Receipt of an unfavorable DOT safety rating could have a materially adverse effect on our operations and profitability.
We currently have a satisfactory DOT rating, which is the highest available rating under the current safety rating scale. If we were to receive a conditional or unsatisfactory DOT safety rating, it could materially adversely affect our business, financial condition, and results of operations as customer contracts may require a satisfactory DOT safety rating, and a conditional or unsatisfactory rating could materially adversely affect or restrict our operations.
The FMCSA has proposed regulations that would modify the existing rating system and the safety labels assigned to motor carriers evaluated by the DOT. Under regulations that were proposed in 2016, the methodology for determining a carrier’s DOT safety rating would be expanded to include the on-road safety performance of the carrier’s drivers and equipment, as well as results obtained from investigations. Exceeding certain thresholds based on such performance or results would cause a carrier to receive an unfit safety rating. The proposed regulations were withdrawn in March 2017, but the FMCSA noted that a similar process may be initiated in the future. If similar regulations were enacted and we were to receive an unfit or other negative safety rating, our business would be materially adversely affected in the same manner as if we received a conditional or unsatisfactory safety rating under the current regulations. In addition, poor safety performance could lead to increased risk of liability, increased insurance, maintenance and equipment costs, and potential loss of customers, which could materially adversely affect our business, financial condition, and results of operations. These risks are heightened if we consolidate our operations under one or two DOT authorities.
Compliance with various environmental laws and regulations upon which our operations are subject may increase our costs of operations and non-compliance with such laws and regulations could result in substantial fines or penalties.
In addition to direct regulation under the DOT and related agencies, we are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous materials, fuel storage tanks, air emissions from our vehicles and facilities, and discharge and retention of storm water. Our corporate headquarters and main terminaltractor terminals often are located in industrial areas where groundwater or other forms of environmental contamination may have occurred or could occur. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. We also maintain above-ground bulk fuel storage tanks and fueling islands at several of our facilities and one leased facility has below-ground bulk fuel storage tanks. A small percentage of our freight consists of low-grade hazardous substances, which subjects us to a wide array of regulations. Although we have instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations, if we are involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances we transport, if soil or groundwater contamination is found at our facilities or results from our operations, or if we are found to be in violation of applicable laws or regulations, we could be subject to cleanup costs and liabilities, including substantial fines or penalties or civil and criminal liability, any of which could have a materially adverse effect on approximately 180 acresour business and operating results. For further discussion of propertyenvironmental laws and regulations, please see "Regulation" under “Item 1. Business.”
Changes to trade regulation, quotas, duties, or tariffs, caused by the changing U.S. and geopolitical environments or otherwise, may increase our costs and materially adversely affect our business.
The approach of President Biden’s administration to tariffs and other trade regulations is still to be determined. The imposition of additional tariffs or quotas or changes to certain trade agreements, including tariffs applied to goods traded between the United States and China, could, among other things, increase the costs of the materials used by our suppliers to produce new revenue equipment or increase the price of fuel. Such cost increases for our revenue equipment suppliers would likely be passed on to us, and to the extent fuel prices increase, we may not be able to fully recover such increases through rate increases or our fuel surcharge program, either of which could have a material adverse effect on our business.
Litigation may adversely affect our business, financial condition, and results of operations.
Our business is subject to the risk of litigation by employees, independent contractors, customers, vendors, government agencies, stockholders, and other parties through private actions, class actions, administrative proceedings, regulatory actions, and other processes. Recently, trucking companies, including us, have been and currently are subject to lawsuits, including class action lawsuits, alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal breaks, rest periods, overtime eligibility, and failure to pay for all hours worked. A number of these lawsuits have resulted in Chattanooga, Tennessee. This facility includes an office buildingthe payment of approximately 182,000 square feet,substantial settlements or damages by the defendants.
The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend litigation may also be significant. Not all claims are covered by our insurance, and there can be no assurance that our coverage limits will be adequate to cover all amounts in dispute. To the extent we experience claims that are uninsured, exceed our coverage limits, involve significant aggregate use of our self-insured retention amounts, or cause increases in future premiums, the resulting expenses could have a maintenance facilitymaterially adverse effect on our business, results of approximately 65,000 square feet,operations, financial condition, or cash flows.
In addition, we may be subject, and have been subject in the past, to litigation resulting from trucking accidents. The number and severity of litigation claims may be worsened by distracted driving by both truck drivers and other motorists. These lawsuits have resulted, and may result in the future, in the payment of substantial settlements or damages and increases of our insurance costs.
FINANCIAL RISKS
Our Third Amended and Restated Credit Agreement (our "Credit Facility") and other financing arrangements contain certain covenants, restrictions, and requirements, and we may be unable to comply with such covenants, restrictions, and requirements.
We have a body shop$110.0 million Credit Facility and numerous other financing arrangements. Our Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of approximately 60,000 square feet,the ordinary course of business, affiliate transactions, and a tractor wash. fixed charge coverage ratio, if availability is below a certain threshold. We have had difficulty meeting budgeted results and have had to request amendments or waivers in the past. If we are unable to meet budgeted results or otherwise comply with our Credit Facility, we may be unable to obtain amendments or waivers under our Credit Facility, or we may incur fees in doing so.
Certain other financing arrangements contain certain restrictions and non-financial covenants, in addition to those contained in our Credit Facility. In addition, certain of our fuel hedging contracts are with lenders under our Credit Facility and could be terminated by such lenders if the Credit Facility is terminated or replaced. If we fail to comply with any of our financing arrangement covenants, restrictions, and requirements, we will be in default under the relevant agreement, which could cause cross-defaults under our other financing arrangements. In the event of any such default, if we failed to obtain replacement financing, amendments to, or waivers under the applicable financing arrangements, our lenders could cease making further advances, declare our debt to be immediately due and payable, fail to renew letters of credit, impose significant restrictions and requirements on our operations, institute foreclosure procedures against their collateral, or impose significant fees and transaction costs. If acceleration occurs, economic conditions such as the recent credit market crisis may make it difficult or expensive to refinance the accelerated debt or we may have to issue equity securities, which would dilute stock ownership. Even if new financing is made available to us, credit may not be available to us on acceptable terms. A default under our financing arrangements could result in a materially adverse effect on our liquidity, financial condition, and results of operations.
In the future, we may need to obtain additional financing that may not be available or, if it is available, may result in a reduction in the percentage ownership of our stockholders.
We may need to raise additional funds in order to:
| ● | finance working capital requirements, capital investments, or refinance existing indebtedness; |
| ● | develop or enhance our technological infrastructure and our existing products and services; |
| ● | fund strategic relationships; |
| ● | respond to competitive pressures; and |
| ● | acquire complementary businesses, technologies, products, or services. |
If the economy and/or the credit markets weaken, or we are unable to enter into finance or operating leases to acquire revenue equipment on terms favorable to us, our business, financial results, and results of operations could be materially adversely affected, especially if consumer confidence declines and domestic spending decreases.
If adequate funds are not available or are not available on acceptable terms, our ability to fund our strategic initiatives, take advantage of unanticipated opportunities, develop or enhance technology or services, or otherwise respond to competitive pressures or market changes could be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our stockholders may be reduced, and holders of these securities may have rights, preferences, or privileges senior to those of our stockholders.
Our Solutions subsidiaryindebtedness and finance and operating lease obligations could adversely affect our ability to respond to changes in our industry or business.
As a result of our level of debt, finance leases, operating leases, and encumbered assets, we believe:
| ● | our vulnerability to adverse economic and industry conditions and competitive pressures is heightened; |
| ● | we will continue to be required to dedicate a substantial portion of our cash flows from operations to lease payments and repayment of debt, limiting the availability of cash for our operations, capital expenditures, and future business opportunities; |
| ● | our flexibility in planning for, or reacting to, changes in our business and industry will be limited; |
| ● | our profitability is sensitive to fluctuations in interest rates because some of our debt obligations are subject to variable interest rates, and future borrowings and lease financing arrangements will be affected by any such fluctuations; |
| ● | our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions, or other purposes may be limited; |
| ● | it may be difficult for us to comply with the multitude of financial covenants, borrowing conditions, or other obligations contained in our debt agreements, thereby increasing the risk that we trigger certain cross-default provisions; and |
| ● | we may be required to issue additional equity securities to raise funds, which would dilute the ownership position of our stockholders. |
Our financing obligations could negatively impact our future operations, ability to satisfy our capital needs, or ability to engage in other business activities. We also cannot assure you that additional financing will be available to us when required or, if available, will be on terms satisfactory to us. Finally, we may be unsuccessful in our strategy to reduce leverage.
Our profitability may be materially adversely impacted if our capital investments do not match customer demand or if there is a decline in the availability of funding sources for these investments.
Our operations require significant capital investments. The amount and timing of such investments depend on various factors, including anticipated freight demand and the price and availability of assets. If anticipated demand differs materially from actual usage, we may have too many or too few assets. Moreover, resource requirements vary based on customer demand, which may be subject to seasonal or general economic conditions. Our ability to select profitable freight and adapt to changes in customer transportation requirements is important to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our asset based operations) or obtain qualified third-party capacity at a reasonable price (with respect to our Managed Freight segment). Although our business volume is not highly concentrated, our customers’ financial failures or loss of customer business may also operatedaffect us.
We expect to pay for projected capital expenditures with cash flows from operations, borrowings under our Credit Facility, proceeds from the sale of our used revenue equipment, proceeds under other financing facilities, and managed outleases of revenue equipment. If we are unable to generate sufficient cash from operations and obtain financing on favorable terms in the future, we may have to limit our fleet size, enter into less favorable financing arrangements, or operate our revenue equipment for longer periods, any of which could have a materially adverse effect on our profitability.
Increased prices for new revenue equipment, design changes of new engines, future uses of autonomous tractors, volatility in the used equipment market, decreased availability of new revenue equipment, and the failure of manufacturers to meet their sale or trade-back obligations to us could have a materially adverse effect on our business, financial condition, results of operations, and profitability.
We are subject to risk with respect to higher prices for new tractors. We have at times experienced an increase in prices for new tractors and the resale values of the Chattanooga facility.tractors have not always increased to the same extent. Prices have increased and may continue to increase, due, in part, to (i) government regulations applicable to newly manufactured tractors and diesel engines, (ii) higher commodity prices, and (iii) the pricing discretion of equipment manufacturers. In addition, we have recently equipped our tractors with safety, aerodynamic, and other options that increase the price of new equipment. Compliance with such regulations has increased the cost of our new tractors, may increase the cost of new trailers, could impair equipment productivity, in some cases, result in lower fuel mileage, and increase our operating expenses. Our business could be harmed if we are unable to continue to obtain an adequate supply of new tractors and trailers for these or other reasons, and future use of autonomous tractors could increase the price of new tractors and decrease the value of used, non-autonomous tractors. As a result, we expect to continue to pay increased prices for equipment and incur additional expenses and related financing costs for the foreseeable future. Furthermore, reduced equipment efficiency may result from new engines designed to reduce emissions, thereby increasing our operating expenses.
A depressed market for used equipment could require us to trade our revenue equipment at depressed values or to record losses on disposal or impairments of the carrying values of our revenue equipment that is not protected by residual value arrangements. Used equipment prices are subject to substantial fluctuations based on freight demand, the supply of used tractors, the availability of financing, the presence of buyers for export to foreign countries, and commodity prices for scrap metal. If there is a deterioration of resale prices, it could have a material adverse effect on our business, financial condition, and results of operations.
Certain of our revenue equipment financing arrangements have balloon payments at the end of the finance terms equal to the values we expect to be able to obtain in the used market. To the extent the used market values are lower than that, we may be forced to sell the equipment at a loss and our results of operations would be materially adversely affected.
Our 49% owned subsidiary, TEL, faces certain additional risks particular to its operations, any one of which could adversely affect our operating results.
In May 2011, we acquired a 49% interest in TEL, a used equipment leasing company and reseller. We maintain seven terminals,account for our investment in TEL using the equity method of accounting. TEL faces several risks similar to those we face and additional risks particular to its business and operations. TEL has significant ongoing capital requirements and carries significant debt. The ability to secure financing and market fluctuations in interest rates could impact TEL's ability to grow its leasing business and its margins on leases. Adverse economic activity may restrict the number of used equipment buyers and their ability to pay prices for used equipment that we find acceptable. In addition, TEL's leasing customers are typically small trucking companies without substantial financial resources, and TEL is subject to risk of loss should those customers be unable to make their lease payments. In 2019, TEL had a significant customer that declared bankruptcy, which resulted in a reduction in TEL’s profitability. A portion of TEL’s business includes leasing equipment to individual independent contractors who are generally not required to provide significant amounts to secure their obligations under the lease agreements with TEL. Such independent contractors generally have few assets and are at a heightened risk of defaulting under such lease agreements, which may cause TEL to incur unreimbursed costs related to the recovery of equipment, equipment maintenance and repair, missed lease payments, and the reletting of the equipment. In addition, the shrinking independent contractor market may decrease the number of drivers available to utilize such portion of TEL’s business and could decrease TEL’s revenues. Further, we believe the used equipment market will significantly impact TEL's results of operations and such market has been volatile in the past. There can be no assurance that TEL will experience gains on sale similar to those it has experienced in the past and it may incur losses on sale. As regulations change, the market for used equipment may be impacted as such regulatory changes may make used equipment costly to upgrade to comply with such regulations or we may be forced to scrap equipment if such regulations eliminate the market for particular used equipment. Further, there is an overlap in providers of equipment financing to TEL and our wholly owned operations and those providers may consider the combined exposure and limit the amount of credit available to us.
In May 2016, the operating agreement with TEL was amended to, among other things, remove the previously agreed to fixed date purchase options. Our option to acquire up to the remaining 51% of TEL would have expired May 31, 2016, and TEL's majority owners would have received the option to purchase our ownership in TEL. The options previously in effect were eliminated as part of the amendment. TEL's majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. There is no assurance that we will be able to agree on a revised formula or that TEL's ownership incentives will not be changed as a result of this process.
Finally, we do not control TEL's ownership or management. Our investment in TEL is subject to the risk that TEL's management and controlling members may make business, financial, or management decisions with which we do not agree or that the management or controlling members may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the value of our investment in TEL could decrease, and our financial condition, results of operations, and cash flow could suffer as a result.
We may incur additional charges in connection with the disposition of substantially all of the operations and assets of TFS, which could have a material adverse effect on our results of operations, cash flows, available liquidity, and total indebtedness.
During the third quarter of 2020, we sold substantially all of the operations and assets of TFS. In connection with the sale of TFS’ assets, we agreed to indemnify the purchaser of TFS’ assets for certain advances we made to specified clients prior to the sale. We are responsible for and will indemnify the purchaser for 100% of the first $30 million of any losses incurred by the purchaser related to these advances, and for 50% of the next $30 million of any losses incurred by the purchaser, for total indemnification by us of $45.0 million. Our indemnification obligations are secured by certain revenue equipment.
During the fourth quarter of 2020, triggering events caused us to assess our likely indemnification obligation, which resulted in recording a $44.2 million contingent loss charge, which reflects nearly all of our potential exposure. The payment of amounts with respect to the indemnification obligations could create volatility in our reported future financial results and have an adverse effect on our results of operations, cash flows, available liquidity, and total indebtedness. To date, no actual claims for indemnification have been made by the purchaser of TFS’ assets. However, we believe such claims are probable.
We could determine that our goodwill and other intangible assets are impaired, thus recognizing a related loss.
As of December 31, 2020, we had goodwill of $42.5 million and other intangible assets of $24.5 million, solely from the Landair Acquisition. We evaluate our goodwill and other intangible assets for impairment. We could recognize impairments in the future, and we may never realize the full value of our intangible assets. If these events occur, our profitability and financial condition will suffer.
Our Chairman of the Board and Chief Executive Officer and his wife control a large portion of our stock and have substantial control over us, which could limit other stockholders' ability to influence the outcome of key transactions, including changes of control.
Our Chairman of the Board and Chief Executive Officer, David Parker, and his wife, Jacqueline Parker, beneficially own or have sole voting and dispositive power over approximately 10% of our outstanding Class A common stock and 100% of our Class B common stock. On all matters with respect to which our stockholders have a right to vote, including the election of directors, each share of Class A common stock is entitled to one vote, while each share of Class B common stock is entitled to two votes. All outstanding shares of Class B common stock are owned by the Parkers and are convertible to Class A common stock on a share-for-share basis at the election of the Parkers or automatically upon transfer to someone outside of the Parker family. This voting structure gives the Parkers approximately 32% of the voting power of all of our outstanding stock. As such, the Parkers are able to substantially influence decisions requiring stockholder approval, including the election of our entire board of directors, the adoption or extension of anti-takeover provisions, mergers, and other business combinations. This concentration of ownership could limit the price that some investors might be willing to pay for the Class A common stock, and could allow the Parkers to prevent or could discourage or delay a change of control, which other stockholders may favor. The interests of the Parkers may conflict with the interests of other holders of Class A common stock, and they may take actions affecting us with which other stockholders disagree.
Provisions in our charter documents or Nevada law may inhibit a takeover, which could limit the price investors might be willing to pay for our Class A common stock.
Our Third Amended and Restated Articles of Incorporation (“Articles of Incorporation”), our Fifth Amended and Restated Bylaws ("Bylaws"), and Nevada corporate law contain provisions that could delay, discourage or prevent a change of control or changes in our Board of Directors or management that a stockholder might consider favorable. For example, our Articles of Incorporation authorize our Board of Directors to issue preferred stock without stockholder approval and to set the rights, preferences and other terms thereof, including voting rights of those shares; our Articles of Incorporation do not provide for cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors; our Class B common stock possesses disproportionate voting rights; and our Bylaws provide that a stockholder must provide advance notice of business to be brought before an annual meeting or to nominate candidates for election as directors at an annual meeting of stockholders. These provisions will apply even if the change may be considered beneficial by some of our stockholders, and thereby negatively affect the price that investors might be willing to pay in the future for our Class A common stock. In addition, to the extent that these provisions discourage an acquisition of our company or other change in control transaction, they could deprive stockholders of opportunities to realize takeover premiums for their shares of our Class A common stock.
The market price of our Class A common stock may be volatile.
The price of our Class A common stock may fluctuate widely, depending upon a number of factors, many of which are utilized bybeyond our Truckload segment locatedcontrol. In addition, stock markets generally experience significant price and volume volatility from time to time which may adversely affect the market price of our Class A common stock for reasons unrelated to our performance.
We cannot guarantee the timing or amount of repurchases of our Class A common stock, if any.
The timing and amount of future repurchases of our Class A common stock, including repurchases under the stock repurchase program authorizing the purchase of up to $40 million of our Class A common stock announced on January 25, 2021, is at the discretion of our Board of Directors and will depend on many factors such as our financial condition, earnings, cash flows, capital requirements, any future debt service obligations, covenants under our existing or future debt agreements, industry practice, legal requirements, regulatory constraints, and other factors our Board of Directors deems relevant.
If we fail to maintain effective internal control over financial reporting in the future, there could be an elevated possibility of a material misstatement, and such a misstatement could cause investors to lose confidence in our financial statements, which could have a material adverse effect on our major traffic lanesstock price.
As of June 30, 2020, we identified a deficiency in our internal control over financial reporting that we considered to be a material weakness regarding ineffective internal control related to credit approval and monitoring within our TFS subsidiary. The Company completed the sale of substantially all assets of TFS on July 8, 2020. Management determined that the material weakness was isolated to the TFS subsidiary. As a result, management believes that the material weakness was eliminated upon the sale of TFS. If we fail to maintain effective internal controls in the future, including any future acquisitions, it could result in a material misstatement of our financial statements, which could cause investors to lose confidence in our financial statements or nearcause our stock price to decline.
COVID-19 RISKS
We could be negatively impacted by the cities listed below. TheseCOVID-19 outbreak or other similar outbreaks.
We have experienced an increase in absences or terminations among our driver and non-driver personnel due to the outbreak of COVID-19, which have disrupted our operations, particularly for our maintenance personnel. Further, our operations, particularly in areas of increased COVID-19 infections could be disrupted. Negative financial results, operational disruptions, driver and non-driver absences, uncertainties in the market, and a tightening of credit markets, caused by COVID-19, other similar outbreaks, or a recession, could have a material adverse effect on our liquidity, reduce credit options available to us, make it more difficult to obtain amendments, extensions, and waivers, and adversely impact our ability to effectively meet our short- and long-term obligations.
The outbreak of COVID-19 has significantly increased economic and demand uncertainty. The current outbreak has caused a slowdown in the global economy and the duration of the contraction remains uncertain. Risks related to a slowdown or recession are described in our risk factor titled “Our business is subject to economic, credit, business, and regulatory factors affecting the truckload industry that are largely beyond our control, any of which could have a materially adverse effect on our operating results”.
Short-term and long-term developments related to COVID-19 have been unpredictable and the extent to which further developments could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain. Such developments may include the duration of the virus, the distribution and availability of vaccines, the severity of the disease, and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak.
We continue to diligently monitor the impact of the COVID-19 pandemic on all aspects of our business, including the impact on our customers, teammates, suppliers and communities. Our business has been recognized by the United States Department of Homeland Security and state and local governments in the communities in which we operate as “essential,” as all of our teammates support the transportation industry.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
We own or lease administrative offices and truck terminals (which provide a base for drivers in proximity to their homes, a transfer location for trailer relays on transcontinental routes, parking space for equipment dispatch, facilities for recruiting and orientation, sales offices, and warehouses) throughout the other uses indicated below. All of the properties noted below are subject to mortgages or deeds of trust under our Credit Facility, with the exception of our Chattanooga headquarters, which is subject to a deed of trust under a separate financing.
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Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, taking into account existing reserves, is not likely to have a materially adverse effect on our consolidated financial statements.
ITEM 4.MINE SAFETY DISCLOSURES
None.
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our Class A common stock is traded on the NASDAQ Global Select Market, under the symbol "CVTI."CVLG." The following table sets forth, for the calendar periods indicated, the range of high and low sales price for our Class A common stock as reported by NASDAQ from January 1, 2016, to December 31, 2017.
| Period | | High | | | Low | |
| | | | | | | |
| Calendar Year 2016: | | | | | | |
| | | | | | | |
1st Quarter | | $ | 25.77 | | | $ | 13.60 | |
2nd Quarter | | $ | 25.22 | | | $ | 16.31 | |
3rd Quarter | | $ | 23.51 | | | $ | 16.50 | |
4th Quarter | | $ | 22.61 | | | $ | 14.26 | |
| | | | | | | | | |
| Calendar Year 2017: | | | | | | | | |
| | | | | | | | | |
1st Quarter | | $ | 22.40 | | | $ | 17.25 | |
2nd Quarter | | $ | 20.44 | | | $ | 16.11 | |
3rd Quarter | | $ | 29.58 | | | $ | 15.86 | |
4th Quarter | | $ | 30.61 | | | $ | 24.79 | |
On February 16, 2018, the last reported sale price of our Class A common stock on the NASDAQ Global Select Market was $26.25.
As of February 16, 2018,March 2, 2021, we had approximately 8786 stockholders of record of our Class A common stock; however, we estimate our actual number of stockholders is much higher because a substantial number of our shares are held of record by brokers or dealers for their customers in street names. As of February 26, 2018,March 2, 2021, Mr. Parker, together with certain of his family members, owned all of the outstanding Class B common stock.
We have never declared and paid a cash dividend on our Class A or Class B common stock. It is the current intention of our Board of Directors to continue to retain earnings to finance our business and reduce our indebtedness rather than to pay dividends. The payment of cash dividends is currently limited by our financing arrangements. Future payments of cash dividends will depend upon our financial condition, results of operations, capital commitments, restrictions under then-existing agreements, and other factors deemed relevant by our Board of Directors.
See "Equity Compensation Plan Information" under Item 12 in Part III of this Annual Report on Form 10-K for certain information concerning shares of our Class A common stock authorized for issuance under our equity compensation plans.
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Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases of our Class A common stock made by or on behalf of us during the quarter ended December 31, 2017:
| Period | | (a) Total Number of Shares Purchased (1) | | | (b) Average Price Paid per Share | | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | (d) Maximum Number of Class A Shares that May Yet Be Purchased Under the Publicly Announced Plans or Programs | |
| October 1-31, 2017 | | | - | | | | - | | | | - | | | | - | |
| November 1-30, 2017 | | | 390 | | | $ | 28.91 | | | | - | | | | - | |
| December 1-31, 2017 | | | 17,986 | | | $ | 28.73 | | | | - | | | | - | |
| Total | | | 18,376 | | | $ | 28.73 | | | | - | | | | - | |
(1)ITEM 6. | Includes 390 and 17,986 shares of Class A common stock withheld at $28.91 and $28.73 per share, respectively (under the terms of grants under the Covenant Transportation Group, Inc. Third Amended and Restated 2006 Omnibus Incentive Plan) to offset tax withholding obligations that occurred upon vesting and release of restricted shares. The withholding of shares was permitted under the applicable award agreements and was not part of any stock repurchase plan.SELECTED FINANCIAL DATA |
Not applicable.
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ITEM 6.SELECTED FINANCIAL DATA
| (In thousands, except per share and operating data amounts) | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| Statement of Operations Data: | | | | | | | | | | | | | | | |
| Freight revenue | | $ | 626,809 | | | $ | 610,845 | | | $ | 640,120 | | | $ | 578,204 | | | $ | 538,933 | |
| Fuel surcharge revenue | | | 78,198 | | | | 59,806 | | | | 84,120 | | | | 140,776 | | | | 145,616 | |
| Total revenue | | $ | 705,007 | | | $ | 670,651 | | | $ | 724,240 | | | $ | 718,980 | | | $ | 684,549 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Salaries, wages, and related expenses | | | 241,784 | | | | 234,526 | | | | 244,779 | | | | 231,761 | | | | 218,946 | |
| Fuel expense | | | 103,139 | | | | 103,108 | | | | 122,160 | | | | 168,856 | | | | 186,002 | |
| Operations and maintenance | | | 48,774 | | | | 45,864 | | | | 46,458 | | | | 47,251 | | | | 50,043 | |
| Revenue equipment rentals and purchased transportation | | | 141,954 | | | | 117,472 | | | | 118,583 | | | | 111,772 | | | | 102,954 | |
| Operating taxes and licenses | | | 9,878 | | | | 11,712 | | | | 11,016 | | | | 10,960 | | | | 10,969 | |
| Insurance and claims (1) | | | 33,155 | | | | 32,596 | | | | 31,909 | | | | 39,594 | | | | 30,305 | |
| Communications and utilities | | | 6.938 | | | | 6,057 | | | | 6,162 | | | | 5,806 | | | | 5,240 | |
| General supplies and expenses | | | 14,783 | | | | 14,413 | | | | 14,007 | | | | 16,950 | | | | 16,002 | |
| Depreciation and amortization, including gains and losses on disposition of equipment and impairment of assets | | | 76,447 | | | | 72,456 | | | | 61,384 | | | | 46,384 | | | | 43,694 | |
| Total operating expenses | | | 676,852 | | | | 638,204 | | | | 656,458 | | | | 679,334 | | | | 664,155 | |
| Operating income | | | 28,155 | | | | 32,447 | | | | 67,782 | | | | 39,646 | | | | 20,394 | |
| Interest expense, net | | | 8,258 | | | | 8,226 | | | | 8,445 | | | | 10,794 | | | | 10,397 | |
| Income from equity method investment | | | (3,400 | ) | | | (3,000 | ) | | | (4,570 | ) | | | (3,730 | ) | | | (2,750 | ) |
| Income before income taxes | | | 23,297 | | | | 27,221 | | | | 63,907 | | | | 32,582 | | | | 12,747 | |
| Income tax (benefit) expense | | | (32,142 | ) | | | 10,386 | | | | 21,822 | | | | 14,774 | | | | 7,503 | |
| Net income | | $ | 55,439 | | | $ | 16,835 | | | $ | 42,085 | | | $ | 17,808 | | | $ | 5,244 | |
| Basic income per share | | $ | 3.03 | | | $ | 0.93 | | | $ | 2.32 | | | $ | 1.17 | | | $ | 0.35 | |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted income per share | | $ | 3.02 | | | $ | 0.92 | | | $ | 2.30 | | | $ | 1.15 | | | $ | 0.35 | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic weighted average common shares outstanding | | | 18,279 | | | | 18,182 | | | | 18,145 | | | | 15,250 | | | | 14,837 | |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted weighted average common shares outstanding | | | 18,372 | | | | 18,266 | | | | 18,311 | | | | 15,517 | | | | 15,039 | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| Selected Balance Sheet Data: | | | | | | | | | | | | | | | |
| Net property and equipment | | $ | 464,072 | | | $ | 465,471 | | | $ | 454,049 | | | $ | 382,491 | | | $ | 329,608 | |
| Total assets (2) | | $ | 649,668 | | | $ | 620,538 | | | $ | 646,717 | | | $ | 539,304 | | | $ | 461,188 | |
| Long-term debt and capital lease obligations, less current maturities | | $ | 186,242 | | | $ | 188,437 | | | $ | 206,604 | | | $ | 172,903 | | | $ | 182,677 | |
| Total stockholders' equity | | $ | 295,201 | | | $ | 236,414 | | | $ | 202,160 | | | $ | 169,204 | | | $ | 100,360 | |
| | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Data: | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures (proceeds), net (3) | | $ | 72,006 | | | $ | 59,052 | | | $ | 148,994 | | | $ | 89,455 | | | $ | 91,976 | |
| Average freight revenue per loaded mile (4) | | $ | 1.89 | | | $ | 1.86 | | | $ | 1.89 | | | $ | 1.77 | | | $ | 1.66 | |
| Average freight revenue per total mile (4) | | $ | 1.70 | | | $ | 1.67 | | | $ | 1.69 | | | $ | 1.60 | | | $ | 1.49 | |
| Average freight revenue per tractor per week (4) | | $ | 3,917 | | | $ | 3,881 | | | $ | 3,967 | | | $ | 3,777 | | | $ | 3,411 | |
| Average miles per tractor per year | | | 120,043 | | | | 121,782 | | | | 122,508 | | | | 123,275 | | | | 119,375 | |
| Weighted average tractors for year (5) | | | 2,557 | | | | 2,593 | | | | 2,700 | | | | 2,609 | | | | 2,777 | |
| Total tractors at end of period (5) | | | 2,559 | | | | 2,535 | | | | 2,656 | | | | 2,665 | | | | 2,688 | |
| Total trailers at end of period (6) | | | 6,846 | | | | 7,389 | | | | 6,978 | | | | 6,722 | | | | 6,861 | |
| Team-driven tractors as percentage of fleet | | | 38.1 | % | | | 38.7 | % | | | 35.3 | % | | | 32.1 | % | | | 29.2 | % |
(1)ITEM 7. | 2017 and 2014 insurance and claims expense includes $0.9 million and $7.5 million of additional reserves for 2008 cargo claim, respectively.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(2) | Adjusted for retrospective adoption of ASU 2015-17.
|
(3) | Includes equipment purchased under capital leases. |
(4) | Excludes fuel surcharge revenue. |
(5) | Includes monthly rental tractors and tractors provided by owner operators. |
(6) | Excludes monthly rental trailers. |
The information set forth above should be read in conjunction with "Management'sThis Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto includedOperations should be read together with “Business” in Items 7 and 8, respectively, of this Form 10-K.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
Part I, Item 7, as well as other items1 of this Annual Report on Form 10-K, contains certainas well as the consolidated financial statements that may be consideredand notes thereto in Part II, Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements within the meaningas a result of Section 27Amany factors, including those set forth under Part I, Item 1A. “Risk Factors” and Part I “Cautionary Note Regarding Forward-Looking Statements” of the Securities Act of 1933, as amended,this Annual Report on Form 10-K, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Inelsewhere in this Item 7, statements relating to future demand for and supply of new and used tractors and trailers (including expected prices of such equipment), expected sources and adequacy of working capital and liquidity, future relationships, use, compensation, and availability with respect to third-party service providers, future driver market conditions, future allocation of capital, expected settlement of operating lease obligations, future asset sales and acquisitions, future insurance, litigation, and claims levels and expenses, future tax rates, expense, and deductions, future fuel management, expense, and the future effectiveness of fuel surcharge programs and price hedges, future interest rates and effectiveness of interest rate swaps, expected capital expenditures (including the future mix of lease and purchase obligations), future trucking capacity, expected freight demand and volumes, future rates, future depreciation and amortization, future compliance with and impact of existing and proposed federal and state laws and regulations, future salaries, wages, and other employee benefit expenses, future earnings from and value of our investments, future customer relationships, future defaults under debt agreements, future payment of financing and lease liabilities, future performance of our subsidiaries, future credit availability, including expected borrowing base increases in our credit facility, expected transition to and effect of new accounting standards, expected effect of remeasured deferred tax assets, and future operating and maintenance expenses, among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as "believe," "may," "could," "expects," "estimates," "projects," "anticipates," "plans," "intends," and similar terms and phrases. Forward-lookingreport. These statements are based on currently available operating, financial,current expectations and competitive information. Forward-looking statementsassumptions that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, whichuncertainties. Actual results could cause future events and actual results to differ materially from those set forthdiscussed.
EXECUTIVE OVERVIEW
We are a leading provider of high-service truckload transportation and logistics services. Our strategy is to focus on value-added, less commoditized portions of our customers’ supply chains and thereby become embedded in contemplated by, or underlyingtheir business processes. We believe disciplined planning and execution of our strategy will reduce the forward-looking statements. Factors that could cause or contribute to such differences include, butcyclicality and seasonality of our financial results through growth in higher margin, less volatile services, which in turn will enhance sustainable long-term earnings power and return on invested capital for our stockholders.
Our four reportable segments are not limited to, those discussedExpedited, Dedicated, Managed Freight, and Warehousing, each as described under “Reportable Operating Segments and Service Offerings” in the section entitled "Part I, Item 1A. Risk Factors," set forth above. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.
All such forward-looking statements speak only as of the date1 of this Annual Report. You are cautioned not to place undue relianceReport on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change inForm 10-K. Consistent with our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.
Whilestrategic plan, we have generally been pleased with recent profitability levels and operational improvements, particularly at SRT, we still have work ahead as operating results were behind those of 2016. Additionally, we were disappointed with our fourth quarter peak season for the second consecutive year. In addition to managing our operating costs, we continue to evaluate the most effective level of participation in the peak season and the manner of allocating our assets and coordinating third party capacity. We remain committed to providing peak capacity for our customers; however, we will need to challenge our pricing models to ensure we are appropriately rewarded for our efforts related to this valuable annual shipping period.
We are encouraged by our continued profitability and we continue to focus on our turnaround efforts at SRT, which realized a more than a 400 basis point improvement in its operating margin compared to 2016. We are also continuing to deleverage our balance sheet, resulting in total indebtedness, net of cash and including the present value of off-balance sheet lease obligations, decreasing approximately $6.6 million since December 31, 2016. Additionally, earnings included the approximately $40.1 million favorable effective tax rate impact from the Tax Cuts and Jobs Act of 2017, and the reduced negative impact of the fuel hedges have increased tangible book value per basic share 24.4% to $16.11 from $12.95 at December 31, 2016.
Our annual operating ratio deteriorated 80 basis points to 96.0%. Our adjusted operating ratio (as defined below), a key measure of profitability in our industry, also deteriorated 80 basis points to a 95.5%. These unfavorable changes were primarily the result of the significantly more expensive third-party capacity during the latter portion of the year, affecting ourcapital toward Dedicated, Managed Freight, and
TruckloadWarehousing, and away from Expedited (particularly non-dedicated, solo-driver refrigerated services) over the past several years and discontinued the solo-driver refrigerated services during 2020. Within our Dedicated reportable segment we have been reducing our business with less profitable customers while working to grow our relationships with customers that are more profitable. This approach has resulted in a reduction in revenue from 2019 to 2020, however, as more of that business is replaced, we expect to see improvements in both revenue and profitability. The table below reflects the total revenue trends in each of these reportable segments:| | | Year ended December 31, | |
(in thousands) | | 2020 | | | 2019 | |
Revenues: | | | | | | | | |
Expedited | | $ | 320,202 | | | $ | 356,521 | |
Dedicated | | | 288,652 | | | | 342,473 | |
Managed Freight | | | 177,579 | | | | 138,616 | |
Warehousing | | | 52,128 | | | | 47,777 | |
Total revenues | | $ | 838,561 | | | $ | 885,387 | |
During 2020 we strategically repositioned our enterprise around our reportable segments, reduced our fixed overhead and capital deployed in non-core businesses, flattened our management structure, and improved our margins on an adjusted basis. For perspective, our freight revenue was approximately the same on a fleet that averaged approximately 12% smaller than last year. At the same time, we paid down over $200 million in debt and lease obligations, which we believe will provide us significant flexibility in making future capital allocation decisions. The changes were not without cost, as well as increased employee wagesfor the year we incurred approximately $69 million non-cash restructuring related charges, including an approximately $44 million contingent loss charge in relation to our discontinued TFS factoring business in the fourth quarter of 2020. We exit 2020 more profitable and increasedgenerating higher return on capital excluding the restructuring costs. Our mission for 2021 is clear: seat more of our tractors, continue to control costs, compared to 2016. and improve the profitability of certain legacy contracts in our Dedicated segment that generate unacceptable returns.
The following is a summary of infrequent and non-cash transactions that occurred during 2020:
| (in thousands) | | Twelve Months Ended December 31, 2020 | |
| Intangible asset amortization | | $ | 5,097 | |
| Bad debt expense associated with customer bankruptcy and high credit risk customers | | | 2,617 | |
| Insurance policy erosion | | | 4,447 | |
| Strategic restructuring adjusting items: | | | | |
| Discontinued operations loss contingency, net | | | 40,431 | |
| Gain on disposal of terminals, net | | | (4,740 | ) |
| Impairment of real estate and related intangible assets | | | 9,790 | |
| Impairment of revenue equipment and related charges | | | 17,604 | |
| Restructuring related separation and other | | | 4,334 | |
| Abandonment of information technology infrastructure | | | 1,048 | |
| Contract exit costs and other restructuring | | | 695 | |
| Total pre-tax adjustments | | $ | 81,323 | |
Our consolidated financial results are summarized as follows:
● | ● | Total revenue was $705.0$838.6 million, compared with $670.7$885.4 million for 2016,2019, and freight revenue (which excludes revenue from fuel surcharges) was $626.8$776.2 million, compared with $610.8$791.3 million for 2016;2019; |
| | |
● | Operating incomeloss from continuing operations was $28.1$14.0 million, compared with operating income from continuing operations of $32.4$8.8 million for 2016;2019; |
| | |
● | Net incomeloss was $55.4$42.7 million, or $3.02$2.46 per diluted share, compared with net income of $16.8$8.5 million, or $0.92$0.45 per diluted share, for 2016;2019; Net loss from continuing operations was $14.1 million, or $0.81 per diluted share, for 2020 compared to $5.2 million net income from continuing operations or $0.28 per diluted share in 2019. Net loss from discontinued operations of $28.6 million, or $1.65 per diluted share, for 2020 compared to net income from discontinued operations of $3.3 million, or $0.18 per diluted share in 2019. |
| | ● | With available borrowing capacity of $65.3 million under our Credit Facility as of December 31, 2020, we do not expect to be required to test our fixed charge covenant in the foreseeable future; |
● | ● | Our equity investment in TEL provided $3.4$3.9 million of pre-tax earnings in 2017,2020, compared to $3.0$7.0 million for 2016; and2019; |
| | ● | Since December 31, 2019, total indebtedness, net of cash, decreased by $202.1 million to $102.0 million; and |
● | ● | Stockholders' equity and tangible book value at December 31, 2017,2020 were $295.2$290.6 million and $223.6 million, respectively. |
COVID-19
During the second quarter, we increased our reserves for uncollectible accounts receivable by approximately $2.6 million as a result of the bankruptcy of one customer and the heightened risk we have on certain of our retail related customers as a result of COVID-19. There were no additional COVID-19 related reserves during the remainder of the year. Local, state and national governments continue to emphasize the importance of transportation and have designated it as an essential service. The health and safety of our team members and the community is our first priority.
To protect our customers, teammates, and communities, while we continue to operate we:
| ● | continue to execute our Infectious Disease Response Plan and Incident Management Crisis Response Protocols as the macro environment moves through the Response, Reopen and Recovery phases of the COVID-19 pandemic; |
| ● | established a process for the reporting of COVID-19 symptoms, exposures and positive test results of teammates. This reporting process enables us to follow appropriate quarantine protocols and to communicate to our workforce in a timely and appropriate manner; |
| ● | increased our communications with teammates through videos, virtual meetings and emails about safety protocols and CDC requirements and recommendations; |
| ● | increased sanitation protocols to sanitize equipment and common areas multiple times per day in order to mitigate risk and exposure situations; |
| ● | promoted hygiene practices recommended by the CDC, including social distancing requiring six or $16.11 per basic share.more feet between teammates where possible, and staggered work times; |
| ● | implemented work-from-home routines for teammates whose work duties permit it and are utilizing virtual technology to replace many of our in-person meetings; and |
| ● | developed a comprehensive Return to Office Program of Guidelines to manage a phased, measured approach and to prepare our higher density locations with safety modifications, signage and process changes to promote a safe work environment. |
We believe we have sufficient liquidity to satisfy our cash needs, however we continue to evaluate and act, as necessary, to maintain sufficient liquidity to ensure our ability to operate during these unprecedented times. The extent to which COVID-19 could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and will depend on future developments. We will continue to evaluate the nature and extent of the potential short-term and long-term impacts to our business.
Outlook
Going forward, our focus will be continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by Dedicated, Managed Freight, and Warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure, improving legacy contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas. The freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan. While this will take time, we believe our existing pipeline will produce ongoing sequential progress during 2021.
Going into 2021 we are facing cost increases from the end of our short term COVID-19 programs, increased wages, and higher insurance and claims expense. Effective January 4, 2021, we implemented the largest pay increase in the Company’s 35-year history for our Expedited driving force in an effort to increase our team count to targeted levels. In addition, we have replaced our $9.0 million in excess of $1.0 million layer of auto liability insurance with a new $7.0 million excess of $3.0 million policy that runs from January 28, 2021, through April 1, 2024. While the combination of the increased retention and premiums is forecasted to increase our insurance and claims cost, eliminating the gap in coverage created in the third quarter of 2020 that resulted in a self-insured retention of $10.0 million per claim has been a focus area to minimize forward looking volatility.
Taking into account the commercial and cost environment, we expect results for the first half of 2021 will significantly exceed the prior year’s adjusted results for the comparable period. Our comparative results for the second half and full year of 2021 will depend on factors such as our ability to reduce driver turnover, the number and significance of auto liability claims, and the outcome of contract negotiations with customers, many of which won’t see a full quarter impact until the third quarter of 2021. Over the longer term, we expect to be a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.
RESULTS OF CONSOLIDATED OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
The following table sets forth total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated:
Revenue
| | | Year ended December 31, | |
(in thousands) | | 2020 | | | 2019 | |
Revenue: | | | | | | | | |
Freight revenue | | $ | 776,218 | | | $ | 791,260 | |
Fuel surcharge revenue | | | 62,343 | | | | 94,127 | |
Total revenue | | $ | 838,561 | | | $ | 885,387 | |
The decrease in freight revenue resulted from a $35.1 million and $23.3 million decrease in Dedicated and Expedited freight revenue, respectively, partially offset by a $39.0 million and a $4.4 million increase in revenues from our Managed Freight, and Warehousing reportable segments, respectively.
Our Expedited total revenue decreased $36.3 million, as freight revenue decreased $23.3 million and fuel surcharge revenue decreased $13.0 million. The decrease in 2020 Expedited revenue relates to a 205 (or 15.6%) average tractor decrease partially offset by an increase in average freight revenue per tractor per week of 9.6% compared to 2019. The increase in average freight revenue per tractor per week is the result of an approximately 16.6% increase in average miles per tractor, partially offset by a 5.7%, or 11.1 cents per mile, decrease in average rate per total mile, when compared to 2019. Seated team driven tractors increased approximately 10.1% to an average of 836 teams in 2020 from 759 teams in 2019.
Our Dedicated total revenue decreased $53.8 million, as freight revenue decreased $35.1 million and fuel surcharge revenue decreased $18.7 million. The decrease in 2020 Dedicated freight revenue relates to a 166 (or 9.4%) average tractor decrease, primarily as a result of a shortage of drivers, and a decrease in average freight revenue per tractor per week of 3.3% compared to 2019. The decrease in average freight revenue per tractor per week is the result of 6.7% fewer miles per tractor partially offset by a 3.9%, or 7.1 cents per mile, increase in average rate per total mile. Our strategic plan for our Dedicated reportable segment involves reducing our business with less profitable customers while working to grow our relationships with customers that are more profitable. This approach has resulted in a reduction in revenue from 2019 to 2020, however, as more of that business is replaced, we expect to see improvements in revenue.
Managed Freight total revenue increased $39.0 million in 2020 compared to 2019 as the result of additional opportunities in the brokerage market as a result of COVID-19 and handling overflow freight from both our Expedited and Dedicated operations.
The $4.4 million increase in Warehousing revenue is primarily the result of new customer business that began operations during the third quarter of 2020.
For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue.
Salaries, wages, and related expenses
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Salaries, wages, and related expenses | | $ | 315,023 | | | $ | 320,498 | |
% of total revenue | | | 37.6 | % | | | 36.2 | % |
% of freight revenue | | | 40.6 | % | | | 40.5 | % |
The change in salaries, wages, and related expenses is primarily due to a decrease in driver pay in 2020 as compared to 2019, as a result of an 8.5% decrease on total miles for the same period, as well as the temporary suspension of the 401(k) discretionary match in 2020, and a decrease in workers' compensation costs compared to 2019. These decreases were partially offset by an increase in non-driver pay compared to 2019 resulting from higher incentive pay costs as a result of achieving specified targets compared to 2019 when no such targets were achieved.
We believe salaries, wages, and related expenses will increase going forward as a result of higher incentive compensation, wage inflation, higher healthcare costs, reinstatement of the company 401(k) match, and, in certain periods, increased incentive compensation due to better performance. We believe higher average driver salary costs will be partially offset by fewer drivers as a result of our change in business model and our smaller fleet. In addition to the driver pay increases put into place during the fourth quarter of 2020 for our Dedicated reportable segment, in January 2021 we implemented the largest driver pay increase in our history. If freight market rates increase further, we would expect to, as we have historically, pass a portion of those rate increases on to our professional drivers. Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Managed Freight segment, for which payments are reflected in the purchased transportation line item.
Fuel expense
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Fuel expense | | $ | 77,443 | | | $ | 115,307 | |
% of total revenue | | | 9.2 | % | | | 13.0 | % |
% of freight revenue | | | 10.0 | % | | | 14.6 | % |
The changes in total fuel expense are primarily related to lower fuel prices in 2020, and an 8.5% decrease in total miles.
We receive a fuel surcharge on our loaded miles from most shippers; however, in times of increasing fuel prices, this does not cover the entire increase in fuel prices for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.
The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the DOE for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by the DOE averaged approximately $0.51 per gallon lower in 2020 than 2019.
To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties, which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles driven by company tractors, our fuel economy, and our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues. Net fuel expense is shown below:
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Total fuel surcharge | | $ | 62,343 | | | $ | 94,127 | |
Less: Fuel surcharge revenue reimbursed to independent contractors and other third parties | | | 7,153 | | | | 11,673 | |
Company fuel surcharge revenue | | $ | 55,190 | | | $ | 82,454 | |
Total fuel expense | | $ | 77,443 | | | $ | 115,307 | |
Less: Company fuel surcharge revenue | | | 55,190 | | | | 82,454 | |
Net fuel expense | | $ | 22,253 | | | $ | 32,853 | |
% of freight revenue | | | 2.9 | % | | | 4.2 | % |
Net fuel expense decreased $10.6 million, or 32.3%, for the year ended December 31, 2020 compared to 2019. As a percentage of freight revenue, net fuel expense decreased 1.3% for the year ended December 31, 2020, compared to 2019. These decreases primarily resulted from historically low fuel costs, partially offset by reduced fuel surcharge revenue, and a change in business mix that resulted in less idling and less temperature-controlled freight thus reducing reefer fuel expense. Additionally, $0.3 million and none were reclassified from accumulated other comprehensive loss to our results of operations for the years ended December 31, 2020 and 2019, respectively, as additional fuel expense related to net losses on fuel hedge contracts that expired. As of December 31, 2020, we have $0.2 million of remaining fuel hedge contracts classified as other assets in our consolidated balance sheet. These contracts will be reclassified into fuel expense as they mature. We did not have any fuel hedges in place during the same 2019 period.
We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operations (which uses diesel fuel for refrigeration but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.
Operations and maintenance
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Operations and maintenance | | $ | 48,368 | | | $ | 59,506 | |
% of total revenue | | | 5.8 | % | | | 6.7 | % |
% of freight revenue | | | 6.2 | % | | | 7.5 | % |
The decrease in operations and maintenance expense was primarily related to the reduction in our tractors and the timing of the trade cycle for our tractors as compared to the same 2019 periods, as well as decreased maintenance and repair expense on our younger fleet of tractors, reduction in unloading charges and other costs associated with temperature-controlled freight due to a change in business mix, and a planned reduction in outside driver recruiting expense related to improved efficiency of advertising dollars.
Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models.
Revenue equipment rentals and purchased transportation
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Revenue equipment rentals and purchased transportation | | $ | 222,705 | | | $ | 204,655 | |
% of total revenue | | | 26.6 | % | | | 23.1 | % |
% of freight revenue | | | 28.7 | % | | | 25.9 | % |
The increases in revenue equipment rentals and purchased transportation were primarily the result of a more competitive market for sourcing third-party capacity and growth in the Managed Freight reportable segment, partially offset by a reduction in the percentage of the total miles run by independent contractors from 12.5% for 2019 to 11.1% for 2020.
We expect revenue equipment rentals to decrease going forward as a result of the reduction in our tractor fleet.
We expect purchased transportation to increase as we seek to grow the Managed Freight reportable segment. In addition, if fuel prices increase, it would result in a further increase in what we pay third party carriers and independent contractors. However, this expense category will fluctuate with the number and percentage of loads hauled by independent contractors, loads handled by Managed Freight, and tractors, trailers, and other assets financed with operating leases. In addition, factors such as the cost to obtain third party transportation services and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category. If industry-wide trucking capacity continues to tighten in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue. If we were to recruit more independent contractors we would expect this line item to increase as a percentage of revenue.
Operating taxes and licenses
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Operating taxes and licenses | | $ | 11,621 | | | $ | 13,024 | |
% of total revenue | | | 1.4 | % | | | 1.5 | % |
% of freight revenue | | | 1.5 | % | | | 1.6 | % |
Operating taxes and licenses remained relatively flat in 2020 compared to 2019.
Insurance and claims
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Insurance and claims | | $ | 53,052 | | | $ | 47,719 | |
% of total revenue | | | 6.3 | % | | | 5.4 | % |
% of freight revenue | | | 6.8 | % | | | 6.0 | % |
Insurance and claims per mile cost increased to 17.5 cents per mile for 2020 from 14.3 cents per mile in 2019. The increases are primarily related to the erosion of our excess insurance coverage layer $9.0 million in excess of $1.0 million, as discussed below, an increase in overall cost per claim, and an increase in fixed premiums expenses, partially offset by a refund of $7.3 million of previously expensed premiums from our commutation of the April 10, 2015 through March 31, 2018 policy for our primary auto liability insurance.
Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the current policy period (April 1, 2018 to March 31, 2021), the aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million were estimated to be fully eroded based on claims expense accruals. We have replaced our $9.0 million in excess of $1.0 million layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024. Due to the erosion of the $9.0 million in excess of $1.0 million layer, any adverse developments in claims filed between April 1, 2018 and March 31, 2021, could result in additional expense accruals. Effective April 1, 2020, consistent with an extremely difficult insurance market for the industry, our insurance renewal terms include a higher fixed premium expense of approximately $0.5 million per quarter, greater self-insured retention, and lower aggregate limits than prior coverage. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations.
In addition, in future periods, insurance and claims costs may be more volatile depending on our future accident experience, which could have a material adverse effect on our business, financial condition, and results of operations.
Communications and utilities
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Communications and utilities | | $ | 5,898 | | | $ | 6,968 | |
% of total revenue | | | 0.7 | % | | | 0.8 | % |
% of freight revenue | | | 0.8 | % | | | 0.9 | % |
Communications and utilities remained relatively flat in 2020 compared to 2019.
General supplies and expenses
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
General supplies and expenses | | $ | 34,143 | | | $ | 30,089 | |
% of total revenue | | | 4.1 | % | | | 3.4 | % |
% of freight revenue | | | 4.4 | % | | | 3.8 | % |
The increases in general supplies and expenses primarily relate to additional reserves put in place for potentially uncollectible accounts receivable, increased period over period legal fees incurred to defend class action litigation, and strategic planning and process improvement investments that are part of our organizational restructuring.
Depreciation and amortization
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Depreciation and amortization | | $ | 65,472 | | | $ | 80,502 | |
% of total revenue | | | 7.8 | % | | | 9.1 | % |
% of freight revenue | | | 8.4 | % | | | 10.2 | % |
Depreciation and amortization consists primarily of depreciation of tractors, trailers and other capital assets (including those under finance leases), as well as amortization of intangible assets.
Depreciation, consisting primarily of depreciation of revenue equipment, decreased $17.2 million in 2020 compared to 2019, to $60.4 million, primarily due to a reduction in the average number of tractors as we reduced our business with less profitable customers. Amortization of intangible assets increased $2.2 million in 2020 compared to 2019, to $5.1 million. This increase is a result of the revised remaining useful life of the Landair trade name to 15 months as of June 30, 2020 and the termination of the non-compete agreement with a former Landair executive as a result of management changes, a change in the branding of the organization, and the expected use of the Landair trade name.
We expect depreciation and amortization, including amortization of intangible assets, to more closely resemble the second half of 2020 going forward as the majority of our planned tractor fleet reductions were completed during the first half of 2020. Additionally, changes in the used tractor market could cause us to adjust residual values, increase depreciation, hold assets longer than planned, or experience increased losses on sale.
(Gain) loss on disposition of property and equipment, net
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Gain on disposition of property and equipment, net | | $ | (7,706 | ) | | $ | (1,650 | ) |
% of total revenue | | | (0.9% | ) | | | (0.2% | ) |
% of freight revenue | | | (1.0% | ) | | | (0.2% | ) |
The increases in gain on disposition of property and equipment, net are primarily the result of the $5.7 million gain in the second quarter of 2020 on the disposition of our Hutchins, TX terminal facility, which was sold as part of the Company's restructuring plan as well as gains on tractor disposals related to downsizing our tractor fleet during 2020.
Impairment of long-lived property, equipment, and right-of use assets
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Impairment of long lived property and equipment | | $ | 26,569 | | | $ | - | |
% of total revenue | | | 3.2 | % | | | 0.0 | % |
% of freight revenue | | | 3.4 | % | | | 0.0 | % |
During the second quarter of 2020, as part of our restructuring, we discontinued the use of a significant amount of property and equipment and adjusted the carrying value of the owned property and equipment to fair market value less estimated costs to sell. As a result, we recognized impairment of $16.8 million on revenue equipment, $7.3 million on our Texarkana, AR terminal, related leasehold improvements, and equipment, $2.2 million on an office facility in Chattanooga, TN held under an operating lease, and $0.2 million on a training and orientation facility in Chattanooga, TN.
Interest expense, net
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Interest expense, net | | $ | 6,841 | | | $ | 8,218 | |
% of total revenue | | | 0.8 | % | | | 0.9 | % |
% of freight revenue | | | 0.9 | % | | | 1.0 | % |
Interest expense, net remained relatively flat in 2020 compared to 2019.
This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage. Going forward, we expect this line item to decrease based upon our indebtedness reduction from the TFS disposition and dispositions of terminals and revenue equipment.
Income from equity method investment
| | | Year ended December 31, | |
(in thousands) | | 2020 | | | 2019 | |
Income from equity method investment | | $ | 3,944 | | | $ | 7,017 | |
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income. For the year ended December 31, 2020, our earnings resulting from our investment in TEL decreased to $3.9 million. The decrease in 2020 as compared to 2019 is the result of the revenue impact associated with a customer bankruptcy during the fourth quarter of 2019. We expect the impact on our earnings resulting from our investment in TEL to return to prior year levels during 2021.
Income tax (benefit) expense
| | | Year ended December 31, | |
(dollars in thousands) | | 2020 | | | 2019 | |
Income tax (benefit) expense | | $ | (2,804 | ) | | $ | 2,349 | |
% of total revenue | | | (0.3 | %) | | | 0.3 | % |
% of freight revenue | | | (0.4 | %) | | | 0.3 | % |
These changes were primarily related to the decrease in operating income and the decrease in earnings on investment in TEL as described above, as well as a decrease in our effective tax rate.
The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related to our per diem pay structure for drivers. Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates. We are currently estimating our 2021 effective income tax rate to be approximately 26.9%.
RESULTS OF SEGMENT OPERATIONS
We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing each as described under "Reportable Operating Segments and Service Offerings" in Part I, Item 1 of this Annual Report on Form 10-K.
The following table summarizes revenue and operating income data by reportable segment and service offering:
| | | Year ended December 31, | |
(in thousands) | | 2020 | | | 2019 | |
Revenues: | | | | | | | | |
| Expedited | | $ | 320,202 | | | $ | 356,521 | |
| Dedicated | | | 288,652 | | | | 342,473 | |
Managed Freight | | | 177,579 | | | | 138,616 | |
| Warehousing | | | 52,128 | | | | 47,777 | |
Total revenues | | $ | 838,561 | | | $ | 885,387 | |
| | | | | | | | | |
Operating (Loss) Income: | | | | | | | | |
| Expedited | | $ | (7,038 | ) | | $ | (1,260 | ) |
| Dedicated | | | (15,534 | ) | | | 1,188 | |
| Managed Freight | | | 4,482 | | | | 3,323 | |
| Warehousing | | | 4,063 | | | | 5,518 | |
Total operating income | | $ | (14,027 | ) | | $ | 8,769 | |
Comparison of Year Ended December 31, 2020 to Year Ended December 31, 2019
For discussion of the changes in segment revenue, see "Revenue" within "Results of Consolidated Operations" above.
Total operating loss was $14.0 million in 2020 compared to operating income of $8.8 million in 2019. In addition to the changes in revenue described above, the change in operating loss resulted from a $30.5 million and $37.1 million decrease in Expedited and Dedicated operating expenses, respectively, partially offset by a $37.8 million and $5.8 million increase in Managed Freight and Warehousing operating expenses, respectively.
The decrease in Dedicated and Expedited operating expenses was primarily due to a 15.6% and 9.4% average operating fleet reduction, respectively, partially offset, for Expedited, by higher variable costs associated with a greater concentration of team driven tractors in the Expedited fleet. The downsizing of our terminal network and short-term cost reductions also contributed to this reduction. These decreases were partially offset by $16.8 million and $15.4 million of restructuring costs incurred by Dedicated and Expedited, respectively, during 2020. See Note 3, "Restructuring and Cost Savings Initiatives" in the financial statements for one-time impairment and restructuring related costs that further contributed to the reduction of operating income for 2020.
The increase in Managed Freight operating expenses is the result of increased revenue driving an increase in variable expenses, primarily purchased transportation, partially offset by cost structure improvements that were implemented as part of our strategic plan.
The increase operating expenses for Warehousing was the result of the new customer business that began operations during 2020 as well as an increase in contract labor costs to compensate for employees quarantined as a result of COVID-19.
Liquidity and Capital Resources
Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. Going forward, we expect revenue equipment acquisitions through purchases and finance leases to increase as a percentage of our fleet as we decrease our use of operating leases. Further, we expect to increase our capital allocation toward our Dedicated, Managed Freight, and Warehousing reportable segments to become the go-to partner for our customers’ most critical transportation and logistics needs. We had working capital (total current assets less total current liabilities) of $14.4 million and $93.1 million at December 31, 2020 and 2019, respectively. Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future.
With an average tractor fleet age of 1.9 years, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options. If we were to grow our independent contractor fleet, our capital requirements would be reduced.
As of December 31, 2020 and December 31, 2019 we had $110.4 million and $348.2 million in debt and lease obligations, respectively, consisting of the following:
| ● | $15.0 million and no outstanding borrowings under the Credit Facility, respectively; |
| | |
| ● | No outstanding borrowings under the Draw Note, respectively; |
| | |
| ● | $17.8 million and $230.9 million in revenue equipment installment notes, respectively; |
| | |
| ● | $22.7 million and $23.8 million in real estate notes, respectively; |
| | |
| ● | $16.4 million and $33.3 million of the principal portion of financing lease obligations, respectively, and; |
| | |
| ● | $38.5 million and $60.3 million of the operating lease obligations, respectively. |
The decrease in our revenue equipment installment notes and financing lease obligations was primarily due to a strategic decision to reduce our debt and lease obligations during 2020. The decrease in operating lease obligations was primarily due to the termination of a property lease related to our Managed Freight segment and the amortization of the operating lease liability during 2020.
As of December 31, 2020, we had $15.0 million of borrowings outstanding, undrawn letters of credit outstanding of approximately $29.7 million, and available borrowing capacity of $65.3 million under the Credit Facility. Additionally, we had availability of a $45.0 million line of credit from Triumph Bank ("Triumph") which is available solely to fund any indemnification owed to Triumph in relation to the sale of TFS. See Note 1, "Summary of Significant Accounting Policies," of the accompanying consolidated financial statements for more information regarding our indemnification obligation to Triumph. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable and leases, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment. Refer to Note 8, “Debt” of the accompanying consolidated financial statements for further information about material debt agreements.
Our net capital expenditures for the year ended December 31, 2020 totaled $28.2 million of proceeds as compared to $91.7 million of expenditures for the prior year. For 2021, we expect our average operational fleet size to remain relatively consistent with our ending 2020 count at around 2,500 tractors and we expect to reduce our trailer fleet from approximately 5,600 at December 31, 2020, to between 4,500 - 5,000 by December 31, 2021. Net gains on disposal of equipment and real estate for 2020 were $7.7 million compared to $1.7 million in 2019.
During the first half of 2020, in response to the uncertainty of the upcoming economic environment as a result of COVID-19 and as part of our strategic focus to reduce overhead costs, we took measures to preserve our liquidity, including capital reductions, financing, cost reduction, and working capital actions. During the second half of 2020, we paid down over $200.0 million of debt and lease obligations. If needed, we have other potential flexible sources of liquidity that we can leverage, such as currently unencumbered owned revenue equipment.
In April 2020, in an effort to improve our liquidity during the COVID-19 pandemic, we executed a modification to certain of our revenue equipment installment notes, exercising an option to make interest only payments for a period of 90 days, extending the due date of $177.3 million of debt by three months.
Cash Flows
Net cash flows provided by operating activities remained relatively even at $63.0 million in 2020 compared with $64.0 million in 2019.
Net cash flows provided by investing activities were $138.0 million in 2020 compared with $93.0 million used in 2019. The change in net cash flows related to investing activities was primarily the result of the disposal of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our Factoring reportable segment and the disposal of our Orlando and Hutchins properties during the 2020 period as well as timing of our trade cycle whereby we reduced our tractor fleet by approximately 560 tractors from December 31, 2019 to December 31, 2020.
Net cash flows used by financing activities were approximately $236.3 million in 2020, compared to $49.5 million provided in the 2019. The change in net cash flows provided by financing activities was primarily a function of paying down over $200.0 million of debt and lease obligations during the second half of 2020 and our stock repurchase program during the first quarter of 2020.
On February 10, 2020, our Board of Directors approved a stock repurchase program authorizing the purchase of up to $20.0 million of our Class A common stock from time-to-time based upon market conditions and other factors. The stock could be repurchased on the open market or in privately negotiated transactions. The repurchased shares are held as treasury stock and may be used for general corporate purposes as our Board of Directors may determine. On March 26, 2020, our Board of Directors temporarily suspended the stock repurchase program for added flexibility in response to the uncertain impact of the COVID-19 pandemic. Between February 10, 2020 and March 26, 2020, we repurchased 1.4 million shares of our Class A common stock in the open market for $17.5 million. There were no additional changes to the stock repurchase program during 2020.
Going forward, the disposition of our Factoring reportable segment is expected to improve our cash flows used by financing activities. However, on an ongoing basis, our cash flows may fluctuate depending on capital expenditures, future stock repurchases, strategic investments or divestitures, settlement of any indemnification of Triumph, and the extent of future income tax obligations and refunds.
Off-Balance Sheet Arrangements
We had commitments outstanding at December 31, 2020, to acquire revenue equipment totaling approximately $34.8 million in 2021 versus commitments at December 31, 2019 of approximately $68.4 million. These commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits.
Non-GAAP Financial Measures
Operating Ratio
Operating Ratio (“OR”) For 2020 and 2019:
(dollars in thousands) | | For the twelve months ended December 31, | |
| | | 2020 | |
GAAP Operating Ratio: | | Combined | | | Expedited | | | Dedicated | | | Managed Freight | | | Warehousing | |
Total revenue | | $ | 838,561 | | | $ | 320,202 | | | $ | 288,652 | | | $ | 177,579 | | | $ | 52,128 | |
Total operating expenses | | | 852,588 | | | | 327,240 | | | | 304,186 | | | | 173,097 | | | | 48,065 | |
Operating (loss) income | | $ | (14,027 | ) | | $ | (7,038 | ) | | $ | (15,534 | ) | | $ | 4,482 | | | $ | 4,063 | |
Operating ratio | | | 101.7 | % | | | 102.2 | % | | | 105.4 | % | | | 97.5 | % | | | 92.2 | % |
(dollars in thousands) | | For the twelve months ended December 31, | |
| | | 2020 | |
Adjusted Operating Ratio: | | Combined | | | Expedited | | | Dedicated | | | Managed Freight | | | Warehousing | |
Total revenue | | $ | 838,561 | | | $ | 320,202 | | | $ | 288,652 | | | $ | 177,579 | | | $ | 52,128 | |
Fuel surcharge revenue | | | (62,343 | ) | | | (28,731 | ) | | | (33,149 | ) | | | - | | | | (463 | ) |
Freight revenue (total revenue, excluding fuel surcharge) | | | 776,218 | | | | 291,471 | | | | 255,503 | | | | 177,579 | | | | 51,665 | |
| | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 852,588 | | | | 327,240 | | | | 304,186 | | | | 173,097 | | | | 48,065 | |
Adjusted for: | | | | | | | | | | | | | | | | | | | | |
Fuel surcharge revenue | | | (62,343 | ) | | | (28,731 | ) | | | (33,149 | ) | | | - | | | | (463 | ) |
Amortization of intangibles (1) | | | (5,097 | ) | | | - | | | | (2,778 | ) | | | (633 | ) | | | (1,686 | ) |
Bad debt expense associated with customer bankruptcy and high credit risk customers | | | (2,617 | ) | | | (972 | ) | | | (867 | ) | | | (778 | ) | | | - | |
Insurance policy erosion and premium reinstatement expense | | | (4,447 | ) | | | (2,627 | ) | | | (1,820 | ) | | | - | | | | - | |
Strategic restructuring adjusting items: | | | | | | | | | | | | | | | | | | | | |
Gain on sale of terminal | | | 4,740 | | | | 2,505 | | | | 2,235 | | | | - | | | | - | |
Impairment of real estate and related tangible assets | | | (9,790 | ) | | | (3,991 | ) | | | (3,563 | ) | | | (2,236 | ) | | | - | |
Impairment of revenue equipment and related charges | | | (17,604 | ) | | | (8,046 | ) | | | (9,558 | ) | | | - | | | | - | |
Restructuring related severance and other | | | (4,334 | ) | | | (2,290 | ) | | | (2,044 | ) | | | - | | | | - | |
Abandonment of information technology infrastructure | | | (1,048 | ) | | | (554 | ) | | | (494 | ) | | | - | | | | - | |
Contract exit costs and other restructuring | | | (695 | ) | | | (367 | ) | | | (328 | ) | | | - | | | | - | |
Adjusted operating expenses | | | 749,353 | | | | 282,167 | | | | 251,820 | | | | 169,450 | | | | 45,916 | |
Adjusted operating income (loss) | | $ | 26,865 | | | $ | 9,304 | | | $ | 3,683 | | | $ | 8,129 | | | $ | 5,749 | |
Adjusted operating ratio | | | 96.5 | % | | | 96.8 | % | | | 98.6 | % | | | 95.4 | % | | | 88.9 | % |
| | | | | | | | | | | | | | | | | | | | | |
(1) "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets. | |
(dollars in thousands) | | For the twelve months ended December 31, | |
| | | 2019 | |
GAAP Operating Ratio: | | Combined | | | Expedited | | | Dedicated | | | Managed Freight | | | Warehousing | |
Total revenue | | $ | 885,387 | | | $ | 356,521 | | | $ | 342,473 | | | $ | 138,616 | | | $ | 47,777 | |
Total operating expenses | | | 876,618 | | | | 357,619 | | | | 341,447 | | | | 135,293 | | | | 42,259 | |
Operating (loss) income | | $ | 8,769 | | | $ | (1,098 | ) | | $ | 1,026 | | | $ | 3,323 | | | $ | 5,518 | |
Operating ratio | | | 99.0 | % | | | 100.3 | % | | | 99.7 | % | | | 97.6 | % | | | 88.5 | % |
(dollars in thousands) | | For the twelve months ended December 31, | |
| | | 2019 | |
Adjusted Operating Ratio: | | Combined | | | Expedited | | | Dedicated | | | Managed Freight | | | Warehousing | |
Total revenue | | $ | 885,387 | | | $ | 356,521 | | | $ | 342,473 | | | $ | 138,616 | | | $ | 47,777 | |
Fuel surcharge revenue | | | (94,127 | ) | | | (41,682 | ) | | | (51,871 | ) | | | - | | | | (574 | ) |
Freight revenue (total revenue, excluding fuel surcharge) | | | 791,260 | | | | 314,839 | | | | 290,602 | | | | 138,616 | | | | 47,203 | |
| | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 876,618 | | | | 357,619 | | | | 341,447 | | | | 135,293 | | | | 42,259 | |
Adjusted for: | | | | | | | | | | | | | | | | | | | | |
Fuel surcharge revenue | | | (94,127 | ) | | | (41,682 | ) | | | (51,871 | ) | | | - | | | | (574 | ) |
Amortization of intangibles (1) | | | (2,924 | ) | | | - | | | | (1,516 | ) | | | (232 | ) | | | (1,176 | ) |
Adjusted operating expenses | | | 779,567 | | | | 315,937 | | | | 288,060 | | | | 135,061 | | | | 40,509 | |
Adjusted operating income (loss) | | $ | 11,693 | | | $ | (1,098 | ) | | $ | 2,542 | | | $ | 3,555 | | | $ | 6,694 | |
Adjusted operating ratio | | | 98.5 | % | | | 100.3 | % | | | 99.1 | % | | | 97.4 | % | | | 85.8 | % |
| | | | | | | | | | | | | | | | | | | | | |
(1) "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets. | |
In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue and intangibles amortization, expressed as a percentage of revenue, excluding fuel surcharge revenue. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices. Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
Operating Ratio
| Operating Ratio (“OR”) From 2015 to 2017 | |
| | | | | | | | | | | | | | | | | | | |
| GAAP Operating Ratio: | | 2017 | | | OR % | | | 2016 | | | OR % | | | 2015 | | | OR % | |
| Total revenue | | $ | 705,007 | | | | | | $ | 670,651 | | | | | | $ | 724,240 | | | | |
| Total operating expenses | | | 676,852 | | | | 96.0 | % | | | 638,204 | | | | 95.2 | % | | | 656,458 | | | | 90.6 | % |
| Operating income | | $ | 28,155 | | | | | | | $ | 32,447 | | | | | | | $ | 67,782 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted Operating Ratio: | | 2017 | | | Adj. OR % | | | 2016 | | | Adj. OR % | | | 2015 | | | Adj. OR % | |
| Total revenue | | $ | 705,007 | | | | | | | $ | 670,651 | | | | | | | $ | 724,240 | | | | | |
| Less: Fuel surcharge revenue: | | | 78,198 | | | | | | | | 59,806 | | | | | | | | 84,120 | | | | | |
| Revenue (excluding fuel surcharge revenue) | | | 626,809 | | | | | | | | 610,845 | | | | | | | | 640,120 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 676,852 | | | | | | | | 638,204 | | | | | | | | 656,458 | | | | | |
| Less: Fuel surcharge revenue | | | 78,198 | | | | | | | | 59,806 | | | | | | | | 84,120 | | | | | |
| Total operating expenses (net of fuel surcharge revenue) | | | 598,654 | | | | 95.5 | % | | | 578,398 | | | | 94.7 | % | | | 572,338 | | | | 89.4 | % |
| Operating income | | $ | 28,155 | | | | | | | $ | 32,447 | | | | | | | $ | 67,782 | | | | | |
Outlook
For 2018, we are forecasting sequential operating income improvement throughout the year. We believe the combination of an improving economy, tightening truckload supply dynamics, industry regulatory changes including the ELD mandate and its enforcement, depleting inventories, year-over-year net fuel expense savings from our improved fuel hedge positions, and further operational progress at SRT should deliver increased pre-tax earnings for the full year of 2018. In addition, we expect earnings improvement from the estimated favorable effective tax rate impact of the Tax Cuts and Jobs Act of 2017. We are currently estimating our 2018 effective income tax rate to be in the range of 24.0% to 27.0%. We expect year-over-year average freight revenue per truck to be positive by a mid-to-high single digit percentage, inflecting more positively later in the year as a large portion of annual contractual rate revisions are implemented during the second quarter of 2018. Our expectation of positive year-over-year pretax income includes higher employee wages for each quarter of 2018 versus comparable 2017 quarters. We also expect a decline in the operating income of our non-asset based logistics service offering to partially offset the forecasted operating income improvement for our Truckload service offering. Within the non-asset based logistics service offering, we expect some margin deterioration resulting from higher purchased transportation expense, coupled with planned investments in strategic employees and a new transport management system designed to enhance our supply chain services and growth potential. From a balance sheet perspective, with net capital expenditures scheduled to be below normal due to the timing of our expected replacement cycle, along with anticipated positive operating cash flows, we expect to further reduce combined balance sheet and off-balance sheet debt over the course of fiscal 2018.
RESULTS OF CONSOLIDATED OPERATIONS
The following table sets forth total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated:
Revenue
| | | Year ended December 31, | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Revenue: | | | | | | | | | |
| Freight revenue | | $ | 626,809 | | | $ | 610,845 | | | $ | 640,120 | |
| Fuel surcharge revenue | | | 78,198 | | | | 59,806 | | | | 84,120 | |
| Total revenue | | $ | 705,007 | | | $ | 670,651 | | | $ | 724,240 | |
For 2017, total revenue increased $34.4 million, or 5.1%, to $705.0 million from $670.7 million in 2016. Freight revenue increased $16.0 million, or 2.6%, to $626.8 million for 2017, from $610.8 million in 2016, while fuel surcharge revenue increased $18.4 million year-over-year. The increase in freight revenue resulted from a $22.8 million increase in revenues from Managed Freight, partially offset by a $6.8 million decrease in freight revenue from our Truckload segment.
The decrease in 2017 Truckload revenue relates to a $4.2 million decrease in freight revenue contributed by our temperature-controlled intermodal service offering, a decrease in our average tractor fleet of 1.4% from 2016, partially offset by an increase in average freight revenue per tractor per week of 0.9% compared to 2016. The increase in average freight revenue per tractor per week is the result of a 2.1% increase, or 3.6 cents per mile, in average rate per total mile, partially offset by a 1.4% decrease in average miles per unit when compared to 2016. Team driven units decreased approximately 11.6% to an average of 912 teams in 2017 from 1,032 teams in 2016.
The increase in Managed Freight revenue is primarily as a result of spot market opportunities related to the hurricane-affected regions during 2017 and growth with existing customers compared with the same 2016 periods.
For 2016, total revenue decreased $53.6 million, or 7.4%, to $670.7 million from $724.2 million in 2015. Freight revenue decreased $29.3 million, or 4.6%, to $610.8 million for 2016, from $640.1 million in 2015, while fuel surcharge revenue decreased $24.3 million year-over-year. The decrease in freight revenue resulted from a $30.4 million decrease in freight revenue from our Truckload segment, partially offset by a $1.1 million increase in revenues from Managed Freight.
The decrease in 2016 Truckload revenue relates to a decrease in average freight revenue per tractor per week of 2.2% compared to 2015 and a decrease in our average tractor fleet of 3.9% from 2015, partially offset by a $1.7 million increase in freight revenue contributed by our temperature-controlled intermodal service offering. The decrease in average freight revenue per tractor per week is the result of a 1.3% decrease, or 2.2 cents per mile, in average rate per total mile and a 0.6% decrease in average miles per unit when compared to 2015. Team driven units increased approximately 5.3% to an average of approximately 1,000 teams in 2016 from approximately 950 teams in 2015.
The increase in Managed Freight revenue is primarily the result of improved coordination with our Truckload segment, additional business from new customers added during the year, and the full year effect of a large customer added in 2015.
If capacity tightens as a result of regulations impacting the industry or economic growth, we expect the pricing environment to improve into 2018 and 2019, offset in part by higher driver pay and other inflationary costs. Further, in the fourth quarter of 2017, we exited the temperature-controlled intermodal business, which provided $11.0 million of total revenue in 2017, in order to focus on our objective to continue improvements at SRT, which could result in more muted revenue growth at SRT.
For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. As it relates to the comparison of expenses to freight revenue, we believe removing fuel surcharge revenue, which is sometimes a volatile source of revenue, affords a more consistent basis for comparing the results of operations from period-to-period. Nonetheless, freight revenue is a non-GAAP financial measure and is not a substitute for revenue measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Our Board and management focus on our freight revenue as an indicator of our performance from period to period. We believe our presentation of freight revenue is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that freight revenue improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define freight revenue differently. Because of these limitations, freight revenue should not be considered a measure of total revenue generated by or available to our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
Salaries, wages, and related expenses
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Salaries, wages, and related expenses | | $ | 241,784 | | | $ | 234,526 | | | $ | 244,779 | |
| % of total revenue | | | 34.3 | % | | | 35.0 | % | | | 33.8 | % |
| % of freight revenue | | | 38.6 | % | | | 38.4 | % | | | 38.2 | % |
Salaries, wages, and related expenses increased approximately $7.3 million, or 3.1%, for the year ended December 31, 2017, compared with 2016. As a percentage of total revenue, salaries, wages, and related expenses decreased to 34.3% of total revenue for the year ended December 31, 2017, as compared to 35.0% in 2016. As a percentage of freight revenue, salaries, wages, and related expenses increased slightly to 38.6% of freight revenue for the year ended December 31, 2017, from 38.4% in 2016. The change in salaries, wages, and related expenses is primarily due to pay adjustments for both driver and non-drivers since 2016 and an increase in non-driver incentive compensation. Additionally, fees paid to third party agents increased $1.1 million as a result of improved Managed Freight revenue and workers’ compensation costs increased approximately 0.4 cents per mile as compared to the historic lows of 2016.
Salaries, wages, and related expenses decreased approximately $10.3 million, or 4.2%, for the year ended December 31, 2016, compared with 2015. As a percentage of total revenue, salaries, wages, and related expenses increased to 35.0% of total revenue for the year ended December 31, 2016, as compared to 33.8% in 2015. As a percentage of freight revenue, salaries, wages, and related expenses increased slightly to 38.4% of freight revenue for the year ended December 31, 2016, from 38.2% in 2015. Salaries, wages, and related expenses decreased significantly on an overall dollar basis as a result of a 3.9% decrease in average tractors, but were relatively flat as a percentage of freight revenue, primarily due to pay adjustments for both driver and non-drivers since 2015, partially offset by a decrease in non-driver incentive compensation as a result of reduced profitability in 2016 versus 2015. Additionally, group insurance costs decreased approximately $2.3 million from 2015 as a result of better claims experience.
Going forward, we believe salaries, wages, and related expenses will increase as a result of a tight driver market, wage inflation, higher healthcare costs, and, in certain periods, increased incentive compensation due to better performance. In particular, we expect driver pay to increase as we look to reduce the number of unseated tractors in our fleet in a tight market for drivers. Additionally, when the freight market allows for an increase in rates we would expect to, as we have historically, pass a portion of those rate increases on to our professional drivers. Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by owner operators and our Managed Freight segment, for which payments are reflected in the purchased transportation line item.
Fuel expense
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Fuel expense | | $ | 103,139 | | | $ | 103,108 | | | $ | 122,160 | |
| % of total revenue | | | 14.6 | % | | | 15.4 | % | | | 16.9 | % |
We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire increase in fuel prices for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.
The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the DOE for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by the DOE averaged approximately $0.35 cents per gallon higher in 2017 than 2016 and $0.40 cents per gallon lower in 2016 than 2015.
Additionally, $4.1 million, $16.7 million, and $15.3 million were reclassified from accumulated other comprehensive income (loss) to our results from operations for the years ended December 31, 2017, 2016, and 2015, respectively, as additional fuel expense for 2017, 2016 and 2015, related to losses on fuel hedge contracts that expired. We previously evaluated these contracts for "hedge effectiveness," which is the extent to which the hedge contract effectively offsets changes in cash flows that the contract was intended to offset. At December 31, 2017, all fuel hedge contracts were deemed to be effective and thus continue to qualify as cash flow hedges. As a result of our early adoption of ASU 2017-12, we are no longer required to measure or record hedge ineffectiveness.
To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to owner operators and other third parties, which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge collection, the percentage of miles driven by company tractors, our fuel economy, and our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues. Net fuel expense is shown below:
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Total fuel surcharge | | $ | 78,198 | | | $ | 59,806 | | | $ | 84,120 | |
| Less: Fuel surcharge revenue reimbursed to owner operators and other third parties | | | 7,997 | | | | 6,250 | | | | 7,790 | |
| Company fuel surcharge revenue | | $ | 70,201 | | | $ | 53,556 | | | $ | 76,330 | |
| Total fuel expense | | $ | 103,139 | | | $ | 103,108 | | | $ | 122,160 | |
| Less: Company fuel surcharge revenue | | | 70,201 | | | | 53,556 | | | | 76,330 | |
| Net fuel expense | | $ | 32,938 | | | $ | 49,552 | | | $ | 45,830 | |
| % of freight revenue | | | 5.3 | % | | | 8.1 | % | | | 7.2 | % |
Total fuel expense remained flat for the year ended December 31, 2017, compared with 2016. As a percentage of total revenue, total fuel expense decreased to 14.6% for the year ended December 31, 2017, from 15.4% in 2016. As a percentage of freight revenue, total fuel expense decreased to 16.5% of freight revenue for the year ended December 31, 2017, from 16.9% in 2016. These increases primarily related to higher fuel prices in 2017, offset by net losses from fuel hedging transactions of $4.1 million in 2017 compared to $16.7 million in 2016.
Net fuel expense decreased $16.6 million, or 33.5%, for the year ended December 31, 2017 compared to 2016. As a percentage of freight revenue, net fuel expense decreased 2.9% for the year ended December 31, 2017 compared to 2016. These decreases primarily resulted from higher fuel surcharge recovery as a result of decreased broker freight and the tiered reimbursement structure of certain fuel surcharge agreements. The decreases were partially offset by a greater percentage of miles driven by owner operators, where we pay a rate that reflects then-existing fuel prices and we do not have the natural hedge created by fuel surcharge.
For the year ended December 31, 2016, total fuel expense decreased approximately $19.1 million, or 15.6%, compared with 2015. As a percentage of total revenue, total fuel expense decreased to 15.4% of total revenue for the year ended December 31, 2016, from 16.9% in 2015. As a percentage of freight revenue, total fuel expense decreased to 16.9% of freight revenue for the year ended December 31, 2016, from 19.1% in 2015. These decreases primarily related to lower fuel prices and an increase in our average fuel miles per gallon during 2016 as a result of purchasing equipment with more fuel-efficient engines. The decreases were partially offset by increased net losses from fuel hedging transactions of $16.7 million in 2016 compared to $13.9 million in 2015.
Net fuel expense increased $3.7 million, or 8.1%, for the year ended December 31, 2016 compared to 2015. As a percentage of freight revenue, net fuel expense increased 0.9% for the year ended December 31, 2016 compared to 2015. These increases primarily resulted from lower fuel surcharge recovery as a result of increased broker freight and the tiered reimbursement structure of certain fuel surcharge agreements. The increases were partially offset by improved miles per gallon due to new engine technology, internal fuel efficiency initiatives, and a greater percentage of miles driven by owner operators, where we pay a rate that reflects then-existing fuel prices and we do not have the natural hedge created by fuel surcharge.
We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operation (which uses diesel fuel for refrigeration, but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from owner operators, the success of fuel efficiency initiatives, and gains and losses on fuel hedging contracts.
Given recent historical lows, we would expect diesel fuel prices to increase over the next few years. We are continuing our efforts to increase our ability to recover fuel surcharges under our customer contracts for fuel used in refrigeration units. If these efforts are successful, it could give rise to an increase in fuel surcharges recovered and a corresponding decrease in net fuel expense. Also, due to hedging contracts being locked in at a fixed rate on a portion of the fuel gallons we expect to use in 2018, we expect net fuel expense to decline in 2018 if fuel prices remain flat or increase. We do not currently have fuel hedging contracts for periods beyond 2018.
Operations and maintenance
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Operations and maintenance | | $ | 48,774 | | | $ | 45,864 | | | $ | 46,458 | |
| % of total revenue | | | 6.9 | % | | | 6.8 | % | | | 6.4 | % |
| % of freight revenue | | | 7.8 | % | | | 7.5 | % | | | 7.3 | % |
Operations and maintenance increased $2.9 million, or 6.3%, for the year ended December 31, 2017, compared with 2016. As a percentage of total revenue, operations and maintenance remained relatively flat at 6.9% of total revenue in 2017, compared with 6.8% in 2016. As a percentage of freight revenue, operations and maintenance increased to 7.8% of freight revenue for 2017, from 7.5% in 2016, primarily due to extending the trade cycle of our tractors in the second half of 2016, as well as unloading and other operational costs associated with our increase in dedicated freight that was added since the first quarter of 2016.
For the year ended December 31, 2016, operations and maintenance decreased $0.6 million, or 1.3%, compared with 2015. As a percentage of total revenue, operations and maintenance remained relatively flat at 6.8% of total revenue in 2016, compared with 6.4% in 2015. As a percentage of freight revenue, operations and maintenance increased to 7.5% of freight revenue for 2016, from 7.3% in 2015 due to an increase in unloading and other operational costs associated with our increase in dedicated freight, partially offset by lower maintenance cost on our revenue equipment.
Going forward, we believe this category will fluctuate based on several factors, including our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models.
Revenue equipment rentals and purchased transportation
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Revenue equipment rentals and purchased transportation | | $ | 141,954 | | | $ | 117,472 | | | $ | 118,583 | |
| % of total revenue | | | 20.1 | % | | | 17.5 | % | | | 16.4 | % |
| % of freight revenue | | | 22.6 | % | | | 19.2 | % | | | 18.5 | % |
Revenue equipment rentals and purchased transportation increased approximately $24.5 million, or 20.8%, for the year ended December 31, 2017, compared with 2016. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 20.1% of total revenue for the year ended December 31, 2017, from 17.5% in 2016. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 22.6% of freight revenue for the year ended December 31, 2017, from 19.2% in 2016. These changes were primarily the result of a $19.8 million increase in payments to third-party transportation providers primarily related to increased revenues for our Managed Freight segment and the increased need for outside capacity to meet the demands of peak season for our Truckload services. Additionally, the percentage of the total miles run by owner-operators increased from 9.7% for 2016 to 10.3% for 2017. These increases were partially offset by reduced expenses resulting from a reduction and subsequent elimination of our temperature-controlled intermodal service offering.
For the year ended December 31, 2016, revenue equipment rentals and purchased transportation decreased approximately $1.1 million, or 0.9%, compared with 2015. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 17.5% of total revenue for the year ended December 31, 2016, from 16.4% in 2015. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 19.2% of freight revenue for the year ended December 31, 2016, from 18.5% in 2015. These changes were primarily the result of a $0.7 million increase in payments to third-party transportation providers related to increased revenues for our Managed Freight segment and growth of our temperature-controlled intermodal service offering. These increases were partially offset by a decrease in leased equipment rental payments due to a reduction in our trailers under operating leases from 2,239 at December 31, 2015 to 1,695 at December 31, 2016. We expect revenue equipment rentals to decrease going forward as a result of our increase in acquisition of revenue equipment through financed purchases or capital leases rather than operating leases. As discussed below, this decrease may be partially or fully offset by an increase in purchased transportation as we expect to continue to grow our Managed Freight segment.
We expect purchased transportation to increase as we seek to grow our Managed Freight segment. In addition, if fuel prices continue to increase, it would result in a further increase in what we pay third party carriers and owner operators. However, this expense category will fluctuate with the number and percentage of loads hauled by owner operators, loads handled by Managed Freight, and tractors, trailers, and other assets financed with operating leases. In addition, factors such as the cost to obtain third party transportation services, and growth of our intermodal service offerings, and the amount of fuel surcharge revenue passed through to the third party carriers and owner operators will affect this expense category. If industry-wide trucking capacity were to tighten in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers, owner operators, and intermodal transportation providers, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue. We continue to actively recruit owner operators and, if we are successful, we would expect this line item to increase as a percentage of revenue. Further, we exited the temperature-controlled intermodal business in the fourth quarter of 2017 in order to focus on our objective to continue improvements at SRT. As a result, we expect purchased transportation costs at SRT to decrease going forward, which could partially offset any increase in consolidated purchased transportation.
Operating taxes and licenses
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Operating taxes and licenses | | $ | 9,878 | | | $ | 11,712 | | | $ | 11,016 | |
| % of total revenue | | | 1.4 | % | | | 1.7 | % | | | 1.5 | % |
| % of freight revenue | | | 1.6 | % | | | 1.9 | % | | | 1.7 | % |
Operating taxes and licenses decreased approximately $1.8 million, or 15.7%, for the year ended December 31, 2017, compared with 2016. As a percentage of total revenue, operating taxes and licenses decreased to 1.4% of total revenue for the year ended December 31, 2017, from 1.7% in 2016. As a percentage of freight revenue, operating taxes and licenses decreased to 1.6% of freight revenue for the year ended December 31, 2017, from 1.9% in 2016. The decrease in operating taxes and licenses, including as a percentage of total revenue and freight revenue, is primarily due to the settlement of a property tax matter that resulted in a decrease of a prior year’s assessment and related refund, as well as a lower truck count.
For the 2016 year compared to 2015, the change in operating taxes and licenses was not significant as either a percentage of total revenue or freight revenue.
Insurance and claims
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Insurance and claims | | $ | 33,155 | | | $ | 32,596 | | | $ | 31,909 | |
| % of total revenue | | | 4.7 | % | | | 4.9 | % | | | 4.4 | % |
| % of freight revenue | | | 5.3 | % | | | 5.3 | % | | | 5.0 | % |
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, increased approximately $0.6 million, or 1.7%, for year ended December 31, 2017, compared to 2016. As a percentage of total revenue, insurance and claims decreased to 4.7% of total revenue for the year ended December 31, 2017, from 4.9% in 2016. As a percentage of freight revenue, insurance and claims remained flat at 5.3% of freight revenue for the years ended December 31, 2017 and 2016. The change in total revenue resulted from increased accident severity early in 2017, partially offset by an 8.2% improvement in DOT reportable accidents per million miles driven for the 2017 year. Total insurance cost increased to 10.7 cents per mile for 2017 from 10.3 cents per mile in 2016.
Insurance and claims increased approximately $0.7 million, or 2.2%, for year ended December 31, 2016, compared to 2015. As a percentage of total revenue, insurance and claims increased to 4.9% of total revenue for the year ended December 31, 2016, from 4.4% in 2015. As a percentage of freight revenue, insurance and claims increased to 5.3% of freight revenue for the year ended December 31, 2016, from 5.0% in 2015. These increases are primarily related to the $3.6 million benefit in the second quarter of 2015 from commutation of our auto liability policy for the period from April 1, 2013, through September 30, 2014. These increases also resulted from increased accident severity, resulting in total insurance cost increasing to 10.3 cents per mile for 2016 from 9.6 cents per mile in 2015. These increases were partially offset by decreased accident rates in 2016, as measured by a 6.8% improvement in DOT reportable accidents per million miles driven at 0.82% – the second lowest in the last ten years.
Our auto liability (personal injury and property damage), cargo, and general liability insurance programs include significant self-insured retention amounts. The auto liability policy contains a feature whereby we are able to retroactively obtain a partial refund of the premium in exchange for taking on the liability for incidents that occurred during the period and releasing the insurers. This is referred to as "commuting" the policy or "policy commutation." In several past periods, including the policy period from April 1, 2013, through September 30, 2014, commuted in 2015, we have commuted the policy, which has lowered our insurance and claims expense. We are also self-insured for physical damage to our equipment. Because of these significant self-insured exposures, insurance and claims expense may fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-existing reserves, could adversely affect our financial condition and results of operations. We have accrued a reserve in connection with a judgment that was rendered against us based on a 2008 cargo claim. We recorded an additional $0.9 million of expense in the first quarter of 2017 in order to accrue additional legal fees and pre-judgment interest since the time of our previous appeal. We are currently pursuing a second appeal to the Sixth Circuit Court of Appeals related to the District Court’s decision on damages. If these further proceedings are resolved favorably to us, any reduction of the accrual could reduce insurance and claims expense in the period in which the claim is resolved. On the other hand, if the proceedings are not resolved favorably, insurance and claims expense may increase as a result of continuing litigation expenses, including pre and post judgment interest. We periodically evaluate strategies to efficiently reduce our insurance and claims expense, which in the past have included the commutation of our auto liability insurance policy. We intend to evaluate our ability to commute the current policy and any such commutation could significantly impact insurance and claims expense.
Communications and utilities
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Communications and utilities | | $ | 6,938 | | | $ | 6,057 | | | $ | 6,162 | |
| % of total revenue | | | 1.0 | % | | | 0.9 | % | | | 0.9 | % |
| % of freight revenue | | | 1.1 | % | | | 1.0 | % | | | 1.0 | % |
For the periods presented, the changes in communications and utilities were not significant as either a percentage of total revenue or freight revenue.
General supplies and expenses
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| General supplies and expenses | | $ | 14,783 | | | $ | 14,413 | | | $ | 14,007 | |
| % of total revenue | | | 2.1 | % | | | 2.1 | % | | | 1.9 | % |
| % of freight revenue | | | 2.4 | % | | | 2.4 | % | | | 2.2 | % |
For the periods presented, the changes in communications and utilities were not significant as either a percentage of total revenue or freight revenue.
Depreciation and amortization
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Depreciation and amortization | | $ | 76,447 | | | $ | 72,456 | | | $ | 61,384 | |
| % of total revenue | | | 10.8 | % | | | 10.8 | % | | | 8.5 | % |
| % of freight revenue | | | 12.2 | % | | | 11.9 | % | | | 9.6 | % |
Depreciation and amortization consists primarily of depreciation of tractors, trailers and other capital assets offset or increased, as applicable, by gains or losses on dispositions of capital assets. Depreciation and amortization in 2017 increased $4.0 million, or 5.5%, compared with 2016. As a percentage of total revenue, depreciation and amortization remained flat at 10.8% of total revenue for the years ended December 31, 2017 and 2016. As a percentage of freight revenue, depreciation and amortization increased to 12.2% of freight revenue for the year ended December 31, 2017, from 11.9% in 2016. Depreciation, consisting primarily of depreciation of revenue equipment and excluding gains and losses, increased $0.8 million in 2017 from 2016, primarily as a result of the full year effect of the decreased salvage values implemented in 2016. Additionally, the soft used truck market contributed to losses on the sale of property and equipment of $4.0 million in 2017 compared to losses of $0.8 million in 2016.
For the year ended December 31, 2016, depreciation and amortization increased $11.1 million, or 18.0%, compared with 2015. As a percentage of total revenue, depreciation and amortization increased to 10.8% of total revenue for the year ended December 31, 2016 compared to 8.5% for 2015. As a percentage of freight revenue, depreciation and amortization increased to 11.9% of freight revenue for the year ended December 31, 2016, from 9.6% in 2015. Depreciation, consisting primarily of depreciation of revenue equipment and excluding gains and losses, increased $9.6 million in 2016 from 2015, primarily as a result of more owned equipment and a significant reduction on the value of used tractors resulting in a change to residual values. Losses on the disposal of property and equipment totaled $0.8 million in 2016, as compared to gains of $0.6 million in 2015.
We expect depreciation and amortization to stabilize as the impact of the significant 2016 reductions in residual values will flatten on a comparative basis going forward. Additionally, if the used tractor market were to decline further, we could have to adjust residual values again and increase depreciation or experience increased losses on sale.
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Interest expense, net | | $ | 8,258 | | | $ | 8,226 | | | $ | 8,445 | |
| % of total revenue | | | 1.2 | % | | | 1.2 | % | | | 1.2 | % |
| % of freight revenue | | | 1.3 | % | | | 1.3 | % | | | 1.3 | % |
For the periods presented, the change in interest expense, net was not significant as either a percentage of total revenue or freight revenue.
This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage.
Income from equity method investment
| | | Year ended December 31, | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Income from equity method investment | | $ | 3,400 | | | $ | 3,000 | | | $ | 4,570 | |
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income. Given TEL's growth during the three years preceding 2015 and volatility in the used and leased equipment markets in which TEL operates, including the recent softening of the used tractor market, the impact on our earnings resulting from our investment and TEL's profitability was more moderate in 2017 and 2016 when compared to 2015, For the year ended December 31, 2017, our earnings resulting from our investment in TEL increased $0.4 million, primarily as a result of growth in TEL’s lease offerings. We expect the impact on our earnings resulting from our investment in TEL to improve year-over-year, particularly if the used equipment market stabilizes or improves.
Income tax (benefit) expense
| | | Year ended December 31, | |
| (dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Income tax (benefit) expense | | $ | (32,142 | ) | | $ | 10,386 | | | $ | 21,822 | |
| % of total revenue | | | (4.6 | )% | | | 1.5 | % | | | 3.0 | % |
| % of freight revenue | | | (5.1 | )% | | | 1.7 | % | | | 3.4 | % |
Income tax (benefit) expense fluctuated approximately $42.5 million, or 409.5%, for the year ended December 31, 2017, compared with 2016. As a percentage of total revenue, income tax (benefit) expense decreased to -4.6% of total revenue for 2017 from 1.5% in 2016. As a percentage of freight revenue, income tax (benefit) expense decreased to -5.1% of freight revenue for 2017 compared to 1.7% in 2016. These decreases were primarily related to the $40.1 million remeasurement of deferred taxes due to the Tax Cuts and Jobs Act of 2017. Additionally, primarily as a result of tax-planning strategies implemented during the fourth quarter of 2017, we were able to remove valuation allowances on certain state tax net operating losses providing for additional favorable impact of $1.2 million. These decreases were partially offset by the $3.9 million decrease in pre-tax income in 2017 compared to 2016, resulting from the declines in operating income noted above.
Income tax expense decreased approximately $11.4 million, or 52.4%, for the year ended December 31, 2016, compared with 2015. As a percentage of total revenue, income tax expense decreased to 1.5% of total revenue for 2016 from 3.0% in 2015. As a percentage of freight revenue, income tax expense decreased to 1.7% of freight revenue for 2016 compared to 3.4% in 2015. These decreases were primarily related to the $36.7 million decrease in pre-tax income in 2016 compared to 2015 resulting from the declines in operating income noted above, the decrease in the contribution from TEL's earnings, and the large non-recurring tax credit in fiscal year 2015.
The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related to our per diem pay structure for drivers. Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates. Our effective tax rate for 2017 was an anomaly due to the nonrecurring remeasurement of deferred taxes noted above related to the Tax Cuts and Jobs Act of 2017. We are currently estimating our 2018 effective income tax rate to be in the range of 24.0% to 27.0%.
RESULTS OF SEGMENT OPERATIONS
We have two reportable segments, truckload services, which we refer to as Truckload. In addition, our Managed Freight segment has service offerings ancillary to our Truckload services, including: freight brokerage and logistics service provided both directly and through freight brokerage agents, who are paid a commission for the freight they provide. These operations consist of several operating segments, which are aggregated due to similar margins and customers. Included within Managed Freight is also our accounts receivable factoring business, which does not meet the aggregation criteria but only accounts for $3.1 million of revenue. The operation of each of these businesses is described in our notes to Item 1 of Part 1 of this Annual Report on Form 10-K.
"Unallocated Corporate Overhead" includes costs that are incidental to our activities and are not specifically allocated to one of the segments. The following table summarizes financial and operating data by segment:
| | | Year ended December 31, | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
| Revenues: | | | | | | | | | |
| Truckload | | $ | 612,834 | | | $ | 601,226 | | | $ | 655,918 | |
| Managed Freight | | | 92,173 | | | | 69,425 | | | | 68,322 | |
| Total | | $ | 705,007 | | | $ | 670,651 | | | $ | 724,240 | |
| Operating Income (loss): | | | | | | | | | | | | |
| Truckload | | $ | 38,781 | | | $ | 37,031 | | | $ | 74,107 | |
| Managed Freight | | | 8,588 | | | | 7,631 | | | | 5,768 | |
| Unallocated Corporate Overhead | | | (19,214 | ) | | | (12,215 | ) | | | (12,093 | ) |
| Total | | $ | 28,155 | | | $ | 32,447 | | | $ | 67,782 | |
Comparison of Year Ended December 31, 2017 to Year Ended December 31, 2016
Our Truckload revenue increased $11.6 million, as fuel surcharge revenue increased $18.4 million, offset by a decrease in freight revenue of $6.8 million. The decrease in freight revenue relates to a $4.2 million decrease in freight revenue contributed by our temperature-controlled intermodal service offering, a decrease in our average tractor fleet of 1.4% from 2016, partially offset by an increase in average freight revenue per tractor per week of 0.9% compared to 2016. The increase in average freight revenue per tractor per week is the result of a 2.1% increase, or 3.6 cents per mile, in average rate per total mile, partially offset by a 1.4% decrease in average miles per unit when compared to 2016. Team driven units decreased approximately 11.6% to an average of 912 teams in 2017 from 1,032 teams in 2016.
Our Truckload operating income was $1.7 million higher in 2017 than 2016 primarily as a result of a decrease in operating costs per mile, net of fuel surcharge revenue, due primarily to decreased net fuel expense, partially offset by increased purchased transportation expenses, depreciation and amortization expense, and operations and maintenance expense.
Managed Freight total revenue increased $22.8 million in 2017 compared to 2016 and Managed Freight operating income increased $1.0 million in 2017 compared to 2016. These improvements are primarily the result of spot market opportunities related to the hurricane-affected regions during 2017 and growth with existing customers compared to 2016.
Unallocated corporate overhead increased primarily as a result of increased salaries and wages, including workers’ compensation expense, compared to the historic lows for workers’ compensation in 2016, as well as non-driver headcount increases since 2016 and increased non-driver incentive compensation. Non-driver headcount increased in 2017 due to strategic initiatives in information technology.
Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015
Our Truckload revenue decreased $54.7 million, as freight revenue decreased $30.4 million and fuel surcharge revenue decreased $24.3 million. The decrease in freight revenue relates to a decrease in average freight revenue per tractor per week of 2.2% compared to 2015, partially offset by a $1.7 million increase in freight revenue contributed by our temperature-controlled intermodal service offering, as well as a decrease in our average tractor fleet of 3.9% from 2015. The decrease in average freight revenue per tractor per week is the result of a 1.3% decrease, or 2.2 cents per mile, in average rate per total mile and a 0.6% decrease in average miles per unit when compared to 2015. Additionally, team driven units increased approximately 5.3% to an average of approximately 1,000 teams in 2016 compared to approximately 950 in 2015.
Our Truckload operating income was $37.1 million less in 2016 than 2015 due to the abovementioned decrease in freight revenue. Additionally, operating costs per mile, net of fuel surcharge revenue, increased primarily due to increased salaries, wages, and related expenses (which was primarily due to a higher percentage of our fleet being comprised of team-driven tractors, as well as driver and non-driver employee pay increases since the same 2015 period), increased net fuel expense, and increased capital costs, partially offset by reduced workers’ compensation expense and operations and maintenance expense.
Managed Freight total revenue increased $1.1 million in 2016 compared to 2015 and operating income increased $1.9 million for the same period. These improvements are primarily the result of improved coordination with our Truckload segment, additional business from new customers added during the year, and the full year effect of a large customer added in 2015.
Unallocated corporate overhead remained relatively flat as a result of a $3.2 million reduction in incentive compensation in 2016, primarily as a result of decreased profitability, partially offset by the 2015 period including the $3.6 million in return of previously expensed insurance premiums for the commutation of our primary auto liability policy for the period of April 1, 2013, through September 30, 2014.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, capital leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. Going forward, we expect revenue equipment acquisitions through purchases and capital leases to increase as a percentage of our fleet as we decrease our use of operating leases. We had working capital (total current assets less total current liabilities) of $81.1 million and $47.9 million at December 31, 2017 and 2016, respectively. Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future.
As of December 31, 2017, we had $9.0 million of borrowings outstanding, undrawn letters of credit outstanding of approximately $32.9 million, and available borrowing capacity of $53.1 million under the Credit Facility. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment. Unless we decide to make any strategic investments during the year, we anticipate paying off an aggregate of approximately $40.0 to $60.0 million of financing and lease liabilities, comprised of both on and off balance sheet obligations, during 2018.
With an average tractor fleet age of 2.1 years, we believe we have flexibility to manage our fleet and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and financing options.
Cash Flows
Net cash flows provided by operating activities were $82.9 million in 2017 compared with $102.4 million in 2016 primarily due to the change in receivables and advances related to the timing of revenue and the related collections at the beginning of each period and the timing of cash collections on our other receivables in 2017 compared to 2016. These declines are partially offset by net income of $55.4 million in 2017 compared to net income of $16.8 million in 2016, of which approximately $40.1 million relates to the one-time remeasurement of deferred taxes due to the Tax Cuts and Jobs Act of 2017. The fluctuations in cash flows from accounts payable and accrued expenses primarily related to the timing of payments on our accrued expenses and trade accounts in the 2017 period compared to the 2016 period.
Net cash flows used by investing activities were $62.1 million in 2017 compared with $47.3 million in 2016. The $14.8 million increase in net investing activities was attributable primarily to a $16.8 million decrease in proceeds from dispositions of used revenue equipment which primarily resulted from the timing and dispositions of assets held for sale as well as our decision to extend the trade cycle of our current equipment. During 2018 we plan to take delivery of approximately 510 new company tractors and dispose of approximately 500 used tractors. This compares to the approximately 635 new company tractors we took delivery of and the approximately 615 used tractors we disposed of during 2017. Going forward, cash flows from disposals of equipment could be more volatile given the weakness in the used tractor market.
Net cash flows used in financing activities were $13.2 million in 2017 compared to $51.9 million in 2016, primarily as a function of net repayments, in 2016, of notes payable facilitated by cash flows primarily related to the trade cycle of our revenue equipment. In particular, this decrease reflects the sale of the previously noted 615 tractors in the 2017 compared to 1,074 tractors in 2016.
Going forward, our cash flows may fluctuate depending on capital expenditures, the resolution of the 2008 cargo claim, future stock repurchases, strategic investments or divestitures, and the extent of future income tax obligations and refunds.
We and substantially all of our subsidiaries (collectively, the "Borrowers") are parties to a Third Amended and Restated Credit Facility (the "Credit Facility") with Bank of America, N.A., as agent (the "Agent") and JPMorgan Chase Bank, N.A. ("JPM," and together with the Agent, the "Lenders").
The Credit Facility is a $95.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million, subject to Lender acceptance of the additional funding commitment. The Credit Facility includes, within our $95.0 million revolving credit facility, a letter of credit sub facility in an aggregate amount of $95.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time.
Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.5% to 1.0%; while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.5% to 2.0%. The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate or revenue equipment pledged under other financing agreements, including revenue equipment installment notes and capital leases.
Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $95.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the appraised fair market value of eligible real estate, as reduced by a periodic amortization amount. We had $9.0 million of borrowings outstanding under the Credit Facility as of December 31, 2017, undrawn letters of credit outstanding of approximately $32.9 million, and available borrowing capacity of $53.1 million. The interest rate on outstanding borrowings as of December 31, 2017, was 5.0% on less than $0.1 million of base rate loans and 3.1% on $9.0 million of LIBOR loans. Based on availability as of December 31, 2017 and 2016, there was no fixed charge coverage requirement.
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated. If an event of default occurs under the Credit Facility and the Lenders cause all of the outstanding debt obligations under the Credit Facility to become due and payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions. The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply with the covenants and restrictions set forth in the Credit Facility could result in an event of default.
Capital lease obligations are utilized to finance a portion of our revenue equipment and are entered into with certain finance companies who are not parties to our Credit Facility. The leases in effect at December 31, 2017 terminate in January 2018 through September 2023 and contain guarantees of the residual value of the related equipment by us. As such, the residual guarantees are included in the related debt balance as a balloon payment at the end of the related term as well as included in the future minimum capital lease payments. These lease agreements require us to pay personal property taxes, maintenance, and operating expenses.
Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from January 2018 to July 2023. The notes contain certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or other material covenants or events of default except certain notes totaling $120.8 million are cross-defaulted with the Credit Facility. Additionally, our fuel hedge contracts totaling $0.8 million at December 31, 2017, are cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in 2018, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, capital leases, and/or from the Credit Facility.
In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third party lender. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%. See Note 13 for further information about the interest rate swap.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual cash obligations and commitments as of December 31, 2017:
Payments due by period: (in thousands) | | Total | | | | | | | | | | | | | | | | | | | |
| Credit Facility (1) | | $ | 10,187 | | | $ | - | | | $ | - | | | $ | - | | | $ | 10,187 | | | $ | - | | | $ | - | |
| Revenue equipment and property installment notes, including interest (2) | | $ | 204,414 | | | $ | 30,503 | | | $ | 30,505 | | | $ | 51,731 | | | $ | 39,558 | | | $ | 23,311 | | | $ | 28,806 | |
| Operating leases (3) | | $ | 219 | | | $ | 73 | | | $ | 73 | | | $ | 73 | | | $ | - | | | $ | - | | | $ | - | |
| Capital leases (4) | | $ | 26,951 | | | $ | 3,606 | | | $ | 3,606 | | | $ | 5,813 | | | $ | 5,368 | | | $ | 5,175 | | | $ | 3,383 | |
| Lease residual value guarantees | | $ | 3,968 | | | $ | 2,961 | | | $ | 1,007 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Purchase obligations (5) | | $ | 51,660 | | | $ | 51,660 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Total contractual cash obligations (6) | | $ | 297,399 | | | $ | 88,803 | | | $ | 35,191 | | | $ | 57,617 | | | $ | 55,113 | | | $ | 28,486 | | | $ | 32,189 | |
(1) | Represents principal owed at December 31, 2017 and interest on such principal amount through maturity. The borrowings consist of draws under our Credit Facility, with fluctuating borrowing amounts and variable interest rates. In determining future contractual interest and principal obligations, for variable interest rate debt, the interest rate and principal amount in place at December 31, 2017, was utilized. The table assumes long-term debt is held to maturity. Refer to Note 7, "Debt" of the accompanying consolidated financial statements for further information. |
(2) | Represents principal and interest payments owed at December 31, 2017. The borrowings consist of installment notes with finance companies, with fixed borrowing amounts and fixed interest rates, except for a variable rate real estate note, for which the interest rate is effectively fixed through an interest rate swap. The table assumes these installment notes are held to maturity. Refer to Note 7, "Debt" of the accompanying consolidated financial statements for further information. |
(3) | Represents future monthly rental payment obligations under operating leases for tractors, trailers, and terminal properties, and computer and office equipment. Substantially all lease agreements for revenue equipment have fixed payment terms based on the passage of time. The tractor lease agreements generally stipulate maximum miles and provide for mileage penalties for excess miles. These leases generally run for a period of three to five years for tractors and five to seven years for trailers. Refer to Note 8, "Leases" of the accompanying consolidated financial statements for further information. |
(4) | Represents principal and interest payments owed at December 31, 2017. The borrowings consist of capital leases with one finance company, with fixed borrowing amounts and fixed interest rates or rates that are floating but effectively fixed through related interest rate swaps. Borrowings in 2018 and thereafter include the residual value guarantees on the related equipment as balloon payments. Refer to Note 7, "Debt" of the accompanying consolidated financial statements for further information. |
(5) | Represents purchase obligations for revenue equipment totaling approximately $51.7 million in 2017. These commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits. These purchase commitments are expected to be financed by operating leases, capital leases, long-term debt, proceeds from sales of existing equipment, and/or cash flows from operations. Refer to Notes 7 and 8, "Debt" and "Leases," respectively, of the accompanying consolidated financial statements for further information. |
(6) | Excludes any amounts accrued for unrecognized tax benefits as we are unable to reasonably predict the ultimate amount or timing of settlement of such unrecognized tax benefits. |
Off-Balance Sheet Arrangements
Operating leases are an important source of financing for our revenue equipment and certain real estate. At December 31, 2017, we had financed 234 tractors and 967 trailers under operating leases. Vehicles held under operating leases are not carried on our consolidated balance sheets, and lease payments, in respect of such vehicles, are reflected in our consolidated statements of operations in the line item "Revenue equipment rentals and purchased transportation." Our revenue equipment rental expense was $12.1 million in 2017, compared with $10.6 million in 2016. The total value of remaining payments under operating leases as of December 31, 2017, was approximately $18.6 million. In connection with various operating leases, we issued residual value guarantees, which provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. The residual guarantees expire between August 2018 and February 2019 and had an undiscounted value of approximately $4.0 million at December 31, 2017. The discounted present value of the total remaining lease payments and residual value guarantees were approximately $21.7 million at December 31, 2017. We expect our residual guarantees to approximate the market value at the end of the lease term. We believe that proceeds from the sale of equipment under operating leases would equal or exceed the payment obligation on substantially all operating leases.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.GAAP requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. A summary of the significant accounting policies followed in preparation of the financial statements is contained in Note 1, "Summary of Significant Accounting Policies," of the consolidated financial statements attached hereto. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
Revenue Recognition
Revenue, drivers' wages, and other direct operating expenses generated by our Truckload reportable segment are recognized on the date shipments are delivered to the customer. Revenue includes transportation revenue, fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services.
Revenue generated by our Managed Freight segment is recognized upon completion of the services provided. Revenue is recorded on a gross basis, without deducting third party purchased transportation costs, as we act as a principal with substantial risks as primary obligor, except for transactions whereby equipment from our Truckload segment perform the related services, which we record on a net basis in accordance with the related authoritative guidance. Managed Freight revenue includes $3.1 million, $2.6 million, and $2.4 million of revenue in 2017, 2016, and 2015, respectively, related to an accounts receivable factoring business. Revenue for this business is recognized on a net basis, given we are acting as an agent and are not the primary obligor in these transactions.
Depreciation of Revenue Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined usingManagement estimates the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is generally recorded using an accelerated method. Depreciationand salvage value of revenue equipment isbased upon, among other things, the expected use, our largest item of depreciation.experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. We generally depreciate new tractors (excluding day cabs) over five years to salvage values that range from 10% to 35% of approximately 15%cost, depending on the operating segment profile of their cost andthe equipment. We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 25%28% and 21% of their cost. We annually review the reasonableness of our estimates regardingcost, respectively. Historically, changes in estimated useful lives andlife or salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experiencehave typically resulted from us transferring tractors to different operating segments with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Over the past several years, the price of new tractors has risen dramatically and there has been significant volatilitydifferent operating profiles. Significant fluctuations in the used equipment market. As a result of the progressive decline in the market value of used tractors and our expectations that used tractor prices will not rebound in the near term, effective July 1, 2016 we reduced the salvage values on our tractors and, thus, prospectively increased depreciation expense. Estimates around the salvage values and useful lives for trailers remain unchanged. The impact from the third quarter of 2016 through 2017 was approximately $2.0 million per quarter of additional depreciation expense in subsequent quarters, or approximately $1.2 million per quarter net of tax, which represents approximately $0.06 per common or diluted share. We expect depreciation levels in 2018 to approximate those of 2017. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations. Gains and losses on the disposal of revenue equipment are included in depreciation expense in the consolidated statements of operations.
In 2017 and 2016 we had net losses on revenue equipment of $4.0 million and $0.8 million, respectively, and in 2015 we generated net gains on revenue equipment, including assets held for sale, of $0.6 million. We review salvage values of our revenue equipment annually and make adjustments periodically, based on trends in the used equipment market, to reflect updated estimates of fair value at disposal.
We lease certain revenue equipment under capital leases with terms of approximately 60 to 84 months. Amortization of leased assets is included in depreciation and amortization expense.
Pursuant to applicable accounting standards, revenue equipment and other long-lived assets are tested for impairment whenever an event occurs that indicates impairment may exist. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised value of the assets, as appropriate.
Although aA portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back agreements with the manufacturers, somemanufacturers. The remainder of our tractors and substantially all of our owned trailers continue to beare subject to fluctuations in market prices for used revenue equipment. Moreover, our trade-back agreements are contingent upon reaching acceptable terms for the purchase of new equipment. Further declinesDeclines in the price of used revenue equipment or failure to reach agreement for the purchase of new tractors with the manufacturers issuing trade-back agreements could result in impairment of, or losses on the sale of, revenue equipment. Historically, only a de minimis percentage
Goodwill and Other Intangible Assets
We classify intangible assets into two categories: (i) goodwill and (ii) intangible assets with finite lives subject to amortization.
We test goodwill for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. The fair value of our equipment has been sold backreporting units is based on a blend of estimated discounted cash flows and publicly traded company multiples. The results of these models are then weighted and combined into a single estimate of fair value for our reporting units. Estimated discounted cash flows are based on projected sales and related cost of sales. Publicly traded company multiples and acquisitions are derived from information on traded shares and analysis of recent acquisitions in the marketplace, respectively, for companies with operations similar to the dealers pursuant to the trade back agreements as we have generally found that market prices exceeded the trade back allowances, althoughours. The primary assumptions used in recent years, trade back allowances have increased asthese various models include earnings multiples of acquisitions in a resultcomparable industry, future cash flow estimates of each of the increasingreporting units, weighted average cost of capital, working capital and capital expenditure requirements.
We completed our annual goodwill impairment test as of October 1, 2020, for each of our reporting units. The impairment tests indicated no impairment.
We test intangible assets with finite lives for impairment if conditions exist that indicate the underlying equipment.
Assets Held For Sale
Assets held for salecarrying value may not be recoverable. Such conditions may include
property and revenue equipment no longer utilizedan economic downturn in
continuing operations which are available and held for sale. Assets held for sale are no longer subject to depreciation, and are recorded ata geographic market or a change in the
lowerassessment of
depreciated book value or fair market value less selling costs.future operations. We
periodically reviewrecord an impairment charge when the carrying value of
thesethe finite lived intangible asset is not recoverable by the cash flows generated from the use of the asset. We determine the useful lives of our identifiable intangible assets
after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement, the history of the asset, our long-term strategy for
possible impairment. the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have finite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 3 to 15 years. Self-Insurance Accruals
We expect to sell these assets within twelve months.
Insurance and Other Claims
The primary claims arising against us consist of autorecord a liability (personal injury and property damage), workers' compensation, cargo, commercial liability, and employee medical expenses. Our insurance program involves self-insurance with the following risk retention levels (before giving effect to any commutation of an auto liability policy):
| ● | auto liability - $1.0 million |
| ● | workers' compensation - $1.3 million |
| ● | cargo - $0.3 million |
| ● | employee medical - $0.4 million |
| ● | physical damage - 100% |
Due to our significant self-insured retention amounts, we have exposure to fluctuations in the number and severity of claims and to variations between our estimated and actual ultimate payouts. We accruefor the estimated cost of the uninsured portion of pending claims and
an estimate forthe estimated allocated loss adjustment expenses including legal and other direct costs associated with a claim. Estimates require,
among other things, judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages, future medical costs, and inflation estimates of future claims development, and the legal and other costs to settle or defend the claims.
We have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and 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 limitsSelf-insured liabilities represent management's best estimate of our insurance coverage, our profitability could be adversely affected.
ultimate obligations.In addition to estimates within our self-insured retention layers, we also must make judgments concerning claims where we have third party insurance and for claims outside our coverage limits. Upon settling claims and expenses associated with claims where we have third party coverage, we are generally required to initially fund payment to the claimant and seek reimbursement from the insurer. Receivables from insurers for claims and expenses we have paid on behalf of insurers were $1.1 million and $0.7 million at December 31, 2017 and 2016, respectively, and are included in drivers' advances and other receivables on our consolidated balance sheet. Additionally, we accrue claims above our self-insured retention and record a corresponding receivable for amounts we expect to collect from insurers upon settlement of such claims. We have $2.1 million and less than $0.1 million at December 31, 2017 and 2016, respectively, as a receivable in other assets and as a corresponding accrual in the long-term portion of insurance and claims accruals on our consolidated balance sheet for claims above our self-insured retention for which we believe it is reasonably assured that the insurers will provide their portion of such claims. We evaluate collectability of the receivables based on the credit worthiness and surplus of the insurers, along with our prior experience and contractual terms with each. If any claim occurrence were to exceed our aggregate 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. If one or more claims were to exceed our then effective coverage limits, our financial condition and results of operations could be materially and adversely affected.
We also make judgments regarding the ultimate benefit versus risk of commuting certain periods within our auto liability policy. If we commute a policy, we assume 100% risk for covered claims in exchange for a policy refund. In April 2015, we commuted two liability policies for the period from April 1, 2013 through September 30, 2014, such that we are now responsible for any claim that occurred during that period up to $20.0 million, should such a claim develop. We recorded a $3.6 million reduction in insurance and claims expense in the second quarter of 2015 related to the commutation. The insurer did not remit the premium refund directly to the Company, but rather applied a credit to the current auto liability insurance policy, such that we recorded the policy release premium refund as a prepaid asset at June 30, 2015.
Effective April 2015, we entered into new auto liability policies with a three-year term. The policy includes a limit for a single loss of $9.0 million, an aggregate of $18.0 million for each policy year, and a $30.0 million aggregate for the 42 month term ended March 31, 2018. The policy includes a policy release premium refund of up to $14.6 million, less any future amounts paid on claims by the insurer, from October 1, 2014 through March 31, 2018, if we were to commute the policy for the entire 42 months. A decision with respect to commutation of the policy cannot be made before April 1, 2018, unless both we and the insurance carrier agree to a commutation prior to the end of the policy term. Management cannot predict whether or not future claims or the development of existing claims will justify a commutation, and accordingly, no related amounts were recorded at December 31, 2017.
If claims development factors that are based upon historical experience change by 10%, our claims accrual as of December 31, 2017, would change by approximately $0.8 million.
Lease Accounting and Off-Balance Sheet Transactions
We issue residual value guarantees in connection with the operating leases we enter into for certain of our revenue equipment. These leases provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, then we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. To the extent the expected value at the lease termination date is lower than the residual value guarantee, we would accrue for the difference over the remaining lease term. We believe that proceeds from the sale of equipment under operating leases would equal or exceed the payment obligation on substantially all operating leases. The estimated values at lease termination involve management judgments. As leases are entered into, determination as to the classification as an operating or capital lease involves management judgments on residual values and useful lives.
Accounting for Income Taxes
Significant management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We believe the future tax deductions will be realized principally through future reversals of existing taxable temporary differences and future taxable income, except for when a valuation allowance has been provided.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
Stock-Based Employee Compensation
We issue several types of stock-based compensation, including awards that vest based on service and performance conditions or a combination of the conditions. Performance-based awards vest contingent upon meeting certain performance criteria established by the Compensation Committee of our Board of Directors. For performance-based awards, determining the appropriate amount to expense in each period is based on likelihood and timing of achieving the stated targets and requires judgment, including forecasting future financial results. The estimates are revised periodically based on the probability and timing of achieving the required performance targets and adjustments are made as appropriate. Awards that are only subject to time vesting provisions are amortized using the straight-line method.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, commodity contracts, accounts payable, debt, and interest rate swaps. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of these instruments. The carrying value of the factored receivables approximates the fair value, as the receivables are generally repaid directly to us by the client's customer within 30–40 days due to the combination of the short-term nature of the financing transaction and the underlying quality of the receivables. Interest rates that are currently available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our revenue equipment installment notes approximated the carrying value at December 31, 2017, as the weighted average interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit Facility approximate fair value due to the variable interest rate on the facility. Additionally, commodity contracts, which are accounted for as hedge derivatives, as discussed in Note 13, are valued based on the forward rate of the specific indices upon which the contract is being settled and adjusted for counterparty credit risk using available market information and valuation methodologies. The fair value of our interest rate swap agreements is determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate swap agreements.
Derivative Instruments and Hedging Activities
We periodically utilize derivative instruments to manage exposure to changes in fuel prices and interest rates. At inception of a derivative contract, we document relationships between derivative instruments and hedged items, as well as our risk-management objective and strategy for undertaking various derivative transactions, and assess hedge effectiveness. We record derivative financial instruments in the balance sheet as either an asset or liability at fair value. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we discontinue hedge accounting prospectively. The changes in the fair value of derivatives are recorded in other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings.
Recent Accounting Pronouncements
Accounting Standards adopted
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12, which among other things, eliminates the requirement to separately measure and report hedge ineffectiveness and requires all items that affect earnings to be presented in the same income statement line as the hedged item. The ASU is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. We have adopted the standard for the fiscal year ended December 31, 2017. Entities adopting the ASU must apply a cumulative-effect adjustment related to the elimination of the separate hedge ineffectiveness measurement. No adjustment was required, however, since no hedge ineffectiveness has been recorded. We have adopted the amended presentation and disclosure guidance, which is required only prospectively.
Accounting Standards not yet adopted
In April 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. The new standard introduces a five-step model to determine when and how revenue is recognized. The premise of the new model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for us for our annual reporting period beginning January 1, 2018, including interim periods within that reporting period. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect.
The new standard will require us to recognize revenue from loads proportionally as the transportation service is performed as opposed to recognizing revenue upon the completion of the load, which is our current practice. Our recognition of revenue under the new standard will approximate our recognition of revenue under the current standards, as there will generally be a consistent amount of freight in process at the beginning and end of the period; however, seasonality and the day on which the period ends may cause minor differences. We plan to transition to the new standard by recognizing the cumulative effect of adoption as an adjustment in the first quarter of 2018. We believe the cumulative effect of the adoption will result in a positive adjustment to retained earnings of approximately $0.6 million, net of tax, from initially recording in process revenue and associated direct expenses. We plan to finalize our evaluation during the first quarter of 2018, including an assessment of the new expanded disclosure requirements and a final determination of the impact to adoption and related changes required to internal controls.
In February 2016, FASB issued ASU 2016-02, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Lessor accounting under the new standard is substantially unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. This new standard will become effective for us in our annual reporting period beginning January 1, 2019, including interim periods within that reporting period and requires a modified retrospective transition approach. We are currently evaluating the impacts the adoption of this standard will have on the consolidated financial statements.
INFLATION, NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. In recent years, the most significant effects of inflation have been on revenue equipment prices and the related depreciation, health care,litigation and claims, and driver and non-driver wages. New emissions control regulations and increases in wages of manufacturing workers and other items have resulted in higher tractor prices, while the decline in the market value of used equipment significantly reduced the residual values of units in fiscal 2015 through 2017.fluctuated significantly. The cost of fuel has been extremely volatile over the last several years, with costs increasing slightly in 20172019 and 2020 after significant decreases in both 20162018 and 2015. We believe at least some of this volatility reflects the fluctuations in the U.S. dollar and global demand for petroleum products, unrest in certain oil-producing countries, improved fuel efficiency due to technological advancements, and an increase in domestic supply.2017. Health care prices have increased faster than general inflation, primarily due to the rapid increase in prescription drug costs and more people on our health plan in order to comply with the individual healthcare mandate.plan. The nationwide shortage of qualified drivers has caused us to raise driver wages per mile at a rate faster than general inflation for the past four years, and this trend may continue as additional government regulations constrain industry capacity. Additionally, competition and the related cost to employ non-drivers have increased, especially for the more skilled or technical positions, including mechanics, those with information technology related skills, and degreed professionals.
Geographic Areas
We operate throughout the U.S. and all of our tractors are domiciled in the U.S. All of our revenue generated was generated within the U.S. in 2020. Less than one percent of our revenue in Canada and Mexico in 2019, respectively. In 2019, as part of our strategic plan to improve profitability, we discontinued our services within Mexico and Canada. We do not separately track domestic and foreign revenue from customers, and providing such information would not be meaningful. Excluding a de minimis number of trailers, all of our long-lived assets are, and have been for the last three fiscal years, located within the United States.
In 2015During 2019 and 2016,2020, though not to the same extent as in the past, we experienced marked surgesincreases in business and profitability during the fourth quarter holiday season, due to our team drivers and customer base. This occurred again in 2017, though not to the same extent as in the previous two years. After this surge, revenue generally decreases as customers reduce shipments following the holiday season and as inclement weather impedes operations. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and weather, creating more physical damage equipment repairs. For the reasons stated, first quarter results historically have been lower than results in each of the other three quarters of the year, excluding charges. The duration of what is considered peak season has shortened over the last few years and now is approximately a five-week period beginning the week of Thanksgiving and ending on Christmas Eve, and we have seen our customers’ networks adjust accordingly. If this trend continues, our ability to take advantage of this surge in business and our fourth quarter profitability could be negatively affected.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We experience various market risks, including changes in interest rates and fuel prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes, or when there are no underlying related exposures. Because our operations are mostly confined to the United States, we are not subject to a material amount of foreign currency risk. Refer to Note 13, "Derivative Instruments," of the accompanying consolidated financial statements for further information.
We engage in activities that expose us to market risks, including the effects of changes in fuel prices and in interest rates. Financial exposures are evaluated as an integral part of our risk management program, which seeks, from time-to-time, to reduce the potentially adverse effects that the volatility of fuel markets and interest rate risk may have on operating results.
In an effort to seek to reduce the variability of the ultimate cash flows associated with fluctuations in diesel fuel prices, we have periodically enterentered into various derivative instruments, including forward futures swap contracts. We enterhave historically entered into hedging contracts with respect to ULSD. Under these contracts, we paypaid a fixed rate per gallon of ULSD and receivereceived the monthly average price of Gulf Coast ULSD. The retrospective and prospective regression analyses provided that changes in the prices of diesel fuel and ULSD were deemed to be highly effective based on the relevant authoritative guidance. Previously we had also entered into hedging contracts with respect to heating oil, a small portionAs of which we determined to be ineffective on a prospective basis in 2015. Consequently, we recognized a reduction in fuel expense of $1.4 million in 2015 to mark the related liability to market. As a result of our early adoption of ASU 2017-12, we are no longer required to separately measure and record hedge ineffectiveness. At December 31, 2017 and 2016, there were no remaining ineffective fuel hedge contracts and, thus, all2020, we have $0.2 million of remaining fuel hedge contracts continue to qualifyclassified as cash flow hedges.other assets in our consolidated balance sheet. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes.
purposes.A one dollar increase in the price of diesel per gallon would decrease our net income by $1.4$5.8 million. This sensitivity analysis considers that we expect to purchase approximately 46.942.3 million gallons of diesel annually, with an assumed fuel surcharge recovery rate of 78.9%80.5% of the cost (which was our fuel surcharge recovery rate during the year ended December 31, 2017)2020). Assuming our fuel surcharge recovery is consistent, this leaves 9.9 million gallons that are not covered by the natural hedge created by our fuel surcharges.
In August 2015, we entered into an interest rate swap agreement with a notional amount of $28.0 million, which was designated as a hedge against the variability in future interest payments due on the debt associated with the purchase of our corporate headquarters. The terms of the swap agreement effectively convert the variable rate interest payments on this note to a fixed rate of 4.2% through maturity on August 1, 2035. In 2016, we also entered into several interest rate swaps, which were designated to hedge against the variability in future interest rate payments due on rent associated with the purchase of certain trailers. Because the critical terms of the swap and hedged item coincide, in accordance with the requirements of ASC 815, the change in the fair value of the derivative is expected to exactly offset changes in the expected cash flows due to fluctuations in the LIBOR rate over the term of the debt instrument, and therefore no ongoing assessment of effectiveness is required. TheFor the years ended December 31, 2020 and 2019, the fair value of the swap agreements, that were in effect at December 31, 2017 and 2016, of approximately $0.4 million and $0.7 million, respectively, is included in other assets and other liabilities, as appropriate, in the consolidated balance sheet, and is included in accumulated other comprehensive income (loss), net of tax. Additionally, $0.4 million and $0.6 million wasamounts reclassified from accumulated other comprehensive income (loss)loss into our results of operations, as additional interest expense for the year ended December 31, 2017 and 2016, respectively, relatedamounts expected to changes in interest rates during such periods. Based on the amounts in accumulated other comprehensive income (loss) as of December 31, 2017, we expect to reclassify losses of approximately $0.2 million, net of tax, on derivative instrumentsbe reclassified from accumulated other comprehensive income (loss)loss into our results of operations during the next twelve months due to interest rate changes, in interest rates.are immaterial. The amounts actually realized will depend on the fair values as of the date of settlement.
Our market risk is also affected by changes in interest rates. Historically, we have used a combination of fixed-rate and variable-rate obligations to manage our interest rate exposure. Fixed-rate obligations expose us to the risk that interest rates might fall. Variable-rate obligations expose us to the risk that interest rates might rise. Of our total $213.8$110.4 million of debt including operating and capitalfinance leases, we had $44.5$31.5 million of variable rate debt outstanding at December 31, 2017,2020, including our Credit Facility, a real-estate note and certain equipment notes, of which the real-estate note of $25.8$23.8 million was hedged with the interest rate swap agreement noted above at 4.2% and certain of our equipment notes totaling $9.7$7.7 million were hedged at a weighted average interest rate of 2.0%2.9%. Our earnings would be affected by changes in these short-term interest rates. Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates. At our December 31, 20172020 level of borrowing on our non-hedged variable rate debt, a 1% increase in our applicable rate would reduce annual net income by less than $0.1 million. Our remaining debt is fixed rate debt, and therefore changes in market interest rates do not directly impact our interest expense.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements of Covenant TransportationLogistics Group, Inc. and subsidiaries, including the consolidated balance sheets as of December 31, 20172020 and 2016,2019, and the related statements of operations, statements of comprehensive income, statements of stockholders' equity, and statements of cash flows for each of the years in the three-year period ended December 31, 2017,2020, together with the related notes, and the report of Grant Thornton LLP, our independent registered public accounting firm as of December 31, 2020, and for the year ended December 31, 2020, and the report of KPMG LLP, our independent registered public accounting firm as of December 31, 2017 and 2016,2019, and for each of the years in the threetwo year period ended December 31, 20172019, are set forth at pages 6752 through 9554 elsewhere in this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There has been no change in or disagreement with accountants on accounting or financial disclosure during our two most recent fiscal years.
ITEM 9A.CONTROLS AND PROCEDURES
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to us, andincluding our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.
Based on theirAs of the end of the period covered by this report, we carried out an evaluation, asunder the supervision and with the participation of December 31, 2017, our management, including the Chief Executive Officer and Chief Financial Officer, have concluded thatof the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) are effective at a reasonable assurance level to ensure. Based upon that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, includingevaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as appropriate, to allow timely decisions regarding required disclosure.
of December 31, 2020.Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internalreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Management, including our Chief Executive Officer and Chief Financial Officer under the oversight of our Board of Directors, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, our management used the criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management believes that, as of December 31, 2020, our internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act aseffective based on those criteria.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officers and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles andGAAP. A company’s internal control over financial reporting includes those policies and procedures that:
● | ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;the assets of the company; |
● | ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,GAAP, and that our receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors;directors of the company; and |
● | ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of ourthe company’s assets that could have a material effect on ourthe financial statements. |
We have confidenceBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in ourconditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. control over financial reporting can only provide reasonable assurance of achieving its control objectives.
An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.
Management assessed the effectiveness of ourThe Company's internal control over financial reporting as of December 31, 2017. Management based this assessment on the framework in the Internal Control- Integrated Framework (2013) issued2020, has been audited by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management believes that, as of December 31, 2017, our internal control over financial reporting is effective based on those criteria.
KPMGGrant Thornton, LLP,
thean independent registered public accounting firm
who audited the Company's Consolidated Financial Statements includedas stated in
this From 10-K, has issued aits report
on the Company's internal control over financial reporting which is included herein.
Changes in Internal Control Over Financial Reporting
There werehave been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fourth quarter ended December 31, 2017,of fiscal year 2020, that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
ITEM 9B.OTHER INFORMATION
ITEM 9B. | OTHER INFORMATION |
None.
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
We incorporate by reference the information respecting executive officers and directors set forth under the captions "Proposal 1 - Election of Directors", "Corporate Governance – Section 16(a) Beneficial Ownership Reporting Compliance", "Corporate Governance – Our Executive Officers", "Corporate Governance – Code of Conduct and Ethics", “Corporate Governance – The Board of Directors and Its Committees – Committees of the Board of Directors – The Nominating and Corporate Governance Committee”, "Corporate Governance – The Board of Directors and Its Committees – Committees of the Board of Directors – The Audit Committee" and "Corporate Governance – Delinquent Section 16(a) Reports" in our Proxy Statement for the 20182021 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934, as amended (the "Proxy Statement"); provided, that the section entitled "Corporate Governance – The Board of Directors and Its Committees – Committees of the Board of Directors – The Audit Committee – Report of the Audit Committee" contained in the Proxy Statement is not incorporated by reference.
ITEM 11.EXECUTIVE COMPENSATION
ITEM 11. | EXECUTIVE COMPENSATION |
We incorporate by reference the information set forth under the sections entitled "Executive Compensation", "Corporate Governance – The Board of Directors and Its Committees – Committees of the Board of Directors – The Compensation Committee – Compensation Committee Interlocks and Insider Participation", and "Corporate Governance – The Board of Directors and Its Committees – Committees of the Board of Directors – The Compensation Committee" in the Proxy Statement; provided, that the section entitled "Corporate Governance – Committees of the Board of Directors – The Compensation Committee – Report of the Compensation Committee" contained in the Proxy Statement is not incorporated by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table provides certain information, as of December 31, 2017,2020, with respect to our compensation plans and other arrangements under which shares of our Class A common stock are authorized for issuance.
Equity Compensation Plan Information
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted average exercise price of outstanding options, warrants and rights | | | Number of securities remaining eligible for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | | (a) | | | (b) | | | (c) | |
| Equity compensation plans approved by security holders | | | 587,024 | (1) | | $ | - | | | | 186,430 | |
| Equity compensation plans not approved by security holders | | | | | | | | | | | | |
| Total | | | 587,024 | | | $ | - | | | | 186,430 | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | | Weighted average exercise price of outstanding options, warrants and rights | | | Number of securities remaining eligible for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | | (a) | | | | (b) | | | (c) | |
Equity compensation plans approved by security holders | | | 1,366,125 | | (1) | | | - | | | | 1,785,014 | |
Equity compensation plans not approved by security holders | | | - | | | | | - | | | | - | |
Total | | | 1,366,125 | | | | | - | | | | 1,785,014 | |
(1) | Represents unvested restricted shares granted under the 2006 Omnibus Incentive Plan, as amended. The weighted average stock price on the date of grant for outstanding restricted stock awards was $18.14,$18.25, which is not reflected in column (b), because restricted stock awards do not have an exercise price. |
We incorporate by reference the information set forth under the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
We incorporate by reference the information set forth under the sections entitled "Corporate Governance – The Board of Directors and Its Committees"Committees - Board of Directors" and "Certain Relationships and Related Transactions" in the Proxy Statement.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
We incorporate by reference the information set forth under the section entitled "Relationships with Independent Registered Public Accounting Firm – Principal Accountant Fees and Services" in the Proxy Statement.
PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)ITEM 15. | 1.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | Financial Statements. | |
| | | |
(a) | 1. | Financial Statements. | |
| | | |
| | Our audited consolidated financial statements are set forth at the following pages of this report: | |
| | | 6752 |
| | | | 53 |
| | Consolidated Balance Sheets | 6955 |
| | | 7056 |
| | | 7157 |
| | | 7258 |
| | | 7359 |
| | | 7460 |
| | | |
| 2. | Financial Statement Schedules. | |
| | | |
| | Financial statement schedules are not required because all required information is included in the financial statements or is not applicable. |
| | | |
| 3. | Exhibits. | |
| | | |
| | The exhibits required to be filed by Item 601 of Regulation S-K are listed under paragraph (b) below and on the Exhibit Index appearing at the end of this report. Management contracts and compensatory plans or arrangements are indicated by an asterisk. |
| | | |
(b) | | Exhibits. | |
| | The following exhibits are filed with this Form 10-K or incorporated by reference to the document set forth next to the exhibit listed below. |
