OLD DOMINION FREIGHT LINE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K) | MarketScreener (2023)

This Management's Discussion and Analysis of Financial Condition and Results ofOperations generally discusses our 2021 and 2020 results and year-to-yearcomparisons between 2021 and 2020. Discussions of our 2019 results andyear-to-year comparisons between 2020 and 2019 that are not included in thisAnnual Report on Form 10-K can be found in "Management's Discussion and Analysisof Financial Condition and Results of Operations" in Part II, Item 7 of ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2020, whichwas filed with the Securities and Exchange Commission on February 24, 2021.

Overview

We are one of the largest North American less-than-truckload ("LTL") motorcarriers. We provide regional, inter-regional and national LTL services througha single integrated, union-free organization. Our service offerings, whichinclude expedited transportation, are provided through an expansive network ofservice centers located throughout the continental United States. Throughstrategic alliances, we also provide LTL services throughout North America. Inaddition to our core LTL services, we offer a range of value-added servicesincluding container drayage, truckload brokerage and supply chain consulting.More than 98% of our revenue has historically been derived from transporting LTLshipments for our customers, whose demand for our services is generally tied toindustrial production and the overall health of the U.S. domestic economy.In analyzing the components of our revenue, we monitor changes and trends in ourLTL volumes and LTL revenue per hundredweight. While LTL revenue perhundredweight is a yield measurement, it is also a commonly-used indicator forgeneral pricing trends in the LTL industry. This yield metric is not a truemeasure of price, however, as it can be influenced by many other factors, suchas changes in fuel surcharges, weight per shipment and length of haul. As aresult, changes in revenue per hundredweight do not necessarily indicate actualchanges in underlying base rates. LTL revenue per hundredweight and the keyfactors 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

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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

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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 tonnagegrowth within our existing infrastructure. Increases in density allow us tomaximize our asset utilization and labor productivity, which we measure overmany different functional areas of our operations including linehaul loadfactor, 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 toour focus on density and operating efficiencies, it is critical for us to obtainan appropriate yield, which is measured as revenue per hundredweight, on theshipments we handle to offset our cost inflation and support our ongoinginvestments in capacity and technology. We regularly monitor the components ofour pricing, including base freight rates, accessorial charges and fuelsurcharges. The fuel surcharge is generally designed to offset fluctuations inthe cost of our petroleum-based products and is indexed to diesel fuel pricespublished by the U.S. 20
--------------------------------------------------------------------------------Department of Energy, which reset each week. We believe our yield managementprocess focused on individual account profitability, and ongoing improvements inoperating efficiencies, are both key components of our ability to produceprofitable growth.Our primary cost elements are direct wages and benefits associated with themovement of freight, operating supplies and expenses, which include diesel fuel,and depreciation of our equipment fleet and service center facilities. We gaugeour overall success in managing costs by monitoring our operating ratio, ameasure of profitability calculated by dividing total operating expenses byrevenue, which also allows for industry-wide comparisons with our competition.We regularly upgrade our technological capabilities to improve our customerservice and lower our operating costs. Our technology provides our customerswith visibility of their shipments throughout our network, increases theproductivity of our workforce, and provides key metrics that we use to monitorand enhance our processes.Results of Operations

The following table sets forth, for the years indicated, expenses and otheritems as a percentage of revenue from operations:

 2021 2020Revenue from operations 100.0 % 100.0 %Operating expenses:Salaries, wages and benefits 47.0 51.2Operating supplies and expenses 10.8 9.3General supplies and expenses 2.6 2.7Operating taxes and licenses 2.5 2.9Insurance and claims 1.0 1.1Communication and utilities 0.7 0.8Depreciation and amortization 4.9 6.5Purchased transportation 3.5 2.4Miscellaneous expenses, net 0.5 0.5Total operating expenses 73.5 77.4Operating income 26.5 22.6Interest expense, net 0.0 0.1Other expense, net 0.1 0.1Income before income taxes 26.4 22.4Provision for income taxes 6.7 5.6Net income 19.7 % 16.8 %

Key financial and operating metrics for 2021 and 2020 are presented below:

 2021 2020 Change % ChangeWork days 252 254 (2 ) (0.8 )Revenue (in thousands) $ 5,256,328 $ 4,015,129 $ 1,241,199 30.9Operating ratio 73.5 % 77.4 %Net income (in thousands) $ 1,034,375 $ 672,682 $ 361,693 53.8Diluted earnings per share $ 8.89 $ 5.68 $ 3.21 56.5LTL tons (in thousands) 10,119 8,770 1,349 15.4LTL shipments (in thousands) 12,880 10,869 2,011 18.5LTL weight per shipment (lbs.) 1,571 1,614 (43 ) (2.7 )LTL revenue per hundredweight $ 25.59 $ 22.62 $ 2.97 13.1LTL revenue per shipment $ 402.01 $ 364.94 $ 37.07 10.2LTL revenue per intercity mile $ 7.32 $ 6.42 $ 0.90 14.0LTL intercity miles (in thousands) 707,611 617,805 89,806 14.5Average length of haul (miles) 935 925 10 1.1Our financial results for 2021 reflect the highest annual revenue andprofitability in our Company's history. We believe the increase in our annualrevenue to $5.3 billion in 2021 was driven by the consistent execution of ourlong-term strategy of providing superior service to customers at a fair price,while continuing to invest in capacity and technology to support the increasedcustomer demand for our services. Our revenue growth reflects higher shipmentvolumes and further improvements in our yield, both of which were supported bythe strength of the domestic economy. The increased freight density in ourservice center network and improvement in our yield, combined with improvedoperating efficiencies, led to the 390 basis-point improvement in our operatingratio to 73.5% 21
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for 2021 as compared to 2020. As a result, net income and earnings per dilutedshare increased by 53.8% and 56.5%, respectively, in 2021 as compared to 2020.

Revenue

Revenue increased $1.24 billion, or 30.9%, in 2021 compared to 2020, due toincreases in both our LTL tonnage and LTL revenue per hundredweight. Theincrease in tonnage resulted from higher LTL shipment volumes that werepartially offset by a decrease in LTL weight per shipment. Our LTL weight pershipment declined due primarily to our continuing efforts to reduce the numberof heavy-weighted and larger, harder-to-handle types of shipments in ournetwork. We believe the increase in LTL shipments was driven by higher customerdemand for our superior service, coupled with our available network capacity andthe strength of the U.S. domestic economy.Our LTL revenue per hundredweight increased 13.1% in 2021 compared to 2020. Webelieve the increase in LTL revenue per hundredweight was driven by the successof our long-term pricing strategy as well as changes in mix of our freight. Theincrease also reflects the positive impact of a decline in weight per shipmentand an increase in average length of haul on this metric. Excluding fuelsurcharges, LTL revenue per hundredweight increased 8.8% in 2021 compared to2020.January 2022 UpdateRevenue per day increased 25.7% in January 2022 compared to the same month lastyear. LTL tons per day increased 7.7%, due primarily to a 10.2% increase in LTLshipments per day that was offset by a 2.2% decrease in LTL weight per shipment.LTL revenue per hundredweight increased 16.8% as compared to the same month lastyear. LTL revenue per hundredweight, excluding fuel surcharges, increased 11.0%as compared to the same month last year.

Operating Costs and Other Expenses

Salaries, wages, and benefits increased $414.1 million, or 20.2%, in 2021 ascompared to 2020, due to a $272.0 million increase in the costs attributable tosalaries and wages and a $142.1 million increase in employee benefit costs. Theincrease in salaries and wages was due primarily to increases in the averagenumber of active full-time employees and increases in our employees' wage rates.Our average number of active full-time employees increased 3,034, or 15.9%,during 2021 as compared to 2020. We believe our full-time employee headcountwill continue to increase as we hire employees to balance our workforce withongoing growth in customer demand and shipment trends. Our employees' salariesand wages also increased as a result of the annual wage increases provided toour employees in September 2021, as well as higher performance-basedcompensation.Our productive labor costs, which include wages for drivers, platform employees,and fleet technicians, improved as a percent of revenue to 25.1% in 2021compared to 27.8% in 2020. This improvement includes the impact of increases inour linehaul laden load average and P&D shipments per hour as we increaseddensity across our network, as well as declines in our platform shipments perhour as we trained our new employees. Our other salaries and wages as a percentof revenue also decreased to 9.3% in 2021 as compared to 10.4% in 2020.The increase in the costs attributable to employee benefits of $142.1 million,or 27.4%, includes the impact of the increase in the number of full-timeemployees eligible for our benefits. Our employee benefit costs also increaseddue to additional holiday pay benefits provided in 2021 and increases in certainretirement benefit plan costs directly linked to our net income. In addition,our group health and dental costs increased due to increases in costs per claim,as well as higher claim volumes per covered employee. As a result of these costincreases, our employee benefit costs as a percent of salaries and wagesincreased to 36.6% in 2021 from 33.8% in 2020.Operating supplies and expenses increased $194.2 million, or 52.0%, in 2021 ascompared to 2020, due primarily to an increase in our costs for diesel fuel. Thecost of diesel fuel, excluding fuel taxes, represents the largest component ofoperating supplies and expenses, and can vary based on both the average priceper gallon and consumption. The increase in our diesel fuel costs was primarilydue to a 60.3% increase in our average cost per gallon of diesel fuel during2021. In addition, our gallons consumed increased 13.5% in 2021 as compared to2020 due to an increase in miles driven. We do not use diesel fuel hedginginstruments; therefore, our costs are subject to market price fluctuations. Ourother operating supplies and expenses remained relatively consistent as apercent of revenue between the periods compared.Depreciation and amortization costs were relatively consistent in 2021 ascompared to 2020. While our capital expenditures were significantly higher in2021 compared to 2020, our 2021 depreciation and amortization costs wereimpacted by our planned reduction in capital expenditures for revenue equipmentin 2020 as we balanced our fleet with volumes, as well as delays in receipt ofcertain revenue equipment included in our 2021 capital expenditure plan. Webelieve depreciation costs will increase in future periods as we execute our2022 capital expenditure plan. While our investments in real estate, equipment,and technology can increase our costs in the short-term, we believe theseinvestments are necessary to support our continued long-term growth andstrategic initiatives. 22--------------------------------------------------------------------------------Purchased transportation expense increased $87.8 million, or 89.7%, in 2021 ascompared to 2020, due primarily to an increase in our use of third-partytransportation providers to supplement our workforce and equipment as demand forour services increased. We expect to continue to purchase supplementaltransportation services until the capacity of our team and fleet can fullysupport our anticipated growth.

Our effective tax rate in 2021 was 25.5% as compared to 25.4% in 2020. Oureffective tax rate generally exceeds the federal statutory rate due to theimpact of state taxes and, to a lesser extent, certain other non-deductibleitems.

Liquidity and Capital Resources

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A summary of our cash flows is presented below:

(In thousands) 2021 2020Cash and cash equivalents at beginning of year $ 401,430 $ 403,571Cash flows provided by (used in):Operating activities 1,212,606 933,024Investing activities (455,288 ) (551,663 )Financing activities (696,184 ) (383,502 )Increase (decrease) in cash and cash equivalents 61,134 (2,141 )Cash and cash equivalents at end of year $ 462,564 $ 

401,430

The increase in our cash flows provided by operating activities during 2021 ascompared to 2020 was impacted by an increase in our income before income taxesof $487.1 million, which was partially offset by an increase in income taxespaid of $86.3 million and fluctuations in certain working capital accounts.The decrease in our cash flows used in investing activities during 2021 ascompared to 2020 was due primarily to proceeds from the maturities of ourshort-term investments in excess of purchases, partially offset by increases inreal estate and equipment purchases under our capital expenditure plan for 2021as compared to 2020. Changes in our capital expenditure plans are more fullydescribed below in "Capital Expenditures".The increase in our cash flows used in financing activities during 2021 ascompared to 2020 was due primarily to increases in share repurchases and cashdividends paid to shareholders. These increases were partially offset byreductions in proceeds from debt issuances and scheduled principal paymentsduring 2021 as compared to 2020. Our return of capital to shareholders is morefully described below under "Stock Repurchase Program" and "Dividends toShareholders".We have five primary sources of available liquidity: cash flows from operations,our existing cash and cash equivalents, short-term investments, availableborrowings under our second amended and restated credit agreement with WellsFargo Bank, National Association serving as administrative agent for thelenders, 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 intoon May 4, 2020 (the "Note Agreement"). Our Credit Agreement and the NoteAgreement are described in more detail below under "Financing Arrangements". Webelieve we also have sufficient access to debt and equity markets to provideother sources of liquidity, if needed.

Capital Expenditures

The table below sets forth our net capital expenditures for property andequipment, including those obtained through noncash transactions, for the yearsended December 31, 2021 and 2020:

 December 31,(In thousands) 2021 2020Land and structures $ 252,155 $ 181,221Tractors 130,772 17,518Trailers 140,595 2,151Technology 17,139 11,925

Other equipment and assets 25,450 12,266Less: Proceeds from sales (19,548 ) (3,690 )Total

 $ 546,563 $ 221,391Our capital expenditures vary based upon the projected increase in the numberand size of our service center facilities necessary to support our plan forlong-term growth, our planned tractor and trailer replacement cycle, andforecasted tonnage and shipment growth. Expenditures for land and structures canbe dependent upon the availability of land in the geographic areas where we are 23--------------------------------------------------------------------------------looking to expand. We historically spend 10% - 15% of our revenue on capitalexpenditures each year. Our 2020 capital expenditures were lower than normal,particularly with respect to revenue equipment and real estate, due to economicuncertainty as a result of the COVID-19 pandemic. We expect to continue tomaintain a high level of capital expenditures in order to support our long-termplan for market share growth.We currently estimate capital expenditures will be approximately $825 millionfor the year ending December 31, 2022. Approximately $300 million is allocatedfor the purchase of service center facilities, construction of new servicecenter facilities or expansion of existing service center facilities, subject tothe availability of suitable real estate and the timing of constructionprojects; approximately $485 million is allocated for the purchase of tractorsand trailers; and approximately $40 million is allocated for investments intechnology and other assets. We expect to fund these capital expendituresprimarily through cash flows from operations, our existing cash and cashequivalents, short-term investments and, ifneeded, borrowings available under our Credit Agreement or Note Agreement. Webelieve our current sources of liquidity will be sufficient to satisfy ourexpected capital expenditures for the next twelve months and in the longer term.

Stock Repurchase Program

On May 1, 2020, we announced that our Board of Directors had approved a two-yearstock 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 $350.0million repurchase program on May 29, 2020. On July 28, 2021, we announced thatour Board of Directors had approved a new stock repurchase program authorizingus to repurchase up to an aggregate of $2.0 billion of our outstanding commonstock (the "2021 Repurchase Program"). The 2021 Repurchase Program, which doesnot have an expiration date, began after the completion of the 2020 RepurchaseProgram.Under our repurchase programs, we may repurchase shares from time to time inopen market purchases or through privately negotiated transactions. Shares ofour common stock repurchased under our repurchase programs are canceled at thetime of repurchase and are classified as authorized but unissued shares of ourcommon stock.

At December 31, 2021, our stock repurchase programs had $2.02 billion remainingavailable, including $62.5 million that was deferred until final settlementoccurred on our accelerated share repurchase agreement in January 2022.Following final settlement, there is $1.96 billion remaining available anduncommitted.

Dividends to Shareholders

On February 21, 2020, we announced that our Board of Directors approved athree-for-two split of our common stock for shareholders of record as of theclose of business on the record date of March 10, 2020. On March 24, 2020, thoseshareholders received one additional share of common stock for every two sharesowned. In lieu of fractional shares, shareholders received a cash payment basedon the average of the high and low sales prices of our common stock on therecord date.

All references in this report to dividend amounts have been restatedretroactively to reflect this stock split.

Our Board of Directors also declared quarterly cash dividends that totaled $0.80per share for the year ended December 31, 2021 and quarterly cash dividends thattotaled $0.60 per share for the year ended December 31, 2020.

Financing Agreements

Note Agreement

The Note Agreement, which is uncommitted and subject to Prudential's solediscretion, provides for the issuance of senior promissory notes with anaggregate principal amount of up to $350.0 million through May 4, 2023. Pursuantto the Note Agreement, we issued $100.0 million aggregate principal amount ofsenior promissory notes (the "Series B Notes") on May 4, 2020. Borrowingavailability under the Note Agreement is reduced by the outstanding amount ofthe existing Series B Notes, and all other senior promissory notes issuedpursuant 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 May4, 2023 in equal installments of $20.0 million through May 4, 2027. The Series BNotes are senior unsecured obligations and rank pari passu with borrowings underour Credit Agreement or other senior promissory notes issued pursuant to theNote Agreement. 24
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Credit Agreement

The Credit Agreement provides for a five-year, $250.0 million senior unsecuredrevolving line of credit and a $150.0 million accordion feature, which if fullyexercised and approved, would expand the total borrowing capacity up to anaggregate of $400.0 million. Of the $250.0 million line of credit commitmentsunder the Credit Agreement, up to $100.0 million may be used for letters ofcredit.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 anapplicable margin (based on our ratio of net debt-to-total capitalization) thatranges from 0.000% to 0.375%. Letter of credit fees equal to the applicablemargin for LIBOR loans are charged quarterly in arrears on the daily averageaggregate 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 netdebt-to-total capitalization) are charged quarterly in arrears on the aggregateunutilized portion of the Credit Agreement.

For periods covered under the Credit Agreement, the applicable margin on LIBORloans and letter of credit fees were 1.000% and commitment fees were 0.100%.

The amounts outstanding and available borrowing capacity under the CreditAgreement are presented below:

 December 31,(In thousands) 2021 2020Facility limit $ 250,000 $ 250,000Line of credit borrowings - -

Outstanding letters of credit (39,169 ) (42,134 )Available borrowing capacity $ 210,831 $ 207,866

General Debt Provisions

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The Credit Agreement and Note Agreement contain customary covenants, includingfinancial covenants that require us to observe a maximum ratio of debt to totalcapital and a minimum fixed charge coverage ratio. The Credit Agreement and NoteAgreement also include a provision limiting our ability to make restrictedpayments, including dividends and payments for share repurchases, unless, amongother conditions, no defaults or events of default are ongoing (or would becaused by such restricted payment). We were in compliance with all covenants inour outstanding debt instruments for the period ended December 31, 2021.We do not anticipate financial performance that would cause us to violate anysuch covenants in the future, and we believe the combination of our existingCredit Agreement and Note Agreement along with our additional borrowing capacitywill be sufficient to meet foreseeable seasonal and long-term capital needs.The interest rate is fixed on the Note Agreement. Therefore, short-term exposureto fluctuations in interest rates is limited to our Credit Agreement. We do notcurrently use interest rate derivative instruments to manage exposure tointerest rate changes.

Contractual Obligations

The following table summarizes our significant contractual obligations as ofDecember 31, 2021: Payments due by periodContractual Obligations (1) Less than More than(In thousands) Total 1 year 1-3 years 3-5 years 5 yearsSeries B Notes $ 110,354 $ 3,100 $ 44,762 $ 42,281 $ 20,211Operating lease obligations (2) 121,248 16,909 29,130 21,746 53,463Purchase obligations and Other 120,344 104,589 15,755 - -Total $ 351,946 $ 124,598 $ 89,647 $ 64,027 $ 73,674

(1) Contractual obligations include principal and interest on our Series B Notes;

operating leases consisting primarily of real estate and automotive leases;

and purchase obligations relating to non-cancellable purchase orders for (i)

equipment scheduled for delivery in 2022, and (ii) information technology

agreements. Please refer to the information regarding interest rates and the

balance on our revolving credit facility in this section above and also in

Note 2 of the Notes to the Financial Statements included in Item 8 of this

 report.

(2) Lease payments include lease extensions that are reasonably certain to be

 exercised. 25
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Critical Accounting Policies

In preparing our financial statements, we apply the following criticalaccounting policies that we believe affect our judgments and estimates ofamounts recorded in certain assets, liabilities, revenue and expenses. Thesecritical accounting policies, which are those that have, or are reasonablylikely to have, a material impact on our financial condition or results ofoperations, are further described in Note 1 of the Notes to the FinancialStatements included in Item 8 of this report.

Revenue Recognition

Our revenue is generated from providing transportation and related services tocustomers in accordance with the bill of lading ("BOL") contract, our generaltariff provisions and contractual agreements. Generally, our performanceobligations begin when we receive a BOL from a customer and are satisfied whenwe complete the delivery of a shipment and related services. We recognizerevenue for our performance obligations under our customer contracts over time,as our customers receive the benefits of our services in accordance withAccounting Standards Update ("ASU") 2014-09. With respect to services notcompleted at the end of a reporting period, we use a percentage of completionmethod to allocate the appropriate revenue to each separate reporting period.Under this method, we develop a factor for each uncompleted shipment by dividingthe actual number of days in transit at the end of a reporting period by thatshipment's standard delivery time schedule. This factor is applied to the totalrevenue for that shipment and revenue is allocated between reporting periodsaccordingly. A hypothetical change of 10% in our percentage of completionestimate would not have a material effect on our recorded revenue.

Claims and Insurance Accruals

Claims and insurance accruals reflect the estimated cost of various claims,including those related to bodily injury/property damage ("BIPD") and workers'compensation. All related costs associated with BIPD claims are charged toinsurance and claims expense, and all related costs associated with workers'compensation claims are charged to employee benefits expense.Insurers providing excess coverage above a company's self-insured retention ordeductible levels typically adjust their premiums to cover insured losses andfor other market factors. As a result, we periodically evaluate our self-insuredretention and deductible levels to determine the most cost-efficient balancebetween our exposure and excess coverage.In establishing accruals for claims and expenses, we evaluate and monitor eachclaim individually, and we use factors such as historical claims developmentexperience, known trends and third-party actuarial estimates to determine theappropriate reserves for potential liabilities. We believe the assumptions andmethods used to estimate these liabilities are reasonable; however, any changesin the severity or number of reported claims, significant changes in medicalcosts and regulatory changes affecting the administration of our plans couldsignificantly impact the determination of appropriate reserves in futureperiods. Our accrued liability for insurance, BIPD claims, and workers'compensation claims totaled $126.4 million and $120.6 million at December 31,2021 and 2020, respectively. Claims and insurance accruals are discussed furtherin Note 1 of the Notes to the Financial Statements included in Item 8 of thisreport.Property and EquipmentProperty and equipment are recorded at cost and depreciated on a straight-linebasis over their estimated economic lives. We use historical experience, certainassumptions and estimates in determining the economic life of each asset. Whenindicators of impairment exist, we review property and equipment for impairmentdue to changes in operational and market conditions, and we adjust the carryingvalue and economic life of any impaired asset as appropriate.Estimated economic lives for structures are 7 to 30 years, revenue equipment is4 to 15 years, other equipment is 2 to 20 years, and leasehold improvements arethe lesser of the economic life of the leasehold improvement or the remaininglife of the lease. The use of different assumptions, estimates or significantchanges in the resale market for our equipment could result in material changesin the carrying value and related depreciation of our assets. Depreciationexpense in 2021 totaled $259.9 million. A hypothetical change of 1% in theestimated useful lives of all depreciable assets would not have a materialimpact on our financial results.

Inflation

Most of our expenses are affected by inflation, which typically results inincreased operating costs. In response to fluctuations in the cost of petroleumproducts, particularly diesel fuel, we generally include a fuel surcharge in ourtariffs and contractual agreements. The fuel surcharge is designed to offset thecost of diesel fuel above a base price and fluctuates as diesel fuel priceschange from the base, which is generally indexed to the DOE's published fuelprices that reset each week. Volatility in the price of diesel fuel, independentof inflation, has impacted our business, as described in this report. However,we do not believe inflation has had a material effect on our results ofoperations for any of the past three years. 26--------------------------------------------------------------------------------
Related Party TransactionsFamily RelationshipsJohn R. Congdon, Jr., a member of our Board of Directors, is the cousin of DavidS. Congdon, Executive Chairman of our Board of Directors. Our employmentagreement with David S. Congdon is incorporated by reference as an exhibit tothis Annual Report on Form 10-K. We regularly disclose the amount ofcompensation that we pay to these individuals, as well as the compensation paidto any of their family members employed by us that from time to time may requiredisclosure, in the proxy statement for our Annual Meeting of Shareholders.

Audit Committee Approval

The Audit Committee of our Board of Directors reviews and approves all relatedperson transactions in accordance with our Related Person Transactions Policy.

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