FORWARD AIR CORP (FWRD) FY 2022 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, 2022. For a discussion of similar topics for the years ended December 31, 2021 and December 31, 2020, 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, 2022, which is incorporated herein by reference.
Overview
We are a leading asset-light freight provider of transportation services, including LTL, truckload, final mile and intermodal drayage services across the United States and in Canada and Mexico. We offer premium services that typically require precision execution, such as expedited transit, delivery during tight time windows and special handling. We utilize an asset-light strategy to minimize our investments in equipment and facilities and to reduce our capital expenditures.
Our services are classified into two reportable segments: Expedited Freight and Intermodal.
Our Expedited Freight segment provides expedited regional, inter-regional and national LTL services. Expedited Freight also 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 through acquisitions.
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 CFS warehouse and handling services, and in select locations, linehaul and LTL services. We plan to grow our Intermodal geographic footprint through acquisitions as well as through greenfield start-ups where no suitable acquisition is available.
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 or shipment for the freight shipped or moved through our network. Additionally, our earnings depend on the growth of other services, such as LTL pickup and delivery, which will allow us to maintain revenue growth in a challenging freight environment. We continue to create synergies across our services, particularly with services offered in our Expedited Freight reportable segment. Synergistic opportunities include the ability to share resources, in particular our fleet resources.
We monitor and analyze a number of key operating statistics in order to manage our business and evaluate our financial and operating performance. These key operating statistics are defined below and are referred to throughout the discussion of the financial results of our Expedited Freight and Intermodal reportable segments. Our key operating statistics should not be interpreted as better measurements of our results than income from operations as determined under U.S. generally accepted accounting principles.
Within our Expedited Freight reportable segment, our primary revenue focus is to increase density, which is shipment and tonnage growth within our existing LTL network. Increases in density allow us to maximize our asset utilization and labor productivity, which we measure over many different functional areas of our operations including linehaul load factor, pickup and delivery (“P&D”) stops per hour, P&D shipments per hour and door pounds handled 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. Revenue per hundredweight is also a commonly-used indicator for general pricing trends in the LTL industry and can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment and length of haul. Therefore, changes in revenue per hundredweight may not necessarily indicate actual changes in underlying base rates. 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 the petroleum-based products used in our operations and is indexed to diesel fuel prices published by the U.S. Department of Energy. The impact of fuel on our results of operations depends on the relationship between the applicable surcharge, the fuel efficiency of our Company drivers, and the load factor achieved by our operation. Fluctuations in fuel prices in either direction could have a positive or negative impact on our margins, particularly in our LTL business where the weight of a shipment subject to the fuel surcharge on a given trailer can vary materially. We believe our yield management process focused on account level profitability, and ongoing improvements in operating efficiencies, are both key components of our ability to grow profitably.
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The key operating statistics necessary to understand the operating results of our Expedited Fright reportable segment are described below in more detail:
Tonnage - Total weight of shipments in pounds. The level of freight tonnage is affected by economic cycles and conditions, customers’ business cycles, changes in customers’ business practices and capacity in the truckload market.
Weight Per Shipment - Total pounds divided by the number of shipments. 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 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.
Revenue Per Hundredweight - Network revenue per every 100 pounds of shipment weight. Our LTL transportation services are generally priced based on weight, commodity, and distance. Our pricing policies are reflective of the services we provide, and can be influenced by competitive market conditions. Changes in the freight profile factors such as average shipment size, average length of haul, freight density, and customer and geographic mix can impact the revenue per hundredweight. Fuel surcharges and intercompany revenue between Network and Truckload are included in this measurement.
Revenue Per Shipment - Network revenue divided by the number of shipments. Fuel surcharges and intercompany revenue between Network and Truckload are included in this measurement.
Average Length of Haul - Total miles between origin and destination service centers for all shipments, with miles based on the size of shipments. Length of haul is used to analyze our tonnage and pricing trends for shipments with similar characteristics. Changes in length of haul generally have a direct effect on our revenue per hundredweight, as an increase in length of haul will typically cause an increase in revenue per hundredweight.
Within our Intermodal reportable segment, our primary revenue focus is to increase the number of shipments. The key operating statistic necessary to understand the operating results of our Intermodal reportable segment is described below in more detail:
Drayage Revenue Per Shipment - Intermodal revenue divided by the number of drayage shipments. Revenue derived from container freight station warehouse and handling, and linehaul and LTL services is excluded from this measurement. Fuel surcharges and accessorial charges are included in this measurement.
Trends and Developments
Intermodal Acquisitions
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. In 2022, the earn-out period ended and the Company paid $91 based on the terms of the purchase agreement. Proficient Transport is an intermodal drayage company headquartered in Chicago, Illinois. The acquisition of Proficient Transport expands our intermodal footprint in Georgia, Illinois, North Carolina, and Texas, and introduces 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 funded using cash flows from operations. The results of BarOle have been included in our consolidated financial statements as of and from the date of acquisition.
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In May 2022, we acquired certain assets and liabilities of Edgmon Trucking, LLC (“Edgmon”) for $40,993 and a potential earn-out of up to $5,000, based on the achievement of certain profit contribution milestones over a nineteen month period, beginning May 31, 2022. Edgmon, headquartered in Kent, Washington, operates a terminal in Kent and a yard in Seattle, servicing both the Port of Seattle and the Port of Tacoma. The acquisition of Edgmon marks our first Intermodal location on the West Coast, a key area of expansion in the Intermodal strategic growth plan. The acquisition was funded using cash flows from operations. The results of Edgmon have been included in our consolidated financial statements as of and from the date of acquisition.
Expedited Freight Acquisition
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 flows 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.
COVID-19
Our business is highly susceptible to changes in 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 adversely impacted economic activity and conditions worldwide and created significant volatility and disruption to the financial markets and supply chains worldwide.
Although our operations have returned to pre-COVID levels, should we experience another COVID-19-like virus outbreak in the future with similar restrictions, we would anticipate a similar impact on our business.
Fuel
We depend heavily upon the availability of adequate diesel fuel supplies, and recently, fuel availability and prices have fluctuated significantly. Fuel availability and prices can be impacted by factors beyond our control, such as natural or man-made disasters, adverse weather conditions, political events, economic sanctions imposed against oil-producing countries or specific industry participants, disruptions or failure of technology or information systems, price and supply decisions by oil producing countries and cartels, terrorist activities, armed conflict, tariffs, sanctions, other changes to trade agreements and world supply and demand imbalance. Through our fuel surcharge programs, we have been able to mitigate the impact of fluctuations in fuel prices. Our fuel surcharge rates are set weekly based on the national average for fuel prices as published by the U.S. Department of Energy and our fuel surcharge table. In periods of changing fuel prices, our fuel surcharges vary by different degrees and may not fully offset fuel price fluctuations or may result in higher than expected increases in revenue. Fuel shortages, changes in fuel prices, and the potential volatility in fuel surcharge revenue may impact our results of operations and overall profitability. Fuel surcharge revenue as a percentage of operating revenues increased to 17.1% for the year ended December 31, 2022 compared to 11.5% for the year ended December 31, 2021, as a result of changes in fuel prices.
Economy
Participants in the transportation industry have historically experienced cyclical fluctuations in financial results due to economic recessions, downturns in the business cycles of customers, volatility in the prices charged by third-party carriers, interest rate fluctuations and other U.S. and global macroeconomic developments. During economic downturns, reductions in overall demand for transportation services will likely reduce demand for our services and exert downward pressures on our rates and margins. In periods of strong economic growth, overall demand may exceed the available supply of transportation resources. While this may present an opportunity to increase economies of scale in our network and enhanced pricing and margins, these benefits may be lessened by increased network congestion and operating inefficiencies.
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Like other providers of freight transportation services, our business has been impacted by the macroeconomic conditions of the past year. Industry freight volumes as measured by the Cass Freight Index were flat in 2022 compared to the prior year. As global demand slowed, the peak shipping season that generally drives higher volumes in the second half of the year was atypically soft. Shippers in the United States continue to struggle with elevated inventory levels as consumer demand has been negatively impacted by inflation and macroeconomic uncertainty. In response to this slowing demand, steamship lines continue to rationalize services by reducing capacity where possible, which has allowed port congestion to ease. The slowdown of consumer demand has also had a significant impact on the air freight market. Air freight volumes have significantly declined, also as a consequence of higher inventory levels and declining consumer demand. These trends, in combination with elevated volume growth in our network in the first half of 2022, drove a decline in the volume of freight shipped by our customers in the second half of 2022. These trends have continued through the early months of 2023.
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Results from Operations
The following table sets forth our consolidated financial data for the years ended December 31, 2022 and 2021 (in thousands):
| Year Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2022 | December 31, 2021 | Change | Percent Change | |||||||||||
| Operating revenue: | ||||||||||||||
| Expedited Freight | $ | 1,553,890 | $ | 1,374,270 | $ | 179,620 | 13.1 | % | ||||||
| Intermodal | 419,718 | 289,214 | 130,504 | 45.1 | ||||||||||
| Eliminations and other operations | (205) | (1,057) | 852 | 80.6 | ||||||||||
| Operating revenue | 1,973,403 | 1,662,427 | 310,976 | 18.7 | ||||||||||
| Operating expenses: | ||||||||||||||
| Purchased transportation | 906,549 | 833,075 | 73,474 | 8.8 | ||||||||||
| Salaries, wages, and employee benefits | 347,970 | 327,814 | 20,156 | 6.1 | ||||||||||
| Operating leases | 97,094 | 79,633 | 17,461 | 21.9 | ||||||||||
| Depreciation and amortization | 47,386 | 39,552 | 7,834 | 19.8 | ||||||||||
| Insurance and claims | 49,759 | 42,186 | 7,573 | 18.0 | ||||||||||
| Fuel expense | 27,583 | 17,027 | 10,556 | 62.0 | ||||||||||
| Other operating expenses | 231,086 | 163,839 | 67,247 | 41.0 | ||||||||||
| Total operating expenses | 1,707,427 | 1,503,126 | 204,301 | 13.6 | ||||||||||
| Income (loss) from continuing operations: | ||||||||||||||
| Expedited Freight | 210,968 | 139,321 | 71,647 | 51.4 | ||||||||||
| Intermodal | 56,874 | 30,117 | 26,757 | 88.8 | ||||||||||
| Other operations | (1,866) | (10,137) | 8,271 | 81.6 | ||||||||||
| Income from continuing operations | 265,976 | 159,301 | 106,675 | 67.0 | ||||||||||
| Other expense: | ||||||||||||||
| Interest expense, net | (5,138) | (4,338) | (800) | (18.4) | ||||||||||
| Other, net | — | — | — | — | ||||||||||
| Total other expense | (5,138) | (4,338) | (800) | 18.4 | ||||||||||
| Income from continuing operations before income taxes | 260,838 | 154,963 | 105,875 | 68.3 | ||||||||||
| Income tax expense | 67,647 | 38,872 | 28,775 | 74.0 | ||||||||||
| Net income from continuing operations | 193,191 | 116,091 | 77,100 | 66.4 | ||||||||||
| Loss from discontinued operation, net of tax | — | (10,232) | 10,232 | (100.0) | ||||||||||
| Net income and comprehensive income | $ | 193,191 | $ | 105,859 | $ | 87,332 | 82.5 | % |
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Operating Revenues
Operating revenues increased $310,976, or 18.7% to $1,973,403 for the year ended December 31, 2022 compared to $1,662,427 for the year ended December 31, 2021. The revenue increase was primarily driven by increased revenue from our Expedited Freight segment of $179,620 due to increased Network and Final Mile revenue, and from our Intermodal segment of $130,504 driven by increased drayage and accessorial revenues. The results for our two reportable segments are discussed in detail in the following sections.
Operating Expenses
Operating expenses increased $204,301, or 13.6%, to $1,707,427 for the year ended December 31, 2022 compared to $1,503,126 for the same period in 2021. The increase was primarily driven by an increase in purchased transportation of $73,474, other operating expenses of $67,247, salaries, wages and employee benefits of $20,156, and operating leases of $17,461. Purchased transportation expense includes our Leased Capacity Providers, third-party motor carriers and capacity secured by transportation intermediaries, while expenses for Company-employed drivers are included in salaries, wages and employee benefits. Purchased transportation expense increased due to higher rates for Leased Capacity Providers, third-party motor carriers, and transportation intermediaries. Other operating expenses increased due to contract labor, professional fees, software license fees, recruiting costs, travel and entertainment expenses and accessorial storage costs incurred in support of the increased accessorial revenues. Salaries, wages and employee benefits increased primarily due to the additional employees hired in 2022, higher salaries and wages, and an increase in the reserve for incentive compensation. Operating leases increased primarily due to higher facility and equipment lease expense.
Income from Continuing Operations and Segment Operations
Income from continuing operations increased $106,675, or 67.0%, to $265,976 for the year ended December 31, 2022, compared to $159,301 for the same period in 2021. The increase was primarily driven by an increase in income from continuing operations in our Expedited Freight segment and Intermodal segment of $71,647 and $26,757, respectively.
Interest Expense, net
Interest expense, net was $5,138 for the year ended December 31, 2022 compared to $4,338 for the same period in 2021. The increase in interest expense was primarily due to a higher weighted-average interest rate during the year ended December 31, 2022. The weighted-average interest rate on the outstanding borrowings under our credit facility were 2.77% and 1.43% during the years ended December 31, 2022 and 2021, respectively.
Income Taxes on a Continuing Basis
The effective tax rate on a continuing basis for the year ended December 31, 2022 was 25.9%, compared to a rate of 25.1% for the same period in 2021. The higher effective tax rate for the year ended December 31, 2022 was primarily due to an increase in the non-deductible compensation in 2022 compared to the same period in 2021.
Loss from Discontinued Operation, net of tax
There was no loss from discontinued operation, net of tax for the year ended December 31, 2022 compared to a loss from discontinued operation, net of tax of $10,232 for the year ended December 31, 2021. Loss from discontinued operation includes our Pool business, which, as discussed above, was sold on February 12, 2021.
Net Income
As a result of the foregoing factors, net income increased by $87,332, or 82.5%, to $193,191 for the year ended December 31, 2022 compared to $105,859 for the same period in 2021.
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Expedited Freight - Year Ended December 31, 2022 compared to Year Ended December 31, 2021
The following table sets forth our financial data of the Expedited Freight segment for the years ended December 31, 2022 and 2021 (unaudited and in thousands):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2022 | Percent of Revenue | December 31, 2021 | Percent of Revenue | Change | Percent Change | |||||||||||||||
| Operating revenue: | ||||||||||||||||||||
| Network 1 | $ | 947,817 | 61.1 | % | $ | 805,015 | 58.6 | % | $ | 142,802 | 17.7 | % | ||||||||
| Truckload | 221,979 | 14.3 | 223,026 | 16.2 | (1,047) | (0.5) | ||||||||||||||
| Final Mile | 293,769 | 18.9 | 275,201 | 20.0 | 18,568 | 6.7 | ||||||||||||||
| Other | 90,325 | 5.8 | 71,028 | 5.2 | 19,297 | 27.2 | ||||||||||||||
| Total operating revenue | 1,553,890 | 100.0 | 1,374,270 | 100.0 | 179,620 | 13.1 | ||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Purchased transportation | 801,131 | 51.7 | 743,418 | 54.1 | 57,713 | 7.8 | ||||||||||||||
| Salaries, wages and employee benefits | 279,087 | 18.0 | 261,405 | 19.0 | 17,682 | 6.8 | ||||||||||||||
| Operating leases | 65,143 | 4.2 | 57,309 | 4.2 | 7,834 | 13.7 | ||||||||||||||
| Depreciation and amortization | 31,892 | 2.1 | 28,842 | 2.1 | 3,050 | 10.6 | ||||||||||||||
| Insurance and claims | 36,205 | 2.3 | 32,243 | 2.3 | 3,962 | 12.3 | ||||||||||||||
| Fuel expense | 11,589 | 0.7 | 8,752 | 0.6 | 2,837 | 32.4 | ||||||||||||||
| Other operating expenses | 117,875 | 7.6 | 102,980 | 7.5 | 14,895 | 14.5 | ||||||||||||||
| Total operating expenses | 1,342,922 | 86.4 | 1,234,949 | 89.9 | 107,973 | 8.7 | ||||||||||||||
| Income from operations | $ | 210,968 | 13.6 | % | $ | 139,321 | 10.1 | % | $ | 71,647 | 51.4 | % | ||||||||
| 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, 2022 | December 31, 2021 | Percent Change | |||||||
| Business days | 255 | 254 | 0.4 | % | |||||
| Tonnage 1,2 | |||||||||
| Total pounds | 2,793,756 | 2,812,071 | (0.7) | ||||||
| Pounds per day | 10,956 | 11,071 | (1.0) | ||||||
| Shipments 1,2 | |||||||||
| Total shipments | 3,654 | 3,856 | (5.2) | ||||||
| Shipments per day | 14.3 | 15.2 | (5.9) | ||||||
| Weight per shipment | 764 | 729 | 4.8 | ||||||
| Revenue per hundredweight 3 | $ | 34.23 | $ | 28.96 | 18.2 | ||||
| Revenue per hundredweight, ex fuel 3 | $ | 25.98 | $ | 24.06 | 8.0 | ||||
| Revenue per shipment 3 | $ | 261.68 | $ | 211.19 | 23.9 | ||||
| Revenue per shipment, ex fuel 3 | $ | 198.62 | $ | 175.48 | 13.2 | ||||
| 1 In thousands | |||||||||
| 2 Excludes accessorial, Truckload and Final Mile products | |||||||||
| 3 Includes intercompany revenue between the Network and Truckload revenue streams |
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Operating Revenues
Expedited Freight operating revenue increased $179,620, or 13.1%, to $1,553,890 for the year ended December 31, 2022 from $1,374,270 for the same period in 2021. The increase was driven by increased Network and Final Mile revenue. Network revenue increased due to an 8.0% increase revenue per hundredweight, partially offset by a 0.7% decrease in tonnage as compared to the prior year. Revenue per hundredweight excluding fuel increased to $25.98 in 2022 as compared to $24.06 in 2021. The increase in the revenue per hundredweight excluding fuel was driven by the execution of our revenue growth strategies, measured pricing initiatives, including our general rate increase, and strong demand for our services in the first half of 2022. The slight decrease in tonnage reflects an increase in weight per shipment of 4.8% on 5.2% fewer number of shipments. The increase in the weight per shipment was the result of more dense freight in our network primarily driven by our freight rationalization actions in the second half of 2021 to capture higher quality freight. Network fuel surcharge revenue increased $92,744, or 67.3%, as a result of the rise in the average price of fuel. Final Mile revenue increased $18,568 primarily due to strong demand for our services and new market expansions, while Truckload decreased $1,047 due to softening in the spot market in the second half of 2022. Other revenue, which includes warehousing and terminal handling, increased $19,297 due to targeted pricing initiatives, partially offset by the fewer number of shipments.
Purchased Transportation
Expedited Freight purchased transportation expense increased by $57,713, or 7.8%, to $801,131 for the year ended December 31, 2022 from $743,418 for the same period in 2021. As a percentage of segment operating revenue, Expedited Freight purchased transportation was 51.7% during the year ended December 31, 2022 compared to 54.1% for the same period in 2021.Expedited Freight purchased transportation includes Leased Capacity Providers, third-party motor carriers and transportation intermediaries, while expenses for Company-employed drivers are included in salaries, wages and employee benefits. The increase in purchased transportation expense was primarily due to higher rates for purchased miles in 2022 from Leased Capacity Providers, third-party motor carriers, and transportation intermediaries, partially offset by the change in the mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers, and transportation intermediaries for Network and Truckload. For the year ended December 31, 2022, 67.2%, 29.3% and 3.4% of our freight capacity was purchased from Leased Capacity Providers, third-party motor carriers, transportation intermediaries and Company-employed drivers, respectively for Network and Truckload. This compares to 62.3%, 34.0% and 3.7% in the same period in 2021.
Salaries, Wages, and Employee Benefits
Expedited Freight salaries, wages and employee benefits increased by $17,682, or 6.8%, to $279,087 for the year ended December 31, 2022 from $261,405 for the same period in 2021. Salaries, wages and employee benefits were 18.0% of Expedited Freight operating revenue for the year ended December 31, 2022 compared to 19.0% for the same period in 2021. The increase in salaries, wages and employee benefits expense was primarily due to the additional employees hired in response to the increased volumes in the first half of 2022, higher salaries and wages, and an increase in the reserve for incentive compensation as compared to the same period in 2021.
Operating Leases
Expedited Freight operating leases increased $7,834, or 13.7%, to $65,143 for the year ended December 31, 2022 from $57,309 for the same period in 2021. Operating leases were 4.2% of Expedited Freight operating revenue for both years ended December 31, 2022 and 2021. The increase in operating lease expense was primarily due to higher facility expense for the year ended December 31, 2022 as compared to the same period in 2021.
Depreciation and Amortization
Expedited Freight depreciation and amortization increased $3,050, or 10.6%, to $31,892 for the year ended December 31, 2022 from $28,842 for the same period in 2021. Depreciation and amortization expense as a percentage of Expedited Freight operating revenue was 2.1% for both the year ended December 31, 2022 and 2021. The increase in depreciation and amortization expense was primarily due to an increase in equipment depreciation for the year ended December 31, 2022 as compared to the same period in 2021.
Insurance and Claims
Expedited Freight insurance and claims expense increased $3,962, or 12.3%, to $36,205 for the year ended December 31, 2022 from $32,243 for the same period in 2021. Insurance and claims as a percentage of Expedited Freight operating revenue was 2.3% for both years ended December 31, 2022 and 2021. The increase in insurance and claims expense was primarily due to an increase in insurance premiums, vehicle liability claims and equipment repairs, partially offset by a decrease in cargo claims for the year ended December 31, 2022 as compared to the same period in 2021. See additional discussion over the consolidated change in self-insurance reserves in the “Other Operations” section below.
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Fuel Expense
Expedited Freight fuel expense increased $2,837, or 32.4%, to $11,589 for the year ended December 31, 2022 from $8,752 for the same period in 2021. Fuel expense was 0.7% of Expedited Freight operating revenue for the year ended December 31, 2022 compared to 0.6% for the same period in 2021. Expedited Freight fuel expense increased primarily due to the rise in the average price of fuel during the year ended December 31, 2022.
Other Operating Expenses
Expedited Freight other operating expenses increased $14,895, or 14.5%, to $117,875 for the year ended December 31, 2022 from $102,980 for the same period in 2021. Other operating expenses were 7.6% of Expedited Freight operating revenue for the year ended December 31, 2022 compared to 7.5% for the same period in 2021. 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 primarily due to an increase in contract labor, professional fees, software license fees, recruiting costs, and travel and entertainment expenses for the year ended December 31, 2022 as compared to the same period in 2021.
Income from Operations
Expedited Freight income from operations increased by $71,647, or 51.4%, to $210,968 for the year ended December 31, 2022 compared to $139,321 for the same period in 2021. Expedited Freight income from operations was 13.6% of operating revenue for the year ended December 31, 2022, compared to 10.1% for the same period in 2021. The increase in income from operations as a percentage of operating revenue was driven by increased revenue per hundredweight excluding fuel combined with higher fuel surcharge revenue, partially offset by higher rates for purchased miles in 2022 from Leased Capacity Providers, third-party motor carriers, and transportation intermediaries for Network and Truckload.
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Intermodal - Year Ended December 31, 2022 compared to Year Ended December 31, 2021
The following table sets forth our financial data of the Intermodal segment for the years ended December 31, 2022 and 2021 (unaudited and in thousands):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2022 | Percent of Revenue | December 31, 2021 | Percent of Revenue | Change | Percent Change | |||||||||||||||
| Operating revenue | $ | 419,718 | 100.0 | % | $ | 289,214 | 100.0 | % | $ | 130,504 | 45.1 | % | ||||||||
| Operating expenses: | ||||||||||||||||||||
| Purchased transportation | 105,656 | 25.1 | 90,575 | 31.3 | 15,081 | 16.7 | ||||||||||||||
| Salaries, wages and employee benefits | 73,406 | 17.5 | 65,599 | 22.7 | 7,807 | 11.9 | ||||||||||||||
| Operating leases | 31,950 | 7.6 | 22,218 | 7.7 | 9,732 | 43.8 | ||||||||||||||
| Depreciation and amortization | 15,393 | 3.7 | 10,647 | 3.7 | 4,746 | 44.6 | ||||||||||||||
| Insurance and claims | 9,087 | 2.2 | 9,850 | 3.4 | (763) | (7.7) | ||||||||||||||
| Fuel expense | 15,993 | 3.8 | 8,275 | 2.9 | 7,718 | 93.3 | ||||||||||||||
| Other operating expenses | 111,359 | 26.5 | 51,933 | 18.0 | 59,426 | 114.4 | ||||||||||||||
| Total operating expenses | 362,844 | 86.4 | 259,097 | 89.6 | 103,747 | 40.0 | ||||||||||||||
| Income from operations | $ | 56,874 | 13.6 | % | $ | 30,117 | 10.4 | % | $ | 26,757 | 88.8 | % |
| Intermodal Operating Statistics | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended | ||||||||||
| December 31, 2022 | December 31, 2021 | Percent Change | ||||||||
| Drayage shipments | 347,066 | 369,601 | (6.1) | % | ||||||
| Drayage revenue per shipment | $ | 1,064 | $ | 667 | 59.5 | % |
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Operating Revenues
Intermodal operating revenue increased $130,504, or 45.1%, to $419,718 for the year ended December 31, 2022, from $289,214 for the same period in 2021. The increase in operating revenues was primarily attributable to a 59.5% increase in drayage revenue per shipment over the same period in 2021 and an increase in accessorial revenues, partially offset by a 6.1% decrease in drayage shipments as compared to the prior year. The increase in drayage revenue per shipment was driven by execution of our revenue growth strategies, measured pricing initiatives, and the contribution from the BarOle acquisition in November 2021 and the Edgmon acquisition in May 2022. Our accessorial revenue was elevated in 2022 as compared to the same period in 2021 in support of our customers and continued strong demand for our services. Fuel surcharge revenue increased $26,335 or 97.1%, as a result of the rise in the average price of fuel.
Purchased Transportation
Intermodal purchased transportation increased $15,081, or 16.7%, to $105,656 for the year ended December 31, 2022 from $90,575 for the same period in 2021. As a percentage of segment operating revenue, Intermodal purchased transportation was 25.1% for the year ended December 31, 2022, compared to 31.3% for the same period in 2021. Intermodal purchased transportation includes Leased Capacity Providers, third-party motor carriers, and transportation intermediaries, while expenses for Company-employed drivers are included in salaries, wages and employee benefits. The increase in purchased transportation expense was primarily due to higher rates in 2022 for Leased Capacity Providers, third-party motor carriers, and transportation intermediaries, partially offset by the change in the mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers, transportation intermediaries and Company-employed drivers.
Salaries, Wages, and Employee Benefits
Intermodal salaries, wages and employee benefits increased $7,807, or 11.9%, to $73,406 for the year ended December 31, 2022 from $65,599 for the same period in 2021. Salaries, wages and employee benefits were 17.5% of Intermodal operating revenue for the year ended December 31, 2022 compared to 22.7% for the same period in 2021. The increase in salaries, wages and employee benefits expense was primarily due to additional employees hired in connection with the BarOle and Edgmon acquisitions, higher salaries and wages, and an increase in the reserve for incentive compensation as compared to the same period in 2021.
Operating Leases
Intermodal operating leases increased $9,732, or 43.8%, to $31,950 for the year ended December 31, 2022, from $22,218 for the same period in 2021. Operating leases were 7.6% of Intermodal operating revenue for the year ended December 31, 2022, compared to 7.7% in the same period in 2021. The increase in operating leases expense was due to higher facility and equipment lease expense during the year ended December 31, 2022 as compared to the same period in 2021.
Depreciation and Amortization
Intermodal depreciation and amortization increased $4,746, or 44.6%, to $15,393 for the year ended December 31, 2022, from $10,647 for the same period in 2021. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.7% for the year ended December 31, 2022, compared to 3.7% for the same period in 2021. The increase in depreciation and amortization expense was primarily due to the equipment and intangible assets acquired in connection with the BarOle and Edgmon acquisitions for year ended December 31, 2022 as compared to the same period in 2021.
Insurance and Claims
Intermodal insurance and claims expense decreased $763, or 7.7%, to $9,087 for the year ended December 31, 2022 from $9,850 for the same period in 2021. Insurance and claims were 2.2% of Intermodal operating revenue for the year ended December 31, 2022, compared to 3.4% for the same period in 2021. The decrease in insurance and claims expense was primarily due to the decrease in insurance premiums for the year ended December 31, 2022, as compared to the same period in 2021. See additional discussion over the consolidated change in self-insurance reserves in the “Other Operations” section below.
Fuel Expense
Intermodal fuel expense increased $7,718, or 93.3%, to $15,993 for the year ended December 31, 2022, from $8,275 for the same period in 2021. Fuel expense was 3.8% of Intermodal operating revenue for the year ended December 31, 2022, compared to 2.9% for the same period in 2021. Intermodal fuel expense increased due to the additional Company-employed drivers and the rise in the average price of fuel during the year ended December 31, 2022.
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Other Operating Expenses
Intermodal other operating expenses increased $59,426, or 114.4%, to $111,359 for the year ended December 31, 2022, from $51,933 for the same period in 2021. Other operating expenses as a percentage of Intermodal revenue for the year ended December 31, 2022 were 26.5%, compared to 18.0% for the same period in 2021. Other operating expense include equipment maintenance, facility expenses, legal and professional fees, and accessorial storage costs. The increase in other operating expenses was primarily due to contract labor and accessorial storage costs incurred in support of the increased accessorial revenues for the year ended December 31, 2022 as compared to the same period in 2021.
Income from Operations
Intermodal income from operations increased by $26,757, or 88.8%, to $56,874 for the year ended December 31, 2022, compared to $30,117 for the same period in 2021. Income from operations as a percentage of Intermodal operating revenue was 13.6% for the year ended December 31, 2022, compared to 10.4% in the same period in 2021. The increase in income from operations as a percentage of operating revenue was primarily due to increased drayage revenue per shipment and accessorial revenues, partially offset by higher rates in 2022 for Leased Capacity Providers, third-party motor carriers, and transportation intermediaries.
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Other operations - Year Ended December 31, 2022 compared to Year Ended December 31, 2021
Other operating activity included a $1,866 operating loss for the year ended December 31, 2022 compared to a $10,137 operating loss for the same period in 2021. The change in the operating loss was primarily due to a decrease in the reserves for group health insurance claims and professional fees, offset by an increase in self-insurance reserves for vehicle liability claims, a legal reserve, and a reserve for an incentive program established for certain employees in 2021. The increase in the self-insurance reserves for vehicle liability claims was due to the unfavorable loss development factor of historical claims. Professional fees related to cybersecurity and shareholder engagement activities in the amount of $6,955 were incurred during the year ended December 31, 2021. Similar professional fees were not incurred during the year ended December 31, 2022.
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 self-insurance loss reserves, which includes vehicle liability, and workers’ compensation claims; for 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, 2022 and 2021, we recorded self-insurance loss reserves of $68,654 and $65,649, 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 $29,087 and $28,667 as of December 31, 2022 and 2021, 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 are 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 understanding 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 at closing while contingent consideration is paid upon the satisfaction of a future obligation. If contingent consideration is included in the purchase price, then the consideration is valued as of the acquisition date.
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 attributable to the intangible asset. A DCF analysis also requires judgments regarding the selection of discount rates to reflect the risks inherent in the projected cash flows, the determination of terminal growth rates, and the useful life and pattern of use of the underlying intangible asset. The valuation of acquired property, 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 estimated fair value of net assets acquired. Goodwill is not amortized but rather evaluated annually or more frequently if circumstances indicate possible impairment, as of June 30 for impairment using a qualitative assessment or quantitative one-step assessment. Examples of such events or circumstance that could indicate a possible impairment may include a significant change in business climate or a loss of significant customers. Intangible assets are amortized over their estimated useful lives.
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Liquidity and Capital Resources
For discussion of our Liquidity and Capital Resources for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020, refer to Part I, Item 7 of our annual report on form 10-K filed with SEC on March 1,2022.
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. In 2022, we completed multiple business acquisitions. See Note 3, Acquisitions, in the Notes to Consolidated Financial Statements for further discussion on this topic. We used cash from operations to finance these transactions and to provide any necessary liquidity for current and future operations. In addition, we frequently utilize operating leases to acquire revenue equipment.
To further support liquidity and cash reserves, 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 establishes annual mandatory repayment of the principal amount of the term loan of: 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, 2022, 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, 2022 Cash Flows compared to December 31, 2021 Cash Flows
Continuing Operations
Net cash provided by operating activities of continuing operations was $259,090 for the year ended December 31, 2022 compared to $124,896 for the year ended December 31, 2021. The increase in net cash provided by operating activities of continuing operations was primarily due to the increase in net income from continuing operations after consideration of non-cash items, and the change in accounts receivable. The accounts receivable balance changed due to the increase in operating revenues in 2022, partially offset by a higher amount of cash collected in 2022.
Net cash used in investing activities of continuing operations was $104,462 for the year ended December 31, 2022 compared to $96,332 during the year ended December 31, 2021. Capital expenditures for the year ended December 31, 2022 were $40,729, which primarily related to the purchase of technology and operating equipment, and the investment in the expansion of our national hub in Columbus, Ohio. Capital expenditures for the year ended December 31, 2021 were $39,109, which primarily related to the investment in the expansion of our national hub in Columbus, Ohio and the purchase of equipment. Investing activities of continuing operations for the year ended December 31, 2022 included the acquisition of Edgmon for a preliminary purchase price of $40,433 and Chickasaw Container Services, Inc. for a preliminary purchase price of $25,733, while investing activities for the year ended December 31, 2021 included the acquisition of Proficient Transport for $16,339, J&P for $7,669 and BarOle for $35,436.
Net cash used in financing activities of continuing operations was $146,122 for the year ended December 31, 2022 compared to $31,502 for the year ended December 31, 2021. The change in the net cash used in financing activities of continuing operations was primarily due to the net proceeds received from credit facility in 2021 and the payments made on the credit facility in 2022. For the year ended December 31, 2021, net proceeds from the credit facility were $45,000 as compared to the year ended December 31, 2022 payments on the credit facility of $49,000. In addition, the change in the net cash used in financing activities of operations was due to increased repurchases and retirement of common stock.
Discontinued Operation
Net cash used in discontinued operating activities was $— for the year ended December 31, 2022 compared to $4,635 for the year ended December 31, 2021. The change in net cash used in operating activities of discontinued operation was primarily related to a decrease in net income of discontinued operation after consideration of non-cash items. The sale of Pool was completed on February 12, 2021.
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Net cash provided by discontinued investing activities was $— for the year ended December 31, 2022 compared to net cash used in discontinued investing activities was $8,020 during the year ended December 31, 2021. 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. The sale of Pool was completed on February 12, 2021.
Net cash used in financing activities of discontinued operation was $— for the year ended December 31, 2022 compared to $3,385 for the year ended December 31, 2021. The change in the net cash used in financing activities of discontinued operation was due to decreased contributions to the parent. The sale of Pool was completed on February 12, 2021.
Share Repurchase Program
During the year ended December 31, 2022 and 2021, we repurchased 600 and 535 shares of our common stock, respectively, for approximately $62,771 and $48,989, 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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