# COVENANT LOGISTICS GROUP, INC. (CVLG) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from COVENANT LOGISTICS GROUP, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/928658/000143774922004571/cvti20211231_10k.htm
Accession: 0001437749-22-004571
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CVLG/
All MD&A years: /company/CVLG/mda/
Next year: /company/CVLG/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 on Form 10-K, as well as the consolidated financial statements and notes thereto in Part II, Item 8 of this Annual Report on Form 10-K. 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 on Form 10-K, 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.

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 their business processes. We believe disciplined planning and execution of our strategy will reduce the cyclicality 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 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. In 2020, we discontinued our solo-driver refrigerated services. Within our Dedicated reportable segment we have continued reducing our business with less profitable customers while working to grow our relationships with customers that are more profitable. We have a robust pipeline of opportunities for our Dedicated service offering and will continue to transition business to new customers in instances where we are unable to come to terms with existing customers. Managed Freight produced record performance in 2021 as a result of strong execution and effective coordination with our Expedited and Dedicated segments, while Warehousing grew revenue, but fell short of our 2021 margin goals as a result of start-up rent on a new facility and increased labor costs. The table below reflects the total revenue trends in each of these reportable segments:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(in thousands)","","2021","","","2020"],["Revenues:"],["Expedited","","$","337,063","","","$","320,202"],["Dedicated","","","324,541","","","","288,652"],["Managed Freight","","","321,236","","","","177,579"],["Warehousing","","","63,163","","","","52,128"],["Total revenues","","$","1,046,003","","","$","838,561"]]
[[/GREPCENT_TABLE]]

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. At the same time, we paid down over $200 million in debt and lease obligations. As a result of those changes, for 2020 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. Our results for 2021 exhibited the power of these changes to our operating model and show what our team can accomplish with diligent execution and teamwork.

The following is a summary of infrequent and non-cash transactions that occurred during 2020:

[[GREPCENT_TABLE]]
[["(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"]]
[[/GREPCENT_TABLE]]

Our consolidated financial results are summarized as follows:

[[GREPCENT_TABLE]]
[["","\u25cf","Total revenue was $1,046.0 million, compared with $838.6 million for 2020, and freight revenue (which excludes revenue from fuel surcharges) was $949.9 million, compared with $776.2 million for 2020;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Operating income from continuing operations was $67.2 million, compared with operating loss from continuing operations of $14.0 million for 2020;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Net income was $60.7 million, or $3.57 per diluted share, compared with net loss of $42.7 million, or $2.46 per diluted share, for 2020; Net income from continuing operations was $79.2 million, or $3.42 per diluted share, for 2021 compared to $16.9 million net loss from continuing operations or $0.81 per diluted share in 2020. Net income from discontinued operations of $2.5 million, or $0.15 per diluted share, for 2021 compared to net loss from discontinued operations of $28.6 million, or $1.65 per diluted share in 2020;"],["","\u25cf","With available borrowing capacity of $83.6 million under our Credit Facility as of December 31, 2021, we do not expect to be required to test our fixed charge covenant in the foreseeable future;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Our equity investment in TEL provided $14.8 million of pre-tax earnings in 2021, compared to $3.9 million for 2020;"],["","\u25cf","Since December 31, 2020, total indebtedness, net of cash, decreased by $36.1 million to $65.8 million;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Leverage ratio (average total indebtedness, net of cash, divided by the sum of operating income (loss, depreciation and amortization, gain on disposition of property and equipment, net, and impairment of long lived property and equipment) was 0.72 at December 31, 2021, compared to 2.89 at December 31, 2020;"],["","\u25cf","Stockholders' equity at December 31, 2021 was $349.7 million; and"],["","\u25cf","Tangible book value per end-of-quarter basic share at December 31, 2021 was $17.10, compared to $13.03 at December 31, 2020."]]
[[/GREPCENT_TABLE]]

COVID-19

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:

[[GREPCENT_TABLE]]
[["","\u25cf","continue to execute our Infectious Disease Response Plan and Incident Management Crisis Response Protocols;"],["","\u25cf","follow our established 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;"],["","\u25cf","communicate with teammates through videos, virtual meetings and emails about safety protocols and CDC requirements and recommendations;"],["","\u25cf","continue increased sanitation protocols to sanitize equipment and common areas multiple times per day in order to mitigate risk and exposure situations;"],["","\u25cf","promote hygiene practices recommended by the CDC, including social distancing requiring six or more feet between teammates where possible, and staggered work times;"],["","\u25cf","support 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"],["","\u25cf","follow 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."]]
[[/GREPCENT_TABLE]]

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, we intend to steadily and intentionally grow the percentage of our revenue generated by Dedicated, Managed Freight, and Warehousing segments, while selectively investing in the Expedited segment to remain a leader in that sector. At the same time, we will continue to diligently pursue reducing unnecessary overhead, improving our safety, service, and productivity, diversifying our customer base with less seasonal and cyclical exposure, improving customer contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas. Over time, we expect Expedited and Dedicated to generate high single-digit to low double-digit operating margins, and Managed Freight and Warehousing to generate mid-to-high single-digit operating margins. Based on our expected asset intensity, these operating margins should produce double-digit returns on invested capital.

With diligence and accountability, we expect to grow our market share organically and through acquisitions, continue to improve our operations, and be a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation. Based on our anticipated cash flow generation profile, we will be able to continue our cash dividend program and evaluate a full range of capital allocation alternatives, including debt paydown, organic growth, acquisition and disposition opportunities, and stock repurchases.

Our outlook is positive for continued operational progress during 2022. For at least the first few months of 2022, we anticipate a strong freight market accompanied by constrained capacity due to a national driver and equipment shortage. During this period, we expect a continuation of significant increases in pricing and operating costs, and we expect to continue to improve the margin expectation in certain Dedicated contracts and the duration of fleet commitments in certain Expedited contracts. Later in the year, we expect demand to become more balanced as supply chains gain fluidity, economic growth potentially slows, and consumer spending on services rebounds. 

We expect cost pressure to persist even if freight demand moderates. From wages and insurance, to equipment and parts, to fuel prices and interest rates, the cost of our business is increasing. During the first half of 2022, we will have difficult comparisons due to unusually low insurance and claims and overhead expense during the 2021 period. Overall, absent a substantial, near-term deterioration in market forces, we expect a combination of pricing gains, improvement in our Dedicated segment, revenue growth, and continued focus on cost control, to support 2022 operating results similar to those in 2021, although the timing of various market factors and the speed of our execution could cause a range of possible results.

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RESULTS OF CONSOLIDATED OPERATIONS

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020.

The following table sets forth total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated:

Revenue

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(in thousands)","","2021","","","2020"],["Revenue:"],["Freight revenue","","$","949,913","","","$","776,218"],["Fuel surcharge revenue","","","96,090","","","","62,343"],["Total revenue","","$","1,046,003","","","$","838,561"]]
[[/GREPCENT_TABLE]]

The increase in freight revenue resulted from a $143.7 million, $21.4 million, and $10.8 million increase in Managed Freight, Dedicated, and Warehousing freight revenue, respectively, partially offset by a $2.1 million decrease in freight revenue from our Expedited reportable segment.

Our Expedited total revenue increased $16.9 million, as fuel surcharge revenue increased $19.0 million and freight revenue decreased $2.1 million. The decrease in 2021 Expedited freight revenue relates to a 254 (or 22.9%) average tractor decrease partially offset by an increase in average freight revenue per tractor per week of 29.2% compared to 2020. The increase in average freight revenue per tractor per week is the result of an approximately 19.0% increase in average miles per tractor and an 8.3%, or 15.0 cents per mile, increase in average rate per total mile when compared to 2020. Seated team driven tractors decreased approximately 6.2% to an average of 784 teams in 2021 from 836 teams in 2020. 

Our Dedicated total revenue increased $35.9 million, as freight revenue increased $21.4 million and fuel surcharge revenue increased $14.5 million. The increase in 2021 Dedicated freight revenue relates to an increase in average freight revenue per tractor per week of 11.5%, partially offset by a 40 (or 2.5%) average tractor decrease, compared to 2020. The increase in average freight revenue per tractor per week is the result of a 16.6%, or 31.2 cents per mile increase in average rate per total mile, partially offset by 4.7% fewer miles per tractor. As part of our focus to improve Dedicated profitability we seek to continue to improve revenue per tractor per week in 2022.

Managed Freight total revenue increased $143.7 million in 2021 compared to 2020 as the result of a robust freight market, executing various spot rate opportunities, and handling overflow freight from both our Expedited and Dedicated truckload operations.

The $11.0 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.

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Salaries, wages, and related expenses

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Salaries, wages, and related expenses","","$","350,246","","","$","315,023"],["% of total revenue","","","33.5","%","","","37.6","%"],["% of freight revenue","","","36.9","%","","","40.6","%"]]
[[/GREPCENT_TABLE]]

The increase in salaries, wages, and related expenses on a dollars basis is primarily due to substantial cents per mile driver pay increases made throughout 2021, management incentive compensation attributable to favorable 2021 results, and increases in contract labor and workers' compensation costs for 2021 compared to 2020. The increase in driver pay was partially offset by a 7.7% decrease on total miles compared to 2020. The decreases on a percentage basis are due to increased revenue over which to spread those costs.

We believe salaries, wages, and related expenses will continue to increase going forward as a result of driver pay changes put in place in the tight freight market. Additionally, we expect salaries, wages, and related expenses to continue to increase as the result of wage inflation, higher healthcare costs, and, in certain periods, increased incentive compensation due to better performance. In addition to the driver pay increases put into place during the fourth quarter of 2020 for our Dedicated reportable segment, in 2021 we implemented the largest driver pay increases 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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Fuel expense","","$","103,641","","","$","77,443"],["% of total revenue","","","9.9","%","","","9.2","%"],["% of freight revenue","","","10.9","%","","","10.0","%"]]
[[/GREPCENT_TABLE]]

The changes in total fuel expense are primarily related to higher fuel prices in 2021, partially offset by a 7.7% 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 $0.74 per gallon, or 29.0%,  higher in 2021 than 2020.

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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:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Total fuel surcharge","","$","96,090","","","$","62,343"],["Less: Fuel surcharge revenue reimbursed to independent contractors and other third parties","","","7,683","","","","7,153"],["Company fuel surcharge revenue","","$","88,407","","","$","55,190"],["Total fuel expense","","$","103,641","","","$","77,443"],["Less: Company fuel surcharge revenue","","","88,407","","","","55,190"],["Net fuel expense","","$","15,234","","","$","22,253"],["% of freight revenue","","","1.6","%","","","2.9","%"]]
[[/GREPCENT_TABLE]]

Net fuel expense decreased $7.0 million, or 32.3%, for the year ended December 31, 2021 compared to 2020. As a percentage of freight revenue, net fuel expense decreased 1.3% for the year ended December 31, 2021, compared to 2020. These decreases primarily resulted from increased fuel surcharge revenue and fewer total miles, partially offset by higher fuel costs. Also, as a result of the change in our business mix our fleet was more fuel efficient due to less idling and less temperature-controlled freight thus reducing refrigerated trailer fuel expense. Additionally, $0.4 million of gains and $0.3 million of losses were reclassified from accumulated other comprehensive income (loss) to our results of operations for the years ended December 31, 2021 and 2020, respectively, as changes to fuel expense related to the fuel hedge contracts that expired. As of December 31, 2021, we have no remaining fuel hedge contracts.

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Operations and maintenance","","$","59,269","","","$","48,368"],["% of total revenue","","","5.7","%","","","5.8","%"],["% of freight revenue","","","6.2","%","","","6.2","%"]]
[[/GREPCENT_TABLE]]

The increase in operations and maintenance expense on a dollars basis was primarily related to an additional $6.8 million in costs related to the recruitment and onboarding of drivers when compared to 2020, despite having a smaller fleet in 2021. This increase is attributable to the extremely tight driver market and our focused effort to seat more of our tractors. Additionally, maintenance costs, including parts and labor, have increased as compared to the 2020 year as a result of the global supply chain disruptions. 

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, the reliability of new and untested revenue equipment models, and the global disruption of the supply chain. For 2022, due to the relatively new age of our tractor fleet and remaining unexpired warranty coverage for most of our tractors, we do not expect the percentage of our equipment being operated outside of warranty coverage to increase in any material respect even if delays occur; however, operations and maintenance costs may increase regardless due to wage and parts inflation.

Revenue equipment rentals and purchased transportation

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Revenue equipment rentals and purchased transportation","","$","331,685","","","$","222,705"],["% of total revenue","","","31.7","%","","","26.6","%"],["% of freight revenue","","","34.9","%","","","28.7","%"]]
[[/GREPCENT_TABLE]]

The increase in revenue equipment rentals and purchased transportation was 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 11.1% for 2020 to 8.2% for 2021. 

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We expect revenue equipment rentals to decrease going forward as we transition from tractors held under operating leases to owned equipment in 2022. However, we expect purchased transportation to fluctuate as volumes in our Managed Freight reportable segment may be volatile. 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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Operating taxes and licenses","","$","10,899","","","$","11,621"],["% of total revenue","","","1.0","%","","","1.4","%"],["% of freight revenue","","","1.1","%","","","1.5","%"]]
[[/GREPCENT_TABLE]]

Operating taxes and licenses remained relatively flat in 2021 compared to 2020.

Insurance and claims

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Insurance and claims","","$","38,788","","","$","53,052"],["% of total revenue","","","3.7","%","","","6.3","%"],["% of freight revenue","","","4.1","%","","","6.8","%"]]
[[/GREPCENT_TABLE]]

Insurance and claims per mile cost decreased to 14.2 cents per mile for 2021 from 17.5 cents per mile in 2020. The decrease is primarily a result of the occurrence and development of large claims in 2020 and additional premium expense during 2020 as a result of the erosion of our excess insurance coverage layer $9.0 million in excess of $1.0 million, partially offset by the 2020 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 and a 7.7% reduction in total miles as compared to 2020. Additionally, incident rates during 2021 decreased as compared to 2020.

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 policy period that ran from 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 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, 2021, consistent with an extremely difficult insurance market for the industry, our insurance renewal terms include a higher fixed premium expense of approximately $0.4 million per quarter. We maintained our retention and limits set in place during the prior renewal cycle. 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. 

We expect insurance and claims expense to continue to be volatile over the long-term. Recently the trucking industry has experienced a decline in the number of carriers and underwriters that write insurance policies or that are willing to provide insurance for trucking companies. 

Communications and utilities

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Communications and utilities","","$","4,558","","","$","5,898"],["% of total revenue","","","0.4","%","","","0.7","%"],["% of freight revenue","","","0.5","%","","","0.8","%"]]
[[/GREPCENT_TABLE]]

Communications and utilities remained relatively flat in 2021 compared to 2020.

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General supplies and expenses

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["General supplies and expenses","","$","29,673","","","$","34,143"],["% of total revenue","","","2.8","%","","","4.1","%"],["% of freight revenue","","","3.1","%","","","4.4","%"]]
[[/GREPCENT_TABLE]]

The decrease in general supplies and expenses primarily relates to the additional reserves in place in 2020 for potentially uncollectible accounts receivable. Additionally we made strategic planning and process improvement investments that were part of our organizational restructuring in 2020.

Depreciation and amortization

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Depreciation and amortization","","$","53,881","","","$","65,472"],["% of total revenue","","","5.2","%","","","7.8","%"],["% of freight revenue","","","5.7","%","","","8.4","%"]]
[[/GREPCENT_TABLE]]

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 $10.5 million in 2021 compared to 2020, to $49.8 million, primarily due to the mix change in the overall business that reduced total tractor count and increased utilization, along with reductions in terminals and other capital assets. Amortization of intangible assets decreased $1.1 million in 2021 compared to 2020, to $4.0 million. This decrease is the result of the 2020 termination of the non-compete agreement with a former Landair executive partially offset by the revised remaining useful life of the Landair trade name to 15 months as of June 30, 2020, 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 to increase going forward as the cost of new equipment increases and as we transition from revenue equipment held under operating leases to more owned revenue equipment, especially during the second half of 2022. 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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Gain on disposition of property and equipment, net","","$","(3,799",")","","$","(7,706",")"],["% of total revenue","","","(0.4","%)","","","(0.9","%)"],["% of freight revenue","","","(0.4","%)","","","(1.0","%)"]]
[[/GREPCENT_TABLE]]

The decreases in gain on disposition of property and equipment, net are primarily the result of the $5.7 million gain on a terminal in the second quarter of 2020, as part of the Company's restructuring plan, partially offset by the timing of the trade cycle of our equipment and the strategic reduction of our tractors that began during the second quarter of 2020.

Impairment of long-lived property, equipment, and right-of use assets

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Impairment of long lived property and equipment","","$","-","","","$","26,569"],["% of total revenue","","","0.0","%","","","3.2","%"],["% of freight revenue","","","0.0","%","","","3.4","%"]]
[[/GREPCENT_TABLE]]

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. We incurred no restructuring charges in 2021.

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Interest expense, net

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Interest expense, net","","$","2,791","","","$","6,841"],["% of total revenue","","","0.3","%","","","0.8","%"],["% of freight revenue","","","0.3","%","","","0.9","%"]]
[[/GREPCENT_TABLE]]

Interest expense, net decreased in 2021 compared to 2020 as a result of the reduction of our total indebtedness.

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 maintain lower leverage than we have historically. Going forward, we expect this line item to be similar to that of 2021.

Income from equity method investment

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(in thousands)","","2021","","","2020"],["Income from equity method investment","","$","14,782","","","$","3,944"]]
[[/GREPCENT_TABLE]]

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, 2021, our earnings resulting from our investment in TEL increased to $14.8 million. The increase in 2021 as compared to 2020 is the result of constricted used equipment capacity in the transportation market that increased income from both equipment sales and leasing.

Income tax expense (benefit)

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["Income tax expense (benefit)","","$","20,962","","","$","(2,804",")"],["% of total revenue","","","2.0","%","","","(0.3","%)"],["% of freight revenue","","","2.2","%","","","(0.4","%)"]]
[[/GREPCENT_TABLE]]

The increase in tax expense primarily relates to the increase in operating income and earnings on investment in TEL as described above. As 2021 results show income as compared to 2020 that showed a loss, the impact of permanent differences has increased our effective tax rate for 2021, while in 2020 these items decreased our effective tax benefit rate.

The effective tax rate is different from the expected combined tax rate due primarily to state tax expense and permanent differences, such as executive compensation disallowance in 2021 and our per diem pay structure for drivers in 2020. The nondeductible effect of the per diem payments is temporarily suspended for 2021 and 2022 in accordance with IRS guidance issued during the quarter ended December 31, 2021. The rate impact of these items will fluctuate in future periods as income fluctuates.

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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:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(in thousands)","","2021","","","2020"],["Revenues:"],["Expedited","","$","337,063","","","$","320,202"],["Dedicated","","","324,541","","","","288,652"],["Managed Freight","","","321,236","","","","177,579"],["Warehousing","","","63,163","","","","52,128"],["Total revenues","","$","1,046,003","","","$","838,561"],["Operating Income (Loss):"],["Expedited","","$","33,064","","","$","(7,038",")"],["Dedicated","","","(1,357",")","","","(15,534",")"],["Managed Freight","","","32,461","","","","4,482"],["Warehousing","","","2,994","","","","4,063"],["Total operating income","","$","67,162","","","$","(14,027",")"]]
[[/GREPCENT_TABLE]]

Comparison of Year Ended December 31, 2021 to Year Ended December 31, 2020

For discussion of the changes in segment revenue, see "Revenue" within "Results of Consolidated Operations" above.

Total operating income was $67.2 million in 2021 compared to operating loss of $14.0 million in 2020. In addition to the changes in revenue described above, the change was impacted by a $115.7 million, $21.7 million, and $12.1 million increase in Managed Freight, Dedicated, and Warehousing operating expenses, respectively, partially offset by a $23.2 million decrease in Expedited operating expenses. 

The decrease in Expedited operating expenses was primarily due to the 2020 restructuring costs incurred related to downsizing our solo-driver refrigerated, one-way irregular routes, and other less profitable operations, a 22.9% average operating fleet reduction, and a reduction in insurance and claims costs, partially offset by higher variable costs associated with driver pay increases. The increase in Dedicated operating expenses was primarily related to driver pay increases and increased driver recruiting costs, partially offset by the aforementioned 2020 restructuring costs.

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. The increase in operating expenses for Warehousing was primarily driven by the new customer business that began operations during the latter portion of third quarter of 2020, as well as increased contract labor costs as a result of the resurgence of the COVID-19 pandemic and escalating real estate costs for a newly leased facility.

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Liquidity and Capital Resources

Our business requires significant capital investments over the short-term and the long-term. Historically, 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 $45.8 million and $14.4 million at December 31, 2021 and 2020, 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 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 purchase options. If we were to grow our independent contractor fleet, our capital requirements would be reduced.

As of December 31, 2021 and December 31, 2020 we had $74.3 million and $110.4 million in debt and lease obligations, respectively, consisting of the following:

[[GREPCENT_TABLE]]
[["","\u25cf","No and $15.0 million outstanding borrowings under the Credit Facility, respectively;"],["","\u25cf","No outstanding borrowings under the Draw Note, respectively;"],["","\u25cf","$4.5 million and $17.8 million in revenue equipment installment notes, respectively;"],["","\u25cf","$21.5 million and $22.7 million in real estate notes, respectively;"],["","\u25cf","$10.8 million and $16.4 million of the principal portion of financing lease obligations, respectively, and;"],["","\u25cf","$37.4 million and $38.5 million of the operating lease obligations, respectively."]]
[[/GREPCENT_TABLE]]

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 through December 31, 2021, as well as a reduced fleet size.

As of December 31, 2021, we had no borrowings outstanding, undrawn letters of credit outstanding of approximately $26.4 million, and available borrowing capacity of $83.6 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, 2021 totaled $8.9 million of expenditures as compared to $28.2 million of proceeds for the prior year. For 2022, we are planning for a sizable increase in net capital expenditures as we return to a more normalized equipment replacement cycle. This replacement effort will occur against a backdrop of substantial price increases for new equipment, strong prices for used equipment, and industry-wide order cutbacks and deferrals by equipment manufacturers. The timing, cost, and projected fleet net capital expenditures will depend on how these factors play out. Our baseline expectation for 2022 fleet net capital expenditures is a range of $50 million to $70 million. Net gains on disposal of equipment and real estate for 2021 were $3.8 million compared to $7.7 million in 2020. 

We had commitments outstanding at December 31, 2021, to acquire revenue equipment totaling approximately $73.8 million in 2022 versus commitments at December 31, 2020 of approximately $34.8 million. These commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits.

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 and its variants 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.

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Cash Flows

Net cash flows provided by operating activities increased to $73.2 million in 2021 compared with $63.0 million in 2020, primarily due to a $103.4 million increase in net income partially offset by decreases to non-cash expenses compared to the prior year.

Net cash flows provided by investing activities were $10.3 million in 2021 compared with $138.0 million provided in 2020. The change in net cash flows related to investing activities was primarily the result of the 2020 disposal of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our former Factoring reportable segment, as well as the 2020 disposal of our Orlando and Hutchins properties. The change is also due to the timing of our trade cycle whereby our average number of tractors has remained relatively flat compared to our ending 2020 tractors while we reduced our ending fleet size by 560 tractors during 2020.

Net cash flows used in financing activities were approximately $83.6 million in 2021, compared to $236.3 million in 2020. The change in net cash flows used in financing activities was primarily a function of paying down approximately $70.7 million of debt and lease obligations during 2021 compared to over $200.0 million in 2020. Additionally, we repurchased shares of our Class A common stock for $10.3 million and $17.5 million in 2021 and 2020, respectively.

On February 10, 2020, our Board of Directors approved the repurchase of up to $20.0 million of our Class A common stock. The program was suspended on March 26, 2020 with approximately $2.5 million remaining authorized.

On January 25, 2021, our Board of Directors approved the repurchase of up to $40.0 million of our outstanding Class A common stock. Under such authorization, we repurchased 0.5 million shares of our Class A common stock for $8.4 million between January 2021 and April 2021. On August 5, 2021, our Board of Directors increased such authorization to $40.0 million. On August 9, 2021 we commenced a modified Dutch tender offer to purchase for cash shares of our Class A common stock for an aggregate purchase price of not more than $40.0 million and at a price per share of not less than $21.00 and not more than $23.00 per share. The tender offer expired on September 3, 2021. Through the tender offer, we accepted for purchase 86,132 shares of our Class A common stock at a purchase price of $23.00 per share for an aggregate purchase price of approximately $2.0 million, excluding fees and expenses. The shares of Class A common stock purchased through the tender offer were immediately retired. The excess purchase price over par value was recorded as a reduction of retained earnings on the consolidated balance sheet. Including the tender offer, we repurchased 0.6 million and 1.4 million shares for $10.3 million and $17.5 million during 2021 and 2020, respectively. We have the ability to repurchase up to $38.0 million of the Company's outstanding Class A common stock under the current stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors. In the first quarter of 2022, we adopted a 10b5-1 plan for the purchase of up to $30.0 million in shares subject to defined trading parameters, under such repurchase program.

 Our cash flows may fluctuate depending on capital expenditures, future stock repurchases, strategic investments or divestitures, any indemnification calls related to the TFS settlement, and the extent of future income tax obligations and refunds.

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Non-GAAP Financial Measures

Operating Ratio

Operating Ratio (“OR”) For 2021 and 2020:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","For the twelve months ended December 31, 2021"],["GAAP Operating Ratio:","","Combined","","","Expedited","","","Dedicated","","","Managed Freight","","","Warehousing"],["Total revenue","","$","1,046,003","","","$","337,063","","","$","324,541","","","$","321,236","","","$","63,163"],["Total operating expenses","","","978,841","","","","303,999","","","$","325,898","","","","288,775","","","","60,169"],["Operating income (loss)","","$","67,162","","","$","33,064","","","$","(1,357",")","","$","32,461","","","$","2,994"],["Operating ratio","","","93.6","%","","","90.2","%","","","100.4","%","","","89.9","%","","","95.3","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","For the twelve months ended December 31, 2021"],["Adjusted Operating Ratio:","","Combined","","","Expedited","","","Dedicated","","","Managed Freight","","","Warehousing"],["Total revenue","","$","1,046,003","","","$","337,063","","","$","324,541","","","$","321,236","","","$","63,163"],["Fuel surcharge revenue","","","(96,090",")","","","(47,713",")","","","(47,678",")","","","-","","","","(699",")"],["Freight revenue (total revenue, excluding fuel surcharge)","","","949,913","","","","289,350","","","","276,863","","","","321,236","","","","62,464"],["Total operating expenses","","","978,841","","","","303,999","","","","325,898","","","","288,775","","","","60,169"],["Adjusted for:"],["Fuel surcharge revenue","","","(96,090",")","","","(47,713",")","","","(47,678",")","","","-","","","","(699",")"],["Amortization of intangibles (1)","","","(4,043",")","","","-","","","","(2,097",")","","","(525",")","","","(1,421",")"],["Adjusted operating expenses","","","878,708","","","","256,286","","","","276,123","","","","288,250","","","","58,049"],["Adjusted operating income","","$","71,205","","","$","33,064","","","$","740","","","$","32,986","","","$","4,415"],["Adjusted operating ratio","","","92.5","%","","","88.6","%","","","99.7","%","","","89.7","%","","","92.9","%"]]
[[/GREPCENT_TABLE]]

(1) "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets.

[[GREPCENT_TABLE]]
[["(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","","","$","52,128"],["Total operating expenses","","","852,590","","","","327,240","","","","304,188","","","","173,097","","","","48,065"],["Operating (loss) income","","$","(14,029",")","","$","(7,038",")","","$","(15,536",")","","$","4,482","","","$","4,063"],["Operating ratio","","","101.7","%","","","102.2","%","","","105.4","%","","","97.5","%","","","92.2","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["(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","","","$","52,128"],["Fuel surcharge revenue","","","(62,343",")","","","(28,731",")","","","(33,149",")","","","-","","","","(463",")"],["Freight revenue (total revenue, excluding fuel surcharge)","","","776,218","","","","291,471","","","","255,503","","","","177,579","","","","51,665"],["Total operating expenses","","","852,590","","","","327,240","","","","304,186","","","","173,097","","","","48,065"],["Adjusted for:"],["Fuel surcharge revenue","","","(62,343",")","","","(28,731",")","","","(33,149",")","","","-","","","","(463",")"],["Amortization of intangibles (1)","","","(5,097",")","","","-","","","","(2,778",")","","","(633",")","","","(1,686",")"],["Bad debt expense associated with customer bankruptcy and high credit risk customers","","","(2,617",")","","","(972",")","","","(867",")","","","(778",")","","","-"],["Insurance policy erosion and premium reinstatement expense","","","(4,447",")","","","(2,627",")","","","(1,820",")","","","-","","","","-"],["Strategic restructuring adjusting items:"],["Gain on sale of terminal","","","4,740","","","","2,505","","","","2,235","","","","-","","","","-"],["Impairment of real estate and related tangible assets","","","(9,790",")","","","(3,991",")","","","(3,563",")","","","(2,236",")","","","-"],["Impairment of revenue equipment and related charges","","","(17,604",")","","","(8,046",")","","","(9,558",")","","","-","","","","-"],["Restructuring related severance and other","","","(4,334",")","","","(2,290",")","","","(2,044",")","","","-","","","","-"],["Abandonment of information technology infrastructure","","","(1,048",")","","","(554",")","","","(494",")","","","-","","","","-"],["Contract exit costs and other restructuring","","","(695",")","","","(367",")","","","(328",")","","","-","","","","-"],["Adjusted operating expenses","","","749,355","","","","282,167","","","","251,820","","","","169,450","","","","45,916"],["Adjusted operating income","","$","26,863","","","$","9,304","","","$","3,683","","","$","8,129","","","$","5,749"],["Adjusted operating ratio","","","96.5","%","","","96.8","%","","","98.6","%","","","95.4","%","","","88.9","%"]]
[[/GREPCENT_TABLE]]

(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 of Directors 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.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with 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 Equipment

Management estimates the useful lives and salvage value of revenue equipment based upon, among other things, the expected use, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. We generally depreciate new tractors over five years to salvage values of approximately 35% of cost, depending on the operating segment profile of the equipment. We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 28% and 21% of their cost, respectively. Historically, changes in estimated useful life or salvage values have typically resulted from us transferring tractors to different operating segments with different operating profiles. Significant fluctuations in the used equipment market could have a material effect on our results of operations.

A portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back agreements with the manufacturers. The remainder of our tractors and substantially all of our owned trailers are 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. Declines 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.

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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. We may elect to perform an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, including goodwill. When performing the qualitative assessment, the Company considers the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performance of each reporting unit, litigation and new legislation. If based on the qualitative assessments, the Company believes it more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, or periodically as deemed appropriate by management, we will prepare an estimation of the respective reporting unit's fair value utilizing a quantitative approach. When using a quantitative approach, the fair value of our reporting 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 ours. The primary assumptions used in these various models include earnings multiples of acquisitions in a comparable industry, future cash flow estimates of each of the reporting units, weighted average cost of capital, working capital and capital expenditure requirements. 

We completed our annual goodwill impairment test as of October 1, 2021, for each of our reporting units. As a result of the most recent goodwill impairment analysis performed (October 1, 2021), no impairment was indicated and the fair value of the Dedicated reporting unit exceeded its carrying amount by approximately 8.5%.

We test intangible assets with finite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. We record an impairment charge when the carrying value of the 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 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 record a liability for the estimated cost of the uninsured portion of pending claims and the 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. 

Self-insured liabilities represent management's best estimate of our ultimate obligations.

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Accounting for Income Taxes

Significant management judgment is required 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.

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, 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 market value of used equipment fluctuated significantly. The cost of fuel has been volatile over the last several years, with costs increasing in 2019 and 2021 but decreasing in 2018 and 2020. 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. 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 2021 and 2020. 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 two fiscal years, located within the United States.

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SEASONALITY

Our tractor productivity decreases during the winter season because inclement weather impedes operations, and some shippers reduce their shipments after the winter holiday season. Our Expedited segment, historically has experienced a greater reduction in first quarter demand than our other operations. Revenue also can be affected by bad weather, holidays and the number of business days that occur during a given period, since revenue is directly related to available working days of shippers. At the same time, operating expenses increase and fuel efficiency declines because of engine idling and harsh weather creating higher accident frequency, increased claims, and more equipment repairs. In addition, many of our customers, particularly those in the retail industry where we have a large presence, demand additional capacity during the fourth quarter, which limits our ability to take advantage of more attractive spot market rates that generally exist during such periods. Further, despite our efforts to meet such demands, we may fail to do so, which may result in lost future business opportunities with such customers, which could have a materially adverse effect on our operations. Recently, the duration of this increased period of demand in the fourth quarter has shortened, with certain customers requiring the same volume of shipments over a more condensed timeframe, resulting in increased stress and demand on our network, people, and systems. If this trend continues, it could make satisfying our customers and maintaining the quality of our service during the fourth quarter increasingly difficult. We may also suffer from natural disasters and weather-related events, such as tornadoes, hurricanes, blizzards, ice storms, floods, and fires, which may increase in frequency and severity due to climate change, as well as other man-made disasters. These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy our assets, or adversely affect the business or financial condition of our customers, any of which could have a materially adverse effect on our results of operations or make our results of operations more volatile. Weather and other seasonal events could adversely affect our operating results.