our insurance renewal terms include a higher fixed premium expense of approximately $0.4 million per quarter.

We maintained our retention and limits set in place during the prior renewal cycle. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. 

We expect insurance and claims expense to continue to be volatile over the long-term.

Recently the trucking industry has experienced a decline in the number of carriers and underwriters that write insurance policies or that are willing to provide insurance for trucking companies. 

Communications and utilities

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% of freight revenue

The increases in general supplies and expenses primarily relate to additional reserves put in place for potentially uncollectible accounts receivable, increased period over period legal fees incurred to defend class action litigation, and strategic planning and process improvement investments that are part of our organizational restructuring.

The decrease in general supplies and expenses primarily relates to the additional reserves in place in 2020 for potentially uncollectible accounts receivable.

Additionally we made strategic planning and process improvement investments that were part of our organizational restructuring in 2020.

Depreciation and amortization

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Depreciation and amortization consists primarily of depreciation of tractors, trailers and other capital assets (including those under finance leases), as well as amortization of intangible assets. 

Depreciation, consisting primarily of depreciation of revenue equipment, decreased $17.2 million in 2020 compared to 2019, to $60.4 million, primarily due to a reduction in the average number of tractors as we reduced our business with less profitable customers.

Amortization of intangible assets increased $2.2 million in 2020 compared to 2019, to $5.1 million.

This increase is a result of the revised remaining useful life of the Landair trade name to 15 months as of June 30, 2020 and the termination of the non-compete agreement with a former Landair executive as a result of management changes, a change in the branding of the organization, and the expected use of the Landair trade name.

We expect depreciation and amortization, including amortization of intangible assets, to more closely resemble the second half of 2020 going forward as the majority of our planned tractor fleet reductions were completed during the first half of 2020.

Depreciation, consisting primarily of depreciation of revenue equipment, decreased $10.5 million in 2021 compared to 2020, to $49.8 million, primarily due to the mix change in the overall business that reduced total tractor count and increased utilization, along with reductions in terminals and other capital assets. Amortization of intangible assets decreased $1.1 million in 2021 compared to 2020, to $4.0 million.

This decrease is the result of the 2020 termination of the non-compete agreement with a former Landair executive partially offset by the revised remaining useful life of the Landair trade name to 15 months as of June 30, 2020, as a result of management changes, a change in the branding of the organization, and the expected use of the Landair trade name.

We expect depreciation and amortization to increase going forward as the cost of new equipment increases and as we transition from revenue equipment held under operating leases to more owned revenue equipment, especially during the second half of 2022.

Additionally, changes in the used tractor market could cause us to adjust residual values, increase depreciation, hold assets longer than planned, or experience increased losses on sale.

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% of freight revenue

The increases in gain on disposition of property and equipment, net are primarily the result of the $5.7 million gain in the second quarter of 2020 on the disposition of our Hutchins, TX terminal facility, which was sold as part of the Company's restructuring plan as well as gains on tractor disposals related to downsizing our tractor fleet during 2020. 

The decreases in gain on disposition of property and equipment, net are primarily the result of the $5.7 million gain on a terminal in the second quarter of 2020, as part of the Company's restructuring plan, partially offset by the timing of the trade cycle of our equipment and the strategic reduction of our tractors that began during the second quarter of 2020.

Impairment of long-lived property, equipment, and right-of use assets

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During the second quarter of 2020, as part of our restructuring, we discontinued the use of a significant amount of property and equipment and adjusted the carrying value of the owned property and equipment to fair market value less estimated costs to sell. As a result, we recognized impairment of $16.8 million on revenue equipment, $7.3 million on our Texarkana, AR terminal, related leasehold improvements, and equipment, $2.2 million on an office facility in Chattanooga, TN held under an operating lease, and $0.2 million on a training and orientation facility in Chattanooga, TN.

We incurred no restructuring charges in 2021.

Interest expense, net

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% of freight revenue

Interest expense, net remained relatively flat in 2020 compared to 2019.

This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage.

Going forward, we expect this line item to decrease based upon our indebtedness reduction from the TFS disposition and dispositions of terminals and revenue equipment.

Interest expense, net decreased in 2021 compared to 2020 as a result of the reduction of our total indebtedness.

Going forward, we expect this line item to be similar to that of 2021.

Income from equity method investment

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We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income.

For the year ended December 31, 2020, our earnings resulting from our investment in TEL decreased to $3.9 million. The decrease in 2020 as compared to 2019 is the result of the revenue impact associated with a customer bankruptcy during the fourth quarter of 2019. We expect the impact on our earnings resulting from our investment in TEL to return to prior year levels during 2021.

Income tax (benefit) expense

For the year ended December 31, 2021, our earnings resulting from our investment in TEL increased to $14.8 million. The increase in 2021 as compared to 2020 is the result of constricted used equipment capacity in the transportation market that increased income from both equipment sales and leasing.

Income tax expense (benefit)

Year ended December 31,

(dollars in thousands)

Income tax (benefit) expense

Income tax expense (benefit)

% of total revenue

% of freight revenue

These changes were primarily related to the decrease in operating income and the decrease in earnings on investment in TEL as described above, as well as a decrease in our effective tax rate.

The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related to our per diem pay structure for drivers.

Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates.

We are currently estimating our 2021 effective income tax rate to be approximately 26.9%.

The increase in tax expense primarily relates to the increase in operating income and earnings on investment in TEL as described above.

As 2021 results show income as compared to 2020 that showed a loss, the impact of permanent differences has increased our effective tax rate for 2021, while in 2020 these items decreased our effective tax benefit rate.

The effective tax rate is different from the expected combined tax rate due primarily to state tax expense and permanent differences, such as executive compensation disallowance in 2021 and our per diem pay structure for drivers in 2020.

The nondeductible effect of the per diem payments is temporarily suspended for 2021 and 2022 in accordance with IRS guidance issued during the quarter ended December 31, 2021.

The rate impact of these items will fluctuate in future periods as income fluctuates.

RESULTS OF SEGMENT OPERATIONS

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Total revenues

Operating (Loss) Income:

Operating Income (Loss):

Managed Freight

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For discussion of the changes in segment revenue, see "Revenue" within "Results of Consolidated Operations" above.

Total operating loss was $14.0 million in 2020 compared to operating income of $8.8 million in 2019. In addition to the changes in revenue described above, the change in operating loss resulted from a $30.5 million and $37.1 million decrease in Expedited and Dedicated operating expenses, respectively, partially offset by a $37.8 million and $5.8 million increase in Managed Freight and Warehousing operating expenses, respectively. 

The decrease in Dedicated and Expedited operating expenses was primarily due to a 15.6% and 9.4% average operating fleet reduction, respectively, partially offset, for Expedited, by higher variable costs associated with a greater concentration of team driven tractors in the Expedited fleet.

The downsizing of our terminal network and short-term cost reductions also contributed to this reduction.

These decreases were partially offset by $16.8 million and $15.4 million of restructuring costs incurred by Dedicated and Expedited, respectively, during 2020.

Total operating income was $67.2 million in 2021 compared to operating loss of $14.0 million in 2020. In addition to the changes in revenue described above, the change was impacted by a $115.7 million, $21.7 million, and $12.1 million increase in Managed Freight, Dedicated, and Warehousing operating expenses, respectively, partially offset by a $23.2 million decrease in Expedited operating expenses. 

The decrease in Expedited operating expenses was primarily due to the 2020 restructuring costs incurred related to downsizing our solo-driver refrigerated, one-way irregular routes, and other less profitable operations, a 22.9% average operating fleet reduction, and a reduction in insurance and claims costs, partially offset by higher variable costs associated with driver pay increases.

The increase in Dedicated operating expenses was primarily related to driver pay increases and increased driver recruiting costs, partially offset by the aforementioned 2020 restructuring costs.

See Note 3, "Restructuring and Cost Savings Initiatives" in the financial statements for one-time impairment and restructuring related costs that further contributed to the reduction of operating income for 2020.

The increase in Managed Freight operating expenses is the result of increased revenue driving an increase in variable expenses, primarily purchased transportation, partially offset by cost structure improvements that were implemented as part of our strategic plan.

The increase operating expenses for Warehousing was the result of the new customer business that began operations during 2020 as well as an increase in contract labor costs to compensate for employees quarantined as a result of COVID-19.

The increase in Managed Freight operating expenses is the result of increased revenue driving an increase in variable expenses, primarily purchased transportation. The increase in operating expenses for Warehousing was primarily driven by the new customer business that began operations during the latter portion of third quarter of 2020, as well as increased contract labor costs as a result of the resurgence of the COVID-19 pandemic and escalating real estate costs for a newly leased facility.

Liquidity and Capital Resources

Our business requires significant capital investments over the short-term and the long-term.

Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment.

Historically, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment.

Going forward, we expect revenue equipment acquisitions through purchases and finance leases to increase as a percentage of our fleet as we decrease our use of operating leases.

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most critical transportation and logistics needs.

We had working capital (total current assets less total current liabilities) of $14.4 million and $93.1 million at December 31, 2020 and 2019, respectively.

We had working capital (total current assets less total current liabilities) of $45.8 million and $14.4 million at December 31, 2021 and 2020, respectively.

Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements.

Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future.

With an average tractor fleet age of 1.9 years, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options.

With an average tractor fleet age of 2.1 years, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options.

If we were to grow our independent contractor fleet, our capital requirements would be reduced.

As of December 31, 2020 and December 31, 2019 we had $110.4 million and $348.2 million in debt and lease obligations, respectively, consisting of the following:

$15.0 million and no outstanding borrowings under the Credit Facility, respectively;

As of December 31, 2021 and December 31, 2020 we had $74.3 million and $110.4 million in debt and lease obligations, respectively, consisting of the following:

No and $15.0 million outstanding borrowings under the Credit Facility, respectively;

No outstanding borrowings under the Draw Note, respectively;

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$21.5 million and $22.7 million in real estate notes, respectively;

$16.4 million and $33.3 million of the principal portion of financing lease obligations, respectively, and;

$38.5 million and $60.3 million of the operating lease obligations, respectively.

The decrease in our revenue equipment installment notes and financing lease obligations was primarily due to a strategic decision to reduce our debt and lease obligations during 2020.

The decrease in operating lease obligations was primarily due to the termination of a property lease related to our Managed Freight segment and the amortization of the operating lease liability during 2020.

As of December 31, 2020, we had $15.0 million of borrowings outstanding, undrawn letters of credit outstanding of approximately $29.7 million, and available borrowing capacity of $65.3 million under the Credit Facility.

Additionally, we had availability of a $45.0 million line of credit from Triumph Bank ("Triumph") which is available solely to fund any indemnification owed to Triumph in relation to the sale of TFS.

$10.8 million and $16.4 million of the principal portion of financing lease obligations, respectively, and;

$37.4 million and $38.5 million of the operating lease obligations, respectively.

The decrease in our revenue equipment installment notes and financing lease obligations was primarily due to a strategic decision to reduce our debt and lease obligations through December 31, 2021, as well as a reduced fleet size.

As of December 31, 2021, we had no borrowings outstanding, undrawn letters of credit outstanding of approximately $26.4 million, and available borrowing capacity of $83.6 million under the Credit Facility.

Additionally, we had availability of a $45.0 million line of credit from Triumph Bank ("Triumph") which is available solely to fund any indemnification owed to Triumph in relation to the sale of TFS.

See Note 1, "Summary of Significant Accounting Policies," of the accompanying consolidated financial statements for more information regarding our indemnification obligation to Triumph.

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of the accompanying consolidated financial statements for further information about material debt agreements.

Our net capital expenditures for the year ended December 31, 2020 totaled $28.2 million of proceeds as compared to $91.7 million of expenditures for the prior year. For 2021, we expect our average operational fleet size to remain relatively consistent with our ending 2020 count at around 2,500 tractors and we expect to reduce our trailer fleet from approximately 5,600 at December 31, 2020, to between 4,500 - 5,000 by December 31, 2021. Net gains on disposal of equipment and real estate for 2020 were $7.7 million compared to $1.7 million in 2019.

During the first half of 2020, in response to the uncertainty of the upcoming economic environment as a result of COVID-19 and as part of our strategic focus to reduce overhead costs, we took measures to preserve our liquidity, including capital reductions, financing, cost reduction, and working capital actions. During the second half of 2020, we paid down over $200.0 million of debt and lease obligations. If needed, we have other potential flexible sources of liquidity that we can leverage, such as currently unencumbered owned revenue equipment.

In April 2020, in an effort to improve our liquidity during the COVID-19 pandemic, we executed a modification to certain of our revenue equipment installment notes, exercising an option to make interest only payments for a period of 90 days, extending the due date of $177.3 million of debt by three months. 

Net cash flows provided by operating activities remained relatively even at $63.0 million in 2020 compared with $64.0 million in 2019.

Net cash flows provided by investing activities were $138.0 million in 2020 compared with $93.0 million used in 2019. The change in net cash flows related to investing activities was primarily the result of the disposal of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our Factoring reportable segment and the disposal of our Orlando and Hutchins properties during the 2020 period as well as timing of our trade cycle whereby we reduced our tractor fleet by approximately 560 tractors from December 31, 2019 to December 31, 2020.

Net cash flows used by financing activities were approximately $236.3 million in 2020, compared to $49.5 million provided in the 2019.

The change in net cash flows provided by financing activities was primarily a function of paying down over $200.0 million of debt and lease obligations during the second half of 2020 and our stock repurchase program during the first quarter of 2020. 

On February 10, 2020, our Board of Directors approved a stock repurchase program authorizing the purchase of up to $20.0 million of our Class A common stock from time-to-time based upon market conditions and other factors.

The stock could be repurchased on the open market or in privately negotiated transactions.

The repurchased shares are held as treasury stock and may be used for general corporate purposes as our Board of Directors may determine.

On March 26, 2020, our Board of Directors temporarily suspended the stock repurchase program for added flexibility in response to the uncertain impact of the COVID-19 pandemic.

Between February 10, 2020 and March 26, 2020, we repurchased 1.4 million shares of our Class A common stock in the open market for $17.5 million.

There were no additional changes to the stock repurchase program during 2020.

Going forward, the disposition of our Factoring reportable segment is expected to improve our cash flows used by financing activities.

However, on an ongoing basis, our cash flows may fluctuate depending on capital expenditures, future stock repurchases, strategic investments or divestitures, settlement of any indemnification of Triumph, and the extent of future income tax obligations and refunds.

Off-Balance Sheet Arrangements

We had commitments outstanding at December 31, 2020, to acquire revenue equipment totaling approximately $34.8 million in 2021 versus commitments at December 31, 2019 of approximately $68.4 million.

Our net capital expenditures for the year ended December 31, 2021 totaled $8.9 million of expenditures as compared to $28.2 million of proceeds for the prior year. For 2022, we are planning for a sizable increase in net capital expenditures as we return to a more normalized equipment replacement cycle.

This replacement effort will occur against a backdrop of substantial price increases for new equipment, strong prices for used equipment, and industry-wide order cutbacks and deferrals by equipment manufacturers. The timing, cost, and projected fleet net capital expenditures will depend on how these factors play out.

Our baseline expectation for 2022 fleet net capital expenditures is a range of $50 million to $70 million.

Net gains on disposal of equipment and real estate for 2021 were $3.8 million compared to $7.7 million in 2020. 

We had commitments outstanding at December 31, 2021, to acquire revenue equipment totaling approximately $73.8 million in 2022 versus commitments at December 31, 2020 of approximately $34.8 million.

These commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits.

The extent to which COVID-19 and its variants could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and will depend on future developments.

We will continue to evaluate the nature and extent of the potential short-term and long-term impacts to our business.

Net cash flows provided by operating activities increased to $73.2 million in 2021 compared with $63.0 million in 2020, primarily due to a $103.4 million increase in net income partially offset by decreases to non-cash expenses compared to the prior year.

Net cash flows provided by investing activities were $10.3 million in 2021 compared with $138.0 million provided in 2020. The change in net cash flows related to investing activities was primarily the result of the 2020 disposal of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our former Factoring reportable segment, as well as the 2020 disposal of our Orlando and Hutchins properties.

The change is also due to the timing of our trade cycle whereby our average number of tractors has remained relatively flat compared to our ending 2020 tractors while we reduced our ending fleet size by 560 tractors during 2020.

Net cash flows used in financing activities were approximately $83.6 million in 2021, compared to $236.3 million in 2020.

The change in net cash flows used in financing activities was primarily a function of paying down approximately $70.7 million of debt and lease obligations during 2021 compared to over $200.0 million in 2020. Additionally, we repurchased shares of our Class A common stock for $10.3 million and $17.5 million in 2021 and 2020, respectively.

On February 10, 2020, our Board of Directors approved the repurchase of up to $20.0 million of our Class A common stock.

The program was suspended on March 26, 2020 with approximately $2.5 million remaining authorized.

On January 25, 2021, our Board of Directors approved the repurchase of up to $40.0 million of our outstanding Class A common stock.

Under such authorization, we repurchased 0.5 million shares of our Class A common stock for $8.4 million between January 2021 and April 2021.

On August 5, 2021, our Board of Directors increased such authorization to $40.0 million.

On August 9, 2021 we commenced a modified Dutch tender offer to purchase for cash shares of our Class A common stock for an aggregate purchase price of not more than $40.0 million and at a price per share of not less than $21.00 and not more than $23.00 per share.

The tender offer expired on September 3, 2021.

Through the tender offer, we accepted for purchase 86,132 shares of our Class A common stock at a purchase price of $23.00 per share for an aggregate purchase price of approximately $2.0 million, excluding fees and expenses.

The shares of Class A common stock purchased through the tender offer were immediately retired.

The excess purchase price over par value was recorded as a reduction of retained earnings on the consolidated balance sheet.

Including the tender offer, we repurchased 0.6 million and 1.4 million shares for $10.3 million and $17.5 million during 2021 and 2020, respectively.

We have the ability to repurchase up to $38.0 million of the Company's outstanding Class A common stock under the current stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors.

In the first quarter of 2022, we adopted a 10b5-1 plan for the purchase of up to $30.0 million in shares subject to defined trading parameters, under such repurchase program.

 Our cash flows may fluctuate depending on capital expenditures, future stock repurchases, strategic investments or divestitures, any indemnification calls related to the TFS settlement, and the extent of future income tax obligations and refunds.

Non-GAAP Financial Measures

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Total operating expenses

Operating (loss) income

Operating income (loss)

Operating ratio

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Amortization of intangibles (1)

Bad debt expense associated with customer bankruptcy and high credit risk customers

Insurance policy erosion and premium reinstatement expense

Strategic restructuring adjusting items:

Gain on sale of terminal

Impairment of real estate and related tangible assets

Impairment of revenue equipment and related charges

Restructuring related severance and other

Abandonment of information technology infrastructure

Contract exit costs and other restructuring

Adjusted operating expenses

Adjusted operating income (loss)

Adjusted operating income

Adjusted operating ratio

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Amortization of intangibles (1)

Bad debt expense associated with customer bankruptcy and high credit risk customers

Insurance policy erosion and premium reinstatement expense

Strategic restructuring adjusting items:

Gain on sale of terminal

Impairment of real estate and related tangible assets

Impairment of revenue equipment and related charges

Restructuring related severance and other

Abandonment of information technology infrastructure

Contract exit costs and other restructuring

Adjusted operating expenses

Adjusted operating income (loss)

Adjusted operating income

Adjusted operating ratio

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We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices.

Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period.

Our Board of Directors and management focus on our adjusted operating ratio as an indicator of our performance from period to period.

We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance.

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Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances.

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Revenue Equipment

Management estimates the useful lives and salvage value of revenue equipment based upon, among other things, the expected use, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. We generally depreciate new tractors over five years to salvage values that range from 10% to 35% of cost, depending on the operating segment profile of the equipment.

Management estimates the useful lives and salvage value of revenue equipment based upon, among other things, the expected use, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. We generally depreciate new tractors over five years to salvage values of approximately 35% of cost, depending on the operating segment profile of the equipment.

We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 28% and 21% of their cost, respectively.

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We test goodwill for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred.

The fair value of our reporting units is based on a blend of estimated discounted cash flows and publicly traded company multiples.

We may elect to perform an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, including goodwill.

When performing the qualitative assessment, the Company considers the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performance of each reporting unit, litigation and new legislation.

If based on the qualitative assessments, the Company believes it more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, or periodically as deemed appropriate by management, we will prepare an estimation of the respective reporting unit's fair value utilizing a quantitative approach.

When using a quantitative approach, the fair value of our reporting units is based on a blend of estimated discounted cash flows and publicly traded company multiples.

The results of these models are then weighted and combined into a single estimate of fair value for our reporting units.

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We completed our annual goodwill impairment test as of October 1, 2021, for each of our reporting units.

The impairment tests indicated no impairment. 

As a result of the most recent goodwill impairment analysis performed (October 1, 2021), no impairment was indicated and the fair value of the Dedicated reporting unit exceeded its carrying amount by approximately 8.5%.

We test intangible assets with finite lives for impairment if conditions exist that indicate the carrying value may not be recoverable.

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Accounting for Income Taxes

Significant management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized.

Significant management judgment is required to determine whether deferred income taxes will be realized.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

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In recent years, the most significant effects of inflation have been on revenue equipment prices and the related depreciation, litigation and claims, and driver and non-driver wages.

New emissions control regulations and increases in wages of manufacturing workers and other items have resulted in higher tractor prices, while the market value of used equipment fluctuated significantly. The cost of fuel has been volatile over the last several years, with costs increasing in 2019 and 2020 after significant decreases in both 2018 and 2017. Health care prices have increased faster than general inflation, primarily due to the rapid increase in prescription drug costs and more people on our health plan. The nationwide shortage of qualified drivers has caused us to raise driver wages per mile at a rate faster than general inflation for the past four years, and this trend may continue as additional government regulations constrain industry capacity.

New emissions control regulations and increases in wages of manufacturing workers and other items have resulted in higher tractor prices, while the market value of used equipment fluctuated significantly. The cost of fuel has been volatile over the last several years, with costs increasing in 2019 and 2021 but decreasing in 2018 and 2020. Health care prices have increased faster than general inflation, primarily due to the rapid increase in prescription drug costs and more people on our health plan. The nationwide shortage of qualified drivers has caused us to raise driver wages per mile at a rate faster than general inflation for the past four years, and this trend may continue as additional government regulations constrain industry capacity.

Additionally, competition and the related cost to employ non-drivers have increased, especially for the more skilled or technical positions, including mechanics, those with information technology related skills, and degreed professionals.

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and all of our tractors are domiciled in the U.S. All of our revenue generated was generated within the U.S.

Less than one percent of our revenue in Canada and Mexico in 2019, respectively. In 2019, as part of our strategic plan to improve profitability, we discontinued our services within Mexico and Canada.

We do not separately track domestic and foreign revenue from customers, and providing such information would not be meaningful. Excluding a de minimis number of trailers, all of our long-lived assets are, and have been for the last three fiscal years, located within the United States.

During 2019 and 2020, though not to the same extent as in the past, we experienced marked increases in business and profitability during the fourth quarter holiday season, due to our team drivers and customer base.

After this surge, revenue generally decreases as customers reduce shipments following the holiday season and as inclement weather impedes operations.

At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and weather, creating more physical damage equipment repairs.

For the reasons stated, first quarter results historically have been lower than results in each of the other three quarters of the year, excluding charges.

The duration of what is considered peak season has shortened over the last few years and now is approximately a five-week period beginning the week of Thanksgiving and ending on Christmas Eve, and we have seen our customers’

networks adjust accordingly.

If this trend continues, our ability to take advantage of this surge in business and our fourth quarter profitability could be negatively affected.

in 2021 and 2020. We do not separately track domestic and foreign revenue from customers, and providing such information would not be meaningful. Excluding a de minimis number of trailers, all of our long-lived assets are, and have been for the last two fiscal years, located within the United States.

Our tractor productivity decreases during the winter season because inclement weather impedes operations, and some shippers reduce their shipments after the winter holiday season.

Our Expedited segment, historically has experienced a greater reduction in first quarter demand than our other operations.

Revenue also can be affected by bad weather, holidays and the number of business days that occur during a given period, since revenue is directly related to available working days of shippers.

At the same time, operating expenses increase and fuel efficiency declines because of engine idling and harsh weather creating higher accident frequency, increased claims, and more equipment repairs.

In addition, many of our customers, particularly those in the retail industry where we have a large presence, demand additional capacity during the fourth quarter, which limits our ability to take advantage of more attractive spot market rates that generally exist during such periods.

Further, despite our efforts to meet such demands, we may fail to do so, which may result in lost future business opportunities with such customers, which could have a materially adverse effect on our operations.

Recently, the duration of this increased period of demand in the fourth quarter has shortened, with certain customers requiring the same volume of shipments over a more condensed timeframe, resulting in increased stress and demand on our network, people, and systems.

If this trend continues, it could make satisfying our customers and maintaining the quality of our service during the fourth quarter increasingly difficult.

We may also suffer from natural disasters and weather-related events, such as tornadoes, hurricanes, blizzards, ice storms, floods, and fires, which may increase in frequency and severity due to climate change, as well as other man-made disasters.

These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy our assets, or adversely affect the business or financial condition of our customers, any of which could have a materially adverse effect on our results of operations or make our results of operations more volatile.

Weather and other seasonal events could adversely affect our operating results.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis