U.S. XPRESS ENTERPRISES, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with "Business" in Part I, Item 1 of this Annual Report, as well as the consolidated financial statements and accompanying footnotes in Part II, Item 8 of this Annual Report. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A. "Risk Factors" and Part I "Cautionary Note Regarding Forward-looking Statements" of this Annual Report, and elsewhere in this report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed.
Overview
Total revenue for 2022 increased by$212.6 million to$2.2 billion as compared to 2021. The increase was primarily a result of a$146.5 million increase in Truckload revenue, a$110.8 million increase in fuel surcharge offset by a$44.7 million decrease in Brokerage revenue. Excluding the impact of fuel surcharge revenue, revenue increased$101.9 million to$1.9 billion , an increase of 5.7% as compared to the prior year. Operating loss for 2022 was$26.9 million compared to operating income of$18.4 million in 2021. We delivered a 101.2% operating ratio for the year compared to 99.1% in 2021. Our profitability decreased primarily due to increased insurance premiums and claims, increased technology and personnel expenses and higher net fuel costs, partially offset by a 10.9% increase in our average revenue per mile, a 9.1% increase in our available tractors and a$12.1 million increase in our Brokerage operating income. For much of our history, we focused primarily on scaling our fleet and expanding our service offerings to support sustainable, multi-faceted relationships with customers. More recently, we have focused on our core service offerings and refined our network to focus on shorter, more profitable lanes with more density, which we believe are more attractive to drivers. We believe we have the strategy, management team, revenue base, modern fleet, and capital structure that position us to execute upon our initiatives, drive further operational gains, and deliver long term value for our stockholders, but acknowledge that our performance has fallen below our expectations.
On
The Realignment Plan has allowed our OTR division to focus on improving capacity, cost and service levels for our customers while gaining benefits from improved network planning as well as more effective allocation of freight between Company and third-party assets. These improvements should contribute to improved utilization within the OTR division in 2023. We do not believe that the Realignment Plan has impacted our professional drivers' ability to service our customers. As part of the Realignment Plan, we have eliminated$32.0 million in annualized costs which is made up of$22.0 million in personnel costs and$10.0 million in real estate and other miscellaneous cost. Our personnel costs were reduced as a result of eliminating organization overlaps and, in certain circumstances, duplicative functions. In the immediate term, we expect to use proceeds from the divestiture of non-core real estate holdings as well as a more conservative trade cycle management program to positively benefit capital expenditures, net of proceeds, free cash flow and overall debt levels. We have also taken steps to reduce annualized capitalized wages, which primarily relate to internal use software development by over$10.0 million . Further out, we expect the benefits from our Realignment Plan to generate increased operating income and net earnings, a portion of which could be used to pay down outstanding debt. During the second half of 2021, Variant's turnover, utilization, and revenue per tractor per week began to deteriorate and those trends accelerated in the fourth quarter. At the end of 2021 and throughout 2022, we made steady progress correcting our strategy for our OTR fleet, including Variant. Starting in the third quarter of 2022, we instituted the Realignment Plan, which included significant changes in how we manage our OTR fleet. As part of the Realignment Plan, we are re-integrating our former Variant operations back into our legacy OTR fleet. Page 35 Table of Contents
We are continuing to focus on our driver centric initiatives throughout our fleet, while at the same time driving more accountability through our OTR fleet operations with the goal of increasing revenue miles and ultimately lowering driver turnover. We believe these initiatives will aid us in retaining our current professional drivers and attracting new professional drivers to our team. We will continue to focus on implementing and executing our initiatives that we expect will drive sustainable improved fleet performance over time. In the past, we spoke about the importance of growing our overall fleet size to improve our financial performance; however, with our Realignment Plan and associated cost takeout initiatives, we will be focused on improving the mix and profitability at our current fleet size. During 2020, we purchased a small business with a technology platform and an experienced and talented team. Their approach to the brokerage business is to utilize a digital framework for handling transactions which we expect to be scalable. Importantly, we believe this platform will enable our team to continue scaling the business and drive a high level of growth in the years to come. We continue to actively attempt to expand our Brokerage segment in a profitable manner, although growth will be difficult given current industry dynamics.
In our Dedicated division, our team successfully addressed pricing in certain Dedicated accounts as a result of driver and capacity cost inflation. As a result, our overall Dedicated rates increased 16.2% in 2022 compared to 2021.
We expect a challenging freight market early in the year that we believe will improve between the second half of 2023 or beginning of 2024, due to improvements in the supply chain, inventory restocking, and the exit of capacity as a result of a continuation of depressed spot market rates. On the supply side, the market for experienced drivers is loosening as there is currently excess capacity in the market relative to overall freight volumes. Our Management's Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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 endedDecember 31, 2021 .
Reportable Segments
Our business is organized into two reportable segments, Truckload and Brokerage. Our Truckload segment offers truckload services, including OTR trucking and dedicated contract services. Our OTR service offering transports a full trailer of freight for a single customer from origin to destination, typically without intermediate stops or handling pursuant to short-term contracts and spot moves that include irregular route moves without volume and capacity commitments. Tractors are operated with a solo driver or, when handling more time-sensitive, higher-margin freight, a team of two drivers. Our dedicated contract service offering provides similar freight transportation services, but with contractually assigned equipment, drivers and on-site personnel to address customers' needs for committed capacity and service levels pursuant to multi-year contracts with guaranteed volumes and pricing. Our Brokerage segment is principally engaged in asset-light freight brokerage services, where loads are contracted to third-party carriers.
Truckload Segment
In our Truckload segment, we generate revenue by transporting freight for our customers in our OTR and dedicated contract service offerings. Our OTR service offering provides solo and expedited team services through one-way movements of freight over routes throughoutthe United States . While we primarily operate in the eastern half ofthe United States , we provide services into and out ofMexico through a variable cost model using third party carriers. The revenue from such model is generated inthe United States . Our dedicated contract service offering devotes the use of equipment to specific customers and provides services through long-term contracts. We have one chief operating decision maker over all our Truckload operations that reviews our Truckload segment income statement. Our Truckload segment provides services that are geographically diversified but have similar economic and other relevant characteristics, as they all provide truckload carrier services of general commodities and durable goods to similar classes of customers. We are typically paid a predetermined rate per load or per mile for our Truckload services. We enhance our revenue by charging for tractor and trailer detention, loading and unloading activities and other specialized services. Consistent with industry practice, our typical customer contracts (other than those contracts in which we have agreed to dedicate certain tractor and trailer capacity for use by specific customers) do not guarantee load levels or tractor availability. This gives us and our customers a certain degree of flexibility to negotiate rates up or down in response to changes in freight demand Page 36 Table of Contents and trucking capacity. In our dedicated contract service offering, which comprised approximately 44.9% of our Truckload operating revenue, and approximately 44.2% of our Truckload revenue, before fuel surcharge, for 2022, we provide service under contracts with fixed terms, volumes and rates. Dedicated contracts are often used by our customers with high-service and high-priority freight, sometimes to replace private fleets previously operated by them. We expect to grow our dedicated business as a percentage of our average tractors. Generally, in our Truckload segment, we receive fuel surcharges on the miles for which we are compensated by customers. Fuel surcharge revenue mitigates the effect of price increases over a negotiated base rate per gallon of fuel; however, these revenues may not fully protect us from all fuel price increases. Our fuel surcharges to customers may not fully recover all fuel increases due to engine idle time, out-of-route miles and non-revenue generating miles that are not generally billable to the customer, as well as to the extent the surcharge paid by the customer is insufficient. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of revenue miles we generate. Although our surcharge programs vary by customer, we generally attempt to negotiate an additional penny per mile charge for everyfive-cent increase in theU.S. Department of Energy's (the "DOE") national average diesel fuel index over an agreed baseline price. Our fuel surcharges are billed on a lagging basis, meaning we typically bill customers in the current week based on a 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. Based on the current status of our empty miles percentage and the fuel efficiency of our tractors, we believe that our fuel surcharge recovery is effective. The main factors that affect our operating revenue in our Truckload segment are the average revenue per mile we receive from our customers, the percentage of miles for which we are compensated and the number of shipments and miles we generate. Our primary measures of revenue generation for our Truckload segment are average revenue per loaded mile and average revenue miles per tractor per period, in each case excluding fuel surcharge revenue. In our Truckload segment, our most significant operating expenses vary with miles traveled and include (i) fuel, (ii) driver-related expenses, such as wages, benefits, training and recruitment and (iii) costs associated with independent contractors (which are primarily included in the "Purchased transportation" line item). Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency and other factors. Our main fixed costs include vehicle rent and depreciation of long-term assets, such as revenue equipment and service center facilities, the compensation of non-driver personnel and other general and administrative expenses. Our Truckload segment requires substantial capital expenditures for purchase of new revenue equipment. We use a combination of operating leases and secured financing to acquire tractors and trailers, which we refer to as revenue equipment. When we finance revenue equipment acquisitions with operating leases, we record an operating lease right of use asset and an operating lease liability on our consolidated balance sheet, and the lease payments in respect of such equipment are reflected in our consolidated statement of comprehensive income (loss) in the line item "Vehicle rents." When we finance revenue equipment acquisitions with secured financing, the asset and liability are recorded on our consolidated balance sheet, and we record expense under "Depreciation and amortization" and "Interest expense." Typically, the aggregate monthly payments are similar under operating lease financing and secured financing. We use a mix of finance leases and operating leases with individual decisions being based on competitive bids, tax projections and contractual restrictions. We expect our vehicle rents, depreciation and amortization and interest expense will be impacted by changes in the percentage of our revenue equipment acquired through operating leases versus equipment owned or acquired through finance leases. Because of the inverse relationship between vehicle rents and depreciation and amortization, we review both line items together. Approximately 14% of our total tractor fleet was operated by independent contractors as ofDecember 31, 2022 . Independent contractors provide a tractor and a driver and are responsible for all of the costs of operating their equipment and drivers, including interest and depreciation, vehicle rents, driver compensation, fuel and other expenses, in exchange for a fixed payment per mile or percentage of revenue per invoice plus a fuel surcharge pass-through. Payments to independent contractors are recorded in the "Purchased transportation" line item. When independent contractors increase as a percentage of our total tractor fleet, our "Purchased transportation" line item typically will increase, with offsetting reductions in employee driver wages and related expenses, net of fuel (assuming all other factors remain equal). The reverse is true when the percentage of our total fleet operated by company drivers increases. Page 37 Table of Contents Brokerage Segment In our Brokerage segment, we retain the customer relationship, including billing and collection, and we outsource the transportation of the loads to third-party carriers. For this segment, we rely on brokerage employees to procure third-party carriers, as well as information systems to match loads and carriers. Our Brokerage segment revenue is mainly affected by the rates we obtain from customers, the freight volumes we ship through our third-party carriers and our ability to secure third-party carriers to transport customer freight. We generally do not have contracted long-term rates for the cost of third-party carriers, and we cannot assure that our results of operations will not be adversely impacted in the future if our ability to obtain third-party carriers changes or the rates of such providers increase. The most significant expense of our Brokerage segment, which is primarily variable, is the cost of purchased transportation that we pay to third-party carriers, and is included in the "Purchased transportation" line item. This expense generally varies depending upon truckload capacity, availability of third-party carriers, rates charged to customers and current freight demand and customer shipping needs. Other operating expenses are generally fixed and primarily include the compensation and benefits of non-driver personnel (which are recorded in the "Salaries, wages and benefits" line item) and depreciation and amortization expense. The primary performance indicator in our Brokerage segment is operating margin (brokerage operating revenue, less brokerage operating expenses, as a percentage of brokerage operating revenue). Operating margin can be impacted by the rates charged to customers and the costs of securing third-party carriers.
Our Brokerage segment does not require significant capital expenditures and is not asset-intensive like our Truckload segment.
Results of Operations
Revenue
We generate revenue from two primary sources: transporting freight for our customers (including related fuel surcharge revenue) and arranging for the transportation of customer freight by third-party carriers. We have two reportable segments: our Truckload segment and our Brokerage segment. Truckload revenue, before fuel surcharge and truckload fuel surcharge are primarily generated through trucking services provided by our two Truckload service offerings (OTR and dedicated contract). Brokerage revenue is primarily generated through brokering freight to third-party carriers. Our total operating revenue is affected by certain factors that relate to, among other things, the general level of economic activity inthe United States , customer inventory levels, specific customer demand, the level of capacity in the truckload and brokerage industry, the success of our marketing and sales efforts and the availability of drivers, independent contractors and third-party carriers. A summary of our revenue generated by type for the periods indicated is as follows: Year EndedDecember 31, 2022 2021 (in thousands)
Revenue, before fuel surcharge
265,021 154,248
Total operating revenue $ 2,161,170 $ 1,948,526 The primary factors driving the increases in total operating revenue and revenue, before fuel surcharge, were increased pricing and volumes in our Truckload segment combined with increased fuel surcharge revenues.
Page 38
Table of Contents
A summary of our revenue generated by segment for the periods indicated is as
follows:
Year Ended December 31,
2022 2021
(in thousands)
Truckload revenue, before fuel surcharge
265,021 154,248
Total Truckload operating revenue 1,824,855 1,567,520
Brokerage operating revenue 336,315 381,006
Total operating revenue $ 2,161,170 $ 1,948,526 The following is a summary of our key Truckload segment performance indicators, before fuel surcharge, for the periods indicated.
Year Ended
December 31,
2022 2021
Over the road
Average revenue per tractor per week
$ 2.492 $ 2.333
Average revenue miles per tractor per week 1,528 1,600 Average tractors
3,858 3,442
Dedicated
Average revenue per tractor per week
$ 2.926 $ 2.518
Average revenue miles per tractor per week 1,648 1,731 Average tractors
2,695 2,564
Consolidated
Average revenue per tractor per week
$ 2.679 $ 2.416
Average revenue miles per tractor per week 1,577 1,656 Average tractors
6,553 6,006
The primary factors driving the changes in Truckload revenue, were a 10.9%
increase in average revenue per loaded mile and an increase of 9.1% average
available tractors partially offset by a decrease of $42.4 million in
miscellaneous revenue and a 4.8% decrease in average revenue miles per tractor
per week. The increase in average revenue per loaded mile was primarily due to
an approximate 16.4% increase in contractual rates partially offset by an
approximate 13.0% decrease in spot rates. During 2022, revenue generated from
spot rates increased 20.1% compared to 2021. Fuel surcharge revenue increased by
$110.8 million , or 71.8%, to $265.0 million , compared with $154.2 million in
2021. The DOE national weekly average fuel price per gallon averaged
approximately $1.70 per gallon higher for 2022 compared to 2021. The increase in
fuel surcharge revenue primarily relates to increased fuel prices combined with
a 3.6% increase in revenue miles compared to 2021.
The primary performance indicator of our Brokerage segment is brokerage
operating margin (brokerage operating revenue, less brokerage operating
expenses, as a percentage of brokerage operating revenue). The largest factors
that impact our brokerage operating margin are load count, revenue per load, and
purchased transportation. As an asset-light business, brokerage relies upon
third parties to transport the loads it arranges, with the cost paid to the
third party being reflected under brokerage purchased transportation. The ratio
of brokerage purchased transportation to brokerage operating revenue fluctuates
based on factors such as freight volumes, freight rates, the ratio of contract
to spot rate freight, the market rate for third party capacity, and the success
of our team in negotiating for rates and capacity costs. Other operating
expenses consist primarily of salaries, wages, and benefits, depreciation and
amortization, and other general expenses. The following
Page 39
Table of Contents
table details our Brokerage segment operating revenues, purchased transportation
expense and other operating expenses, total operating expenses, and operating
income for the periods indicated.
Year Ended
December 31,
2022 2021
$ % $ %
Brokerage operating revenue $ 336,315 100.0 $ 381,006 100.0Brokerage operating expenses Brokerage purchased transportation 272,660 81.1 332,863 87.4 Brokerage other operating expenses 48,494 14.4 45,037 11.8 Total Brokerage operating expenses 321,154 95.5 377,900 99.2 Brokerage operating income
$ 15,161 4.5$ 3,106 0.8 The primary factors driving the decrease in Brokerage operating revenue were 25.5% decrease in load count partially offset by an 18.5% increase in average revenue per load. We experienced an increase in our Brokerage operating income to$15.2 million compared to$3.1 million in 2021. The increase in Brokerage operating income was due primarily to the increase in revenue per load of 18.5% exceeding the 10.0% increase in cost per load as compared to 2021. During 2022, we focused on improving operating margin over increased revenues.
Operating Expenses
Our operating expenses are attributed to our two reportable segments as follows to arrive at operating income for each segment:
Salaries, wages and benefits: Salaries, wages, and benefits are primarily directly identifiable to an individual segment while some administrative salaries, wages, and benefits are allocated to segments based on load count or other criteria.
Fuel and fuel taxes: Fuel and fuel taxes are directly identifiable to an individual segment, the Truckload segment.
Vehicle Rents and Depreciation and Amortization: Tractor rents and depreciation are charged to the Truckload segment, which is the only segment utilizing this equipment. Trailer rents and depreciation and other trailer operating costs are allocated to segments using a calculation of these costs on a per load basis multiplied by the number of loads moved in each segment during the period. Other depreciation and amortization, such as software, are allocated to segments based primarily on specific identification and some based on load count or other criteria. Purchased Transportation: Purchased transportation expenses are primarily directly identifiable to a specific segment. Purchased transportation expense is comprised of payments to independent contractors, which are charged to our Truckload segment and payments to third-party capacity providers are charged to our Brokerage segment. Operating Expenses and Supplies: For the most part, supplies and maintenance costs are directly identifiable to an individual segment, primarily the Truckload segment. Trailer maintenance is allocated using a calculation of these costs on a per load basis multiplied by the number of loads moved in each segment during the period.
Insurance Premiums and Claims: Individual premiums and claims are directly identifiable to a segment.
Operating Taxes and Licenses: Operating taxes and licenses are directly identifiable to our Truckload segment.
Communications and Utilities: Communications and utilities are directly identifiable to the segment or are allocated to segments based on load count or other criteria.
General and Other Operating Expenses: General and Other operating expenses are
directly identifiable to the segment or are allocated to segments based on load
count or other criteria.
For comparison purposes in the discussion below, we use total operating revenue
and revenue, before fuel surcharge when discussing changes as a percentage of
revenue. As it relates to the comparison of expenses to revenue, before fuel
surcharge, we believe that 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.
Page 40
Table of Contents
Individual expense line items as a percentage of total operating revenue also are affected by fluctuations in the percentage of our revenue generated by independent contractor and brokerage loads.
Salaries, wages, and benefits
Salaries, wages, and benefits consist primarily of compensation for all
employees. Salaries, wages, and benefits are primarily affected by the total
number of miles driven by company drivers, the rate per mile we pay our company
drivers, employee benefits such as health care and workers' compensation, and to
a lesser extent by the number of, and compensation and benefits paid to,
non-driver employees.
The following is a summary of our salaries, wages, and benefits for the periods
indicated:
Year Ended December 31,
2022 2021
(dollars in thousands)
Salaries, wages and benefits $ 726,308 $ 619,983
% of total operating revenue 33.6 % 31.8 %
% of revenue, before fuel surcharge 38.3 % 34.6 %
The increase in salaries, wages, and benefits was due primarily to $74.3 million
in higher driver wages, which was the result of increased company driver miles
of 52.7 million combined with a 7.7% increase in driver pay per mile, and an
increase of $27.0 million in office wages due in part to a 6.6% increase in
average headcount. Our group health and workers' compensation expense increased
12.0% primarily due to increased group health claims expense combined with a
slight increase in workers compensation premiums and claims as compared to the
same period in 2021. During the fourth quarter of 2022, our office salaries and
contract labor decreased approximately 9.0% compared to the third quarter of
2022, due to the implementation of our Realignment Plan. In the near term, we
believe salaries, wages, and benefits will moderate as a result of our plans to
maintain our current fleet size and non-driver personnel count with current
levels. As a percentage of revenue, we expect salaries, wages, and benefits will
fluctuate based on our ability to generate offsetting increases in average
revenue per total mile and the percentage of revenue generated by independent
contractors and brokerage operations, for which payments are reflected in the
"Purchased transportation" line item.
Fuel and fuel taxes
Fuel and fuel taxes consist primarily of diesel fuel expense and fuel taxes for
our company-owned and leased tractors. The primary factors affecting our fuel
and fuel taxes expense are the cost of diesel fuel, the miles per gallon we
realize with our equipment and the number of miles driven by company drivers.
We believe that the most effective protection against net fuel cost increases in
the near term is to maintain an effective fuel surcharge program and to operate
a fuel-efficient fleet by incorporating fuel efficiency measures, such as
auxiliary heating units, installation of aerodynamic devices on tractors and
trailers and low-rolling resistance tires on our tractors, engine idle
limitations and computer-optimized fuel-efficient routing of our fleet.
The following is a summary of our fuel and fuel taxes for the periods indicated:
Year Ended December 31,
2022 2021
(dollars in thousands)
Fuel and fuel taxes $ 328,037 $ 182,875
% of total operating revenue 15.2 % 9.4 %
% of revenue, before fuel surcharge 17.3 % 10.2 %
To measure the effectiveness of our fuel surcharge program, we calculate "net
fuel expense" by subtracting fuel surcharge revenue (other than the fuel
surcharge revenue we reimburse to independent contractors, which is included in
purchased transportation) from our fuel expense. Our net fuel expense as a
percentage of revenue, before fuel surcharge, is affected by the cost of diesel
fuel net of surcharge collection, the percentage of miles driven by company
tractors and our percentage
Page 41
Table of Contents
of non-revenue generating miles, for which we do not receive fuel surcharge
revenues. Net fuel expense as a percentage of revenue, before fuel surcharge, is
shown below:
Year Ended December 31,
2022 2021
(dollars in thousands)Total fuel surcharge revenue$ 265,021
44,972 32,503
Company fuel surcharge revenue$ 220,049 $ 121,745 Total fuel and fuel taxes$ 328,037 $ 182,875 Less: company fuel surcharge revenue 220,049
121,745
Net fuel expense $ 107,988 $ 61,130
% of total operating revenue 5.0 % 3.1 %% of revenue, before fuel surcharge 5.7 %
3.4 %
During 2022, the net fuel expense increase as a percentage of revenue before fuel surcharge is primarily due to our excess exposure to the spot market which generally does not have adequate fuel surcharge revenue to offset increased fuel prices, combined with the average company fuel price per gallon increase of 56.1% partially offset by a$98.3 million increase in company fuel surcharge revenue as compared to 2021. In the near term, our net fuel expense is expected to fluctuate as a percentage of total operating revenue and revenue, before fuel surcharge, based on factors such as diesel fuel prices, the percentage recovered from fuel surcharge programs, the percentage of uncompensated miles, the percentage of revenue generated by independent contractors, and the 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).
Vehicle Rents and Depreciation and Amortization
Vehicle rents consist primarily of payments for tractors and trailers financed
with operating leases. The primary factors affecting this expense item include
the size and age of our tractor and trailer fleets, the cost of new equipment
and the relative percentage of owned versus leased equipment.
Depreciation and amortization consists primarily of depreciation for owned
tractors and trailers and to a lesser extent computer software amortization. The
primary factors affecting these expense items include the size and age of our
tractor and trailer fleets, the cost of new equipment and the
relative percentage of owned equipment and equipment acquired through debt or
finance leases versus equipment leased through operating leases. We use a mix of
finance leases and operating leases to finance our revenue equipment with
individual decisions being based on competitive bids and tax projections. Gains
or losses realized on the sale of owned revenue equipment are included in
depreciation and amortization for reporting purposes.
Vehicle rents and depreciation and amortization are closely related because both
line items fluctuate depending on the relative percentage of owned equipment and
equipment acquired through finance leases versus equipment leased through
operating leases. Vehicle rents increase with greater amounts of equipment
acquired through operating leases, while depreciation and amortization increases
with greater amounts of owned equipment and equipment acquired through finance
leases. Because of the inverse relationship between vehicle rents and
depreciation and amortization, we review both line items together.
Page 42
Table of Contents
The following is a summary of our vehicle rents and depreciation and amortization for the periods indicated:
Year Ended December 31,
2022 2021
(dollars in thousands)
Vehicle rents $ 104,121
82,289 81,976
Vehicle rents and depreciation and amortization of property and equipment$ 186,410 $ 172,061 % of total operating revenue 8.6 % 8.8 % % of revenue, before fuel surcharge 9.8 %
9.6 %
The increase in absolute dollar terms of vehicle rents was primarily due to increased tractors and trailers financed under operating leases compared to 2022. The increase in depreciation and amortization, net of (gains) losses on sale of property, is due in part to increased software amortization partially offset by a decrease in the number of owned trailers and a decrease in average depreciation per tractor as compared to 2021.
Purchased Transportation
Purchased transportation consists of the payments we make to independent contractors, including fuel surcharge reimbursements paid to independent contractors, in our Truckload segment, and payments to third-party carriers in our Brokerage segment.
The following is a summary of our purchased transportation for the periods
indicated:
Year Ended December 31,
2022 2021
(dollars in thousands)
Purchased transportation $ 533,014 $ 634,271
% of total operating revenue 24.7 % 32.6 %
% of revenue, before fuel surcharge 28.1 % 35.3 %
Because we reimburse independent contractors for fuel surcharges we receive, we
subtract fuel surcharge revenue reimbursed to them from our purchased
transportation. The result, referred to as purchased transportation, net of fuel
surcharge reimbursements, is evaluated as a percentage of total operating
revenue and as a percentage of revenue, before fuel surcharge, as shown below:
Year Ended December 31,
2022 2021
(dollars in thousands)
Purchased transportation $ 533,014
44,972 32,503
Purchased transportation, net of fuel surcharge reimbursement$ 488,042 $ 601,768 % of total operating revenue 22.6 % 30.9 % % of revenue, before fuel surcharge 25.7 %
33.5 %
Brokerage purchased transportation decreased$60.2 million , or 18.1%, due to a 25.5% decrease in load count offset by a 10.0% increase in cost per load as compared to 2021. Truckload purchased transportation decreased$53.5 million , or 19.9% primarily due to decreased independent contractor miles of 26.6% as compared to 2021. This expense category will fluctuate with the number and percentage of loads hauled by independent contractors and third-party carriers, as well as the amount of fuel surcharge revenue passed through to independent contractors. 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 carriers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of total operating revenue and revenue, before fuel surcharge, absent an offsetting increase in revenue. We continue to actively Page 43 Table of Contents attempt to expand our Brokerage segment and recruit independent contractors. Our success in growing our lease-purchase program and independent contractor drivers have contributed to increased purchased transportation expense. If we are successful in continuing these efforts, we would expect this line item to increase as a percentage of total operating revenue and revenue, before fuel surcharge.
Operating Expenses and Supplies
Operating expenses and supplies consist primarily of ordinary vehicle repairs
and maintenance costs, driver on-the-road expenses, tolls and driver recruiting
and training costs. Operating expenses and supplies are primarily affected by
the age of our company-owned and leased fleet of tractors and trailers, the
number of miles driven in a period and driver turnover.
The following is a summary of our operating expenses and supplies for the
periods indicated:
Year Ended December 31,
2022 2021
(dollars in thousands)
Operating expenses and supplies
8.9 % 7.6 %
% of revenue, before fuel surcharge 10.1 % 8.2 %
The primary factors driving the increase in operating expenses and supplies were
increased tractor and trailer maintenance and tires due in part to increased
company tractors and miles, increased driver hiring costs combined with
increased tolls and other operating expenses as compared to 2021.
Insurance Premiums and Claims
Insurance premiums and claims consists primarily of retained amounts for liability (personal injury and property damage), physical damage and cargo damage, as well as insurance premiums. The primary factors affecting our insurance premiums and claims are the frequency and severity of accidents, trends in the development factors used in our actuarial accruals and developments in large, prior year claims. The number of accidents tends to increase with the miles we travel. With our significant retained amounts, insurance claims expense may fluctuate significantly and impact the cost of insurance premiums and claims from period-to-period, and any increase in frequency or severity of claims or adverse loss development of prior period claims would adversely affect our financial condition and results of operations.
The following is a summary of our insurance premiums and claims expense for the
periods indicated:
Year Ended December 31,
2022 2021
(dollars in thousands)
Insurance premiums and claims $ 115,735 $ 83,376
% of total operating revenue 5.4 % 4.3 %
% of revenue, before fuel surcharge 6.1 % 4.6 %
The primary factors driving the increase in insurance premiums and claims were
increased auto liability claims and premium expenses due to adverse development
in prior year claims combined with increased current year physical damage and
auto liability claims expense due to increased frequency and average dollars per
claim. We renewed our liability insurance policies effective September 1, 2022
and decreased our premiums 3.3% while preserving our coverage limits at $75.0
million per occurrence.
General and Other Operating Expenses
General and other operating expenses consist primarily of legal and professional services fees, general and administrative expenses and other costs.
Page 44
Table of Contents
The following is a summary of our general and other operating expenses for the
periods indicated:
Year Ended December 31,
2022 2021
(dollars in thousands)
General and other operating expenses
3.5 % 3.2 %
% of revenue, before fuel surcharge 4.0 % 3.5 %
General and other expenses increased primarily due to computer software services
combined with a legal settlement of
Interest
Interest expense consists of cash interest and amortization of deferred financing fees.
The following is a summary of our interest expense for the periods indicated:
Year Ended December 31,
2022 2021
(in thousands)
Interest expense, excluding non-cash items
603 613
Interest expense, net $ 19,054 $ 14,532 For 2022, interest expense increased primarily due to increased borrowings and higher average interest rates as compared to 2021.
Other
During 2022, we recorded an unrealized loss of
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our business requires substantial amounts of cash to cover operating expenses as
well as to fund capital expenditures, working capital changes, principal and
interest payments on our obligations, lease payments, letters of credit to
support insurance requirements and tax payments when we generate taxable income.
Recently, we have financed our capital requirements with borrowings under our
Credit Facility, cash flows from operating activities, direct equipment
financing, operating leases and proceeds from equipment sales.
We make substantial net capital expenditures to maintain a modern company
tractor fleet and refresh our trailer fleet. During 2023, we currently plan to
replace owned tractors with new owned tractors as they reach approximately
475,000 to 575,000 miles. Our mix of owned and leased equipment may vary over
time due to tax treatment, financing options and flexibility of terms, among
other factors.
We believe we can fund our expected cash needs, including debt repayment, in the
short-term with projected cash flows from operating activities, borrowings under
our Credit Facility and direct debt and lease financing we believe to be
available for at least the next 12 months. Over the long-term, we expect that we
will continue to have significant capital requirements, which may require us to
seek additional borrowings or lease financing. We have obtained a significant
portion of our revenue equipment under operating leases, which are not reflected
as net capital expenditures but are recorded as operating lease liabilities on
our balance sheet. The availability of financing will depend upon our financial
condition and results of operations as well as prevailing market conditions.
Page 45
Table of Contents
Sources of Liquidity
Credit Facility
On January 28, 2020 , we entered into the Credit Facility and contemporaneously
with the funding of the Credit Facility paid off obligations under our then
existing credit facility and terminated such facility. The Credit Facility is a
$250.0 million revolving credit facility, with an uncommitted accordion feature
that, so long as no event of default exists, allows the Company to request an
increase in the revolving credit facility of up to $75.0 million .
The Credit Facility is a five-year facility scheduled to terminate on January
28, 2025 . Borrowings under the Credit Facility are classified as either "base
rate loans" or "term SOFR loans". Base rate loans accrue interest at a base
rate equal to the highest of (A) the Federal Funds Rate plus 0.50%, (B) the
Agent's prime rate, and (C) SOFR for a one month interest period. Term SOFR
loans accrue interest at SOFR for a one, three, or six month period, at the
Company's election, plus an adjustment of 0.10% for one month SOFR period, 0.15%
for a three month SOFR period, or 0.25% for a six month SOFR period, plus an
applicable margin that adjusts quarterly between 1.25% and 1.75% based on the
ratio of daily average availability under the Credit Facility to the daily
average of the lesser of the borrowing base or the revolving credit facility.
The Credit Facility includes, within its
An unused line fee of 0.25% is applied to the average daily amount by which the lenders' aggregate revolving commitments exceed the outstanding principal amount of revolver loans and aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The Credit Facility is secured by a pledge of substantially all of the Company's assets, excluding, among other things, any real estate or revenue equipment financed outside the Credit Facility. Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A)$250.0 million ; or (B) the sum of (i) 87.5% of eligible billed accounts receivable, plus (ii) 85.0% of eligible unbilled accounts receivable (less than 30 days), plus (iii) 85.0% of the net orderly liquidation value percentage applied to the net book value of eligible revenue equipment, plus (iv) the lesser of (a) 80.0% the fair market value of eligible real estate or (b)$25.0 million . The Credit Facility contains a single springing financial covenant, which requires a consolidated fixed charge coverage ratio of at least 1.0 to 1.0. The financial covenant is tested only in the event excess availability under the Credit Facility is less than the greater of (A) 10.0% of the lesser of the borrowing base or revolving credit facility or (B)$20.0 million . Based on excess availability as ofDecember 31, 2022 , there was no fixed charge coverage ratio 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. The Credit Facility contains certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions and dispositions, affiliate transactions, and other indebtedness.
The Company has letters of credit of
See Notes 8 and 9 to the accompanying consolidated financial statements for additional disclosures regarding our debt and leases, respectively.
Cash Flows
Our summary statements of cash flows for the periods indicated are set forth in
the table below:
Year Ended December 31,
2022 2021
(in thousands)
Net cash provided by operating activities
(153,114) (96,997)
Net cash provided by financing activities 106,230 18,620
Page 46
Table of Contents
Operating Activities
For 2022, we generated cash flows from operating activities of $43.5 million , a
decrease of $35.1 million compared to 2021. The decrease was due primarily to a
$49.6 million decrease in net income adjusted for noncash items, combined with a
$52.7 million decrease in our operating liabilities offset by $67.2 million
decreased operating assets. The decrease in operating assets is primarily due to
deceased growth in Brokerage receivables in 2022 compared to 2021 partially
offset by an increase in Truckload receivables. The decrease in operating
liabilities was due in part to decreased Brokerage purchase transportation due
to fewer loads combined with decreased accrued wages and benefits due to timing
of payments offset by increased insurance reserves. Our decrease in net income
adjusted for noncash items was due in part to increased insurance and claims
expense, increased fuel costs per mile and increased driver and office payroll
per mile, decreased average revenue miles per tractor per week, partially offset
by increased operating margin at Brokerage, increased revenue per mile of 10.9%
and increased available tractors.
Investing Activities
For 2022, net cash flows used in investing activities increased primarily as a result of increased net tractor purchases combined with decreased proceeds from sales of used equipment compared to 2021. During 2022, our miscellaneous capital expenditures were$46.9 million primarily due to computer software and terminal renovations offset by proceeds of$9.8 million related to the sale of a terminal and the improvements and office furniture associated with an office lease exited compared to$47.1 million in 2021. We expect our net capital expenditures for calendar year 2023 will approximate less than$75.0 million to execute our equipment replacement strategy and will be financed with cash from operations, borrowings on the Credit Facility and secured debt financing.
Financing Activities
For 2022, the increase in net cash flows provided by financing activities is due in part to increased borrowings under our Credit Facility along with decreased payments of long-term debt as compared to the same period in 2021.
Working Capital
As ofDecember 31, 2022 , we had a working capital deficit of$129.4 million , representing a$49.3 million decrease in our working capital fromDecember 31, 2021 . When we analyze our working capital, we typically exclude balloon payments in the current maturities of long-term debt and current portion of operating lease liabilities as these payments are typically either funded with the proceeds from equipment sales or addressed by extending the maturity of such payments. We believe this facilitates a more meaningful analysis of our changes in working capital from period-to-period. Excluding balloon payments included in current maturities of long-term debt and current portion of operating lease liabilities as ofDecember 31, 2022 , we had a working capital deficit of$32.8 million , compared with a working capital deficit of$54.1 million as ofDecember 31, 2021 . The increase in working capital was due in part to increased assets held for sale combined with decreased accounts payable, decreased current maturities of debt and current portion of operating lease liabilities excluding balloon payments. Working capital deficits are common to many trucking companies that operate by financing revenue equipment purchases through borrowing or finance leases and who use operating leases. When we finance revenue equipment through borrowing or finance leases, the principal amortization scheduled for the next twelve months is categorized as a current liability, although the revenue equipment is classified as a long-term asset. Consequently, each purchase of revenue equipment financed with borrowing or finance leases decreases working capital. Similarly, our operating lease right of use assets are classified as long-term, while a portion of the corresponding lease liabilities are classified as a current liability. We believe a working capital deficit has little impact on our liquidity. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future. Page 47 Table of Contents
Contractual Obligations and Commercial Commitments
The table below summarizes our contractual obligations as ofDecember 31, 2022 : Payments Due by Period Less than More than 1 year 1 3 years 3 5 years 5 years Total (in thousands)
Longterm debt obligations(1)$ 141,251 285,502 81,723 15,639$ 524,115 Finance lease obligations(2) 2,363 2,046 1,184 3,435 9,028 Operating lease obligations(3) 117,240 155,619 61,953 39,552 374,364 Purchase obligations(4) 134,473 5,002 2,501 - 141,976
Total contractual obligations(5)
147,361
Including interest obligations on long-term debt, excluding fees. The table (1) assumes long-term debt is held to maturity and does not reflect events
subsequent to
(2) Including interest obligations on finance lease obligations.
We lease certain revenue and service equipment and office and service center
facilities under long-term, non-cancelable operating lease agreements
expiring at various dates through
terms are generally three to five years for tractors and five to eight years
for trailers. The lease terms and any subsequent extensions generally
represent the estimated usage period of the equipment, which is generally (3) substantially less than the economic lives. Certain revenue equipment leases
provide for guarantees by us of a portion of the specified residual value at
the end of the lease term. The maximum potential amount of future payments
(undiscounted) under these guarantees is approximately
revenue equipment is covered by repurchase or trade agreements between us and
the equipment manufacturer.
We had commitments outstanding as of
other equipment of
software licenses of
benefits. These purchase commitments are expected to be financed by operating
leases, long-term debt, proceeds from sales of existing equipment and cash
flows from operating activities.
(5) Excludes deferred taxes and long or short-term portion of self-insurance
claims accruals.
INFLATION
Inflation in the price of revenue equipment, tires, diesel fuel, health care,
operating tolls and taxes and other items has impacted our operating costs over
the past several years. A prolonged or more severe period of inflation in these
or other items would adversely affect our results of operations unless freight
rates correspondingly increase. Historically, the majority of the increase in
fuel costs has been passed on to our customers through a corresponding increase
in fuel surcharge revenue, making the impact of the increased fuel costs on our
results of operations less severe. Inflation related to other costs is not
directly covered from our customers through a surcharge mechanism. Because these
potential cost increases would be relatively consistent across the industry, we
would expect corresponding rate increases generally to offset these increased
costs over time. If these and other costs escalate and we are unable to recover
such costs timely with effective fuel surcharges and rate increases, it would
have an adverse effect on our operations and profitability.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
position in the preparation of our financial statements in conformity with GAAP.
Actual results could differ significantly from those estimates under different
assumptions and conditions. We believe that the following discussion addresses
our most critical accounting policies, which are those that are most important
to the portrayal of our financial condition and results of operations and
require management's most difficult, subjective and complex judgments,
Page 48
Table of Contents
often as a result of the need to make estimates about the effect of matters that are inherently uncertain. See Note 2 of the accompanying consolidated financial statements for additional information about our critical accounting policies and estimates. Income Taxes Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in years in which the temporary differences are expected to be recovered or settled. When it is more likely than not that all or some portion of specific deferred tax assets, such as state tax credit carry-forwards or state net operating loss carry-forwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined to be not realizable. The determination of the combined tax rate used to calculate our provision for income taxes for both current and deferred income taxes also requires significant judgment by management. We value the net deferred tax asset or liability by using enacted tax rates that we believe will be in effect when these temporary differences are recovered or settled. We use the combined tax rates at the time the financial statements are prepared since more accurate information is not available. If changes in the federal statutory rate or significant changes in the statutory state and local tax rates occur prior to or during the reversal of these items or if our filing obligations were to change materially, this could change the combined rate and, by extension, our provision for income taxes. We account for uncertain tax positions in accordance with ASC 740, Income Taxes and record a liability when such uncertainties meet the more likely than not recognition threshold.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and equipment is computed using the straight-line method for financial reporting purposes and accelerated methods for tax purposes over the estimated useful lives of the related assets (net of estimated salvage value or trade-in value). We generally use estimated useful lives of three to five years for tractors and ten or more years for trailers with estimated salvage values ranging from 25% to 50% of the capitalized cost. The depreciable lives of our revenue equipment represent the estimated usage period of the equipment, which is generally substantially less than the economic lives. The residual value of a substantial portion of our equipment is covered by repurchase or trade agreements between us and the equipment manufacturer. Periodically, we evaluate the useful lives and salvage values of our revenue equipment and other long-lived assets based upon, but not limited to, our experience with similar assets including gains or losses upon dispositions of such assets, conditions in the used equipment market and prevailing industry practices. Changes in useful lives or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material impact on our financial results. Further, if our equipment manufacturer does not perform under the terms of the agreements for guaranteed trade-in values, such non-performance could have a materially negative impact on financial results. We review our property and equipment whenever events or circumstances indicate the carrying amount of the asset may not be recoverable. An impairment loss equal to the excess of carrying amount over fair value would be recognized if the carrying amount of the asset is not recoverable.
Claims and Insurance Accruals
Claims and insurance accruals consist of estimates of cargo loss, physical damage, group health, liability (personal injury and property damage) and workers' compensation claims and associated legal and other expenses within our established retention levels. Claims in excess of retention levels are generally covered by insurance in amounts we consider adequate. Claims accruals represent the uninsured portion of pending claims including estimates of adverse development of known claims, plus an estimated liability for incurred but not reported claims and the associated expense. Accruals for cargo loss, physical damage, group health, liability and workers' compensation claims are estimated based on our evaluation of the type and severity of individual claims and historical information, primarily our own claims experience, along with assumptions about future events combined with the assistance of independent actuaries in the case of workers' compensation and liability. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near future.
Workers' compensation and liability claims are particularly subject to a significant degree of uncertainty due to the potential for growth and development of the claims over time. Claims and insurance reserves related to workers'
Page 49
Table of Contents
compensation and liability are estimated by a third-party actuary and we refer
to these estimates in establishing the reserve. Liability reserves are estimated
based on historical experience and trends, the type and severity of individual
claims and assumptions about future costs. Further, in establishing the workers'
compensation and liability reserves, we must take into account and estimate
various factors, including, but not limited to, assumptions concerning the
nature and severity of the claim, the effect of the jurisdiction on any award or
settlement, the length of time until ultimate resolution, inflation rates in
health care and in general, interest rates, legal expenses and other factors.
Our actual experience may be different than our estimates, sometimes
significantly. Changes in assumptions made in actuarial studies could
potentially have a material effect on the provision for workers' compensation
and liability claims. Additionally, if any claim were to exceed our coverage
limits, we would have to accrue for and pay the excess amount, which could have
a material adverse effect on our financial condition, results of operations and
cash flows.
Recent Accounting Pronouncements
See Note 2 of the accompanying consolidated financial statements for information about recent accounting pronouncements.
Page 50
Table of Contents
© Edgar Online, source
