Schneider National, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and related notes. INTRODUCTION Company Overview We are a transportation and logistics services company providing a broad portfolio of truckload, intermodal, and logistics solutions and operating one of the largest for-hire trucking fleets in North America. Our diversified portfolio of complementary service offerings combines truckload services with intermodal and logistics offerings, enabling us to serve our customers’ varied transportation needs. Recent Developments COVID-19 COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the U.S. in March 2020. Schneider continues to monitor the impact of COVID-19 and take steps to mitigate risks posed by the virus. The impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the efforts of governments at the national, state, and local levels to manage the outbreak, the impact of the pandemic and governmental actions on our customers, and the timing and rollout of approved vaccines to combat the spread of COVID-19, which are uncertain and not fully predictable. The Company provides an essential service to its customers and has taken additional measures to keep our associates safe and to minimize unnecessary risk of exposure to COVID-19, including precautions for our associates and owner-operators who work in the field. We have also implemented work from home policies where appropriate and imposed travel limitations on employees. The Company implemented and continues to maintain physical and cyber-security measures to ensure our systems remain functional in order to serve our operational needs with a remote workforce and ensure uninterrupted service to our customers. The Company’s operational and financial performance was impacted by a decrease in demand primarily during the second quarter of 2020 resulting, in part, from government imposed stay-at-home orders and the related closure of certain customers as a result of COVID-19. We believe the largest impacts from COVID-19 were experienced in the second quarter of 2020. Freight demand began to normalize during the third quarter, and we did not experience significant negative operational or financial impacts from COVID-19. While we are unable to predict with any certainty the impact COVID-19 may have on our operational and financial performance, we do not anticipate significant future impacts. We implemented cost reduction efforts to help mitigate the impact reduced revenues had, and may continue to have, on our income from operations. While we worked diligently to manage costs throughout the organization, we incurred additional expenses related to the safe onboarding of company drivers, the purchase of personal protective equipment, emergency sick leave benefits, and additional cleaning services. We will continue to incur these added costs for the duration of the pandemic in order to ensure the safety of our associates, owner-operators, and customers. We continue to actively monitor the situation and take further actions that alter our business operations as may be required by federal, state, or local governmental authorities, or that we determine are in the best interests of our associates, customers, and shareholders. In this time of uncertainty resulting from COVID-19, we are continuing to serve our customers while taking precautions to provide a safe work environment for our associates, owner-operators, and customers. Strategy Our goals are to grow revenue and profitability, drive strong and consistent return on capital, and increase stakeholder value resiliently through economic cycles. We believe our competitive strengths position us to pursue our goals by way of the following strategies: 22 Table of Contents Leverage core strengths to drive organic growth and maintain or improve market position We intend to drive organic growth through leveraging our existing customer relationships, as well as expanding our customer base. We believe our broad portfolio of services, with different asset intensities, and our North American footprint allow for supply chain alternatives which enable new and existing customer growth. We also plan to drive revenue growth by increasing our marketing to customers that seek to outsource their transportation services. Our growth decisions are based on our “Value Triangle,” which represents profitable growth while balancing the needs of our customers, our associates, and our shareholders. Our integrated technology platform serves as an instrumental factor which drives profitability as it enables real-time, data-driven decision support science on every load/order and assists our associates to proactively manage our services across our network. Together with our highly incentivized and proactive sales organization, we believe that our platform will continue to provide better service and foster organic growth in each of our reportable segments. Expand capabilities in the specialty equipment freight market and continue growing our asset-light and non-asset businesses We believe that our specialty freight capabilities position us to grow in the specialty equipment market, which has higher barriers to entry, potentially higher margins, and lasting customer relationships. The complexity and time-sensitivity of the loads often require increased collaboration with, and greater understanding of, our customers’ business needs and processes. The transportation of specialty equipment freight requires specially trained drivers with appropriate licenses and special hauling permits, as well as equipment that can handle items with unique requirements in terms of temperature, freight treatment, size, and shape. As such, there are few carriers that have comparable network scale and capabilities in the specialty equipment market, which we believe will allow us to grow profitably in that business. Our intermodal product offering continues to identify opportunities to profitably grow services and compete in the intermodal marketplace. As an asset-based provider, we have more control over our equipment to include containers and chassis, perform most of our own drays, and have strong contractual rail relationships. We believe our integrated technology platform will enable us to enjoy certain benefits of complete end-to-end control, including increased pick–up and delivery predictability, better visibility, and the ability to source and retain capacity. Freight brokerage, which is a significant part of our Logistics segment, is a business that is expected to be a driver of growth into the future. As shippers increasingly consolidate their business with fewer freight brokers, we are well-positioned to become one of their select providers due to our customer service, innovative technology, and an established dense network of qualified third-party carriers. We believe shippers see the value of working with providers like us that have scale, capacity, and lane density. Brokerage serves as a non-asset innovation hub for Schneider, particularly in the areas of predictive analytics, process automation, and new customer relationship generation. Continue to improve our operations and margins by leveraging benefits from investments in technology and business transformation We continue to benefit from our technology and business transformation by improving the effectiveness with which we use data to increase revenue and lower costs. Full visibility into each driver’s profile allows us to increase driver satisfaction and retention by matching drivers to loads and routes that better fit their individual needs. We can improve our customer service, retain drivers, lower costs, and generate business by anticipating our customers’ and drivers’ needs and preferences in a dynamic network. We believe the implementation of simple and intuitive customer interfaces will also enable a stronger connection with our customers through increased interaction and an enhanced user experience. Through our investment in MLSI, in which we are collaborating to develop a Transportation Management System using MLSI’s SaaS technology, we aim to further complement our technology platform and enable enhanced decision making, resource allocation, and visibility with our supply chain partners. We expect additional margin improvement as we continue to leverage data analytics within our integrated technology platform. Along with our revenue management discipline, the strong foundation we have established with our Quest transformation and integration of technology and systems through leading third-party providers will allow us to continue to incorporate new technologies and build additional capabilities into the platform over time, maintaining our competitive edge and setting the foundation for future growth. Allocate capital across businesses to maximize return on capital and selectively pursue opportunistic acquisitions Our broad portfolio of services provides us with a greater opportunity to allocate capital within our portfolio of services in a manner that maximizes returns across all market cycles and economic conditions. For example, we can efficiently move our equipment between services and regions when we see opportunities to maximize our return on capital. We continually monitor our performance and market conditions to ensure appropriate allocation of capital and resources to grow our businesses, while 23 Table of Contents optimizing returns across reportable segments. Furthermore, our strong balance sheet enables us to carry out an acquisition strategy that strengthens our overall portfolio. We are positioned to leverage our scalable platform and experienced operations team to acquire high-quality businesses that meet our disciplined selection criteria to enhance our service offerings and broaden our customer base. Attract and retain top talent at all levels to ensure sustainable growth Our people are our strongest assets, and we believe they are key to growing our customer base and driving our performance. Our goal is to be the employer of choice; attract, develop, engage, and retain the best talent in the industry. We strive for a high-performance culture with operational excellence that seeks individuals who are passionate about our business and fit our culture and to foster a collaborative environment which promotes diversity, equality, and inclusion. We value the direct relationship we have with our associates, and we intend to continue working together to provide professional growth and a quality work environment without third-party representation. Our compensation structure is performance-based and aligns with our strategic objectives. In today’s driver constrained environment, we seek to maintain our reputation as a preferred carrier of choice within the driver community through our continued focus on improving the driver experience and to attract and retain high-quality, safe drivers that meet or exceed our qualification standards. We invest in the well-being of our associates through our commitment to ensure a differentiated driver experience and efforts to improve the quality of drivers’ touchpoints. We provide mandatory physical check-ups which cover sleep apnea and hair follicle, in addition to urine-based, drug testing, among other things. We believe that investing in the health of our associates helps maintain a high-quality driver base. Our technology platform facilitates the application, screening, and onboarding of top talent. As an industry leader with a respected “safety first and always” culture and underlying core value, we believe that we will continue to be the employer of choice for both driving and non-driving associates. RESULTS OF OPERATIONS A discussion regarding our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 can be found under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on the Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on February 19, 2020 and is available on the SEC’s website at www.sec.gov, as well as our Investor Relations website at www.schneider.com. Non-GAAP Financial Measures In this section of our report, we present the following non-GAAP financial measures: (1) revenues (excluding fuel surcharge), (2) adjusted income from operations, (3) adjusted operating ratio, and (4) adjusted net income. We also provide reconciliations of these measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. Management believes the use of each of these non-GAAP measures assists investors in understanding our business by (1) removing the impact of items from our operating results that, in our opinion, do not reflect our core operating performance, (2) providing investors with the same information our management uses internally to assess our core operating performance, and (3) presenting comparable financial results between periods. In addition, in the case of revenues (excluding fuel surcharge), we believe the measure is useful to investors because it isolates volume, price, and cost changes directly related to industry demand and the way we operate our business from the external factor of fluctuating fuel prices and the programs we have in place to manage fuel price fluctuations. Fuel-related costs and their impact on our industry are important to our results of operations, but they are often independent of other, more relevant factors affecting our results of operations and our industry. Although we believe these non-GAAP measures are useful to investors, they have limitations as analytical tools and may not be comparable to similar measures disclosed by other companies. You should not consider the non-GAAP measures in this report in isolation or as substitutes for, or alternatives to, analysis of our results as reported under GAAP. The exclusion of unusual or infrequent items or other adjustments reflected in the non-GAAP measures should not be construed as an inference that our future results will not be affected by unusual or infrequent items or by other items similar to such adjustments. Our management compensates for these limitations by relying primarily on our GAAP results in addition to using the non-GAAP measures. 24 Table of Contents Enterprise Summary The following table includes key GAAP and non-GAAP financial measures for the consolidated enterprise. Adjustments to arrive at non-GAAP measures are made at the enterprise level, with the exception of fuel surcharge revenues, which are not included in segment revenues. Year Ended December 31, (in millions, except ratios) 2020 2019 Operating revenues $ 4,552.8 $ 4,747.0 Revenues (excluding fuel surcharge) (1) 4,234.5 4,281.0 Income from operations 286.7 207.8 Adjusted income from operations (2) 300.5 306.1 Operating ratio 93.7 % 95.6 % Adjusted operating ratio (3) 92.9 % 92.8 % Net income $ 211.7 $ 147.0 Adjusted net income (4) 222.0 220.2 (1) We define “revenues (excluding fuel surcharge)” as operating revenues less fuel surcharge revenues, which are excluded from revenues at the segment level. Included below is a reconciliation of operating revenues, the most closely comparable GAAP financial measure, to revenues (excluding fuel surcharge). (2) We define “adjusted income from operations” as income from operations, adjusted to exclude material items that do not reflect our core operating performance. Included below is a reconciliation of income from operations, which is the most directly comparable GAAP measure, to adjusted income from operations. Excluded items for the periods shown are explained in the table and notes below. (3) We define “adjusted operating ratio” as operating expenses, adjusted to exclude material items that do not reflect our core operating performance, divided by revenues (excluding fuel surcharge). Included below is a reconciliation of operating ratio, which is the most directly comparable GAAP measure, to adjusted operating ratio. Excluded items for the periods shown are explained below under our explanation of “adjusted income from operations.” (4) We define “adjusted net income” as net income, adjusted to exclude material items that do not reflect our core operating performance. Included below is a reconciliation of net income, which is the most directly comparable GAAP measure, to adjusted net income. Excluded items for the periods shown are explained below under our explanation of “adjusted income from operations.” Revenues (excluding fuel surcharge) Year Ended December 31, (in millions) 2020 2019 Operating revenues $ 4,552.8 $ 4,747.0 Less: Fuel surcharge revenues 318.3 466.0 Revenues (excluding fuel surcharge) $ 4,234.5 $ 4,281.0 Adjusted income from operations Year Ended December 31, (in millions) 2020 2019 Income from operations $ 286.7 $ 207.8 Litigation (1) 12.8 — Goodwill impairment (2) — 34.6 Restructuring—net (3) 1.0 63.7 Adjusted income from operations $ 300.5 $ 306.1 (1) Contested prior period federal excise taxes, including court awarded costs and interest, as a result of an adverse tax ruling in 2020 related to an IRS dispute over the applicability of excise taxes on certain tractors refurbished during tax years 2011 through 2013 and no longer in service. Refer to Note 14, Commitments and Contingencies , for more information. (2) Goodwill impairment charge recorded for our FTFM reporting unit during 2019. Refer to Note 6, Goodwill, for more information. (3) Activity associated with the shutdown of the FTFM service offering. Refer to Note 16, Restructuring , for additional details. 25 Table of Contents Adjusted operating ratio Year Ended December 31, (in millions, except ratios) 2020 2019 Total operating expenses $ 4,266.1 $ 4,539.2 Divide by: Operating revenues 4,552.8 4,747.0 Operating ratio 93.7 % 95.6 % Total operating expenses $ 4,266.1 $ 4,539.2 Adjusted for: Fuel surcharge revenues (318.3) (466.0) Litigation (12.8) — Goodwill impairment — (34.6) Restructuring—net (1.0) (63.7) Adjusted total operating expenses $ 3,934.0 $ 3,974.9 Operating revenues $ 4,552.8 $ 4,747.0 Less: Fuel surcharge revenues 318.3 466.0 Revenues (excluding fuel surcharge) $ 4,234.5 $ 4,281.0 Adjusted operating ratio 92.9 % 92.8 % Adjusted net income Year Ended December 31, (in millions) 2020 2019 Net income $ 211.7 $ 147.0 Litigation 12.8 — Goodwill impairment — 34.6 Restructuring—net 1.0 63.7 Income tax effect of non-GAAP adjustments (1) (3.5) (25.1) Adjusted net income $ 222.0 $ 220.2 (1) Our estimated tax rate on non-GAAP items is determined annually using the applicable consolidated federal and state effective tax rate, modified to remove the impact of tax credits and adjustments that are not applicable to the specific items. Due to differences in the tax treatment of items excluded from non-GAAP income, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP items may differ from our GAAP tax rate and from our actual tax liabilities. Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Enterprise Results Summary Enterprise net income increased $64.7 million, approximately 44%, in the year ended December 31, 2020 compared to 2019, primarily due to a $78.9 million increase in income from operations and an $8.8 million gain on our ownership interest in PSI. These items were partially offset by an increase in income taxes related to higher taxable income. Adjusted net income increased $1.8 million, approximately 1%. 26 Table of Contents Components of Enterprise Net Income Enterprise Revenues Enterprise operating revenues decreased $194.2 million, approximately 4%, in the year ended December 31, 2020 compared to 2019. Factors contributing to the decrease were as follows: • a $225.8 million decrease in Truckload segment revenues (excluding fuel surcharge) resulting from an overall reduction in Truckload volume driven by driver capacity constraints and COVID-19 market impacts, as well as the shutdown of our FTFM service offering in August 2019 which generated $78.1 million of revenues in 2019; • a $147.7 million decrease in fuel surcharge revenues resulting from a 16% decline in average diesel price per gallon in the U.S. as reported by the Department of Energy, a decline in Truckload and Intermodal volumes, and a $13.2 million reduction related to the FTFM shutdown; and • a $33.1 million decrease in our Intermodal segment revenues (excluding fuel surcharge) driven by a decrease in volume due primarily to COVID-19 impacts and rail fluidity network disruptions, as well as shorter length of haul and freight mix. The above factors were partially offset by a $194.5 million increase in Logistics segment revenues (excluding fuel surcharge) primarily related to volume growth and improved revenue per order within our brokerage business. Enterprise revenues (excluding fuel surcharge) decreased $46.5 million, approximately 1%. Enterprise Income from Operations and Operating Ratio Enterprise income from operations increased $78.9 million, approximately 38%, in the year ended December 31, 2020 compared to 2019, primarily due to $131.7 million of favorability resulting from the FTFM shutdown in 2019, including net restructuring, goodwill impairment charges, and FTFM’s $34.4 million loss from operations. Cost savings resulting from auto insurance favorability and lower healthcare costs also contributed to the increase in income from operations. Those increases were partially offset by a reduction in Truckload and Intermodal freight volumes primarily due to driver capacity constraints resulting, in part, from COVID-19 and rail driven market disruptions, a $31.8 million increase in performance-based incentive compensation, and $12.8 million of costs related to an adverse excise tax ruling in 2020. Adjusted income from operations decreased $5.6 million, approximately 2%. Enterprise operating ratio improved on a GAAP basis but weakened on an adjusted basis compared to the same period of 2019. Our operating ratio can be negatively impacted when our lower margin, less asset-focused Logistics segment grows faster than our higher margin, capital-intensive Truckload segment. Enterprise Operating Expenses Key operating expense fluctuations are described below. • Purchased transportation increased $1.4 million, year over year, primarily due to an increase in third party carrier costs within our Logistics segment driven by brokerage volume growth and higher purchased transportation per order. This increase was partially offset by a decrease in Truckload and Intermodal volumes and reduced owner-operator costs within Truckload resulting from business mix. The FTFM shutdown also resulted in a $24.7 million reduction in purchased transportation. • Salaries, wages, and benefits decreased $59.5 million, or 5%, year over year, largely due to a benefit of approximately $75.0 million associated with the FTFM shutdown and insourcing of warehouse management operations by an import/export customer in 2019 and reduced healthcare costs primarily due to fewer claims and plan participants in 2020. While we expect to see continued favorability in our healthcare costs in 2021, we don’t anticipate favorability at the same levels. Favorability in driver pay due to lower headcount, along with other headcount reductions across the organization, further contributed to the decrease in salaries, wages, and benefits. These decreases were partially offset by a $31.8 million increase in performance-based incentive compensation. • Fuel and fuel taxes decreased $85.3 million, or 29%, year over year, driven by a decrease in cost per gallon, less company driver miles within our Truckload segment, and a $10.6 million reduction in fuel and fuel taxes attributable to the FTFM shutdown. A significant portion of fuel costs are recovered through our fuel surcharge programs. 27 Table of Contents • Depreciation and amortization decreased $2.4 million, or 1%, year over year, driven by the FTFM shutdown, partially offset by an increase in trailer and telematics depreciation expense within the Truckload segment. • Operating supplies and expenses increased $2.8 million, or 1%, year over year, driven by $12.8 million of costs for an adverse tax ruling related to a dispute with the IRS over the applicability of excise taxes on certain tractors refurbished during tax years 2011 through 2013 and no longer in service, a $9.5 million unfavorable change from equipment dispositions, and an $8.5 million increase in cost of goods sold from an increase in equipment sales by our leasing business. These increases were partially offset by a $10.0 million decrease in impairment of held for sale assets, a $9.7 million decrease in facility, utility, and other costs primarily due to temporary facility closures associated with COVID-19, reduced volumes, the FTFM shutdown, and various other cost savings initiatives, a $4.0 million reduction in temporary worker pay due to insourcing by one of our import/export customers, and reductions in a variety of other operating-related expenses that were individually immaterial. • Insurance and related expenses decreased $23.5 million, or 21%, year over year, predominately due to favorability in auto liability despite an increase in insurance premiums. Improvements in equipment technology, combined with a reduction in company driver miles and less traffic congestion resulting from COVID-19, led to a decrease in claim severity. We anticipate that we will continue to see favorability in claims severity driven by technology improvements, however not at the same levels as 2020. • Other general expenses decreased $9.3 million, or 8%, year over year, as a result of reduced travel expenses and general supplies resulting from Company enforced travel restrictions related to COVID-19 and cost savings initiatives, as well as a decline in driver recruiting and training costs due to lower company driver turnover and fewer hires. Additional costs were incurred in the driver recruiting and training space to safely onboard new drivers during COVID-19; however, these costs were more than offset by savings from lower company driver turnover and fewer inexperienced hires. • Goodwill impairment charges decreased $34.6 million year over year, due to the FTFM goodwill impairment charge of $34.6 million in 2019. • Restructuring—net was $62.7 million favorable year over year, due to higher initial costs in 2019 related to impairment charges, receivable write-downs, and other costs related to the FTFM shutdown. Restructuring activity in 2020 was insignificant. Refer to Note 16, Restructuring , for additional details. Total Oth er Expenses Other expenses decreased $5.9 million, approximately 61%, in the year ended December 31, 2020 compared to 2019, primarily from an $8.8 million pre-tax gain recognized on our ownership interest in PSI and a $3.0 million decrease in interest expense primarily a result of lower outstanding debt balances year over year. See Note 5, Investments , for more information on PSI. These items were partially offset by a $5.2 million decrease in interest income attributed to a decline in interest rates. Income Tax Expense Our provision for income taxes increased $20.1 million, approximately 39% , in the year ended December 31, 2020 compared to 2019, primarily due to higher taxable income. Our effective income tax rate was 25.2% for the year ended December 31, 2020 compared to 25.8% for 2019. We anticipate that our ongoing effective tax rate will be 25.2% - 25.7% subject to further changes in tax law. Revenues and Income (Loss) from Operations by Segment The following tables summarize revenue and income (loss) from operations by segment. Year Ended December 31, Revenues by Segment (in millions) 2020 2019 Truckload $ 1,851.0 $ 2,076.8 Intermodal 974.7 1,007.8 Logistics 1,129.3 934.8 Other 359.0 371.3 Fuel surcharge 318.3 466.0 Inter-segment eliminations (79.5) (109.7) Operating revenues $ 4,552.8 $ 4,747.0 28 Table of Contents Year Ended December 31, Income (Loss) from Operations by Segment (in millions) 2020 2019 Truckload $ 187.8 $ 59.0 Intermodal 75.0 107.7 Logistics 43.1 37.3 Other (19.2) 3.8 Income from operations 286.7 207.8 Adjustments: Litigation 12.8 — Goodwill impairment — 34.6 Restructuring—net 1.0 63.7 Adjusted income from operations $ 300.5 $ 306.1 We monitor and analyze a number of KPIs to manage our business and evaluate our financial and operating performance. Below are our KPIs by segment. Truckload The following table presents the KPIs for our Truckload segment for the periods indicated, consistent with how revenues and expenses are reported internally for segment purposes. Prior to 2020, we reported KPIs within our Truckload segment by quadrant. Going forward, KPIs will be reported for our dedicated and network operations only. This presentation change does not impact KPIs at the segment level. Descriptions of the two operations that make up our Truckload segment are as follows: • Dedicated - Transportation services with equipment devoted to customers under long-term contracts. • Network - Transportation services of one-way shipments, formerly called for-hire. Year Ended December 31, 2020 2019 Dedicated Revenues (excluding fuel surcharge) (1) $ 709.5 $ 706.0 Average trucks (2) (3) 3,940 3,921 Revenue per truck per week (4) $ 3,514 $ 3,526 Network Revenues (excluding fuel surcharge) (1) $ 1,141.0 $ 1,370.9 Average trucks (2) (3) 6,115 7,170 Revenue per truck per week (4) $ 3,642 $ 3,764 Total Truckload Revenues (excluding fuel surcharge) (5) $ 1,851.0 $ 2,076.8 Average trucks (2) (3) 10,055 11,091 Revenue per truck per week (4) $ 3,592 $ 3,668 Average company trucks (3) 7,255 8,191 Average owner-operator trucks (3) 2,800 2,900 Trailers 36,921 34,742 Operating ratio (6) 89.9 % 97.2 % (1) Revenues (excluding fuel surcharge), in millions, exclude revenue in transit. (2) Includes company trucks and owner-operator trucks. (3) Calculated based on beginning and end of month counts and represents the average number of trucks available to haul freight over the specified timeframe. (4) Calculated excluding fuel surcharge and revenue in transit, consistent with how revenue is reported internally for segment purposes, using weighted workdays. (5) Revenues (excluding fuel surcharge), in millions, include revenue in transit at the operating segment level, and therefore does not sum with amounts presented above. 29 Table of Contents (6) Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level. Truckload revenues (excluding fuel surcharge) decreased $225.8 million, approximately 11%, in the year ended December 31, 2020 compared to 2019. The decrease was primarily attributable to a 6% decline in volume, the shutdown of our FTFM service offering in August 2019 which generated $78.1 million of revenues during 2019, and a 1% reduction in price, defined as rate per loaded mile. Decreased volume resulted from early 2020 soft market conditions being compounded by the shutdown of non-essential businesses in response to COVID-19 and capacity constraints resulting, in part, from the impacts of COVID-19. Price decreased year over year due to lower contracted freight rates primarily in the first half of 2020 mostly offset by improved contract and spot rates in the second half of 2020. Truckload income from operations increased $128.8 million in the year ended December 31, 2020 compared to 2019, mainly due to favorability of $131.7 million resulting from the FTFM shutdown in 2019, including net restructuring, goodwill impairment charges, and FTFM’s $34.4 million loss from operations. Cost savings in healthcare due to fewer claims and plan participants, and safety due to the number and severity of claims as a result of fewer drivers, less miles driven, and safety technology, also contributed to the increase in income from operations. These items were partially offset by the unfavorable earnings impact of reduced volume and price noted above, and increased performance-based incentive compensation costs. Intermodal The following table presents the KPIs for our Intermodal segment for the periods indicated. In support of a few key customers, we provide dray-only service utilizing our drivers and chassis. The length of haul and revenue characteristics of dray-only service are much different than rail. Prior to 2020, we reported orders and revenue per order inclusive of dray-only activity. Orders and revenue per order presented below for both 2020 and 2019 exclude dray-only shipments. Year Ended December 31, 2020 2019 Orders (1) 433,358 438,902 Containers 21,890 22,655 Trucks (2) 1,629 1,531 Revenue per order (3) $ 2,208 $ 2,292 Operating ratio (4) 92.3 % 89.3 % (1) Based on delivered rail orders. (2) Includes company trucks and owner-operator trucks at the end of the period. (3) Calculated using rail revenues excluding fuel surcharge and revenue in transit, consistent with how revenue is reported internally for segment purposes. (4) Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level. Intermodal revenues (excluding fuel surcharge) decreased $33.1 million, approximately 3%, in the year ended December 31, 2020 compared to 2019. Contributing to the revenue reduction was an $84, or 4%, decrease in revenue per order driven by a decline in length of haul due to a greater mix of freight volumes in the East. Orders also decreased 1% as a result of COVID-19 induced network demand disruptions in the first half of 2020, rail network fluidity and service issues, and dray capacity constraints, partially offset by growth in the East. Intermodal income from operations decreased $32.7 million, approximately 30%, in the year ended December 31, 2020 compared to 2019. Factors affecting revenue discussed above, coupled with incremental driver pay and incentives and higher rail storage costs, drove the decline in income from operations. Logistics The following table presents the KPI for our Logistics segment for the periods indicated. Year Ended December 31, 2020 2019 Operating ratio (1) 96.2 % 96.0 % (1) Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level. 30 Table of Contents Logistics revenues (excluding fuel surcharge) increased $194.5 million, approximately 21%, in the year ended December 31, 2020 compared to 2019, primarily attributable to an increase in volume, including growth of the Power Only offering, partially offset by one of the Company’s import/export customers insourcing their warehouse management function in April 2019. Revenue per order within our brokerage business also improved compared to 2019 due to h igher spot mix and rate, along with promotional and project opportunities in the second half of 2020. Logistics income from operations increased $5.8 million, approximately 16%, in the year ended December 31, 2020 compared to 2019. This increase was primarily driven by the volume growth noted above in addition to net revenue improvements in our brokerage business due to market strength in the second half of 2020. Other Included in Other was a loss from operations of $19.2 million in the year ended December 31, 2020 compared to income from operations of $3.8 million in 2019. Factors contributing to the change include a $24.3 million increase in performance-based incentive compensation and $12.8 million of costs resulting from an adverse excise tax ruling in 2020. These items were partially offset by a $6.7 million decrease in loss from operations within our captive insurance business primarily resulting from favorable auto liability despite an increase in premiums and a $5.2 million reduction in healthcare costs mostly due to fewer claims and plan participants. LIQUIDITY AND CAPITAL RESOURCES Our primary uses of cash are working capital requirements, capital expenditures, dividend payments, and debt service requirements. Additionally, we may use cash for acquisitions and other investing and financing activities. Working capital is required principally to ensure we are able to run the business and have sufficient funds to satisfy maturing short-term debt and operational expenses. Our capital expenditures consist primarily of transportation equipment and information technology. Historically, our primary source of liquidity has been cash flow from operations. In addition, we have a $250.0 million revolving credit facility and a $200.0 million accounts receivable facility, for which our available capacity as of December 31, 2020 was $375.8 million. We anticipate that cash generated from operations, together with amounts available under our credit facilities, will be sufficient to meet our requirements for the foreseeable future. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, or because the COVID-19 crisis lasts longer than anticipated, we anticipate that we will obtain these funds through additional borrowings, equity offerings, or a combination of these potential sources of liquidity. Our ability to fund future operating expenses and capital expenditures, as well as our ability to meet future debt service obligations or refinance our indebtedness, will depend on our future operating performance, which will be affected by general economic, financial, and other factors beyond our control. The following table presents our cash and cash equivalents, marketable securities, and outstanding debt as of the dates shown. (in millions) December 31, 2020 December 31, 2019 Cash and cash equivalents $ 395.5 $ 551.6 Marketable securities 47.1 48.3 Total cash, cash equivalents, and marketable securities $ 442.6 $ 599.9 Debt: Senior notes $ 305.0 $ 360.0 Finance leases 2.0 1.7 Total debt (1) $ 307.0 $ 361.7 (1) Debt on our consolidated balance sheets is presented net of deferred financing costs. Debt At December 31, 2020, we were in compliance with all financial covenants under our credit agreements and the agreements governing our senior notes. See Note 7, Debt and Credit Facilities , for more information about our short-term and long-term financing arrangements. 31 Table of Contents Cash Flows The following table summarizes the changes to our cash flows provided by (used in) operating, investing, and financing activities for the periods indicated. Year Ended December 31, (in millions) 2020 2019 Cash provided by operating activities $ 618.2 $ 636.3 Cash used in investing activities (318.7) (350.2) Cash used in financing activities (455.6) (113.2) Operating Activities Cash provided by operating activities decreased $18.1 million, approximately 3%, during 2020 compared to 2019. The decrease was driven by a decrease in net income after adjustments for various noncash charges, partially offset by a net increase in cash provided by working capital. Improvements in cash flows from working capital included payroll taxes deferred under the CARES Act of $30.7 million, which we intend to pay in 2021. Investing Activities Cash used in investing activities decreased $31.5 million, approximately 9%, during 2020 compared to 2019. The decrease in cash used was primarily driven by a $69.8 million decrease in net capital expenditures, partially offset by a $25.8 million increase in purchases of lease equipment and $10.4 million of investments in equity securities. Capital Expenditures The following table sets forth, for the periods indicated, our net capital expenditures. Year Ended December 31, (in millions) 2020 2019 Transportation equipment $ 274.8 $ 335.3 Other property and equipment 49.7 61.7 Proceeds from sale of property and equipment (87.4) (90.1) Net capital expenditures $ 237.1 $ 306.9 Net capital expenditures decreased by $69.8 million in 2020 compared to 2019. The decrease was driven by a $60.5 million decrease in expenditures for transportation equipment resulting mainly from decreased tractor purchases due to reduced manufacturer capacity in the beginning of 2020 due to COVID-19, a $12.0 million decrease in purchases of other property and equipment, and a $2.7 million decrease in proceeds from the sale of property and equipment. We currently anticipate net capital expenditures in 2021 to be approximately $425.0 million. Financing Activities Cash used in financing activities increased by $342.4 million during 2020 compared to 2019. The main drivers of the increase in cash used were an increase in dividend payments of $357.5 million primarily the result of the 2020 special dividend of $2.00 per share, and the $25.0 million and $30.0 million repayments of private placement notes in March and September of 2020, respectively; partially offset by the $40.0 million repayment of private placement notes in November 2019 and the final guaranteed payment associated with the 2016 WSL acquisition in 2019. Other Considerations That Could Affect Our Results, Liquidity, and Capital Resources COVID-19 Despite disruptions in the financial markets due to COVID-19, we have been able to fund our liquidity needs to date. We believe we are in a strong liquidity position with a cash, cash equivalents, and marketable securities balance of $442.6 million and $375.8 million of unused credit capacity as of December 31, 2020. Our outstanding debt as of the end of 2020 was $307.0 32 Table of Contents million, of which $40.4 million is short-term in nature. We are compliant with all financial covenants under our credit agreements and do not anticipate the need to seek additional capital as a result of COVID-19. Driver Capacity and Wage Cost Our professional driver workforce is one of our most valuable assets. Recruiting and retaining sufficient numbers of qualified drivers is challenging in an increasingly competitive driver market and has a significant impact on our operating costs and ability to serve our customers. Changes in the demographic composition of the workforce, alternative employment opportunities that become available in the economy, and individual driver’s desire to be home more frequently can affect availability of drivers and increase the wages our drivers require. Off-Balance Sheet Arrangements As of December 31, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources. Contractual Obligations The following table sets forth our contractual obligations as of December 31, 2020. Payments Due by Period (in millions) Total Amounts Committed 2021 2022-2023 2024-2025 After 2025 Other Long-term debt (1) $ 338.4 $ 50.8 $ 145.9 $ 141.7 $ — $ — Purchase obligations (2) 161.9 161.9 — — — — Finance lease obligations (1) 2.1 0.5 1.0 0.5 0.1 — Operating lease obligations (1) 80.7 25.8 31.9 17.6 5.4 — Deferred payroll taxes (3) 30.7 30.7 — — — — Unrecognized tax benefits (4) 4.3 — — — — 4.3 Total $ 618.1 $ 269.7 $ 178.8 $ 159.8 $ 5.5 $ 4.3 (1) Includes principal and interest obligations. (2) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. Our purchase obligations relate to transportation equipment. (3) Represents employer social security taxes deferred under the CARES Act and expected to be paid in 2021. (4) This amount is shown in the other column because the year of settlement cannot be reasonably estimated. See Note 9, Income Taxes , for additional information. CRITICAL ACCOUNTING ESTIMATES The preparation of our consolidated financial statements in accordance with GAAP requires that management make estimates and assumptions that impact the amounts reported in our consolidated financial statements and accompanying notes. Therefore, these estimates and assumptions affect reported amounts of assets, liabilities, revenue, expenses, and associated disclosures of contingent liabilities. Management evaluates these estimates on an ongoing basis, using historical experience, consultation with third parties, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position, or results of operations resulting from revisions to these estimates are recognized in the accounting period in which the facts that give rise to the revision become known. The estimates discussed below include the financial statement elements that are either the most judgmental or involve the selection or application of alternative accounting policies and are material to our consolidated financial statements. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board and with our independent registered public accounting firm. 33 Table of Contents Claims Accruals Reserves are established based on estimated or expected losses for claims. The primary claims arising for the Company consist of accident-related claims for personal injury, collision, and comprehensive compensation, in addition to workers’ compensation and cargo liability. We maintain self-insurance levels for these various areas of risk and have established reserves to cover these self-insured liabilities. The amounts of self-insurance change from time to time based on measurement dates, policy expiration dates, policy exhaustion, and claim type. We also maintain insurance to cover liabilities in excess of the self-insurance amounts to limit our exposure to catastrophic claim costs or damages. We are substantially self-insured for loss of and damage to our owned and leased equipment. The current claims settlement environment within the industry has resulted in excess insurance carriers decreasing coverage and increasing premiums. As a result of this trend, we may experience increases in our insurance and claims expense. Our reserves represent accruals for the estimated self-insured and reinsured portions of pending claims, including adverse development of known claims, as well as incurred but not reported claims. Our estimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, consultation with actuarial experts, the specific facts of individual cases, the jurisdictions involved, estimates of future claims development, and the legal and other costs to settle or defend the claims. The actual cost to settle our self-insured claim liabilities can differ from our reserve estimates because of a number of uncertainties, including the inherent difficulty in estimating the severity of a claim and the potential amount to defend and settle a claim. At December 31, 2020 and 2019, we had an accrual of $144.2 million and $143.5 million, respectively, for estimated claims net of reinsurance receivables. We have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and/or severity of claims, or we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance coverage, our profitability would be adversely affected. In addition to estimates within our self-insured retention, we also must make judgments concerning our coverage limits. If any claim were to exceed our coverage limits, we would have to accrue for the excess amount. Our critical estimates include evaluating whether a claim may exceed such limits and, if so, by how much. Currently, we are not aware of any such claims. If one or more claims were to exceed our effective coverage limits, our financial condition and results of operations could be materially and adversely affected. 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 or outside counsel, as well as legal, economic, and regulatory factors. Our insurance and claims personnel work directly with representatives from the insurance companies to provide updated estimates of the potential loss associated with each tendered claim. The ultimate cost of a claim is developed over time as additional information regarding the nature, timing, and extent of damages claimed becomes available. Property and Equipment We operate a large fleet of trucks, trailers, containers, chassis, and other equipment in connection with our business and must determine the estimated useful lives and salvage values of our fleet to calculate depreciation. Property and equipment are stated at cost less accumulated depreciation and depreciated to an estimated salvage value using the straight-line method over the asset’s estimated useful life. Depreciable lives of revenue equipment range from 3 to 20 years and are based on historical experience, as well as future expectations regarding the period we expect to benefit from the assets, and company policies around maintenance and asset replacement. Estimates of salvage value at the expected date of sale are based on the expected market values of equipment at the expected time of disposal. We consider our experience with similar assets, conditions in the used revenue equipment market, and operational information such as average annual miles. We periodically review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and adjust these assumptions appropriately when warranted. We review our property and equipment whenever events or circumstances indicate the carrying amount of assets may not be recoverable. An impairment loss equal to the excess of carrying amount over fair value is recognized when the carrying amount of assets is not recoverable. Additionally, we reclassify certain revenue equipment to assets held for sale when the applicable criteria are met. An impairment loss equal to the excess of carrying amount over fair value less estimated costs to sell the asset is recognized if the carrying amount of the held for sale asset is not recoverable. Fair value is determined using recent sales prices or National Automobile Dealers Association wholesale prices for assets with the same or similar specifications. 34 Table of Contents As of December 31, 2020 and 2019, we had assets held for sale of $18.8 million and $67.4 million, respectively, of which $1.6 million and $33.4 million related to the shutdown of the FTFM service offering, respectively. Impairment losses on assets held for sale of $4.7 million and $42.4 million were recorded in 2020 and 2019, respectively. Goodwill To expand our business offerings, we have, on occasion, acquired other companies. In a business combination, the consideration is first assigned to identifiable assets and liabilities based on estimated fair values, with any excess recorded as goodwill. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as marketplace participants, history, future expansion and profitability expectations, amount and timing of future cash flows, and the discount rate applied to the cash flows. Goodwill is not amortized but is assessed for impairment at least annually and more frequently if a triggering event indicates that impairment may exist. Our total goodwill balance at December 31, 2020 and 2019 was $128.1 million and $127.5 million, respectively. Goodwill is evaluated for impairment at the reporting unit level annually, or more frequently if events or circumstances indicate the carrying value is not recoverable. A reporting unit can be a segment or business within a segment. When reviewing goodwill for impairment, we consider the amount of excess fair value over the carrying value of each reporting unit, the period of time since a reporting unit’s last quantitative test, the extent a reorganization or disposition changes the composition of one or more of our reporting units, and other factors to determine whether or not to first perform a qualitative test. When performing a qualitative test, we assess numerous factors to determine whether it is more likely than not that the fair value of our reporting units is less than their respective carrying values. Examples of qualitative factors that we assess include our share price, our financial performance, market and competitive factors in our industry, and other events specific to our reporting units. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative impairment test. In the quantitative impairment evaluation, the carrying value of a reporting unit, including goodwill, is compared with its fair value. We base our fair value estimation on a valuation, which uses a combination of (1) an income approach based on the present value of estimated future cash flows and (2) a market approach based on market price data of shares of our company and others in our industry to value our reporting units. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded equal to that excess. Significant judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in impairment evaluations, such as forecasted growth rates and our cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. These assumptions could be adversely impacted by certain risks discussed earlier in this document. During the second quarter of 2019, a triggering event occurred as results from our FTFM reporting unit continued to be less than projected, despite sustained investments and operational changes designed to improve efficiencies. Because of this triggering event, an impairment test was performed for the FTFM reporting unit. As a result of the testing performed, an impairment loss of $34.6 million was recorded, as the discounted cash flows expected to be generated by this reporting unit were not sufficient to recover its carrying value. This represented all of the goodwill related to the FTFM reporting unit. We completed the required annual goodwill impairment test for all three of our reporting units with goodwill as of October 31, 2020 and concluded that the excess of estimated fair values over carrying values for each reporting unit was more than insignificant. There were no triggering events identified from the date of our assessment through December 31, 2020 that would require an update to our annual impairment test. If future operating performance of any of our reporting units is below our expectations or there are changes to forecasted growth rates or our cost of capital, a decline in the fair value of the reporting units could result, and we may be required to record a goodwill impairment charge. See Note 6, Goodwill, for more information.