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 Acquisition On December 31, 2021, the Company completed the acquisition of MLS, a privately held truckload carrier based in Celina, OH. MLS is a dedicated carrier that primarily serves the central U.S. and complements our growing dedicated operations. Because the acquisition closed on December 31, 2021 , MLS did not have an impact on our consolidated results of operations for the year ended December 31, 2021. MLS financial results will be reported in dedicated operations as part of our Truckload segment beginning in the first quarter of 2022. Refer to Note 2, Acquisition, for additional details. COVID-19 Schneider continues to monitor the COVID-19 pandemic and take steps to mitigate the potential risks it poses. The health and safety of our associates and owner operators remains our top priority, and we have taken additional precautions to minimize the unnecessary risk of exposure to COVID-19. We have implemented additional safety measures and flexible work arrangements, placed travel limitations on associates where appropriate, and taken physical and cybersecurity measures to ensure our systems are capable of serving our operational needs while providing uninterrupted service to our customers. COVID-19 has led to labor shortages for Schneider and many of its suppliers and customers. The labor shortages have contributed to supply chain disruptions and delays in the delivery of products and materials. We continue to work with our suppliers to understand delivery timelines and challenges, and plan for delays that may impact our operations. Many of the products we purchase, as well as our labor and certain other operating costs, have experienced price increases driven by supply chain constraints and other inflationary impacts. We have been successful in finding alternatives where available and in exercising contractual rights as appropriate to limit the overall impact on our results. Our efforts will continue, and we will take further actions 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 stakeholders. Additional information concerning the impact COVID-19 may have to our future business and results of operations is provided in Part I, Item 1A “Risk Factors”. 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: 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 21 Table of Contents 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, associates, and 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 in proactively managing 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 and dedicated freight markets 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 and dedicated markets, which have 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. We believe that opportunities identified within our intermodal product offering allow us 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 experience 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 continue to be well-positioned due to our customer service, innovative technology, and an established, dense network of qualified third-party carriers and access to trailer network. 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. Our Schneider FreightPower® online marketplace, for example, digitally connects the benefits of Quest with the strength of our trailer network and carrier relationships to service our customers. Additionally, through our investment in MLSI, with 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 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. 22 Table of Contents 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 fosters 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 or 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 2021 compared to fiscal 2020 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 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, 2020, which was filed with the SEC on February 19, 2021 and is available on the SEC’s website at www.sec.gov, as well as the “Investors” section of our 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 such 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. 23 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) 2021 2020 Operating revenues $ 5,608.7 $ 4,552.8 Revenues (excluding fuel surcharge) (1) 5,163.9 4,234.5 Income from operations 533.7 286.7 Adjusted income from operations (2) 532.7 300.5 Operating ratio 90.5 % 93.7 % Adjusted operating ratio (3) 89.7 % 92.9 % Net income $ 405.4 $ 211.7 Adjusted net income (4) 407.2 222.0 (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) 2021 2020 Operating revenues $ 5,608.7 $ 4,552.8 Less: Fuel surcharge revenues 444.8 318.3 Revenues (excluding fuel surcharge) $ 5,163.9 $ 4,234.5 Adjusted income from operations Year Ended December 31, (in millions) 2021 2020 Income from operations $ 533.7 $ 286.7 Litigation (1) (13.5) 12.8 Acquisition-related costs (2) 1.9 — Goodwill impairment (3) 10.6 — Restructuring—net (4) — 1.0 Adjusted income from operations $ 532.7 $ 300.5 (1) In 2020, we recorded expense for prior period federal excise taxes, including court awarded costs and interest, as a result of an adverse tax ruling which we disputed. In 2021, after a favorable ruling in the U.S. Court of Appeals, we recorded a recovery of such taxes and interest upon confirmation from the IRS of the refund amount. Refer to Note 14, Commitments and Contingencies , for more information. 24 Table of Contents (2) Advisory, legal, and accounting costs related to the December 31, 2021 acquisition of MLS. Refer to Note 2, Acquisition , for additional details. (3) Goodwill impairment charge recorded for our Asia reporting unit in the fourth quarter of 2021. Refer to Note 6, Goodwill, for more information. (4) Activity associated with the shutdown of the FTFM service offering. Refer to Note 16, Restructuring , for additional details. Adjusted operating ratio Year Ended December 31, (in millions, except ratios) 2021 2020 Total operating expenses $ 5,075.0 $ 4,266.1 Divide by: Operating revenues 5,608.7 4,552.8 Operating ratio 90.5 % 93.7 % Total operating expenses $ 5,075.0 $ 4,266.1 Adjusted for: Fuel surcharge revenues (444.8) (318.3) Litigation 13.5 (12.8) Acquisition-related costs (1.9) — Goodwill impairment (10.6) — Restructuring—net — (1.0) Adjusted total operating expenses $ 4,631.2 $ 3,934.0 Operating revenues $ 5,608.7 $ 4,552.8 Less: Fuel surcharge revenues 444.8 318.3 Revenues (excluding fuel surcharge) $ 5,163.9 $ 4,234.5 Adjusted operating ratio 89.7 % 92.9 % Adjusted net income Year Ended December 31, (in millions) 2021 2020 Net income $ 405.4 $ 211.7 Litigation (13.5) 12.8 Acquisition-related costs 1.9 — Goodwill impairment 10.6 — Restructuring—net — 1.0 Income tax effect of non-GAAP adjustments (1) 2.8 (3.5) Adjusted net income $ 407.2 $ 222.0 (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. The Asia goodwill impairment in 2021 was not subject to taxes. Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Enterprise Results Summary Enterprise net income increased $193.7 million, approximately 91%, in the year ended December 31, 2021 compared to 2020, primarily due to a $247.0 million increase in income from operations, partially offset by the corresponding increase in income taxes. In addition, net income in 2021 and 2020 included pre-tax equity investment net gains of $21.6 million and $8.8 million, respectively. 25 Table of Contents Adjusted net income increased $185.2 million, approximately 83%. Components of Enterprise Net Income Enterprise Revenues Enterprise operating revenues increased $1,055.9 million, approximately 23%, in the year ended December 31, 2021 compared to 2020. Factors contributing to the increase were as follows: • a $679.4 million increase in Logistics segment revenues (excluding fuel surcharge) due to an increase in revenue per order and volume growth; • a $168.4 million increase in Intermodal segment revenues (excluding fuel surcharge) driven by improvement in revenue per order and an increase in orders despite network fluidity constraints; • a $126.5 million increase in fuel surcharge revenues resulting from an increase in fuel prices in 2021 compared to 2020 (for example, based on information reported by the U.S. Department of Energy, the average diesel price per gallon in the U.S. increased by 27% between such periods) and an increase in Intermodal volumes, partially offset by a decrease in Truckload volumes; and • an $83.9 million increase in Truckload segment revenues (excluding fuel surcharge) driven by improved revenue per truck per week, partially offset by lower volumes due to driver capacity constraints. Enterprise revenues (excluding fuel surcharge) increased $929.4 million, approximately 22%. Enterprise Income from Operations and Operating Ratio Enterprise income from operations increased $247.0 million, approximately 86%, in the year ended December 31, 2021 compared to 2020, primarily due to increases in revenue per truck per week in Truckload, revenue per order in Intermodal, and net revenue per order in Logistics largely driven by strong freight market conditions and effective network and revenue management. A $70.6 million improvement in equipment dispositions and a $26.3 million favorable change related to a 2020 adverse tax ruling that was overturned in 2021 also contributed to improved income from operations. The above factors were partially offset by an increase in driver costs resulting from additional costs incurred to attract and retain drivers, a reduction in Truckload freight volumes due to industry-wide capacity constraints, and higher rail costs. Adjusted income from operations increased $232.2 million, approximately 77%. Enterprise operating ratio improved on both a GAAP and adjusted basis when compared to the same period of 2020. Among other factors, our operating ratio can be negatively impacted by changes in portfolio mix when our higher operating ratio, less asset-focused Logistics segment grows faster than our lower operating ratio, capital-intensive Truckload segment. Enterprise Operating Expenses Key operating expense fluctuations are described below. • Purchased transportation increased $659.9 million, or 33%, year over year, primarily resulting from increased third party carrier costs due to higher purchased transportation costs per order and volume growth within Logistics, as well as higher rail purchased transportation resulting from an increase in both rail costs and orders in Intermodal. • Salaries, wages, and benefits increased $103.0 million, or 10%, year over year, driven by increases in Truckload and Intermodal driver pay, Logistics salaries and wages, performance-based incentive compensation, and healthcare costs. The increases in driver pay were largely the result of pay increases and actions to address driver capacity constraints, while the increase in Logistics salaries and wages was primarily due to an increase in headcount and sales commissions. Healthcare costs increased 17% when compared to the prior year mainly resulting from an increase in the severity and frequency of claims in 2021. • Fuel and fuel taxes increased $77.0 million, or 38%, year over year, driven primarily by an increase in cost per gallon, partially offset by a decrease in company driver miles resulting from industry-wide capacity constraints. A significant portion of fuel costs are recovered through our fuel surcharge programs. • Depreciation and amortization increased $5.7 million, or 2%, year over year, primarily driven by an increase in internal use software amortization. • Operating supplies and expenses decreased $70.6 million, or 13%, year over year, a result of a $70.1 million favorable 26 Table of Contents change in equipment dispositions driven by a strong used equipment market and the strength of our nationwide maintenance network in facilitating equipment sales, a $26.3 million favorable change related to a $12.8 million adverse tax ruling in 2020 and its reversal (plus interest) in 2021, and a decrease in cost of goods sold in our leasing business as a result of reduced lease activity. These factors were partially offset by an increase in equipment rental expense due to port congestion and higher customer dwell times, additional rail storage expenses caused by network fluidity constraints, and an increase in a variety of other operating-related areas that were individually immaterial. • Insurance and related expenses decreased $3.7 million, or 4%, year over year, primarily due to favorability in auto liability resulting from a decrease in claims severity and frequency. • Other general expenses increased $28.0 million, or 26%, year over year, primarily due to higher driver onboarding costs as the costs to attract and retain drivers increased as a result of constrained industry-wide capacity levels, which we expect to continue into 2022, compared to favorable driver turnover in 2020 during the onset of the COVID-19 pandemic. The remaining increase is attributable to increased software development and professional services costs, including $1.9 million of acquisition-related costs associated with the acquisition of MLS in 2021. • Goodwill impairment charges increased $10.6 million year over year, due to the full impairment recorded for our Asia reporting unit in 2021. Total Other Expenses (Income) Total other income increased $12.1 million in the year ended December 31, 2021 compared to 2020, primarily due to a $12.8 million increase in pre-tax equity investment net gains as we recorded a pre-tax net gain of $21.6 million in 2021 compared to an $8.8 million pre-tax gain in 2020. See Note 5, Investments , for more information on our equity investments. Income Tax Expense Our provision for income taxes increased $65.4 million, approximately 92%, in the year ended December 31, 2021 compared to 2020 due to higher taxable income. Our effective income tax rate was 25.2% for the years ended December 31, 2021 and 2020. While we anticipate that our ongoing effective tax rate will be 25.0% - 25.5%, our provision for income taxes may fluctuate in future periods to the extent there are changes to tax laws and regulations. Revenues and Income (Loss) from Operations by Segment The following tables summarize revenues and income (loss) from operations by segment. Year Ended December 31, Revenues by Segment (in millions) 2021 2020 Truckload $ 1,934.9 $ 1,851.0 Intermodal 1,143.1 974.7 Logistics 1,808.7 1,129.3 Other 365.3 359.0 Fuel surcharge 444.8 318.3 Inter-segment eliminations (88.1) (79.5) Operating revenues $ 5,608.7 $ 4,552.8 Year Ended December 31, Income (Loss) from Operations by Segment (in millions) 2021 2020 Truckload $ 284.7 $ 187.8 Intermodal 155.2 75.0 Logistics 92.4 43.1 Other 1.4 (19.2) Income from operations 533.7 286.7 Adjustments: Litigation (13.5) 12.8 Acquisition-related costs 1.9 — Goodwill impairment 10.6 — Restructuring—net — 1.0 Adjusted income from operations $ 532.7 $ 300.5 27 Table of Contents We monitor and analyze a number of KPIs in order to manage our business and evaluate our financial and operating performance. 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. The Truckload KPIs below do not contemplate the impacts of our acquisition of MLS on December 31, 2021. As of December 31, 2021, MLS operated approximately 900 tractors and 3,600 trailers. 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 shipment. Year Ended December 31, 2021 2020 Dedicated Revenues (excluding fuel surcharge) (1) $ 818.3 $ 709.5 Average trucks (2) (3) 4,265 3,940 Revenue per truck per week (4) $ 3,756 $ 3,514 Network Revenues (excluding fuel surcharge) (1) $ 1,115.0 $ 1,141.0 Average trucks (2) (3) 5,059 6,115 Revenue per truck per week (4) $ 4,315 $ 3,642 Total Truckload Revenues (excluding fuel surcharge) (5) $ 1,934.9 $ 1,851.0 Average trucks (2) (3) 9,324 10,055 Revenue per truck per week (4) $ 4,059 $ 3,592 Average company trucks (3) 6,987 7,255 Average owner-operator trucks (3) 2,337 2,800 Trailers (6) 36,601 36,921 Operating ratio (7) 85.3 % 89.9 % (1) Revenues (excluding fuel surcharge), in millions, exclude revenue in transit. (2) Includes company 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. (6) Includes entire fleet of owned trailers, including trailers with leasing arrangements between Truckload and Logistics. (7) 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) increased $83.9 million, approximately 5%, in the year ended December 31, 2021 compared to 2020, resulting from price improvements being largely offset by a 10% decline in volume. Revenue per truck per week increased $467, or 13%, year over year, due to a 17% increase in rate per loaded mile driven by higher contract and spot rates in an inflationary market, partially offset by reduced productivity due to network disruptions. While our dedicated business experienced growth year over year as a result of new business wins, overall Truckload order volumes declined primarily driven by driver capacity constraints within our network business. Truckload income from operations increased $96.9 million, approximately 52%, in the year ended December 31, 2021 compared to 2020, primarily due to the impact of contract renewals and favorable spot market pricing, in addition to a $58.1 million favorable change in equipment dispositions. These items were partially offset by an increase in driver-related costs as a result of pay increases and actions taken to attract and retain drivers in response to industry-wide driver capacity constraints, in addition to the earnings impact of reduced volumes, noted above. 28 Table of Contents Intermodal The following table presents the KPIs for our Intermodal segment for the periods indicated. Year Ended December 31, 2021 2020 Orders (1) 448,568 433,358 Containers 25,187 21,890 Trucks (2) 1,602 1,629 Revenue per order (3) $ 2,526 $ 2,208 Operating ratio (4) 86.4 % 92.3 % (1) Based on delivered rail orders. (2) Includes company 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) increased $168.4 million, approximately 17%, in the year ended December 31, 2021 compared to 2020. Revenue per order increased $318, or 14%, driven primarily by strong market conditions resulting in improvements in price and increased premium opportunities, partially offset by shorter length of haul due to growth in the East which typically has a lower revenue per order. Orders also increased 4% due to favorable market demand conditions, despite supply chain inefficiencies resulting in extended container dwell times and rail network disruptions. Intermodal income from operations increased $80.2 million, approximately 107%, in the year ended December 31, 2021 compared to 2020, mainly due to factors impacting revenues discussed above and a $12.1 million favorable change in equipment dispositions, partially offset by the impact of network fluidity and capacity challenges on rail and driver-related costs. Logistics The following table presents the KPI for our Logistics segment for the periods indicated. Year Ended December 31, 2021 2020 Operating ratio (1) 94.9 % 96.2 % (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. Logistics revenues (excluding fuel surcharge) increased $679.4 million, approximately 60%, in the year ended December 31, 2021 compared to 2020. This increase was mainly the result of an increase in revenue per order and 20% volume growth within our brokerage business driven by supportive market conditions, in addition to expansion of our Power Only offering and digital platform. Logistics income from operations increased $49.3 million, approximately 114%, in the year ended December 31, 2021 compared to 2020, primarily due to net revenue per order improvements within our brokerage business and volume growth, as cited above. Other Included in Other was income from operations of $1.4 million in the year ended December 31, 2021 compared to a loss from operations of $19.2 million in 2020. The fluctuation was primarily driven by a $26.3 million favorable change related to a 2020 adverse tax ruling that was subsequently overturned in 2021 and an increase in income from operations within our leasing business driven by a decrease in cost of goods sold. These factors were partially offset by an increase in performance-based incentive compensation year over year, in addition to a $10.6 million goodwill impairment charge for our Asia reporting unit in 2021. 29 Table of Contents 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 $150.0 million accounts receivable facility, for which our combined available capacity as of December 31, 2021 was $325.8 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, 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, 2021 December 31, 2020 Cash and cash equivalents $ 244.8 $ 395.5 Marketable securities 49.3 47.1 Total cash, cash equivalents, and marketable securities $ 294.1 $ 442.6 Debt: Senior notes $ 265.0 $ 305.0 Finance leases 5.3 2.0 Total debt (1) $ 270.3 $ 307.0 (1) Debt on the consolidated balance sheets is presented net of deferred financing costs. Debt At December 31, 2021, 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. 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) 2021 2020 Cash provided by operating activities $ 566.1 $ 618.2 Cash used in investing activities (626.4) (318.7) Cash used in financing activities (90.4) (455.6) Operating Activities Cash provided by operating activities decreased $52.1 million, approximately 8%, during 2021 compared to 2020. The decrease was the result of an increase in cash used for working capital, partially offset by an increase in net income adjusted for various noncash charges. Working capital changes decreasing net cash provided by operating activities were driven by an increase in trade accounts receivable, which increased proportionate to revenue growth, and a decrease in other liabilities primarily related to the $30.7 million payment of payroll taxes deferred under the CARES Act during 2021, in comparison to the ending 2020 accrual. 30 Table of Contents Investing Activities Cash used in investing activities increased $307.7 million, approximately 97%, during 2021 compared to 2020. The increase in cash used was primarily driven by the Company’s acquisition of 100% of the outstanding equity of MLS for $271.3 million on December 31, 2021, as well as a $34.0 million increase in net capital expenditures. Capital Expenditures The following table sets forth our net capital expenditures for the periods indicated. Year Ended December 31, (in millions) 2021 2020 Purchases of transportation equipment $ 399.4 $ 274.8 Purchases of other property and equipment 49.5 49.7 Proceeds from sale of property and equipment (177.8) (87.4) Net capital expenditures $ 271.1 $ 237.1 Net capital expenditures increased $34.0 million in 2021 compared to 2020. The increase was driven by a $124.6 million increase in purchases of transportation equipment mainly due to replacement capital and to reduce the age of our tractor fleet, partially offset by a $90.4 million increase in proceeds from the sale of property and equipment primarily resulting from higher proceeds per unit and increased tractor and trailer sales. The higher proceeds per unit in 2021 were driven by the current supply and demand environment, and we expect to see this trend persist as long as there are shortages in the supply chain. We currently anticipate net capital expenditures in 2022 to be approximately $450.0 million. Financing Activities Cash used in financing activities decreased $365.2 million, approximately 80%, during 2021 compared to 2020. The main drivers of the decrease in cash used were a $350.4 million decrease in dividend payments 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 2021. Other Considerations That Could Affect Our Results, Liquidity, and Capital Resources Investment in TuSimple On January 12, 2021, the Company purchased a $5.0 million non-controlling interest in TuSimple. Upon completion of its initial public offering in April 2021, our investment in TuSimple was converted into Class A common shares and is being accounted for under ASC 321, Investments - Equity Securities , with subsequent changes in share price recorded within other expense (income)—net on the consolidated statements of comprehensive income. In the year ended December 31, 2021, the Company recognized a pre-tax net gain of $7.7 million on its investment in TuSimple. Due to the volatility of the global markets and the potential for high volatility of public equity prices of technology-related companies, we expect the value of our investment to fluctuate which could materially affect our financial condition and results of operations. COVID-19 While the ongoing COVID-19 pandemic creates potential liquidity risks, 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 $294.1 million and $325.8 million of unused credit capacity as of December 31, 2021. Our outstanding debt at the end of 2021 was $270.3 million, of which $61.4 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. Off-Balance Sheet Arrangements As of December 31, 2021, 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. 31 Table of Contents Contractual Obligations As of December 31, 2021, we had contractual obligations related to our long-term debt of $265.0 million and $22.6 million for principal borrowings and interest, respectively, which become due through 2025. See Note 7, Debt and Credit Facilities , for additional information regarding our debt obligations. We also have contractual obligations for finance and operating leases and purchase commitments related to agreements to purchase transportation equipment. See Note 8, Leases , and Note 14, Commitments and Contingencies , respectively, for additional information regarding our lease and purchase commitment obligations. 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. 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, property damage, cargo, and wage and benefit claims. We maintain self-insurance levels for these various areas of risk and have established reserves to cover 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, 2021 and 2020, we had an accrual of $158.3 million and $144.2 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, we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed or exceed the limits of our insurance coverage, and 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. 32 Table of Contents 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 goodwill balance at December 31, 2021 and 2020 was $240.5 million and $128.1 million, respectively. Goodwill is evaluated for impairment annually at the reporting unit level, 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 are assessed include our share price, 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. We completed the required annual goodwill impairment assessment for all three of our reporting units with goodwill as of October 31, 2021. A qualitative goodwill assessment was performed for our VTL/Dedicated Services reporting unit, and quantitative assessments were performed for our Import/Export and Asia reporting units. The fair value of the Import/Export reporting unit was significantly in excess of its carrying value, while our Asia reporting unit had a carrying value in excess of its fair value requiring full impairment of its remaining goodwill of $10.6 million. The long-term earnings growth rate used in the 2021 goodwill valuation decreased from the prior year’s valuation as a result of lower profitability in the terminal period, causing the Asia reporting unit’s carrying value to exceed its fair value at October 31, 2021. There were no triggering events identified from the date of our assessment through December 31, 2021 that would require an update to our annual impairment test. If future operating performance of our VTL/Dedicated Services or Import/Export 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. Additionally, as a result of the Company’s acquisition of MLS on December 31, 2021, $122.7 million of goodwill was recorded representing the excess of the purchase price over the estimated fair values of assets acquired and liabilities assumed. See Note 2, Acquisition, for more information. Business Combinations We record assets acquired and liabilities assumed in a business combination under the purchase method of accounting where consideration is first assigned to identifiable assets and liabilities based on estimated fair values, with any excess recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may adjust provisional amounts that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date. Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the selection of valuation methodologies such as the income, sales comparison, and market approaches. For the MLS acquisition, fair value estimates of acquired property and equipment were based on an independent appraisal, giving consideration to the highest and best use of the assets. Key assumptions used in the transportation equipment appraisals were based on the market approach, 33 Table of Contents while key assumptions used in the land, buildings, and improvements and other property and equipment appraisals were based on a combination of the income (direct capitalization) and sales comparison approaches, as appropriate. Our determination of the fair value of these assets involved the use of significant estimates and assumptions including recent selling prices of similar equipment, asset condition, and current and anticipated market trends.