Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a leading asset-light freight provider of transportation services, including LTL, truckload, final mile and intermodal drayage services across the United States and in Canada and Mexico. We offer premium services that typically require precision execution, such as expedited transit, delivery during tight time windows and special handling. We utilize an asset-light strategy to minimize our investments in equipment and facilities and to reduce our capital expenditures.
Our services are classified into two reportable segments: Expedited Freight and Intermodal.
Our Expedited Freight segment provides expedited regional, inter-regional and national LTL services. Expedited Freight also offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling. We plan to grow our LTL and final mile geographic footprints through greenfield start-ups as well as through acquisitions.
Our Intermodal segment provides first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers dedicated contract and CFS warehouse and handling services, and in select locations, linehaul and LTL services. We plan to grow our Intermodal geographic footprint through acquisitions as well as greenfield start-ups where no suitable acquisition is available.
Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our ability to increase our earnings depends in significant part on our ability to increase the amount of freight and the revenue per pound or shipment for the freight shipped or moved through our network. Additionally, our earnings depend on the growth of other services, such as LTL pickup and delivery, which will allow us to maintain revenue growth in a challenging freight environment. We continue to focus on creating synergies across our services, particularly with services offered in our Expedited Freight reportable segment. Synergistic opportunities include the ability to share resources, in particular our fleet resources.
We monitor and analyze a number of key operating statistics in order to manage our business and evaluate our financial and operating performance. These key operating statistics are defined below and are referred to throughout the discussion of the financial results of our Expedited Freight and Intermodal reportable segments. Our key operating statistics should not be interpreted as better measurements of our results than income from operations as determined under U.S. generally accepted accounting principles.
Within our Expedited Freight reportable segment, our primary revenue focus is to increase density, which is shipment and tonnage growth within our existing LTL network. Increases in density allow us to maximize our asset utilization and labor productivity, which we measure over many different functional areas of our operations including linehaul load factor, pickup and delivery (“P&D”) stops per hour, P&D shipments per hour and door pounds handled per hour. In addition to our focus on density and operating efficiencies, it is critical for us to obtain an appropriate yield, which is measured as revenue per hundredweight, on the shipments we handle to offset our cost inflation and support our ongoing investments in capacity and technology. Revenue per hundredweight is also a commonly-used indicator for general pricing trends in the LTL industry and can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment and length of haul. Therefore, changes in revenue per hundredweight may not necessarily indicate actual changes in underlying base rates. We regularly monitor the components of our pricing, including base freight rates, accessorial charges and fuel surcharges. The fuel surcharge is generally designed to offset fluctuations in the cost of the petroleum-based products used in our operations and is indexed to diesel fuel prices published by the U.S. Department of Energy. The impact of fuel on our results of operations depends on the relationship between the applicable surcharge, the fuel efficiency of our Company drivers, and the load factor achieved by our operation. Fluctuations in fuel prices in either direction could have a positive or negative impact on our margins, particularly in our LTL business where the weight of a shipment subject to the fuel surcharge on a given trailer can vary materially. We believe our yield management process focused on account level profitability, and ongoing improvements in operating efficiencies, are both key components of our ability to grow profitably.
The key operating statistics necessary to understand the operating results of our Expedited Freight reportable segment are described below in more detail:
Tonnage - Total weight of shipments in pounds. The level of freight tonnage is affected by economic cycles and conditions, customers’ business cycles, changes in customers’ business practices and capacity in the truckload market.
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Weight Per Shipment - Total pounds divided by the number of shipments. Fluctuations in weight per shipment can indicate changes in the mix of freight we receive from our customers, as well as changes in the number of units included in a shipment. Generally, increases in weight per shipment indicate higher demand and overall increased economic activity. Changes in weight per shipment can also be influenced by shifts between LTL and other modes of transportation, such as truckload, in response to capacity, service and pricing issues. Fluctuations in weight per shipment generally have an inverse effect on our revenue per hundredweight, as a decrease in weight per shipment will typically cause an increase in revenue per hundredweight.
Revenue Per Hundredweight - Network revenue per every 100 pounds of shipment weight. Our LTL transportation services are generally priced based on weight, commodity, and distance. Our pricing policies are reflective of the services we provide, and can be influenced by competitive market conditions. Changes in the freight profile factors such as average shipment size, average length of haul, freight density, and customer and geographic mix can impact the revenue per hundredweight. Fuel surcharges and intercompany revenue between Network and Truckload are included in this measurement.
Revenue Per Shipment - Network revenue divided by the number of shipments. Fuel surcharges and intercompany revenue between Network and Truckload are included in this measurement.
Average Length of Haul - Total miles between origin and destination service centers for all shipments, with miles based on the size of shipments. Length of haul is used to analyze our tonnage and pricing trends for shipments with similar characteristics. Changes in length of haul generally have a direct effect on our revenue per hundredweight, as an increase in length of haul will typically cause an increase in revenue per hundredweight.
Within our Intermodal reportable segment, our primary revenue focus is to increase the number of shipments. The key operating statistic necessary to understand the operating results of our Intermodal reportable segment is described below in more detail:
Drayage Revenue Per Shipment - Intermodal revenue divided by the number of drayage shipments. Revenue derived from container freight station warehouse and handling, and linehaul and LTL services is excluded from this measurement. Fuel surcharges and accessorial charges are included in this measurement.
Trends and Developments
Expedited Freight Acquisition
In January 2023, we acquired certain assets of Land Air Express, Inc. (“Land Air”) for $56,567. Land Air, headquartered in Bowling Green, Kentucky, offers a variety of less-than-truckload services including guaranteed, standard, exclusive, same day, hot shot and pickup and delivery, and operates in over 25 terminals across the United States. The acquisition of Land Air will accelerate the expansion of our national terminal footprint, particularly in the middle part of the United States, and it will strategically position us to better meet the current and future needs of customers.The acquisition was funded using cash flow from operations and proceeds from our credit facility. The results of Land Air have been included in our Condensed Consolidated Financial Statements as of and from the date of acquisition. The associated goodwill has been included in our Expedited Freight reportable segment.
COVID-19
Our business is highly susceptible to changes in the economic conditions. Our products and services are directly tied to the production and sale of goods and, more generally, to the North American economy. The COVID-19 pandemic has adversely impacted economic activity and conditions worldwide and created significant volatility and disruption to the financial markets and supply chains worldwide.
Although our operations have returned to pre-COVID levels, should we experience another COVID-19-like virus outbreak in the future with similar restrictions, we would anticipate a similar impact on our business.
Fuel
We depend heavily upon the availability of adequate diesel fuel supplies, and recently, fuel availability and prices have fluctuated significantly. Fuel availability and prices can be impacted by factors beyond our control, such as natural or man-
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made disasters, adverse weather conditions, political events, economic sanctions imposed against oil-producing countries or specific industry participants, disruptions or failure of technology or information systems, price and supply decisions by oil producing countries and cartels, terrorist activities, armed conflict, tariffs, sanctions, other changes to trade agreements and world supply and demand imbalance. Through our fuel surcharge programs, we have been able to mitigate the impact of fluctuations in fuel prices. Our fuel surcharge rates are set weekly based on the national average for fuel prices as published by the U.S. Department of Energy and our fuel surcharge table. In periods of changing fuel prices, our fuel surcharges vary by different degrees and may not fully offset fuel price fluctuations or may result in higher than expected increases in revenue. Fuel shortages, changes in fuel prices, and the potential volatility in fuel surcharge revenue may impact our results of operations and overall profitability. Fuel surcharge revenue as a percentage of operating revenues increased to 15.8% for the quarter ended March 31, 2023 compared to 14.7% for the quarter ended March 31, 2022 as a result of changes in fuel prices.
Economy
Participants in the transportation industry have historically experienced cyclical fluctuations in financial results due to economic recessions, downturns in the business cycles of customers, volatility in the prices charged by third-party carriers, interest rate fluctuations and other U.S. and global macroeconomic developments. During economic downturns, reductions in overall demand for transportation services will likely reduce demand for our services and exert downward pressures on our rates and margins. In periods of strong economic growth, overall demand may exceed the available supply of transportation resources. While this may present an opportunity to increase economies of scale in our network and enhanced pricing and margins, these benefits may be lessened by increased network congestion and operating inefficiencies.
Like other providers of freight transportation services, our business has been impacted by the macroeconomic conditions of the past year. Industry freight volumes, as measured by the Cass Freight Index, were approximately flat in the first quarter of 2023 compared to the first quarter of 2022. The balance of supply and demand in the United States transportation market continued to shift toward a market with excess carrier capacity in the first quarter of 2023. Transportation rates continue to decline as shippers in the United States manage through elevated inventory levels amidst slowing economic growth. In response to this slowing demand, steamship lines continue to rationalize services by reducing capacity where possible, which has allowed port congestion to ease. The slowdown of consumer demand has also had a significant impact on the air freight market. Air freight volumes have significantly declined, also as a consequence of higher inventory levels and declining consumer demand. These trends drove a decline in the volume of freight shipped by our customers in the first quarter of 2023 and is expected to continue into the second quarter of 2023.
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Results from Operations
The following table sets forth our consolidated financial data for the three months ended March 31, 2023 and 2022 (unaudited and in thousands):
Three Months Ended
March 31,
2023 March 31,
2022 Change Percent Change
Operating revenues:
Expedited Freight $ 338,934 $ 376,591 $ (37,657) (10.0) %
Intermodal 88,169 90,440 (2,271) (2.5)
Eliminations and other operations (37) (70) 33 (47.1)
Operating revenues 427,066 466,961 (39,895) (8.5)
Operating expenses:
Purchased transportation 185,217 224,832 (39,615) (17.6)
Salaries, wages, and employee benefits 79,520 86,081 (6,561) (7.6)
Operating leases 27,248 22,673 4,575 20.2
Depreciation and amortization 13,635 11,130 2,505 22.5
Insurance and claims 13,782 11,968 1,814 15.2
Fuel expense 5,784 5,865 (81) (1.4)
Other operating expenses 51,371 47,061 4,310 9.2
Total operating expenses 376,557 409,610 (33,053) (8.1)
Income (loss) from operations:
Expedited Freight 32,998 47,680 (14,682) (30.8)
Intermodal 11,203 11,146 57 0.5
Other Operations 6,308 (1,475) 7,783 (527.7)
Income from operations 50,509 57,351 (6,842) (11.9)
Other expense:
Interest expense (2,355) (784) (1,571) 200.4
Total other expense (2,355) (784) (1,571) 200.4
Income from operations before income taxes 48,154 56,567 (8,413) (14.9)
Income tax expense 11,786 13,881 (2,095) (15.1)
Net income and comprehensive income $ 36,368 $ 42,686 $ (6,318) (14.8) %
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Revenues
Operating revenues decreased $39,895, or 8.5%, to $427,066 for the three months ended March 31, 2023 compared to $466,961 for the three months ended March 31, 2022. The decrease was driven primarily by decreased revenue from our Expedited Freight segment of $37,657 due to decreased Network and Truckload revenue, and from our Intermodal segment of $2,271 driven by decreased drayage shipments. The results for our two reportable segments are discussed in detail in the following sections.
Operating Expenses
Operating expenses decreased $33,053, or 8.1%, to $376,557 for the three months ended March 31, 2023 compared to $409,610 for the three months ended March 31, 2022. The decrease was primarily driven by a decrease in purchased transportation expense of $39,615 and salaries, wages and employee benefits of $6,561 offset by an increase in operating leases of $4,575 and other operating expenses of $4,310 in both our Expedited Freight and Intermodal segments. Purchased transportation expense includes our independent contractor fleet owners and owner-operators, who lease their equipment to our motor carrier (“Leased Capacity Providers ”), third-party motor carriers and capacity secured by transportation intermediaries, while Company-employed drivers are included in salaries, wages and employee benefits. Purchased transportation expense decreased due to the utilization of less third-party motor carriers over the same period in the prior year combined with a lower third-party motor carrier cost per mile. Salaries, wages and employee benefits decreased primarily due to a decrease in the accrual for an incentive plan established for certain employees in 2021. Operating leases increased primarily due to higher facility and equipment lease expense. Other operating expenses increased due to higher contract labor, travel and entertainment, software l icense fees and professional fees, partially offset by lower expenses incurred to support the decreased container rental revenues in our Intermodal segment.
Income from Operations and Segment Operations
Income from continuing operations decreased $6,842, or 11.9%, to $50,509 for the three months ended March 31, 2023 compared to $57,351 for the three months ended March 31, 2022. The decrease was primarily driven by a decrease in income from operations in our Expedited Freight segment of $14,682, partially offset by an increase in our Intermodal segment of $57 and Other Operations of $7,783.
Interest Expense
Interest expense was $2,355 for the three months ended March 31, 2023 compared to $784 for the three months ended March 31, 2022. The increase in interest expense was due to a higher variable interest rate during the first quarter of 2023. The interest rate on the outstanding borrowings under our credit facility was 5.96% and 1.44% during the three months ended March 31, 2023 and 2022, respectively.
Income Taxes
The effective tax rate on a continuing basis for both the three months ended March 31, 2023 and 2022 was 24.5%.
Net Income
As a result of the foregoing factors, net income decreased $6,318, or 14.8%, to $36,368 for the three months ended March 31, 2023 compared to $42,686 for the three months ended March 31, 2022.
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Expedited Freight - Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022
The following table sets forth the financial data of our Expedited Freight segment for the three months ended March 31, 2023 and 2022 (unaudited and in thousands):
Three Months Ended
March 31,
2023 Percent of Revenue March 31,
2022 Percent of Revenue Change Percent Change
Operating revenues:
Network 1
$ 205,931 60.8 % $ 233,700 62.1 % $ (27,769) (11.9) %
Truckload 41,744 12.3 55,908 14.8 (14,164) (25.3)
Final Mile 69,357 20.5 65,758 17.5 3,599 5.5
Other 21,902 6.5 21,225 5.6 677 3.2
Total operating revenues 338,934 100.0 376,591 100.0 (37,657) (10.0)
Operating expenses:
Purchased transportation 165,240 48.8 200,034 53.1 (34,794) (17.4)
Salaries, wages and employee benefits 68,791 20.3 68,220 18.1 571 0.8
Operating leases 18,913 5.6 15,731 4.2 3,182 20.2
Depreciation and amortization 8,889 2.6 7,481 2.0 1,408 18.8
Insurance and claims 9,743 2.9 8,751 2.3 992 11.3
Fuel expense 2,611 0.8 2,650 0.7 (39) (1.5)
Other operating expenses 31,749 9.4 26,044 6.9 5,705 21.9
Total operating expenses 305,936 90.3 328,911 87.3 (22,975) (7.0)
Income from operations $ 32,998 9.7 % $ 47,680 12.7 % $ (14,682) (30.8) %
1 Network revenue is comprised of all revenue, including linehaul, pickup and/or delivery, and fuel surcharge revenue, excluding accessorial, Truckload and Final Mile revenue.
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Expedited Freight Operating Statistics
Three Months Ended
March 31,
2023 March 31,
2022 Percent Change
Business days 64 64 — %
Tonnage 1,2
Total pounds 629,080 717,611 (12.3)
Pounds per day 9,829 11,213 (12.3)
Shipments 1,2
Total shipments 817 892 (8.4)
Shipments per day 12.8 13.9 (7.9)
Weight per shipment 770 804 (4.2)
Revenue per hundredweight 3
$ 33.36 $ 32.84 1.6
Revenue per hundredweight, ex fuel 3
$ 25.75 $ 25.92 (0.7)
Revenue per shipment 3
$ 256.89 $ 264.17 (2.8)
Revenue per shipment, ex fuel 3
$ 198.30 $ 208.55 (4.9)
1 In thousands
2 Excludes accessorial, Truckload and Final Mile products
3 Includes intercompany revenue between the Network and Truckload revenue streams
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Operating Revenues
Expedited Freight operating revenues decreased $37,657, or 10.0%, to $338,934 for the three months ended March 31, 2023 from $376,591 for the three months ended March 31, 2022. The decrease was attributable to decreased Network and Truckload revenue, offset by increased Final Mile revenue. Network revenue decreased due to a 12.3% decrease in tonnage and 0.7% decrease in revenue per hundredweight ex fuel as compared to the same period in the prior year. The decrease in tonnage reflects a decrease in weight per shipment of 4.2% on 8.4% fewer number of shipments. The decreased tonnage is due to softer demand for our services driven by the weak freight environment while the decrease in weight per shipment was the result of less dense freight in our network driven by fewer pieces per a shipment. Fuel surcharge revenue decreased $1,756, or 3.5% as a result of lower tonnage in the Network, partially offset by the rise in diesel fuel prices. Truckload revenue decreased $14,164 primarily due to softer demand for our services driven by the weak freight environment and Final Mile revenue increased $3,599 primarily due to new locations with existing and new customers. Other revenue, which includes warehousing and terminal handling, increased $677.
Purchased Transportation
Expedited Freight purchased transportation decreased $34,794, or 17.4%, to $165,240 for the three months ended March 31, 2023 from $200,034 for the three months ended March 31, 2022. Purchased transportation was 48.8% of Expedited Freight operating revenues for the three months ended March 31, 2023 compared to 53.1% for the same period in 2022. Expedited Freight purchased transportation includes Leased Capacity Providers and third-party motor carriers and transportation intermediaries, while Company-employed drivers are included in salaries, wages and employee benefits. The decrease in purchased transportation was primarily due to lower volumes in Network and Truckload and the change in mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers and transportation intermediaries, and Company-employed drivers for Network and Truckload services. In the first quarter of 2023, we purchased 71.1%, 24.8% and 4.1% of our freight capacity from Leased Capacity Providers, third-party motor carriers and transportation intermediaries and Company-employed drivers, respectively. This compares to 62.5%, 34.0% and 3.5% in the same period in 2022.
Salaries, Wages and Employee Benefits
Expedited Freight salaries, wages and employee benefits increased $571, or 0.8%, to $68,791 for the three months ended March 31, 2023 from $68,220 for the three months ended March 31, 2022. Salaries, wages and employee benefits were 20.3% of Expedited Freight operating revenues for the three months ended March 31, 2023 compared to 18.1% for the same period in 2022. The increase in salaries, wages and employee benefits expense was due to additional employees from the Land Air Express, LLC acquisition and an increase in salaries and wages in the first quarter of 2023 as compared to the same period in 2022.
Operating Leases
Expedited Freight operating leases increased $3,182, or 20.2%, to $18,913 for the three months ended March 31, 2023 from $15,731 for the three months ended March 31, 2022. Operating leases were 5.6% of Expedited Freight operating revenues for the three months ended March 31, 2023 compared to 4.2% for the same period in 2022. The increase in operating leases expense was primarily due to higher facility expense in the first quarter of 2023 as compared to the same period in 2022 .
Depreciation and Amortization
Expedited Freight depreciation and amortization increased $1,408, or 18.8%, to $8,889 for the three months ended March 31, 2023 from $7,481 for the three months ended March 31, 2022. Depreciation and amortization was 2.6% of Expedited Freight operating revenues for the three months ended March 31, 2023 compared to 2.0% for the same period in 2022. The increase in depreciation and amortization expense was primarily due to an increase in equipment depreciation in the first quarter of 2023 as compared to the same period in 2022 .
Insurance and Claims
Expedited Freight insurance and claims increased $992, or 11.3%, to $9,743 for the three months ended March 31, 2023 from $8,751 for the three months ended March 31, 2022. Insurance and claims was 2.9% of Expedited Freight operating revenues for the three months ended March 31, 2023 compared to 2.3% for the same period in 2022. The increase in insurance and claims expense was primarily due to an increase in vehicle liability claims and equipment repairs in the first quarter of 2023 as compared to the same period in 2022 . See additional discussion over the consolidated change in self-insurance reserves in the “Other Operations ” section below.
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Fuel Expense
Expedited Freight fuel expense decreased $39, or 1.5%, to $2,611 for the three months ended March 31, 2023 from $2,650 for the three months ended March 31, 2022. Fuel expense was 0.8% of Expedited Freight operating revenues for the three months ended March 31, 2023 compared to 0.7% and for the same period in 2022. Expedited Freight fuel expense decreased due to fewer miles driven by Company-employed drivers in the first quarter of 2023 offset by an increase in the average price of fuel as compared to the same period in 2022.
Other Operating Expenses
Expedited Freight other operating expenses increased $5,705, or 21.9%, to $31,749 for the three months ended March 31, 2023 from $26,044 for the three months ended March 31, 2022. Other operating expenses were 9.4% of Expedited Freight operating revenues for the three months ended March 31, 2023 compared to 6.9% for the same period in 2022. Other operating expenses include equipment maintenance, facility expenses, legal and professional fees, and other over-the-road costs. The increase in other operating expenses was primarily driven by an increase in contract labor, software license fees, professional fees and bad debts in the first quarter of 2023 as compared to the same period in 2022.
Income from Operations
Expedited Freight income from operations decreased $14,682, or 30.8%, to $32,998 for the three months ended March 31, 2023 compared to $47,680 for the three months ended March 31, 2022. Income from operations was 9.7% of Expedited Freight operating revenues for the three months ended March 31, 2023 compared to 12.7% for the same period in 2022. The decrease in income from operations as a percentage of operating revenues was driven by decreased tonnage in the Network as well as a decline in the revenue per hundredweight ex fuel, partially offset by the change in mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers and transportation intermediaries and Company-employed drivers for Network and Truckload.
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Intermodal - Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022
The following table sets forth the financial data of our Intermodal segment for the three months ended March 31, 2023 and 2022 (unaudited and in thousands):
Three Months Ended
March 31,
2023 Percent of Revenue March 31,
2022 Percent of Revenue Change Percent Change
Operating revenues $ 88,169 100.0 % $ 90,440 100.0 % $ (2,271) (2.5) %
Operating expenses:
Purchased transportation 20,014 22.7 24,868 27.5 (4,854) (19.5)
Salaries, wages and employee benefits 18,914 21.5 17,935 19.8 979 5.5
Operating leases 8,335 9.5 6,941 7.7 1,394 20.1
Depreciation and amortization 4,746 5.4 3,610 4.0 1,136 31.5
Insurance and claims 2,349 2.7 2,060 2.3 289 14.0
Fuel expense 3,173 3.6 3,215 3.6 (42) (1.3)
Other operating expenses 19,435 22.0 20,665 22.8 (1,230) (6.0)
Total operating expenses 76,966 87.3 79,294 87.7 (2,328) (2.9)
Income from operations $ 11,203 12.7 % $ 11,146 12.3 % $ 57 0.5 %
Intermodal Operating Statistics
Three Months Ended
March 31,
2023 March 31,
2022 Percent Change
Drayage shipments 72,465 88,312 (17.9) %
Drayage revenue per shipment $ 1,100 $ 890 23.6 %
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Revenues
Intermodal operating revenues decreased $2,271, or 2.5%, to $88,169 for the three months ended March 31, 2023 from $90,440 for the three months ended March 31, 2022. The decrease in operating revenues was primarily attributable to a 17.9% decrease in drayage shipments, partially offset by an increase in drayage revenue per shipment of 23.6% over the same period in 2022. The increase in drayage revenue per shipment was driven by execution of our pricing initiatives, the acquisitions completed in 2022 and higher accessorial revenue to support our customers.
Purchased Transportation
Intermodal purchased transportation decreased $4,854, or 19.5%, to $20,014 for the three months ended March 31, 2023 from $24,868 for the three months ended March 31, 2022. Purchased transportation was 22.7% of Intermodal operating revenues for the three months ended March 31, 2023 compared to 27.5% for the same period in 2022. Intermodal purchased transportation includes Leased Capacity Providers, third-party motor carriers, while Company-employed drivers are included in salaries, wages and employee benefits. The decrease in purchased transportation costs was primarily due to fewer drayage shipments and the change in mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers and Company-employed drivers.
Salaries, Wages and Employee Benefits
Intermodal salaries, wages and employee benefits increased $979, or 5.5%, to $18,914 for the three months ended March 31, 2023 compared to $17,935 for the three months ended March 31, 2022. Salaries, wages and employee benefits were 21.5% of Intermodal operating revenues for the three months ended March 31, 2023 compared to 19.8% for the same period in 2022. The increase in salaries, wages and employee benefits expense was primarily due to additional employees from the acquisitions completed in 2022 and higher salaries and wages as compared to the same period in 2022.
Operating Leases
Intermodal operating leases increased $1,394, or 20.1%, to $8,335 for the three months ended March 31, 2023 compared to $6,941 for the three months ended March 31, 2022. Operating leases were 9.5% of Intermodal operating revenues for the three months ended March 31, 2023 compared to 7.7% for the same period in 2022. The increase in operating leases expense was primarily due to higher facility expense in the first quarter of 2023 as compared to the same period in 2022.
Depreciation and Amortization
Intermodal depreciation and amortization increased $1,136, or 31.5%, to $4,746 for the three months ended March 31, 2023 from $3,610 for the three months ended March 31, 2022. Depreciation and amortization was 5.4% of Intermodal operating revenues for the three months ended March 31, 2023 compared to 4.0% for the same period in 2022 . The increase in depreciation and amortization expense was primarily due to the additional depreciation and amortization expense as result of the equipment and intangible assets acquired in connection with the acquisitions completed in 2022.
Insurance and Claims
Intermodal insurance and claims increased $289, or 14.0%, to $2,349 for the three months ended March 31, 2023 from $2,060 for the three months ended March 31, 2022. Insurance and claims were 2.7% of Intermodal operating revenues for the three months ended March 31, 2023 compared to 2.3% for the same period in 2022. The increase in insurance and claims expense was primarily due to an increase in vehicle liability claims and equipment repairs during the first quarter of 2023 as compared to the same period in 2022. See additional discussion over the consolidated change in self-insurance reserves in the “Other Operations ” section below.
Fuel Expense
Intermodal fuel expense decreased $42, or 1.3%, to $3,173 for the three months ended March 31, 2023 from $3,215 for the three months ended March 31, 2022. Fuel expense was 3.6% of Intermodal operating revenues for both the three months ended March 31, 2023 and 2022. Intermodal fuel expense decreased due to fewer miles driven by Company-employed drivers in the first quarter of 2023 offset by an increase in the average price of fuel as compared to the same period in 2022.
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Other Operating Expenses
Intermodal other operating expenses decreased $1,230, or 6.0%, to $19,435 for the three months ended March 31, 2023 from $20,665 for the three months ended March 31, 2022. Other operating expenses were 22.0% of Intermodal operating revenues for the three months ended March 31, 2023 compared to 22.8% for the same period in 2022. The decrease in Intermodal other operating expenses was driven by lower expenses incurred to support the decreased container rental revenues, partially offset by higher contract labor in the first quarter of 2023 as compared to the same period in 2022.
Income from Operations
Intermodal income from operations increased $57, or 0.5%, to $11,203 for the three months ended March 31, 2023 compared to $11,146 for the three months ended March 31, 2022. Income from operations was 12.7% of Intermodal operating revenues for the three months ended March 31, 2023 compared to 12.3% for the same period in 2022. The increase in income from operations as a percentage of operating revenues was driven by increased drayage revenue per shipment on fewer drayage shipments and a change in mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers and Company-employed drivers.
Other Operations - Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022
Other operations included $6,308 operating income during the three months ended March 31, 2023 compared to an $1,475 operating loss during the three months ended March 31, 2022. The change in the operating income was driven by the reversal of an accrual for an incentive program established for certain employees in 2021, partially offset by an increase in the reserves for group health insurance claims and vehicle liability claims. The change in self-insurance reserves for vehicle liability claims was due to the unfavorable loss development factor of historical claims.
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP ” ). The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and expenses during the reporting period. On an ongoing basis, management evaluates estimates, including those related to allowance for doubtful accounts and revenue adjustments, deferred income taxes and uncertain tax positions, goodwill, other intangible and long-lived assets, and self-insurance loss reserves. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions. A description of critical accounting policies and related judgments and estimates that affect the preparation of the Condensed Consolidated Financial Statements is set forth in the Annual Report on Form 10-K for the year-ended December 31, 2022.
Liquidity and Capital Resources
We have historically financed our working capital needs, including capital expenditures, with available cash, cash flows from operations and borrowings under our credit facility. We believe that borrowings under our credit facility, together with available cash and internally generated funds, will be sufficient to support our working capital, capital expenditures and debt service requirements for the foreseeable future. In the first quarter of 2023, we completed a business acquisition. See Note 3, Acquisitions, in the Notes to the Condensed Consolidated Financial Statements for further discussion on this topic. We used cash from operations and our credit facility to finance this transaction and to provide any necessary liquidity for current and future operations. In addition, we frequently utilize operating leases to acquire revenue equipment.
To further support liquidity and cash reserves, in December 2021, we entered into a third amendment to our credit facility, which increased the amount available for borrowing to $450,000, consisting of $300,000 revolving line of credit and a term loan of $150,000. The amendment establishes annual mandatory repayment of the principal amount of the term loan of: 1.0% per annum in 2022 and 2023; 2.5% per annum in 2024 and 2025; 5.0% per annum in 2026; with the remaining unpaid principal being due on July 20, 2026. As of March 31, 2023, we were in compliance with our financial convents contained in the credit facility and expect to maintain such compliance. In the event that we encounter difficulties, our historical relationships with our lenders has been strong and we anticipate their continued long-term support of our business. Refer to Note 6, Indebtedness, to our Condensed Consolidated Financial Statements for additional information regarding our credit facility.
Cash Flows
Net cash provided by operating activities was $65,993 for the three months ended March 31, 2023 compared to $62,486 for the three months ended March 31, 2022. The increase in net cash provided by operating activities was primarily due to the decrease in accounts receivable, partially offset by the decrease in accounts payable and accrued expenses and net income from operations after consideration of non-cash items.
Net cash used in investing activities was $61,541 for the three months ended March 31, 2023 compared to $9,397 for the three months ended March 31, 2022. Capital expenditures for the first three months of 2023 were $6,789, which primarily related to the purchase of equipment. Capital expenditures for the first three months of 2022 were $9,908, which primarily related to the organic investment in the expansion of our national hub in Columbus, Ohio and for the purchase of equipment. Investing activities for the first three months of 2023 included the acquisition of Land Air Express, Inc. for a preliminary purchase price of $56,567.
Net cash used in financing activities was $18,246 for the three months ended March 31, 2023 compared to $28,775 for the three months ended March 31, 2022. The change in the net cash used in financing activities was primarily due to proceeds from the revolving credit facility, partially offset by the increase in repurchases and retirement of common stock for the first three months of 2023 as compared to the same period in 2022.
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Share Repurchase Program
During the three months ended March 31, 2023 and 2022, we repurchased 474 and 176 shares of our common stock, respectively, for approximately $50,491 and $17,780, respectively, through open market transactions. All shares received were retired upon receipt, and the excess of the purchase price over the par value per share was recorded to “Retained Earnings” in our Condensed Consolidated Balance Sheets.
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Forward-Looking Statements
This report contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements other than historical information or statements of current condition and relate to future events or our future financial performance. Some forward-looking statements may be identified by use of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,” “projects” or “expects.” In this Form 10-Q, forward-looking statements include, but are not limited to, any statements regarding any projections of earnings, revenues, other financial items or related accounting treatment, or cost reduction measures; any statements regarding future performance; any statements regarding the availability of cash; any statements regarding our ability to maintain compliance with the covenants of our credit facility; any statements of plans, strategies, and objectives of management for future operations; any statements regarding our yield management process and any improvements in operating efficiencies; any statements regarding fuel shortages, changes in fuel prices and volatility in fuel surcharge revenue, and the impact on our business; any statements regarding consumer demand and inventory levels, and the impact on air freight volumes; any statements regarding future insurance, claims and litigation and any associated estimates or projections; any statements regarding an increase in the cost of new equipment; any statements concerning proposed or intended, new services, developments or integration measures; any statements regarding our technology and information systems, including the effectiveness of each; any statements regarding competition, including our specific advantages, the capabilities of our segments, including the integration of services and our geographic location; any statement regarding our properties; any statements regarding intended expansion through acquisition or greenfield startups; any statements regarding future business, economic conditions or performance; any statement regarding certain tax and accounting matters, including the impact on our financial statements; any statement regarding the impact and implementation of disclosure control systems; and any statements of belief and any statements of assumptions underlying any of the foregoing.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The following is a list of factors, among others, that could cause actual results to differ materially from those contemplated by the forward-looking statements: economic factors such as recessions, inflation, higher interest rates and downturns in customer business cycles, our ability to manage our growth and ability to grow, in part, through acquisitions, while being able to successfully integrate such acquisitions, our ability to secure terminal facilities in desirable locations at reasonable rates, more limited liquidity than expected which limits our ability to make key investments, the creditworthiness of our customers and their ability to pay for services rendered, our inability to maintain our historical growth rate because of a decreased volume of freight or decreased average revenue per pound of freight moving through our network, the availability and compensation of qualified Leased Capacity Providers and freight handlers as well as contracted, third-party motor carriers needed to serve our customers’ transportation needs, our inability to manage our information systems and inability of our information systems to handle an increased volume of freight moving through our network, the occurrence of cybersecurity risks and events, market acceptance of our service offerings, claims for property damage, personal injuries or workers’ compensation, enforcement of and changes in governmental regulations, environmental, tax, insurance and accounting matters, the handling of hazardous materials, changes in fuel prices, loss of a major customer, increasing competition and pricing pressure, our dependence on our senior management team and the potential effects of changes in employee status, seasonal trends, the occurrence of certain weather events, restrictions in our charter and bylaws, the cost of new equipment, the impact and efficacy of our disclosure controls and procedures, and the risks described in our Annual Report on Form 10-K for the year ended December 31, 2022. As a result of the foregoing, no assurance can be given as to future financial condition, cash flows or results of operations. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.