OLD DOMINION FREIGHT LINE, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
This Management's Discussion and Analysis of Financial Condition and Results of Operations generally discusses our 2021 and 2020 results and year-to-year comparisons between 2021 and 2020. Discussions of our 2019 results and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2020, which was filed with the Securities and Exchange Commissionon February 24, 2021.
We are one of the largest North American less-than-truckload ("LTL") motor carriers. We provide regional, inter-regional and national LTL services through a single integrated, union-free organization. Our service offerings, which include expedited transportation, are provided through an expansive network of service centers located throughout the continental
United States. Through strategic alliances, we also provide LTL services throughout North America. In addition to our core LTL services, we offer a range of value-added services including container drayage, truckload brokerage and supply chain consulting. More than 98% of our revenue has historically been derived from transporting LTL shipments for our customers, whose demand for our services is generally tied to industrial production and the overall health of the U.S.domestic economy. In analyzing the components of our revenue, we monitor changes and trends in our LTL volumes and LTL revenue per hundredweight. While LTL revenue per hundredweight is a yield measurement, it is also a commonly-used indicator for general pricing trends in the LTL industry. This yield metric is not a true measure of price, however, as it can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment and length of haul. As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates. LTL revenue per hundredweight and the key factors that can impact this metric are described in more detail below:
• LTL revenue per quintal – Our LTL transport services are
price generally based on weight, product and distance. This
the measure 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
Inc. Light and bulky cargo usually has a higher class and its price is
revenue per quintal higher than dense and heavy freight. Fuel
surcharges, ancillary charges, revenue adjustments and revenue for
undelivered freight is included in this measurement. Income for
undelivered freight is reported for financial statement purposes in
in accordance with our revenue recognition policy; however, we believe
including it in our measures of revenue per quintal results in greater
accurate representation of the underlying changes in our returns in
match the total revenues invoiced with the corresponding weight of those
• LTL Weight Per Shipment – Fluctuations in weight per shipment may indicate
changes in the composition of the 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 increased economic activity overall. Weight changes by
shipping may also be influenced by changes between LTL and other modes of transportation.
transportation, such as truckload and intermodal, in response to capacity,
service and price issues. Weight fluctuations per shipment in general
have an opposite effect on our turnover per quintal, such as a decrease in
weight per shipment will typically cause an increase in revenue per hundredweight.
• Average transport length: we consider transport lengths less than 500 miles
be regional traffic, haul lengths between 500 miles and 1,000 miles
be inter-regional traffic and haul lengths greater than 1,000 miles
be domestic traffic. This metric is used to analyze our tonnage and
price trends for shipments with similar characteristics, and also allows
for purposes of comparison with other transportation providers serving
markets. By analyzing this metric, we can determine success and growth
potential of our service products in these markets. The length changes of
transport generally have a direct effect on our turnover per quintal, because
an increase in trip length will generally lead to an increase in revenue
• LTL revenue per shipment – This metric is primarily determined by the
three measurements listed above and is used in conjunction with the number of
LTL shipments we receive to assess LTL revenue.
Our primary revenue focus is to increase density, which is shipment and tonnage growth within our existing infrastructure. Increases in density allow us to maximize our asset utilization and labor productivity, which we measure over many different functional areas of our operations including linehaul load factor, pickup and delivery ("P&D") stops per hour, P&D shipments per hour, platform pounds handled per hour and platform shipments per hour. In addition to our focus on density and operating efficiencies, it is critical for us to obtain an appropriate yield, which is measured as revenue per hundredweight, on the shipments we handle to offset our cost inflation and support our ongoing investments in capacity and technology. We regularly monitor the components of our pricing, including base freight rates, accessorial charges and fuel surcharges. The fuel surcharge is generally designed to offset fluctuations in the cost of our petroleum-based products and is indexed to diesel fuel prices published by the
Department of Energy, which reset each week. We believe our yield management process focused on individual account profitability, and ongoing improvements in operating efficiencies, are both key components of our ability to produce profitable growth. Our primary cost elements are direct wages and benefits associated with the movement of freight, operating supplies and expenses, which include diesel fuel, and depreciation of our equipment fleet and service center facilities. We gauge our overall success in managing costs by monitoring our operating ratio, a measure of profitability calculated by dividing total operating expenses by revenue, which also allows for industry-wide comparisons with our competition. We regularly upgrade our technological capabilities to improve our customer service and lower our operating costs. Our technology provides our customers with visibility of their shipments throughout our network, increases the productivity of our workforce, and provides key metrics that we use to monitor and enhance our processes. Results of Operations
The following table shows, for the years indicated, expenses and other items as a percentage of operating revenue:
2021 2020 Revenue from operations 100.0 % 100.0 % Operating expenses: Salaries, wages and benefits 47.0 51.2 Operating supplies and expenses 10.8 9.3 General supplies and expenses 2.6 2.7 Operating taxes and licenses 2.5 2.9 Insurance and claims 1.0 1.1 Communication and utilities 0.7 0.8 Depreciation and amortization 4.9 6.5 Purchased transportation 3.5 2.4 Miscellaneous expenses, net 0.5 0.5 Total operating expenses 73.5 77.4 Operating income 26.5 22.6 Interest expense, net 0.0 0.1 Other expense, net 0.1 0.1 Income before income taxes 26.4 22.4 Provision for income taxes 6.7 5.6 Net income 19.7 % 16.8 %
The main financial and operational indicators for 2021 and 2020 are presented below:
2021 2020 Change % Change Work days 252 254 (2 ) (0.8 ) Revenue (in thousands)
$ 5,256,328 $ 4,015,129 $ 1,241,19930.9 Operating ratio 73.5 % 77.4 % Net income (in thousands) $ 1,034,375 $ 672,682 $ 361,69353.8 Diluted earnings per share $ 8.89 $ 5.68 $ 3.21 56.5 LTLtons (in thousands) 10,119 8,770 1,349 15.4 LTLshipments (in thousands) 12,880 10,869 2,011 18.5 LTLweight per shipment (lbs.) 1,571 1,614 (43 ) (2.7 ) LTLrevenue per hundredweight $ 25.59 $ 22.62 $ 2.97 13.1 LTLrevenue per shipment $ 402.01 $ 364.94 $ 37.07 10.2 LTLrevenue per intercity mile $ 7.32 $ 6.42 $ 0.90 14.0 LTLintercity miles (in thousands) 707,611 617,805 89,806 14.5 Average length of haul (miles) 935 925 10 1.1 Our financial results for 2021 reflect the highest annual revenue and profitability in our Company's history. We believe the increase in our annual revenue to $5.3 billionin 2021 was driven by the consistent execution of our long-term strategy of providing superior service to customers at a fair price, while continuing to invest in capacity and technology to support the increased customer demand for our services. Our revenue growth reflects higher shipment volumes and further improvements in our yield, both of which were supported by the strength of the domestic economy. The increased freight density in our service center network and improvement in our yield, combined with improved operating efficiencies, led to the 390 basis-point improvement in our operating ratio to 73.5% 21
for 2021 compared to 2020. As a result, net earnings and diluted earnings per share increased by 53.8% and 56.5%, respectively, in 2021 compared to 2020.
$1.24 billion, or 30.9%, in 2021 compared to 2020, due to increases in both our LTL tonnage and LTL revenue per hundredweight. The increase in tonnage resulted from higher LTL shipment volumes that were partially offset by a decrease in LTL weight per shipment. Our LTL weight per shipment declined due primarily to our continuing efforts to reduce the number of heavy-weighted and larger, harder-to-handle types of shipments in our network. We believe the increase in LTL shipments was driven by higher customer demand for our superior service, coupled with our available network capacity and the strength of the U.S.domestic economy. Our LTL revenue per hundredweight increased 13.1% in 2021 compared to 2020. We believe the increase in LTL revenue per hundredweight was driven by the success of our long-term pricing strategy as well as changes in mix of our freight. The increase also reflects the positive impact of a decline in weight per shipment and an increase in average length of haul on this metric. Excluding fuel surcharges, LTL revenue per hundredweight increased 8.8% in 2021 compared to 2020. January 2022Update Revenue per day increased 25.7% in January 2022compared to the same month last year. LTL tons per day increased 7.7%, due primarily to a 10.2% increase in LTL shipments 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 last year. 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 as compared to 2020, due to a $272.0 millionincrease in the costs attributable to salaries and wages and a $142.1 millionincrease in employee benefit costs. The increase in salaries and wages was due primarily to increases in the average number 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 headcount will continue to increase as we hire employees to balance our workforce with ongoing growth in customer demand and shipment trends. Our employees' salaries and wages also increased as a result of the annual wage increases provided to our employees in September 2021, as well as higher performance-based compensation. Our productive labor costs, which include wages for drivers, platform employees, and fleet technicians, improved as a percent of revenue to 25.1% in 2021 compared to 27.8% in 2020. This improvement includes the impact of increases in our linehaul laden load average and P&D shipments per hour as we increased density across our network, as well as declines in our platform shipments per hour as we trained our new employees. Our other salaries and wages as a percent of 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-time employees eligible for our benefits. Our employee benefit costs also increased due to additional holiday pay benefits provided in 2021 and increases in certain retirement 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 cost increases, our employee benefit costs as a percent of salaries and wages increased to 36.6% in 2021 from 33.8% in 2020. Operating supplies and expenses increased $194.2 million, or 52.0%, in 2021 as compared to 2020, due primarily to an increase in our costs for 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 the average price per gallon and consumption. The increase in our diesel fuel costs was primarily due to a 60.3% increase in our average cost per gallon of diesel fuel during 2021. In addition, our gallons consumed increased 13.5% in 2021 as compared to 2020 due to an increase in miles driven. We do not use diesel fuel hedging instruments; therefore, our costs are subject to market price fluctuations. Our other operating supplies and expenses remained relatively consistent as a percent of revenue between the periods compared. Depreciation and amortization costs were relatively consistent in 2021 as compared to 2020. While our capital expenditures were significantly higher in 2021 compared to 2020, our 2021 depreciation and amortization costs were impacted by our planned reduction in capital expenditures for revenue equipment in 2020 as we balanced our fleet with volumes, as well as delays in receipt of certain revenue equipment included in our 2021 capital expenditure plan. We believe depreciation costs will increase in future periods as we execute our 2022 capital expenditure plan. While our investments in real estate, equipment, and technology can increase our costs in the short-term, we believe these investments are necessary to support our continued long-term growth and strategic initiatives. 22 -------------------------------------------------------------------------------- Purchased transportation expense increased $87.8 million, or 89.7%, in 2021 as compared to 2020, due primarily to an increase in our use of third-party transportation providers to supplement our workforce and equipment as demand for our services increased. We expect to continue to purchase supplemental transportation services until the capacity of our team and fleet can fully support our anticipated growth.
Our effective tax rate in 2021 was 25.5% compared to 25.4% in 2020. 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.
Cash and capital resources
A summary of our cash flows is shown below:
(In thousands) 2021 2020 Cash and cash equivalents at beginning of year
$ 401,430 $ 403,571Cash flows provided by (used in): Operating activities 1,212,606 933,024 Investing 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$
The increase in our cash flows provided by operating activities during 2021 as compared to 2020 was impacted by an increase in our income before income taxes of
$487.1 million, which was partially offset by an increase in income taxes paid of $86.3 millionand fluctuations in certain working capital accounts. The decrease in our cash flows used in investing activities during 2021 as compared to 2020 was due primarily to proceeds from the maturities of our short-term investments in excess of purchases, partially offset by increases in real estate and equipment purchases under our capital expenditure plan for 2021 as compared to 2020. Changes in our capital expenditure plans are more fully described below in "Capital Expenditures". The increase in our cash flows used in financing activities during 2021 as compared to 2020 was due primarily to increases in share repurchases and cash dividends paid to shareholders. These increases were partially offset by reductions in proceeds from debt issuances and scheduled principal payments during 2021 as compared to 2020. Our return of capital to shareholders is more fully described below under "Stock Repurchase Program" and "Dividends to Shareholders". We have five primary sources of available liquidity: cash flows from operations, our existing cash and cash equivalents, short-term investments, available borrowings under our second amended and restated credit agreement with Wells Fargo Bank, National Associationserving as administrative agent for the lenders, which we entered into on November 21, 2019(the "Credit Agreement"), and our Note Purchase and Private Shelf Agreement with PGIM, Inc.("Prudential") and certain affiliates and managed accounts of Prudential, which we entered into on May 4, 2020(the "Note Agreement"). Our Credit Agreement and the Note Agreement are described in more detail below under "Financing Arrangements". We believe we also have sufficient access to debt and equity markets to provide other sources of liquidity, if needed.
The table below shows our net capital expenditures for property, plant and equipment, including those obtained through non-cash transactions, for the years ended
December 31, (In thousands) 2021 2020 Land and structures
$ 252,155 $ 181,221Tractors 130,772 17,518 Trailers 140,595 2,151 Technology 17,139 11,925
Other equipment and assets 25,450 12,266 Less: Proceeds from sales (19,548 ) (3,690 ) Total
$ 546,563 $ 221,391Our capital expenditures vary based upon the projected increase in the number and size of our service center facilities necessary to support our plan for long-term growth, our planned tractor and trailer replacement cycle, and forecasted tonnage and shipment growth. Expenditures for land and structures can be dependent upon the availability of land in the geographic areas where we are 23 -------------------------------------------------------------------------------- looking to expand. We historically spend 10% - 15% of our revenue on capital expenditures each year. Our 2020 capital expenditures were lower than normal, particularly with respect to revenue equipment and real estate, due to economic uncertainty as a result of the COVID-19 pandemic. 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 $825 millionfor the year ending December 31, 2022. Approximately $300 millionis allocated for the purchase of service center facilities, construction of new service center facilities or expansion of existing service center facilities, subject to the availability of suitable real estate and the timing of construction projects; approximately $485 millionis allocated for the purchase of tractors and trailers; and approximately $40 millionis allocated for investments in technology and other assets. We expect to fund these capital expenditures primarily through cash flows from operations, our existing cash and cash equivalents, short-term investments and, if needed, borrowings available under our Credit Agreement or Note Agreement. We believe our current sources of liquidity will be sufficient to satisfy our expected capital expenditures for the next twelve months and in the longer term.
Share buyback program
May 1, 2020, we announced that our Board of Directors had approved a two-year stock repurchase program authorizing us to repurchase up to an aggregate of $700.0 millionof our outstanding common stock (the "2020 Repurchase Program"). The 2020 Repurchase Program became effective upon the termination of our $350.0 millionrepurchase program on May 29, 2020. On July 28, 2021, we announced that our Board of Directors had approved a new stock repurchase program authorizing us to repurchase up to an aggregate of $2.0 billionof our outstanding common stock (the "2021 Repurchase Program"). The 2021 Repurchase Program, which does not have an expiration date, began after the completion of the 2020 Repurchase Program. Under our repurchase programs, we may repurchase shares from time to time in open market purchases or through privately negotiated transactions. Shares of our common stock repurchased under our repurchase programs are canceled at the time of repurchase and are classified as authorized but unissued shares of our common stock.
Dividends to shareholders
February 21, 2020, we announced that our Board of Directors approved a three-for-two split of our common stock for shareholders of record as of the close of business on the record date of March 10, 2020. On March 24, 2020, those shareholders received one additional share of common stock for every two shares owned. In lieu of fractional shares, shareholders received a cash payment based on the average of the high and low sales prices of our common stock on the record date.
All references in this report to dividend amounts have been retroactively restated 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, 2021and quarterly cash dividends that totaled $0.60per share for the year ended December 31, 2020.
The Note Agreement, which is uncommitted and subject to Prudential's sole discretion, provides for the issuance of senior promissory notes with an aggregate principal amount of up to
$350.0 millionthrough May 4, 2023. Pursuant to the Note Agreement, we issued $100.0 millionaggregate principal amount of senior promissory notes (the "Series B Notes") on May 4, 2020. Borrowing availability under the Note Agreement is reduced by the outstanding amount of the existing Series B Notes, and all other senior promissory notes issued pursuant to the Note Agreement. The Series B Notes bear an annual interest rate of 3.10% and mature on May 4, 2027, unless prepaid. Principal payments are required annually beginning on May 4, 2023in equal installments of $20.0 millionthrough May 4, 2027. The Series B Notes are senior unsecured obligations and rank pari passu with borrowings under our Credit Agreement or other senior promissory notes issued pursuant to the Note Agreement. 24
The Credit Agreement provides for a five-year,
$250.0 millionsenior unsecured revolving line of credit and a $150.0 millionaccordion feature, which if fully exercised and approved, would expand the total borrowing capacity up to an aggregate of $400.0 million. Of the $250.0 millionline of credit commitments under the Credit Agreement, up to $100.0 millionmay be used for letters of credit. At our option, borrowings under the Credit Agreement bear interest at either: (i) LIBOR (including applicable successor provisions) plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from 1.000% to 1.375%; or (ii) a Base Rate, as defined in the Credit Agreement, plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from 0.000% to 0.375%. Letter of credit fees equal to the applicable margin for LIBOR loans are charged quarterly in arrears on the daily average aggregate stated amount of all letters of credit outstanding during the quarter. Commitment fees ranging from 0.100% to 0.175% (based upon the ratio of net debt-to-total capitalization) are charged quarterly in arrears on the aggregate unutilized portion of the Credit Agreement.
For the periods covered by the credit agreement, the applicable margin on LIBOR loans and letter of credit fees was 1.000% and the commitment fees were 0.100%.
The outstandings and the borrowing capacity available under the Credit Agreement are presented below:
December 31, (In thousands) 2021 2020 Facility limit
$ 250,000 $ 250,000Line of credit borrowings - -
Outstanding letters of credit (39,169 ) (42,134 ) Available borrowing capacity
General debt provisions
The Credit Agreement and Note Agreement contain customary covenants, including financial covenants that require us to observe a maximum ratio of debt to total capital and a minimum fixed charge coverage ratio. The Credit Agreement and Note Agreement also include a provision limiting our ability to make restricted payments, including dividends and payments for share repurchases, unless, among other conditions, no defaults or events of default are ongoing (or would be caused by such restricted payment). We were in compliance with all covenants in our outstanding debt instruments for the period ended
December 31, 2021. We do not anticipate financial performance that would cause us to violate any such covenants in the future, and we believe the combination of our existing Credit Agreement and Note Agreement along with our additional borrowing capacity will be sufficient to meet foreseeable seasonal and long-term capital needs. The interest rate is fixed on the Note Agreement. Therefore, short-term exposure to fluctuations in interest rates is limited to our Credit Agreement. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes.
The following table summarizes our significant contractual obligations as of
December 31, 2021: Payments due by period Contractual Obligations (1) Less than More than (In thousands) Total 1 year 1-3 years 3-5 years 5 years Series B Notes $ 110,354 $ 3,100 $ 44,762 $ 42,281 $ 20,211Operating lease obligations (2) 121,248 16,909 29,130 21,746 53,463 Purchase 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 mainly of property and automobile leases;
and purchase obligations relating to non-cancellable purchase orders for (i)
equipment scheduled for delivery in 2022, and (ii) information technology
The agreements. Please refer to the information regarding interest rates and
balance on our revolving credit facility in this section above and also in
Note 2 of the notes to the financial statements included in section 8 of this
(2) Rents include lease extensions of which it is reasonably certain
Critical accounting policies
In preparing our financial statements, we apply the following significant accounting policies which we believe affect our judgments and estimates of the amounts recognized in certain assets, liabilities, income and expenses. These critical accounting policies, which are those that have, or are reasonably likely to have, a material effect on our financial condition or results of operations, are described in more detail in note 1 of the notes to the financial statements included in point 8 of this report. .
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. A hypothetical change of 10% in our percentage of completion estimate would not have a material effect on our recorded revenue.
Insurance claims and provisions
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 to insurance 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 or deductible levels typically adjust their premiums to cover insured losses and for other market factors. As a result, we periodically evaluate our self-insured retention 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 actuarial estimates to determine the appropriate reserves for potential liabilities. We believe the assumptions and methods used to estimate these liabilities are reasonable; however, any changes in the severity or number of 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. Our accrued liability for insurance, BIPD claims, and workers' compensation claims totaled
$126.4 millionand $120.6 millionat December 31, 2021and 2020, respectively. Claims and insurance accruals are discussed further in Note 1 of the Notes to the Financial Statements included in Item 8 of this report. 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. Depreciation expense in 2021 totaled $259.9 million. A hypothetical change of 1% in the estimated useful lives of all depreciable assets would not have a material impact on our financial results.
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'spublished 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. 26 --------------------------------------------------------------------------------
Related Party Transactions Family Relationships
John R. Congdon, Jr., a member of our Board of Directors, is the cousin of David S. Congdon, Executive Chairman of our Board of Directors. Our employment agreement with David S. Congdonis incorporated by reference as an exhibit 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.
Audit Committee Approval
The Audit Committee of our Board of Directors reviews and approves all related party transactions in accordance with our Related Party Transactions Policy.
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