What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-28 · 118 added, 171 removed, 293 unchanged (50% of the section changed)

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We are a leading provider of high-service truckload transportation and logistics services. Our strategy is to focus on value-added, less commoditized portions of our customers’

supply chains and thereby become embedded in their business processes. We believe disciplined planning and execution of our strategy will reduce the cyclicality and seasonality of our financial results through growth in higher margin, less volatile services, which in turn will enhance sustainable long-term earnings power and return on invested capital for our stockholders.

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

supply chains and thereby become embedded in their business processes. We believe disciplined planning and execution of our strategy will continue to reduce the cyclicality and seasonality of our financial results through growth in higher margin, less volatile services, which in turn will enhance sustainable long-term earnings power and return on invested capital for our stockholders.

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

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:

For 2022, we generated over $1.0 billion in freight revenue, the highest annual earnings per share in our history, and a 15.3% return on average invested capital.

We also acquired AAT, repurchased 3.4 million shares, resulting in a reduction of approximately 20% of the shares outstanding compared to a year ago, and, for the first time in Company history, distributed four quarterly dividend payments, all while maintaining moderately low debt. Within our Expedited and Dedicated reportable segments, we improved total revenue and margins year over year and we are continuing to work to improve the durability of contracts in these reportable segments to lower volatility across economic and freight cycles. Managed Freight continued to exceed our expectations as a result of strong execution and effective coordination with our Expedited and Dedicated reportable segments. Warehousing was able to grow revenue through new customer startups but had diminished margins primarily due to incremental cost headwinds associated with new customer startups and investments in capacity for future growth in this reportable segment.

This has been a remarkable year for Covenant. Our results were in part the product of an exceptional freight market in the first half of the year and in part the result of an intentional, multi-year effort to evolve toward a less cyclical business model.

We cannot eliminate the impact of economic and freight market cycles, but we view our 2022 results as incremental progress toward delivering solid, more consistent returns for our stockholders.

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. 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:

(in thousands)

Twelve Months Ended December 31, 2020

Intangible asset amortization

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

Insurance policy erosion

Strategic restructuring adjusting items:

Discontinued operations loss contingency, net

Gain on disposal of terminals, net

Impairment of real estate and related intangible assets

Impairment of revenue equipment and related charges

Restructuring related separation and other

Abandonment of information technology infrastructure

Contract exit costs and other restructuring

Total pre-tax adjustments

Our consolidated financial results are summarized as follows:

Total revenue was $1,216.9 million, compared with $1,046.0 million for 2021, and freight revenue (which excludes revenue from fuel surcharges) was $1,046.4 million, compared with $949.9 million for 2021;

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;

Operating income from continuing operations was $120.7 million, compared with operating income from continuing operations of $67.2 million for 2021;

Net income was $108.7 million, or $7.00 per diluted share, compared with net income of $60.7 million, or $3.57 per diluted share, for 2021;

Net income from continuing operations was $142.8 million, or $6.95 per diluted share, for 2022, compared to $79.2 million or $3.42 per diluted share in 2021.

Net income from discontinued operations of $0.8 million, or $0.05 per diluted share, for 2022, compared to $2.5 million, or $0.15 per diluted share in 2021;

With available borrowing capacity of $86.1 million under our Credit Facility as of December 31, 2022, we do not expect to be required to test our fixed charge covenant in the foreseeable future;

Our equity investment in TEL provided $25.2 million of pre-tax earnings in 2022, compared to $14.8 million for 2021;

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;

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;

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, 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.

Since December 31, 2021, total indebtedness, comprised of total debt and finance leases, net of cash, increased by $17.9 million to $46.4 million;

Leverage 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 0.34 at December 31, 2022, compared to 0.24 at December 31, 2021;

Stockholders' equity at December 31, 2022 was $377.1 million, compared to $349.7 million at December 31, 2021; and

Tangible book value per end-of-quarter basic share at December 31, 2022 was $19.97, compared to $17.10 at December 31, 2021. 

We remain focused on continued forward progress on our long-term strategic plan. We are also focused on aggressive improvements to our operating cost profile. With our equipment replacement plan and strong safety results, we see opportunities to improve costs in the short term through improved fuel economy, and reduced operations and maintenance and insurance costs in a freight environment that will pressure both rates and margins. There’s a lot of work for us to be ready for.

We expect market headwinds from a softer market during contract renewals as well as continued inflationary pressures. However, based on company specific factors –

the investments we have made in the sales team, the acquisition of AAT, share repurchases, the equipment upgrade plan and reduced insurance casualty costs resulting from our improved safety results, we expect less earnings volatility than in prior periods of economic weakness. Over the last 5 years, our customer base has been strategically shifted to less cyclical industries through our full-service logistics focus.

Even with a heavy equipment investment year in 2023, we expect our cash generation, low leverage, and available liquidity to provide the full range of capital allocation opportunities to benefit our stockholders.

With continued 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 maintaining a lower leveraged balance sheet, organic growth, acquisition and disposition opportunities, and stock repurchases. 

As we look toward 2023, we anticipate a very difficult freight environment for at least the first half of the year, which could compress rates and margins when compared to 2022. However, we believe our more resilient operating model, together with the steps we are taking to reduce costs and inefficiencies, will mitigate a portion of our historical volatility throughout economic and freight market cycles. Overall, we are pleased with our current position, which features a de-leveraged balance sheet, strong liquidity and a reduction of approximately 20% of the shares outstanding compared to a year ago.

We will remain focused on growing our market share, continuing to improve our operations, and becoming a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.

RESULTS OF CONSOLIDATED OPERATIONS

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Total revenue

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.

The increase in total revenue resulted from a $66.0 million, $16.4 million, and $14.3 million increase in Expedited, Warehousing, and Dedicated freight revenue, respectively, partially offset by a $0.3 million decrease in freight revenue from our Managed Freight reportable segment.

See results of reportable segment operations section for discussion of fluctuations.

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 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.

Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Managed Freight segment, for which payments are reflected in the purchased transportation line item.

The increase in salaries, wages, and related expenses on a dollars basis is primarily the result of driver and non-driver, including shop technicians, pay and benefits increases since 2021.

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

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. While driver pay remains stable at the present time, we have historically put driver pay increases in place as necessary to address driver market pressure and will continue to do so in the future as necessary. 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.

Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Managed Freight reportable segment, for which payments are reflected in the purchased transportation line item.

Year ended December 31,

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% of freight revenue

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.

The changes in total fuel expense are primarily related to higher fuel prices in 2022 and poor fuel economy on abandoned leased tractors, partially offset by a 3.5% 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 $0.74 per gallon, or 29.0%,  higher in 2021 than 2020.

Fuel prices as measured by the DOE averaged approximately $4.99 per gallon, or 51.7%, higher in 2022 than 2021.

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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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.

Additionally, none and $0.4 million of gains were reclassified from accumulated other comprehensive income to our results of operations for the years ended December 31, 2022, and 2021, respectively, as changes to fuel expense related to the fuel hedge contracts that expired.

As of December 31, 2022, 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.

Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operations (which uses diesel fuel for refrigeration but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.

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

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

Operations and maintenance

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% of freight revenue

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. 

The increase in operations and maintenance expense on a dollars basis was primarily related to the increased maintenance costs as a result of an increase in the average age of equipment, unusually high maintenance costs on abandoned leased tractors, inflationary increases in the costs of parts and labor, as well as increased overage, shortage, and damage expense, as compared to 2021. These increases are partially offset by having a smaller fleet in 2022.

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, however, such increases may be offset by reductions in the age of our fleet due to our replacement plan for 2023, as well as the removal of the abandoned leased tractors that were requiring unusually high maintenance costs.

For 2023, 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;

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% of freight revenue

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.

The decrease in revenue equipment rentals and purchased transportation was primarily the result of a reduction in purchased transportation costs in our Managed Freight reportable segment as a result of the softening freight market, partially offset by a reduction in the percentage of the total miles run by independent contractors from 8.2% for 2021 to 6.6% for 2022 and the recognition of $7.5 million of expense related to the early lease abandonment and disposal charges for tractors pulled from operations during the fourth quarter of 2022, which have been the source of significant operational headwinds throughout the year due to poor fuel economy, unusually high maintenance costs, and elevated down time.

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

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

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In addition, factors such as the cost to obtain third party transportation services and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category.

If industry-wide trucking capacity continues to tighten in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue.

If industry-wide trucking capacity tightens in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue.

If we were to recruit more independent contractors we would expect this line item to increase as a percentage of revenue.

5 unchanged sentences

% of freight revenue

Operating taxes and licenses remained relatively flat in 2021 compared to 2020.

For the period presented, the change in operating taxes and licenses is insignificant both as a percentage of total revenue and freight revenue.

Insurance and claims

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% of freight revenue

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.

Insurance and claims per mile cost increased to 19.2 cents per mile for 2022 from 14.2 cents per mile in 2021.

The increase is primarily the result of unfavorable development of a small number of prior period claims, as well as claims experienced during 2022, partially offset by lower accident rates. 

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

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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, 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. 

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% of freight revenue

Communications and utilities remained relatively flat in 2021 compared to 2020.

For the period presented, the change in communications and utilities are insignificant both as a percentage of total revenue and freight revenue.

General supplies and expenses

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% of freight revenue

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.

The increase in general supplies and expenses was primarily the result of new leased spaces for our Warehousing reportable segment, increased travel expenses, and the increase in the contingent consideration liability since the 2021 period related to the acquisition of AAT.

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 $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.

Depreciation, increased $3.4 million in 2022 to $53.2 million compared to 2021, primarily as a result of increased costs on new equipment partially offset by reduced tractor count. Amortization of intangible assets increased $0.3 million in 2022, compared to 2021, to $4.3 million.

This increase is due to the amortization of the intangible asset related to the AAT acquisition partially offset by the completion of the amortization of the Landair trade name to the $0.5 million residual value during the third quarter of 2021.

We expect depreciation and amortization to increase going forward as the cost of new equipment increases, we implement our 2023 revenue equipment replacement plan, and we transition from revenue equipment held under operating leases to a greater proportion of owned revenue equipment. 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.

(Gain) loss on disposition of property and equipment, net

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% of freight revenue

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

Year ended December 31,

(dollars in thousands)

Impairment of long lived property and equipment

% of total revenue

% of freight revenue

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.

The increase in gain on disposition of property and equipment, net are primarily the result of the $38.5 million gain on sale of a California terminal in the third quarter of 2022.

For 2023 we expected reduced gains on disposition of property and equipment as compared to 2022 as a result of having no large real property sales planned, however, we expect this decrease to be partially offset by an increase in used tractor sales as we return to a more normalized equipment replacement cycle.

Interest expense, net

4 unchanged sentences

% of freight revenue

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

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 maintain lower leverage than we have historically.

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

For the period presented, the change in interest expense, net is insignificant both as a percentage of total revenue and freight revenue.

This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases, the implementation of our revenue equipment replacement plan between now and the end of 2023, increasing interest rates, and our ability to continue to generate profitable results and maintain lower leverage than we have historically.

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, 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)

For the year ended December 31, 2022, our earnings resulting from our investment in TEL increased to $25.2 million.

The increase in 2022 as compared to 2021 is the result of a combination of a rapidly growing business and gains on sale of used equipment that resulted from a constricted used equipment capacity in the transportation market that increased income from both equipment sales and leasing.

Due to TEL's business model, gains and losses on sale of equipment is a normal part of the business and can cause earnings to fluctuate from quarter to quarter and therefore our income from investment to similarly fluctuate.

We expect TEL's results for 2023 to remain similar to those of 2022.

Income tax expense

Year ended December 31,

(dollars in thousands)

Income tax expense (benefit)

Income tax expense

% of total revenue

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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 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.

The nondeductible effect of the per diem payments was 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

We have four reportable segments, 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.

We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing each as described under "Reportable Segments and Service Offerings" in Part I, Item 1 of this Annual Report on Form 10-K.

The following table summarizes revenue and operating income data by reportable segment and service offering:

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Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021

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

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. 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.

Our Expedited total revenue increased $115.7 million, as freight revenue increased $66.0 million and fuel surcharge revenue increased $49.6 million. The increase in Expedited freight revenue relates to an increase in average freight revenue per tractor per week of 17.0% compared to 2021 as well as a 42 (or 5.0%) average tractor increase.

The increase in average freight revenue per tractor per week is the result of a 17.8%, or 35.1 cents per mile, increase in average rate per total mile partially offset by an approximately 0.7% decrease in average miles per tractor when compared to 2021.

Seated team driven tractors increased approximately 9.1% to an average of 776 teams in 2022 from 711 teams in 2021. 

Our Dedicated total revenue increased $38.5 million, as freight revenue increased $14.3 million and fuel surcharge revenue increased $24.1 million. The increase in Dedicated freight revenue relates to an increase in average freight revenue per tractor per week of 16.3%, partially offset by a 149 (or 9.6%) average tractor decrease, compared to 2021.

The increase in average freight revenue per tractor per week is the result of a 20.1%, or 44.1 cents per mile increase in average rate per total mile, partially offset by 3.1% fewer miles per tractor.

Managed Freight total revenue decreased $0.3 million in 2022, compared to 2021 as a result of reduced volumes of overflow freight from both Expedited and Dedicated truckload operations.

With the softening freight market, we anticipate the revenue attributable to overflow freight to continue to decline.

The $17.0 million increase in Warehousing revenue as a result of period-over-period new customer business as well as rate increases with existing customers.

Total operating income was $120.7 million in 2022, compared to operating income of $67.2 million in 2021. In addition to the changes in revenue described above, the change was impacted by an $88.2 million, $17.8 million, and $16.0 million increase in Expedited, Warehousing, and Dedicated operating expenses, respectively, partially offset by a $4.6 million decrease in Managed Freight operating expenses. 

The increase in Expedited and Dedicated operating expenses was primarily due to driver and non-driver pay increases since 2021, and increased maintenance costs as a result of an increase in the average age of equipment and increases in the costs of parts and labor.

Additionally, we've experienced increased overage, shortage, and damage expenses and insurance related expense when compared to 2021.

The increased insurance expense is the result of unfavorable developments on a small number of prior period claims, as well as claims experience during 2022, partially offset by lower accident rates.

The early lease abandonment and disposal charges for tractors pulled from operations during the fourth quarter of 2022, have also been the source of significant operational headwinds throughout the year due to poor fuel economy, unusually high maintenance costs, and elevated down time and also unfavorably impacted Expedited and Dedicated operating expenses as compared to 2021.

These increases were partially offset by the $38.5 million gain on sale of a California terminal in the third quarter of 2022.

The decrease in Managed Freight operating expenses is the result of the changes in revenue driving changes in variable expenses, primarily purchased transportation. The increase in Warehousing operating expenses is a result of non-recurring temporary incremental costs associated with new startup business and the costs of securing additional unoccupied leased space in key locations, consistent with our longer-term growth strategy.

We expect the startup and lease costs to normalize in 2023, improving margins.

In our asset-light reportable segments, we are prioritizing growth, focusing on talent acquisition and technology enhancements.

Liquidity and Capital Resources

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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.

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 for revenue equipment.

Further, we expect to increase our capital allocation toward our Dedicated, Managed Freight, and Warehousing reportable segments to become the go-to partner for our customers’

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As of December 31, 2022 and December 31, 2021 we had $179.6 million and $74.3 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 Credit Facility, respectively;

No outstanding borrowings under the Draw Note, respectively;

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$64.6 million and $37.4 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.

The increase in our revenue equipment installment notes was primarily due to replacing our older revenue equipment with new equipment as part of our trade cycle.

The increase in operating lease obligations was primarily due to additional facilities for new Warehousing customers as well as new operating leases for revenue equipment as part of our trade cycle, partially offset by amortization of the operating lease liability.

While we entered into a small number of operating leases for revenue equipment during 2022, as of December 31, 2022, 510 tractors and 121 trailers were financed under operating leases or short term rentals, compared to 665 tractors and 103 trailers that were financed under operating leases or short term rentals as of December 31, 2021.

As of December 31, 2022, we had no borrowings outstanding, undrawn letters of credit outstanding of approximately $23.9 million, and available borrowing capacity of $86.1 million under the Credit Facility.

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Our net capital expenditures for the year ended December 31, 2022 totaled $47.5 million of expenditures as compared to $8.9 million of proceeds for the prior year. For 2023, 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.

This replacement effort will occur against a backdrop of substantial price increases for new equipment. The timing, cost, and projected fleet net capital expenditures will depend on how these factors play out.

Our baseline expectation for 2023 fleet net capital expenditures is a range of $75 million to $85 million, assuming scheduled deliveries and strong but moderating sale prices for used equipment.

These assumptions are subject to risk.

For example, global supply chain disruptions could impact the availability of tractors and trailers and lead to increased pricing on new and used equipment.

Net gains on disposal of equipment and real estate for 2022 were $40.3 million compared to $3.8 million in 2021 primarily due to the $38.5 million gain on a California terminal during 2022.

We had commitments outstanding at December 31, 2022, to acquire revenue equipment totaling approximately $156.6 million in 2023 versus commitments at December 31, 2022 of approximately $73.8 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.

We distributed a total of $4.3 million to stockholders during 2022 through dividends.

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. 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 $159.2 million in 2022, compared with $73.2 million in 2021, primarily due to a $108.7 million of net income, including the $38.5 million gain on sale of a California terminal, and a decrease in receivables and driver advances as a result of a decrease in our average receivable days outstanding.

These increases were partially offset by decreases to non-cash expenses compared to the prior year.

Net cash flows used by investing activities were $86.2 million in 2022, compared with $10.3 million provided in 2021. The change in net cash flows related to investing activities was primarily the result of the February 2022 acquisition of AAT partially offset by the sale of a California terminal during the third quarter of 2022.

The change is also due to the timing of our trade cycle whereby we took delivery of approximately 458 new company tractors and disposed of approximately 223 used tractors in 2022, compared to delivery of 247 new company tractors and disposal of 362 used company tractors in 2021.

Net cash flows used in financing activities were approximately $12.8 million in 2022, compared to $83.6 million in 2021.

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.

The decrease in net cash flows used in financing activities was primarily the result of net proceeds relating to notes payable, the Draw Note, and our Credit Facility of $77.7 million in 2022, compared to net repayments of $70.7 million in 2021, partially offset by the repurchase of $84.7 million of shares of our Class A common stock during 2022, compared to $10.3 million during 2021, as well as the payment of approximately $4.3 million in dividends during 2022.

On January 25, 2021, our Board 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 $8.1 million during the three months ended March 31, 2021.

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

As of January 1, 2022, there was approximately $38.0 million remaining under such authorization.

On February 10, 2022, our Board adopted a 10b5-1 plan for the purchase of up to $30.0 million in shares subject to defined trading parameters, under our then current stock repurchase program.

Under such authorization, we repurchased 1.4 million shares of our Class A common stock for $30.0 million completing the program in May 2022.

On May 18, 2022 our Board approved a new stock repurchase authorization of up to $75.0 million of our Class A common stock, with any remaining amount available under prior authorizations being excluded and no longer available.

Under such authorization, we repurchased 2.0 million shares of our Class A common stock for $54.7 million during 2022.

On January 30, 2023, the Board approved an amendment to the Company's stock repurchase program authorizing the purchase of up to an aggregate $55 million of our Class A common stock.

The amendment added an incremental approximately $37.5 million to the approximately $17.5 million that was then-remaining under the program.

We repurchased an additional 0.3 million shares of our Class A common stock through February 24, 2023, for a total of 3.7 million shares repurchased since February 2022.

Our cash flows may fluctuate depending on capital expenditures, future stock repurchases, dividends, 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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Amortization of intangibles (1)

Gain on sale of terminals, net

Contingent consideration liability adjustment

Abandonment of revenue equipment

Adjusted operating expenses

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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

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

Our Board 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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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 of approximately 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 that range from 10% to 35% of cost, depending on the reportable 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 29% of their cost, respectively.

Historically, changes in estimated useful life or salvage values have typically resulted from us transferring tractors to different operating segments with different operating profiles.

Historically, changes in estimated useful life or salvage values have typically resulted from us transferring tractors to different reportable segments with different operating profiles.

Significant fluctuations in the used equipment market could have a material effect on our results of operations.

A portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back agreements with the manufacturers.

A portion of our tractors are protected by binding trade-back agreements with the manufacturers.

The remainder of our tractors and substantially all of our owned trailers are subject to fluctuations in market prices for used revenue equipment.

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Publicly traded company multiples and acquisitions are derived from information on traded shares and analysis of recent acquisitions in the marketplace, respectively, for companies with operations similar to ours. The primary assumptions used in these various models include earnings multiples of acquisitions in a comparable industry, future cash flow estimates of each of the reporting units, weighted average cost of capital, working capital and capital expenditure requirements. 

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

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 completed our annual goodwill impairment test, using the qualitative test, as of October 1, 2022, for each of our reporting units.

As a result of the most recent goodwill impairment analysis performed (October 1, 2022), no impairment was indicated.

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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Self-insured liabilities represent management's best estimate of our ultimate obligations.

Accounting for Income Taxes

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.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We believe the future tax deductions will be realized principally through future reversals of existing taxable temporary differences and future taxable income, except for when a valuation allowance has been provided. 

In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions.

We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates.

For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

Potential accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.

INFLATION, NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS

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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 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.

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, 2021, and 2022 but decreasing in 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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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.

Our Expedited reportable segment, has historically experienced a greater reduction in first quarter demand than our other operations, however, this trend has lessened following the growth of AAT, which is part of the Expedited reportable segment, and our work with long-term customers to improve the stability of contracted capacity in our Expedited fleet.

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.

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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