Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading, less-than-truckload (“LTL”), union-free motor carrier providing regional, inter-regional and national LTL services, which include ground and air expedited transportation and consumer household pickup and delivery through a single integrated organization. In addition to our core LTL services, we offer a range of value-added services including container drayage, truckload brokerage, supply chain consulting and warehousing. More than 97% 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 services using the following key metrics, which exclude certain transportation and logistics services where pricing is generally not determined by weight, commodity or distance:

•

LTL Revenue Per Hundredweight - 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 better indicator of changes in this metric by matching total billed revenue with the corresponding weight of those shipments.

Revenue per hundredweight is a commonly-used indicator of pricing trends, but this metric can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment, length of haul and the class, or mix, of our freight. As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates.

•

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.

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. We manage our yields by focusing on individual account profitability. We believe yield management and improvements in efficiency are key components in 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 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 continually 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 years indicated, expenses and other items as a percentage of revenue from operations:

		2016			2015			2014
Revenue from operations		100.0	%		100.0	%		100.0	%
Operating expenses:
Salaries, wages and benefits		55.2			52.8			49.6
Operating supplies and expenses		10.8			11.9			15.5
General supplies and expenses		2.9			3.0			3.0
Operating taxes and licenses		3.1			3.1			3.0
Insurance and claims		1.3			1.3			1.3
Communication and utilities		0.9			0.9			0.9
Depreciation and amortization		6.3			5.6			5.3
Purchased transportation		2.5			3.9			4.6
Building and office equipment rents		0.3			0.3			0.4
Miscellaneous expenses, net		0.5			0.4			0.6
Total operating expenses		83.8			83.2			84.2
Operating income		16.2			16.8			15.8
Interest expense, net (1)		0.1			0.2			0.2
Other expense, net		0.1			0.1			0.1
Income before income taxes		16.0			16.5			15.5
Provision for income taxes		6.1			6.2			5.9
Net income		9.9	%		10.3	%		9.6	%

(1)	For the purpose of this table, interest expense is presented net of interest income.

Although our revenue for 2016 increased slightly, we believe demand for our service during 2016 was impacted by general weakness in the domestic economy. We believe that some shippers placed more emphasis on the cost of service in 2016 rather than our high-quality total value proposition, which also resulted in some freight diversion to lower cost carriers. We nonetheless remained committed to our pricing philosophy and focused on providing superior customer service during 2016. On-time deliveries were above 99% and our cargo claims ratio was below 0.3%. We continue to believe that providing superior service at a fair price will drive additional growth in market share for us, particularly in a strong economy.

We also maintained our long-term commitment to the continuous investment in our business in 2016. We spent $417.9 million on real estate, equipment and technology to increase the capacity of our network to accommodate future growth, while also meeting the increasing service demands of our customers. As a result of these investments and lower than expected revenue growth, certain operating costs as a percent of revenue increased during 2016. This led to a 60 basis-point increase in our operating ratio to 83.8% as compared to our Company record 83.2% in 2015. Net income decreased $8.9 million, or 2.9%, and diluted earnings per share decreased 0.3% to $3.56 in 2016 as compared to $3.57 in 2015.

2016 Compared to 2015

Key financial and operating metrics for 2016 and 2015 are presented below:

		2016				2015				Change				% Change
Work days		254				254				—				—
Revenue (in thousands)		$	2,991,517			$	2,972,442			$	19,075			0.6
Operating ratio		83.8		%		83.2		%
Net income (in thousands)		$	295,765			$	304,690			$	(8,925	)		(2.9	)
Diluted earnings per share		$	3.56			$	3.57			$	(0.01	)		(0.3	)
LTL tons (in thousands)		7,931				7,938				(7		)		(0.1	)
LTL shipments (in thousands)		10,148				10,129				19				0.2
LTL weight per shipment (lbs.)		1,563				1,567				(4		)		(0.3	)
LTL revenue per hundredweight		$	18.51			$	18.23			$	0.28			1.5
LTL revenue per shipment		$	289.36			$	285.67			$	3.69			1.3
LTL revenue per intercity mile		$	5.09			$	5.11			$	(0.02	)		(0.4	)
LTL intercity miles (in thousands)		576,953				566,210				10,743				1.9
Average length of haul (miles)		928				928				—				—

Revenue

Our revenue in 2016 increased $19.1 million, or 0.6% as compared to 2015 due to a $45.9 million increase in LTL revenue, partially offset by a $26.8 million reduction in non-LTL revenue. LTL revenue was higher in 2016 as a result of an increase in LTL revenue per hundredweight that was negatively impacted by a slight decline in LTL tonnage. The reduction in non-LTL revenue was primarily due to strategic changes in our container drayage and international freight forwarding service offerings that we initiated in the second half of 2015.

LTL revenue per hundredweight increased 1.5% to $18.51 in 2016 primarily due to our disciplined yield management process and a generally stable pricing environment. The increase in LTL revenue per hundredweight was negatively impacted by a decline in our fuel surcharges that reflected lower average diesel fuel prices. Excluding fuel surcharges, LTL revenue per hundredweight increased 2.6% in 2016 as compared to 2015.

Most of our tariffs and contracts provide for a fuel surcharge that is generally indexed to the DOE's published diesel fuel prices that reset each week. Our fuel surcharges are designed to offset fluctuations in the cost of petroleum-based products and are one of the many components included in the overall negotiated price we charge for our services. Fuel surcharge revenue decreased to 9.5% of revenue in 2016 from 10.4% in 2015, primarily due to a decrease in the average price per gallon for diesel fuel for those comparative periods. We regularly monitor the components of our pricing, including base freight rates and fuel surcharges, and our costs at the customer level. We address individual customer profitability issues to minimize the negative impact on our profitability that would likely result from a rapid and significant change in any of our operating expenses.

First Quarter 2017 Update

Total revenue per day for January 2017 increased 5.3% as compared to January 2016, which includes a 2.2% increase in LTL tons per day.

Operating Costs and Other Expenses

Salaries, wages and benefits increased $82.3 million, or 5.2% in 2016 due to a $47.1 million increase in salaries and wages and a $35.2 million increase in benefit costs. The increase in salaries and wages, excluding benefits, was due primarily to the impact of the annual wage increases provided to employees in September 2015 and 2016 and an increase in our direct labor costs to support our strategic reduction in purchased transportation. We implemented certain operational initiatives in the second half of 2015 to decrease our reliance on purchased transportation providers, but these changes increased our utilization of Company employees and equipment. These increases were partially offset by lower performance-based compensation linked to operating results as well as improvements in productivity. Platform pounds and platform shipments per hour improved 4.0% and 3.8%, respectively, in 2016 as compared to 2015. Both P&D stops and P&D shipments per hour remained consistent between the periods compared, while our linehaul laden load average declined 1.7% as compared to 2015. Our aggregate productive labor costs increased to 28.9% of revenue in 2016 as compared to 27.9% in 2015, while our other indirect salaries and wages increased to 12.2% of revenue in 2016 as compared to 11.9% in 2015.

Employee benefit costs increased $35.2 million, or 9.1% in 2016 compared to 2015, primarily due to higher costs for our group health and dental plans and an increase in certain retirement benefit plan costs that are directly linked to the market price of our common stock. Our group health and dental costs were higher in 2016 primarily due to a 5.8% increase in the average cost per covered employee as compared to 2015. As a result, our employee benefit costs increased to 34.2% of salaries and wages in 2016 as compared to 32.6% in 2015.

Operating supplies and expenses decreased $30.9 million in 2016 as compared to 2015. These costs as a percent of revenue improved to 10.8% of revenue in 2016 from 11.9% of revenue in 2015 primarily due to a reduction in fuel costs. The cost of diesel fuel, excluding fuel taxes, represents the largest component of operating supplies and expenses, and can vary based on both average price per gallon and consumption. The decrease in our diesel fuel costs, excluding fuel taxes, during 2016 was due primarily to a 13.4% decline in our average cost per gallon, while our fuel consumption remained relatively consistent between the periods compared despite the increase in miles driven. Our fuel consumption benefited from an overall improvement in miles per gallon, which continues to improve as we add newer, more fuel-efficient equipment to our operations. We do not use diesel fuel hedging instruments and are therefore subject to market price fluctuations. Other operating supplies and expenses, excluding diesel fuel, remained relatively consistent as a percent of revenue between the periods compared.

Depreciation and amortization increased $24.5 million due primarily to the assets acquired as part of our 2015 and 2016 capital expenditure programs. As a percent of revenue, our depreciation and amortization expense increased to 6.3% in 2016 compared to 5.6% in 2015. We believe depreciation will continue to increase based on our 2017 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 growth and strategic initiatives.

Purchased transportation decreased $42.2 million, or 36.3% in 2016 as compared to 2015. The decrease was due primarily to the strategic elimination of certain services in the second quarter of 2015 that reduced our use of third-party providers for the remainder of 2015 and throughout 2016. We continue to utilize purchased transportation services, when beneficial, to support our LTL services and other non-LTL services, including our container drayage and truckload brokerage services.

Our effective tax rate in 2016 was 38.1% as compared to 37.8% in 2015. Our effective tax rates in 2016 and 2015 were favorably impacted by various tax credits. Our effective tax rate generally exceeds the federal statutory rate of 35% due to the impact of state taxes, and to a lesser extent, certain other non-deductible items.

2015 Compared to 2014

Key financial and operating metrics for 2015 and 2014 are presented below:

		2015				2014				Change				% Change
Work days		254				254				—				—
Revenue (in thousands)		$	2,972,442			$	2,787,897			$	184,545			6.6
Operating ratio		83.2		%		84.2		%
Net income (in thousands)		$	304,690			$	267,514			$	37,176			13.9
Diluted earnings per share		$	3.57			$	3.10			$	0.47			15.2
LTL tons (in thousands)		7,938				7,391				547				7.4
LTL shipments (in thousands)		10,129				9,073				1,056				11.6
LTL weight per shipment (lbs.)		1,567				1,629				(62		)		(3.8	)
LTL revenue per hundredweight		$	18.23			$	18.33			$	(0.10	)		(0.5	)
LTL revenue per shipment		$	285.67			$	298.65			$	(12.98	)		(4.3	)
LTL revenue per intercity mile		$	5.11			$	5.38			$	(0.27	)		(5.0	)
LTL intercity miles (in thousands)		566,210				503,923				62,287				12.4
Average length of haul (miles)		928				928				—				—

Revenue

Our revenue in 2015 increased $184.5 million, or 6.6% as compared to 2014. LTL tonnage increased 7.4% primarily due to an 11.6% increase in LTL shipments, although our tonnage growth was affected by a 3.8% decrease in weight per shipment. We attribute the decline in weight per shipment in 2015 to softening economic conditions and changes in the mix of our freight as compared to 2014.

LTL revenue per hundredweight decreased 0.5% to $18.23 in 2015, primarily due to declines in our fuel surcharges. LTL revenue per hundredweight, excluding fuel surcharges, increased 5.7% in 2015 as compared to 2014, which included the positive effect on this metric from a decrease in weight per shipment. We believe the increase in revenue per hundredweight, excluding fuel surcharges, reflected our continued commitment to a disciplined yield management process and a relatively stable pricing environment.

Most of our tariffs and contracts provide for a fuel surcharge that is generally indexed to the DOE's published diesel fuel prices that reset each week. Our fuel surcharges are designed to offset fluctuations in the cost of petroleum-based products and are one of the many components included in the overall negotiated price we charge for our services. Fuel surcharge revenue decreased to 10.4% of revenue in 2015 from 15.5% in 2014, primarily due to a decrease in the average price per gallon for diesel fuel for those comparative periods.

Operating Costs and Other Expenses

Salaries, wages and benefits increased $188.5 million, or 13.6% in 2015 due to a $143.6 million increase in salaries and wages and a $44.9 million increase in benefit costs. The increase in salaries and wages, excluding benefits, was primarily due to an increase in the average number of full-time employees of 2,063, or 13.5%, over 2014, as well as annual wage increases provided to our employees in September of 2014 and 2015. The increase in full-time employees was necessary to provide capacity for the increase in shipments during the year. We also implemented certain operational initiatives that decreased our reliance on purchased transportation providers and increased our utilization of Company employees and equipment. The additional freight density contributed to a slight improvement in our P&D and platform shipments per hour, which improved 1.1% and 1.8%, respectively, from 2014. Our aggregate productive labor costs increased to 27.9% of revenue in 2015 as compared to 25.8% in 2014, while our other salaries and wages increased to 11.9% of revenue in 2015 as compared to 11.5% in 2014.

Employee benefit costs increased $44.9 million, or 13.2%, primarily due to an increase in the number of full-time employees eligible for benefits, certain enhancements to paid-time-off benefits and an increase in our workers compensation expense. These increases were partially offset by a reduction in expense for certain retirement benefit plans directly linked to the share price of our common stock. Our group health costs increased in the fourth quarter of 2015 and continued to increase into 2016. Employee benefit costs in 2015 were 32.6% of salaries and wages as compared to 32.8% in 2014.

Operating supplies and expenses decreased $78.8 million in 2015 as compared to 2014. The cost of diesel fuel, excluding fuel taxes, represents the largest component of operating supplies and expenses, and can vary based on both average price per gallon and consumption. Our diesel fuel costs decreased primarily due to a 33.7% decrease in our average cost per gallon during 2015 as compared to the prior year. This decrease was partially offset by an increase in fuel consumption of 9.1%, primarily due to an 11.6% increase in linehaul and P&D miles driven. Our fuel consumption benefited from an overall improvement in miles per gallon, which continues to improve as we add newer, more fuel-efficient equipment to our operations. The additional fuel consumption resulted in an increase in fuel taxes, which increased our operating taxes and licenses.

Depreciation and amortization expenses increased $18.9 million primarily due to the assets acquired through our 2015 and 2014 capital expenditures. As a percent of revenue, our depreciation and amortization expense increased to 5.6% in 2015 compared to 5.3% in 2014.

Purchased transportation expense decreased $13.0 million, or 10.1%, in 2015 as compared to 2014. We primarily utilized purchased transportation services from third-party providers to support our container drayage, international freight-forwarding and truckload brokerage services. We also utilized purchased transportation to perform limited services in our LTL operations. The decrease in purchased transportation was primarily due to operational improvement initiatives to reduce our use of third-party providers for the movement of our customers’ shipments.

Our effective tax rate in 2015 was 37.8% as compared to 38.1% in 2014. Our effective tax rates in 2015 and 2014 were favorably impacted by various tax credits, including credits for the use of alternative fuel in our operations. Our effective tax rate generally exceeds the federal statutory rate of 35% 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:

(In thousands)		2016				2015				2014
Cash and cash equivalents at beginning of year		$	11,472			$	34,787			$	30,174
Cash flows provided by (used in):
Operating activities		565,583				553,880				391,674
Investing activities		(407,400		)		(437,617		)		(345,814		)
Financing activities		(159,484		)		(139,578		)		(41,247		)
(Decrease) increase in cash and cash equivalents		(1,301		)		(23,315		)		4,613
Cash and cash equivalents at end of year		$	10,171			$	11,472			$	34,787

The change in our cash flows provided by operating activities during 2016 was impacted by an increase in depreciation and amortization of $24.5 million as compared to 2015. This increase was partially offset by an $8.9 million decrease in net income as well as other fluctuations in certain working capital accounts.

The change in our cash flows provided by operating activities in 2015 as compared to 2014 was due primarily to fluctuations within our working capital accounts, which included changes in income taxes, customer receivables and certain accrued liabilities. In addition, an increase in our net income and higher depreciation and amortization expenses in 2015 as compared to 2014, as described above in “Results of Operations,” also resulted in increased cash flows provided by operating activities.

The changes in our cash flows used in investing activities for all periods were due primarily to fluctuations in our capital expenditure programs and proceeds from asset disposals each year. Changes in our capital expenditures are more fully described below in “Capital Expenditures.”

The changes in our cash flows used in financing activities for all periods were due primarily to increases in repurchases of our common stock, fluctuations in our senior unsecured revolving line of credit and scheduled principal payments under our long-term debt agreements. Our repurchases of common stock and financing arrangements are more fully described below in "Stock Repurchase Program" and "Financing Agreements," respectively.

We have three primary sources of available liquidity: cash and cash equivalents, cash flows from operations and available borrowings under our senior unsecured revolving credit agreement, which is described below. 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 capital leases, for the years ended December 31, 2016, 2015 and 2014:

		Year Ended December 31,
(In thousands)		2016				2015				2014
Land and structures		$	161,646			$	153,460			$	117,487
Tractors		114,166				128,911				91,750
Trailers		94,040				114,209				80,853
Technology		18,428				32,044				38,264
Other equipment and assets		29,661				36,987				39,326
Less: Proceeds from sales		(10,541		)		(24,442		)		(21,866		)
Total		$	407,400			$	441,169			$	345,814

Our capital expenditures varied based upon the projected increase in the number and size of our service center facilities 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 $385 million for the year ending December 31, 2017. Approximately $185 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 $155 million is allocated for the purchase of tractors and trailers; and approximately $45 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 and the use of our senior unsecured revolving credit facility. We believe our current sources of liquidity will be sufficient to satisfy our expected capital expenditures.

Stock Repurchase Program

During the second quarter of 2016, we completed our $200.0 million stock repurchase program, previously announced on November 10, 2014. On May 23, 2016, we announced that our Board of Directors had approved the 2016 Repurchase Program, under which we may repurchase up to $250.0 million of shares of our common stock 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 authorized but unissued shares of our common stock.

During the years ended December 31, 2016, 2015 and 2014, we repurchased 2,062,841, 1,682,419 and 70,620 shares of our common stock under our repurchase programs for an aggregate of $130.3 million, $114.1 million and $5.5 million, respectively. As of December 31, 2016, we had $200.0 million remaining authorized under the 2016 Repurchase Program.

Dividends to Shareholders

On February 2, 2017, we announced that our Board of Directors had declared a quarterly cash dividend of $0.10 per share payable on March 20, 2017, to shareholders of record at the close of business on March 6, 2017. We anticipate that the quarterly cash dividend will be funded through cash flow from operations and, if needed, borrowings under our revolving credit facility. Although we intend to pay a quarterly cash dividend on our common stock for the foreseeable future, the declaration of any future dividend is subject to approval by our Board of Directors, and is restricted by applicable state law limitations on distributions to shareholders, as well as certain covenants under our revolving credit facility. We did not declare or pay a dividend on our common stock in 2016 or 2015.

Financing Agreements

We have one unsecured senior note agreement with an amount outstanding of $95.0 million at December 31, 2016. At December 31, 2015, we had two unsecured senior note agreements with an aggregate amount outstanding of $120.0 million. The remaining unsecured senior note agreement calls for two scheduled principal payments of $50.0 million and $45.0 million on January 3, 2018 and January 3, 2021, respectively. Interest rates on the January 3, 2018 and January 3, 2021 scheduled principal payments are 4.00% and 4.79%, respectively. The effective average interest rates on our outstanding senior note agreements were 4.37% and 4.68% at December 31, 2016 and 2015, respectively.

On December 15, 2015, we entered into an amended and restated credit agreement with Wells Fargo Bank, National Association ("Wells Fargo") serving as administrative agent for the lenders (the "Credit Agreement"). The Credit Agreement originally provided for a five-year, $250.0 million senior unsecured revolving line of credit and a $100.0 million accordion feature, which, if exercised and approved, would expand the total borrowing capacity up to an aggregate of $350.0 million.

On September 9, 2016, we exercised a portion of the accordion feature and entered into an amendment to the Credit Agreement to increase the aggregate commitments from existing lenders by $50.0 million to an aggregate of $300.0 million. Of the $300.0 million line of credit commitments under the Credit Agreement, as amended, up to $100.0 million may be used for letters of credit and $30.0 million may be used for borrowings under the Wells Fargo Sweep Plus Loan Program (the "Sweep Program"). We utilize the Sweep Program to manage our daily cash needs, as it automatically initiates borrowings to cover overnight cash requirements primarily for working capital needs. The Credit Agreement matures on December 15, 2020.

At our option, borrowings under the Credit Agreement bear interest at either: (i) LIBOR plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from 1.0% to 1.50%; or (ii) a Base Rate plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from 0.0% to 0.5%. Loans under the Sweep Program bear interest at the LIBOR plus applicable margin rate. 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 0.125% to 0.2% (based upon the ratio of net debt-to-total capitalization) are charged quarterly in arrears on the aggregate unutilized portion of the Credit Agreement. Wells Fargo, as administrative agent, also receives an annual fee for providing administrative services.

For the year ended December 31, 2016, the applicable margin on LIBOR loans was 1.0% and commitment fees were 0.125%. For the year ended December 31, 2015, the applicable margin on LIBOR loans was 1.0% and commitment fees ranged from 0.125% to 0.175%. There were $74.6 million and $67.7 million of outstanding letters of credit at December 31, 2016 and 2015, respectively. Letter of credit fees remained at 1.0% during the years ended December 31, 2016 and 2015.

The amounts outstanding and remaining borrowing capacity under our revolving credit facilities are presented below:

		December 31,
(In thousands)		2016				2015
Facility limit		$	300,000			$	250,000
Line of credit borrowings		(9,975		)		(12,317		)
Outstanding letters of credit		(74,611		)		(67,719		)
Available borrowing capacity		$	215,414			$	169,964

With the exception of borrowings pursuant to the Credit Agreement, interest rates are fixed on all of our debt instruments. Therefore, short-term exposure to fluctuations in interest rates is limited to our line of credit facility. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes.

Our senior note agreement and Credit 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. Any future wholly-owned material domestic subsidiaries of the Company would be required to guarantee payment of all of our obligations under these agreements. The Credit Agreement also includes 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 December 31, 2016.

A significant decrease in demand for our services could limit our ability to generate cash flow and could also affect our profitability. Most of our debt agreements have covenants that require stated levels of financial performance, which if not achieved could cause acceleration of the payment schedules. As of December 31, 2016, we were in compliance with these covenants. We do not anticipate a significant decline in business levels or financial performance that would cause us to violate any such covenants in the future, and we believe the combination of our existing Credit Agreement along with our additional borrowing capacity will be sufficient to meet foreseeable seasonal and long-term capital needs.

Contractual Obligations

The following table summarizes our significant contractual obligations as of December 31, 2016:

		Payments due by period
Contractual Obligations (1)						Less than												More than
(In thousands)		Total				1 year				1-3 years				3-5 years				5 years
Senior Notes		$	107,700			$	4,156			$	55,311			$	48,233			$	—
Revolving credit facility		9,975				—				—				9,975				—
Operating lease obligations		61,647				12,340				14,208				7,129				27,970
Purchase obligations		6,158				2,854				3,304				—				—
Total		$	185,480			$	19,350			$	72,823			$	65,337			$	27,970

(1)

Contractual obligations include principal and interest on our senior notes; borrowings under our Credit Agreement; operating leases consisting primarily of real estate leases; and non-cancellable purchase obligations related to 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.

Critical Accounting Policies

In preparing our financial statements, we apply the following critical accounting policies that we believe affect our judgments and estimates of amounts recorded in certain assets, liabilities, revenue and expenses. These critical accounting policies are further described in Note 1 of the Notes to the Financial Statements included in Item 8 of this report.

Revenue Recognition

We recognize revenue based upon when our transportation services have been completed in accordance with the bill of lading contract, our general tariff provisions or contractual agreements with our customers. Generally, this occurs when we complete the delivery of a shipment. For transportation services not completed at the end of a reporting period, we use a percentage of completion method to allocate the appropriate revenue to each separate reporting period. Under this method, we develop a factor for each uncompleted shipment by dividing the actual number of days in transit at the end of a reporting period by that shipment’s standard delivery time schedule. This factor is applied to the total revenue for that shipment and revenue is allocated between reporting periods accordingly.

Allowances for Uncollectible Accounts and Revenue Adjustments

We maintain an allowance for uncollectible accounts for estimated losses resulting from the failure of our customers to make required payments. We estimate this allowance by analyzing the aging of our customer receivables, our historical loss experience and other trends and factors affecting the credit risk of our customers. We determine customer receivables to be past due when payment has not been received by the invoice due date. Write-offs occur when we determine an account to be uncollectible and could differ from our allowance estimate as a result of factors such as changes in the overall economic environment or risks surrounding our customers. Additional allowances may be required if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments. We periodically review the underlying assumptions in our estimate of the allowance for uncollectible accounts to ensure that the allowance reflects the most recent trends and factors.

We also maintain an allowance for estimated revenue adjustments resulting from future billing corrections, customer allowances, money-back service guarantees and other miscellaneous revenue adjustments. These revenue adjustments are recorded in our revenue from operations. We use historical experience, trends and current information to update and evaluate these estimates.

Claims and Insurance Accruals

Claims and insurance accruals reflect the estimated cost of claims not covered by insurance for cargo loss and damage, BIPD, workers’ compensation, group health and dental. The related costs are charged to insurance and claims expense except for workers’ compensation, group health and dental, which are charged to employee benefits expense.

Insurers providing excess coverage above a company's self-insured retention ("SIR") or deductible levels typically adjust their premiums to cover insured losses and for other market factors. As a result, we periodically evaluate our SIR and deductible levels to determine the most cost-efficient balance between our exposure and excess coverage.

In establishing accruals for claims and expenses, we evaluate and monitor each claim individually, and we use factors such as historical claims development experience, known trends and third-party estimates to determine the appropriate reserves for potential liability. We believe the assumptions and methods used to estimate these liabilities are reasonable; however, any changes in the severity of previously-reported claims, significant changes in medical costs and regulatory changes affecting the administration of our plans could significantly impact the determination of appropriate reserves in future periods.

Property and Equipment

Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated economic lives. We use historical experience, certain assumptions and estimates in determining the economic life of each asset. When indicators of impairment exist, we review property and equipment for impairment due to changes in operational and market conditions, and we adjust the carrying value and economic life of any impaired asset as appropriate.

Estimated economic lives for structures are 7 to 30 years; revenue equipment is 4 to 15 years; other equipment is 2 to 20 years; and leasehold improvements are the lesser of the economic life of the leasehold improvement or the remaining life of the lease. The use of different assumptions, estimates or significant changes in the resale market for our equipment could result in material changes in the carrying value and related depreciation of our assets.

Inflation

Most of our expenses are affected by inflation, which typically results in increased operating costs. In response to fluctuations in the cost of petroleum products, particularly diesel fuel, we generally include a fuel surcharge in our tariffs and contractual agreements. The fuel surcharge is designed to offset the cost of diesel fuel above a base price and fluctuates as diesel fuel prices change from the base, which is generally indexed to the DOE’s published fuel prices that reset each week. Volatility in the price of diesel fuel, independent of inflation, has impacted our business, as described in this report. However, we do not believe inflation has had a material effect on our results of operations for each of the past three years.

Related Party Transactions

Family Relationships

Each of Earl E. Congdon, David S. Congdon and John R. Congdon, Jr. are related to one another and served in various management positions and/or on our Board of Directors during 2016. Our employment agreements with Earl E. Congdon and David S. Congdon are incorporated by reference as exhibits to this report. We regularly disclose the amount of compensation that we pay to these individuals, as well as any of their family members employed by us and whose compensation from time to time may require disclosure, in the proxy statement for our Annual Meeting of Shareholders.

Transactions with Old Dominion Truck Leasing, Inc.

Old Dominion Truck Leasing, Inc. (“Leasing”) is a North Carolina corporation whose voting stock is beneficially owned by members of the Congdon family. Leasing is primarily engaged in the business of leasing tractors, trailers and other vehicles as well as providing contract dedicated fleet services. John R. Congdon, Jr. serves as Chairman of the Board of Directors of Leasing. Earl E. Congdon and David S. Congdon currently serve as members of Leasing’s Board of Directors. From time to time, we have collaborated with Leasing for the purchase of certain equipment and fuel. Our collaboration with Leasing for the purchase of fuel ended in the fourth quarter of 2015.

We purchased $254,000, $313,000 and $298,000 of maintenance and other services from Leasing in 2016, 2015 and 2014, respectively. We intend to continue to purchase maintenance and other services from Leasing, provided that Leasing’s

prices continue to be favorable to us. We received $12,000, $12,000 and $17,500 from Leasing for the rental of property in 2016, 2015 and 2014, respectively.

Audit Committee Approval

The Audit Committee of our Board of Directors reviewed and approved all of the related person transactions described above in accordance with our Related Person Transactions Policy.