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 through a single integrated organization. Our service offerings, which include expedited transportation, are provided through an expansive network of service centers located throughout the continental United States. Through strategic alliances, we also provide LTL services throughout North America. In addition to our core LTL services, we offer a range of value-added services including container drayage, truckload brokerage and supply chain consulting. More than 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, 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 are committed to a disciplined yield management process that focuses 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:

		2018				2017				2016
Revenue from operations			100.0	%			100.0	%			100.0	%
Operating expenses:
Salaries, wages and benefits			51.3				53.7				55.2
Operating supplies and expenses			12.1				11.4				10.8
General supplies and expenses			2.9				3.2				2.9
Operating taxes and licenses			2.8				3.0				3.1
Insurance and claims			1.1				1.2				1.3
Communication and utilities			0.8				0.8				0.9
Depreciation and amortization			5.7				6.2				6.3
Purchased transportation			2.4				2.5				2.5
Building and office equipment rents			0.2				0.2				0.3
Miscellaneous expenses, net			0.5				0.7				0.5
Total operating expenses			79.8				82.9				83.8
Operating income			20.2				17.1				16.2
Interest (income) expense, net			(0.1	)			0.1				0.1
Other expense (income), net			0.1				(0.1	)			0.1
Income before income taxes			20.2				17.1				16.0
Provision for income taxes			5.2				3.3				6.1
Net income			15.0	%			13.8	%			9.9	%

Our financial results for 2018 reflected Company records in revenue and profitability, as we exceeded $4.0 billion of annual revenue with an operating ratio below 80.0%. We believe the increase in revenue during the year was driven by the continued strength of the domestic economy and consistent execution of our long-term strategy of providing industry-leading service to our customers at a fair price. These factors, combined with the increase in freight density in our service center network and our continued focus on improving operating efficiency, led to a 310 basis-point improvement in our operating ratio compared to 2017. As a result, our net income and diluted earnings per share increased 30.6% and 31.1%, respectively, in 2018 as compared to 2017.

2018 Compared to 2017

Key financial and operating metrics for 2018 and 2017 are presented below:

		2018				2017				Change				% Change
Work days			253				253				—				—
Revenue (in thousands)		$	4,043,695			$	3,358,112			$	685,583				20.4
Operating ratio			79.8	%			82.9	%
Net income (in thousands)		$	605,668			$	463,774			$	141,894				30.6
Diluted earnings per share		$	7.38			$	5.63			$	1.75				31.1
LTL tons (in thousands)			9,379				8,519				860				10.1
LTL shipments (in thousands)			11,748				10,736				1,012				9.4
LTL weight per shipment (lbs.)			1,597				1,587				10				0.6
LTL revenue per hundredweight		$	21.25			$	19.39			$	1.86				9.6
LTL revenue per shipment		$	339.35			$	307.66			$	31.69				10.3
LTL revenue per intercity mile		$	5.91			$	5.46			$	0.45				8.2
LTL intercity miles (in thousands)			674,506				605,204				69,302				11.5
Average length of haul (miles)			918				917				1				0.1

Revenue

Revenue increased $685.6 million, or 20.4% as compared to 2017, due to a $679.1 million increase in LTL revenue and a $6.5 million increase in non-LTL revenue. LTL revenue was higher in 2018 due to increases in both LTL tons and yield. The 10.1% increase in LTL tons during 2018 resulted from a 9.4% increase in LTL shipments and a 0.6% increase in LTL weight per shipment as compared to 2017. We believe these increases were driven by a stronger U.S. domestic economy and market share gains resulting from increased demand for the consistent levels of superior service that we provide to our customers.

LTL revenue per hundredweight increased 9.6% to $21.25 in 2018 as compared to 2017. We believe the continued increase in our revenue per hundredweight reflects our consistent yield management process and a favorable pricing environment that resulted from general capacity constraints in the transportation industry. Our LTL revenue and yield were also positively impacted by an increase in fuel surcharges in 2018 as compared to 2017. Excluding fuel surcharges, LTL revenue per hundredweight increased 6.9% in 2018 compared to 2017.

Most of our tariffs and contracts provide for a fuel surcharge that is generally indexed to the diesel fuel prices published by the DOE, which 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. As a percent of revenue, fuel surcharges increased to 13.3% in 2018 from 11.1% in 2017. This increase was due primarily to an increase in the average price per gallon for diesel fuel during 2018 as compared to 2017. We regularly monitor the components of our pricing, including base freight rates and fuel surcharges. We also address any individual account profitability issues with our customers as part of our effort to minimize the negative impact on our profitability that would likely result from a rapid and significant change in any of our operating expenses.

January 2019 Update

Revenue per day increased 8.3% in January 2019 compared to the same month last year. LTL tons per day decreased 1.5%, due primarily to a 4.4% decrease in weight per shipment that was slightly offset by a 3.0% increase in LTL shipments. LTL revenue per hundredweight increased approximately 9.8% as compared to the same month last year.

Operating Costs and Other Expenses

Salaries, wages and benefits increased $273.2 million, or 15.2% in 2018 due to a $201.6 million increase in salaries and wages and a $71.6 million increase in benefit costs. The increase in the costs attributable to salaries and wages was due primarily to an increase in the number of full-time employees and increases in our employees’ wages. Our average number of full-time employees increased 14.2% during 2018 as compared to 2017 to support our shipment growth. Salaries and wages also increased as a result of higher performance-based compensation and annual wage increases provided to our employees at the beginning of both September 2018 and September 2017. In addition, our costs were also impacted by productivity declines in our platform and P&D operations related to training of our new employees. Although our costs increased, our aggregate productive labor costs as a percent of revenue improved to 27.0% in 2018 compared to 28.3% in 2017. Our indirect salaries and wages as a percent of revenue also improved to 11.5% in 2018, compared to 12.0% in 2017.

Employee benefit costs increased $71.6 million or 15.9%, due primarily to the increase in our average number of full-time employees, enhancements to our employees’ paid time off benefits implemented in 2018, and higher 401(k) benefits directly linked to the increase in our net income. The change in our benefit costs was also impacted by a decrease in the costs of certain retirement benefits directly linked to the market price of our common stock, and lower workers’ compensation cost per employee in 2018 as compared to 2017. As a percent of salaries and wages, our benefit costs increased to 33.5% in 2018 compared to 33.2% in 2017.

Operating supplies and expenses increased $109.2 million, or 28.6% in 2018 as compared to 2017, due primarily to increased costs of diesel fuel. 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 increase in our diesel fuel costs, excluding fuel taxes, was due primarily to a 24.9% increase in our average cost per gallon of diesel fuel during 2018. In addition, our gallons consumed increased 10.8% in 2018 as compared to 2017 due primarily to an 11.1% increase in linehaul and P&D miles driven. We do not use diesel fuel hedging instruments; therefore our costs are subject to market price fluctuations.

Depreciation and amortization increased $24.6 million, or 12.0%, due primarily to the assets acquired as part of our 2017 and 2018 capital expenditure programs. We believe depreciation will continue to increase based on our 2019 capital expenditure program. While our investments in real estate, equipment, and technology can increase our costs in the short-term, we believe these investments are necessary to support our continued long-term growth and strategic initiatives.

Our effective tax rate in 2018 was 25.7% as compared to 19.5% in 2017. Our provision for income taxes in 2017 included a $104.9 million income tax benefit resulting from the revaluation of our deferred tax liabilities in connection with the passage of the Tax Act in December 2017. The Tax Act also lowered the federal statutory rate to 21% from 35% beginning in 2018. Our effective tax rate generally exceeds the federal statutory rate due to the impact of state taxes and, to a lesser extent, certain other non-deductible items.

2017 Compared to 2016

Key financial and operating metrics for 2017 and 2016 are presented below:

		2017				2016				Change				% Change
Work days			253				254				(1	)			(0.4	)
Revenue (in thousands)		$	3,358,112			$	2,991,517			$	366,595				12.3
Operating ratio			82.9	%			83.8	%
Net income (in thousands)		$	463,774			$	295,765			$	168,009				56.8
Diluted earnings per share		$	5.63			$	3.56			$	2.07				58.1
LTL tons (in thousands)			8,519				7,931				588				7.4
LTL shipments (in thousands)			10,736				10,148				588				5.8
LTL weight per shipment (lbs.)			1,587				1,563				24				1.5
LTL revenue per hundredweight		$	19.39			$	18.51			$	0.88				4.8
LTL revenue per shipment		$	307.66			$	289.36			$	18.30				6.3
LTL revenue per intercity mile		$	5.46			$	5.09			$	0.37				7.3
LTL intercity miles (in thousands)			605,204				576,953				28,251				4.9
Average length of haul (miles)			917				928				(11	)			(1.2	)

Revenue

Revenue increased $366.6 million, or 12.3% as compared to 2016, due to a $364.0 million increase in LTL revenue and a $2.6 million increase in non-LTL revenue. LTL revenue was higher in 2017 due to increases in both LTL tons and yield. The 7.4% increase in LTL tons during 2017 resulted from a 5.8% increase in LTL shipments and a 1.5% increase in LTL weight per shipment as compared to 2016. We believe our tonnage growth in 2017 was driven by a stronger economic environment and market share gains resulting from increased demand for the consistent levels of premium service that we provide to our customers.

LTL revenue per hundredweight increased 4.8% to $19.39 in 2017 as compared to 2016, despite the downward pressure on this metric created by the increase in our LTL weight per shipment and the decline in our average length of haul. We believe this increase in our LTL revenue per hundredweight reflected our continued focus on yield management which benefited from a favorable pricing environment. Our LTL revenue and yield were also positively impacted by an increase in fuel surcharges in 2017 as compared to 2016. Excluding fuel surcharges, LTL revenue per hundredweight increased 2.9% in 2017 as compared to 2016.

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. As a percent of revenue, fuel surcharges increased to 11.1% in 2017 from 9.5% in 2016. This increase was due primarily to an increase in the average price per gallon for diesel fuel during 2017 as compared to 2016. We regularly monitor the components of our pricing, including base freight rates and fuel surcharges. We also address any individual account profitability issues with our customers as part of our effort to minimize the negative impact on our profitability that would likely result from a rapid and significant change in any of our operating expenses.

Operating Costs and Other Expenses

Salaries, wages and benefits increased $150.4 million, or 9.1% in 2017, due to a $122.3 million increase in salaries and wages and a $28.1 million increase in benefit costs. The increase in the costs attributable to salaries and wages was due primarily to the 3.0% increase in the average number of full-time employees in 2017, annual wage increases provided to our employees in September 2016 and 2017 and higher performance-based compensation linked to our operating results. In addition, we paid a special bonus to all non-executive employees in December 2017 following passage of the Tax Act that totaled $9.8 million. Although our costs increased, our aggregate productive labor costs as a percent of revenue decreased to 28.3% for 2017 from 28.9% for 2016 and our other indirect salaries and wages as a percent of revenue decreased to 12.0% for 2017 from 12.2% for 2016.

Employee benefit costs increased $28.1 million or 6.7%, due primarily to an increase in our average number of full-time employees and higher wage rates, which led to higher payroll-related taxes and paid-time-off benefits. Our employee benefit costs also increased for certain retirement benefit plans directly linked to the improvement in our net income and the share price of our common stock. Our group health costs and workers’ compensation expenses decreased as a percent of salaries and wages, which contributed to the overall improvement in total employee benefit costs as a percent of salaries and wages to 33.2% for 2017 from 34.2% for 2016.

Operating supplies and expenses increased $58.8 million, or 18.2% in 2017 as compared to 2016, due primarily to increased costs of diesel fuel. 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 increase in our diesel fuel costs, excluding fuel taxes, was

due primarily to a 23.5% increase in our average cost per gallon of diesel fuel during 2017. In addition, our gallons consumed increased 4.3% in 2017 as compared to 2016 due primarily to a 4.5% increase in linehaul and P&D miles driven. We do not use diesel fuel hedging instruments, and our costs are therefore subject to market price fluctuations.

General supplies and expenses increased $21.1 million, or 24.4% in 2017 as compared to 2016. The increase was due primarily to an increase in our advertising and marketing costs and higher costs for technology and related support.

Depreciation and amortization increased $15.9 million, or 8.4% due primarily to the assets acquired as part of our 2016 and 2017 capital expenditure programs. These costs, however, were relatively consistent as a percent of revenue between the periods compared. 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.

Our effective tax rate in 2017 was 19.5% as compared to 38.1% in 2016. Our provision for income taxes in 2017 included a $104.9 million income tax benefit resulting from the revaluation of our deferred tax liabilities in connection with the passage of the Tax Act in December 2017. In addition, our effective tax rates for 2017 and 2016 were favorably impacted by various tax credits. Our effective tax rate generally exceeds the federal statutory rate due to the impact of state taxes and, to a lesser extent, certain other non-deductible items.

Liquidity and Capital Resources

A summary of our cash flows is presented below:

(In thousands)		2018				2017				2016
Cash and cash equivalents at beginning of year		$	127,462			$	10,171			$	11,472
Cash flows provided by (used in):
Operating activities			900,116				536,294				565,583
Investing activities			(580,391	)			(367,746	)			(407,400	)
Financing activities			(256,905	)			(51,257	)			(159,484	)
Increase (decrease) in cash and cash equivalents			62,820				117,291				(1,301	)
Cash and cash equivalents at end of year		$	190,282			$	127,462			$	10,171

The change in our cash flows provided by operating activities during 2018 as compared to 2017 was impacted by an increase in income before income taxes of $239.7 million, an increase in depreciation and amortization of $24.6 million, a decrease in income taxes paid of $29.4 million and fluctuations in certain working capital accounts.

The change in our cash flows provided by operating activities during 2017 was impacted by an increase in income before income taxes of $98.2 million and an increase in depreciation and amortization of $15.9 million. These increases were more than offset by an increase in income taxes paid of $76.0 million and other fluctuations in certain working capital accounts.

The changes in cash flows used in investing activities for all periods were due to the timing of equipment purchases under our capital expenditure plans. Changes in our capital expenditures are more fully described below in “Capital Expenditures.”

The changes in cash flows used in financing activities for all periods were due primarily to fluctuations in capital returned to shareholders and fluctuations in our long-term debt, which includes our senior unsecured revolving line of credit. Our financing arrangements are more fully described below under “Financing Agreements.” Our return of capital to shareholders is more fully described below under “Stock Repurchase Program” and “Dividends to Shareholders,” 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, 2018, 2017 and 2016:

		Year Ended December 31,
(In thousands)		2018				2017				2016
Land and structures		$	247,291			$	179,150			$	161,646
Tractors			185,209				123,152				114,166
Trailers			98,835				37,424				94,040
Technology			20,309				19,329				18,428
Other equipment and assets			36,648				23,070				29,661
Less: Proceeds from sales			(6,983	)			(12,240	)			(10,541	)
Total		$	581,309			$	369,885			$	407,400

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 $490 million for the year ending December 31, 2019. Approximately $220 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 $175 million is allocated for the purchase of tractors and trailers; and approximately $95 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

Our stock repurchase program, which was previously announced on May 23, 2016 and pursuant to which we could repurchase up to an aggregate of $250.0 million of our outstanding common stock, expired in accordance with its terms during the second quarter of 2018. On May 17, 2018, we announced that our Board of Directors had approved a new two-year stock repurchase program authorizing us to repurchase up to an aggregate of $250.0 million of our outstanding common stock (the “2018 Repurchase Program”). Under the 2018 Repurchase Program, which became effective upon the expiration of our prior stock repurchase program, we may repurchase shares from time to time in open market purchases or through privately negotiated transactions. Shares of our common stock repurchased under our repurchase programs are canceled at the time of repurchase and are classified as authorized but unissued shares of our common stock.

During the years ended December 31, 2018, 2017 and 2016, we repurchased 1,175,565, 91,921 and 2,062,841 shares of our common stock under our repurchase programs for an aggregate of $163.3 million, $8.0 million and $130.3 million, respectively. As of December 31, 2018, we had $131.7 million remaining authorized under the 2018 Repurchase Program.

Dividends to Shareholders

Our Board of Directors declared a cash dividend of $0.13 per share for each quarter of 2018 and a cash dividend of $0.10 per share for each quarter of 2017. We did not declare or pay any dividends on our common stock during 2016.

On February 7, 2019, we announced that our Board of Directors had declared a cash dividend of $0.17 per share of our common stock. The dividend is payable on March 20, 2019 to shareholders of record at the close of business on March 6, 2019. Although we intend to pay a quarterly cash dividend on our common stock for the foreseeable future, the declaration and amount of any future dividend is subject to approval by our Board of Directors, and is restricted by applicable state law limitations on distributions to shareholders as well as certain covenants under our revolving credit facility. We anticipate that any future quarterly cash dividends will be funded through cash flows from operations and, if needed, borrowings under our revolving credit facility.

Financing Agreements

We had one unsecured senior note agreement with a principal amount outstanding of $45.0 million and $95.0 million at December 31, 2018 and December 31, 2017, respectively. Our unsecured senior note agreement called for a scheduled principal

payment of $50.0 million, which was paid on January 3, 2018. A second scheduled principal payment of $45.0 million is due on January 3, 2021. Interest rates on the January 3, 2018 and January 3, 2021 scheduled principal payments were and are 4.00% and 4.79%, respectively. The effective average interest rate on our outstanding senior note agreement was 4.79% and 4.37% at December 31, 2018 and December 31, 2017, 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 fully 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.

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%. 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.

For periods covered under the Credit Agreement, the applicable margin on LIBOR loans and letter of credit fees were 1.0% and commitment fees were 0.125%.

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

		December 31,
(In thousands)		2018				2017
Facility limit		$	300,000			$	300,000
Line of credit borrowings			—				—
Outstanding letters of credit			(61,455	)			(71,368	)
Available borrowing capacity		$	238,545			$	228,632

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, 2018.

A significant decrease in demand for our services could limit our ability to generate cash flow and 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, 2018, 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, 2018:

		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		$	51,467			$	2,156			$	49,311			$	—			$	—
Operating lease obligations			108,709				12,502				23,560				16,026				56,621
Purchase obligations			196,625				193,429				2,203				993				—
Total		$	356,801			$	208,087			$	75,074			$	17,019			$	56,621

(1)

Contractual obligations include principal and interest on our senior notes; operating leases consisting primarily of real estate and automotive leases; and purchase obligations relating to non-cancellable purchase orders for equipment scheduled for delivery in 2019 and 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

Our revenue is generated from providing transportation and related services to customers in accordance with the bill of lading (“BOL”) contract, our general tariff provisions and contractual agreements. Generally, our performance obligations begin when we receive a BOL from a customer and are satisfied when we complete the delivery of a shipment and related services. We recognize revenue for our performance obligations under our customer contracts over time, as our customers receive the benefits of our services in accordance with Accounting Standards Update (“ASU”) 2014-09. With respect to 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. Payment terms vary by customer and are short-term in nature.

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 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 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 any 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 2018. Our employment agreement with Earl E. Congdon (which expired in accordance with its terms on November 1, 2018) and our employment agreement with David S. Congdon are incorporated by reference as exhibits to this Annual Report on Form 10-K. We regularly disclose the amount of compensation that we pay to these individuals, as well as the compensation paid to any of their family members employed by us that from time to time may require disclosure, in the proxy statement for our Annual Meeting of Shareholders.

Transactions with Old Dominion Truck Leasing, Inc.

Prior to 2018, we utilized the services of Old Dominion Truck Leasing, Inc. (“Leasing”), leased property to Leasing, and collaborated with Leasing for the purchase of certain equipment and fuel. Leasing, which historically had been primarily engaged in the business of leasing tractors, trailers and other vehicles as well as providing contract dedicated fleet services, was acquired by Penske Truck Leasing during the third quarter of 2017 (the “Penske Acquisition”). Prior to the Penske Acquisition, John R. Congdon, Jr. served as Leasing’s Chairman of the Board and CEO, and Earl E. Congdon and David S. Congdon each served on Leasing’s board of directors.

Our business relationships with Leasing, as well as the positions held at Leasing by John R. Congdon, Jr., Earl E. Congdon and David S. Congdon, ceased in the third quarter of 2017 in connection with the Penske Acquisition. Prior to the Penske Acquisition, we purchased $110,000 and $254,000 of maintenance and other services from Leasing in 2017 and 2016, respectively. In addition, we received $6,000 and $12,000 from Leasing for the rental of property in 2017 and 2016, 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.