FORWARD AIR CORP (FWRD) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section of this Form 10-K generally discusses our results of operations and financial condition for the year ended December 31, 2021. For a discussion of similar topics for the years ended December 31, 2020 and December 31, 2019, please refer to “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K, filed on March 1, 2021, which is incorporated herein by reference.
Overview and Executive Summary
We have two reportable segments: Expedited Freight and Intermodal.
Through the Expedited Freight segment, we operate a comprehensive national network to provide expedited regional, inter-regional and national LTL services. Expedited Freight offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling. We plan to grow our LTL and final mile geographic footprints through greenfield start-ups as well as acquisitions. During the year ended December 31, 2021, Expedited Freight accounted for 82.6% of our consolidated revenue.
Our Intermodal segment provides first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers dedicated contract and container freight station (“CFS”) warehouse and handling services. Today, Intermodal operates primarily in the Midwest and Southeast, with smaller operational presence in Southwest and Mid-Atlantic United States. We plan to grow Intermodal’s geographic footprint through acquisitions as well as greenfield start-ups where we do not have an acceptable acquisition target. During the year ended December 31, 2021, Intermodal accounted for 17.4% of our consolidated revenue.
Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our ability to increase our earnings depends in significant part on our ability to increase the amount of freight and the revenue per pound for the freight shipped through our networks and to grow other services, such as LTL pickup and delivery, final mile solutions and intermodal services, which will allow us to maintain revenue growth in challenging shipping environments. In addition, we are continuing to execute synergies across our services, particularly with service offerings in the Expedited Freight segment. Synergistic opportunities include the ability to share resources, particularly our fleet resources.
In analyzing the components of our revenue, we monitor changes and trends in our LTL volumes and LTL revenue per hundredweight. While LTL revenue per hundredweight is a yield measurement, it is also a commonly-used indicator for general pricing trends in the LTL industry. This yield metric is not a true measure of price; however, as it can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment and length of haul. As a result, changes in revenue per
hundredweight do not necessarily indicate actual changes in underlying base rates. LTL revenue per hundredweight and the key factors that can impact this metric are described in more detail below:
• LTL Revenue Per Hundredweight - Our LTL transportation services are generally priced based on weight, commodity, and distance. This measurement reflects the application of our pricing policies to the services we provide, which are influenced by competitive market conditions and our growth objectives. Generally, freight is rated by a class system, which is established by the National Motor Freight Traffic Association, Inc. Light, bulky freight typically has a higher class and is priced at higher revenue per hundredweight than dense, heavy freight. Fuel surcharges and accessorial charges are included in this measurement.
• LTL Weight Per Shipment - Fluctuations in weight per shipment can indicate changes in the mix of freight we receive from our customers, as well as changes in the number of units included in a shipment. Generally, increases in weight per shipment indicate higher demand for our customers’ products and overall increased economic activity. Changes in weight per shipment can also be influenced by shifts between LTL and other modes of transportation, such as truckload, in response to capacity, service and pricing issues. Fluctuations in weight per shipment generally have an inverse effect on our revenue per hundredweight, as a decrease in weight per shipment will typically cause an increase in revenue per hundredweight.
• LTL Revenue Per Shipment - This measurement is primarily determined by the two metrics listed above as well as average length of haul and is used in conjunction with the number of LTL shipments we receive to evaluate LTL revenue.
Our primary revenue focus is to increase density, which is shipment and tonnage growth within our existing network. Increases in density allow us to maximize our asset utilization and labor productivity, which we measure over many different
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functional areas of our operations including linehaul load factor, pickup and delivery (“P&D”) stops per hour, P&D shipments per hour, door pounds handled per hour and door shipments per hour. In addition to our focus on density and operating efficiencies, it is critical for us to obtain an appropriate yield, which is measured as revenue per hundredweight, on the shipments we handle to offset our cost inflation and support our ongoing investments in capacity and technology. We regularly monitor the components of our pricing, including base freight rates, accessorial charges and fuel surcharges. The fuel surcharge is generally designed to offset fluctuations in the cost of our petroleum-based products and is indexed to diesel fuel prices published by the U.S.
Trends and Developments
Intermodal Acquisitions
As part of the inorganic growth strategy, in February 2021, we acquired certain assets and liabilities of Proficient Transport Incorporated and Proficient Trucking, Inc. (together “Proficient Transport”) for $16,339 and a potential earn-out up to $2,000. The estimated fair value of the earn-out liability on the date of acquisition was $829. The fair value was based on the estimated one-year performance of the acquired customer revenue and was calculated using the option pricing method. Proficient Transport is an intermodal drayage company headquartered in Chicago, Illinois. The acquisition of Proficient Transport will expand our intermodal footprint in Georgia, Illinois, North Carolina, and Texas, and will introduce a new location in Ohio. The acquisition was funded using cash flows from operations. The results of Proficient Transport have been included in our consolidated financial statements as of and from the date of acquisition.
In November 2021, we acquired certain assets and liabilities of BarOle Trucking, Inc. (“BarOle”) for $35,436. BarOle is an intermodal drayage company headquartered in Roseville, Minnesota. The acquisition of BarOle provides additional capacity and resources to meet customer demands in the intermodal market, and extends the service footprint to the Minneapolis-Saint Paul, Minnesota area. In addition, BarOle has a larger terminal location, which allows for further expansion in the future. The acquisition was financed by cash flows from operations. The results of BarOle have been included in our consolidated financial statements as of and from the date of acquisition.
Expedited Freight Acquisition
As part of the inorganic growth strategy, in May 2021, we acquired certain assets and liabilities of J&P Hall Express Delivery (“J&P”) for $7,670. J&P is headquartered in Atlanta, Georgia with a second terminal in Albany, Georgia. The acquisition of J&P supports our strategic growth plan by expanding pickup and delivery, less-than-truckload, truckload, less than container load, container freight station warehousing, and airport transfer services across the Southeastern United States. The acquisition was funded using cash flow from operations. The results of J&P have been included in our consolidated financial statements as of and from the date of acquisition.
See Note 3, Acquisitions, to our Consolidated Financial Statements for more information about our acquisitions.
Sale of Pool
On February 12, 2021, we sold Pool for an $8,000 cash payment and up to a $12,000 earn-out based on 2021 earnings before interest, taxes, depreciation and amortization attainment, beginning February 1, 2021. The estimated fair value of the earn-out on the date of sale was $6,967, and was calculated based on the estimated performance of Pool using a Monte Carlo simulation model. A loss on the sale of Pool in the amount of $2,860 was recorded in 2021 in discontinued operation.
The financial performance of the Pool business significantly deteriorated during third quarter of 2021. As a result, an evaluation of the earn-out asset for impairment was completed, which included a review of the revised forecasts. The revised forecasts indicated an impairment of the entire earn-out asset was necessary. In 2021, a non-cash charge of $6,967 was recorded as an “Impairment charge” in discontinued operation.
COVID-19
Our business is highly susceptible to changes in the economic conditions. Our products and services are directly tied to the production and sale of goods and, more generally, to the North American economy. The COVID-19 pandemic has adversely impacted economic activity and conditions worldwide and created significant volatility and disruption to the financial markets. Efforts to control the spread of COVID-19 led governments and other authorities to impose restrictions which resulted in business closures and disrupted supply chains worldwide. As a result, transportation and supply chain companies such as ours experienced slowdowns and reduced demand for our services.
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Although our business and operations have returned to pre-COVID levels, the situation surrounding COVID-19 and its variants remains fluid and may be further impacted by the policies of President Biden’s administration, the availability and success of a vaccine and vaccination rates. The extent to which outbreaks of COVID-19 and its variants impacts our business, results of operations and financial condition during 2022 will depend on future developments, which are highly uncertain and cannot be predicted by, including, but not limited to the duration, spread, severity and impact of the COVID-19 outbreak, including the new variants, the effects of the outbreak on our customers and suppliers and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume.
Like many other businesses affected by current macroeconomic conditions, we are experiencing a labor shortage relating to our employee drivers, terminal and dock workers and otherwise throughout our business and operations. We are also operating in an environment where competition is intense for independent fleet owner-operators, creating shortages in the marketplace. These factors have adversely affected our operations, by increasing our operational costs for labor and purchased transportation. The steps we have taken to address these shortages include paying sign-on bonuses, and offering enhanced wages in select competitive markets. These measures have increased costs in certain areas of our business. We will continue to mitigate the effects of the labor shortages and other inflationary conditions through similar actions.
In addition, although we believe we have sufficient capital and liquidity to manage our business over the short- and long-term, our liquidity may be materially affected if conditions in the credit and financial markets deteriorate as a result of COVID-19 including failure by us or our customers to secure any necessary financing in a timely manner.
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Results from Operations
The following table sets forth our consolidated financial data for the years ended December 31, 2021 and 2020 (in thousands):
| Year Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | Change | Percent Change | |||||||||||
| Operating revenue: | ||||||||||||||
| Expedited Freight | $ | 1,374,270 | $ | 1,072,301 | $ | 301,969 | 28.2 | % | ||||||
| Intermodal | $ | 289,214 | $ | 199,603 | $ | 89,611 | 44.9 | |||||||
| Eliminations and other operations | $ | (1,057) | $ | (2,331) | $ | 1,274 | 54.7 | |||||||
| Operating revenue | $ | 1,662,427 | $ | 1,269,573 | $ | 392,854 | 30.9 | |||||||
| Operating expenses: | ||||||||||||||
| Purchased transportation | $ | 833,075 | $ | 650,664 | $ | 182,411 | 28.0 | |||||||
| Salaries, wages, and employee benefits | $ | 327,814 | $ | 270,785 | $ | 57,029 | 21.1 | |||||||
| Operating leases | $ | 79,633 | $ | 69,720 | $ | 9,913 | 14.2 | |||||||
| Depreciation and amortization | $ | 39,552 | $ | 37,125 | $ | 2,427 | 6.5 | |||||||
| Insurance and claims | $ | 42,186 | $ | 34,912 | $ | 7,274 | 20.8 | |||||||
| Fuel expense | $ | 17,027 | $ | 12,166 | $ | 4,861 | 40.0 | |||||||
| Other operating expenses | $ | 163,839 | $ | 120,277 | $ | 43,562 | 36.2 | |||||||
| Total operating expenses | $ | 1,503,126 | $ | 1,195,649 | $ | 307,477 | 25.7 | |||||||
| Income (loss) from continuing operations: | ||||||||||||||
| Expedited Freight | $ | 139,321 | $ | 71,266 | $ | 68,055 | 95.5 | |||||||
| Intermodal | $ | 30,117 | $ | 16,391 | $ | 13,726 | 83.7 | |||||||
| Other operations | $ | (10,137) | $ | (13,733) | $ | 3,596 | 26.2 | |||||||
| Income from continuing operations | $ | 159,301 | $ | 73,924 | $ | 85,377 | 115.5 | |||||||
| Other expense: | ||||||||||||||
| Interest expense, net | $ | (4,338) | $ | (4,561) | $ | 223 | 4.9 | |||||||
| Other, net | $ | — | $ | (3) | $ | 3 | 100.0 | |||||||
| Total other expense | $ | (4,338) | $ | (4,564) | $ | 226 | (5.0) | |||||||
| Income from continuing operations before income taxes | $ | 154,963 | $ | 69,360 | $ | 85,603 | 123.4 | |||||||
| Income tax expense | $ | 38,872 | $ | 16,593 | $ | 22,279 | 134.3 | |||||||
| Net income from continuing operations | $ | 116,091 | $ | 52,767 | $ | 63,324 | 120.0 | |||||||
| Loss from discontinued operation, net of tax | $ | (10,232) | $ | (29,034) | $ | 18,802 | (64.8) | |||||||
| Net income and comprehensive income | $ | 105,859 | $ | 23,733 | $ | 82,126 | 346.0 | % |
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Revenues
Operating revenues increased $392,854, or 30.9% to $1,662,427 for the year ended December 31, 2021 compared to $1,269,573 for the year ended December 31, 2020. The revenue increase was primarily driven by increased revenue from our Expedited Freight segment of $301,969 due to increased Network, Truckload and Final Mile revenue.
Operating Expenses
Operating expenses increased $307,477 primarily driven by an increase in purchased transportation of $182,411, other operating expenses of $43,562 and salaries, wages and employee benefits of $57,029. Purchased transportation includes Leased Capacity Providers and third-party carriers, while Company-employed drivers are included in salaries, wages and employee benefits. Purchased transportation expense increased due to the utilization of more third-party carriers as it relates to the Expedited Freight segment. Other operating expenses increased primarily due to an increase in rail storage expenses, demurrage fees and professional fees. Salaries, wages and employee benefits increased primarily due the additional employees hired in response to the increase in volumes in 2021, increased reserve for incentive compensation and higher group health insurance premiums.
Income from Continuing Operations and Segment Operations
Income from continuing operations increased $85,377, or 115.5%, from the year ended December 31, 2020 to $159,301 for the year ended December 31, 2021. The increase was primarily driven by Expedited Freight segment and Intermodal segment of $68,055 and $13,726, respectively. The results for our two reportable segments are discussed in detail in the following sections.
Interest Expense, net
Interest expense, net was $4,338 for the year ended December 31, 2021 compared to $4,561 for the same period in 2020. The decrease in interest expense, net was primarily driven by a lower interest rate during the year ended December 31, 2021, partially offset by additional borrowings in 2021 under our revolving credit facility. The interest rate on outstanding borrowings under our revolving credit facility was 1.43% and 3.25% as of December 31, 2021 and 2020, respectively.
Income Taxes on a Continuing Basis
The combined federal and state effective tax rate for the year ended December 31, 2021 was 25.1% compared to a rate of 23.9% for the same period in 2020. The higher effective tax rate for the year ended December 31, 2021 was primarily due a return to provision expense adjustment recorded in 2021 compared to a return to provision benefit adjustment recorded in 2020, partially offset by increased excess tax benefits realized on share-based awards in 2021 compared to the same period in 2020. During the year ended December 31, 2020, a refund for Tennessee tax credits was received. A similar refund was not received during the year ended December 31, 2021.
Loss from Discontinued Operation, net of tax
Loss from discontinued operation, net of tax decreased $18,802 to a $10,232 loss for the year ended December 31, 2021 from $29,034 loss for the year ended December 31, 2020. Loss from discontinued operation includes our Pool business and, as discussed above, the Pool business was sold on February 12, 2021. An evaluation of the earn-out asset indicated an impairment was necessary and as a result, for the year ended December 31, 2021, a non-cash impairment charge was recorded. For the year ended December 31, 2020, our Pool business was adversely impacted by COVID-19 as many of our customers were affected by retail mall closure in response to stay-at-home orders beginning in March 2020. In addition, during 2020, a non-cash impairment charge of $28,384 was recorded to reflect the net assets held for sale at fair value less costs to sell.
Net Income
As a result of the foregoing factors, net income increased by $82,126, or 346.0%, to $105,859 for the year ended December 31, 2021 compared to $23,733 for the same period in 2020.
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Expedited Freight - Year Ended December 31, 2021 compared to Year Ended December 31, 2020
The following table sets forth our financial data of the Expedited Freight segment for the years ended December 31, 2021 and 2020 (unaudited and in thousands):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | Percent of Revenue | December 31, 2020 | Percent of Revenue | Change | Percent Change | |||||||||||||||
| Operating revenue: | ||||||||||||||||||||
| Network 1 | $ | 840,429 | 61.3 | % | $ | 625,517 | 58.3 | % | $ | 215 | 34.4 | % | ||||||||
| Truckload | $ | 223,026 | 16.2 | $ | 194,058 | 18.1 | $ | 29 | 14.9 | |||||||||||
| Final Mile | $ | 275,201 | 20.0 | $ | 224,475 | 20.9 | $ | 51 | 22.6 | |||||||||||
| Other | $ | 35,614 | 2.6 | $ | 28,251 | 2.6 | $ | 7 | 26.1 | |||||||||||
| Total operating revenue | $ | 1,374,270 | 100.0 | $ | 1,072,301 | 100.0 | $ | 302 | 28.2 | |||||||||||
| Operating expenses: | ||||||||||||||||||||
| Purchased transportation | $ | 743,418 | 54.2 | $ | 583,552 | 54.4 | $ | 160 | 27.4 | |||||||||||
| Salaries, wages and employee benefits | $ | 261,405 | 19.0 | $ | 218,421 | 20.4 | $ | 43 | 19.7 | |||||||||||
| Operating leases | $ | 57,309 | 4.2 | $ | 53,680 | 5.0 | $ | 4 | 6.8 | |||||||||||
| Depreciation and amortization | $ | 28,842 | 2.1 | $ | 27,003 | 2.5 | $ | 2 | 6.8 | |||||||||||
| Insurance and claims | $ | 32,243 | 2.3 | $ | 24,021 | 2.2 | $ | 8 | 34.2 | |||||||||||
| Fuel expense | $ | 8,752 | 0.6 | $ | 6,793 | 0.6 | $ | 2 | 28.8 | |||||||||||
| Other operating expenses | $ | 102,980 | 7.5 | $ | 87,565 | 8.2 | $ | 15 | 17.6 | |||||||||||
| Total operating expenses | $ | 1,234,949 | 89.9 | $ | 1,001,035 | 93.4 | $ | 234 | 23.4 | |||||||||||
| Income from operations | $ | 139,321 | 10.1 | % | $ | 71,266 | 6.6 | % | $ | 68 | 95.5 | % | ||||||||
| 1 Network revenue is comprised of all revenue, including linehaul, pickup and/or delivery, and fuel surcharge revenue, excluding accessorial, Truckload and Final Mile revenue. |
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| Expedited Freight Operating Statistics | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Year Ended | |||||||||
| December 31, 2021 | December 31, 2020 | Percent Change | |||||||
| Business days | 254 | 256 | (0.8) | % | |||||
| Tonnage 1,2 | |||||||||
| Total pounds | 2,812,071 | 2,369,551 | 18.7 | ||||||
| Pounds per day | 11,071 | 9,256 | 19.6 | ||||||
| Shipments 1,2 | |||||||||
| Total shipments | 3,856 | 3,918 | (1.6) | ||||||
| Shipments per day | 15.2 | 15.3 | (0.7) | ||||||
| Weight per shipment | 729 | 605 | 20.5 | ||||||
| Revenue per hundredweight 3 | $ | 28.90 | $ | 26.75 | 8.0 | ||||
| Revenue per hundredweight, excluding fuel 3 | $ | 24.69 | $ | 23.21 | 6.4 | ||||
| Revenue per shipment 3 | $ | 213 | $ | 160 | 33.5 | ||||
| Revenue per shipment, excluding fuel 3 | $ | 182 | $ | 138 | 32.0 | ||||
| Network revenue from door-to-door shipments as a percentage of network revenue 3,4 | 47.8 | % | 48.0 | % | (0.4) | ||||
| 1 In thousands | |||||||||
| 2 Excludes accessorial, full Truckload and Final Mile products | |||||||||
| 3 Includes intercompany revenue between the Network and Truckload revenue streams | |||||||||
| 4 Door-to-door shipments include all shipments with a pickup and/or delivery |
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Revenues
Expedited Freight operating revenue increased $301,969, or 28.2%, to $1,374,270 for the year ended December 31, 2021 from $1,072,301 for the same period of 2020. The increase was driven by increased Network, Truckload and Final Mile revenue. Network revenue increased due to a 18.7% increase in tonnage and a 8.0% increase in revenue per hundredweight partially offset by a 1.6% decrease in shipments as compared to the prior year. The increase in tonnage was primarily driven by the economic recovery from COVID-19, which adversely impacted the results of operations in 2020. Strategic pricing initiatives and freight rationalization actions contributed to the increase in the revenue per hundredweight. Fuel surcharge revenue increased $53,860, or 64.2% as a result of the rise in fuel prices and increased tonnage. Truckload revenue increased $28,968 primarily driven by the economic recovery from COVID-19, which adversely impacted the results of operations for 2020. Final Mile revenue increased $50,726 due to the combination of organic growth and the acquisition of CLW in October 2020. Other revenue, which includes warehousing and terminal handling, increased $7,363 due to the higher linehaul tonnage.
Purchased Transportation
Expedited Freight purchased transportation increased by $159,866, or 27.4%, to $743,418 for the year ended December 31, 2021 from $583,552 for the same period of 2020. As a percentage of segment operating revenue, Expedited Freight purchased transportation was 54.2% during the year ended December 31, 2021 compared to 54.4% for the same period of 2020. Expedited Freight purchased transportation includes Leased Capacity Providers and third-party carriers, while Company-employed drivers are included in salaries, wages and benefits. The decrease in purchased transportation as a percentage of segment operating revenue was primarily due to the change in the mix of freight capacity purchased from Leased Capacity Providers, third party carriers and Company-employed drivers for Network and Truckload services. For the year ended December 31, 2021, 62.3%, 34.0% and 3.7% of our freight capacity was filled by Leased Capacity Providers, third party carriers and Company-employed drivers, respectively. This compares to 68.0%, 27.7% and 4.3% in the same period in 2020.
Salaries, Wages, and Benefits
Expedited Freight salaries, wages and employee benefits increased by $42,984, or 19.7%, to $261,405 for the year ended December 31, 2021 from $218,421 for the same period of 2020. Salaries, wages and employee benefits were 19.0% of Expedited Freight’s operating revenue for the year ended December 31, 2021 compared to 20.4% for the same period of 2020. The increase in salaries, wages and employee benefits expense was primarily due to the additional employees hired in response to the increase in tonnage in 2021, increased reserve for incentive compensation and higher group health insurance premiums. Cost-control measures implemented in the prior year contributed to the decrease in salaries, wages and employee benefits expense as a percentage of operating revenues.
Operating Leases
Expedited Freight operating leases increased $3,629, or 6.8%, to $57,309 for the year ended December 31, 2021 from $53,680 for the same period of 2020. Operating leases were 4.2% of Expedited Freight’s operating revenue for the year ended December 31, 2021 compared to 5.0% for the same period of 2020. The increase in operating leases expense was primarily due to higher facility expense in 2021, partially due to facility leases assumed in connection with the CLW and J&P acquisitions.
Depreciation and Amortization
Expedited Freight depreciation and amortization increased $1,839, or 6.8%, to $28,842 for the year ended December 31, 2021 from $27,003 for the same period of 2020. Depreciation and amortization expense as a percentage of Expedited Freight operating revenue was 2.1% in the year ended December 31, 2021 compared to 2.5% for the same period of 2020. The increase in depreciation and amortization expense was primarily due to an increase in equipment depreciation and additional amortization expense resulting from intangible assets recorded in connection with the CLW and J&P acquisitions.
Insurance and Claims
Expedited Freight insurance and claims expense increased $8,222, or 34.2%, to $32,243 for the year ended December 31, 2021 from $24,021 for the same period of 2020. Insurance and claims as a percentage of Expedited Freight’s operating revenue was 2.3% for the year ended December 31, 2021 compared to 2.2% for the same period of 2020. The increase in expense was primarily due to an increase in vehicle insurance premiums, and additional vehicle liability and cargo claims. See additional discussion over the consolidated increase in self-insurance reserves related to vehicle claims in the “Other Operations” section below.
Fuel Expense
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Expedited Freight fuel expense increased $1,959, or 28.8%, to $8,752 for the year ended December 31, 2021 from $6,793 for the same period of 2020. Fuel expense was 0.6% of Expedited Freight’s operating revenue for the year ended December 31, 2021 compared to 0.6% for the same period of 2020. Expedited Freight fuel expense increased due to the rise in the average price of fuel in 2021.
Other Operating Expenses
Expedited Freight other operating expenses increased $15,415, or 17.6%, to $102,980 for the year ended December 31, 2021 from $87,565 for the same period of 2020. Expedited Freight other operating expenses were 7.5% of operating revenue for the year ended December 31, 2021 compared to 8.2% for the same period of 2020. Other operating expenses include equipment maintenance, facility expenses, legal and professional fees and other over-the-road costs. The increase in other operating expenses was driven by an increase in equipment maintenance costs, terminal and office expenses, legal and professional fees, other over-the-road costs and parts for final mile installations.
Income from Operations
Expedited Freight income from operations increased by $68,055, or 95.5%, to $139,321 for the year ended December 31, 2021 compared to $71,266 for the same period of 2020. Expedited Freight’s income from operations was 10.1% of operating revenue for the year ended December 31, 2021 compared to 6.6% for the same period of 2020. The increase in income from operations as a percentage of operating revenues was driven by increased revenue per hundredweight combined with cost-control measures and operational efficiencies, partially offset by the change in mix of freight capacity purchased from Leased Capacity Providers, third party carriers and Company-employed drivers.
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Intermodal - Year Ended December 31, 2021 compared to Year Ended December 31, 2020
The following table sets forth our financial data of the Intermodal segment for the years ended December 31, 2021 and 2020 (unaudited and in thousands):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | Percent of Revenue | December 31, 2020 | Percent of Revenue | Change | Percent Change | |||||||||||||||
| Operating revenue | $ | 289,214 | 100.0 | % | $ | 199,603 | 100.0 | % | $ | 89,611 | 44.9 | % | ||||||||
| Operating expenses: | ||||||||||||||||||||
| Purchased transportation | $ | 90,575 | 31.2 | $ | 68,705 | 34.4 | $ | 21,870 | 31.8 | |||||||||||
| Salaries, wages and employee benefits | $ | 65,599 | 22.7 | $ | 48,698 | 24.4 | $ | 16,901 | 34.7 | |||||||||||
| Operating leases | $ | 22,218 | 7.7 | $ | 16,325 | 8.2 | $ | 5,893 | 36.1 | |||||||||||
| Depreciation and amortization | $ | 10,647 | 3.7 | $ | 9,977 | 5.0 | $ | 670 | 6.7 | |||||||||||
| Insurance and claims | $ | 9,850 | 3.4 | $ | 7,872 | 3.9 | $ | 1,978 | 25.1 | |||||||||||
| Fuel expense | $ | 8,275 | 2.9 | $ | 5,373 | 2.7 | $ | 2,902 | 54.0 | |||||||||||
| Other operating expenses | $ | 51,933 | 18.0 | $ | 26,262 | 13.2 | $ | 25,671 | 97.7 | |||||||||||
| Total operating expenses | $ | 259,097 | 89.6 | $ | 183,212 | 91.8 | $ | 75,885 | 41.4 | |||||||||||
| Income from operations | $ | 30,117 | 10.4 | % | $ | 16,391 | 8.2 | % | $ | 13,726 | 83.7 | % |
| Intermodal Operating Statistics | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended | ||||||||||
| December 31, 2021 | December 31, 2020 | Percent Change | ||||||||
| Drayage shipments | 369,601 | 301,454 | 22.6 | % | ||||||
| Drayage revenue per shipment | $ | 667 | $ | 563 | 18.5 | % | ||||
| Number of locations | 29 | 24 | 20.8 | % |
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Revenues
Intermodal operating revenue increased $89,611, or 44.9%, to $289,214 for the year ended December 31, 2021 from $199,603 for the same period of 2020. The increase in operating revenues was primarily attributable to a 22.6% increase in drayage shipments over the same period in 2020 and an increase in accessorial revenues. The increase in drayage shipments was driven by the combination of the economic recovery from COVID-19, which adversely impacted the results of operations for the year ended December 31, 2020, and the Proficient Transport acquisition in February 2021.
Purchased Transportation
Intermodal purchased transportation increased $21,870, or 31.8%, to $90,575 for the year ended December 31, 2021 from $68,705 for the same period of 2020. Intermodal purchased transportation as a percentage of revenue was 31.2% for the year ended December 31, 2021 compared to 34.4% for the year ended December 31, 2020. Intermodal purchased transportation includes Leased Capacity Providers and third party carriers, while Company-employed drivers are included in salaries, wages and employee benefits. The decrease in purchased transportation as a percentage of revenues was primarily due to the change in the mix of freight capacity purchased from Leased Capacity Providers, third party carriers and Company-employed drivers.
Salaries, Wages, and Benefits
Intermodal salaries, wages and employee benefits increased $16,901, or 34.7%, to $65,599 for the year ended December 31, 2021 from $48,698 for the same period of 2020. Salaries, wages and employee benefits were 22.7% of Intermodal operating revenues for the year ended December 31, 2021 compared to 24.4% for the same period of 2020. The increase in salaries, wages and employee benefits expense was primarily due to the additional employees hired in response to the increase in drayage shipments for the year ended December 31, 2021, an increased reserve for incentive compensation and higher group health insurance premiums. Cost-control measures implemented in the prior year contributed to the decrease in salaries, wages and employee benefits expense as a percentage of operating revenues.
Operating Leases
Intermodal operating leases increased $5,893, or 36.1% to $22,218 for the year ended December 31, 2021 from $16,325 for the same period of 2020. Operating leases were 7.7% of Intermodal operating revenue for the year ended December 31, 2021 compared to 8.2% in the same period of 2020. The increase in operating leases expense was primarily due to new equipment and property leases in 2021.
Depreciation and Amortization
Intermodal depreciation and amortization increased $670, or 6.7%, to $10,647 for the year ended December 31, 2021 from $9,977 for the same period of 2020. Intermodal depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.7% for the year ended December 31, 2021 compared to 5.0% for the same period of 2020. The increase in depreciation and amortization expense was primarily due to amortization expense resulting from intangible assets recorded in connection with the Proficient Transport acquisition, partially offset by a decrease in equipment depreciation.
Insurance and Claims
Intermodal insurance and claims expense increased $1,978, or 25.1%, to $9,850 for the year ended December 31, 2021 from $7,872 for the same period of 2020. Intermodal insurance and claims were 3.4% of operating revenue for the year ended December 31, 2021 compared to 3.9% for the same period of 2020. The increase in Intermodal insurance and claims was primarily due to an increase in vehicle insurance premiums. See additional discussion over the consolidated increase in self-insurance reserves related to vehicle claims in the “Other operations” section below.
Fuel Expense
Intermodal fuel expense increased $2,902, or 54.0%, to $8,275 for the year ended December 31, 2021 from $5,373 for the same period of 2020. Fuel expenses were 2.9% of Intermodal operating revenue for the year ended December 31, 2021 compared to 2.7% for the same period of 2020. Intermodal fuel expense increased due to the rise in the average price of fuel in 2021.
Other Operating Expenses
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Intermodal other operating expenses increased $25,671, or 97.7%, to $51,933 for the year ended December 31, 2021 from $26,262 for the same period of 2020. Intermodal other operating expenses as a percentage of revenue for the year ended December 31, 2021 were 18.0% compared to 13.2% for the same period of 2020. The increase in Intermodal other operating expenses was driven by additional expenses incurred to support the increased accessorial revenues noted above, increase in bad debt expense and higher equipment maintenance costs.
Income from Operations
Intermodal’s income from operations increased by $13,726, or 83.7%, to $30,117 for the year ended December 31, 2021 compared to $16,391 for the same period in 2020. Income from operations as a percentage of Intermodal operating revenue was 10.4% for the year ended December 31, 2021 compared to 8.2% in the same period of 2020. The increase in income from operations as a percentage of operating revenues was due to increase in drayage revenue per shipment combined with cost-control measures and operational efficiencies, partially offset by the change in mix of freight capacity purchased from Leased Capacity Providers, third party carriers and Company-employed drivers.
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Other operations - Year Ended December 31, 2021 compared to Year Ended December 31, 2020
Other operating activity was a $10,137 operating loss for the year ended December 31, 2021 compared to $13,733 for the same period in 2020. The change in the operating loss was driven by increased professional fees related to cybersecurity and shareholder engagement activities and an increased reserve for an incentive program established for employees in 2021, partially offset by decreased self-insurance reserves for vehicle liability, workers’ compensation and group health insurance claims. The decrease in self-insurance reserves for vehicle liability and workers’ compensation claims was due to the favorable loss development factor of historical claims attributable to the safety measures in place. For the year ended December 31, 2020, severance costs in the amount of $997 were recorded in accordance with severance agreements for former employees and a reserve in the amount of $2,300 was recorded for a litigated contract dispute. Similar costs were not recorded for the year ended December 31, 2021.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of financial statements in accordance with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates and assumptions are based on historical experience and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. The significant accounting policies followed in the preparation of the financial statements are detailed in Note 1 of our Consolidated Financial Statements included in this Form 10-K.
Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments. We believe that our application of the policies discussed below involves significant levels of judgment, estimates and complexity. Due to the levels of judgment, complexity and period of time over which many of these items are resolved, actual results could differ from those estimated at the time of preparation of the financial statements. Adjustments to these estimates would impact our financial position and future results of operations.
Self-Insurance Loss Reserves
We provide for the estimated costs of vehicle liability and workers’ compensation claims both reported and for claims incurred but not reported. The amount of self-insurance loss reserves and loss adjustment expenses is determined based on an estimation process that requires us to make significant judgments and use information obtained from both our-specific and industry data, as well as general economic information. We estimate our self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and through actuarial analysis to determine an estimate of probable losses on claims incurred but not reported. If the events underlying the claims have occurred as of the balance sheet date, then losses are recognized immediately. Historically, we have experienced both favorable and unfavorable development of claim estimates.
The estimation process for self-insurance loss exposure requires management to make significant judgments and continuously monitor and evaluate the life cycle of claims. Using data obtained from this monitoring and our assumptions about the emerging trends, management develops an estimate of ultimate claims based on its historical experience and other available market information. The most significant assumptions used in the estimation process include determining the trend in loss costs, the expected consistency in the frequency and severity of claims incurred but not yet reported, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. We utilize quarterly actuarial analyses to evaluate open claims and estimate the ongoing development exposure. The actual cost to settle our self-funded claim liabilities can differ from our reserve estimates because of a number of uncertainties, including the inherent difficulty in estimating the severity of a claim and the potential amount to defend and settle a claim.
As of December 31, 2021 and 2020, we recorded insurance reserves of $65,649 and $68,647, respectively, inclusive of reserves in excess of the self-insured retention limit that are expected to be reimbursed from insurance carriers. Additionally, we recognized a receivable for insurance proceeds and a corresponding claims payable for vehicle liability and workers’ compensation claims in excess of the self-insured retention limit in the amount of $28,667 and $35,088 as of December 31, 2021 and 2020, respectively.
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Business Combinations and Goodwill
Acquisitions are accounted for using the purchase method. Upon the acquisition of a business, the fair value of the assets acquired and liabilities assumed must be estimated. This requires judgments regarding the identification of acquired assets and liabilities assumed, some of which may not have been previously recorded by the acquired business, as well as judgments regarding the valuation of all identified acquired assets and assumed liabilities. The assets acquired and liabilities assumed are determined by reviewing the operations, interviewing management and reviewing the financial and contractual information of the acquired business. Consideration is typically paid in the form of cash paid upon closing or contingent consideration paid upon satisfaction of a future obligation. If contingent consideration is included in the purchase price, we value that consideration as of the acquisition date and it is recorded to goodwill.
Once the acquired assets and assumed liabilities are identified, the fair value of the assets and liabilities are estimated using a variety of approaches that require significant judgments. For example, intangible assets are typically valued using a discounted cash flow (“DCF”) analysis, which requires estimates of the future cash flows that are attributable to the intangible asset. A DCF analysis also requires significant judgments regarding the selection of discount rates that are intended to reflect the risks that are inherent in the projected cash flows, the determination of terminal growth rates, and judgments about the useful life and pattern of use of the underlying intangible asset. The valuation of acquired property, plant and equipment requires judgments about current market values, replacement costs, the physical and functional obsolescence of the assets and their remaining useful lives. A failure to appropriately assign a fair value to acquired assets and assumed liabilities could significantly impact the amount and timing of future depreciation and amortization expense, as well as significantly overstate or understate assets or liabilities.
Goodwill is recorded at cost based on the excess of purchase price over the fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized but rather we conduct an annual, or more frequently if circumstances indicate possible impairment, impairment test of goodwill for each reporting unit at June 30 of each year. Examples of such events or circumstances could include a significant change in business climate or a loss of significant customers. Intangible assets are amortized over their useful lives.
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Liquidity and Capital Resources
We have historically financed our working capital needs, including capital expenditures, with available cash, cash flows from operations and borrowings under our credit facility. We believe that borrowings under our credit facility, together with available cash and internally generated funds, will be sufficient to support our working capital, capital expenditures and debt service requirements for the foreseeable future. During 2021, we deferred a portion of our equipment purchases in order to increase our available cash in response to the disruption and uncertainty resulting from the COVID-19 pandemic. We also frequently utilize operating leases to acquire revenue equipment. In 2021, we completed multiple business acquisitions. See Note 3, Acquisitions, in the Notes to Consolidated Financial Statements for further discussion on this topic. We used existing cash and credit facility to finance these transactions and to provide any necessary liquidity for current and future operations.
To further support liquidity and capital resources, in July 2021, we entered into a second amendment to our credit facility, which extended the maturity date to July 20, 2026 and changed the interest rate options available. In connection with the second amendment, we have replaced the London Interbank Offered Rate with the Bloomberg Short-Term Bank Yield Index rate as the reference rate in our credit facility to calculate interest due to our lender. In December 2021, we entered into a third amendment to our credit facility, which increased the amount available for borrowing to $450,000, consisting of a $300,000 revolving line of credit and a term loan of $150,000. The amendment resets the $75,000 limit on incremental loan facilities that may be incurred under the credit facility and establishes annual mandatory repayment of the principal amount of the term loan at: 1.0% per annum in 2022 and 2023; 2.5% per annum in 2024 and 2025; 5.0% per annum in 2026; with the remaining unpaid principal being due on July 20, 2026.
As of December 31, 2021, we were in compliance with our financial covenants contained in the credit facility and expect to maintain such compliance. In the event that we encounter difficulties, our historical relationships with our lenders has been strong and we anticipate their continued long-term support of our business. Refer to Note 4, Indebtedness, to our Consolidated Financial Statements for additional information regarding our credit facility.
Cash Flows
Year Ended December 31, 2021 Cash Flows compared to December 31, 2020 Cash Flows
Continuing Operations
Net cash provided by operating activities of continuing operations was $124,896 for the year ended December 31, 2021 compared to $96,105 for the year ended December 31, 2020. The increase in net cash provided by operating activities of continuing operations was primarily due to the increase in net income from continuing operations, partially offset by an increase in accounts receivable and other receivable balances. The accounts receivable balance changed due to the increase in operating revenues in 2021. The other receivables balance changed as a result of the Transition Services Agreement entered into with the buyer of the Pool business. Under the Transition Services Agreement, we remitted payments to outside vendors on behalf of the buyer for expenses incurred by the Pool business, up to a limit of $18,000, and we are reimbursed by the buyer within 60 days from the end of the month in which the payment is remitted.
Net cash used in investing activities of continuing operations was $96,332 for the year ended December 31, 2021 compared to $81,506 during the year ended December 31, 2020. Capital expenditures for 2021 were $39,109, which primarily related to an organic investment to expand the capacity of our national hub in Columbus, Ohio and the purchase of new trailers. Capital expenditures for 2020 were $20,268, which primarily related to the organic investment to expand the capacity of our national hub in Columbus, Ohio. Continuing investing activities for 2021 included the acquisition of Proficient Transport for $16,339, J&P for $7,669 and BarOle for $35,436 while continuing investing activities for 2020 included the acquisition of Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC for $55,931 and CLW Delivery, Inc. for $5,500.
Net cash used in financing activities of continuing operations was $31,502 for the year ended December 31, 2021 compared to $39,094 for the year ended December 31, 2020. The change in the net cash used in financing activities of continuing operations was primarily due to increased contributions from a subsidiary held for sale, partially offset by increased payment of dividends and increased repurchases and retirement of common stock.
Discontinued Operation
Net cash used in discontinued operating activities was $4,635 for the year ended December 31, 2021 compared to $11,439 for the year ended December 31, 2020. The change in net cash provided by discontinued operating activities was primarily related to a decrease in discontinued net income after consideration of non-cash items.
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Net cash provided by discontinued investing activities was $8,020 for the year ended December 31, 2021 compared to net cash used in discontinued investing activities was $1,201 during the year ended December 31, 2020. The change in net cash provided by discontinued investing activities was due to the proceeds received from the sale of the Pool business in 2021.
Net cash used in discontinued financing activities was $3,385 for the year ended December 31, 2021 compared to net cash provided by discontinued financing activities was $12,640 for the year ended December 31, 2020. The change in net cash used in discontinued financing activities was due to decreased contributions from the parent.
Share Repurchase Program
During the year ended December 31, 2021 and 2020, we repurchased 535 and 787 shares of our common stock, respectively, for approximately $48,989 and $45,248, respectively, through open market transactions. All shares received were retired upon receipt, and the excess of the purchase price over par value per share was recorded to “Retained Earnings” in our Consolidated Balance Sheets.
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