Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 using assets we own and operate, and some of which are provided by third parties with whom we contract. Our services include intermodal, truckload, less-than-truckload, flatbed, temperature-controlled, dedicated and regional trucking. Other services include full outsource logistics solutions, transportation management services, freight consolidation, warehousing and fulfillment, and final mile delivery 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.
Beginning in the first quarter of 2023, we concluded we have two reportable segments - Intermodal and Transportation Solutions, and Logistics, which are based primarily on the services each segment provides. Results for the years ended December 31, 2022 and 2021 have been recast to conform with current year presentation.
Intermodal and Transportation Solutions. Our Intermodal and Transportation Solutions segment 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. This segment includes our trucking operations which provides our customers with local pickup and delivery as well as high service local and regional trucking transportation using equipment dedicated to their needs. In 2023, approximately 78% of our drayage services was provided by our own fleet. We arrange for the movement of our customers’ freight in one of our approximately 50,000 containers. We contract with railroads to provide transportation for the long-haul portion of the shipment between rail terminals. Drayage between origin or destination and rail terminals are provided by our own trucking operations and third parties with whom we contract. Our dedicated service operation offers fleets of equipment and drivers to each customer on a contract basis, as well as the management and infrastructure to operate according to the customer’s high service expectations. As of December 31, 2023, our trucking transportation operation consisted of approximately 2,300 tractors, 2,900 employee drivers and 4,300 trailers. We also contract for services with approximately 460 independent owner-operators. These assets and contractual services are used to support drayage for our intermodal service offering and to serve our customers who require high service local and regional trucking transportation using equipment dedicated to their needs. Our dedicated service operation offers fleets of equipment and drivers to each customer on a contract basis, as well as the management and infrastructure to operate according to the customer’s high service expectations.
Logistics . Our Logistics segment offers a wide range of non-asset-based services including transportation management, freight brokerage services, shipment optimization, load consolidation, mode selection, carrier management, load planning and execution, warehousing, fulfillment, cross-docking, consolidation services and final mile delivery. Logistics includes our brokerage business which consists of a full range of trucking transportation services, including dry van, expedited, less-than-truckload (“LTL”), refrigerated and flatbed, all of which is provided by third-party carriers with whom we contract. We leverage proprietary technology along with collaborative relationships with third-party service providers to deliver cost savings and performance-enhancing supply chain services to our clients. Our transportation management offering also serves as a source of volume for our ITS segment. Many of the customers for these solutions are consumer goods companies who sell into the retail channel. Our final mile delivery offering provides residential final mile delivery and installation of appliances and big and bulky goods. Final mile operates through a network of independent service providers in company, customer and third-party facilities throughout the continental United States. Our business operates or has access to approximately 11 million square feet of warehousing and cross-dock space across North America, to which our customers ship their goods to be stored and distributed to destinations including residences, retail stores and other commercial locations. These services offer our customers shipment visibility, transportation cost savings, high service and compliance with retailers’ increasingly stringent supply chain requirements.
We are focused 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. Hub’s top 50 customers represent approximately 64% of revenue for fiscal 2023 while one customer accounted for more than 10% of our annual revenue in 2023 in both segments. We use various performance indicators to manage our business. We closely monitor profit levels for our top customers. We also evaluate on-time performance, customer service, cost per load and daily sales outstanding by customer account. Vendor cost changes and vendor service levels are also monitored closely.
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Uncertainties and risks to our outlook include inflation, increased healthcare costs, a slowdown in consumer spending (driven by, among other factors, rising inflation, increases in interest rates, an economic recession and geopolitical concerns), a shift by consumers to spending on services at the expense of goods, an increase of retailers’ inventory levels, the ability of customers to pay our accounts receivable, 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 2024. Exiting of truckload capacity, retail inventory levels declining leading to restocking demand, a return of typical shipping peak season demands and a stronger used tractor market could have a materially positive impact on our revenue, profitability and cash flows in 2024.
Strategic Transactions
On December 20, 2023, we acquired 100% of the equity interests of Forward Air Final Mile (“FAFM”). Total consideration for the transaction was approximately $261 million in cash.
On August 22, 2022, we acquired 100% of the equity interests of TAGG. Total consideration for the transaction was approximately $103.4 million in cash.
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.
RESULTS OF OPERATIONS
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following table summarizes our operating revenue by segment (in thousands):
Years Ended
Operating Revenue
December 31,
2023
2022
Intermodal and Transportation Solutions
$
2,495,663
$
3,312,431
Logistics
1,820,856
2,121,818
Inter-segment eliminations
(113,934
)
(93,759
)
Total operating revenue
$
4,202,585
$
5,340,490
The following table summarizes our operating income by segment (in thousands):
Years Ended
Operating Income
December 31,
2023
2022
Intermodal and Transportation Solutions
$
107,117
$
348,537
Logistics
105,114
126,184
Total operating income
$
212,231
$
474,721
Total consolidated operating revenue decreased 21% to $4.2 billion in 2023 from $5.3 billion in 2022.
Intermodal and Transportation Solutions (“ITS”) revenue decreased 25% to $2.5 billion primarily due to a 14% decrease in intermodal volume due to low transportation demand and an oversupply of truckload carrier capacity, a 14% decrease in intermodal revenue per load (primarily due to lower price, fuel prices and mix) and a 4% decline in dedicated revenues due to lost customers partially offset by growth with existing and new customers.
ITS operating income decreased to $107 million, 4% of revenue, as compared to $349 million, 11% of revenue in the prior year due to lower volume, lower customer rates, and lower surcharges and accessorial income. These headwinds were partially offset by lower drayage costs as we increased the portion of drayage handled on our own fleet to 78% in 2023 as compared to 55% in the prior year, as well as an improvement in profitability at our dedicated trucking service line.
22
Logistics revenue decreased 14% to $1.8 billion primarily driven by lower revenue per load in our brokerage service line and lower managed transportation and final mile service line revenue, partially offset by an increase in fulfillment revenue. Brokerage volumes were flat compared to the prior year. Logistics operating income was 6% of revenue in both 2023 and 2022. Operating income was $105 million as compared to $126 million last year, as lower revenue was partially offset by lower purchased transportation costs and our yield management initiatives.
The following is a summary of operating results and certain items in the consolidated statements of income as a percentage of revenue (in thousands):
Years Ended
December 31,
2023
2022
Operating revenue
$
4,202,585
100.0%
$
5,340,490
100.0%
Operating expenses:
Purchased transportation and warehousing
3,145,595
74.8%
4,036,503
75.6%
Salaries and benefits
553,326
13.2%
543,010
10.2%
Depreciation and amortization
143,523
3.4%
131,789
2.5%
Insurance and claims
49,040
1.2%
58,064
1.1%
General and administrative
105,705
2.5%
120,579
2.2%
Gain on sale of assets, net
(6,835
)
-0.2%
(24,176
)
-0.5%
Total operating expenses
3,990,354
94.9%
4,865,769
91.1%
Operating income
$
212,231
5.1%
$
474,721
8.9%
CONSOLIDATED OPERATING EXPENSES
Purchased Transportation and Warehousing
Purchased transportation and warehousing costs decreased 22% to $3.1 billion in 2023 from $4.0 billion in 2022. As a percentage of revenue, purchased transportation and warehousing costs decreased to 74.8% in 2023 versus 75.6% in 2022 due to cost control initiatives and less third-party drayage usage.
Purchased transportation and warehousing costs declined as compared to prior year due to lower volumes, reductions in third party carrier costs and decreased use of third-party carriers for drayage in ITS.
Salaries and Benefits
Salaries and benefits increased to $553 million in 2023 from $543 million in 2022. As a percentage of revenue, salaries and benefits increased to 13.2% in 2023 from 10.2% in 2022.
This increase was primarily due to $81 million of incremental expense related to the increase of our average company driver count and warehouse employees. The increase includes a $5 million increase in medical benefits, as well as increased expenses resulting from TAGG, which incurred twelve months of expenses in 2023 as compared to just over seven months of expenses in 2022 and FAFM which was acquired in December 2023. These increases were partially offset by a $71 million reduction in office employee compensation due to lower headcount and lower incentive compensation expense.
Headcount, which includes drivers, warehouse personnel and office employees, was 5,956, which includes 641 employees of FAFM, as of December 31, 2023 and 5,921 as of December 31, 2022. The increase in headcount was due primarily to the acquisition of FAFM partially offset by decreases in both office employees and company drivers.
Depreciation and Amortization
Depreciation and amortization expense increased to $144 million in 2023 from $132 million in 2022. This increase was primarily due to increased container, tractor and warehouse equipment depreciation expense as well as the amortization of intangibles related to the acquisitions of TAGG and FAFM. This expense, as a percentage of revenue, increased to 3.4% in 2023 from 2.5% in 2022. Depreciation expense includes transportation equipment, technology investments, leasehold improvements, warehouse equipment, office equipment and building improvements.
Insurance and Claims
Insurance and claims expense decreased to $49 million in 2023 from $58 million in 2022. This decrease was primarily due to less claim expenses related to both auto liability and workers compensation claims in 2023. These expenses, as a percentage of revenue, increased to 1.2% in 2023 from 1.1% in 2022.
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General and Administrative
General and administrative expenses decreased to $106 million in 2023 from $121 million in 2022. These expenses, as a percentage of revenue, increased to 2.5% in 2023 from 2.2% in 2022.
This expense decrease was primarily due to less impairment of a right-of-use asset and decreases in use tax expense, outside sales commissions, bad debt expense and professional services expense including IT software expense. These decreases were partially offset by higher rent expense, the closing costs related to the FAFM acquisition, higher temporary labor expense as well as increased expenses resulting from TAGG, which incurred twelve months of expenses in 2023 as compared to just over four months of expenses in 2022 and FAFM which was acquired in December 2023.
Gain on Sale of Assets, Net
Net gains on the sale of equipment decreased to $7 million in 2023 from $24 million in 2022. This decrease resulted from both less units sold and a lower average gain per unit sold in 2023 as compared to 2022. We expect gains in 2024 to continue to be lower than prior years due to a softer used tractor market.
Other Income (Expense)
Other Expense decreased to $3 million in 2023 from $7 million in 2022. Interest expense increased to $13 million in 2023 from $7 million in 2022 due primarily to higher interest rates on our debt and higher average debt balances. The expense increase was partially offset by increased interest income of $10 million in 2023 due to higher interest rates on our cash balance and higher cash balances throughout the year.
Provision for Income Taxes
The provision for income taxes decreased to $42 million in 2023 from $111 million in 2022 due a decrease in pre-tax income. We provided for income taxes using an effective rate of 19.9% in 2023 and an effective rate of 23.7% in 2022. The lower effective tax rate in 2023 resulted primarily from a change in state apportionment methodology.
RESULTS OF OPERATIONS
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
The following table summarizes our operating revenue by segment (in thousands):
Years Ended
Operating Revenue
December 31,
2022
2021
Intermodal and Transportation Solutions
$
3,312,431
$
2,661,160
Logistics
2,121,818
1,643,849
Inter-segment eliminations
(93,759
)
(72,626
)
Total operating revenue
$
5,340,490
$
4,232,383
The following table summarizes our operating income by segment (in thousands):
Years Ended
Operating Income
December 31,
2022
2021
Intermodal and Transportation Solutions
$
348,537
$
169,105
Logistics
126,184
69,352
Total operating income
$
474,721
$
238,457
Total consolidated operating revenue increased 26% to $5.3 billion in 2022 from $4.2 billion in 2021.
Intermodal and Transportation Solutions (“ITS”) revenue increased 24% to $3.3 billion primarily due to a 32% increase in intermodal revenue per load (a combination of price, accessorial, fuel and mix) driven by favorable industry demand and supply conditions, and a 4% increase in dedicated revenues, offset by a 4% decrease in intermodal volume.
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ITS operating income increased to $349 million, 11% of revenue, as compared to $169 million, 6% of revenue in the prior year due to higher customer rates, as well as accessorial and surcharge income, partially offset by lower intermodal volume, higher drayage costs, and increased repositioning costs.
Logistics revenue increased 29% to $2.1 billion primarily driven by the impact of a full year of revenue from Choptank (acquired in October 2021) and the partial year revenue contribution from TAGG (acquired in August 2022). We also experienced revenue growth at our Final Mile, Managed Transportation, Consolidation and legacy Brokerage businesses.
Logistics operating income was 6% of revenue in 2022 and 4% of revenue in 2021. Operating income was $126 million as compared to $69 million in 2021, driven by the acquisitions of Choptank and TAGG, as well as yield improvements and higher operating efficiencies across all of our businesses.
The following is a summary of operating results and certain items in the consolidated statements of income as a percentage of revenue (in thousands):
Years Ended
December 31,
2022
2021
Operating revenue
$
5,340,490
100.0%
$
4,232,383
100.0%
Operating expenses:
Purchased transportation and warehousing
4,036,503
75.6%
3,172,122
74.9%
Salaries and benefits
543,010
10.2%
589,997
13.9%
Depreciation and amortization
131,789
2.5%
116,473
2.8%
Insurance and claims
58,064
1.1%
44,467
1.1%
General and administrative
120,579
2.2%
90,040
2.1%
Gain on sale of assets, net
(24,176
)
-0.5%
(19,173
)
-0.5%
Total operating expenses
4,865,769
91.1%
3,993,926
94.3%
Operating income
$
474,721
8.9%
$
238,457
5.7%
CONSOLIDATED OPERATING EXPENSES
Purchased Transportation and Warehousing
Purchased transportation and warehousing costs increased 27% to $4.0 billion in 2022 from $3.2 billion in 2021. As a percentage of revenue, Purchased transportation and warehousing costs increased to 75.6% in 2022 versus 74.9% in 2021 due to increased fuel costs and accessorial expenses.
The increase in purchased transportation costs in 2022, as compared to 2021, was primarily due to increased rail costs, increased fuel costs, higher brokerage volume, higher third-party carrier costs, increased repositioning costs as well as increased business activity.
Salaries and Benefits
Salaries and benefits decreased to $543 million in 2022 from $590 million in 2021. As a percentage of revenue, salaries and benefits decreased to 10.2% in 2022 from 13.9% in 2021.
This decrease was primarily due to $78 million less of incremental expense related to the decreased average company driver count, partially offset by an $8 million increase in incentive compensation expense, a $4 million increase in office employee compensation due to higher headcount and increased expenses resulting from the acquisitions of TAGG and Choptank.
Headcount, which includes drivers, warehouse personnel and office employees, was 5,921 and 4,718 as of December 31, 2022 and 2021, respectively. The increase in the number of drivers and warehouse personnel was partially offset by a decrease in the headcount of office employees. The above statistics include the impact of both the TAGG and Choptank acquisitions.
Depreciation and Amortization
Depreciation and amortization expense increased to $132 million in 2022 from $116 million in 2021. This increase was primarily due to increased container, tractor and warehouse equipment depreciation expense as well as the amortization of intangibles related to the acquisitions of TAGG in August of 2022 and Choptank in October 2021. This expense, as a percentage of revenue, decreased to 2.5% in 2022 from 2.8% in 2021. Depreciation expense includes transportation equipment, technology investments, leasehold improvements, warehouse equipment, office equipment and building improvements.
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Insurance and Claims
Insurance and claims expense increased to $58 million in 2022 from $44 million in 2021. This increase was primarily due to higher claims expenses related to both auto liability and workers compensation claims in 2022 as well as higher premium costs. These expenses, as a percentage of revenue, remained consistent at 1.1% in both 2022 and 2021.
General and Administrative
General and administrative expenses increased to $121 million in 2022 from $90 million in 2021. These expenses, as a percentage of revenue, increased to 2.2% in 2022 from 2.1% in 2021.
This expense increase was primarily due to the acquisitions of TAGG in August 2022 and Choptank, which incurred twelve months of expenses in 2022 as compared to just two months of expenses in 2021, as well as increases in legal expenses, higher use tax expense, the impairment write-off of leased assets and higher professional costs related to acquisitions and IT costs.
Gain on Sale of Assets, Net
Net gains on the sale of equipment increased to $24 million in 2022 from $19 million in 2021. This increase resulted from both more units sold and a higher average gain per unit sold in 2022 as compared to 2021.
Other Income (Expense)
Other Expense decreased slightly to $7 million in 2022 from $8 million in 2021. Interest expense increased to $8 million in 2022 from $7 million in 2021 due primarily to higher interest rates on our debt and higher average debt balances. This expense increase was partially offset by increased interest income of $1 million in 2022 due to higher interest rates on our cash balance and higher cash balances.
Provision for Income Taxes
Provision for income taxes increased to $111 million in 2022 from $59 million in 2021 due to significantly higher pre-tax income in 2022. Our effective tax rate was 23.7% in 2022 and 25.7% in 2021. The lower effective tax rate in 2022 compared to 2021 was primarily related to a change in our state apportionment factors, resulting in a reduction to the tax rate. Additionally, we decreased the valuation allowance on state tax incentives due to our increase in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Our financing and liquidity strategy is to fund operating cash payments and future dividends 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, 2023, we had $187 million of cash and cash equivalents and $21 million of restricted investments. We generally fund our purchases of transportation equipment through the issuance of secured, fixed rate Equipment Notes. In prior years, we have funded our business acquisitions from cash on hand. 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. Cash used in financing activities including the purchase of treasury stock has been funded by cash from operations or cash on hand. We expect our newly declared dividend to be funded by cash on hand. We have not historically used our Credit Facility to fund our operating, investing, or financing cash needs, though it is available to fund future cash requirements as needed. 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.
Cash provided by operating activities for the year ended December 31, 2023 was approximately $422 million, which resulted primarily from non-cash charges of $210 million, income of $168 million and changes in operating assets and liabilities of $44 million.
Cash provided by operating activities totaled $422 million in 2023 compared to $458 million in 2022. The $36 million decrease in cash flow was primarily due to a decrease in net income of $189 million, partially offset by an increase in the change in assets and liabilities of $103 million and an increase in non-cash charges of $50 million.
Net cash used in investing activities for the year ended December 31, 2023 was $373 million which included cash used in acquisitions of $261 million and capital expenditures of $140 million, partially offset by proceeds from the sale of equipment of $28 million. Capital expenditures of $140 million related primarily to tractors of $71 million, containers of $41 million, technology investments of $14 million, warehouse equipment of $12 million and leasehold improvements of $3 million.
Capital expenditures decreased by approximately $79 million in 2023 as compared to 2022. The 2023 decrease was due to decreased container purchases of $60 million, less spend on our corporate headquarters of $17 million, less technology investments of $9 million
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and less other transportation equipment purchases of $8 million. These decreases were partially offset by more purchases of warehouse equipment of $12 million, tractors of $3 million and the remainder related to leasehold improvements in 2023.
In 2024, we estimate capital expenditures will range from $55 million to $75 million. We expect transportation equipment purchases to range from $40 million to $45 million, technology investments of approximately $20 million and warehouse equipment and other of approximately $10 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, 2023 was $148 million which includes cash used for the purchase of treasury stock of $144 million, repayments of long-term debt of $106 million, cash used for stock tendered for payments of withholding taxes of $10 million and finance lease payments of $2 million, partially offset by proceeds from the issuance of debt of $114 million. Debt incurred in 2023 was used to fund the purchase of transportation equipment.
The $96 million increase in cash used in financing activities for 2023 versus 2022 was primarily due to an increase in the purchase of treasury stock of $34 million, an increase in cash paid for stock related to employee withholding taxes of $2 million and a decrease in proceeds from the issuance of debt of $65 million, partially offset by a decrease in the repayments of long-term debt of $5 million.
In 2023, cash paid for income taxes was $35 million, of which $23 million related to 2023 and $12 million related to 2022. The $23 million of cash paid for income taxes related to 2023 is less than the 2023 income tax expense of $41 million. This difference is a result of favorable book to tax differences, primarily those related to compensation, which caused 2023 taxable income to be less than 2023 financial statement income before taxes. We expect cash payments in 2024 for taxes to be greater than book tax expense.
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 2024. As of December 31, 2023 and December 31, 2022, our letters of credit were $1 million and $43 million, respectively.
As of December 31, 2023 and December 31, 2022, we had no borrowings under our respective credit agreements and our unused and available borrowings were $349 million and $307 million, respectively. We were in compliance with the financial covenants in our credit agreements as of December 31, 2023 and December 31, 2022.
CONTRACTUAL OBLIGATIONS
Aggregated information about our obligations and commitments to make future contractual payments such as debt and lease obligations as of December 31, 2023 is presented in the following table (in thousands).
Future Payments Due:
Operating
Finance
Interest
Leases
Leases
Debt
on Debt
Total
Year 1
$
55,516
$
1,619
$
105,108
$
13,103
$
175,346
Year 2
49,997
558
95,619
9,110
155,284
Year 3
41,650
303
80,699
5,575
128,227
Year 4
33,067
32
51,306
2,379
86,784
Year 5
26,363
-
17,950
481
44,794
Thereafter
54,863
-
-
-
54,863
$
261,456
$
2,512
$
350,682
$
30,648
$
645,298
As of February 16, 2024, Hub signed various operating and finance leases which had not commenced as of December 31, 2023. 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 $7.1 million and $0.3 million for operating and finance leases, respectively.
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Deferred Compensation
Under our Non-qualified 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
$
535
Year 2
2,930
Year 3
1,552
Year 4
1,177
Year 5
1,216
Thereafter
13,075
$
20,485
The above future payments are fully funded by our restricted investments comprised of mutual funds and other security instruments as noted in Note 14.
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.
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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% on average 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.
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.