Hub Group, Inc. 10-K

Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Class A Common Stock (“Class A Common Stock”) trades on the Nasdaq Global Select Market tier of the Nasdaq Stock Market under the symbol “HUBG.” There is no established trading market for shares of our Class B Common Stock (the “Class B Common Stock” together with the Class A Common Stock, the “Common Stock”). On February 11, 2022, there were approximately 414 stockholders of record of the Class A Common Stock and in addition, there were an estimated 18,546 beneficial owners of the Class A Common Stock whose shares were held by brokers and other fiduciary institutions. On February 11, 2022, there were 9 holders of record of our Class B Common Stock. Issuer Purchases of Equity Securities On May 23, 2019, our Board of Directors authorized the purchase of up to $100 million of our Class A Common Stock. Under the program, the shares may be repurchased in the open market or in privately negotiated transactions, from time to time subject to market and other conditions. We did not purchase any stock under this authorization during the fourth quarter of 2021. The approved share repurchase program does not obligate us to repurchase any dollar amount or number of shares and the program may be extended, modified, suspended, or discontinued at any time. We purchased 64,153 shares of Class A Common Stock related to employee withholding upon vesting of restricted stock in the fourth quarter of 2021. The table below gives information on a monthly basis regarding the number of shares delivered to us by employees to satisfy the mandatory tax withholding requirement upon vesting of restricted stock during the fourth quarter of 2021: Maximum Value of Total Total Number of Shares that May Yet Number of Average Shares Purchased as Be Purchased Under Shares Price Paid Part of Publicly the Plan Purchased Per Share Announced Plan (in 000’s) 10/1/2021 - 10/31/2021 409 $ 77.76 - $ - 11/1/2021 - 11/30/2021 1,700 $ 82.28 - $ - 12/1/2021 - 12/31/2021 62,044 $ 79.18 - $ - Total 64,153 $ 79.26 - $ 75,002 We were incorporated in 1995 and have never paid cash dividends on either the Class A Common Stock or the Class B Common Stock. The declaration and payment of dividends are subject to the discretion of the Board of Directors. Any determination as to the payment of dividends will depend upon our results of operations, capital requirements and financial condition of the Company, and such other factors as the Board of Directors may deem relevant. Accordingly, there can be no assurance that the Board of Directors will declare or pay cash dividends on the shares of Common Stock in the future. Our certificate of incorporation requires that any cash dividends must be paid equally on each outstanding share of Class A Common Stock and Class B Common Stock. Our credit facility prohibits us from paying dividends on the Common Stock if there has been, or immediately following the payment of a dividend there would be, a default or an event of default under the credit facility. We are currently in compliance with the covenants contained in the credit facility. 20 Performance Graph The following line graph compares the Company’s cumulative total stockholder return on its Class A Common Stock since December 31, 2016 with the cumulative total return of the Nasdaq Stock Market Index (NQUSBT) and the Nasdaq Trucking and Transportation Index (NQUSB27707). These comparisons assume the investment of $100 on December 31, 2016 in each index and in the Company’s Class A Common Stock and the reinvestment of dividends. Item 6. RESERVED 21 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section of the Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which is incorporated herein by reference. EXECUTIVE SUMMARY We are a leading supply chain solutions provider in North America that offers comprehensive transportation and logistics management services focused on reliability, visibility and value for our customers. Our service offerings include a full range of freight transportation and logistics services, some of which are provided by assets we own and operate, and some of which are provided by third parties with whom we contract. Our transportation services include intermodal, truckload, less-than-truckload, flatbed, temperature-controlled, dedicated and regional trucking. Our logistics services include full outsource logistics solutions, transportation management services, freight consolidation, warehousing and fulfillment, final mile delivery, parcel and international services. We service a large and diversified customer base in a broad range of industries, including retail, consumer products and durable goods. We believe our strategy to offer multi-modal supply chain management solutions serves to strengthen and deepen our relationships with our customers and allows us to provide a more cost effective and higher service solution. We provide services in four lines of business. Our intermodal line of business offers high service, nationwide door-to-door intermodal transportation, providing value, visibility and reliability in both transcontinental and local lanes by combining rail transportation with local trucking. We arrange for the movement of our customers’ freight in one of our approximately 44,000 containers. We contract with railroads to provide transportation for the long-haul portion of the shipment between rail terminals. Local pickup and delivery services between origin or destination and rail terminals are provided by our HGT subsidiary and third-parties with whom we contract. Our logistics business offers a wide range of transportation and logistics management services and technology solutions including shipment optimization, load consolidation, mode selection, carrier management, load planning and execution, warehousing and shipment visibility. We offer multi-modal transportation services including full truckload, less-than-truckload, intermodal, final mile, railcar, small parcel and international transportation. All of our services are provided on a non-asset basis, as underlying transportation or warehousing services are provided by other of Hub’s business lines or by third parties. In late 2020, we acquired NSD which provided us with a final mile delivery capacity. Our truck brokerage operation offers a full range of trucking transportation on a non-asset basis, as we match customers’ shipping needs with trucking carriers’ capacity to provide the most effective combination of service and price. Our services include dry van, expedited, less-than-truckload, refrigerated and flatbed. We substantially increased the size of our brokerage service line, and increased our refrigerated transportation capabilities, through the acquisition of Choptank Transport, LLC in October 2021 (“Choptank”). Approximately half of our truck brokerage volume is generated from committed pricing transactions, with the remainder consisting of loads that are priced on a transactional basis. Our dedicated trucking business line contracts with customers who require high service transportation using equipment dedicated to their needs. We offer a dedicated fleet of approximately 1,000 tractors and 4,600 trailers to our customers, as well as the driver staffing, management and infrastructure to operate according to the customer’s high service expectations. Over the last several years we have begun to combine certain aspects of our dedicated and HGT operations in order to drive efficiency and reduce costs, including a shared services model for driver recruiting, asset management and safety functions, as well as sharing drivers and equipment between dedicated and HGT. In 2021, we experienced favorable market conditions for our services. Demand for our services continued to show strength, as North American consumer spending, particularly on the types of goods that our customers offer, remained robust. Retail inventory levels remain near historically low levels, indicating a need by our customers to move goods as they restock their distribution centers and stores. The response to the COVID-19 pandemic caused many changes in consumer behavior, including a propensity for consumers to shift spending from services toward goods, and also to increase spending on household goods. Available transportation capacity in North America continues to be constrained by high levels of demand, shortages of available drivers, and challenges with the production of new tractors and other equipment. These factors resulted in strong demand for our transportation capacity in 2021, as well as rising prices for our services and those of our competitors. 22 We expect these conditions to continue in 2022. In order to meet customer demand, we have taken several important actions. We are increasing our capacity to handle additional volume by ordering over 6,500 new containers which we expect will be delivered in 2022. Included in this order is a significant expansion of our refrigerated intermodal container fleet, as we believe there is a large opportunity to sell this expanded service to our existing customer base. During 2021, we increased the level of compensation we pay to our drivers in order to increase our hiring and ability to handle additional intermodal loads and we intend to offer competitive compensation in 2022 to retain and attract drivers. We have seen strong demand for final mile delivery services as a result of the factors noted above. We are working on several margin enhancement projects including network optimization, matching of inbound and outbound loads, reducing empty miles, improving our recovery of accessorial costs, increasing our driver and asset utilization, reducing repositioning costs, providing holistic solutions and improving low profit freight. We use various performance indicators to manage our business. We closely monitor profit margins on a lane-level and customer-level basis. We also evaluate on-time performance, customer service, cost per load and customer-level accounts receivable as a multiple of daily sales. Vendor cost changes and vendor service performance are also monitored closely. During 2021 we also took delivery of a large number of new tractors, and we expect to do the same in 2022. A portion of these new units represent replacements for older tractors. These replacements will allow us to reduce operating costs as new equipment generally features lower repair and maintenance costs, while also consuming less fuel per mile operated, which has both financial and environmental benefits. In addition, we recognized approximately $19 million of gains on the sale of older tractors in 2021 due to the strength in the market for used equipment. We expect this strength in gains on sales of our older tractors to continue in 2022 though likely not to the same level as 2021. Uncertainties and risks to our outlook include the following: a slowdown in consumer spending, a shift by consumers to spending on services at the expense of goods, a significant increase in transportation supply in the marketplace, aggressive pricing actions by our competitors; and any inability to pass cost increases, such as transportation and warehouse costs, through to our customers, all of which could have a materially negative impact on our revenue, profitability and cash flow in 2022. Strategic Transactions On October 19, 2021, we acquired 100% of the equity interests of Choptank. Total consideration for the transaction was $127.6 million in cash and the settlement of accounts receivable due from Choptank of $0.3 million. In connection with the acquisition, we granted approximately $22 million of restricted stock to Choptank's senior management team, which is subject to certain vesting conditions. On December 9, 2020, we acquired 100% of the equity interests of NSD. Total consideration for the transaction was $105.9 million which consisted of cash paid of $89.8 million, of which $0.1 million was paid in the second quarter of 2021 as part of the post-closing true-up, and the settlement of Hub’s accounts receivable due from NSD of $16.1 million. RESULTS OF OPERATIONS Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 The following table summarizes our revenue by business line (in thousands): Years Ended December 31, 2021 2020 Intermodal $ 2,391,494 $ 2,029,186 Logistics 887,388 767,279 Truck brokerage 688,867 431,127 Dedicated 264,634 268,052 Total revenue $ 4,232,383 $ 3,495,644 23 The following is a summary of operating results and certain items in the consolidated statements of income as a percentage of revenue: Years Ended December 31, 2021 2020 Revenue $ 4,232,383 100.0% $ 3,495,644 100.0% Transportation costs 3,632,743 85.8% 3,070,207 87.8% Gross margin 599,640 14.2% 425,437 12.2% Costs and expenses: Salaries and benefits 247,240 5.9% 188,777 5.4% General and administrative 76,476 1.8% 99,597 2.9% Depreciation and amortization 37,467 0.9% 31,237 0.9% Total costs and expenses 361,183 8.6% 319,611 9.2% Operating income $ 238,457 5.6% $ 105,826 3.0% Revenue Revenue increased 21.1% to $4.2 billion in 2021 from $3.5 billion in 2020. Intermodal revenue increased 17.9% to $2.4 billion primarily due to a 20.6% increase in revenue per load, partially offset by a 2.2% decrease in volume. Logistics revenue increased 15.7% to $887.4 million primarily due to growth of our consolidation solutions services and the contribution of our final mile operations, partially offset by the impact of lost customers. Truck brokerage revenue increased 59.8% to $688.9 million primarily due to a 44.8% increase in revenue per load and a 10.3% increase in volume, which includes the contribution of Choptank since the acquisition in October 2021. Dedicated’s revenue decreased 1.3% to $264.6 million primarily due to the impact of business we exited, partially offset by growth with new accounts. Transportation Costs Transportation costs increased to $3.6 billion in 2021 from $3.1 billion in 2020. Transportation costs in 2021consisted of purchased transportation costs of $2.9 billion and equipment and driver related costs of $687.0 million. Transportation costs in 2020 consisted of purchased transportation costs of $2.4 billion and equipment and driver related costs of $643.5 million. The 21.4% increase in purchased transportation costs was primarily due to increased rail costs, increased fuel costs, increased truck brokerage volume, higher third-party carrier costs and the impact of the NSD and Choptank acquisitions, partially offset by decreased repositioning costs and decreased container stacking charges. Equipment and driver related costs increased 6.8% in 2021 primarily due to higher driver wages and increased repairs and maintenance expense, partially offset by decreased equipment depreciation expense, and decreased usage of our internal drayage resources to 50% of total drayage moves in 2021 from 56% in 2020. Gross Margin Gross margin increased 40.9% to $599.6 million in 2021 from $425.4 million in 2020. The $174.2 million gross margin increase was the result of increases in intermodal, logistics, and truck brokerage, partially offset by a decrease in dedicated. Intermodal gross margin increased primarily due to a 20.6% increase in revenue per load, partially offset by a 2.2% decrease in volume, increased purchased transportation costs, and internal drayage costs. Logistics gross margin increased primarily due to yield management, higher revenue, and the contribution of final mile operations, partially offset by higher warehousing and transportation costs. Truck brokerage gross margin increased due to revenue per load growth in both committed and transactional freight, a 10.3% increase in volume, including the contribution of Choptank, partially offset by the impact of higher purchased transportation costs. Dedicated gross margin decreased due to business we exited, partially offset with growth from new customers, lower insurance costs and lower third-party carrier costs. As a percentage of revenue, gross margin increased to 14.2% in 2021 from 12.2% in 2020 due to the aforementioned factors. Intermodal gross margin as a percentage of revenue increased 350 basis points. Logistics gross margin as a percentage of revenue increased 170 basis points. Truck brokerage gross margin as a percentage of revenue decreased 190 basis points. Dedicated gross margin as a percentage of revenue decreased 240 basis points. 24 CONSOLIDATED OPERATING EXPENSES Salaries and Benefits Salaries and benefits increased to $247.2 million in 2021 from $188.8 million in 2020. As a percentage of revenue, salaries and benefits increased to 5.9% in 2021 from 5.4% in 2020. The increase of $58.5 million was primarily due the addition of NSD and Choptank, increases in employee bonuses of $36.2 million, salaries of $6.5 million, payroll taxes of $4.7 million, employee benefits of $4.3 million, commissions of $3.8 million and restricted stock expense of $3.0 million. Headcount as of December 31, 2021 and 2020 was 2,304 and 1,989, respectively, which excludes driver headcount, the costs for which are included in transportation costs. The increase in headcount is due primarily to the addition of Choptank employees. General and Administrative General and administrative expenses decreased to $76.5 million in 2021 from $99.6 million in 2020. As a percentage of revenue, these expenses decreased to 1.8% in 2021 from 2.9% in 2020. The decrease of $23.1 million in general and administrative expense was primarily due to gains on sales of transportation equipment of $19.2 million, which was an increase of $20.1 million compared to 2020, as well as decreases of $5.9 million related to non-reoccurring donations of refrigerated trailers in support of COVID-19 efforts made in 2020 and $2.2 million in professional services related primarily to a consulting project in 2020. The decreases were partially offset by an increase in legal claim expense. Depreciation and Amortization Depreciation and amortization increased to $37.5 million in 2021 from $31.2 million in 2020. This increase related primarily to the amortization of intangibles related to the acquisitions of both NSD and Choptank as well as increases in depreciation of computer software. This expense as a percentage of revenue remained consistent at 0.9% in both 2021 and 2020. Other Expense, Net Other expense decreased to $7.5 million in 2021 from $9.7 million in 2020 due to less interest expense caused by less average borrowings and lower average interest rates on existing borrowings. Provision for Income Taxes Provision for income taxes increased to $59.4 million in 2021 from $22.5 million in 2020 due primarily to an increase in income. Our effective tax rate was 25.7% in 2021 and 23.5% in 2020. See Note 7, Income Taxes, in our consolidated financial statements for a detailed reconciliation of our effective tax rate. The increase to the tax rate in 2021 compared to 2020 is primarily related to two factors. In 2020, state law changes prompted us to amend certain state income tax returns that provided refunds and a significant benefit to the effective tax rate. That rate benefit did not repeat in 2021. Additionally, our federal and state tax incentives were smaller in 2021 than in 2020. Net Income Net income increased to $171.5 million in 2021 from $73.6 million in 2020 due primarily to increases in revenue and gross margin, partially offset by higher costs, operating expenses and income tax expense. LIQUIDITY AND CAPITAL RESOURCES Our financing and liquidity strategy is to fund operating cash payments through cash received from the provision of services, cash on hand, and to a lesser extent, from cash received from the sale of equipment. As of December 31, 2021, we had $159.8 million of cash and $24.3 million of restricted investments. We generally fund our purchases of transportation equipment through the issuance of secured, fixed rate Equipment Notes. Payments for our other investing activities, such as the construction of our office buildings and our capitalized technology investments, have been funded by cash on hand or cash flows from operations. We have not historically used our Credit Facility to fund our operating or investing cash needs, though it is available to fund future cash requirements as needed. In the last three years we have funded our business acquisitions from cash on hand, though in the future we may elect to fund these activities through a combination of cash on hand, borrowings on our credit facility, or from issuance of secured or unsecured debt. Cash used in financing activities has generally been funded by cash from operations or cash on hand. Based on past performance and current expectations, we believe cash on hand and cash received from the provision of services, along with other financing sources, will provide us the necessary capital to fund transactions and achieve our planned growth for the next twelve months and the foreseeable future. 25 Cash provided by operating activities for the year ended December 31, 2021 was approximately $252.8 million, which resulted primarily from income of $171.5 million plus non-cash charges of $127.5 million, partially offset by changes in operating assets and liabilities of $46.2 million. Cash provided by operating activities totaled $252.8 million in 2021 compared to $175.0 million in 2020. The $77.8 million increase in cash flow was primarily due to an increase in net income of $97.9 million and a sequential increase in accounts payable of $72.9 million. These increases were partially offset by a sequential increase in accounts receivable of $68.3 million and by additional gains on the sale of equipment of $20.1 million in 2021. Net cash used in investing activities for the year ended December 31, 2021 was $210.1 million which resulted from capital expenditures of $133.0 million and acquisition payments related to NSD and Choptank of $122.4 million partially offset by proceeds received of $45.2 million from the sale of equipment. Capital expenditures of $133.0 million included tractor purchases of $51.9 million, container purchases of $50.8 million, technology investments of $15.6 million, construction spend for our corporate headquarters of $11.1 million, other transportation equipment purchases of $3.2 million and the remainder for leasehold improvements. Capital expenditures increased by approximately $17.6 million in 2021 as compared to 2020. The 2021 increase was due to increases in tractor purchases of $20.0 million, container purchases of $11.5 million and technology investments of $2.2 million. These increases were partially offset by decreased spend on our corporate headquarters of $8.8 million, less purchases of other transportation equipment of $6.7 million and less spend for leasehold improvements. In 2022, we estimate capital expenditures will range from $240 million to $270 million. We expect transportation equipment purchases to range from $210 million to $230 million and building and technology investments will range from $30 million to $40 million. We plan to fund these expenditures with a combination of cash and debt. Net cash used in financing activities for the year ended December 31, 2021 was $7.4 million which includes repayments of long-term debt of $107.6 million, cash for stock tendered for payments of withholding taxes of $9.1 million and finance lease payments of $2.7 million partially offset by the proceeds from the issuance of debt $112.0 million. Debt incurred in 2021 was used to fund the purchase of transportation equipment. The $14.9 million decrease in cash used in financing activities for 2021 versus 2020 was primarily due to the decrease in repayments of long-term debt of $91.1 million partially offset by less proceeds from the issuance of debt of $75.5 million and an increase in cash for stock related to employee withholding taxes of $1.2 million. In 2021, cash paid for income taxes was $58.6 million, of which $55.6 million related to 2021 and $3.0 million related to 2020. In 2022, we expect to pay an additional $6.5 million of cash for taxes related to 2021. The 2021 income tax expense of $59.4 million is less than the amount paid for 2021 income taxes of $55.6 million and the anticipated $6.5 million to be paid in 2022 that relates to 2021. This is due to net unfavorable book to tax differences causing 2021 taxable income to exceed 2021 financial statement income before taxes. See Note 10 of the consolidated financial statements for details related to interest rates and commitment fees. We have standby letters of credit that expire in 2022. As of December 31, 2021, our letters of credit were $41.3 million. As of December 31, 2021, we had no borrowings under our credit facility and our unused and available borrowings were $308.7 million. Our unused and available borrowings were $312.3 million as of December 31, 2020. We believe our line of credit is adequate to meet our cash needs. Refer to Note 17 "Subsequent Event" for information regarding the new credit agreement. We were in compliance with our debt covenants as of December 31, 2021. 26 CONTRACTUAL OBLIGATIONS Aggregated information about our obligations and commitments to make future contractual payments such as debt and lease obligations as of December 31, 2021 is presented in the following table (in thousands). Future Payments Due: Operating Finance Interest Leases Leases Debt on Debt Total Year 1 $ 12,253 $ 1,257 $ 97,273 $ 5,084 $ 115,867 Year 2 9,904 - 72,971 2,687 85,562 Year 3 8,133 - 48,031 1,371 57,535 Year 4 6,842 - 37,257 630 44,729 Year 5 5,320 - 19,220 131 24,671 Thereafter 6,436 - - - 6,436 $ 48,888 $ 1,257 $ 274,752 $ 9,903 $ 334,800 As of February 15, 2022, Hub signed various operating and finance leases which had not commenced as of December 31, 2021. Based on the present value of the lease payments, the estimated right-of-use (“ROU”) assets and lease liabilities related to these contracts will total approximately $3.0 and $2.0 million for operating and finance leases, respectively. Deferred Compensation Under our Nonqualified Deferred Compensation Plan (the “Plan”), participants can elect to defer certain compensation. Payments under the Plan are due as follows (in thousands): Future Payments Due: Year 1 $ 4,923 Year 2 2,375 Year 3 1,747 Year 4 2,092 Year 5 1,276 Thereafter 11,687 $ 24,100 The above future payments are fully funded by our restricted investments comprised of mutual funds as noted in Note 14. 27 CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying consolidated financial statements. We have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The following is a brief discussion of the more significant accounting policies and estimates. These critical accounting policies are further discussed in Note 1 of the consolidated financial statements, which describes these and our other significant accounting policies. Revenue Recognition In accordance with the Accounting Standards Codification (ASC) topic 606, Revenue from Contracts with Customers, our significant accounting policy for revenue is as follows: Revenue is recognized when we transfer services to our customers in an amount that reflects the consideration we expect to receive. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We generally recognize revenue over time because of continuous transfer of control to the customer. Since control is transferred over time, revenue and related transportation costs are recognized based on relative transit time, which is based on the extent of progress towards completion of the related performance obligation. We enter into contracts that can include various combinations of services, which are capable of being distinct and accounted for as separate performance obligations. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Further, in most cases, we report our revenue on a gross basis because we are the primary obligor as we are responsible for providing the service desired by the customer. Our customers view us as responsible for fulfillment including the acceptability of the service. Service requirements may include, for example, on-time delivery, handling freight loss and damage claims, setting appointments for pick-up and delivery and tracing shipments in transit. We have discretion in setting prices for our services and as a result, the amount we earn varies. In addition, we have the discretion to select our vendors from multiple suppliers for the services ordered by our customers. These factors, discretion in setting prices and discretion in selecting vendors, further support reporting revenue on a gross basis for most of our revenue. Allowance for Uncollectible Trade Accounts We extend credit to customers after a review of each customer’s credit profile and history. An allowance for uncollectible trade accounts has been established through an analysis of the accounts receivable aging, an assessment of collectability based on historical trends and an evaluation based on current economic conditions. Annually we review, in hindsight, the percentage of receivables that are collected that aged over one year, those that are not one year old and the accounts that went into bankruptcy. We reserve for accounts less than one year old based on specifically identified uncollectible balances and our historic collection percentage, including receivable adjustments charged through revenue for items such as billing disputes. In establishing a reserve for certain account balances specifically identified as uncollectible, we consider the aging of the customer receivables, the specific details as to why the receivable has not been paid, the customer’s current and projected financial results, the customer’s ability to meet and sustain its financial commitments, the positive or negative effects of the current and projected industry outlook and the general economic conditions. Our historical collection percentage has been over 98% for receivables that are less than one year old. Changes in our historical collection percentages of receivables that are less than one year old either positively or negatively, based on our collection history, would affect our calculated allowance for uncollectible trade accounts. Once a receivable ages over one year, our collection percentage is much lower, thus a separate allowance is calculated for open receivables that have aged over one year. We also review our collection percentage after a customer has gone into bankruptcy. Although these collection percentages may change both negatively and positively, since only a small portion of our receivables are aged over one year or are involved in a bankruptcy case, a large change in either of those collection percentages would not have a material impact on our financial statements. Our level of reserves for customer accounts receivable fluctuates depending upon all the factors mentioned above. Historically, our reserve for uncollectible accounts has approximated actual accounts written off and we do not expect the reserve for uncollectible accounts to change significantly relative to our accounts receivable balance. The allowance for uncollectible accounts is reported on the balance sheet in net accounts receivable. Recoveries of receivables previously charged off are recorded when received. 28 Claims Accruals We purchase insurance coverage for a portion of expenses related to employee injuries, vehicular collisions, accidents, and cargo damage. Certain insurance arrangements include high SIR limits or deductibles applicable to each claim. We have umbrella policies to limit our exposure above these SIR limits and deductibles. Our claims accrual policy for all self-insured claims is to recognize a liability at the time of the incident based on our analysis of the nature and severity of the claims and analyses provided by third-party claims administrators, as well as legal and regulatory factors. Our safety and claims personnel work directly with representatives from the insurance companies and third-party administrators to continually update the estimated cost of each claim. The ultimate cost of a claim develops over time as additional information regarding the nature, timing, and extent of damages claimed becomes available. Accordingly, we use actuarial methods to develop current claim information to derive an estimate of our ultimate claim liability. This process involves the use of loss-development factors based on our historical claims experience. In doing so, the recorded liability considers future claims growth and provides an allowance for incurred-but-not-reported claims. Changes in loss development factors caused by differences between the estimates of future medical costs, future severity trend factors and future legal costs could materially change our recorded claim accrual liability. Our claim accrual liability is classified as either current or non-current in the consolidated balance sheet based on an estimate of when the claims are expected to be paid. We do not discount our estimated losses. In addition, we record receivables for amounts expected to be reimbursed for payments made in excess of self-insurance levels on covered claims. OUTLOOK, RISKS AND UNCERTAINTIES Business Combinations/Divestitures We believe that any future acquisitions or divestitures that we may make could significantly impact financial results. Financial results most likely to be impacted include, but are not limited to, revenue, gross margin, salaries and benefits, general and administrative expenses, depreciation and amortization, interest expense, net income and our debt level. Revenue We believe that the performance of our railroad vendors and a severe or prolonged slow-down of the economy are the most significant factors that could negatively influence our revenue growth rate. Should the rail industry experience a prolonged disruption in service, we believe our intermodal business would likely be negatively impacted. Other factors that could negatively influence our growth rate include, but are not limited to, the elimination of fuel surcharges, lower fuel prices, the entry of new competitors, aggressive pricing by new or existing competitors, poor customer retention, inadequate drayage and intermodal service and inadequate equipment supply and the ongoing coronavirus outbreak or other health concerns. Gross Margin We expect fluctuations in gross margin as a percentage of revenue from quarter-to-quarter caused by various factors including, but not limited to, competitor pricing actions, changes in our business mix, start-up costs for new business, changes in logistics services between transactional business and management fee business, changes in truck brokerage services between transaction, committed and other types of service, insurance and claim costs, driver recruiting costs, driver compensation changes, impact of regulations on drayage costs, trailer and container capacity, vendor cost increases, fuel costs, equipment depreciation and operating costs, equipment utilization, transportation industry growth, intermodal industry service levels, accessorials, competitive pricing and related changes in accounting estimates. Salaries and Benefits We estimate that salaries and benefits as a percentage of revenue could fluctuate from quarter-to-quarter as there are timing differences between volume increases and changes in levels of staffing. Factors that could cause the percentage not to stay in the recent historical range include, but are not limited to, revenue growth rates significantly higher or lower than forecasted, a management decision to invest in additional personnel to stimulate new or existing businesses, changes in customer requirements, changes in our operating structure, availability of labor supply at current rates, severance, employee insurance costs, how well we perform against our incentive-compensation and other bonus goals, and changes in railroad intermodal service levels which could result in a lower or higher cost of labor per move. 29 General and Administrative We believe there are several factors that could cause general and administrative expenses to fluctuate as a percentage of revenue. As customer expectations and the competitive environment require the development of new technology interfaces and the restructuring of our information systems and related platforms, we believe there could be significant expenses incurred. Other factors that could cause general and administrative expense to fluctuate include, but are not limited to, changes in insurance premiums, technology expense related to software and services, claim expense, bad debt expense, professional services expense and costs related to acquisitions or divestitures. Additionally, the gains or losses on sales of used assets can result in fluctuating general and administrative expenses. Depreciation and Amortization We operate tractors and utilize containers, trailers and chassis in connection with our business. This equipment may be purchased or leased as part of an operating or financing lease. In addition, we rent equipment from third parties under short term rental arrangements. Equipment which is purchased is depreciated on the straight-line method over the estimated useful life. We anticipate additional amortization expense due to recent and future acquisitions. Impairment of Property and Equipment, Goodwill and Indefinite-Lived Intangibles On an ongoing basis, we assess the realizability of our assets. If, at any point during the year, we determine that an impairment exists, the carrying amount of the asset is reduced by the estimated impairment with a corresponding charge to earnings which could have a material adverse impact on earnings. Other Expense We expect interest expense to increase in 2022 because we financed our 2021 tractor and container purchases with debt and we expect to incur debt for a significant portion of our 2022 capital expenditures. Factors that could cause a change in interest expense include, but are not limited to, change in interest rates, change in investments, funding working capital needs, funding capital expenditures, funding an acquisition and purchase of treasury stock. Provision for Income Taxes Based on current tax legislation, we estimate that our effective tax rate will be between 24% and 26% in 2022. In the normal course of business, we are audited by federal, state, and foreign tax authorities, and are periodically challenged regarding the amount of taxes due. These challenges relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. We believe our tax positions comply with applicable tax law and we intend to defend our positions. In evaluating the exposure associated with various tax filing positions, we record reserves for uncertain tax positions in accordance with U.S. GAAP based on the technical support for the positions, our past audit experience with similar situations, and potential interest and penalties related to such matters. Our financial results and effective tax rate in any given period could be impacted if, upon final resolution with taxing authorities, we prevail on positions for which reserves have been established, or we are required to pay amounts that exceed established reserves. Significant judgment is required in determining and assessing the impact of complex tax laws and certain tax-related contingencies on our provision for income taxes. As part of our calculation of the provision for income taxes, we assess whether the benefits of our tax positions are at least more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are not more likely than not to be sustained upon audit, we accrue the largest amount of the benefit that is not more likely than not to be sustained in our financial statements. Such accruals require us to make estimates and judgments, whereby actual results could vary materially from these estimates. Further, years may elapse before a particular matter for which we have established an accrual is audited and resolved or its statute of limitations expires. See Note 7, Income Taxes, in our consolidated financial statements for a discussion of our current unrecognized tax benefits. 30 Realizability of Deferred Tax Assets We account for income taxes under the asset and liability method of ASC 740. Our deferred tax assets and liabilities represent items that will result in tax deductions or taxable income in future years for which we have already recorded the related tax expense or benefit in our income statement. Deferred tax assets and liabilities are a result of timing differences between when items are recognized in our income tax returns and when they are recognized on our consolidated income statement. Each quarter, we assess the likelihood that deferred tax assets will be recovered from the reversal of timing differences or from future taxable income. A valuation allowance is established if we feel that the recovery of the deferred tax asset does not meet the more-likely-than-not threshold. If a valuation allowance is established, an expense is recorded as part of our income tax provision. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods, expected future deductions and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.