COVENANT LOGISTICS GROUP, INC.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read together with "Business" in Part I, Item 1 of this
Annual Report on Form 10-K, as well as the consolidated financial statements and
notes thereto in Part II, Item 8 of this Annual Report on Form 10-K. This
discussion contains forward-looking statements as a result of many factors,
including those set forth under Part I, Item 1A. "Risk Factors" and Part I
"Cautionary Note Regarding Forward-Looking Statements" of this Annual Report on
Form 10-K, and elsewhere in this report. These statements are based on current
expectations and assumptions that are subject to risks and uncertainties. Actual
results could differ materially from those discussed.
EXECUTIVE OVERVIEW
We are a leading provider of high-service truckload transportation and logistics
services. Our strategy is to focus on value-added, less commoditized portions of
our customers' supply chains and thereby become embedded in their business
processes. We believe disciplined planning and execution of our strategy will
reduce the cyclicality and seasonality of our financial results through growth
in higher margin, less volatile services, which in turn will enhance sustainable
long-term earnings power and return on invested capital for our stockholders.
Our four reportable segments are Expedited, Dedicated, Managed Freight, and
Warehousing, each as described under "Reportable Operating Segments and Service
Offerings" in Part I, Item 1 of this Annual Report on Form 10-K. Consistent with
our strategic plan, we have been allocating capital toward Dedicated, Managed
Freight, and Warehousing, and away from Expedited (particularly non-dedicated,
solo-driver refrigerated services) over the past several years and discontinued
the solo-driver refrigerated services during 2020. Within our Dedicated
reportable segment we have been reducing our business with less profitable
customers while working to grow our relationships with customers that are more
profitable. This approach has resulted in a reduction in revenue from 2019 to
2020, however, as more of that business is replaced, we expect to see
improvements in both revenue and profitability. The table below reflects the
total revenue trends in each of these reportable segments:
Year ended December 31,
(in thousands) 2020 2019
Revenues:
Expedited $ 320,202 $ 356,521
Dedicated 288,652 342,473
Managed Freight 177,579 138,616
Warehousing 52,128 47,777
Total revenues $ 838,561 $ 885,387
During 2020 we strategically repositioned our enterprise around our
reportable segments, reduced our fixed overhead and capital deployed in non-core
businesses, flattened our management structure, and improved our margins on an
adjusted basis. For perspective, our freight revenue was approximately the same
on a fleet that averaged approximately 12% smaller than last year. At the same
time, we paid down over $200 million in debt and lease obligations, which we
believe will provide us significant flexibility in making future capital
allocation decisions. The changes were not without cost, as for the year we
incurred approximately $69 million non-cash restructuring related charges,
including an approximately $44 million contingent loss charge in relation to our
discontinued TFS factoring business in the fourth quarter of 2020. We exit 2020
more profitable and generating higher return on capital excluding the
restructuring costs. Our mission for 2021 is clear: seat more of our tractors,
continue to control costs, and improve the profitability of certain legacy
contracts in our Dedicated segment that generate unacceptable returns.
The following is a summary of infrequent and non-cash transactions that occurred
during 2020:
Twelve Months
Ended December 31,
(in thousands) 2020
Intangible asset amortization $ 5,097
Bad debt expense associated with customer bankruptcy and high credit risk customers
2,617
Insurance policy erosion
4,447
Strategic restructuring adjusting items: Discontinued operations loss contingency, net
40,431
Gain on disposal of terminals, net (4,740 ) Impairment of real estate and related intangible assets
9,790
Impairment of revenue equipment and related charges
17,604
Restructuring related separation and other
4,334
Abandonment of information technology infrastructure
1,048
Contract exit costs and other restructuring 695 Total pre-tax adjustments $ 81,323
Our consolidated financial results are summarized as follows:
? Total revenue was
freight revenue (which excludes revenue from fuel surcharges) was
million, compared with
? Operating loss from continuing operations was
operating income from continuing operations of
? Net loss was
income of
continuing operations was
compared to
diluted share in 2019. Net loss from discontinued operations of
or
operations of
? With available borrowing capacity of
as of
charge covenant in the foreseeable future;
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? Our equity investment in TEL provided
2020, compared to
? Since
million to
? Stockholders' equity and tangible book value at
million and $223.6 million , respectively.
COVID-19
During the second quarter, we increased our reserves for uncollectible accounts
receivable by approximately $2.6 million as a result of the bankruptcy of one
customer and the heightened risk we have on certain of our retail related
customers as a result of COVID-19. There were no additional COVID-19 related
reserves during the remainder of the year. Local, state and national governments
continue to emphasize the importance of transportation and have designated it as
an essential service. The health and safety of our team members and the
community is our first priority.
To protect our customers, teammates, and communities, while we continue to operate we:
? continue to execute our Infectious Disease Response Plan and Incident
Management Crisis Response Protocols as the macro environment moves through
the Response, Reopen and Recovery phases of the COVID-19 pandemic;
established a process for the reporting of COVID-19 symptoms, exposures and
? positive test results of teammates. This reporting process enables us to
follow appropriate quarantine protocols and to communicate to our workforce
in a timely and appropriate manner;
increased our communications with teammates through videos, virtual
? meetings and emails about safety protocols and CDC requirements and
recommendations;
? increased sanitation protocols to sanitize equipment and common areasmultiple times per day in order to mitigate risk and exposure situations;
promoted hygiene practices recommended by the
? distancing requiring six or more feet between teammates where possible, and
staggered work times;
implemented work-from-home routines for teammates whose work duties permit
? it and are utilizing virtual technology to replace many of our in-person
meetings; and
developed a comprehensive Return to Office Program of Guidelines to manage
? a phased, measured approach and to prepare our higher density locations
with safety modifications, signage and process changes to promote a safe
work environment.
We believe we have sufficient liquidity to satisfy our cash needs, however we
continue to evaluate and act, as necessary, to maintain sufficient liquidity to
ensure our ability to operate during these unprecedented times. The extent to
which COVID-19 could impact our operations, financial condition, liquidity,
results of operations, and cash flows is highly uncertain and will depend on
future developments. We will continue to evaluate the nature and extent of the
potential short-term and long-term impacts to our business.
Outlook
Going forward, our focus will be continued execution of our strategic plan,
which consists of steadily and intentionally growing the percentage of our
business generated by Dedicated, Managed Freight, and Warehousing segments,
reducing unnecessary overhead, and improving our safety, service, and
productivity. This will be a gradual process of diversifying our customer base
with less seasonal and cyclical exposure, improving legacy contracts, and
investing in systems, technology, and people to support the growth of these
previously under-invested areas. The freight environment and our new business
pipeline are both currently robust, which we believe will support our commercial
plan. While this will take time, we believe our existing pipeline will produce
ongoing sequential progress during 2021.
Going into 2021 we are facing cost increases from the end of our short term
COVID-19 programs, increased wages, and higher insurance and claims
expense. Effective January 4, 2021 , we implemented the largest pay increase in
the Company's 35-year history for our Expedited driving force in an effort to
increase our team count to targeted levels. In addition, we have replaced
our $9.0 million in excess of $1.0 million layer of auto liability insurance
with a new $7.0 million excess of $3.0 million policy that runs from January 28,
2021 , through April 1, 2024 . While the combination of the increased retention
and premiums is forecasted to increase our insurance and claims cost,
eliminating the gap in coverage created in the third quarter of 2020 that
resulted in a self-insured retention of $10.0 million per claim has been a focus
area to minimize forward looking volatility.
Taking into account the commercial and cost environment, we expect results for
the first half of 2021 will significantly exceed the prior year's adjusted
results for the comparable period. Our comparative results for the second half
and full year of 2021 will depend on factors such as our ability to reduce
driver turnover, the number and significance of auto liability claims, and the
outcome of contract negotiations with customers, many of which won't see a full
quarter impact until the third quarter of 2021. Over the longer term, we expect
to be a stronger, more profitable, and more predictable business with the
opportunity for significant and sustained value creation.
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RESULTS OF CONSOLIDATED OPERATIONS
Our Management's Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this document can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
The following table sets forth total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated:
Revenue
Year ended December 31,
(in thousands) 2020 2019
Revenue:
Freight revenue $ 776,218 $ 791,260
Fuel surcharge revenue 62,343 94,127
Total revenue $ 838,561 $ 885,387
The decrease in freight revenue resulted from a $35.1 million and $23.3 million
decrease in Dedicated and Expedited freight revenue, respectively, partially
offset by a $39.0 million and a $4.4 million increase in revenues from our
Managed Freight, and Warehousing reportable segments, respectively.
Our Expedited total revenue decreased $36.3 million , as freight revenue
decreased $23.3 million and fuel surcharge revenue decreased
$13.0 million . The decrease in 2020 Expedited revenue relates to a 205 (or
15.6%) average tractor decrease partially offset by an increase in average
freight revenue per tractor per week of 9.6% compared to 2019. The increase in
average freight revenue per tractor per week is the result of an approximately
16.6% increase in average miles per tractor, partially offset by a 5.7%, or
11.1 cents per mile, decrease in average rate per total mile, when compared to
2019. Seated team driven tractors increased approximately 10.1% to an average of
836 teams in 2020 from 759 teams in 2019.
Our Dedicated total revenue decreased $53.8 million , as freight revenue
decreased $35.1 million and fuel surcharge revenue decreased $18.7 million . The
decrease in 2020 Dedicated freight revenue relates to a 166 (or 9.4%) average
tractor decrease, primarily as a result of a shortage of drivers, and a
decrease in average freight revenue per tractor per week of 3.3% compared
to 2019. The decrease in average freight revenue per tractor per week is the
result of 6.7% fewer miles per tractor partially offset by a 3.9%, or 7.1 cents
per mile, increase in average rate per total mile. Our strategic plan for our
Dedicated reportable segment involves reducing our business with less profitable
customers while working to grow our relationships with customers that are more
profitable. This approach has resulted in a reduction in revenue from 2019 to
2020, however, as more of that business is replaced, we expect to see
improvements in revenue.
Managed Freight total revenue increased
The
For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue.
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Salaries, wages, and related expenses
Year ended December 31,
(dollars in thousands) 2020 2019
Salaries, wages, and related expenses $ 315,023 $ 320,498
% of total revenue 37.6 % 36.2 %
% of freight revenue 40.6 % 40.5 %
The change in salaries, wages, and related expenses is primarily due to
a decrease in driver pay in 2020 as compared to 2019, as a result of an 8.5%
decrease on total miles for the same period, as well as the temporary suspension
of the 401(k) discretionary match in 2020, and a decrease in workers'
compensation costs compared to 2019. These decreases were partially offset by an
increase in non-driver pay compared to 2019 resulting from higher incentive pay
costs as a result of achieving specified targets compared to 2019 when no such
targets were achieved.
We believe salaries, wages, and related expenses will increase going forward as
a result of higher incentive compensation, wage inflation, higher healthcare
costs, reinstatement of the company 401(k) match, and, in certain periods,
increased incentive compensation due to better performance. We believe higher
average driver salary costs will be partially offset by fewer drivers as a
result of our change in business model and our smaller fleet. In addition to
the driver pay increases put into place during the fourth quarter of 2020 for
our Dedicated reportable segment, in January 2021 we implemented the largest
driver pay increase in our history. If freight market rates increase further, we
would expect to, as we have historically, pass a portion of those rate increases
on to our professional drivers. Salaries, wages, and related expenses will
fluctuate to some extent based on the percentage of revenue generated by
independent contractors and our Managed Freight segment, for which payments are
reflected in the purchased transportation line item.
Fuel expense
Year ended December 31,
(dollars in thousands) 2020 2019
Fuel expense $ 77,443 $ 115,307
% of total revenue 9.2 % 13.0 %
% of freight revenue 10.0 % 14.6 %
The changes in total fuel expense are primarily related to lower fuel prices in 2020, and an 8.5% decrease in total miles.
We receive a fuel surcharge on our loaded miles from most shippers; however, in times of increasing fuel prices, this does not cover the entire increase in fuel prices for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles. The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by theDOE for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by theDOE averaged approximately$0.51 per gallon lower in 2020 than 2019. 32
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To measure the effectiveness of our fuel surcharge program, we subtract fuel
surcharge revenue (other than the fuel surcharge revenue we reimburse to
independent contractors and other third parties, which is included in purchased
transportation) from our fuel expense. The result is referred to as net fuel
expense. Our net fuel expense as a percentage of freight revenue is affected by
the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles
driven by company tractors, our fuel economy, and our percentage of deadhead
miles, for which we do not receive material fuel surcharge revenues. Net fuel
expense is shown below:
Year ended December 31,
(dollars in thousands) 2020 2019
Total fuel surcharge $ 62,343 $ 94,127
Less: Fuel surcharge revenue reimbursed to
independent contractors and other third parties 7,153 11,673
Company fuel surcharge revenue$ 55,190 $ 82,454 Total fuel expense$ 77,443 $ 115,307 Less: Company fuel surcharge revenue 55,190 82,454 Net fuel expense$ 22,253 $ 32,853 % of freight revenue 2.9 % 4.2 % Net fuel expense decreased$10.6 million , or 32.3%, for the year endedDecember 31, 2020 compared to 2019. As a percentage of freight revenue, net fuel expense decreased 1.3% for the year endedDecember 31, 2020 , compared to 2019. These decreases primarily resulted from historically low fuel costs, partially offset by reduced fuel surcharge revenue, and a change in business mix that resulted in less idling and less temperature-controlled freight thus reducing reefer fuel expense. Additionally,$0.3 million and none were reclassified from accumulated other comprehensive loss to our results of operations for the years endedDecember 31, 2020 and 2019, respectively, as additional fuel expense related to net losses on fuel hedge contracts that expired. As ofDecember 31, 2020 , we have$0.2 million of remaining fuel hedge contracts classified as other assets in our consolidated balance sheet. These contracts will be reclassified into fuel expense as they mature. We did not have any fuel hedges in place during the same 2019 period. We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operations (which uses diesel fuel for refrigeration but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.
Operations and maintenance
Year ended December 31,
(dollars in thousands) 2020 2019
Operations and maintenance $ 48,368 $ 59,506
% of total revenue 5.8 % 6.7 %
% of freight revenue 6.2 % 7.5 %
The decrease in operations and maintenance expense was primarily related to the
reduction in our tractors and the timing of the trade cycle for our tractors as
compared to the same 2019 periods, as well as decreased maintenance and repair
expense on our younger fleet of tractors, reduction in unloading charges and
other costs associated with temperature-controlled freight due to a change in
business mix, and a planned reduction in outside driver recruiting expense
related to improved efficiency of advertising dollars.
Going forward, we believe this category will fluctuate based on several factors,
including the condition of the driver market and our ability to hire and retain
drivers, our continued ability to maintain a relatively young fleet, accident
severity and frequency, weather, and the reliability of new and untested revenue
equipment models.
Revenue equipment rentals and purchased transportation
Year ended December 31,
(dollars in thousands) 2020 2019
Revenue equipment rentals and purchased transportation $ 222,705 $ 204,655
% of total revenue 26.6 % 23.1 %
% of freight revenue 28.7 % 25.9 %
The increases in revenue equipment rentals and purchased transportation were
primarily the result of a more competitive market for sourcing third-party
capacity and growth in the Managed Freight reportable segment, partially offset
by a reduction in the percentage of the total miles run by independent
contractors from 12.5% for 2019 to 11.1% for 2020.
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We expect revenue equipment rentals to decrease going forward as a result of the reduction in our tractor fleet.
We expect purchased transportation to increase as we seek to grow the Managed
Freight reportable segment. In addition, if fuel prices increase, it would
result in a further increase in what we pay third party carriers and independent
contractors. However, this expense category will fluctuate with the number and
percentage of loads hauled by independent contractors, loads handled by Managed
Freight, and tractors, trailers, and other assets financed with operating
leases. In addition, factors such as the cost to obtain third party
transportation services and the amount of fuel surcharge revenue passed through
to the third party carriers and independent contractors will affect this expense
category. If industry-wide trucking capacity continues to tighten in relation to
freight demand, we may need to increase the amounts we pay to third-party
transportation providers and independent contractors, which could increase this
expense category on an absolute basis and as a percentage of freight revenue
absent an offsetting increase in revenue. If we were to recruit more independent
contractors we would expect this line item to increase as a percentage of
revenue.
Operating taxes and licenses
Year ended December 31,
(dollars in thousands) 2020 2019
Operating taxes and licenses $ 11,621 $ 13,024
% of total revenue 1.4 % 1.5 %
% of freight revenue 1.5 % 1.6 %
Operating taxes and licenses remained relatively flat in 2020 compared to 2019.
Insurance and claims
Year ended December 31,
(dollars in thousands) 2020 2019
Insurance and claims $ 53,052 $ 47,719
% of total revenue 6.3 % 5.4 %
% of freight revenue 6.8 % 6.0 %
Insurance and claims per mile cost increased to 17.5 cents per mile for 2020
from 14.3 cents per mile in 2019. The increases are primarily related to
the erosion of our excess insurance coverage layer $9.0 million in excess of
$1.0 million , as discussed below, an increase in overall cost per claim, and an
increase in fixed premiums expenses, partially offset by a refund of $7.3
million of previously expensed premiums from our commutation of the April 10,
2015 through March 31, 2018 policy for our primary auto liability insurance.
Our insurance program includes multi-year policies with specific insurance
limits that may be eroded over the course of the policy term. If that occurs, we
will be operating with less liability coverage insurance at various levels of
our insurance tower. For the current policy period (April 1, 2018 to March 31,
2021 ), the aggregate limits available in the coverage layer $9.0 million in
excess of $1.0 million were estimated to be fully eroded based on claims expense
accruals. We have replaced our $9.0 million in excess of $1.0 million layer with
a new $7.0 million in excess of $3.0 million policy that runs from January 28,
2021 to April 1, 2024 . Due to the erosion of the $9.0 million in excess of $1.0
million layer, any adverse developments in claims filed between April 1, 2018
and March 31, 2021 , could result in additional expense accruals. Effective April
1, 2020 , consistent with an extremely difficult insurance market for the
industry, our insurance renewal terms include a higher fixed premium expense of
approximately $0.5 million per quarter, greater self-insured retention, and
lower aggregate limits than prior coverage. Due to these developments, we may
experience additional expense accruals, increased insurance and claims expenses,
and greater volatility in our insurance and claims expenses, which could have a
material adverse effect on our business, financial condition, and results of
operations.
In addition, in future periods, insurance and claims costs may be more volatile
depending on our future accident experience, which could have a material adverse
effect on our business, financial condition, and results of operations.
Communications and utilities
Year ended December 31,
(dollars in thousands) 2020 2019
Communications and utilities $ 5,898 $ 6,968
% of total revenue 0.7 % 0.8 %
% of freight revenue 0.8 % 0.9 %
Communications and utilities remained relatively flat in 2020 compared to 2019.
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General supplies and expenses
Year ended December 31,
(dollars in thousands) 2020 2019
General supplies and expenses $ 34,143 $ 30,089
% of total revenue 4.1 % 3.4 %
% of freight revenue 4.4 % 3.8 %
The increases in general supplies and expenses primarily relate to additional
reserves put in place for potentially uncollectible accounts receivable,
increased period over period legal fees incurred to defend class action
litigation, and strategic planning and process improvement investments that are
part of our organizational restructuring.
Depreciation and amortization
Year ended December 31,
(dollars in thousands) 2020 2019
Depreciation and amortization $ 65,472 $ 80,502
% of total revenue 7.8 % 9.1 %
% of freight revenue 8.4 % 10.2 %
Depreciation and amortization consists primarily of depreciation of tractors,
trailers and other capital assets (including those under finance leases), as
well as amortization of intangible assets.
Depreciation, consisting primarily of depreciation of revenue
equipment, decreased $17.2 million in 2020 compared to 2019, to $60.4 million ,
primarily due to a reduction in the average number of tractors as we reduced our
business with less profitable customers. Amortization of intangible
assets increased $2.2 million in 2020 compared to 2019, to $5.1 million . This
increase is a result of the revised remaining useful life of the Landair trade
name to 15 months as of June 30, 2020 and the termination of the non-compete
agreement with a former Landair executive as a result of management changes, a
change in the branding of the organization, and the expected use of the Landair
trade name.
We expect depreciation and amortization, including amortization of intangible
assets, to more closely resemble the second half of 2020 going forward as the
majority of our planned tractor fleet reductions were completed during the first
half of 2020. Additionally, changes in the used tractor market could cause us to
adjust residual values, increase depreciation, hold assets longer than planned,
or experience increased losses on sale.
(Gain) loss on disposition of property and equipment, net
Year ended December 31,
(dollars in thousands) 2020 2019
Gain on disposition of property and equipment, net $ (7,706 ) $ (1,650 )
% of total revenue (0.9% ) (0.2% )
% of freight revenue (1.0% ) (0.2% )
The increases in gain on disposition of property and equipment, net are
primarily the result of the $5.7 million gain in the second quarter of 2020 on
the disposition of our Hutchins, TX terminal facility, which was sold as part of
the Company's restructuring plan as well as gains on tractor disposals related
to downsizing our tractor fleet during 2020.
Impairment of long-lived property, equipment, and right-of use assets
Year ended December 31,
(dollars in thousands) 2020 2019
Impairment of long lived property and equipment
- % of total revenue 3.2 % 0.0 % % of freight revenue 3.4 % 0.0 % During the second quarter of 2020, as part of our restructuring, we discontinued the use of a significant amount of property and equipment and adjusted the carrying value of the owned property and equipment to fair market value less estimated costs to sell. As a result, we recognized impairment of$16.8 million on revenue equipment,$7.3 million on ourTexarkana, AR terminal, related leasehold improvements, and equipment,$2.2 million on an office facility inChattanooga, TN held under an operating lease, and$0.2 million on a training and orientation facility inChattanooga, TN. 35
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Interest expense, net
Year ended December 31,
(dollars in thousands) 2020 2019
Interest expense, net $ 6,841 $ 8,218
% of total revenue 0.8 % 0.9 %
% of freight revenue 0.9 % 1.0 %
Interest expense, net remained relatively flat in 2020 compared to 2019.
This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage. Going forward, we expect this line item to decrease based upon our indebtedness reduction from the TFS disposition and dispositions of terminals and revenue equipment.
Income from equity method investment
Year ended December 31,
(in thousands) 2020 2019
Income from equity method investment
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income. For the year endedDecember 31, 2020 , our earnings resulting from our investment in TEL decreased to$3.9 million . The decrease in 2020 as compared to 2019 is the result of the revenue impact associated with a customer bankruptcy during the fourth quarter of 2019. We expect the impact on our earnings resulting from our investment in TEL to return to prior year levels during 2021. Income tax (benefit) expense Year ended December 31, (dollars in thousands) 2020 2019 Income tax (benefit) expense$ (2,804 ) $ 2,349 % of total revenue (0.3 %) 0.3 % % of freight revenue (0.4 %) 0.3 %
These changes were primarily related to the decrease in operating income and the decrease in earnings on investment in TEL as described above, as well as a decrease in our effective tax rate.
The effective tax rate is different from the expected combined tax rate due
primarily to permanent differences related to our per diem pay structure for
drivers. Due to the partial nondeductible effect of the per diem payments, our
tax rate will fluctuate in future periods as income fluctuates. We are currently
estimating our 2021 effective income tax rate to be approximately 26.9%.
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Table of Contents RESULTS OF SEGMENT OPERATIONS We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing each as described under "Reportable Operating Segments and Service Offerings" in Part I, Item 1 of this Annual Report on Form 10-K.
The following table summarizes revenue and operating income data by reportable segment and service offering:
Year ended December 31,
(in thousands) 2020 2019
Revenues:
Expedited $ 320,202 $ 356,521
Dedicated 288,652 342,473
Managed Freight 177,579 138,616
Warehousing 52,128 47,777
Total revenues $ 838,561 $ 885,387
Operating (Loss) Income:
Expedited $ (7,038 ) $ (1,260 )
Dedicated (15,534 ) 1,188
Managed Freight 4,482 3,323
Warehousing 4,063 5,518
Total operating income $ (14,027 ) $ 8,769 Comparison of Year Ended
For discussion of the changes in segment revenue, see "Revenue" within "Results of Consolidated Operations" above.
Total operating loss was$14.0 million in 2020 compared to operating income of$8.8 million in 2019. In addition to the changes in revenue described above, the change in operating loss resulted from a$30.5 million and$37.1 million decrease in Expedited and Dedicated operating expenses, respectively, partially offset by a$37.8 million and$5.8 million increase in Managed Freight and Warehousing operating expenses, respectively. The decrease in Dedicated and Expedited operating expenses was primarily due to a 15.6% and 9.4% average operating fleet reduction, respectively, partially offset, for Expedited, by higher variable costs associated with a greater concentration of team driven tractors in the Expedited fleet. The downsizing of our terminal network and short-term cost reductions also contributed to this reduction. These decreases were partially offset by$16.8 million and$15.4 million of restructuring costs incurred by Dedicated and Expedited, respectively, during 2020. See Note 3, "Restructuring and Cost Savings Initiatives" in the financial statements for one-time impairment and restructuring related costs that further contributed to the reduction of operating income for 2020.
The increase in Managed Freight operating expenses is the result of increased revenue driving an increase in variable expenses, primarily purchased transportation, partially offset by cost structure improvements that were implemented as part of our strategic plan.
The increase operating expenses for Warehousing was the result of the new customer business that began operations during 2020 as well as an increase in contract labor costs to compensate for employees quarantined as a result of COVID-19.
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Liquidity and Capital Resources
Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. Going forward, we expect revenue equipment acquisitions through purchases and finance leases to increase as a percentage of our fleet as we decrease our use of operating leases. Further, we expect to increase our capital allocation toward our Dedicated, Managed Freight, and Warehousing reportable segments to become the go-to partner for our customers' most critical transportation and logistics needs. We had working capital (total current assets less total current liabilities) of$14.4 million and$93.1 million atDecember 31, 2020 and 2019, respectively. Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future. With an average tractor fleet age of 1.9 years, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options. If we were to grow our independent contractor fleet, our capital requirements would be reduced.
As of
?$15.0 million and no outstanding borrowings under the Credit Facility, respectively; ? No outstanding borrowings under the Draw Note, respectively;
?
respectively;
? $22.7 million and $23.8 million in real estate notes, respectively;
?
obligations, respectively, and;
? $38.5 million and $60.3 million of the operating lease obligations,
respectively.
The decrease in our revenue equipment installment notes and financing lease
obligations was primarily due to a strategic decision to reduce our debt and
lease obligations during 2020. The decrease in operating lease obligations was
primarily due to the termination of a property lease related to our Managed
Freight segment and the amortization of the operating lease liability
during 2020.
As of December 31, 2020 , we had $15.0 million of borrowings outstanding, undrawn
letters of credit outstanding of approximately $29.7 million , and available
borrowing capacity of $65.3 million under the Credit Facility. Additionally, we
had availability of a $45.0 million line of credit from Triumph Bank ("Triumph")
which is available solely to fund any indemnification owed to Triumph in
relation to the sale of TFS. See Note 1, "Summary of Significant Accounting
Policies," of the accompanying consolidated financial statements for more
information regarding our indemnification obligation to Triumph. Fluctuations in
the outstanding balance and related availability under our Credit Facility are
driven primarily by cash flows from operations and the timing and nature of
property and equipment additions that are not funded through notes payable and
leases, as well as the nature and timing of collection of accounts receivable,
payments of accrued expenses, and receipt of proceeds from disposals of property
and equipment. Refer to Note 8, "Debt" of the accompanying consolidated
financial statements for further information about material debt agreements.
Our net capital expenditures for the year ended December 31, 2020 totaled $28.2
million of proceeds as compared to $91.7 million of expenditures for the prior
year. For 2021, we expect our average operational fleet size to remain
relatively consistent with our ending 2020 count at around 2,500 tractors and we
expect to reduce our trailer fleet from approximately 5,600 at December 31,
2020 , to between 4,500 - 5,000 by December 31, 2021 . Net gains on disposal of
equipment and real estate for 2020 were $7.7 million compared to $1.7 million in
2019.
During the first half of 2020, in response to the uncertainty of the upcoming
economic environment as a result of COVID-19 and as part of our strategic focus
to reduce overhead costs, we took measures to preserve our liquidity, including
capital reductions, financing, cost reduction, and working capital
actions. During the second half of 2020, we paid down over $200.0 million of
debt and lease obligations. If needed, we have other potential flexible sources
of liquidity that we can leverage, such as currently unencumbered owned revenue
equipment.
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InApril 2020 , in an effort to improve our liquidity during the COVID-19 pandemic, we executed a modification to certain of our revenue equipment installment notes, exercising an option to make interest only payments for a period of 90 days, extending the due date of$177.3 million of debt by three months. Cash Flows
Net cash flows provided by operating activities remained relatively even at
Net cash flows provided by investing activities were$138.0 million in 2020 compared with$93.0 million used in 2019. The change in net cash flows related to investing activities was primarily the result of the disposal of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our Factoring reportable segment and the disposal of ourOrlando andHutchins properties during the 2020 period as well as timing of our trade cycle whereby we reduced our tractor fleet by approximately 560 tractors fromDecember 31, 2019 toDecember 31, 2020 . Net cash flows used by financing activities were approximately$236.3 million in 2020, compared to$49.5 million provided in the 2019. The change in net cash flows provided by financing activities was primarily a function of paying down over$200.0 million of debt and lease obligations during the second half of 2020 and our stock repurchase program during the first quarter of 2020. OnFebruary 10, 2020 , our Board of Directors approved a stock repurchase program authorizing the purchase of up to$20.0 million of our Class A common stock from time-to-time based upon market conditions and other factors. The stock could be repurchased on the open market or in privately negotiated transactions. The repurchased shares are held as treasury stock and may be used for general corporate purposes as our Board of Directors may determine. OnMarch 26, 2020 , our Board of Directors temporarily suspended the stock repurchase program for added flexibility in response to the uncertain impact of the COVID-19 pandemic. BetweenFebruary 10, 2020 andMarch 26, 2020 , we repurchased 1.4 million shares of our Class A common stock in the open market for$17.5 million . There were no additional changes to the stock repurchase program during 2020. Going forward, the disposition of our Factoring reportable segment is expected to improve our cash flows used by financing activities. However, on an ongoing basis, our cash flows may fluctuate depending on capital expenditures, future stock repurchases, strategic investments or divestitures, settlement of any indemnification of Triumph, and the extent of future income tax obligations and refunds.
Off-Balance Sheet Arrangements
We had commitments outstanding atDecember 31, 2020 , to acquire revenue equipment totaling approximately$34.8 million in 2021 versus commitments atDecember 31, 2019 of approximately$68.4 million . These commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits. 39
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Table of Contents Non-GAAP Financial Measures Operating Ratio
Operating Ratio ("OR") For 2020 and 2019:
(dollars in thousands) For the twelve months ended December 31,
2020
Managed
GAAP Operating Ratio: Combined Expedited Dedicated Freight Warehousing
Total revenue $ 838,561 $ 320,202 $ 288,652 $ 177,579 $ 52,128
Total operating expenses 852,588 327,240 304,186 173,097 48,065
Operating (loss) income $ (14,027 ) $ (7,038 ) $ (15,534 ) $ 4,482 $ 4,063
Operating ratio 101.7 % 102.2 % 105.4 % 97.5 % 92.2 %
(dollars in thousands) For the twelve months ended December 31,
2020
Managed
Adjusted Operating Ratio: Combined Expedited Dedicated Freight Warehousing
Total revenue $ 838,561 $ 320,202 $ 288,652 $ 177,579 $ 52,128
Fuel surcharge revenue (62,343 ) (28,731 ) (33,149 ) - (463 )
Freight revenue (total revenue,
excluding fuel surcharge) 776,218 291,471 255,503 177,579 51,665
Total operating expenses 852,588 327,240 304,186 173,097 48,065
Adjusted for:
Fuel surcharge revenue (62,343 ) (28,731 ) (33,149 ) - (463 )
Amortization of intangibles (1) (5,097 ) - (2,778 ) (633 ) (1,686 )
Bad debt expense associated
with customer bankruptcy and
high credit risk customers (2,617 ) (972 ) (867 ) (778 ) -
Insurance policy erosion and
premium reinstatement expense (4,447 ) (2,627 ) (1,820 ) - -
Strategic restructuring
adjusting items:
Gain on sale of terminal 4,740 2,505 2,235 - -
Impairment of real estate and
related tangible assets (9,790 ) (3,991 ) (3,563 ) (2,236 ) -
Impairment of revenue equipment
and related charges (17,604 ) (8,046 ) (9,558 ) - -
Restructuring related severance
and other (4,334 ) (2,290 ) (2,044 ) - -
Abandonment of information
technology infrastructure (1,048 ) (554 ) (494 ) - -
Contract exit costs and other
restructuring (695 ) (367 ) (328 ) - -
Adjusted operating expenses 749,353 282,167 251,820
169,450 45,916
Adjusted operating income
(loss) $ 26,865 $ 9,304 $ 3,683 $ 8,129 $ 5,749
Adjusted operating ratio 96.5 % 96.8 % 98.6 % 95.4 % 88.9 %
(1) "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible
assets.
(dollars in thousands) For the twelve months ended December 31,
2019
Managed
GAAP Operating Ratio: Combined Expedited Dedicated Freight Warehousing
Total revenue $ 885,387 $ 356,521 $ 342,473 $ 138,616 $ 47,777
Total operating expenses 876,618 357,619 341,447 135,293 42,259
Operating (loss) income $ 8,769 $ (1,098 ) $ 1,026 $ 3,323 $ 5,518
Operating ratio 99.0 % 100.3 % 99.7 % 97.6 % 88.5 %
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(dollars in thousands) For the twelve months ended December 31,
2019
Managed
Adjusted Operating Ratio: Combined Expedited Dedicated Freight Warehousing
Total revenue $ 885,387 $ 356,521 $ 342,473 $ 138,616 $ 47,777
Fuel surcharge revenue (94,127 ) (41,682 ) (51,871 ) - (574 )
Freight revenue (total revenue,
excluding fuel surcharge) 791,260 314,839 290,602 138,616 47,203
Total operating expenses 876,618 357,619 341,447 135,293 42,259
Adjusted for:
Fuel surcharge revenue (94,127 ) (41,682 ) (51,871 ) - (574 )
Amortization of intangibles (1) (2,924 ) - (1,516 ) (232 ) (1,176 )
Adjusted operating expenses 779,567 315,937 288,060 135,061 40,509
Adjusted operating income
(loss) $ 11,693 $ (1,098 ) $ 2,542 $ 3,555 $ 6,694
Adjusted operating ratio 98.5 % 100.3 % 99.1 % 97.4 % 85.8 %
(1) "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets.
In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue and intangibles amortization, expressed as a percentage of revenue, excluding fuel surcharge revenue. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices. Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires us to
make decisions based upon estimates, assumptions, and factors we consider as
relevant to the circumstances. Such decisions include the selection of
applicable accounting principles and the use of judgment in their application,
the results of which impact reported amounts and disclosures. Changes in future
economic conditions or other business circumstances may affect the outcomes of
our estimates and assumptions. Accordingly, actual results could differ from
those anticipated. A summary of the significant accounting policies followed in
preparation of the financial statements is contained in Note 1, "Summary of
Significant Accounting Policies," of the consolidated financial statements
attached hereto. The following discussion addresses our most critical accounting
policies, which are those that are both important to the portrayal of our
financial condition and results of operations and that require significant
judgment or use of complex estimates.
Revenue Equipment
Management estimates the useful lives and salvage value of revenue equipment
based upon, among other things, the expected use, our experience with similar
assets, conditions in the used revenue equipment market, and prevailing industry
practice. We generally depreciate new tractors over five years to salvage values
that range from 10% to 35% of cost, depending on the operating segment profile
of the equipment. We generally depreciate new trailers over seven years for
refrigerated trailers and ten years for dry van trailers to salvage values of
approximately 28% and 21% of their cost, respectively. Historically, changes in
estimated useful life or salvage values have typically resulted from us
transferring tractors to different operating segments with different operating
profiles. Significant fluctuations in the used equipment market could have a
material effect on our results of operations.
A portion of our tractors are protected by non-binding indicative trade-in
values or binding trade-back agreements with the manufacturers. The remainder of
our tractors and substantially all of our owned trailers are subject to
fluctuations in market prices for used revenue equipment. Moreover, our
trade-back agreements are contingent upon reaching acceptable terms for the
purchase of new equipment. Declines in the price of used revenue equipment or
failure to reach agreement for the purchase of new tractors with the
manufacturers issuing trade-back agreements could result in impairment of, or
losses on the sale of, revenue equipment.
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We classify intangible assets into two categories: (i) goodwill and (ii) intangible assets with finite lives subject to amortization.
We test goodwill for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. The fair value of our reporting units is based on a blend of estimated discounted cash flows and publicly traded company multiples. The results of these models are then weighted and combined into a single estimate of fair value for our reporting units. Estimated discounted cash flows are based on projected sales and related cost of sales. Publicly traded company multiples and acquisitions are derived from information on traded shares and analysis of recent acquisitions in the marketplace, respectively, for companies with operations similar to ours. The primary assumptions used in these various models include earnings multiples of acquisitions in a comparable industry, future cash flow estimates of each of the reporting units, weighted average cost of capital, working capital and capital expenditure requirements.
We completed our annual goodwill impairment test as of
We test intangible assets with finite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. We record an impairment charge when the carrying value of the finite lived intangible asset is not recoverable by the cash flows generated from the use of the asset. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement, the history of the asset, our long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have finite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 3 to 15 years. Self-Insurance Accruals We record a liability for the estimated cost of the uninsured portion of pending claims and the estimated allocated loss adjustment expenses including legal and other direct costs associated with a claim. Estimates require, among other things, judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages, future medical costs, and inflation estimates of future claims development, and the legal and other costs to settle or defend the claims.
Self-insured liabilities represent management's best estimate of our ultimate obligations.
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Table of Contents Accounting for Income Taxes Significant management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We believe the future tax deductions will be realized principally through future reversals of existing taxable temporary differences and future taxable income, except for when a valuation allowance has been provided. In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
INFLATION, NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. In recent years, the most significant effects of inflation have been on revenue equipment prices and the related depreciation, litigation and claims, and driver and non-driver wages. New emissions control regulations and increases in wages of manufacturing workers and other items have resulted in higher tractor prices, while the market value of used equipment fluctuated significantly. The cost of fuel has been volatile over the last several years, with costs increasing in 2019 and 2020 after significant decreases in both 2018 and 2017. Health care prices have increased faster than general inflation, primarily due to the rapid increase in prescription drug costs and more people on our health plan. The nationwide shortage of qualified drivers has caused us to raise driver wages per mile at a rate faster than general inflation for the past four years, and this trend may continue as additional government regulations constrain industry capacity. Additionally, competition and the related cost to employ non-drivers have increased, especially for the more skilled or technical positions, including mechanics, those with information technology related skills, and degreed professionals. Geographic Areas We operate throughout theU.S. and all of our tractors are domiciled in theU.S. All of our revenue generated was generated within theU.S. in 2020. Less than one percent of our revenue inCanada andMexico in 2019, respectively. In 2019, as part of our strategic plan to improve profitability, we discontinued our services withinMexico andCanada . We do not separately track domestic and foreign revenue from customers, and providing such information would not be meaningful. Excluding a de minimis number of trailers, all of our long-lived assets are, and have been for the last three fiscal years, located withinthe United States . 43
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Table of Contents SEASONALITY During 2019 and 2020, though not to the same extent as in the past, we experienced marked increases in business and profitability during the fourth quarter holiday season, due to our team drivers and customer base. After this surge, revenue generally decreases as customers reduce shipments following the holiday season and as inclement weather impedes operations. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and weather, creating more physical damage equipment repairs. For the reasons stated, first quarter results historically have been lower than results in each of the other three quarters of the year, excluding charges. The duration of what is considered peak season has shortened over the last few years and now is approximately a five-week period beginning the week ofThanksgiving and ending onChristmas Eve , and we have seen our customers' networks adjust accordingly. If this trend continues, our ability to take advantage of this surge in business and our fourth quarter profitability could be negatively affected.
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