This Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "MD&A", contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. See the introductory section immediately prior to "Part I" and Risk Factors in "Item 1A" of this report regarding these statements.
Overview
This management report includes the following sections:
Our business: a brief description of our business and a discussion of how we evaluate our operating results
Consolidated results of operations: an analysis of our consolidated results of operations for the years ended
Certain Non-GAAP Financial Measures: an analysis of our results using certain non-GAAP financial measures, for the years endedDecember 31, 2021 , 2020 and 2019 Financial Condition, Liquidity and Capital Resources: a discussion of our major sources and uses of cash as well as an analysis of our cash flows and certain contractual obligations and commercial commitments
Our business
Yellow Corporation is a holding company that, through its operating subsidiaries, offers our customers a wide range of transportation services. The Company has one of the largest, most comprehensive LTL networks inNorth America with local, regional, national and international capabilities. Through its team of experienced service professionals, the Company offers industry-leading expertise in LTL shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence.
We measure our business performance using several metrics, but primarily (but not limited to) operating revenue, operating profit (loss), and operating ratio. We also use certain non-GAAP financial measures as secondary measures to assess our operating performance.
•
Operating Revenue: Our operating revenue has two primary components: volume (commonly evaluated using tonnage, tonnage per day, number of shipments, shipments per day or weight per shipment) and yield or price (commonly evaluated using picked up revenue, revenue per hundredweight or revenue per shipment). Yield includes fuel surcharge revenue, which is common in the trucking industry and represents an amount charged to customers that adjusts with changing fuel prices. We base our fuel surcharges on theU.S. Department of Energy fuel index and adjust them weekly. Rapid material changes in the index or our cost of fuel can positively or negatively impact our revenue and operating income as a result of changes in our fuel surcharge. We believe that fuel surcharge is an accepted and important component of the overall pricing of our services to our customers. Without an industry accepted fuel surcharge program, our base pricing for our transportation services would require changes. We believe the distinction between base rates and fuel surcharge has blurred over time, and it is impractical to clearly separate all the different factors that influence the price that our customers are willing to pay. In general, under our present fuel surcharge program, we believe rising fuel costs are beneficial to us and falling fuel costs are detrimental to us in the short term, the effects of which are mitigated over time. • Operating Income (Loss): Operating income (loss) is operating revenue less operating expenses. • Operating Ratio: Operating ratio is a common operating performance measure used in the trucking industry. It is calculated as (i) 100 percent (ii) minus the result of dividing operating income by operating revenue or (iii) plus the result of dividing operating loss by operating revenue, and is expressed as a percentage. • Non-GAAP Financial Measures: We use EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, to assess the following: o EBITDA: a non-GAAP measure that reflects our earnings before interest, taxes, depreciation, and amortization expense. EBITDA is used for internal management purposes as a financial measure that reflects our core operating performance. 21 -------------------------------------------------------------------------------- o Adjusted EBITDA: a non-GAAP measure that reflects EBITDA, and further adjusts for letter of credit fees, equity-based compensation expense, net gains or losses on property disposals, restructuring charges, transaction costs related to issuances of debt, non-recurring consulting fees, non-cash impairment charges and the gains or losses from permitted dispositions, discontinued operations, and certain non-cash expenses, charges and losses (provided that if any of such non-cash expenses, charges or losses represents an accrual or reserve for potential cash items in any future period, the cash payment in respect thereof in such future period will be subtracted from Adjusted EBITDA in such future period to the extent paid). All references to "Adjusted EBITDA" throughout this section and the rest of this report refer to "Adjusted EBITDA" calculated under our UST Credit Agreements and the Term Loan Agreement, as amended, (collectively, the TL Agreements) (defined therein as "Consolidated EBITDA") unless otherwise specified. Consolidated EBITDA is also a defined term in our ABL Facility and the definition there aligns with the prior definition of Consolidated EBITDA under the Prior Term Loan Agreement (defined in the Notes to Consolidated Financial Statements). Adjusted EBITDA is used for internal management purposes as a financial measure that reflects our core operating performance, to measure compliance with financial covenants in our TL Agreements and to determine certain management and employee bonus compensation. We believe our presentation of EBITDA and Adjusted EBITDA is useful to investors and other users as these measures represent key supplemental information our management uses to compare and evaluate our core underlying business results, particularly in light of our leverage position and the capital-intensive nature of our business. Further, EBITDA is a measure that is commonly used by other companies in our industry and provides a comparison for investors to evaluate the performance of the companies in the industry. Additionally, Adjusted EBITDA helps investors to understand how the company is tracking against our financial covenants in our TL Agreements as this measure is calculated as defined in our TL Agreements and serves as a driving component of our key financial covenants.
Our non-GAAP financial measures include the following limitations:
o EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or fund principal payments on our outstanding debt; o Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or fund principal payments on our outstanding debt, letter of credit fees, restructuring charges, transaction costs related to the issuance of debt, non-cash expenses, charges or losses, or nonrecurring consulting fees, among other items; o Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will generally need to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; o Equity-based compensation is an element of our long-term incentive compensation package, although Adjusted EBITDA excludes employee equity-based compensation expense when presenting our ongoing operating performance for a particular period; and o Other companies in our industry may calculate Adjusted EBITDA differently than we do, potentially limiting its usefulness as a comparative measure. Because of these limitations, our non-GAAP measures should not be considered a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and use our non-GAAP measures as secondary measures.
Overview of business strategy
Our strategy is focused on our multi-year enterprise transformation to optimize and structurally improve our network that includes more than 300 strategically located terminals throughoutNorth America . The transformation is expected to increase asset utilization, expand service offerings, leverage operational flexibilities gained with our 2019 labor agreement, consolidate disparate company systems onto a single platform and rationalize the more than 300 physical locations in the network while maintaining geographic coverage. The result will be to operate as one Yellow company, one Yellow network, under one Yellow brand that provides great super-regional service. As of the date of this filing, we have migrated all of our LTL companies to a common technology platform. The next steps in our transformation are the integration of our four disparate linehaul networks into a single national network. The combination of our four individual linehaul networks currently tied to our legacy national and regional carrier brands will result in greater density as freight moves throughout our network from origin to destination terminals. Also, the local terminal pickup and delivery 22 -------------------------------------------------------------------------------- optimization efforts will eliminate the overlapping coverage and customer interactions that currently exist between our legacy national and regional carrier brands. Overall, when completed, this operational transformation will result in enhanced customer service, cost savings opportunities from reduced miles and productivity gains, and will create additional capacity without adding incremental physical infrastructure. Capital investment remains a top priority for us. Our UST Credit Agreements have enabled us to significantly increase the amount of capital we are able to invest in revenue equipment to improve the age of our fleet as there is an immediate return in improved fuel miles per gallon and expected reduced vehicle maintenance expense. To properly execute on our transformation plan, we are committed to continued investing in technology in order to enhance the customer experience and improve our operational flexibility.
Consolidated operating results
2021 Compared to 2020
The table below presents summary consolidated financial information and amounts as a percentage of operating revenue for the years ended
Percent Change
2021 2020 2021 vs. 2020
(in millions) $ % $ % %
Operating Revenue $ 5,121.8 100.0 $ 4,513.7 100.0 13.5 %
Operating Expenses:
Salaries, wages and employee
benefits 2,921.7 57.0 2,770.1 61.4 5.5 %
Fuel, operating expenses and
supplies 858.1 16.8 719.1 15.9 19.3 %
Purchased transportation 800.2 15.6 638.8 14.2 25.3 %
Depreciation and amortization 143.6 2.8 134.9 3.0 6.4 %
Other operating expenses 293.9 5.7 239.6 5.3 22.7 %
(Gains) Losses on property
disposals, net 0.7 0.0 (45.3 ) (1.0 ) NM*
Total operating expenses 5,018.2 98.0 4,457.2 98.7 12.6 %
Operating Income 103.6 2.0 56.5 1.3 83.4 %
Nonoperating Expenses:
Nonoperating expenses, net 209.6 4.1 129.6 2.9 61.7 %
Loss before income taxes (106.0 ) (2.1 ) (73.1 ) (1.6 ) 45.0 %
Income tax expense (benefit) 3.1 0.1 (19.6 ) (0.4 ) NM*
Net Loss $ (109.1 ) (2.1 ) $ (53.5 ) (1.2 ) 103.9 %
(*) not meaningful
The industry is currently in a tight capacity environment with fewer drivers
available to meet shipping demands, which has led to price increases charged to
customers and an increase in the cost of purchased transportation. During 2021,
especially during the second half, the Company executed a yield strategy to
achieve appropriate pricing per shipment for freight that optimized our network
capacity. The execution of this strategy led to increased revenue per shipment
and decreased shipment counts. The Company's yield growth, including fuel
surcharge, produced a consolidated operating revenue increase of $608.1 million
compared to 2020 with an internal focus of retaining the optimal freight mix
relative to human capital availability throughout 2021. Partially offsetting the
positive yield growth, the Company experienced shipping volume decreases
compared to 2020. Further, the results of operations in 2020 were impacted by
the outbreak of COVID-19 as shipping volumes decreased from typical levels and
negatively impacted the pricing environment at certain times and in certain
markets.
The Company's results reflect these yield growth driven revenue increases
partially offset by increased purchased transportation expenses, fuel expense
and variable expenses including salaries, wages and benefits. Further material
changes are provided below.
Salaries, wages and employee benefits. Salaries, wages and employee benefits
increased $151.6 million primarily due to contractual wage rate increases and to
a lesser extent salary and overtime wage increases. Additionally, there was an
increase of $30.9 million in short-term incentive compensation predominantly for
exceeding targeted financial results in 2021 and an increase of $29.0 million in
employee benefits that corresponded with medical plan spending and other benefit
cost trends.
Fuel, operating expenses and supplies. Fuel, operating expenses and supplies
increased $139.0 million , primarily due to a $78.1 million increase in fuel
expense, which was a result of higher fuel prices partially offset by fewer
miles driven. Additional increases included a $14.6 million increase in software
expenses and other operating expenses, a $12.6 million increase for
23
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rebranding and other advertising expenses, a $10.5 million increase for travel
and entertainment in other employee expenses and a $10.1 million increase in
professional services. The majority of these increases were impacted by cost
control measures which decreased variable expenses during 2020.
Purchased transportation. Purchased transportation increased $161.4 million
primarily due to significant rate increases as noted above. These increases were
noted in most of our modes of purchased transportation and include a $50.6
million increase in rail purchased transportation expense, a $50.5 million
increase in over-the-road purchased transportation expense and a $49.3 million
increase in third-party costs due to the growth in customer-specific logistics
solutions. These increases were partially offset by a decrease in vehicle
rentals.
Other operating expenses. Other operating expenses increased
mainly due to a
Gains on property disposals, net. Net losses on disposals of property were$0.7 million during 2021 as compared to net gains of$45.3 million in 2020 which were primarily related to the sale of real properties. Nonoperating expense, net. Included in the overall increase of$80.0 million is an increase in non-union pension settlement charges and an increase in interest expenses. Non-union pension settlement charges increased$61.1 million , primarily due to a partial pension annuitization duringDecember 2021 that resulted in a non-cash settlement charge of approximately$54.9 million . Interest expense increased$14.8 million , primarily due to a$24.1 million increase in interest and associated amortization related to the UST Loans entered into duringJuly 2020 which was partially offset by a$15.9 million decrease in Term Loan interest. Income tax. The Company's effective tax rate for the years endedDecember 31, 2021 and 2020 was (2.9)% and 26.8%, respectively. The primary driver of our 2021 effective tax rate differing from the domestic federal statutory tax rate was the change in valuation allowance established for our domestic net deferred tax asset balance as ofDecember 31, 2021 . The 2021 effective tax rate was not impacted by the exception to intraperiod tax allocation in a similar manner as the 2020 effective tax rate due to the Company's adoption of the change to the relevant accounting standard onJanuary 1, 2021 , as further discussed in Note 2 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. As ofDecember 31, 2021 and 2020, the Company had a full valuation allowance against our domestic net deferred tax assets. 24
-------------------------------------------------------------------------------- The table below summarizes the key revenue metrics for the years endedDecember 31 : Percent 2021 2020 Change(a) Workdays 252.0 253.0 Operating Ratio 98.0 98.7 0.7pp LTL picked up revenue (in millions)$ 4,615.2 $ 4,100.1 12.6 % LTL tonnage (in thousands) 9,520 9,845 (3.3 )% LTL tonnage per workday (in thousands) 37.78 38.91 (2.9 )% LTL shipments (in thousands) 16,707 16,982 (1.6 )% LTL shipments per workday (in thousands) 66.30 67.12 (1.2 )% LTL picked up revenue per hundred weight$ 24.24 $ 20.82 16.4 % LTL picked up revenue per hundred weight (excluding fuel surcharge)$ 21.12 $ 18.78 12.5 % LTL picked up revenue per shipment$ 276 $ 241 14.4 % LTL picked up revenue per shipment (excluding fuel surcharge)$ 241 $ 218 10.5 % LTL weight per shipment (in pounds) 1,140 1,159
(1.7)%
Total revenue collected (in millions)(b)
13.1 % Total tonnage (in thousands) 12,427 12,589 (1.3 )% Total tonnage per workday (in thousands) 49.31 49.76 (0.9 )% Total shipments (in thousands) 17,178 17,446 (1.5 )% Total shipments per workday (in thousands) 68.17 68.96 (1.1 )% Total picked up revenue per hundred weight$ 20.43 $ 17.82 14.6 % Total picked up revenue per hundred weight (excluding fuel surcharge)$ 17.88 $ 16.13 10.9 % Total picked up revenue per shipment$ 296 $ 257 14.9 % Total picked up revenue per shipment (excluding fuel surcharge)$ 259 $ 233 11.2 % Total weight per shipment (in pounds) 1,447 1,443 0.3 % (a) Percent change based on unrounded figures and not the rounded figures presented. (b) Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods and the impact of other revenue. (in millions) 2021
2020
(b) Reconciliation of operating revenue to total picked up revenue: Operating revenue$ 5,121.8 $
4,513.7
Change in revenue deferral and other (44.1 ) (26.0 ) Total picked up revenue$ 5,077.7 $ 4,487.7 25
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2020 vs. 2019
The table below presents summary consolidated financial information and amounts as a percentage of operating revenue for the years ended
Percent Change
2020 2019 2020 vs. 2019
(in millions) $ % $ % %
Operating Revenue $ 4,513.7 100.0 $ 4,871.2 100.0 (7.3 )%
Operating Expenses:
Salaries, wages and employee
benefits 2,770.1 61.4 2,963.7 60.8 (6.5 )%
Fuel, operating expenses and
supplies 719.1 15.9 889.0 18.3 (19.1 )%
Purchased transportation 638.8 14.2 614.2 12.6 4.0 %
Depreciation and amortization 134.9 3.0 152.4 3.1 (11.5 )%
Other operating expenses 239.6 5.3 241.2 5.0 (0.7 )%
(Gains) Losses on property
disposals, net (45.3 ) (1.0 ) (13.7 ) (0.3 ) NM*
Impairment charges - - 8.2 0.2 NM*
Total operating expenses 4,457.2 98.7 4,855.0 99.7 (8.2 )%
Operating Income 56.5 1.3 16.2 0.3 NM*
Nonoperating Expenses:
Nonoperating expenses, net 129.6 2.9 124.5 2.6 4.1 %
Loss before income taxes (73.1 ) (1.6 ) (108.3 ) (2.2 ) (32.5 )%
Income tax expense (benefit) (19.6 ) (0.4 ) (4.3 ) (0.1 ) NM*
Net Loss $ (53.5 ) (1.2 ) $ (104.0 ) (2.1 ) (48.6 )%
(*) not meaningful
Results of operations during 2020 were impacted by the outbreak of COVID-19 as
shipping volumes decreased from typical levels mainly during the second quarter,
especially in certain markets that have seen greater case levels of COVID-19.
Downward pressure on diesel fuel prices reduced the amount of fuel surcharge
revenues, which are typically priced into our services. Partially offsetting
these decreases, during the second half of 2020 reduced shipping capacity
relative to overall shipment demand created a favorable pricing environment
across the industry. As such, our consolidated operating revenue decreased
$357.5 million , during 2020 when compared to 2019.
Due to the trends in shipping volumes and shortages for certain labor resources,
the Company maintained a lower headcount than historical levels to match
shipment volume trends during the year. Lower headcount levels were also
impacted by an imbalance in the available pool of qualified drivers versus
overall shipment demand, which is an industry trend. In addition, the Company's
2020 results reflect decreases from 2019 in variable expenses, including fuel
and maintenance, among others. Offsetting these variable expense decreases the
Company paid higher contractual wage and benefit rates for union employees.
Total operating expenses decreased $397.8 million , for the year ended December
31, 2020 compared to 2019, primarily as a result of decreases in variable
expenses. Further material changes are provided below.
Fuel, operating expenses and supplies. Fuel, operating expenses and supplies
decreased $169.9 million , primarily due to a $100.3 million decrease in fuel
expense, which was a result of lower fuel prices and fewer miles driven.
Additional decreases resulted from cost reduction efforts, including a $21.0
million reduction in professional services, a $17.3 million decrease in other
operating expenses, and a $16.4 million decrease in other employee expenses, and
an $11.0 million decrease in vehicle maintenance.
26
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Purchased transportation. Purchased transportation increased $24.6 million ,
primarily due to a $19.9 million increase in over-the-road purchased
transportation due to increased rates which have been impacted by driver
shortages, and a $16.9 million increase in third-party costs due to growth in
customer-specific logistics solutions partially offset by a $6.0 million
decrease from reduced usage of local purchased transportation and a $6.4 million
decrease in long-term vehicle rentals.
Gains on property disposals, net. Net gains on disposals of property were $45.3
million during 2020 as compared to $13.7 million in 2019. The gains in 2020 and
2019 were primarily related to the sale of real properties.
Impairment charges. During 2019, we recorded an $8.2 million impairment charge
in the first quarter that reflected the write-down of an intangible asset as a
result of rebranding strategies, leading to discontinued use of that tradename.
Nonoperating expense, net. Included in the overall increase of approximately
4.1% is an increase in interest expenses that is partially offset by the
reduction related to a 2019 debt extinguishment. Interest expense increased
$24.7 million , primarily due to a $11.7 million increase in interest and
associated amortization related to the UST Loans entered into during July 2020
and a $10.3 million increase in Term Loan interest due to higher rates and
amortization. In 2019, the Company incurred $11.2 million of nonoperating
expense related to the extinguishment of debt with no such charge in 2020.
Income tax. The Company's effective tax rate for the years ended December 31,
2020 and 2019 was 26.8% and 4.0%, respectively. Significant items impacting the
2020 rate included a benefit recognized due to application of the exception to
the rules regarding intraperiod tax allocation, a benefit from the reversal of
liability for an uncertain tax position resulting from statute expiration, and a
change in the valuation allowance established for the net deferred tax asset
balance at December 31, 2020 . Significant items impacting the 2019 rate included
a provision for net state and foreign taxes, certain permanent items, and a
change in the valuation allowance established for the net deferred tax asset
balance at December 31, 2019 . As of December 31, 2020 and 2019, the Company had
a full valuation allowance against our domestic net deferred tax assets.
The table below summarizes the key revenue metrics for the years ended December
31 :
Percent
2020 2019 Change(a)
Workdays 253.0 251.5
Operating Ratio 98.7 99.7 1.0 pp
LTL picked up revenue (in millions) $ 4,100.1 $ 4,457.2 (8.0 )%
LTL tonnage (in thousands) 9,845 10,314 (4.5 )%
LTL tonnage per workday (in thousands) 38.91 41.01 (5.1 )%
LTL shipments (in thousands) 16,982 18,246 (6.9 )%
LTL shipments per workday (in thousands) 67.12 72.55 (7.5 )%
LTL increased revenue per hundredweight
(3.6 )% LTL picked up revenue per hundred weight (excluding fuel surcharge)$ 18.78 $ 19.05 (1.4 )% LTL picked up revenue per shipment$ 241 $ 244 (1.2 )% LTL picked up revenue per shipment (excluding fuel surcharge)$ 218 $ 215 1.1 % LTL weight per shipment (in pounds) 1,159 1,131 2.6 %
Total revenue collected (in millions)(b)
(7.1 )% Total tonnage (in thousands) 12,589 12,946 (2.8 )% Total tonnage per workday (in thousands) 49.76 51.47 (3.3 )% Total shipments (in thousands) 17,446 18,653 (6.5 )% Total shipments per workday (in thousands) 68.96 74.17 (7.0 )%
Total revenue picked up per hundred weight
(4.5 )% Total picked up revenue per hundred weight (excluding fuel surcharge)$ 16.13 $ 16.50 (2.3 )% Total picked up revenue per shipment$ 257 $ 259 (0.7 )% Total picked up revenue per shipment (excluding fuel surcharge)$ 233 $ 229 1.6 % Total weight per shipment (in pounds) 1,443 1,388 4.0 % (a) Percent change based on unrounded figures and not the rounded figures presented. (b) Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods and the impact of other revenue. 27 -------------------------------------------------------------------------------- (in millions) 2020
2019
(b) Reconciliation of operating revenue to total picked up revenue: Operating revenue$ 4,513.7 $
4,871.2
Change in revenue deferral and other (26.0 ) (39.9 ) Total picked up revenue$ 4,487.7 $ 4,831.3
Certain Non-GAAP Financial Measures
As previously discussed in the "Our Business" section, we use certain non-GAAP financial measures to assess performance including EBITDA and Adjusted EBITDA. We believe our presentation of EBITDA and Adjusted EBITDA is useful to investors and other users as these measures represent key supplemental information our management uses to compare and evaluate our core underlying business results, particularly in light of our leverage position and the capital-intensive nature of our business. These secondary measures should be considered in addition to the results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, our GAAP financial measures.
Adjusted EBITDA
The reconciliation of net loss to EBITDA and EBITDA to Adjusted EBITDA for the years endedDecember 31 : (in millions) 2021 2020 2019 Reconciliation of net income (loss) to Adjusted EBITDA: Net loss$ (109.1 ) $ (53.5 ) $ (104.0 ) Interest expense, net 150.4 135.6 109.9 Income tax expense (benefit) 3.1 (19.6 ) (4.3 ) Depreciation and amortization 143.6 134.9
152.4
EBITDA 188.0 197.4
154.0
Adjustments for TL Agreements: (Gains) losses on property disposals, net 0.7 (45.3 ) (13.7 ) Non-cash reserve changes (a) 11.6 2.9 16.1 Impairment charges - - 8.2 Letter of credit expense 8.5 7.3 6.5 Permitted dispositions and other 0.8 0.3 (0.9 ) Equity-based compensation expense 4.4 4.7
6.3
Loss on extinguishment of debt - -
11.2
Non-union pension settlement charges 64.7 3.6
1.8
Other, net 3.0 3.5
2.9
Expense amounts subject to 10% threshold (b): COVID-19 - 3.9 - Other, net 24.3 17.3
18.2
Adjusted EBITDA prior to 10% threshold 306.0 195.6
210.6
Adjustments pursuant to TTM calculation (b) - (3.7 ) - Adjusted EBITDA$ 306.0 $ 191.9 $ 210.6 (a) Non-cash reserve changes reflect the net non-cash reserve charge for union and nonunion vacation (which includes the impact in 2019 of the New NMFA for the one week of restored vacation), with such non-cash reserve adjustment to be reduced by cash charges in a future period when paid. (b) Pursuant to the TL Agreements, Adjusted EBITDA limits certain adjustments in aggregate to 10% of the trailing-twelve-month ("TTM") consolidated Adjusted EBITDA, prior to the inclusion of amounts subject to the 10% threshold, for each period ending. Such adjustments include, but are not limited to, restructuring charges, integration costs, severance, and non-recurring charges. The limitation calculation is updated quarterly based on TTM Adjusted EBITDA, and any necessary adjustment resulting from this limitation, if applicable, will be presented here. The sum of the quarters may not necessarily equal TTM Adjusted EBITDA due to the expiration of adjustments from prior periods. 28 --------------------------------------------------------------------------------
Financial position, liquidity and capital resources
The following sections provide aggregated information regarding our financial condition, liquidity and capital resources. As ofDecember 31, 2021 and 2020 our total debt was$1,554.5 million and$1,225.4 million , respectively.
Liquidity
Our primary sources of liquidity are cash and cash equivalents, borrowings available under our ABL facility and any prospective net cash flow from operations. From
As ofDecember 31, 2021 , our Availability under our ABL Facility was$93.1 million , and our Managed Accessibility was$48.1 million . Availability is derived by reducing the amount that may be advanced against eligible receivables plus eligible borrowing base cash by certain reserves imposed by the ABL Agent and our$356.9 million of outstanding letters of credit. Our Managed Accessibility represents the maximum amount we would access on the ABL Facility and is adjusted for eligible receivables plus eligible borrowing base cash measured as ofDecember 31, 2021 . If eligible receivables fall below the threshold management uses to measure availability, which is 10% of the borrowing line, the credit agreement governing the ABL Facility permits adjustments from eligible borrowing base cash to restricted cash prior to the compliance measurement date, which for the year-end 2021 is as ofJanuary 15, 2022 . Cash and cash equivalents and Managed Accessibility totaled$358.8 million atDecember 31, 2021 . As ofDecember 31, 2020 , our Availability under our ABL Facility was$43.7 million , and our Managed Accessibility was$4.0 million . As ofJanuary 15, 2021 , we had less than 10% of the borrowing line in eligible receivables and moved$3.1 million of cash into restricted cash, as permitted under the ABL Facility, which effectively put our cash and cash equivalents and Managed Accessibility to$440.2 million as ofDecember 31, 2020 . The table below summarizes cash and cash equivalents and Managed Accessibility atDecember 31 : (in millions) 2021 2020 Cash and cash equivalents$ 310.7 $ 439.3
Less: amounts placed in restricted cash after year-end
- (3.1 ) Managed Accessibility 48.1
4.0
Total cash and cash equivalents and Managed Accessibility$ 358.8 $ 440.2 Outside of funding normal operations, our principal uses of cash include making contributions to our various multi-employer pension funds, and meeting our other cash obligations, including, but not limited to, paying principal and interest on our funded debt, payments on equipment leases and investments in capital expenditures. Covenants Under the UST Loans and Credit Agreement, beginning atDecember 31, 2021 , the Company has a quarterly requirement to maintain a trailing-twelve-month ("TTM") Adjusted EBITDA of$100.0 million . This requirement increases beginningMarch 31, 2022 to a TTM Adjusted EBITDA of$150.0 million and increases atJune 30, 2022 , and thereafter through the maturity of these agreements, to a TTM Adjusted EBITDA of$200.0 million . Management expects, based on actual and forecasted operating results, the Company will meet this covenant requirement for the period it became effective and the next twelve months.
Cash flow
The Company's cash flow activities are summarized in the table below, for the years endedDecember 31 : (in millions) 2021 2020 2019
Net cash provided by (used in) operating activities
$ 21.5 Net cash provided by (used in) investing activities (494.0 ) (84.5 ) (117.3 ) Net cash provided by (used in) financing activities 320.6 330.8 (22.6 ) 29
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Operating Cash Flow The decrease in cash provided by operating activities for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 was primarily attributable to an$118.3 million increase in accounts receivable during 2021. This growth is consistent with the positive yield growth as discussed in our Consolidated Results of Operations, and also reflects the timing of our collections. Additionally, operating cash flows decreased due to$42.8 million in payments of certain deferred employer payroll taxes, which was offset by a net increase in cash flows from various other working capital changes included in other operating liabilities. Cash flow from operations increased by$101.0 million to$122.5 million for the year endedDecember 31, 2020 compared to$21.5 million for the year endedDecember 31, 2019 . The increase in cash flow is primarily related to deferrals of various payments recorded as other operating liabilities. Under the CARES Act, we deferred payment of certain employer payroll taxes incurred in 2020 that resulted in$85.6 million of liabilities as ofDecember 31, 2020 , with 50% dueDecember 31, 2021 and 50% dueDecember 31, 2022 . For the year ended 2020 the Company incurred$42.4 million of interest expenses that were paid-in-kind. Lastly, our operating cash flows from a reduction in lease payments was$20.1 million driven by a decrease in the number of operating lease agreements for revenue equipment and changes in payment timing.
Investing cash flow
The increase of$409.5 million of cash used in investing activities for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 was largely driven by outflows on revenue equipment acquisitions and by lower cash proceeds from the sale of real property. Cash used by investing cash flows are expected to decrease significantly, more consistent with historical levels in 2022 as the UST Credit Agreements funding has been fully utilized. Cash used in investing activities was$84.5 million in 2020 compared to$117.3 million in 2019, largely driven by cash proceeds from the sale of real property as well as a reduction to cash outflows of revenue equipment acquisitions.
Financing cash
Net cash used in financing activities for 2021 was
Net cash used in financing activities for 2020 was$330.8 million , which consists primarily of amounts drawn on our UST Credit Agreements. Net cash used in financing activities for 2019 was$22.6 million , which consists primarily of$579.0 million in repayments of our long-term debt, offset by the issuance of$570.0 million of long-term debt for the Term Loan.
Capital expenditure
Our capital expenditures focus primarily on the replacement of revenue
equipment, investments in information technology and improvements to land and
structures. Our business is capital intensive with significant investments in
tractors, trailers, refurbished engines, information technology and service
center facilities. We determine the amount and timing of capital expenditures
based on numerous factors, including availability and attractiveness of
financing, anticipated liquidity levels, anticipated financial returns and other
factors.
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The table below summarizes our actual net capital expenditures (net of disposal proceeds) by type of investment for the years ended
(in millions) 2021 2020
2019
Acquisition of property and equipment Revenue equipment$ 412.1 $ 86.8 $ 88.6 Land and structures 22.5 8.6
13.2
Technology equipment and software 55.6 33.6 36.0 Other 7.4 11.6 5.4 Total capital expenditures 497.6 140.6 143.2 Proceeds from disposal of property and equipment Land and structures (1.1 ) (52.6 ) (22.9 ) Revenue equipment, technology equipment and software and other (2.5 ) (3.5 ) (3.0 ) Total proceeds (3.6 ) (56.1 ) (25.9 ) Total net capital expenditures$ 494.0 $ 84.5 $ 117.3 Our capital expenditures for revenue equipment were used primarily to fund the purchase of tractors, trailers and containers and to refurbish engines for our revenue equipment fleet. We also acquire our equipment through operating leases which will vary based on current and anticipated liquidity and lease financing options. For the year endedDecember 31, 2021 , we focused on capital expenditures, as detailed above, and not entering new operating leases. As ofDecember 31, 2021 , our operating lease obligations through 2031 totaled$245.6 million . We expect annual capital expenditures in 2022 to be in the range of$325 million to$400 million .
Contractual obligations and other commercial commitments
The following sections provide certain aggregate information regarding our contractual obligations and business commitments as of
Cash contractual obligations
Material contractual obligations arising in the normal course of business primarily consist of long-term debt and interest payments, operating leases, pension deferral principal and interest payments, workers' compensation and third-party liability claim obligations and deferred payroll taxes. The following table reflects our material cash outflows that we are contractually obligated to make related to long-term debt, including interest, and operating leases as ofDecember 31, 2021 : Payments Due by Period Less than 1-3 3-5 After (in millions) Total 1 year years years 5 years ABL Facility(a)$ 18.1 $ 6.7 $ 11.4 $ - $ - Term Loan(b) 744.4 54.1 690.3 - - UST Loans(c) 804.1 23.1 781.0 - - Lease financing obligations(d) 308.6 44.8 88.8 81.5 93.5 Pension deferral obligations(e) 71.9 71.9 - - - Operating leases(f) 245.6 94.4 84.0 27.0 40.2 Total$ 2,192.7 $ 295.0 $ 1,655.5 $ 108.5 $ 133.7 (a) The ABL Facility includes future payments for the letter of credit and unused line fees and are not included on the Company's consolidated balance sheets. (b) The Term Loan includes principal and interest payments but excludes unamortized discounts. (c) The UST Loans includes principal and interest payments, including paid-in-kind interest. (d) The lease financing obligations consist primarily of interest payments. (e) Pension deferral obligations includes principal and interest payments on the Second A&R CDA. (f) Operating leases represent future payments under contractual lease arrangements primarily for revenue equipment and land and structures. We expect cash contributions, if required at all, for our non-union sponsored pension plans to be nominal in 2022 and in years thereafter. Additional details on self-insurance accruals for claims and deferred payroll taxes are also available in Note 2 and Note 3, respectively, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. 31 --------------------------------------------------------------------------------
Other business commitments
The following table reflects other potential business commitments or cash outflows that may result from a contingent event, such as a need to borrow funds in the short term due to insufficient cash.
Amount of Commitment Expiration Per Period
Less than 1-3 3-5 After
(in millions) Total 1 year years years 5 years
ABL Facility availability(a) $ 93.1 $ - $ 93.1 $ - $ -
Letters of credit(b) 356.9 - 356.9 - -
Surety bonds(c) 102.1 98.1 4.0 - -
Total commercial commitments
$454.0 – $ –
(a)
Availability under the ABL Facility is derived by reducing the amount that may be advanced against eligible receivables plus eligible borrowing base cash by certain reserves imposed by the ABL Agent and our outstanding letters of credit. (b) Letters of credit outstanding are generally required as collateral to support self-insurance programs and do not represent additional liabilities as the underlying self-insurance accruals are already included in our consolidated balance sheets. (c) Surety bonds are generally required for workers' compensation to support self-insurance programs, which include certain bonds that do not have an expiration date but are redeemable on demand, and do not represent additional liabilities as the underlying self-insurance accruals are already included in our consolidated balance sheets.
We have no off-balance sheet arrangements except for other contractual obligations relating to letters of credit and surety bonds, which are reflected in the tables above, as well as service agreements in the normal course of business and capital purchases.
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Critical accounting policies
Preparation of our consolidated financial statements requires accounting policies that involve significant estimates and judgments regarding the amounts included in the consolidated financial statements and disclosed in the accompanying notes to the consolidated financial statements. We continually review the appropriateness of our accounting policies and the accuracy of our estimates including discussion with theAudit & Ethics Committee of our Board of Directors that may make recommendations to management regarding these policies. Even with a thorough process, estimates must be adjusted based on changing circumstances and new information. Actual results could differ from those estimates. Management has identified the policies, further described in the notes to the consolidated financial statements included in Item 8 of this report, described below as requiring significant judgment and having a potential material impact to our consolidated financial statements.
We are self-insured up to certain limits for workers' compensation and third-party liability claims. We measure the liabilities associated with workers' compensation and third-party liability claims primarily through actuarial methods performed by an independent third-party. Actuarial methods include estimates for the undiscounted liability for claims reported, for claims incurred but not reported and for certain future administrative costs. These estimates are based on historical loss development factors and judgments about the present and expected levels of costs per claim and the time required to settle claims. The effect of future inflation for costs is considered in the actuarial analysis. Actual claims may vary from these estimates due to a number of factors, including but not limited to, accident frequency and severity, claims management, changes in healthcare costs, legal and judicial developments, and overall economic conditions. We discount the actuarial calculations of claims liabilities for each calendar year to present value based on the averageU.S. Treasury rate, during the calendar year of occurrence, for maturities that match the initial expected payout of the liabilities. As ofDecember 31, 2021 and 2020, we had$354.5 million and$323.3 million accrued for outstanding claims, respectively. Additional details on self-insurance accruals for claims are also available in Note 2 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Non-union pension plans
The Company sponsors defined benefit pension plans for certain employees not covered by collective bargaining agreements. The qualified plans cover approximately 5,000 participants including those currently receiving benefits and those who have left the Company with deferred benefits. OnJanuary 1, 2004 , the existing qualified benefit plans were closed to new participants. EffectiveJuly 1, 2008 , we froze the defined benefit pension plans for all participating employees not covered by collective bargaining agreements. Given the frozen status of the plans, the key estimates in determining pension cost are discount rate and return on plan assets, each of which are discussed below. Additional information on these pension plans is included in Note 4 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Discount Rate The discount rate refers to the interest rate used to discount the estimated future benefit payments to their present value, also referred to as the benefit obligation. The discount rate allows us to estimate what it would cost to settle the pension obligations as of the measurement date,December 31 , and impacts the following year's annual pension expense. We determine the discount rate by selecting a portfolio of high quality non-callable bonds with interest payments and maturities generally consistent with our expected benefit payments. Changes in the discount rate can impact our overall net pension position on the balance sheet, however, hedge assets in our asset portfolio work to partially mitigate this impact with changes in asset returns. A 100-basis-point decrease in our discount rate would increase our net pension position on the consolidated balance sheet by approximately$75.5 million . That same change would decrease our net pension expense by approximately$2.7 million , driven by the return on assets. The discount rate can fluctuate considerably over periods depending on overall economic conditions that impact long-term corporate bond yields. AtDecember 31, 2021 and 2020, we used a discount rate to determine benefit obligations of 3.08% and 2.81%, respectively.
Return on plan assets
The assumption for expected return on plan assets represents a long-term assumption of our portfolio performance that can impact our annual pension expense. With$767.4 million of plan assets atDecember 31, 2021 for the Company's funded pension plans, a 100-basis-point decrease in the assumption for expected rate of return on assets would increase the net annual pension expense by approximately$6.8 million and would have no effect on the net pension position reflected on the consolidated balance sheet atDecember 31, 2021 .
In determining the expected rate of return on assets, we consider our historical experience with the plans’ investment portfolio, historical market data and long-term historical relationships as well as a review of other objective indices, including the current market
33 -------------------------------------------------------------------------------- factors such as inflation and interest rates. Due to the historically underfunded nature of these plans we previously managed our investment portfolio to hedge risks, but primarily focused on risk seeking assets that would provide an opportunity to close the net funded deficit, thus the Company selected an expected rate of return on assets of 7.0% effective for the 2020 valuations. Based on the improved funded status in comparison to historic levels, which impacts the risk profile of the asset portfolio and various market factors, we selected an expected rate of return on assets of 5.0% effective for the 2021 valuation. We have reviewed our expected long-term rate of return based upon several factors, including those detailed above,
Measurement of plan assets
AtDecember 31, 2021 , our plan assets included$343.3 million of investments that are measured at net asset value ("NAV") per share (or its equivalent) using the practical expedient in accordance with the fair value measurement and$26.6 million of Level 3 investments. Level 3 market values are based on inputs that are supported by little or no market activity and are significant to the fair value of the investment. These investments are subject to estimation to determine fair value which is used to determine components of our annual pension expense and the net pension position reflected on the consolidated balance sheet.
Revenue recognition and revenue reserves
The Company's revenues are primarily derived from the transportation services we
provide through the delivery of goods over the duration of a shipment. Upon
receipt of the bill of lading, the contract existence criteria is met as
evidenced by a legally enforceable agreement between two parties where
collectability is probable, thus creating the distinct performance obligation.
The Company has elected to expense initial direct costs as incurred because the
average shipment cycle is less than one week. The Company recognizes revenue and
substantially all the purchased transportation expenses on a gross basis because
we direct the use of the transportation service provided and remain responsible
for the complete and proper shipment.
Inherent within our revenue recognition practices are estimates for revenue
associated with shipments in transit and billing adjustments, which are included
in our consolidated balance sheets as a reduction to accounts receivable.
Additional details on revenue recognition and revenue related reserves are also
available in Note 2 to the consolidated financial statements included in Part
II, Item 8 of this Annual Report on Form 10-K.
For shipments in transit, we record revenue based on the percentage of service
completed as of the period end and recognize delivery costs as incurred. The
percentage of service completed for each shipment is based on how far along in
the shipment cycle each shipment is in relation to standard transit days. The
total revenue earned is accumulated for all shipments in transit at a particular
period end and recorded as operating revenue. The magnitude of the impacts of in
transit adjustment estimates to the consolidated financial statements are
limited due to the short duration, generally less than one week, of the average
shipment cycle.
The Company has reviewed our revenue-related reserves and determined that rerate
reserves are a critical accounting policy. Given the nature of our
transportation services, adjustments may arise which creates variability when
establishing the transaction price used to recognize revenue. We have a high
volume of performance obligations with similar characteristics, therefore we
primarily use historical trends to arrive at estimated reserves. Rerate
reserves, which are common for LTL carriers, are established during a process to
capture incorrect ratings that require adjustment and could be identified based
on many factors, including weight and commodity verifications. Although the
majority of rerating occurs in the same month as the original rating, a portion
occurs during subsequent periods.
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