MARTEN TRANSPORT LTD - Quarter Report: 2019 September (Form 10-Q)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated condensed financial statements.

MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these consolidated condensed financial statements.

MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

 (Unaudited)

The accompanying notes are an integral part of these consolidated condensed financial statements.  

MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

 (Unaudited)

The accompanying notes are an integral part of these consolidated condensed financial statements.  

MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these consolidated condensed financial statements.

MARTEN TRANSPORT, LTD.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019

(Unaudited)

(1) Consolidated Condensed Financial Statements

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements, and therefore do not include all information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, such statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our consolidated financial condition, results of operations and cash flows for the interim periods presented. The results of operations for any interim period do not necessarily indicate the results for the full year. The unaudited interim consolidated condensed financial statements should be read with reference to the consolidated financial statements and notes to consolidated financial statements in our 2018 Annual Report on Form 10-K.

(2) Adoption of New Accounting Standard

We adopted Financial Accounting Standards Board, or FASB, Accounting Standards Update No. 2016-02, Leases (Accounting Standards Codification, or ASC, 842), as of January 1, 2019, using the modified retrospective approach. In addition, we elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.

Adoption of the new standard resulted in the recording of additional operating lease assets and lease liabilities of approximately $1.1 million, respectively, as of January 1, 2019. The standard did not impact our consolidated net earnings and had no impact on cash flows.

The cumulative effect of the changes made to our consolidated condensed balance sheet on January 1, 2019 for the adoption of the new leasing standard was as follows:

              The impact of the adoption of the new leasing standard on our consolidated condensed balance sheet as of September 30, 2019 was as follows:

(3) Earnings per Common Share

Basic and diluted earnings per common share were computed as follows:  

Options totaling 209,300 and 318,600 equivalent shares for each of the three-month and nine-month periods ended September 30, 2019, respectively, and 119,500 equivalent shares for each of the three-month and nine-month periods ended September 30, 2018, were outstanding but were not included in the calculation of diluted earnings per share because including the options in the denominator would be antidilutive, or decrease the number of weighted-average shares, due to their exercise prices exceeding the average market price of the common shares, or because inclusion of average unrecognized compensation expense in the calculation would cause the options to be antidilutive.

Unvested performance unit awards totaling 67,516 and 68,516 equivalent shares for each of the three-month and nine-month periods ended September 30, 2019, respectively, and 22,646 and 74,987 equivalent shares for each of the three-month and nine-month periods ended September, 30, 2018, respectively, were considered outstanding but were not included in the calculation of diluted earnings per share because inclusion of average unrecognized compensation expense in the calculation would cause the performance units to be antidilutive.

(4) Long-Term Debt

In August 2018, we entered into an amendment to our unsecured committed credit facility which reduces the aggregate principal amount of the facility from $40.0 million to $30.0 million and extends the term of the facility to August 2023. At September 30, 2019, there was no outstanding principal balance on the facility. As of that date, we had outstanding standby letters of credit to guarantee settlement of self-insurance claims of $15.7 million and remaining borrowing availability of $14.3 million. At December 31, 2018, there was also no outstanding principal balance on the facility. As of that date, we had outstanding standby letters of credit of $14.6 million on the facility. This facility bears interest at a variable rate based on the London Interbank Offered Rate or the lender’s Prime Rate, in each case plus/minus applicable margins. The interest rate for the facility that would apply to outstanding principal balances was 2.7% at September 30, 2019.

Our credit facility prohibits us from paying, in any fiscal year, stock redemptions and dividends in excess of 25% of our net income from the prior fiscal year. A waiver allowing stock redemptions and dividends in excess of the 25% limitation in a total amount of up to $65 million in 2019 was obtained from the lender in August 2019. This facility also contains restrictive covenants which, among other matters, require us to maintain compliance with cash flow leverage and fixed charge coverage ratios. We were in compliance with all covenants at September 30, 2019 and December 31, 2018.

(5) Related Party Transactions

We purchase fuel and tires and obtain related services from Bauer Built, Inc., or BBI. Jerry M. Bauer, the chairman of the board, chief executive officer and the principal stockholder of BBI, is one of our directors. We paid BBI $311,000 in the first nine months of 2019 and $233,000 in the first nine months of 2018 for fuel, tires and related services. In addition, we paid $1.2 million in the first nine months of 2019 and $2.0 million in the first nine months of 2018 to tire manufacturers for tires that were provided by BBI. BBI received commissions from the tire manufacturers related to these purchases.

We provide transportation services to MW Logistics, LLC (MWL) as described in Note 11.

(6) Leases

We lease facilities, drop yards, office space, land, chassis and equipment. All leases are classified as operating leases. We do not have any financing leases. Payments for operating leases that extend beyond 12 months are fixed.

Some leases include options to renew, with renewal terms that can extend the lease term from six months to three years or more. The exercise of lease renewal options is at our sole discretion and is considered in the determination of the operating lease assets and lease liabilities once reasonably certain of exercise.

Management has elected to apply the short-term lease exemption to leases with an initial term of 12 months or less and these leases are not capitalized. This primarily affects drop yards and chassis, for which we recognize lease expense on a straight-line basis over the lease term.

The classification of operating leases in our consolidated condensed balance sheet was as follows:

The maturity of the operating lease liabilities is as follows:

The weighted-average remaining lease term at September 30, 2019 was 39 months and at January 1, 2019 was 29 months. The weighted-average discount rate was 2.5% at September 30, 2019 and 2.1% at January 1, 2019. The operating leases identified do not contain implicit rates, accordingly, we use our incremental borrowing rate at the time of lease inception to determine the present value of lease payments.

Operating lease assets obtained in exchange for lease obligations in the nine months ended September 30, 2019 totaled $529,000. Cash paid for capitalized operating leases during the nine months ended September 30, 2019 was $459,000.

Total operating lease expense for the nine months ended September 30, 2019 was $1.3 million and is reported within other operating expenses in our consolidated condensed statements of operations. This amount includes $846,000 of short-term lease expense with an initial term of 12 months or less.

(7) Share Repurchase Program

In 2007, our Board of Directors approved, and we announced a share repurchase program to repurchase up to one million shares of our common stock either through purchases on the open market or through private transactions and in accordance with Rule 10b-18 of the Exchange Act. In 2015, our Board of Directors approved and we announced an increase in the share repurchase program, providing for the repurchase of up to $40 million, or approximately two million shares, of our common stock, which was increased by our Board of Directors to 3.3 million shares in August 2017 to reflect the five-for-three stock split effected in the form of a stock dividend on July 7, 2017. In August 2019, our Board of Directors approved and we announced an increase in our existing share repurchase program providing for the repurchase of up to $34 million, or approximately 1.8 million shares, of our common stock. The timing and extent to which we repurchase shares depends on market conditions and other corporate considerations. The repurchase program does not have an expiration date.

We repurchased and retired 200,000 shares of common stock for $3.8 million in the fourth quarter of 2018. We did not repurchase any shares in the first nine months of 2019 or in the rest of 2018. As of September 30, 2019, future repurchases of up to $34 million, or 1.8 million shares, were available in the share repurchase program.

(8) Dividends

In 2010, we announced that our Board of Directors approved a regular cash dividend program to our stockholders, subject to approval each quarter. We paid cash dividends totaling $40.4 million in the first three quarters of 2019 which consisted of a special dividend of $0.65 per share of common stock in September, along with quarterly cash dividends of $0.03 per share of common stock in each of the first three quarters of 2019. A quarterly cash dividend of $0.025 per share of common stock was declared in each of the first three quarters of 2018 and totaled $4.1 million.

Our ability to pay cash dividends is currently limited by restrictions contained in our revolving credit facility, which prohibits us from paying, in any fiscal year, stock redemptions and dividends in excess of 25% of our net income from the prior fiscal year. A waiver allowing stock redemptions and dividends in excess of the 25% limitation in a total amount of up to $65 million in 2019 was obtained from the lender in August 2019.

(9) Amendment of Marten Transport, Ltd. 2015 Equity Incentive Plan

At our 2019 Annual Meeting of Stockholders held on May 7, 2019, our stockholders approved an amendment to the Marten Transport, Ltd. 2015 Equity Incentive Plan, which was previously approved and adopted by our Board of Directors, subject to approval by our stockholders. The amendment increased the number of shares of common stock authorized for issuance under the Marten Transport, Ltd. 2015 Equity Incentive Plan by 1.3 million shares and the number of shares of common stock authorized for issuance pursuant to full-value awards by 558,334 shares. The amendment also adjusted certain numbers to reflect the stock split that occurred in July 2017.

(10) Accounting for Share-based Payment Arrangement Compensation

We account for share-based payment arrangements in accordance with FASB ASC 718, Compensation – Stock Compensation. During the first nine months of 2019, there were no significant changes to the structure of our stock-based award plans. Pre-tax compensation expense related to stock options and performance unit awards recorded in the first nine months of 2019 and 2018 was $1.4 million and $2.1 million, respectively.

(11) Equity Investment

We own a 45% equity interest in MWL, a third-party provider of logistics services to the transportation industry. A non-related party owns the other 55% equity interest in MWL. We account for our ownership interest in MWL under the equity method of accounting. We received $2.0 million and $4.6 million of our revenue for loads transported by our tractors and arranged by MWL in the first nine months of 2019 and 2018, respectively. As of September 30, 2019, we also had a trade receivable in the amount of $413,000 from MWL and an accrued liability of $1.9 million to MWL for the excess of payments by MWL’s customers into our lockbox account over the amounts drawn on the account by MWL.

(12) Fair Value of Financial Instruments

The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments.  

(13) Commitments and Contingencies

We are committed to new revenue equipment purchases of $41.3 million through the remainder of 2019 and of $1.6 million in 2020. Operating lease obligations through 2024 total $1.2 million.

We self-insure, in part, for losses relating to workers’ compensation, auto liability, general liability, cargo and property damage claims, along with employees’ health insurance with varying risk retention levels. We maintain insurance coverage for per-incident and total losses in excess of these risk retention levels in amounts we consider adequate based upon historical experience and our ongoing review, and reserve currently for the estimated cost of the uninsured portion of pending claims.

We are also involved in other legal actions that arise in the ordinary course of business. In the opinion of management, based upon present knowledge of the facts, it is remote that the ultimate outcome of any such legal actions will have a material adverse effect upon our long-term financial position or results of operations.

(14) Revenue and Business Segments

We combine our five current operating segments into four reporting segments (Truckload, Dedicated, Intermodal and Brokerage) for financial reporting purposes. These four reporting segments are also the appropriate categories for the disaggregation of our revenue under FASB ASC 606, Revenue from Contracts with Customers.

We have strategically transitioned from a refrigerated long-haul carrier to a multifaceted business offering a network of refrigerated and dry truck-based transportation capabilities across our five distinct business platforms – Truckload, Dedicated, Intermodal, Brokerage and MRTN de Mexico.

The primary source of our operating revenue is provided by our Truckload segment through a combination of regional short-haul and medium-to-long-haul full-load transportation services. We transport food and other consumer packaged goods that require a temperature-controlled or insulated environment, along with dry freight, across the United States and into and out of Mexico and Canada. Our agreements with customers are typically for one year.

Our Dedicated segment provides customized transportation solutions tailored to meet individual customers’ requirements, utilizing temperature-controlled trailers, dry vans and other specialized equipment within the United States. Our agreements with customers range from three to five years and are subject to annual rate reviews.

Generally, we are paid by the mile for our Truckload and Dedicated services. We also derive Truckload and Dedicated revenue from fuel surcharges, loading and unloading activities, equipment detention and other accessorial services. The main factors that affect our Truckload and Dedicated revenue are the rate per mile we receive from our customers, the percentage of miles for which we are compensated, the number of miles we generate with our equipment and changes in fuel prices. We monitor our revenue production primarily through average Truckload and Dedicated revenue, net of fuel surcharges, per tractor per week. We also analyze our average Truckload and Dedicated revenue, net of fuel surcharges, per total mile, non-revenue miles percentage, the miles per tractor we generate, our fuel surcharge revenue, our accessorial revenue and our other sources of operating revenue.

Our Intermodal segment transports our customers’ freight within the United States utilizing our temperature-controlled trailers on railroad flatcars for portions of trips, with the balance of the trips using our tractors or, to a lesser extent, contracted carriers. The main factors that affect our Intermodal revenue are the rate per mile and other charges we receive from our customers.

Our Brokerage segment develops contractual relationships with and arranges for third-party carriers to transport freight for our customers in temperature-controlled trailers and dry vans within the United States and into and out of Mexico through Marten Transport Logistics, LLC, which was established in 2007 and operates pursuant to brokerage authority granted by the United States Department of Transportation, or DOT. We retain the billing, collection and customer management responsibilities. The main factors that affect our Brokerage revenue are the rate per mile and other charges that we receive from our customers.

Operating results of our MRTN de Mexico business which offers our customers door-to-door service between the United States and Mexico with our Mexican partner carriers is reported within our Truckload and Brokerage segments.

Our customer agreements are typically for one-year terms except for our Dedicated agreements which range from three to five years with annual rate reviews. Under FASB ASC 606, the contract date for each individual load within each of our four reporting segments is generally the date that each load is tendered to and accepted by us. For each load transported within each of our four reporting segments, the entire amount of revenue to be recognized is a single performance obligation and our agreements with our customers detail the per-mile charges for line haul and fuel surcharges, along with the rates for loading and unloading, stop offs and drops, equipment detention and other accessorial services, which is the transaction price. There are no discounts that would be a material right or consideration payable to a customer. We are required to recognize revenue and related expenses over time, from load pickup to delivery, for each load within each of our four reporting segments. We base our calculation of the amount of revenue to record in each period for individual loads picking up in one period and delivering in the following period using the number of hours estimated to be incurred within each period applied to each estimated transaction price. Contract assets for this estimated revenue are classified within prepaid expenses and other within our consolidated condensed balance sheet as of September 30, 2019 and December 31, 2018. We had no impairment losses on contract assets in the first nine months of 2019 or in 2018. We bill our customers for loads after delivery is complete with standard payment terms of 30 days.

We account for revenue of our Intermodal and Brokerage segments and revenue on freight transported by independent contractors within our Truckload and Dedicated segments on a gross basis because we are the principal service provider controlling the promised service before it is transferred to each customer. We are primarily responsible for fulfilling the promise to provide each specified service to each customer. We bear the primary risk of loss in the event of cargo claims by our customers. We also have complete control and discretion in establishing the price for each specified service. Accordingly, all such revenue billed to customers is classified as operating revenue and all corresponding payments to carriers for transportation services we arrange in connection with brokerage and intermodal activities and to independent contractor providers of revenue equipment are classified as purchased transportation expense within our consolidated condensed statements of operations.

The following table sets forth for the periods indicated our operating revenue and operating income by segment. We do not prepare separate balance sheets by segment and, as a result, assets are not separately identifiable by segment.

Truckload segment depreciation expense was $13.7 million and $12.8 million, Dedicated segment depreciation expense was $9.0 million and $7.8 million, Intermodal segment depreciation expense was $1.2 million and $1.4 million, and Brokerage segment depreciation expense was $382,000 and $337,000 in the three-month periods ended September 30, 2019 and 2018, respectively.

Truckload segment depreciation expense was $40.1 million and $39.4 million, Dedicated segment depreciation expense was $25.4 million and $21.9 million, Intermodal segment depreciation expense was $3.7 million and $4.1 million, and Brokerage segment depreciation expense was $1.1 million and $960,000 in the nine-month periods ended September 30, 2019 and 2018, respectively.

(15) Use of Estimates

We must make estimates and assumptions to prepare the consolidated condensed financial statements in conformity with U.S. generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities in the consolidated condensed financial statements and the reported amount of revenue and expenses during the reporting period. These estimates are primarily related to insurance and claims accruals and depreciation. Ultimate results could differ from these estimates.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

              The following discussion and analysis of our financial condition and results of operations should be read together with the selected consolidated financial data and our consolidated condensed financial statements and the related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those included in our Form 10-K, Part 1, Item 1A for the year ended December 31, 2018. We do not assume, and specifically disclaim, any obligation to update any forward-looking statement contained in this report.

Overview

We have strategically transitioned from a refrigerated long-haul carrier to a multifaceted business offering a network of refrigerated and dry truck-based transportation capabilities across our five distinct business platforms – Truckload, Dedicated, Intermodal, Brokerage and MRTN de Mexico.

The primary source of our operating revenue is provided by our Truckload segment through a combination of regional short-haul and medium-to-long-haul full-load transportation services. We transport food and other consumer packaged goods that require a temperature-controlled or insulated environment, along with dry freight, across the United States and into and out of Mexico and Canada. Our agreements with customers are typically for one year.

Our Dedicated segment provides customized transportation solutions tailored to meet individual customers’ requirements, utilizing temperature-controlled trailers, dry vans and other specialized equipment within the United States. Our agreements with customers range from three to five years and are subject to annual rate reviews.

Generally, we are paid by the mile for our Truckload and Dedicated services. We also derive Truckload and Dedicated revenue from fuel surcharges, loading and unloading activities, equipment detention and other accessorial services. The main factors that affect our Truckload and Dedicated revenue are the rate per mile we receive from our customers, the percentage of miles for which we are compensated, the number of miles we generate with our equipment and changes in fuel prices. We monitor our revenue production primarily through average Truckload and Dedicated revenue, net of fuel surcharges, per tractor per week. We also analyze our average Truckload and Dedicated revenue, net of fuel surcharges, per total mile, non-revenue miles percentage, the miles per tractor we generate, our fuel surcharge revenue, our accessorial revenue and our other sources of operating revenue.

Our Intermodal segment transports our customers’ freight within the United States utilizing our temperature-controlled trailers on railroad flatcars for portions of trips, with the balance of the trips using our tractors or, to a lesser extent, contracted carriers. The main factors that affect our Intermodal revenue are the rate per mile and other charges we receive from our customers.

Our Brokerage segment develops contractual relationships with and arranges for third-party carriers to transport freight for our customers in temperature-controlled trailers and dry vans within the United States and into and out of Mexico through Marten Transport Logistics, LLC, which was established in 2007 and operates pursuant to brokerage authority granted by the DOT. We retain the billing, collection and customer management responsibilities. The main factors that affect our Brokerage revenue are the rate per mile and other charges that we receive from our customers.

Operating results of our MRTN de Mexico business which offers our customers door-to-door service between the United States and Mexico with our Mexican partner carriers is reported within our Truckload and Brokerage segments.

In addition to the factors discussed above, our operating revenue is also affected by, among other things, the United States economy, inventory levels, the level of truck and rail capacity in the transportation market, a contracting driver market, severe weather conditions and specific customer demand.

Our operating revenue increased $42.5 million, or 7.3%, in the first nine months of 2019 from the first nine months of 2018. Our operating revenue, net of fuel surcharges, increased $44.8 million, or 8.9%, compared with the first nine months of 2018. Truckload segment revenue, net of fuel surcharges, increased 2.1% from the first nine months of 2018 primarily due to increases in our average number of tractors and in our average revenue per tractor. Dedicated segment revenue, net of fuel surcharges, increased 19.0% from the first nine months of 2018, primarily due to fleet growth driven by an increase in the number of Dedicated contracts we have with our customers and an increase in our average revenue per tractor. Intermodal segment revenue, net of fuel surcharges, decreased 11.3% due to a reduced load volume. Brokerage segment revenue increased 33.7% due to increases in both volume and rates in the first nine months of 2019. Fuel surcharge revenue decreased to $76.4 million in the first nine months of 2019 from $78.8 million in the first nine months of 2018. A shift of a portion of line haul revenue to fuel surcharge revenue, which began in mid-first quarter of 2018 as a result of changes in a number of customer agreements, reduced our revenue excluding fuel surcharges by $12.8 million in the first nine months of 2019 and by $9.3 million in the first nine months of 2018, while increasing our fuel surcharge revenue by the same amounts.

Our profitability is impacted by the variable costs of transporting freight for our customers, fixed costs, and expenses containing both fixed and variable components. The variable costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and independent contractor costs, which are recorded under purchased transportation. Expenses that have both fixed and variable components include maintenance and tire expense and our cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency and other factors. Our main fixed costs relate to the acquisition and subsequent depreciation of long-term assets, such as revenue equipment and operating terminals. We expect our annual cost of tractor and trailer ownership will increase in future periods as a result of higher prices of new equipment, along with any increases in fleet size. Although certain factors affecting our expenses are beyond our control, we monitor them closely and attempt to anticipate changes in these factors in managing our business. For example, fuel prices have significantly fluctuated over the past several years. We manage our exposure to changes in fuel prices primarily through fuel surcharge programs with our customers, as well as through volume fuel purchasing arrangements with national fuel centers and bulk purchases of fuel at our terminals. To help further reduce fuel expense, we have installed and tightly manage the use of auxiliary power units in our tractors to provide climate control and electrical power for our drivers without idling the tractor engine, and also have improved the fuel usage in the temperature-control units on our trailers. For our Intermodal and Brokerage segments, our profitability is impacted by the percentage of revenue which is payable to the providers of the transportation services we arrange. This expense is included within purchased transportation in our consolidated condensed statements of operations.

Our operating income improved 13.6% to $57.7 million in the first nine months of 2019 from $50.8 million in the first nine months of 2018. Our operating expenses as a percentage of operating revenue, or “operating ratio,” improved to 90.8% in the first nine months of 2019 from 91.3% in the first nine months of 2018. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharges, improved to 89.5% in the first nine months of 2019 from 89.9% in the first nine months of 2018. Our net income improved 15.4% to $45.3 million, or $0.82 per diluted share, in the first nine months of 2019 from $39.3 million, or $0.71 per diluted share, in the first nine months of 2018.

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At September 30, 2019, we had $40.5 million of cash and cash equivalents, $582.9 million in stockholders’ equity and no long-term debt outstanding. In the first nine months of 2019, net cash flows provided by operating activities of $119.6 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $92.6 million, to pay cash dividends of $40.4 million, and to upgrade regional operating facilities in the amount of $2.1 million, resulting in a $16.3 million decrease in cash and cash equivalents. We estimate that capital expenditures, net of proceeds from dispositions, will be approximately $44 million in the remainder of 2019. We paid cash dividends totaling $40.4 million in the first three quarters of 2019 which consisted of a special dividend of $0.65 per share of common stock in September, along with quarterly cash dividends of $0.03 per share of common stock in each of the first three quarters of 2019. We believe our sources of liquidity are adequate to meet our current and anticipated needs for at least the next twelve months. Based upon anticipated cash flows, existing cash and cash equivalents balances, current borrowing availability and other sources of financing we expect to be available to us, we do not anticipate any significant liquidity constraints in the foreseeable future.

We continue to invest considerable time and capital resources to actively implement and promote long-term environmentally sustainable solutions that drive reductions in our fuel and electricity consumption and decrease our carbon footprint. These initiatives include (i) reducing idle time for our tractors by installing and tightly managing the use of auxiliary power units, which are powered by solar panels and provide climate control and electrical power for our drivers without idling the tractor engine, (ii) improving the energy efficiency of our newer, more aerodynamic and well-maintained tractor and trailer fleets by optimizing the equipment’s specifications, weight and tractor speed, equipping our tractors with automatic transmissions, converting the refrigeration units in our refrigerated trailers to the new, more-efficient CARB refrigeration units along with increasing the insulation in the trailer walls and installing trailer skirts, and using ultra-fuel efficient and wide-based tires, and (iii) upgrading all of our facilities to indoor and outdoor LED lighting along with converting all of our facilities to solar power by 2020. Additionally, we are an active participant in the United States EPA SmartWay Transport Partnership, in which freight shippers, carriers, logistics companies and other voluntary stakeholders partner with the EPA to measure, benchmark and improve logistics operations to reduce their environmental footprint.                            

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes discussions of operating revenue, net of fuel surcharge revenue; Truckload, Dedicated and Intermodal revenue, net of fuel surcharge revenue; operating expenses as a percentage of operating revenue, each net of fuel surcharge revenue; and net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads). We provide these additional disclosures because management believes these measures provide a more consistent basis for comparing results of operations from period to period. These financial measures in this report have not been determined in accordance with U.S. generally accepted accounting principles (GAAP). Pursuant to Item 10(e) of Regulation S-K, we have included the amounts necessary to reconcile these non-GAAP financial measures to the most directly comparable GAAP financial measures of operating revenue, operating expenses divided by operating revenue, and fuel and fuel taxes.

Results of Operations

The following table sets forth for the periods indicated certain operating statistics regarding our revenue and operations:

Comparison of Three Months Ended September 30, 2019 to Three Months Ended September 30, 2018

The following table sets forth for the periods indicated our operating revenue, operating income and operating ratio by segment, along with the change for each component:

Our operating revenue increased $15.3 million, or 7.7%, to $215.0 million in the 2019 period from $199.6 million in the 2018 period. Our operating revenue, net of fuel surcharges, increased $17.1 million, or 10.0%, to $188.9 million in the 2019 period from $171.8 million in the 2018 period. This increase was due to a $10.8 million increase in Dedicated revenue, net of fuel surcharges, a $6.4 million increase in Brokerage revenue, and a $2.4 million increase in Truckload revenue, net of fuel surcharges, partially offset by a $2.4 million decrease in Intermodal revenue, net of fuel surcharges. Fuel surcharge revenue decreased to $26.1 million in the 2019 period from $27.9 million in the 2018 period.

Truckload segment revenue increased $1.1 million, or 1.1%, to $95.0 million in the 2019 period from $93.9 million in the 2018 period. Truckload segment revenue, net of fuel surcharges, increased $2.4 million, or 2.9%, to $82.9 million in the 2019 period from $80.6 million in the 2018 period due to an increase in our average number of tractors partially offset by a decrease in our average revenue per tractor in the 2019 period. The increase in the operating ratio in the 2019 period was primarily due to an increase in salaries and wages as a percentage of revenue.

Dedicated segment revenue increased $11.5 million, or 19.6%, to $70.3 million in the 2019 period from $58.8 million in the 2018 period. Dedicated segment revenue, net of fuel surcharges, increased 22.2% primarily due to fleet growth driven by an increase in the number of Dedicated contracts we have with our customers and an increase in our average revenue per tractor. The improvement in the operating ratio for our Dedicated segment was primarily due to an increase in our average revenue per tractor along with multiple cost control measures.

Intermodal segment revenue decreased $3.6 million, or 14.0%, to $22.3 million in the 2019 period from $25.9 million in the 2018 period. Intermodal segment revenue, net of fuel surcharges, decreased 11.0% from the 2018 period due to a decrease in load volume. The increase in the operating ratio in the 2019 period was primarily due to increases in purchased transportation, net fuel expense and salaries and wages as a percentage of revenue.

Brokerage segment revenue increased $6.4 million, or 30.3%, to $27.4 million in the 2019 period from $21.0 million in the 2018 period due to increases in both volume and rates with our customers. The improvement in the operating ratio in the 2019 period was primarily due to multiple cost control measures.

The following table sets forth for the periods indicated the dollar and percentage increase or decrease of the items in our unaudited consolidated condensed statements of operations, and those items as a percentage of operating revenue:

Salaries, wages and benefits consist of compensation for our employees, including both driver and non-driver employees, employees’ health insurance, 401(k) plan contributions and other fringe benefits. These expenses vary depending upon the size of our Truckload, Dedicated and Intermodal tractor fleets, the ratio of company drivers to independent contractors, our efficiency, our experience with employees’ health insurance claims, changes in health care premiums and other factors. Salaries, wages and benefits expense increased $5.3 million, or 8.2%, in the 2019 period from the 2018 period. This increase resulted primarily from additional company driver compensation expense of $5.7 million, partially offset by a decrease in bonus compensation expense for our non-driver employees.

Purchased transportation consists of amounts payable to railroads and carriers for transportation services we arrange in connection with Brokerage and Intermodal operations and to independent contractor providers of revenue equipment. This category will vary depending upon the amount and rates, including fuel surcharges, we pay to third-party railroad and motor carriers, the ratio of company drivers versus independent contractors and the amount of fuel surcharges passed through to independent contractors. Purchased transportation expense increased $4.6 million in total, or 12.7%, in the 2019 period from the 2018 period. Amounts payable to carriers for transportation services we arranged in our Brokerage segment increased $5.4 million to $23.1 million in the 2019 period from $17.7 million in the 2018 period, primarily due to an increase in brokerage revenue. Amounts payable to railroads and drayage carriers for transportation services within our Intermodal segment decreased $1.6 million to $14.8 million in the 2019 period from $16.4 million in the 2018 period. This decrease was due to decreased intermodal revenue. The portion of purchased transportation expense related to independent contractors within our Truckload and Dedicated segments, including fuel surcharges, increased $720,000 in the 2019 period. We expect our purchased transportation expense to increase as we grow our Intermodal and Brokerage segments.

Fuel and fuel taxes decreased by $383,000, or 1.2%, in the 2019 period from the 2018 period. Net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads) increased $867,000, or 11.8%, to $8.2 million in the 2019 period from $7.3 million in the 2018 period. Fuel surcharges passed through to independent contractors, outside drayage carriers and railroads decreased to $3.0 million from $3.5 million in the 2018 period. Net fuel expense increased slightly to 5.1% of Truckload, Dedicated and Intermodal segment revenue, net of fuel surcharges, from 4.9% in the 2018 period. We have worked diligently to control fuel usage and costs by improving our volume purchasing arrangements and optimizing our drivers’ fuel purchases with national fuel centers, focusing on shorter lengths of haul, installing and tightly managing the use of auxiliary power units in our tractors to minimize engine idling and improving fuel usage in the temperature-control units on our trailers. Auxiliary power units, which we have installed in our company-owned tractors, provide climate control and electrical power for our drivers without idling the tractor engine.

Supplies and maintenance consist of repairs, maintenance, tires, parts, oil and engine fluids, along with load-specific expenses including loading/unloading, tolls, pallets and trailer hostling. Our supplies and maintenance expense increased $1.5 million, or 14.6%, from the 2018 period primarily due to higher outside repair and parts costs.

Depreciation relates to owned tractors, trailers, auxiliary power units, communication units, terminal facilities and other assets. The $2.0 million increase in depreciation was primarily due to an increase in the size of our fleet. We expect our annual cost of tractor and trailer ownership will increase in future periods as a result of higher prices of new equipment, which will result in greater depreciation over the useful life.

Insurance and claims consist of the costs of insurance premiums and accruals we make for claims within our self-insured retention amounts, primarily for personal injury, property damage, physical damage to our equipment, cargo claims and workers’ compensation claims. These expenses will vary primarily based upon the frequency and severity of our accident experience, our self-insured retention levels and the market for insurance. The $1.1 million increase in insurance and claims in the 2019 period was primarily due to an increase in the cost of physical damage claims related to our tractors and trailers. Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods which could materially impact our financial results depending on the frequency, severity and timing of claims.

Gain on disposition of revenue equipment increased to $2.6 million in the 2019 period from $1.8 million in the 2018 period primarily due to an increase in the number of tractors sold. Future gains or losses on dispositions of revenue equipment will be impacted by the market for used revenue equipment, which is beyond our control.

As a result of the foregoing factors, our operating income improved 5.5% to $20.0 million in the 2019 period from $19.0 million in the 2018 period. Our operating expenses as a percentage of operating revenue, or “operating ratio,” was 90.7% in the 2019 period and 90.5% in the 2018 period. The operating ratio for our Truckload segment was 92.7% in the 2019 period and 89.3% in the 2018 period, for our Dedicated segment was 85.9% in the 2019 period and 91.1% in the 2018 period, for our Intermodal segment was 94.6% in the 2019 period and 90.3% in the 2018 period, and for our Brokerage segment was 92.9% in the 2019 period and 94.2% in the 2018 period. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharges, increased to 89.4% in the 2019 period from 88.9% in the 2018 period.

The increase in our other non-operating income was primarily due to additional interest income earned in the 2019 period, partially offset by an operating loss in the 2019 period for MWL, a 45% owned affiliate.

Our effective income tax rate was 18.2% in the 2019 period and 20.2% in the 2018 period. The 2019 and 2018 periods included additional income tax benefits of $1.4 million and $630,000, respectively, resulting from certain discrete tax benefits included in our tax filings in the periods which were not previously recognized. These estimated benefits are net of reserves which are based on our evaluation of the current facts, circumstances and information available.

As a result of the factors described above, net income improved 8.7% to $16.6 million, or $0.30 per diluted share, in the 2019 period from $15.3 million, or $0.28 per diluted share, in the 2018 period.

Comparison of Nine Months Ended September 30, 2019 to Nine Months Ended September 30, 2018

The following table sets forth for the periods indicated our operating revenue, operating income and operating ratio by segment, along with the change for each component:

Our operating revenue increased $42.5 million, or 7.3%, to $626.1 million in the 2019 period from $583.6 million in the 2018 period. Our operating revenue, net of fuel surcharges, increased $44.8 million, or 8.9%, to $549.7 million in the 2019 period from $504.9 million in the 2018 period. This increase was due to a $26.3 million increase in Dedicated revenue, net of fuel surcharges, a $20.8 million increase in Brokerage revenue, and a $5.0 million increase in Truckload revenue, net of fuel surcharges, partially offset by a $7.2 million decrease in Intermodal revenue, net of fuel surcharges. Fuel surcharge revenue decreased to $76.4 million in the 2019 period from $78.8 million in the 2018 period. A shift of a portion of line haul revenue to fuel surcharge revenue, which began in mid-first quarter of 2018 as a result of changes in a number of customer agreements, reduced our revenue excluding fuel surcharges by $12.8 million in the 2019 period and by $9.3 million in the 2018 period, while increasing our fuel surcharge revenue by the same amounts.

Truckload segment revenue increased $1.4 million, or 0.5%, to $282.7 million in the 2019 period from $281.3 million in the 2018 period. Truckload segment revenue, net of fuel surcharges, increased $5.0 million, or 2.1%, to $246.3 million in the 2019 period from $241.3 million in the 2018 period primarily due to increases in our average number of tractors and in our average revenue per tractor in the 2019 period. The shift from line haul revenue to fuel surcharge revenue as a result of changes in a number of customer agreements decreased our Truckload revenue excluding fuel surcharges by $2.7 million in the 2019 period and by $2.1 million in the 2018 period, while increasing our fuel surcharge revenue by the same amounts. The increase in the operating ratio in the 2019 period was primarily due to an increase in salaries and wages as a percentage of revenue.

Dedicated segment revenue increased $30.5 million, or 18.5%, to $195.1 million in the 2019 period from $164.6 million in the 2018 period. Dedicated segment revenue, net of fuel surcharges, increased 19.0% primarily due to fleet growth driven by an increase in the number of Dedicated contracts we have with our customers and an increase in our average revenue per tractor. The shift from line haul revenue to fuel surcharge revenue as a result of changes in a number of customer agreements decreased our Dedicated revenue excluding fuel surcharges by $10.1 million in the 2019 period and by $7.2 million in the 2018 period, while increasing our fuel surcharge revenue by the same amounts. The improvement in the operating ratio for our Dedicated segment was primarily due to an increase in our average revenue per tractor, startup costs associated with new business that began in the 2018 period and multiple cost control measures.

Intermodal segment revenue decreased $10.2 million, or 13.4%, to $65.9 million in the 2019 period from $76.1 million in the 2018 period. Intermodal segment revenue, net of fuel surcharges, decreased 11.3% from the 2018 period due to a decrease in load volume. The increase in the operating ratio in the 2019 period was primarily due to increases in both salaries and wages and net fuel expense as a percentage of revenue.

Brokerage segment revenue increased $20.8 million, or 33.7%, to $82.4 million in the 2019 period from $61.6 million in the 2018 period due to increases in both volume and rates with our customers. The improvement in the operating ratio in the 2019 period was primarily due to a decrease in the amounts payable to carriers for transportation services which we arranged as a percentage of our Brokerage revenue along with multiple cost control measures.

The following table sets forth for the periods indicated the dollar and percentage increase or decrease of the items in our unaudited consolidated condensed statements of operations, and those items as a percentage of operating revenue:

Salaries, wages and benefits expense increased $15.3 million, or 8.2%, in the 2019 period from the 2018 period. This increase resulted primarily from additional company driver compensation expense of $14.2 million, partially offset by a decrease in bonus compensation expense for our non-driver employees.

Purchased transportation expense increased $11.4 million in total, or 10.8%, in the 2019 period from the 2018 period. Amounts payable to carriers for transportation services we arranged in our Brokerage segment increased $16.8 million to $68.6 million in the 2019 period from $51.7 million in the 2018 period, primarily due to an increase in brokerage revenue. Amounts payable to railroads and drayage carriers for transportation services within our Intermodal segment decreased $5.7 million to $42.9 million in the 2019 period from $48.7 million in the 2018 period. This decrease was due to decreased intermodal revenue. The portion of purchased transportation expense related to independent contractors within our Truckload and Dedicated segments, including fuel surcharges, increased $310,000 in the 2019 period. We expect our purchased transportation expense to increase as we grow our Intermodal and Brokerage segments.

Fuel and fuel taxes decreased by $2.5 million, or 2.7%, in the 2019 period from the 2018 period. Net fuel expense (fuel and fuel taxes net of fuel surcharge revenue and surcharges passed through to independent contractors, outside drayage carriers and railroads) decreased $1.8 million, or 7.6%, to $22.2 million in the 2019 period from $24.0 million in the 2018 period. Fuel surcharges passed through to independent contractors, outside drayage carriers and railroads decreased to $8.7 million from $10.3 million in the 2018 period. Net fuel expense decreased to 4.7% of Truckload, Dedicated and Intermodal segment revenue, net of fuel surcharges, from 5.4% in the 2018 period. The net fuel expense to revenue improved primarily due to a $12.8 million shift during the 2019 period of a portion of line haul revenue to fuel surcharge revenue as a result of changes in a number of customer agreements, compared with a $9.3 million shift to fuel surcharge revenue in the 2018 period. An increase in our revenue rate per mile in the 2019 period, along with a decrease in the United States Department of Energy national average cost of fuel to $3.06 per gallon from $3.15 per gallon in the 2018 period, further improved this ratio. We have worked diligently to control fuel usage and costs by improving our volume purchasing arrangements and optimizing our drivers’ fuel purchases with national fuel centers, focusing on shorter lengths of haul, installing and tightly managing the use of auxiliary power units in our tractors to minimize engine idling and improving fuel usage in the temperature-control units on our trailers. Auxiliary power units, which we have installed in our company-owned tractors, provide climate control and electrical power for our drivers without idling the tractor engine.

Our supplies and maintenance expense increased $3.5 million, or 11.1%, from the 2018 period primarily due to higher outside repair and parts costs.

As a result of the foregoing factors, our operating income improved 13.6% to $57.7 million in the 2019 period from $50.8 million in the 2018 period. Our operating expenses as a percentage of operating revenue, or “operating ratio,” improved to 90.8% in the 2019 period from 91.3% in the 2018 period. The operating ratio for our Truckload segment was 92.0% in the 2019 period and 90.9% in the 2018 period, for our Dedicated segment was 88.1% in the 2019 period and 91.9% in the 2018 period, for our Intermodal segment was 92.2% in the 2019 period and 89.5% in the 2018 period, and for our Brokerage segment was 91.7% in the 2019 period and 93.6% in the 2018 period. Operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharges, improved to 89.5% in the 2019 period from 89.9% in the 2018 period.

The increase in our other non-operating income was primarily due to additional interest income earned in the 2019 period, partially offset by an operating loss in the 2019 period for MWL, a 45% owned affiliate.

Our effective income tax rate decreased slightly to 22.7% in the 2019 period from 23.3% in the 2018 period.

As a result of the factors described above, net income improved 15.4% to $45.3 million, or $0.82 per diluted share, in the 2019 period from $39.3 million, or $0.71 per diluted share, in the 2018 period.

Liquidity and Capital Resources 

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. Our primary sources of liquidity are funds provided by operations and our revolving credit facility. A portion of our tractor fleet is provided by independent contractors who own and operate their own equipment. We have no capital expenditure requirements relating to those drivers who own their tractors or obtain financing through third parties.

The table below reflects our net cash flows provided by operating activities, net cash flows used for investing activities and net cash flows used for financing activities for the periods indicated.

In 2007, our Board of Directors approved, and we announced a share repurchase program to repurchase up to one million shares of our common stock either through purchases on the open market or through private transactions and in accordance with Rule 10b-18 of the Exchange Act. In 2015, our Board of Directors approved and we announced an increase in the share repurchase program, providing for the repurchase of up to $40 million, or approximately two million shares, of our common stock, which was increased by our Board of Directors to 3.3 million shares in August 2017 to reflect the five-for-three stock split effected in the form of a stock dividend on July 7, 2017. In August 2019, our Board of Directors approved and we announced an increase in our existing share repurchase program providing for the repurchase of up to $34 million, or approximately 1.8 million shares, of our common stock. The timing and extent to which we repurchase shares depends on market conditions and other corporate considerations. The repurchase program does not have an expiration date.

We repurchased and retired 200,000 shares of common stock for $3.8 million in the fourth quarter of 2018. We did not repurchase any shares in the first nine months of 2019 or in the rest of 2018. As of September 30, 2019, future repurchases of up to $34 million, or 1.8 million shares, were available in the share repurchase program.

              In the first nine months of 2019, net cash flows provided by operating activities of $119.6 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $92.6 million, to pay cash dividends of $40.4 million, and to upgrade regional operating facilities in the amount of $2.1 million, resulting in a $16.3 million decrease in cash and cash equivalents. In the first nine months of 2018, net cash flows provided by operating activities of $112.1 million were primarily used to purchase new revenue equipment, net of proceeds from dispositions, in the amount of $82.4 million, to acquire and upgrade regional operating facilities in the amount of $5.4 million, and to pay cash dividends of $4.1 million, resulting in a $19.9 million increase in cash and cash equivalents. Beginning in 2018, our net cash flows have been increased by the new tax laws established by the Tax Cuts and Jobs Act of 2017, which reduces the federal corporate statutory income tax rate and establishes bonus depreciation that allows for full expensing of qualified assets.

We estimate that capital expenditures, net of proceeds from dispositions, will be approximately $44 million for the remainder of 2019. We paid cash dividends totaling $40.4 million in the first three quarters of 2019 which consisted of a special dividend of $0.65 per share of common stock in September, along with quarterly cash dividends of $0.03 per share of common stock in each of the first three quarters of 2019. A quarterly cash dividend of $0.025 per share of common stock was declared in each of the first three quarters of 2018 and totaled $4.1 million. We currently expect to continue to pay quarterly cash dividends in the future. The payment of cash dividends in the future, and the amount of any such dividends, will depend upon our financial condition, results of operations, cash requirements, and certain corporate law requirements, as well as other factors deemed relevant by our Board of Directors. We believe our sources of liquidity are adequate to meet our current and anticipated needs for at least the next twelve months. Based upon anticipated cash flows, existing cash and cash equivalents balances, current borrowing availability and other sources of financing we expect to be available to us, we do not anticipate any significant liquidity constraints in the foreseeable future.

In August 2018, we entered into an amendment to our unsecured committed credit facility which reduces the aggregate principal amount of the facility from $40.0 million to $30.0 million and extends the term of the facility to August 2023. At September 30, 2019, there was no outstanding principal balance on the facility. As of that date, we had outstanding standby letters of credit to guarantee settlement of self-insurance claims of $15.7 million and remaining borrowing availability of $14.3 million. This facility bears interest at a variable rate based on the London Interbank Offered Rate or the lender’s Prime Rate, in each case plus/minus applicable margins.

Our credit facility prohibits us from paying, in any fiscal year, stock redemptions and dividends in excess of 25% of our net income from the prior fiscal year. A waiver allowing stock redemptions and dividends in excess of the 25% limitation in a total amount of up to $65 million in 2019 was obtained from the lender in August 2019. This facility also contains restrictive covenants which, among other matters, require us to maintain compliance with cash flow leverage and fixed charge coverage ratios. We were in compliance with all covenants at September 30, 2019 and December 31, 2018.

The following is a summary of our contractual obligations as of September 30, 2019.

Due to uncertainty with respect to the timing of future cash flows, the obligation under our nonqualified deferred compensation plan at September 30, 2019 of 250,078 shares of Company common stock with a value of $5.2 million has been excluded from the above table.

Off-balance Sheet Arrangements

Other than standby letters of credit maintained in connection with our self-insurance programs in the amount of $15.7 million along with purchase obligations and operating leases summarized above in our summary of contractual obligations, we did not have any other material off-balance sheet arrangements at September 30, 2019.

Inflation and Fuel Costs

Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the last two years, the most significant effects of inflation have been on revenue equipment prices, accident claims, health insurance and employee compensation. We attempt to limit the effects of inflation through increases in freight rates and cost control efforts.

In addition to inflation, fluctuations in fuel prices can affect our profitability. We require substantial amounts of fuel to operate our tractors and power the temperature-control units on our trailers. Substantially all of our contracts with customers contain fuel surcharge provisions. Although we historically have been able to pass through a significant portion of long-term increases in fuel prices and related taxes to customers in the form of fuel surcharges and higher rates, such increases usually are not fully recovered. These fuel surcharge provisions are not effective in mitigating the fuel price increases related to non-revenue miles or fuel used while the tractor is idling.

Seasonality

Our tractor productivity generally decreases during the winter season because inclement weather impedes operations and some shippers reduce their shipments. At the same time, operating expenses generally increase, with harsh weather creating higher accident frequency, increased claims, lower fuel efficiency and more equipment repairs.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our consolidated condensed financial statements and related notes. We base our estimates, assumptions and judgments on historical experience, current trends and other factors believed to be relevant at the time our consolidated condensed financial statements are prepared. However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and such differences could be material. We believe that the following critical accounting policies affect our more significant estimates, assumptions and judgments used in the preparation of our consolidated condensed financial statements.

Revenue Recognition. We account for our revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018 using the modified retrospective method. The new revenue standard requires us to recognize revenue and related expenses within each of our four reporting segments over time, compared with our former policy in which we recorded revenue and related expenses on the date shipment of freight was completed.

We account for revenue of our Intermodal and Brokerage segments and revenue on freight transported by independent contractors within our Truckload and Dedicated segments on a gross basis because we are the principal service provider controlling the promised service before it is transferred to each customer. We are primarily responsible for fulfilling the promise to provide each specified service to each customer. We bear the primary risk of loss in the event of cargo claims by our customers. We also have complete control and discretion in establishing the price for each specified service. Accordingly, all such revenue billed to customers is classified as operating revenue and all corresponding payments to carriers for transportation services we arrange in connection with brokerage and intermodal activities and to independent contractor providers of revenue equipment are classified as purchased transportation expense within our consolidated condensed statements of operations.

Accounts Receivable. We are dependent upon a limited number of customers, and, as a result, our trade accounts receivable are highly concentrated. Trade accounts receivable are recorded at the invoiced amounts, net of an allowance for doubtful accounts. Our allowance for doubtful accounts was $382,000 as of September 30, 2019 and $348,000 as of December 31, 2018. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers’ financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The allowance for doubtful accounts is based on the best information available to us and is reevaluated and adjusted as additional information is received. We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy. We review the adequacy of our allowance for doubtful accounts monthly.

Property and Equipment. The transportation industry requires significant capital investments. Our net property and equipment was $629.9 million as of September 30, 2019 and $588.2 million as of December 31, 2018. Our depreciation expense was $70.3 million for the first nine months of 2019 and $66.3 million for the first nine months of 2018. We compute depreciation of our property and equipment for financial reporting purposes based on the cost of each asset, reduced by its estimated salvage value, using the straight-line method over its estimated useful life. We determine and periodically evaluate our estimate of the projected salvage values and useful lives primarily by considering the market for used equipment, prior useful lives and changes in technology. We have not changed our policy regarding salvage values as a percentage of initial cost or useful lives of tractors and trailers within the last ten years. We believe that our policies and past estimates have been reasonable. Actual results could differ from these estimates. A 5% decrease in estimated salvage values would have decreased our net property and equipment as of September 30, 2019 by approximately $13.6 million, or 2.2%.

Impairment of Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets were considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell.

Insurance and Claims. We self-insure, in part, for losses relating to workers’ compensation, auto liability, general liability, cargo and property damage claims, along with employees’ health insurance with varying risk retention levels. We maintain insurance coverage for per-incident and total losses in excess of these risk retention levels in amounts we consider adequate based upon historical experience and our ongoing review. However, we could suffer a series of losses within our self-insured retention limits or losses over our policy limits, which could negatively affect our financial condition and operating results. We are responsible for the first $1.0 million on each auto liability claim and for the first $750,000 on each workers’ compensation claim. We have $15.7 million in standby letters of credit to guarantee settlement of claims under agreements with our insurance carriers and regulatory authorities. The insurance and claims accruals in our consolidated condensed balance sheets were $30.6 million as of September 30, 2019 and $28.1 million as of December 31, 2018. We reserve currently for the estimated cost of the uninsured portion of pending claims. We periodically evaluate and adjust these reserves based on our evaluation of the nature and severity of outstanding individual claims and our estimate of future claims development based on historical development. Actual results could differ from these current estimates. In addition, to the extent that claims are litigated and not settled, jury awards are difficult to predict.

Share-based Payment Arrangement Compensation. We have granted stock options to certain employees and non-employee directors. We recognize compensation expense for all stock options net of an estimated forfeiture rate and only record compensation expense for those shares expected to vest on a straight-line basis over the requisite service period (normally the vesting period). Determining the appropriate fair value model and calculating the fair value of stock options require the input of highly subjective assumptions, including the expected life of the stock options and stock price volatility. We use the Black-Scholes model to value our stock option awards. We believe that future volatility will not materially differ from our historical volatility. Thus, we use the historical volatility of our common stock over the expected life of the award. The assumptions used in calculating the fair value of stock options represent our best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and we use different assumptions, stock option compensation expense could be materially different in the future.

We have also granted performance unit awards to certain employees which are subject to vesting requirements over a five-year period, primarily based on our earnings growth. The fair value of each performance unit is based on the closing market price on the date of grant. We recognize compensation expense for these awards based on the estimated number of units probable of achieving the performance and service vesting requirements of the awards, net of an estimated forfeiture rate.

Item 3. Quantitative and Qualitative Disclosures about Market Risk. 

We are exposed to a variety of market risks, most importantly the effects of the price and availability of diesel fuel. We require substantial amounts of diesel fuel to operate our tractors and power the temperature-control units on our trailers. The price and availability of diesel fuel can vary, and are subject to political, economic and market factors that are beyond our control. Significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition. Based upon our fuel consumption in the first nine months of 2019, a 5% increase in the average cost of diesel fuel would have increased our fuel expense by $4.4 million.

We have historically been able to pass through a significant portion of long-term increases in diesel fuel prices and related taxes to customers in the form of fuel surcharges. Fuel surcharge programs are widely accepted among our customers, though they can vary somewhat from customer-to-customer. These fuel surcharges, which adjust weekly with the cost of fuel, enable us to recover a substantial portion of the higher cost of fuel as prices increase. These fuel surcharge provisions are not effective in mitigating the fuel price increases related to non-revenue miles or fuel used while the tractor is idling. In addition, we have worked diligently to control fuel usage and costs by improving our volume purchasing arrangements and optimizing our drivers’ fuel purchases with national fuel centers, focusing on shorter lengths of haul, installing and tightly managing the use of auxiliary power units in our tractors to minimize engine idling and improving fuel usage in our trailers’ refrigeration units.

While we do not currently have any outstanding hedging instruments to mitigate this market risk, we may enter into derivatives or other financial instruments to hedge a portion of our fuel costs in the future.

Item 4. Controls and Procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Executive Vice President and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. We intend to periodically evaluate our disclosure controls and procedures as required by the Exchange Act Rules.

PART II. OTHER INFORMATION

Item 1A.     Risk Factors.

We do not believe there are any material changes from the risk factors previously disclosed in Item 1A to Part 1 of our Form 10-K for the year ended December 31, 2018.

Item 6.           Exhibits.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.