ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are one of the largest North American less-than-truckload (“LTL”) motor carriers. We provide regional, inter-regional and national LTL services through a single integrated, union-free organization. Our service offerings, which include expedited transportation, are provided through an expansive network of service centers located throughout the continental United States. Through strategic alliances, we also provide LTL services throughout North America. In addition to our core LTL services, we offer a range of value-added services including container drayage, truckload brokerage and supply chain consulting. More than 98% of our revenue has historically been derived from transporting LTL shipments for our customers, whose demand for our services is generally tied to industrial production and the overall health of the U.S. domestic economy.
In analyzing the components of our revenue, we monitor changes and trends in our LTL volumes and LTL revenue per hundredweight. While LTL revenue per hundredweight is a yield measurement, it is also a commonly-used indicator for general pricing trends in the LTL industry. This yield metric is not a true measure of price, however, as it can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment and length of haul. As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates. LTL revenue per hundredweight and the key factors that can impact this metric are described in more detail below:
•LTL Revenue Per Hundredweight - Our LTL transportation services are generally priced based on weight, commodity, and distance. This measurement reflects the application of our pricing policies to the services we provide, which are influenced by competitive market conditions and our growth objectives. Generally, freight is rated by a class system, which is established by the National Motor Freight Traffic Association, Inc. Light, bulky freight typically has a higher class and is priced at higher revenue per hundredweight than dense, heavy freight. Fuel surcharges, accessorial charges, revenue adjustments and revenue for undelivered freight are included in this measurement. Revenue for undelivered freight is deferred for financial statement purposes in accordance with our revenue recognition policy; however, we believe including it in our revenue per hundredweight metrics results in a more accurate representation of the underlying changes in our yields by matching total billed revenue with the corresponding weight of those shipments.
•LTL Weight Per Shipment - Fluctuations in weight per shipment can indicate changes in the mix of freight we receive from our customers, as well as changes in the number of units included in a shipment. Generally, increases in weight per shipment indicate higher demand for our customers’ products and overall increased economic activity. Changes in weight per shipment can also be influenced by shifts between LTL and other modes of transportation, such as truckload and intermodal, 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.
•Average Length of Haul - We consider lengths of haul less than 500 miles to be regional traffic, lengths of haul between 500 miles and 1,000 miles to be inter-regional traffic, and lengths of haul in excess of 1,000 miles to be national traffic. This metric is used to analyze our tonnage and pricing trends for shipments with similar characteristics, and also allows for comparison with other transportation providers serving specific markets. By analyzing this metric, we can determine the success and growth potential of our service products in these markets. 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.
•LTL Revenue Per Shipment - This measurement is primarily determined by the three metrics listed above and is used in conjunction with the number of LTL shipments we receive to evaluate LTL revenue.
Our primary revenue focus is to increase density, which is shipment and tonnage growth within our existing infrastructure. 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, platform pounds handled per hour and platform shipments per hour. In addition to our focus on density and operating efficiencies, it is critical for us to obtain an appropriate yield, which is measured as revenue per hundredweight, on the shipments we handle to offset our cost inflation and support our ongoing investments in capacity and technology. We regularly monitor the components of our pricing, including base freight rates, accessorial charges and fuel surcharges. The fuel surcharge is generally designed to offset fluctuations in the cost of our petroleum-based products and is indexed to diesel fuel prices published by the U.S. Department of Energy, which reset each week. We believe our yield management process focused on individual account profitability, and ongoing improvements in operating efficiencies, are both key components of our ability to produce profitable growth.
Our primary cost elements are direct wages and benefits associated with the movement of freight, operating supplies and expenses, which include diesel fuel, and depreciation of our equipment fleet and service center facilities. We gauge our overall success
10
in managing costs by monitoring our operating ratio, a measure of profitability calculated by dividing total operating expenses by revenue, which also allows for industry-wide comparisons with our competition.
We regularly upgrade our technological capabilities to improve our customer service and lower our operating costs. Our technology provides our customers with visibility of their shipments throughout our network, increases the productivity of our workforce, and provides key metrics that we use to monitor and enhance our processes.
Results of Operations
The following table sets forth, for the periods indicated, expenses and other items as a percentage of revenue from operations:
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Three Months Ended |
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Six Months Ended |
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|
June 30, |
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|
June 30, |
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|
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2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Revenue from operations |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
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|
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|
|
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|
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|
Operating expenses: |
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|
Salaries, wages and benefits |
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|
42.3 |
|
|
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46.4 |
|
|
|
43.8 |
|
|
|
47.3 |
|
Operating supplies and expenses |
|
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14.2 |
|
|
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10.4 |
|
|
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13.5 |
|
|
|
10.7 |
|
General supplies and expenses |
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2.3 |
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2.6 |
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2.4 |
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2.7 |
|
Operating taxes and licenses |
|
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2.1 |
|
|
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2.5 |
|
|
|
2.2 |
|
|
|
2.6 |
|
Insurance and claims |
|
|
1.0 |
|
|
|
1.2 |
|
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1.0 |
|
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|
1.2 |
|
Communications and utilities |
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0.6 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.7 |
|
Depreciation and amortization |
|
|
4.1 |
|
|
|
4.9 |
|
|
|
4.3 |
|
|
|
5.2 |
|
Purchased transportation |
|
|
2.6 |
|
|
|
3.3 |
|
|
|
3.0 |
|
|
|
3.2 |
|
Miscellaneous expenses, net |
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0.3 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.4 |
|
Total operating expenses |
|
|
69.5 |
|
|
|
72.3 |
|
|
|
71.1 |
|
|
|
74.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
30.5 |
|
|
|
27.7 |
|
|
|
28.9 |
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense, net |
|
|
(0.0 |
) |
|
|
0.0 |
|
|
|
(0.0 |
) |
|
|
0.0 |
|
Other expense, net |
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
30.5 |
|
|
|
27.6 |
|
|
|
28.9 |
|
|
|
25.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
7.9 |
|
|
|
7.2 |
|
|
|
7.5 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
22.6 |
% |
|
|
20.4 |
% |
|
|
21.4 |
% |
|
|
19.2 |
% |
Key financial and operating metrics for the three- and six-month periods ended June 30, 2022 and 2021 are presented below:
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Three Months Ended |
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Six Months Ended |
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|
June 30, |
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June 30, |
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2022 |
|
|
2021 |
|
|
% Change |
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|
2022 |
|
|
2021 |
|
|
% Change |
|
Work days |
|
|
64 |
|
|
|
64 |
|
|
|
— |
|
|
|
128 |
|
|
|
127 |
|
|
|
0.8 |
% |
Revenue (in thousands) |
|
$ |
1,667,448 |
|
|
$ |
1,319,409 |
|
|
|
26.4 |
% |
|
$ |
3,164,728 |
|
|
$ |
2,445,924 |
|
|
|
29.4 |
% |
Operating ratio |
|
|
69.5 |
% |
|
|
72.3 |
% |
|
|
|
|
|
71.1 |
% |
|
|
74.0 |
% |
|
|
|
Net income (in thousands) |
|
$ |
376,078 |
|
|
$ |
269,576 |
|
|
|
39.5 |
% |
|
$ |
675,829 |
|
|
$ |
468,935 |
|
|
|
44.1 |
% |
Diluted earnings per share |
|
$ |
3.30 |
|
|
$ |
2.31 |
|
|
|
42.9 |
% |
|
$ |
5.90 |
|
|
$ |
4.01 |
|
|
|
47.1 |
% |
LTL tons (in thousands) |
|
|
2,672 |
|
|
|
2,598 |
|
|
|
2.8 |
% |
|
|
5,325 |
|
|
|
4,930 |
|
|
|
8.0 |
% |
LTL tonnage per day |
|
|
41,746 |
|
|
|
40,600 |
|
|
|
2.8 |
% |
|
|
41,600 |
|
|
|
38,819 |
|
|
|
7.2 |
% |
LTL shipments (in thousands) |
|
|
3,398 |
|
|
|
3,307 |
|
|
|
2.8 |
% |
|
|
6,738 |
|
|
|
6,211 |
|
|
|
8.5 |
% |
LTL shipments per day |
|
|
53,096 |
|
|
|
51,672 |
|
|
|
2.8 |
% |
|
|
52,643 |
|
|
|
48,903 |
|
|
|
7.6 |
% |
LTL weight per shipment (lbs.) |
|
|
1,572 |
|
|
|
1,571 |
|
|
|
0.1 |
% |
|
|
1,580 |
|
|
|
1,588 |
|
|
|
(0.5 |
)% |
LTL revenue per hundredweight |
|
$ |
30.78 |
|
|
$ |
25.10 |
|
|
|
22.6 |
% |
|
$ |
29.46 |
|
|
$ |
24.56 |
|
|
|
20.0 |
% |
LTL revenue per shipment |
|
$ |
484.08 |
|
|
$ |
394.49 |
|
|
|
22.7 |
% |
|
$ |
465.63 |
|
|
$ |
389.94 |
|
|
|
19.4 |
% |
Average length of haul (miles) |
|
|
934 |
|
|
|
930 |
|
|
|
0.4 |
% |
|
|
937 |
|
|
|
929 |
|
|
|
0.9 |
% |
11
Our financial results for the second quarter and first six months of 2022 include Company records for revenue and profitability. We produced these results by continuing to execute on our long-term strategic plan and delivering superior service at a fair price. The increases in revenue, when combined with our disciplined control over our operating costs, resulted in a 280 and 290 basis-point improvement in our operating ratio to 69.5% and 71.1%, respectively, for the second quarter and first six months of 2022 as compared to the same periods last year. As a result, our net income and diluted earnings per share increased by 39.5% and 42.9%, respectively, for the second quarter of 2022 as compared to the same periods last year and 44.1% and 47.1%, respectively, for the first six months of 2022 as compared to the same periods last year.
Revenue
Revenue increased $348.0 million, or 26.4%, and $718.8 million, or 29.4%, in the second quarter and first six months of 2022, respectively, as compared to the same periods of 2021, due to increases in both our LTL revenue per hundredweight and LTL tonnage. Tonnage per day increased 2.8% and 7.2% for the second quarter and first half of 2022, respectively, primarily due to increases in shipments per day for both periods presented. We believe our tonnage growth for both of the comparable periods resulted from continued increases in our market share driven by the demand for our superior service and our available network capacity.
Our LTL revenue per hundredweight increased 22.6% and 20.0% in the second quarter and first six months of 2022, respectively, as compared to the same periods in 2021. These increases reflect the impact of higher fuel surcharges associated with the significant increase in diesel fuel prices as well as our ongoing commitment to our long-term yield management strategy. Excluding fuel surcharges, LTL revenue per hundredweight increased 9.3% and 9.6% in the second quarter and first six months of 2022, respectively, as compared to the same periods in 2021. We believe our focus on obtaining an appropriate yield is necessary to offset rising operating costs and also allows us to invest in opportunities that can improve the quality of our service and provide capacity for future growth.
July 2022 Update
Revenue per day increased 18.4% in July 2022 compared to the same month last year. LTL tons per day decreased 1.4%, due primarily to a 2.6% decrease in LTL shipments per day that was partially offset by a 1.2% increase in LTL weight per shipment. LTL revenue per hundredweight increased 20.5% as compared to the same month last year. LTL revenue per hundredweight, excluding fuel surcharges, increased 7.8% as compared to the same month last year.
Operating Costs and Other Expenses
Salaries, wages and benefits increased $94.2 million, or 15.4%, in the second quarter of 2022 as compared to the second quarter of 2021, due to a $62.3 million increase in salaries and wages and a $31.9 million increase in employee benefit costs. Salaries, wages and benefits increased $228.7 million, or 19.8%, for the first six months of 2022 as compared to the same period of 2021, due to a $157.9 million increase in salaries and wages and a $70.8 million increase in employee benefit costs.
Our salaries and wages expenses were higher for both the second quarter and first six months of 2022 as compared to the same periods of 2021 due primarily to increases in the average number of active full-time employees. Our average number of active full-time employees increased 15.1% and 16.8% for the second quarter and first six months of 2022, respectively, as we hired additional employees to balance our workforce with higher demand and shipment trends. Salaries and wages also increased as a result of an annual wage increase provided to our employees in September 2021, as well as higher performance-based and discretionary bonus compensation.
Our productive labor costs, which include wages for drivers, platform employees, and fleet technicians, improved as a percent of revenue to 22.0% and 23.1% in the second quarter and first half of 2022, respectively, from 24.8% and 25.5% from the same periods of 2021. The improvements in our productive labor costs, as a percentage of revenue, reflect the leveraging effect of increases in our yield as well as our continued focus on operating efficiently. Our productive labor costs as a percentage of revenue were also impacted by declines in our platform and P&D shipments per hour and linehaul laden load average as we continued to onboard and train our new employees. Our other salaries and wages as a percent of revenue also decreased to 8.8% and 9.1% of revenue in the second quarter and first half of 2022, respectively, from 9.4% and 9.7% of revenue for the same periods of 2021, respectively.
The increase in employee benefit costs for both the second quarter and first half of 2022 reflects the impact of the increase in the number of full-time employees eligible for our benefits. Our employee benefit costs also increased due to certain higher retirement benefits costs directly linked to our net income and higher costs per claim for employee group health benefits. As a result of these increases, our employee benefit costs, as a percent of salaries and wages, increased to 37.4% and 36.0% for the second quarter and first six months of 2022, respectively, from 35.5% and 34.4% for the comparable periods of 2021.
12
Operating supplies and expenses increased $99.1 million and $166.3 million in the second quarter and first six months of 2022, respectively, as compared to the same periods of 2021, due primarily to an increase in our costs for diesel fuel used in our vehicles, as well as other petroleum-based products. Our diesel fuel costs, excluding fuel taxes, represents the largest component of operating supplies and expenses, and can vary based on both the average price per gallon and consumption. Our average cost per gallon of diesel fuel increased 99.8% and 83.6% in the second quarter and first six months of 2022, respectively, as compared to the same periods last year. In addition, our gallons consumed increased 6.8% and 9.9% in the second quarter and first six months of 2022, respectively, as compared to the same periods last year due to increases in miles driven. We do not use diesel fuel hedging instruments; therefore, our costs are subject to market price fluctuations. Our other operating supplies and expenses as a percent of revenue increased slightly in the second quarter of 2022 as compared to the second quarter of 2021 due to increases in the cost of maintenance parts and other petroleum-based supplies. Other operating supplies and expenses as a percentage of revenue were relatively consistent in the first half of 2022 as compared to the first half of 2021.
Depreciation and amortization costs increased slightly in the second quarter and first six months of 2022, respectively, as compared to the same periods of 2021. The increases in depreciation and amortization were due primarily to the assets acquired as part of our 2021 and 2022 capital expenditure programs. We believe depreciation costs will increase in future periods based on our 2022 capital expenditure plan. While our investments in real estate, equipment, and technology can increase our costs in the short-term, we believe these investments are necessary to support our continued long-term growth and strategic initiatives.
Purchased transportation expense decreased $1.2 million in the second quarter of 2022 as compared to the second quarter of 2021 and increased $16.5 million in the first half of 2022 as compared to the first half of 2021. We utilize purchased transportation services from third-party transportation providers in our domestic linehaul network to supplement our equipment and our workforce when needed to support our growth initiatives and to maximize the efficient movement of LTL freight within our service center network. Our significant investments in workforce and equipment enabled us to reduce our use of purchased transportation beginning in the second quarter of 2022.
Our effective tax rate for both the second quarter and first six months of 2022 was 26.0% which is consistent with the same periods in 2021. Our effective tax rate generally exceeds the federal statutory rate due to the impact of state taxes and, to a lesser extent, certain other non-deductible items.
Liquidity and Capital Resources
A summary of our cash flows is presented below:
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|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
(In thousands) |
|
2022 |
|
|
2021 |
|
Cash and cash equivalents at beginning of period |
|
$ |
462,564 |
|
|
$ |
401,430 |
|
Cash flows provided by (used in): |
|
|
|
|
|
|
Operating activities |
|
|
816,053 |
|
|
|
508,291 |
|
Investing activities |
|
|
(274,248 |
) |
|
|
(25,490 |
) |
Financing activities |
|
|
(808,235 |
) |
|
|
(400,027 |
) |
(Decrease) increase in cash and cash equivalents |
|
|
(266,430 |
) |
|
|
82,774 |
|
Cash and cash equivalents at end of period |
|
$ |
196,134 |
|
|
$ |
484,204 |
|
The change in our cash flows provided by operating activities during the first half of 2022 as compared to the first half of 2021 was impacted by our increase in net income of $206.9 million, fluctuations in estimated income tax payments and changes in certain working capital accounts.
The change in our cash flows used in investing activities during the first half of 2022 as compared to the first half of 2021 was impacted by the timing of maturities of short-term investments, as well as an increase in our capital expenditure plan for 2022 and the timing of these expenditures during the year. Changes in our capital expenditures are more fully described below in “Capital Expenditures.”
The change in our cash flows used in financing activities during the first half of 2022 as compared to the first half of 2021 was due primarily to higher repurchases of our common stock, as well as an increase in dividend payments to our shareholders. Our return of capital to shareholders is more fully described below under “Stock Repurchase Program” and “Dividends to Shareholders.”
We have five primary sources of available liquidity: cash flows from operations, our existing cash and cash equivalents, short-term investments, available borrowings under our second amended and restated credit agreement with Wells Fargo Bank, National
13
Association serving as administrative agent for the lenders, which we entered into on November 21, 2019 (the “Credit Agreement”), and our Note Purchase and Private Shelf Agreement with PGIM, Inc. (“Prudential”) and certain affiliates and managed accounts of Prudential, which we entered into on May 4, 2020 (the “Note Agreement”). Our Credit Agreement and the Note Agreement are described in more detail below under “Financing Arrangements.” We believe we also have sufficient access to debt and equity markets to provide other sources of liquidity, if needed.
Capital Expenditures
The table below sets forth our net capital expenditures for property and equipment, including those obtained through noncash transactions, for the six-month period ended June 30, 2022 and the years ended December 31, 2021 and 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2022 |
|
|
2021 |
|
|
2020 |
|
Land and structures |
|
$ |
167,306 |
|
|
$ |
252,155 |
|
|
$ |
181,221 |
|
Tractors |
|
|
33,171 |
|
|
|
130,772 |
|
|
|
17,518 |
|
Trailers |
|
|
67,846 |
|
|
|
140,595 |
|
|
|
2,151 |
|
Technology |
|
|
17,829 |
|
|
|
17,139 |
|
|
|
11,925 |
|
Other equipment and assets |
|
|
29,411 |
|
|
|
25,450 |
|
|
|
12,266 |
|
Proceeds from sales |
|
|
(18,928 |
) |
|
|
(19,548 |
) |
|
|
(3,690 |
) |
Total |
|
$ |
296,635 |
|
|
$ |
546,563 |
|
|
$ |
221,391 |
|
Our capital expenditures vary based upon the projected increase in the number and size of our service center facilities necessary to support our plan for long-term growth, our planned tractor and trailer replacement cycle, and forecasted tonnage and shipment growth. Expenditures for land and structures can be dependent upon the availability of land in the geographic areas where we are looking to expand. We expect to continue to maintain a high level of capital expenditures in order to support our long-term plan for market share growth.
We currently estimate capital expenditures will be approximately $835 million for the year ending December 31, 2022. Approximately $300 million is allocated for the purchase of service center facilities, construction of new service center facilities or expansion of existing service center facilities, subject to the availability of suitable real estate and the timing of construction projects; approximately $485 million is allocated for the purchase of tractors and trailers; and approximately $50 million is allocated for investments in technology and other assets. We expect to fund these capital expenditures primarily through cash flows from operations, our existing cash and cash equivalents, short-term investments and, if needed, borrowings available under our Credit Agreement or Note Agreement. We believe our current sources of liquidity will be sufficient to satisfy our expected capital expenditures.
Stock Repurchase Program
On May 1, 2020, we announced that our Board of Directors had approved a two-year stock repurchase program authorizing us to repurchase up to an aggregate of $700.0 million of our outstanding common stock (the “2020 Repurchase Program”). The 2020 Repurchase Program became effective upon the termination of our $350.0 million repurchase program on May 29, 2020. On July 28, 2021, we announced that our Board of Directors had approved a new stock repurchase program authorizing us to repurchase up to an aggregate of $2.0 billion of our outstanding common stock (the “2021 Repurchase Program”). The 2021 Repurchase Program, which does not have an expiration date, began after the completion of the 2020 Repurchase Program in January 2022.
Under our repurchase programs, we may repurchase shares from time to time in open market purchases or through privately negotiated transactions. Shares of our common stock repurchased under our repurchase programs are canceled at the time of repurchase and are classified as authorized but unissued shares of our common stock.
As of June 30, 2022, we had $1.22 billion remaining authorized under the 2021 Repurchase Program.
Dividends to Shareholders
Our Board of Directors declared a cash dividend of $0.30 per share for each of the first two quarters of 2022 and declared a cash dividend of $0.20 per share for each quarter of 2021.
Although we intend to pay a quarterly cash dividend on our common stock for the foreseeable future, the declaration and amount of any future dividend is subject to approval by our Board of Directors, and is restricted by applicable state law limitations on
14
distributions to shareholders as well as certain covenants under our Credit Agreement and Note Agreement. We anticipate that any future quarterly cash dividends will be funded through cash flows from operations, our existing cash and cash equivalents, short-term investments, and, if needed, borrowings under our Credit Agreement or Note Agreement.
Financing Agreements
Senior Note Agreement
The Note Agreement, which is uncommitted and subject to Prudential’s sole discretion, provides for the issuance of senior promissory notes with an aggregate principal amount of up to $350.0 million through May 4, 2023. Pursuant to the Note Agreement, we issued $100.0 million aggregate principal amount of senior promissory notes (the “Series B Notes”) on May 4, 2020. Borrowing availability under the Note Agreement is reduced by the outstanding amount of the existing Series B Notes, and all other senior promissory notes issued pursuant to the Note Agreement.
The Series B Notes bear an annual interest rate of 3.10% and mature on May 4, 2027, unless prepaid. Principal payments are required annually beginning on May 4, 2023 in equal installments of $20.0 million through May 4, 2027. The Series B Notes are senior unsecured obligations and rank pari passu with borrowings under our Credit Agreement or other senior promissory notes issued pursuant to the Note Agreement.
Credit Agreement
The Credit Agreement provides for a five-year, $250.0 million senior unsecured revolving line of credit and a $150.0 million accordion feature, which if fully exercised and approved, would expand the total borrowing capacity up to an aggregate of $400.0 million. Of the $250.0 million line of credit commitments under the Credit Agreement, up to $100.0 million may be used for letters of credit.
At our option, borrowings under the Credit Agreement bear interest at either: (i) LIBOR (including applicable successor provisions) plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from 1.000% to 1.375%; or (ii) a Base Rate, as defined in the Credit Agreement, plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from 0.000% to 0.375%. Letter of credit fees equal to the applicable margin for LIBOR loans are charged quarterly in arrears on the daily average aggregate stated amount of all letters of credit outstanding during the quarter. Commitment fees ranging from 0.100% to 0.175% (based upon the ratio of net debt-to-total capitalization) are charged quarterly in arrears on the aggregate unutilized portion of the Credit Agreement.
For periods covered under the Credit Agreement, the applicable margin on LIBOR loans and letter of credit fees were 1.000% and commitment fees were 0.100%.
The amounts outstanding and available borrowing capacity under the Credit Agreement are presented below:
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June 30, |
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December 31, |
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(In thousands) |
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2022 |
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2021 |
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Facility limit |
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$ |
250,000 |
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$ |
250,000 |
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Line of credit borrowings |
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— |
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— |
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Outstanding letters of credit |
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(38,754 |
) |
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(39,169 |
) |
Available borrowing capacity |
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$ |
211,246 |
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$ |
210,831 |
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General Debt Provisions
The Credit Agreement and Note Agreement contain customary covenants, including financial covenants that require us to observe a maximum ratio of debt to total capital and a minimum fixed charge coverage ratio. The Credit Agreement and Note Agreement also include a provision limiting our ability to make restricted payments, including dividends and payments for share repurchases, unless, among other conditions, no defaults or events of default are ongoing (or would be caused by such restricted payment). We were in compliance with all covenants in our outstanding debt instruments for the period ended June 30, 2022.
We do not anticipate financial performance that would cause us to violate any such covenants in the future, and we believe the combination of our existing Credit Agreement and Note Agreement along with our additional borrowing capacity will be sufficient to meet foreseeable seasonal and long-term capital needs.
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The interest rate is fixed on the Note Agreement. Therefore, short-term exposure to fluctuations in interest rates is limited to our Credit Agreement. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes.
Critical Accounting Policies
In preparing our condensed financial statements, we applied the same critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2021 that we believe affect our judgments and estimates of amounts recorded in certain assets, liabilities, revenue and expenses.
Seasonality
Our tonnage levels and revenue mix are subject to seasonal trends common in our industry, although other factors, such as macroeconomic changes, could cause variation in these trends. Our revenue and operating margins in the first and fourth quarters are typically lower than those during the second and third quarters due to reduced shipments during the winter months; however, the effects of the COVID-19 pandemic on the domestic economy has impacted, and may continue to impact, our normal seasonal trends. Harsh winter weather, hurricanes, tornadoes, floods and other natural disasters can also adversely impact our performance by reducing demand and increasing operating expenses. We believe seasonal trends will continue to impact our business.
Environmental Regulation
We are subject to various federal, state and local environmental laws and regulations that focus on, among other things: the disposal, emission and discharge of hazardous waste, hazardous materials, or other materials into the environment or their presence at our properties or in our vehicles; fuel storage tanks; transportation of certain materials; and the discharge or retention of storm water. Under specific environmental laws, we could also be held responsible for any costs relating to contamination at our past or present facilities and at third-party waste disposal sites, as well as costs associated with clean-up of accidents involving our vehicles. We do not believe that the cost of future compliance with current environmental laws or regulations will have a material adverse effect on our operations, financial condition, competitive position or capital expenditures for the remainder of 2022 or fiscal year 2023. However, future changes to laws or regulations may adversely affect our operations and could result in unforeseen costs to our business.
Forward-Looking Information
Forward-looking statements appear in this report, including, but not limited to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other written and oral statements made by or on behalf of us. These forward-looking statements include, but are not limited to, statements relating to our goals, strategies, expectations, competitive environment, regulation, availability of resources, future events and future financial performance. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically can be identified by such words as “anticipate,” “estimate,” “forecast,” “project,” “intend,” “expect,” “believe,” “should,” “could,” “may” or other similar words or expressions. We caution readers that such forward-looking statements involve risks and uncertainties, including, but not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021 and in other reports and statements that we file with the Securities and Exchange Commission (“SEC”). Such forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied herein, including, but not limited to, the following, many of which are currently amplified by and may continue to be amplified by or may, in the future, be amplified by, the COVID-19 pandemic:
•the challenges associated with executing our growth strategy, and developing, marketing and consistently delivering high-quality services that meet customer expectations;
•various risks related to public health epidemics, pandemics and similar outbreaks, including the continuing impact of the COVID-19 pandemic;
•changes in our relationships with significant customers;
•our exposure to claims related to cargo loss and damage, property damage, personal injury, workers’ compensation and healthcare, increased self-insured retention or deductible levels or premiums for excess coverage, and claims in excess of insured coverage levels;
•the availability and cost of new equipment, including regulatory changes and supply constraints that could impact the cost of these assets;
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•the availability and cost of third-party transportation used to supplement our workforce and equipment needs;
•the availability and price of diesel fuel and our ability to collect fuel surcharges, as well as the effectiveness of those fuel surcharges in mitigating the impact of fluctuating prices for diesel fuel and other petroleum-based products;
•seasonal trends in the LTL industry, including harsh weather conditions and disasters;
•the availability and cost of capital for our significant ongoing cash requirements;
•decreases in demand for, and the value of, used equipment;
•our ability to successfully consummate and integrate acquisitions;
•the costs and potential liabilities related to our international business relationships;
•the costs and potential adverse impact of compliance with anti-terrorism measures on our business;
•the competitive environment with respect to our industry, including pricing pressures;
•various economic factors such as recessions, downturns in the economy, global uncertainty and instability, changes in international trade policies, changes in U.S. social, political, and regulatory conditions or a disruption of financial markets, which may decrease demand for our services or increase our costs;
•the negative impact of any unionization, or the passage of legislation or regulations that could facilitate unionization, of our employees;
•increases in the cost of employee compensation and benefit packages used to address general labor market challenges and to attract or retain qualified employees, including drivers and maintenance technicians;
•our ability to retain our key employees and continue to effectively execute our succession plan;
•potential costs and liabilities associated with cyber incidents and other risks with respect to our information technology systems or those of our third-party service providers, including system failure, security breach, disruption by malware or ransomware or other damage;
•the failure to adapt to new technologies implemented by our competitors in the LTL and transportation industry, which could negatively affect our ability to compete;
•the failure to keep pace with developments in technology, any disruption to our technology infrastructure, or failures of essential services upon which our technology platforms rely, which could cause us to incur costs or result in a loss of business;
•the Compliance, Safety, Accountability initiative of the Federal Motor Carrier Safety Administration (“FMCSA”) could adversely impact our ability to hire qualified drivers, meet our growth projections and maintain our customer relationships;
•the costs and potential adverse impact of compliance with, or violations of, current and future rules issued by the Department of Transportation, the FMCSA and other regulatory agencies;
•the costs and potential liabilities related to compliance with, or violations of, existing or future governmental laws and regulations, including environmental laws;
•the effects of legal, regulatory or market responses to climate change concerns;
•the increase in costs associated with healthcare legislation and other mandated benefits;
•the costs and potential liabilities related to legal proceedings and claims, governmental inquiries, notices and investigations;
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•the impact of changes in tax laws, rates, guidance and interpretations;
•the concentration of our stock ownership with the Congdon family;
•the ability or the failure to declare future cash dividends;
•fluctuations in the amount and frequency of our stock repurchases;
•volatility in the market value of our common stock;
•the impact of certain provisions in our articles of incorporation, bylaws, and Virginia law that could discourage, delay or prevent a change in control of us or a change in our management; and
•other risks and uncertainties described in our most recent Annual Report on Form 10-K and other filings with the SEC.
Our forward-looking statements are based upon our beliefs and assumptions using information available at the time the statements are made. We caution the reader not to place undue reliance on our forward-looking statements as (i) these statements are neither a prediction nor a guarantee of future events or circumstances and (ii) the assumptions, beliefs, expectations and projections about future events may differ materially from actual results. We undertake no obligation to publicly update any forward-looking statement to reflect developments occurring after the statement is made, except as otherwise required by law.