UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20152018
Commission file number: 001-16853
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-22490
FORWARD AIR CORPORATION
(Exact name of registrantRegistrant as specified in its charter)
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Tennessee | 62-1120025 |
| Tennessee | 62-1120025
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
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430 Airport1915 Snapps Ferry Road, Building N | |
| Greeneville, Tennessee | 37745 |
| (Address of principal executive offices) | (Zip Code) |
(423) 636-7000
(Registrant’s telephone number, including area code)code
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Name of Each Exchange on Which Registered |
| Common Stock, $0.01 par value | The NASDAQNasdaq Stock Market LLC |
(Title of class) | (Name of exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant:Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No o
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting Company o | Emerging Growth Company o |
(Do
If an emerging growth company, indicate by checkmark if the registrant has elected not check if a smaller reporting company)to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrantRegistrant was approximately $1,695,536,388 as of June 30, 2015 was approximately $1,589,060,936 based upon the $52.26 closing price of the stock as reported on The NASDAQ Stock Market LLC on that date. For purposes of this computation, all directors and executive officers of the registrant are assumed to be affiliates. This assumption is not a conclusive determination for purposes other than this calculation.2018.
The number of shares outstanding of the registrant’sRegistrant’s common stock $0.01 par value per share as(as of February 17, 2016 was 30,543,873.14, 2019): 28,788,556
DOCUMENTS INCORPORATED BY REFERENCEDocuments Incorporated By Reference
Portions of the proxy statement for the 20152019 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
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| Table of Contents |
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| | Forward Air Corporation | Page Number |
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| Part I. | | |
| Item 1. | | |
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| Item 1A. | | |
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| Item 1B. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Part II. | | |
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| Item 5. | | |
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| Item 6. | | |
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| Item 7. | | |
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| Item 7A. | | |
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| Item 8. | | |
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| Item 9. | | |
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| Item 9A. | | |
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| Item 9B. | | |
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| Part III. | | |
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| Item 10. | | |
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| Item 11. | | |
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| Item 12. | | |
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| Item 13. | | |
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| Item 14. | | |
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| Part IV. | | |
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| Item 15. | | |
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Introductory Note
This Annual Report on Form 10-K for the fiscal year ended December 31, 20152018 (this “Form 10-K”) contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements other than historical information or statements of current condition and relate to future events or our future financial performance. In this Form 10-K, forward-looking statements include, but are not limited to, any projections of earnings, revenues, payment of dividends, or other financial items or related accounting treatment; any statement regarding the availability of cash; any statement of plans, strategies, and objectives of management for future operations; any statements regarding future insurance, claims and litigation; any statements concerning proposed or intended, new services or developments; any statements regarding our technology and information systems, including the effectiveness of each; any statements regarding competition, including our specific advantages, the capabilities of our segments and our geographic location; any statements regarding intended expansion through acquisition or greenfield startups; any statements regarding future business, economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. Some forward-looking statements may be identified by use of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,” “projects” or “expects.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The following is a list of factors, among others, that could cause actual results to differ materially from those contemplated by the forward-looking statements: economic factors such as recessions, inflation, higher interest rates and downturns in customer business cycles, the creditworthiness of our customers and their ability to pay for services rendered, the availability and compensation of qualified independent owner-operators and freight handlers as well as contracted, third-party carriers needed to serve our customers’ transportation needs, the inability of our information systems to handle an increased volume of freight moving through our network, the cybersecurity risks related to our information technology systems, changes in fuel prices, our inability to maintain our historical growth rate, including because of a decreased volume of freight or decreased average revenue per pound of freight moving through our network, increasing competition and pricing pressure, surplus inventories, loss of a major customer, the creditworthiness ofwhether our customersservice offerings gain market acceptance, increasing competition and their ability to pay for services rendered,pricing pressure, our ability to secure terminal facilities in desirable locations at reasonable rates, thelabor and employment concerns, our inability of our information systems to handle an increased volume of freight moving through our network, changes in fuel prices,successfully integrate acquisitions, claims for property damage, personal injuries or workers’ compensation, employment matters including rising health care costs,changes in our self-insurance and third-party insurance, seasonality, enforcement of and changes in governmental regulations, environmental matters, the impact of certain accounting and tax matters, and the handling of hazardous materials, the availability and compensation of qualified independent owner-operators and freight handlers as well as contracted, third party carriers needed to serve our customers' transportation needs and our inability to successfully integrate acquisitions.materials. As a result of the foregoing, no assurance can be given as to future financial condition, cash flows or results of operations. Except as required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Part I
Item 1. Business
Overview
Forward Air is a leading asset-light freight and logistics company. We wereprovide less-than-truckload (“LTL”), truckload, intermodal and pool distribution services across the United States and in Canada. We utilize an asset-light strategy to minimize our investments in equipment and facilities and to reduce our capital expenditures. Forward Air was formed as a corporation under the laws of the State of Tennessee on October 23, 1981. Our operations can be broadlycommon stock is listed on the Nasdaq Global Select Market under the symbol “FWRD”.
Services Provided
Our services are classified into three principalfour reportable segments: Forward AirExpedited LTL, Truckload Premium Services (“Forward Air”TLS”), Forward Air Solutions (“FASI”)Intermodal and Total Quality ("TQI"). Pool Distribution. For financial information relating to each of our business segments, see Note 10, “Segment Reporting,” in the Notes to consolidated Financial Statements included in this Form 10-K.
Through our Forward Air segment weExpedited LTL. We operate a comprehensive national network to provide time-definite surface transportationexpedited regional, inter-regional and related logistics services to the North American expedited ground freight market. Our licensed property broker utilizes qualified motor carriers, including our own, and other third-party transportation companies, to offer ournational LTL services. Expedited LTL offers customers local pick-up and delivery (Forward Air Complete®) and scheduled surface transportation of cargo as a cost-effective, reliable alternative to air transportation. We transport cargo that must be delivered at a specific time but is less time-sensitive than traditional air freight. This type of cargo is frequently referred to in the transportation industry as deferred air freight. We also offer our customers an array of logistics and other services including: expedited full truckload (“TLX”); dedicated fleets; warehousing; customs brokerage; andincluding shipment consolidation and deconsolidation, warehousing, final mile solutions, customs brokerage and other handling. Also includedBecause of our roots in serving the deferred air freight market, our terminal network is located at or near airports in the Forward Air segment areUnited States and Canada. During the services performed by Central States Trucking Co. and Central States Logistics, Inc. (“CST”) which we acquired in 2014. CST provides intermodal drayage, devanning, transloading and warehousing services.year ended December 31, 2018, Expedited LTL accounted for 56.6% of our consolidated revenue.
FASI, whichTLS. We provide expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-
controlled logistics services in the United States and Canada. During the year ended December 31, 2018, TLS accounted for 14.6% of our consolidated revenue.
Intermodal. We provide first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers linehaul service within the LTL space as well as dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. Today, Intermodal operates primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest United States. We plan to grow Intermodal’s geographic footprint through acquisitions as well as greenfield start-ups where we formed in July 2007, provides pooldo not have an acceptable acquisition target. During the year ended December 31, 2018, Intermodal accounted for 15.2% of our consolidated revenue.
Pool Distribution. We provide high-frequency handling and distribution servicesof time sensitive product to numerous destinations within a specific geographic region. We offer this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. During the year ended December 31, 2018, Pool distribution involves managing high-frequency, last mile handling and distributionDistribution accounted for 14.7% of time-sensitive product to numerous destinations in specific geographic regions. Our primary customers for pool distribution are regional and nationwide distributors and specialty retailers, such as mall, strip mall and outlet-based retail chains.
TQI, which we acquired in March 2013, provides maximum security and temperature-controlled logistics services, primarily truckload services, to the life sciences sector (pharmaceutical and biotechnology products). In addition to core pharmaceutical services and other cold chain services, TQI provides truckload and less-than-truckload brokerage transportation services.our consolidated revenue.
Growth Strategy
Our strategy is to take advantage of our competitive strengthscore competencies to provide asset-light freight and logistics services in order to increase our profits and shareholder returns. Our goal is to use our established businesses asgrow in the base from which to expand and launch new services that will allow us to grow and provide shareholder returns in changing economic environments.premium or high service level segments of the markets we serve. Principal components of our efforts include:
Increase Freight Volume from Existing Customers.Expand Service Offerings. Many of our customers currently use us for only a portion of their overall transportation needs. We believe we can increase freight volumes from existing customersand revenues by offering morenew and enhanced and comprehensive services that address all of the customer’s transportation needs, such as Forward Air Complete® ("Complete"), our direct to door pick-up and delivery service and customer label integration. By offering additional services that can be integrated with our existing services, we believe we will attract additional business from existing customers.
Expand Service Offerings. We continue to expand our offered services to increase revenue and improve utilizationmore of our terminal facilities and labor force. Because of the timing of the arrival and departure of cargo, our facilities are under-utilized during certain portions of the day, allowing us to add logistics services without significantly increasing our costs. Therefore, we have added a number of additional services incustomers’ premium transportation needs. In the past few years, such as TLX, pool distribution,we have added or enhanced LTL pickup and delivery, customer label integration, expedited truckload, temperature-controlled shipments, warehousing, drayage, final mile solutions, customs brokerage and shipment consolidation and handling services. These services directly benefit our existing customers and increase our ability to attract new customers, particularly those customers that cannot justify providing the services directly. These services are not offered by many transportation providers with whom we compete and are attractive to customers who prefer to use one provider for all of their transportation needs.customers.
Enhance Information Systems. We are committed to the continued development and enhancement of our information systems in ways that will continueorder to provide us competitive service advantages and increased productivity. We believe our enhancedinformation systems have and will assist us in capitalizing on new business opportunities with existing customers and developing relationships with new customers.
Pursue Strategic Acquisitions.We continue to evaluate and pursue acquisitions that can increase our penetration of a geographic area,area; add new customers, add new business verticals and services; and increase freight volume. In 2015,For example, we completedacquired Central States Trucking Co. (“CST”) in 2014, which created the foundation for what is now our Intermodal segment. Since our acquisition of CLP Towne Inc. ("Towne"). Towne is a full-service trucking provider offering time-sensitive less-than-truckload shipping, full truckload service, an extensive cartage network, container freight stations and dedicated trucking. The acquisition of Towne provides us with opportunities to expand our airport-to-airport service points and service offerings, such as pick up and delivery services. Additional benefits of the acquisition include increased linehaul network shipping density and a significant increase to our owner operator fleet, both of which are key to the profitability of Forward Air. Further,CST in 2014, we have completed the acquisition of CST which later in 2014 acquired substanially all the assets of Recob Great Lakes Express,eight additional intermodal acquisitions including Multi-Modal Transport Inc. ("RGL"MMT") and Multi-Modal Trucking, Inc. and Multi-Modal Services, Inc. (together referred to as "MMT"). CST provides industry leading container and intermodal drayage services primarily within the Midwest region of the United States. CST also provides linehaul service within the airport-to-airport space as well as dedicated contract and ContainerSouthwest Freight Station warehouse services. Acquisitions may affect our short-term cash flow and net income as we expend funds, potentially increase indebtedness and incur additional expenses.Distributors (“Southwest”), both acquired in 2018.
Competitive Advantages
We believe that the following competitive advantages are critical to our success:Operations
Focus on Specific Freight Markets and Concentrated Marketing Strategy. Our Forward Air segment focuses on providing time-definite surface transportation and related logistics services to the North American expedited ground freight market. Forward Air provides our expedited ground freight services mainly to freight forwarders, integrated air cargo carriers, and passenger and cargo airlines rather than directly serving shippers. We believe that Forward Air customers prefer to purchase their transportation services from us because, among other reasons, we generally do not market Forward Air’s services to their shipper customers and, therefore, do not compete directly with them for customers. Our FASI segment focuses on providing high-quality pool distribution services to retailers and nationwide distributors of retail products. Our TQI segment focuses on providing high-level security and temperature-controlled logistics services to the pharmaceutical and life science industries. This focused approach enables us to provide a higher level of service across all our business segments in a more cost-effective manner than our competitors.
Expansive Network of Terminals and Facilities. We have developed a network of terminals and facilities throughout the United States and Canada. We believe it would be difficult for a competitor to duplicate our network of facilities with the expertise and strategic facility locations we have acquired without expending significant capital and management resources. We believe that through our network of terminals and facilities we can offer our customers a variety of comprehensive, high-quality, consistent service across the majority of the continental United States.
Superior Service Offerings. Forward Air’s published expedited ground freight schedule for transit times with specific cut-off and arrival times generally provides Forward Air customers with the predictability they need. In addition, our network of Forward Air terminals allows us to offer our Forward Air customers later cut-off times, a higher percentage of direct shipments (which reduces damage and shortens transit times) and earlier delivery times than most of our competitors. Our network of FASI terminals allows us the opportunity to provide precision deliveries to a wider range
of locations than most pool distribution providers with increased on-time performance. TQI utilizes industry-leading temperature-controlled equipment, 24-hour real-time monitoring and tracking technology, and layered security features and practices to provide its customers with a level of service that is unmatched in the industry today.
Flexible Business Model. Rather than owning and operating our own large fleets of trucks, we purchase most of our transportation requirements from owner-operators or truckload carriers. This approach allows us to respond quickly to changing demands and opportunities in our industry and to generate strong returns on assets because of the lower capital requirements.
Comprehensive Logistic and Other Service Offerings. Through our three segments we offer an array of logistic and other services including: TLX, pick-up and delivery (Forward Air Complete™), pool distribution, temperature-controlled truckload, warehousing, customs brokerage and shipment consolidation and handling. These services are an essential part of many of our customers’ transportation needs and are not offered by many of our competitors. We are often able to provide these services utilizing existing infrastructure and thereby earning additional revenue without incurring significant additional fixed costs.
Leading Technology Platform. We are committed to using information technology to improve our operations. Through improved information technology, we believe we can increase the volume of freight we handle in our networks, improve visibility of shipment information and reduce our operating costs. Our technology allows us to provide our customers with electronic bookings and real-time tracking and tracing of shipments while in our network, complete shipment history, proof of delivery, estimated charges and electronic bill presentment. We continue to enhance our systems to permit us and our customers to access vital information through both the Internet and electronic data interchange. We have continued to invest in information technology to the benefit of our customers and our business processes.
Strong Balance Sheet and Availability of Funding. Our asset-light business model and strong market position in the expedited ground freight market provides the foundation for operations that have produced excellent cash flow from operations even in challenging conditions. Our strong balance sheet and available borrowing capacity can also be a competitive advantage. Our competitors, particularly in the pool distribution market, are mainly regional and local operations, and may struggle to maintain operations in an uncertain economic environment. The threat of financial instability may encourage new and existing customers to use a more financially secure transportation provider.
Operations
The following describes in more detail the operations of each of our reportable segments: Expedited LTL, Truckload Premium Services, Intermodal and Pool Distribution.
Forward AirExpedited LTL
Airport-to-airportOverview
Our Expedited LTL segment provides expedited regional, inter-regional and national LTL and final mile services. We market our Forward Air airport-to-airportExpedited LTL services primarily to freight and logistics intermediaries (such as freight forwarders and third-party logistics companies) and airlines (such as integrated air cargo carriers, and passenger and cargo airlines. To serve this market, weairlines). We offer our customers a high level of service with a focus on on-time, damage-free deliveries. We serve our customers by locating ourOur terminals are located on or near airports in the United States and Canada and maintainingmaintain regularly scheduled transportation service between major cities. We either receive shipments at our terminals or if instructed to do so pick up shipments directly from our customers. We then transport the freight by truck (i) directly to the destination terminal; (ii) to our Columbus, Ohio central sorting facility; or (iii) to oneOur Expedited LTL network encompasses approximately 92% of our 12 regional hubs, where they are unloaded, sorted and reloaded. After reloading the shipments, we deliver them to the terminals nearest their destinations and then, if requested by the customer, on to a final designated site. We ship freight directly between terminals when justified by the tonnage volume.all continental U.S. zip codes, with service in Canada.
Shipments
During 2015,2018, approximately 29.0%30.8% of the freight Forward Air handled by Expedited LTL was for overnight delivery, approximately 55.8%55.4% was for delivery within two to three days and the balance was for delivery in four or more days. Forward Air generally does not market its airport-to-airport services directly to shippers (where such services might compete with our freight forwarder customers). Also, because Forward Air does not place significant size or weight restrictions on airport-to-airport shipments, Forward Air generally does not compete directly with integrated air cargo carriers such as United Parcel Service and Federal Express in the overnight delivery of small parcels.
Terminals
Our airport-to-airport network consists of terminals located in the following 91 cities:
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City | | Airport Served | | City | | Airport Served |
Albany, NY | | ALB | | Memphis, TN | | MEM |
Albuquerque, NM* | | ABQ | | McAllen, TX | | MFE |
Allentown, PA* | | ABE | | Miami, FL | | MIA |
Atlanta, GA | | ATL | | Milwaukee, WI | | MKE |
Austin, TX | | AUS | | Minneapolis, MN | | MSP |
Baltimore, MD | | BWI | | Mobile, AL* | | MOB |
Baton Rouge, LA* | | BTR | | Moline, IA | | MLI |
Birmingham, AL* | | BHM | | Montgomery, AL* | | MGM |
Blountville, TN* | | TRI | | Nashville, TN | | BNA |
Boston, MA | | BOS | | Newark, NJ | | EWR |
Buffalo, NY | | BUF | | Newburgh, NY | | SWF |
Burlington, IA | | BRL | | New Orleans, LA | | MSY |
Cedar Rapids, IA | | CID | | New York, NY | | JFK |
Charleston, SC | | CHS | | Norfolk, VA | | ORF |
Charlotte, NC | | CLT | | Oklahoma City, OK | | OKC |
Chicago, IL | | ORD | | Omaha, NE | | OMA |
Cincinnati, OH | | CVG | | Orlando, FL | | MCO |
Cleveland, OH | | CLE | | Pensacola, FL* | | PNS |
Columbia, SC* | | CAE | | Philadelphia, PA | | PHL |
Columbus, OH*** | | CMH | | Phoenix, AZ | | PHX |
Corpus Christi, TX* | | CRP | | Pittsburgh, PA | | PIT |
Dallas/Ft. Worth, TX | | DFW | | Portland, OR | | PDX |
Dayton, OH* | | DAY | | Raleigh, NC | | RDU |
Denver, CO** | | DEN | | Richmond, VA | | RIC |
Des Moines, IA** | | DSM | | Rochester, NY | | ROC |
Detroit, MI | | DTW | | Sacramento, CA | | SMF |
El Paso, TX | | ELP | | Saginaw, MI | | MBS |
Evansville, IN | | EVV | | Salt Lake City, UT | | SLC |
Fort Wayne, IN | | FWA | | San Antonio, TX | | SAT |
Grand Rapids, MI | | GRR | | San Diego, CA | | SAN |
Greensboro, NC | | GSO | | San Francisco, CA | | SFO |
Greenville, SC | | GSP | | Savannah, GA | | SAV |
Hartford, CT | | BDL | | Seattle, WA | | SEA |
Harrisburg, PA | | MDT | | Shreveport, LA* | | SHV |
Houston, TX | | IAH | | South Bend, IN | | SBN |
Huntsville, AL* | | HSV | | St. Louis, MO | | STL |
Indianapolis, IN | | IND | | Syracuse, NY | | SYR |
Jacksonville, FL | | JAX | | Tampa, FL | | TPA |
Kansas City, MO | | MCI | | Toledo, OH* | | TOL |
Knoxville, TN* | | TYS | | Traverse City, MI* | | TVC |
Lafayette, LA* | | LFT | | Tucson, AZ* | | TUS |
Laredo, TX | | LRD | | Tulsa, OK** | | TUL |
Las Vegas, NV | | LAS | | Washington, DC | | IAD |
Little Rock, AR* | | LIT | | Montreal, Canada* | | YUL |
Los Angeles, CA | | LAX | | Toronto, Canada | | YYZ |
Louisville, KY | | SDF | | | | |
* Denotes an independent agent location.
** Denotes a location with combined Forward Air and FASI operations.
*** Denotes a location in which Forward Air is an agent for FASI.
Independent agents operate 20 of our Forward Air locations. These locations typically handle lower volumes of freight relative to our Company-operated facilities.
Direct Service and Regional Hubs
We operate direct terminal-to-terminal services and regional overnight service between terminals where justified by freight volumes. We currently provide regional overnight service to many of the markets within our network. Direct service allows us to provide quicker scheduled service at a lower cost because it allows us to minimize out-of-route miles and eliminate the added time and cost of handling the freight at our central or regional hub sorting facilities. Direct shipments also reduce the likelihood of damage because of reduced handling and sorting of the freight. As we continue to increase volume between various terminals, we intend to add other direct services. When warranted by sufficient volume in a region, we utilize larger terminals as regional sorting hubs, which allow us to bypass our Columbus, Ohio central sorting facility. These regional hubs improve our operating efficiency and enhance customer service. We operate regional hubs in Atlanta, Charlotte, Chicago, Dallas/Ft. Worth, Denver, Kansas City, Los Angeles, New Orleans, Newark, Newburgh, Orlando, and Sacramento.
Shipments
The average weekly volume of freight moving through our airport-to-airportExpedited LTL network was approximately 47.250.2 million
pounds per week in 2015.2018. During 2015,2018, our average shipment weighed approximately 631 pounds and shipment sizes ranged from small boxes weighing only a few pounds to large shipments of several thousand614 pounds. Although we impose no significant size or weight restrictions, we focus our marketing and price structure on shipments of 200 pounds or more. As a result,
Expedited LTL generally does not market its services directly to shippers (where such services might compete with our freight and logistics intermediary customers). Also, because Expedited LTL does not place significant size or weight restrictions on shipments, we typicallygenerally do not compete directly compete with integrated air cargo carriers such as United Parcel Service and FedEx Corporation in the overnight delivery of small parcels.
The table below summarizes the average weekly volume of freight moving through our network for each year since 2001.2004.
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| Average Weekly | Average Weekly |
| Volume in Pounds | Volume in Pounds |
| Year | (In millions) | (In millions) |
| 2001 | 24.3 | |
| 2002 | 24.5 | |
| 2003 | 25.3 | |
| 2004 | 28.7 | 28.7 |
| 2005 | 31.2 | 31.2 |
| 2006 | 32.2 | 32.2 |
| 2007 | 32.8 | 32.8 |
| 2008 | 34.2 | 34.2 |
| 2009 | 28.5 | 28.5 |
| 2010 | 32.6 | 32.6 |
| 2011 | 34.0 | 34.0 |
| 2012 | 34.9 | 34.9 |
| 2013 | 35.4 | 35.4 |
| 2014 | 37.4 | 37.4 |
| 2015 | 47.2 | 47.2 |
| 2016 | | 46.5 |
| 2017 | | 49.5 |
| 2018 | | 50.2 |
Forward Air Logistics and Other ServicesTransportation
Forward Air customers increasingly demand more than the movement of freight from their transportation providers. To meet these demands, we continually seek ways to customize our logistics services and add new services.
Our logistics and other services allow customers to access the following services from a single source:
expedited full truckload, or TLX;
intermodal drayage, or CST;
dedicated fleet;
customs brokerage, such as assistance with U.S. Customs and Border Protection (“U.S. Customs”) procedures for both import and export shipments;
warehousing, dock and office space;
hotshot or ad-hoc ultra expedited services; and
shipment consolidation and handling, such as shipment build-up and break-down and reconsolidation of air or ocean pallets or containers.
These services are critical to many of our customers that do not provide logistics services themselves or that prefer to use one provider for all of their surface transportation needs.
Our logistics revenue is generated primarily by our TLX and intermodal drayage services. Our TLX service provides a high level of truckload service through a dedicated owner-operator fleet and third party transportation providers that allow for flexible capacity while also allowing us to cross utilize assets and capacity with our airport-to-airport fleet.
In conjunction with our acquisition of CST in February 2014 and the related acquisitions of RGL and MMT, we expanded our container and intermodal drayage operations into the Midwest. We now offer container and intermodal drayage services in Charleston, Chicago, Cleveland, Detroit, Houston, Indianapolis, Milwaukee and Minneapolis.
Forward Air Customers
Our wholesale customer base is primarily comprised of freight forwarders, integrated air cargo carriers and passenger, cargo airlines and steamship lines. Forward Air's freight forwarder customers vary in size from small, independent, single facility companies to large, international logistics companies such as SEKO Worldwide, AIT Worldwide Logistics, Expeditors International of Washington, Associated Global, UPS Supply Chain Solutions, FedEx Corporation and Pilot Air Freight. Because we deliver dependable service, integrated air cargo carriers such as UPS Cargo, FedEx Corporation and DHL Worldwide Express use our network to provide overflow capacity and other services, including shipment of bigger packages and pallet-loaded cargo. Our passenger and cargo airline customers include United Airlines and Delta. In 2015, Forward Air’s ten largest customers accounted for approximately 37.0% of Forward Air’s operating revenue and no single customer accounted for more than 10.0% of Forward Air’s operating revenue.
Forward Air Purchased Transportation
Our licensed property broker places our customers’ cargo with qualified motor carriers, including our own, and other third-party transportation companies. Forward Air'sExpedited LTL licensed motor carrier contracts with owner-operators for most of its transportation services. The owner-operators own, operate and maintain their own tractors and employ their own drivers. Our freight handlers load and unload our trailers and vehicles for hauling by owner-operators between our terminals.
Forward Air seeksWe seek to establish long-term relationships with owner-operators to assure dependable service and availability. Historically, Forward AirWe believe Expedited LTL has experienced significantly higher than industry average retention of owner-operators. Forward Airowner-operators compared to other over-the-road transportation providers. Expedited LTL has established specific guidelines relating to safety records, driving experience and personal evaluations that we use to select our owner-operators. To enhance itsour relationship with the owner-operators, Forward AirExpedited LTL seeks to pay rates that are generally above prevailing market rates and we implemented rate increases at the beginning of 2015. In addition, our owner-operators and their drivers often are able to negotiate a consistent work schedule.schedule for their drivers. Usually, owner-operators andnegotiate schedules for their drivers also negotiate schedules that are between the same two cities or along a consistent route, improving quality of work life for the drivers of our owner-operators and their drivers and, in turn, increasing our driver retention.the retention rate of owner-operators.
As a result of efforts to expand our logistics and other services, and in response to seasonal demands and volume surges in particular markets, we also purchase transportation from other surface transportation providers to handle overflow volume.volume (including TLS). Of the $358.9$360.7 million incurred for Forward Air purchasedExpedited LTL's transportation during 2015,2018, we purchased 59.3%46.5% from the owner-operators of our licensed motor carrier, 3.7% from our company fleet and 40.7%49.9% from other surface transportation providers.
Forward Air Competition
TheAll of our LTL Expedited independent contractor tractors are equipped with in-cab communication devices, which enable us to communicate with our drivers, plan and monitor shipment progress and monitor and record our drivers’ hours of service. We use the real-time global positioning data obtained from these devices to improve customer and driver service.
Other Services
Expedited LTL customers increasingly demand more than the movement of freight from their transportation providers.
To meet these demands, we continually seek ways to customize and add new services.
Other Expedited LTL services allow customers to access the following services from a single source:
customs brokerage;
final mile solutions;
warehousing, dock and office space;
hotshot or ad-hoc ultra expedited groundservices; and
shipment consolidation and handling, such as shipment build-up and break-down and reconsolidation of air or ocean pallets or containers.
Customers
Our wholesale customer base is primarily comprised of freight segment of the transportation industry is highly competitive and very fragmented. Our competitors primarily include national and regional truckload and less-than-truckload carriers. To a lesser extent, Forward Air also competes withforwarders, third-party logistics (“3PL”) companies, integrated air cargo carriers and passenger, cargo airlines and cargo airlines.
We believe competitionsteamship lines. Expedited LTL’s freight forwarder customers vary in size from small, independent, single facility companies to large, international logistics companies. Our dependable service and wide-ranging service offerings also make Expedited LTL an attractive option for 3PL providers , which is one of the fastest growing segments in the expedited ground freighttransportation industry. Because we deliver dependable service, integrated air cargo carriers use our network to provide overflow capacity and other services, including shipment of bigger packages and pallet-loaded cargo. In 2018, LTL's ten largest customers accounted for approximately 41% of its operating revenue and had one customer with revenue greater than 10% of LTL operating revenue for 2018. No single customer accounted for more than 10% of our consolidated revenue.
Truckload Premium Services
Overview
Our TLS segment is based primarily on service, on-time delivery, flexibility and reliability,an asset-light provider of transportation management services, including, but not limited to, expedited truckload brokerage, dedicated fleet services, as well as rates.high security and temperature-controlled logistics services. We offermarket our Forward AirTLS services at rates that generallyto integrated air cargo carriers, airlines, freight forwarders and LTL carriers, as well as life-science companies, and their distributors and other shippers of high value cargo. TLS offers long haul, regional and local services through a dedicated fleet and third-party transportation providers. TLS also utilizes a wide assortment of equipment to meet our customers’ critical on-time expectations in the United States and Canada.
Operations
TLS’ primary operations are significantlylocated in Columbus, Ohio. TLS also has satellite operations in South Bend, Indiana; Greeneville, Tennessee; Grand Rapids, Michigan; and Sacramento, California.
Operating Statistics
The table below summarizes the charge to transport the same shipment to the same destination by air. We believe Forward Air has an advantage over less-than-truckload carriers because Forward Air delivers faster, more reliable service between many cities. average weekly miles driven for each year since 2004.
|
| |
| | Average Weekly Miles |
| Year | (In thousands) |
| 2004 | 260 |
| 2005 | 248 |
| 2006 | 331 |
| 2007 | 529 |
| 2008 | 676 |
| 2009 | 672 |
| 2010 | 788 |
| 2011 | 876 |
| 2012 | 1,005 |
| 2013 | 1,201 |
| 2014 | 1,185 |
| 2015 | 1,459 |
| 2016 | 1,756 |
| 2017 | 1,902 |
| 2018 | 1,547 |
Transportation
TableTLS utilizes a fleet of Contentsowner-operators, company drivers and third-party transportation providers in its operations. The owner-operators own, operate and maintain their own tractors and employ their own drivers. We also maintain a fleet of company drivers, which primarily serve our life science and high value cargo customers. In many instances, our customers request team (driver) service. Through team service, we are able to provide quicker, more secure, transit service to our TLS customers.
We seek to establish long-term relationships with owner-operators and company drivers to assure dependable service and availability. To enhance our relationship with the owner-operators and our company drivers, TLS strives to set its owner-operator and company driver pay rates above prevailing market rates. TLS has established specific guidelines relating to safety records, driving experience and personal evaluations that we use to qualify and select our drivers (leased and employed).
Forward Air Solutions (FASI)In addition to our owner-operators and company fleet, we also purchase transportation from other surface transportation providers (including Expedited LTL) to serve our customers’ needs. TLS’ brokerage operation has relationships with over 6,008 qualified carriers. Of the $155.0 million incurred for TLS transportation during 2018, we purchased 28.5% from the owner-operators of our licensed motor carrier, 6.6% from our company fleet and 64.9% from other surface transportation providers.
We have access to a pool of trailers and we utilize a variety of equipment in our TLS operations including dry van, refrigerated, and roller-bed trailers, as well as straight trucks and cargo vans. We service our life science and high-security cargo customers with industry-leading TAPA (Transported Asset Protection Association) Level 1 certified equipment that has layered security measures to prevent theft, qualified and calibrated refrigerated trailers, and temperature systems that minimize the chance of damage to cargo caused by temperature excursions. All of the TLS trailers have global positioning trailer-tracking technology that allows us to more effectively manage our trailer pool.
All of our TLS company and independent contractor tractors are equipped with in-cab communication devices, which enable us to communicate with our drivers, plan and monitor shipment progress and monitor and record our drivers’ hours of service. We use the real-time global positioning data obtained from these devices to improve customer and driver service.
Customers
Our customer base is primarily comprised of freight forwarders, third-party logistics companies, integrated air cargo carriers, passenger and cargo airlines, and LTL carriers, including our own LTL Expedited segment, as well as retail, life-science companies, and their distributors. TLS’ customers include Fortune 500 pharmaceutical manufacturers and distributors, as well as transportation companies. In 2018, TLS’ ten largest customers accounted for approximately 67% of its operating revenue and had three customers with revenue greater than 10% of TLS operating revenue each. No single customer accounted for more than 10% of our consolidated revenue.
Intermodal
Overview
Our Intermodal segment provides high value intermodal container drayage services. We market our Intermodal services primarily to import and export customers. Intermodal offers first- and last-mile transportation of freight both to and from seaports and railheads through a dedicated fleet and third-party transportation providers. Today, Intermodal operates primarily in the Midwest and Southeast, with a smaller presence in the Southwest United States. We plan to expand beyond our current geographic footprint through acquisitions as well as greenfield start-ups where no suitable acquisition is available. Intermodal also provides linehaul and local less-than-truckload service in the Midwest, as well as CFS warehousing services (e.g. devanning, unit load device build-up/tear-down, and security screening) for air and ocean import/export freight at five (5) of its Midwest terminals (Chicago, Cleveland, Milwaukee, Indianapolis and Detroit). Our Intermodal service differentiators include:
Immediate proof of delivery ("POD") and Signature Capture capability via tablets;
All drivers receive dispatch orders on hand-held units and are trackable via GPS; and
Daily container visibility and per diem management reports.
Operations
Intermodal’s primary office is located in Oak Brook, Illinois. Intermodal’s network consists of 20 locations primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest United States.
Transportation
Intermodal utilizes a mix of Company-employed drivers, owner-operators and third-party carriers. During 2018, approximately 21.0% of Intermodal’s direct transportation expenses were provided by Company-employed drivers, 76.6% by owner-operators and 2.4% was provided by third-party carriers.
All of our Intermodal company and independent contractor tractors are equipped with computer tablets, which enable us to communicate with our drivers, plan and monitor shipment progress and monitor our drivers’ hours of service. We use the real-time global positioning data obtained from these devices to improve customer and driver service and provide a high level of shipment visibility to our customers (including immediate POD signature capture). We believe that our technology is a key differentiator and enables us to provide a higher level of service than our competitors.
Customers
Intermodal’s customer base is primarily comprised of international freight forwarders, passenger and cargo airlines, beneficial cargo owners and steamship lines. In 2018, Intermodal’s ten largest customers accounted for approximately 33% of its operating revenue and had no customers with revenue greater than 10% of Intermodal operating revenue for 2018. No single customer accounted for more than 10% of our consolidated revenue.
Pool Distribution
Through our FASIOverview
Our Pool Distribution (or “Pool”) segment we provideprovides pool distribution services through a network of terminals and service locations in 28 cities throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. Our FASI pool distribution customers are primarily comprised ofWe market these services to national and regional retailers and distributors, such as Stage Stores, The Limited, The Marmaxx Group and The GAP. FASI’s four largest customers accounted for approximately 62.8% of FASI’s 2015 operating revenue, but revenues from these four customers do not exceed 10.0% of our consolidated revenue. No other customers accounted for more than 10.0% of FASI’s operating revenue.distributors.
Our pool distribution network consists of terminals and service locations in the following 28 cities:
|
| |
City |
Albuquerque, NM* | Jeffersonville, OH |
Atlanta, GA | Kansas City, MO |
Baltimore, MD | Lakeland, FL |
Baton Rouge, LA* | Las Vegas, NV |
Charlotte, NC | Little Rock, AR* |
Chicago, IL* | Miami, FL |
Columbus, OH** | Montgomery, AL |
Dallas/Ft. Worth, TX | Nashville, TN |
Denver, CO*** | Raleigh, NC |
Des Moines, IA*** | Richmond, VA |
Detroit, MI* | Rochester, NY |
Houston, TX | San Antonio, TX |
Jacksonville, FL | St. Louis, MO* |
Jacksonville, TX | Tulsa, OK*** |
* Denotes an independent agent station.
** Denotes a location in which Forward Air is an agent for FASI.
*** Denotes a location with combined Forward Air and FASI operations.
FASI Transportation
FASIPool Distribution provides transportation services through a mix of Company-employed drivers, owner-operators and third partythird-party carriers. The mix of sources utilized to provide FASIPool transportation services is dependent on the individual markets and related customer routes. During 2015,2018, approximately 40.0%32.1% of FASI'sPool's direct transportation expenses were provided by Company-employed drivers, 32.4%35.0% by owner-operators and 27.6%32.9% was provided by third partythird-party carriers.
FASI Customers
Pool Distribution’s customer base is primarily composed of national and regional retailers and distributors. Pool’s ten largest customers accounted for approximately 77% of Pool Distribution’s 2018 operating revenue and had two customers with revenue greater than 10% of Pool Distribution’s 2018 operating revenue. No single customer accounted for more than 10% of our consolidated revenue.
Competition
The pool distribution segment of
We compete in the North American transportation and logistics services industry, is alsoand the markets in which we operate are highly competitive, very fragmented and very fragmented.historically have few barriers to entry. We compete with a large number of other asset-light logistics companies, asset-based carriers, integrated logistics companies, and third-party freight brokers. To a lesser extent, we also compete with integrated air cargo carriers and passenger airlines. Our competitorscompetition ranges from small operators that compete within a limited geographic area to companies with substantially greater financial and other resources, including greater freight capacity.
Our Expedited LTL, TLS and Pool Distribution segments primarily includecompete with other national and regional truckload carriers. Expedited LTL also competes with less-than-truckload carriers, and to a lesser extent, integrated air cargo carriers and
passenger and cargo airlines, while our TLS segment also competes with property brokers and 3PLs. Our Intermodal segment primarily competes with national truckload and less-than-truckload carriers. regional drayage providers.
We believe FASIcompetition in our segments is based primarily on quality service, available capacity, on-time delivery, flexibility, reliability, security, transportation rates, location of facilities, and business relationships, and we believe we compete favorably with other transportation service companies. To that end, we believe our Expedited LTL segment has an advantage over other truckload and less-than-truckload carriers because Expedited LTL delivers faster, more reliable services between cities at rates that are generally significantly below the charge to transport the same shipments to the same destinations by air. We believe our competitors due toTLS and Intermodal segments have a competitive advantage over other truckload carriers and drayage providers because we deliver faster, more reliable service while offering greater shipment visibility and security. Additionally, we believe our Intermodal segment is one of the leading providers of drayage and related services in North America today. We believe that our presence in several regions across the continental United States allowing usenables our Pool Distribution segment to provide consistent, high-quality service to our customers regardless of location.
Total Quality (TQI)
TQIlocation, which is a premium provider of high-level security and temperature-controlled services to the pharmaceutical and other life science industries. TQI utilizes industry-leading temperature-controlled equipment, 24-hour real-time monitoring and tracking technology and layered security features and practices to provide our customers with a high level of service. In addition to its core pharmaceutical services, TQI also provides truckload and less-than-truckload brokerage transportation services. TQI’s administrative headquarters are located in Grand Rapids, Michigan.
TQI Transportation
TQI maintains a fleet of Company-employed drivers and owner-operators. All Company-employed drivers and owner-operators are incentivized to follow strict operating procedures during pick up, transport and delivery. In addition to TQI’s private and owner-operator fleet, TQI has contracted third party partner carriers that have committed to meet TQI’s high standards of service and serve as a dedicated source of scalable capacity. Utilizing these partner carriers, TQI is able to accommodate spikes in demand created by product launches, product recalls, special promotions and other seasonal marketing efforts that require additional capacity. During 2015, approximately 34.5% of TQI's direct transportation expenses were provided by Company-employed drivers, 9.2% by owner-operators and 56.3% was provided by third party carriers.
TQI Competition
TQI competitors primarily include national and regional truckload carriers. We believe competition in TQI’s market is based primarily on quality service, on-time delivery and flexibility together with reliability and security. We believe TQI has a competitive advantage as a result of our superior technology and its established relationships with market leaders in the pharmaceutical andover other life science industries.pool distribution providers.
Marketing
We market all of our services through a sales and marketing staff located in major markets of the United States. Senior management also is actively involved in sales and marketing at the national and local account level and supports local sales initiatives.levels. We also participate in air cargo and retail trade shows and advertise our services through direct mail programs and through the Internet via www.forwardaircorp.com, www.forwardair.com,www.forwardairsolutions.com,www.shiptqi.com, and www.cstruck.com.www.cstruck.com. We market our services through all of our websites. The information contained on our websites is not part of this filing and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.
Seasonality
Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third and fourth quarters have traditionally been the strongest. Typically, this pattern has been the result of factors such as economic conditions, customer demand, weather, and national holidays. Additionally, a significant portion of our revenue is derived from customers whose business levels are impacted by the economy. The impact of seasonal trends and the economy is more pronounced on our pool distribution business. The pool distributionPool Distribution business, is seasonal andwhose operating revenues and results tend to improve in the third and fourth quarters compared to the first and second quarters.
Employees and Equipment
As of December 31, 2015,2018, we had 3,4394,362 full-time employees, 2,2261,553 of whom were freight handlers. Also, as of that date, we had an additional 1,0971,007 part-time employees, of whom the majority were freight handlers. None of our employees are covered by a collective bargaining agreement. We recognize that our workforce, including our freight handlers, is one of our most valuable assets. The recruitment, training and retention of qualified employees isare essential to support our continued growth and to meet the service requirements of our customers.
We own the majoritymanage a trailer pool that is utilized by all of trailers we useour reportable segments to move freight through our networks. SubstantiallyOur trailer pool includes dry van, refrigerated and roller-bed trailers, and substantially all of our trailers are 53’ long, some53 feet long. We own the majority of which have specialized roller bed equipment required to serve air cargo industry customers. Atthe trailers we use, but we supplement at times with leased trailers. As of December 31, 2015,2018, we had 4,2346,182 owned trailers in our fleet with an average age of approximately 5.44.3 years. In addition, atas of December 31, 2014,2018, we also had 1,089465 leased trailers in our fleet. AtAs of December 31, 2015,2018, we had 726585 owned tractors and straight trucks in our fleet, with an average age of approximately 4.66.1 years. In addition, atas of December 31, 2015,2018, we also had 185600 leased tractors and straight trucks in our fleet.
Environmental Protection Efforts
Forward Air is committed to protecting the environment and we have taken a variety of steps to improve the sustainability of our operations. We are implementing new practices and technologies, improving our training, and incorporating sustainability objectives in our growth strategies.
As a partner of the U.S. Environmental Protection Agency ("EPA") SmartWay program since 2008, Forward Air has continued to adopt new environmentally safe policies and innovations to improve fuel efficiency and reduce emissions. For example, we actively seek to utilize equipment with reduced environmental impact. We utilize trailers with light weight composites and employ trailer skirts to decrease aerodynamic drag, both of which improve fuel efficiency. We are also increasing our use of electronic forklifts and transitioning to automatic transmission tractors, which will decrease our fuel consumption.
Through vendor partnerships, we are implementing new solutions to manage waste and improve recycling across our facilities. Annually, we recycle tons of dunnage and thousands of aluminum load bars. Forward Air also participates in ReCaps, providing and purchasing recycled trailer tires. We recognize the value in describing our sustainability focus and will continue to update our future disclosures accordingly.
Risk Management and Litigation
Under U.S. Department of Transportation (“DOT”) regulations, we are liable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on our behalf. Additionally, from time to time, the drivers employed and engaged by the third-party transportation carriers we contract with are involved in accidents, which may result in serious personal injuries. The resulting types and/or amounts of damages may be excluded by or exceed the amount of insurance coverage maintained by the contracted carrier. Although these drivers are not our employees, all of these drivers are employees, owner-operators, or independent contractors working for carriers and, from time to time, claims may be asserted against us for their actions, or for our actions in retaining them.
We currently maintain liability insurance coverage that we believe is adequate to cover third-party claims. We have a self-insured retention ("SIR") of $0.5$3.0 million per occurrence for vehicle and general liability claims and will be responsible for any damages and personal injuries below that self-insured amount. We are also responsible for varying annual aggregate deductible amounts of liability for claims in excess of the SIR/deductible. For the policy year that began April 1, 2018, we have an annual $6.0 million aggregate deductible for claims between $3.0 million and $5.0 million. We also have a $2.5 million aggregate deductible for claims between $5.0 million and $10.0 million. As a result, we are responsible for the first $7.5 million per claim, until we meet the $6.0 million aggregate deductible for claims between $3.0 million and $5.0 million and the $2.5 million aggregate deductible for claims between $5.0 million and $10.0 million. We cannot guarantee that our SIR levels will not increase and/or that we have to agree to more unfavorable policy terms as a result of market conditions, poor claims experience or other factors. This insurance covers claims for the LTL Expedited and Pool Distribution segments. TLS maintains separate liability insurance coverage for claims between $0 and $5.0 million, and for the policy year that began April 1, 2018, TLS had no SIR for claims in this layer. Intermodal maintains separate liability insurance coverage for all liability claims. For the policy year that began April 1, 2018, Intermodal had an SIR of $50 thousand for each claim.
We may also be subject to claims for workers’ compensation. We maintain
workers’ compensation insurance coverage that we believe is adequate to cover such claims. We have a self-insured retentionSIR of approximately $0.3$0.4 million for each such claim, except in Ohio, where we are a qualified self-insured entity with an approximately $0.5 million self-insured retention.SIR. We could incur claims in excess of our policy limits or incur claims not covered by our insurance. Any claims beyond the limits or scope of our insurance coverage may have a material adverse effect on us. Because we do not carry “stop loss” insurance, a significant increase in the number of claims that we must cover under our self-insurance retainage could adversely affect our profitability. In addition, we may be unable to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses.
From time to time, we are a party to litigation arising in the normal course of our business, most of which involve claims for personal injury, property damage related to the transportation and handling of freight, or workers’ compensation. We do not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations.
Regulation
The DOTWe are regulated by various United States and various state and federal agencies, including but not limited to the DOT. These regulatory authorities have been granted broad powers, over our business. These entities generally regulategoverning matters such activities as authorizationauthority to engage in property brokerage and motor carrier operations, as well as motor carrier registration, driver hours of service, safety and fitness of transportation equipment and drivers, transportation of hazardous materials, certain mergers and acquisitions and periodic financial reporting. WeThe trucking industry is also subject to regulatory and legislative changes from a variety of other governmental authorities, which address matters such as: increasingly stringent environmental, occupational safety and health regulations, limits on vehicle weight and size, ergonomics, port security, and hours of service. In addition, we are licensed through our subsidiariessubject to compliance with cargo-security and transportation regulations issued by the DOT as a motor carrierTransportation Security Administration and as a property broker to arrange forCustoms and Border Protection (“CBP”) within the transportationU.S. Department of freight by truck. OurHomeland Security, and our domestic customs brokerage operations are licensed by U.S. Customs. WeCBP. Additionally, our Canada business activities are subject to similar regulationrequirements imposed by the laws and regulations of Canada, as well as its provincial laws and regulations. Regulatory requirements, and changes in Canada.regulatory requirements, may affect our business or the economics of the industry by requiring changes in operating practices or by influencing the demand for and increasing the costs of providing transportation services.
Service Marks
Through one of our subsidiaries, we hold federal trademark registrations or applications for federal trademark registration, associated with the following service marks: Forward Air, Inc. ®,®, North America’s Most Complete Roadfeeder Network ®,Network®, Keeping Your Business Moving Forward®, Forward Air ®, Forward Air Solutions®Air®, Forward Air TLXSolutionsSM®, Forward Air Complete®, PROUD®, Total Quality, Inc.®, TQI, Inc.®, TQI®, Central States Trucking Co.® and TQI, Inc. ®.CSTSM. These marks are of significant value to our business. We are also in the process of registering our trademark for Central States Trucking Co.
Website Access
Available Information
We file reports with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, andcurrent reports on Form 8-K. other reports and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended from time to time. We are an electronic filer and the SEC maintains an Internet site at www.sec.gov that contains these reports and other information filed electronically. We make available free of charge through the Investor Relations portion of our website our Code of Business Conduct and Ethics and oursuch reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website addresses are www.forwardair.com,www.forwardairsolutions.com, www.shiptqi.com and www.cstruck.com.address is www.forwardaircorp.com. Our goal is to maintain our website as a portal through which investors can easily find or navigate to pertinent information about us. The information provided on the website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.
Item 1A. Risk Factors
In addition to the other information in this Form 10-K and other documents we have filed with the SEC from time to time, theThe following are important risk factors should be carefully considered in evaluating our business. Such factorsthat could affect our financial performance and could cause actual results and cause resultsfor future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made by,in this Annual Report on Form 10-K or our other filings with the SEC or in oral presentations such as telephone conferences and webcasts open to the public. You should carefully consider the following factors and consider these in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements and related Notes in Item 8.
Overall economic conditions that reduce freight volumes could have a material adverse impact on behalfour operating results and ability to achieve growth.
We are sensitive to changes in overall economic conditions that impact customer shipping volumes, industry freight demand and industry truck capacity. The transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of us. Some or allour customers, interest rate fluctuations, inflation and other economic factors beyond our control. Changes in U.S. trade policy could lead to ‘trade wars’ impacting the volume of these factorseconomic activity in the United States, and as a result, trucking freight volumes may apply tobe materially reduced. Such a reduction may materially and adversely affect our business. Deterioration in the economic environment subjects our business to various risks, including the following, that may have a material and adverse impact on our operating results and cause us not to maintain profitability or achieve growth:
A reduction in overall freight volumes reduces our revenues and opportunities for growth. In addition, a decline in the volume of freight shipped due to a downturn in customers’ business cycles or other factors (including our ability to assess dimensional-based weight increases) generally results in decreases in freight pricing and decreases in average revenue per pound of freight, as carriers compete for loads to maintain truck productivity.
Our business is subjectbase transportation rates are determined based on numerous factors such as length of haul, weight per shipment and freight class. During economic downturns, we may also have to generallower our base transportation rates based on competitive pricing pressures and market factors.
Some of our customers may face economic difficulties and business factors that are largelymay not be able to pay us, and some may go out of business. In addition, some customers may not pay us as quickly as they have in the past, causing our control, anyworking capital needs to increase.
A significant number of our transportation providers may go out of business and we may be unable to secure sufficient equipment or other transportation services to meet our commitments to our customers.
We may not be able to appropriately adjust our expenses to changing market demands. In order to maintain high variability in our business model, it is necessary to adjust staffing levels to changing market demands. In periods of rapid change, it is more difficult to match our staffing levels to our business needs.
If we have difficulty attracting and retaining owner-operators or freight handlers, or are unable to contract with a sufficient number of third-party carriers to supplement our owner-operator fleet, our profitability and results of operations could be adversely affected.
We depend on owner-operators for most of our transportation needs. In 2018, owner-operators provided 49.2% of our purchased transportation. Competition for owner-operators is intense, and sometimes there are shortages of available owner-operators. In addition, a decline in the availability of trucks, tractors and trailers for owner-operator purchase or use may negatively affect our ability to hire, attract or retain available owner-operators. We also need a large number of freight handlers to operate our business efficiently. During periods of low unemployment in the areas where our terminals are located, we may have difficulty hiring and retaining a sufficient number of freight handlers. If we have difficulty attracting and retaining enough qualified freight handlers and owner-operators, we may be forced to increase wages and benefits or to increase the cost at which we contract with our owner-operators, either of which would increase our operating costs. This difficulty may also impede our ability to maintain our delivery schedules, which could make our service less competitive and force us to curtail our planned growth. A capacity deficit may lead to a loss of customers and a decline in the volume of freight we receive from customers.
To augment our fleet of owner-operators, from time to time we purchase transportation from third-party carriers at a higher cost. As with owner-operators, competition for third-party carriers is intense, and sometimes there are shortages of available third-party carriers. If we cannot secure a sufficient number of owner-operators and have to purchase transportation from third-party carriers, our operating costs will increase. If our labor and operating costs increase, we may be unable to offset the increased costs by increasing rates without adversely affecting our business. As a result, our profitability and results of operations could be adversely affected.
A determination by regulators that our independent owner-operators are employees rather than independent contractors could expose us to various liabilities and additional ongoing expenses, and related litigation can subject us to substantial costs, which could have a material adverse effect on our results of operations.operations and our financial condition.
At times, the Internal Revenue Service, the Department of Labor and state authorities have asserted that owner-operators are “employees,” rather than “independent contractors.” In addition, the topic of the classification of individuals as employees or independent contractors has gained increased attention among the plaintiffs’ bar. One or more governmental authorities may challenge our position that the owner-operators we use are not our employees. A determination by regulators that our independent owner-operators are employees rather than independent contractors could expose us to various liabilities and additional ongoing expenses, including but not limited to, employment-related expenses such as workers’ compensation insurance coverage and reimbursement of work-related expenses. Our business is dependent upon a numberexposure could include prior period compensation, as well as potential liability for employee benefits and tax withholdings. In addition, certain states have recently seen numerous class action lawsuits filed against transportation companies that engage independent contractors, some of factors that maywhich have resulted in significant damage awards and/or monetary settlements for workers who have been allegedly misclassified as independent contractors. The legal and other costs associated with any of these matters can be substantial and could have a material adverse effect on theour results of operations and our financial condition.
If we fail to maintain our information technology systems, or if we fail to successfully implement new technology or enhancements, we may be at a competitive disadvantage and experience a decrease in revenues.
We rely heavily on our information technology systems to efficiently run our business, and they are a key component of our growth strategy and competitive advantage. We expect our customers to continue to demand more sophisticated, fully integrated information systems from their transportation providers. To keep pace with changing technologies and customer demands, we must correctly interpret and address market trends and enhance the features and functionality of our information technology systems in response to these trends, which may lead to significant ongoing software development costs. We may be unable to accurately determine the needs of our customers and the trends in the transportation services industry or to design and implement the appropriate features and functionality of our information technology systems in a timely and cost-effective manner, which could put us at a competitive disadvantage and result in a decline in our efficiency, decreased demand for our services and a corresponding decrease in our revenues. In addition, we could incur software development costs for technology that is ultimately not deployed and thus, would require us to write-off these costs, which would negatively impact our financial results. Furthermore, as technology improves, our customers may be able to find alternatives to our services for matching shipments with available freight hauling capacity.
Our information technology systems can also play an integral role in managing our internal freight and transportation information and creating additional revenue opportunities including assessing available backhaul capacity. A failure to capture and utilize our internal freight and transportation information may impair our ability to service our existing customers or grow
revenue.
Our information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant system failures and electrical outages in the past. While we take measures to ensure our major systems have redundant capabilities, our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, data leakage, human error, break-ins, cyber-attacks and similar events. The occurrence of any of these events could disrupt or damage our information technology systems and hamper our internal operations, manyimpede our customers’ access to our information technology systems and adversely impact our customer service, volumes, and revenues and result in increased cost. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Our information technology systems are subject to cybersecurity risks, some of which are beyond our control. These factors include increases or rapid fluctuations
We depend on the proper functioning and availability of our information systems in fuel prices, freight volumes, capacity inoperating our business, including communications and data processing systems. It is important that the trucking industry, insurance premiums, self-insured retention levels, difficulty in attractingdata processed by these systems remains confidential, as it often includes competitive customer information, confidential customer transaction data, employee records, and retaining qualified owner-operatorskey financial and freight handlersoperational results and statistics. Some of our software applications are utilized by third parties who provide outsourced administrative functions, which exposes us to additional cybersecurity risks. Although our information systems are protected through physical and software safeguards as well as needed outside capacitybackup systems considered appropriate by management, it is difficult to fully protect against the possibility of damage or breach created by cybersecurity attacks or other security attacks in every potential circumstance that may arise. As cybersecurity attacks are increasing in frequency and the statussophistication it becomes even more difficult to protect against a breach of our owner-operators as independent contractors. Our profitability would decline if we were unableinformation systems.
Cybersecurity incidents that impact the availability, reliability, speed, accuracy, or other proper functioning of these information systems could have a significant impact on our operations. Failure to anticipateprevent or mitigate data loss or system intrusions from cybersecurity attacks, including system failure, security breach, disruption by malware, or other damage, could expose us or our vendors or customers to a risk of loss or misuse of such information, interrupt or delay our operations, damage our reputation, cause a loss of customers, result in litigation or potential liability for us and react to increases inotherwise harm our operating costs, including purchased transportationbusiness. Likewise, data privacy breaches by employees and labor,others who access our systems may pose a risk that sensitive customer or decreases in the amount of revenue per pound of freight shipped through our networks. As a result of competitive factors, wevendor data may be unableexposed to raiseunauthorized persons or to the public, adversely impacting our prices to meet increases incustomer service, employee relationships and our operating costs,reputation.
We may have difficulty effectively managing our growth, which could result in a material adverse effect onadversely affect our business, results of operations and financial condition.
Economic conditionsOur growth strategy includes increasing freight volume from existing customers, expanding our service offerings and pursing strategic transactions. Our growth plans will place significant demands on our management and operating personnel. Our ability to manage our future growth effectively will require us to, among other things, regularly enhance our operating and management information systems, evaluate and change our service offerings and continue to attract, retain, train, motivate and manage key employees, including through training and development programs. If we are unable to manage our growth effectively, our business, results of operations and financial condition may be adversely affected.
Volatility in fuel prices, shortages of fuel or the ineffectiveness of our fuel surcharge program can have a material adverse effect on our results of operations and profitability.
We are subject to risks associated with the availability and price of fuel. Fuel prices have fluctuated dramatically over recent years. Future fluctuations in the availability and price of fuel could adversely affect our customers and the amount of freight available for transport. This may require us to lower our rates, and this may also result in lower volumes of freight flowing through our network. Customers
encountering adverse economic conditions represent a greater potential for loss, and we may be required to increase our reserve for bad-debt losses.
Our results of operations may be affected by seasonal factors. Volumes of freight tend to be lower in the first quarter after the winter holiday season. In addition, it is not possible to predict the short or long-term effects of any geopolitical events on the economy or on consumer confidence in the United States, or their impact, if any, on our future results of operations.
In order to grow our business, we will need to increase the volumeFuel availability and revenue per pound of the freight shipped through our networks.
Our growth depends in significant part on our ability to increase the amount and revenue per pound of freight shipped through our networks. The amount of freight shipped through our networks and our revenue per pound depend on numerousprices can be impacted by factors many of which are beyond our control, such as economicnatural or man-made disasters, adverse weather conditions, political events, disruption or failure of technology or information systems, price and our competitors’ pricing. Therefore,supply decisions by oil producing countries and cartels, terrorist activities, armed conflict and world supply and demand imbalance. Over time we cannot guarantee thathave been able to mitigate the amount of freight shipped or the revenue per pound we realize on that freight will increase or even remain at current levels. If we fail to increase the volumeimpact of the freight shippedfluctuations through our networks or the revenue per pound of the freight shipped, we may be unable to maintain or increase our profitability.
Our rates, overall revenue and expenses are subject to volatility.
Our rates are subject to change based on competitive pricing and market factors. Our overall transportation rates consist of base transportation and fuel surcharge rates. Our base transportation rates exclude fuel surcharges and are set based on numerous factors such as length of haul, freight class and weight per shipment. The base rates are subject to change based on competitive pricing pressures and market factors. Most of our competitors impose fuel surcharges, but there is no industry standard for the calculation of fuel surcharge rates.programs. Our fuel surcharge rates are set weekly based on the national average for fuel prices as published by the U.S. Department of Energy (“DOE”) and our fuel surcharge table. Historically, we have not adjusted our method for determining fuel surcharge rates.
Our net fuel surcharge revenue is the result of our fuel surcharge rates and the tonnage transiting our networks. TheThere can be no assurance that our fuel surcharge revenue is then netted withprograms will be effective in the fuel surcharge we pay to our owner-operators and third party transportation providers. Thefuture as the fuel surcharge may not capture the entire amount of the increase in fuel prices. DecreasesAdditionally, decreases in fuel prices reduce the cost of transportation services and accordingly, could reduce our revenues and may reduce margins for certain lines of business. In addition to changing fuel prices, fluctuations in volumes and related load factors may subject us to volatility in our net fuel surcharge revenue. ThisFuel shortages, changes in fuel prices and the potential volatility in net fuel surcharge revenue may adversely impact our overall revenue, base transportation revenue plus net fuel surcharge revenue, and results of operations.operations and overall profitability.
Because a portion of our network costs are fixed, we will be adversely affected by any factors that result in a decrease in the volume or revenue per pound of freight shipped through our networks.networks will adversely affect our results of operations.
Our operations, particularly our networks of hubs and terminals, represent substantial fixed costs. As a result, any decline in the volume or revenue per pound of freight we handle maywill have an adverse effect on our operating margin and our results of operations. Several factors can result in such declines, including adverse business and economic conditions affecting shippers of freight as discussed above. In addition, volumes shipped through our network may be negatively impacted by lack of customer contractual obligations or cancellations of existing customer contracts. Typically, Forward Air doeswe do not haveenter into long-term contracts with itsour customers. FASI does have contracts with its customers but theseRather, our customer contracts typically have terms allowingallow for cancellation within 30 to 60 days. As a result, we cannot guarantee that our current customers will continue to utilize our services or that they will continue at the same levels. The actual shippersAny one of the freight moved through our networks include various manufacturers, distributors and/or retailers of electronics, clothing, telecommunications equipment, machine parts, trade show exhibit materials and medical equipment. Adverse business conditions affecting these shippers or adverse general economic conditions are likely to causeforegoing factors that results in a declinedecrease in the volume or revenue per pound of freight shipped throughwill adversely affect our networks.results of operations.
We derive a significant portion of our revenue from a few major customers, the loss of one or more of which could have a material adverse effect on our business.
For the calendar year ended December 31, 2018, our top 10 customers, based on revenue, accounted for approximately 31% of our revenue. Our Expedited LTL, TLS and Intermodal segments typically do not have long-term contracts with their customers. While our Pool segment business may involve a long-term written contract, those contracts may contain cancellation clauses, and there is no assurance that our current customers will continue to utilize our services or continue at the same levels. A reduction in or termination of our services by one or more of our major customers could have a material adverse effect on our business and operating results.
We operate in highly competitive and fragmented segments of our industry, and our business will suffer if we are unable to adequately address downward pricing pressures and other factors that may adversely affect our results of operations, growth prospects and profitability.
The segments of the freight transportation industry in which we participate are highly competitive, very fragmented and historically have few barriers to entry. Our principal competitors include nationalWe compete with a large number of other asset-light logistics companies, asset-based carriers, integrated logistics companies, and regional truckload and less-than-truckload brokers and carriers.third-party freight brokers. To a lesser extent, we also compete with integrated air cargo carriers and passenger airlines. Our competition ranges from small operators that compete within a limited geographic area to companies with substantially greater financial and other resources, including greater freight capacity. We also face competition from freight forwarders who decide to establish their own networks to transport expedited ground freight.freight, as well as from logistics companies, Internet matching services and Internet and third-party freight brokers, and new entrants to the market. In addition, customers can bring in-house some of the services we provide to them. We believe competition is based primarily on quality service, available capacity, on-time delivery, flexibility, reliability and security, transportation rates as well as the ability to acquire and maintain terminal facilities in desirable locations at reasonable rates. Many of our competitors periodically reduce their rates to gain business, especially during times of economic decline. In the past several years, several of our competitors have reduced their rates to
unusually low levels that we believe are unsustainable in the long-term, but that may materially adversely affect our business in the short-term.
In addition, competitors may pursue other strategies to gain a competitive advantage such as developing superior information technology systems or establishing cooperative relationships to increase their ability to address customer needs. Furthermore, the transportation industry continues to consolidate. As a result of consolidation, our competitors may increase their market share and improve their financial capacity, and may strengthen their competitive positions. Business combinations could also result in competitors providing a wider variety of services at competitive prices, which could adversely affect our financial performance. These competitorscompetitive pressures may cause a decrease in our volume of freight, require us to lower the prices we charge for our services and adversely affect both our results of operations, growth prospects and profitability.
If we have difficulty attracting and retaining owner-operators or freight handlers, ourOur results of operations couldwill be materially and adversely affected.
We depend on owner-operators for mostaffected if our new service offerings do not gain market acceptance or result in the loss of our transportation needs. In 2015, owner-operators provided 57.4%current customer base.
One element of our purchased transportation. Competition for owner-operatorsgrowth strategy is intense,to expand our service offerings to customers. As a result, we have added additional services in the past few years. We may not succeed in making our customers sufficiently aware of existing and sometimes there are shortagesfuture services or in creating customer acceptance of available owner-operators.these services at the prices we would want to charge. In addition, we need a large number of freight handlersmay be required to operatedevote substantial resources to educate our business efficiently. During periods of low unemployment in the areas where our terminals are located, we may have difficulty hiring and retainingcustomers, with no assurance that a sufficient number of freight handlers. If we have difficulty attracting and retaining enough qualified owner-operatorscustomers will use our services for commercial success to be achieved. We may not identify trends correctly, or freight handlers, we may not be forcedable to increase wages and benefits, which would increasebring new services to market as quickly, effectively or price-competitively as our operating costs. This difficultycompetitors. In addition, new services may also impede our ability to
maintain our delivery schedules, which could make our service less competitive and force us to curtail our planned growth. If our labor costs increase, we may be unable to offset the increased labor costs by increasing rates without adversely affecting our business. As a result, our profitability may be reduced.alienate existing customers or cause
A determination by regulators that our independent owner-operators are employees rather than independent contractors could expose us to various liabilities and additional costs.
At times,lose business to our competitors. If any of the Internal Revenue Service, the Department of Labor and state authoritiesforegoing occurs, it could have asserted that owner-operators are “employees,” rather than “independent contractors.” One or more governmental authorities may challenge our position that the owner-operators we use are not our employees. A determination by regulators that our independent owner-operators are employees rather than independent contractors could expose us to various liabilities and additional costs including, but not limited to, employment-related expenses such as workers’ compensation insurance coverage and reimbursement of work-related expenses. Additionally, the exposure could include prior period compensation, as well as potential liability for employee benefits and tax withholdings.
If we have difficulty contracting with a sufficient number of third-party carriers to supplement our owner-operator fleet and satisfy our customers’ fast-growing transportation needs,material adverse effect on our results of operations.
We have grown and may grow, in part, through acquisitions, which involve various risks, and we may not be able to identify or acquire companies consistent with our growth strategy or successfully integrate acquired businesses into our operations.
We have grown through acquisitions, and we intend to pursue opportunities to expand our business by acquiring other companies in the future. Acquisitions involve risks, including those relating to:
identification of appropriate acquisition candidates;
negotiation of acquisitions on favorable terms and valuations;
integration of acquired businesses and personnel;
implementation of proper business and accounting controls;
ability to obtain financing, at favorable terms or at all;
diversion of management attention;
retention of employees and customers;
non-employee driver attrition;
unexpected liabilities;
detrimental issues not discovered during due diligence.
Acquisitions also may affect our short-term cash flow and net income as we expend funds, potentially increase indebtedness and incur additional expenses. If we are not able to identify or acquire companies consistent with our growth strategy, or if we fail to successfully integrate any acquired companies into our operations, we may not achieve anticipated increases in revenue, cost savings and economies of scale, our operating results may actually decline and acquired goodwill and intangibles may become impaired.
We could be adversely affected.required to record a material non-cash charge to income if our recorded intangible assets or goodwill are determined to be impaired.
To augmentWe have $113.7 million of recorded net definite-lived intangible assets on our fleetconsolidated balance sheet at December 31, 2018. Our definite-lived intangible assets primarily represent the value of owner-operators,customer relationships and non-compete agreements that were recorded in conjunction with our various acquisitions. We review our long-lived assets, such as our definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is recognized on these assets when the estimated fair value is less than the carrying value. If such measurement indicates impairment, we purchase transportation from third-party carriers. As with owner-operators, competitionwould be required to record a non-cash impairment charge to our consolidated statement of comprehensive income in the amount that the carrying value of these assets exceed the estimated fair value of the assets.
We also have recorded goodwill of $199.1 million on our consolidated balance sheet at December 31, 2018. Goodwill is assessed for third-party carriers is intense,impairment annually (or more frequently if circumstances indicate possible impairment) for each of our reporting units. This assessment includes comparing the fair value of each reporting unit to the carrying value of the assets assigned to each reporting unit. If the carrying value of the reporting unit was to exceed our estimated fair value of the reporting unit, we would then be required to estimate the fair value of the individual assets and sometimes there are shortagesliabilities within the reporting unit to ascertain the amount of available third-party carriers.fair value of goodwill and any potential impairment. If we cannot securedetermine that our fair value of goodwill is less than the related book value, we could be required to record a sufficient numbernon-cash impairment charge to our consolidated statement of owner-operatorscomprehensive income, which could have a material adverse effect on our earnings.
We are dependent on our senior management team and have to purchase transportation from third-party carriers, our operating costs will increase. This capacity deficit may lead to aother key employees, and the loss of customersany such personnel could materially and adversely affect our business, operating results and financial condition.
Our future performance depends, in significant part, upon the continued service of our senior management team and other key employees. We cannot be certain that we can retain these employees. The loss of the services of one or more of these or other key personnel could have a declinematerial adverse effect on our business, operating results and financial condition if we are unable to secure replacement personnel internally or through our recruitment programs and initiatives that have sufficient experience in our industry or in the volumemanagement of freightour business. If we receive from customers.fail to develop, compensate, and retain a core group of senior management and other key employees and address issues of succession planning, it could hinder our ability to execute on our business strategies and maintain our level of service.
Claims for property damage, personal injuries or workers’ compensation and related expenses could significantly reduce our earnings.
Under DOT regulations, we are liable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on our behalf. Additionally, from time to time, the drivers employed and engaged by the third-party transportation carriers we contract with are involved in accidents, which may result in serious personal injuries. The resulting types and/or amounts of damages may be excluded by or exceed the amount of insurance coverage maintained by the contracted carrier. Although these drivers are not our employees and all of these drivers are employees, owner-operators, or independent contractors working for carriers, from time to time, claims may be asserted against us for their actions, or for our actions in retaining them.
We currently maintain liability insurance coverage that we believe is adequate to cover third-party claims. Forward Air and FASIWe have a self-insured retention ("SIR") of $0.5$3.0 million per occurrence for vehicle and general liability claims and will be responsible for any damages and personal injuries below that self-insured amount. We are also responsible for varying annual aggregate deductible amounts of liability for claims in excess of the SIR/deductible. For the policy year that began April 1, 2018, we have an annual $6.0 million aggregate deductible for claims between $3.0 million and $5.0 million. We also have a $2.5 million aggregate deductible for claims between $5.0 million and $10.0 million. As a result, we are responsible for the first $7.5 million per claim, until we meet the $6.0 million aggregate deductible for claims between $3.0 million and $5.0 million and the $2.5 million aggregate deductible for claims between $5.0 million and $10.0 million. This insurance covers claims for the LTL Expedited and Pool Distribution segments. TLS maintains separate liability insurance coverage for claims between $0 and $5.0 million, and for the policy year that began April 1, 2018, TLS had no SIR for claims in this layer. Intermodal maintains separate liability insurance coverage for all liability claims. For the policy year that began April 1, 2018, Intermodal had an SIR of $50 thousand for each claim. We cannot guarantee that our SIR levels will not increase and/or that we have to agree to more unfavorable policy terms as a result of market conditions, poor claims experience or other factors.
We may also be subject to claims for workers’ compensation. We maintain workers’ compensation insurance coverage that we believe is adequate to cover such claims. We have a self-insured retentionSIR of approximately $0.3$0.4 million for each such claim, except in Ohio, where we are a qualified self-insured entity with an approximately $0.5 million self-insured retention.SIR. We could incur claims in excess of our policy limits or incur claims not covered by our insurance. Any claims beyond the limits or scope of our insurance coverage may have a material adverse effect on us. Because we do not carry “stop loss” insurance, a significant increase in the number of claims that we must cover under our self-insurance retainage could adversely affect our profitability. In addition, we may be unable to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses.
We face risks related to self-insurance and third-party insurance that can be volatile to our earnings.
We self-insure a significant portion of our claims exposure and related expenses for cargo loss, employee medical expense, bodily injury, workers’ compensation and property damage, and maintain insurance with insurance companies above our limits of self-insurance. Self-insurance retention and other limitations are detailed in Part II, Item 7, under “Self-Insurance Loss Reserves.” Our large self-insured retention limits can make our insurance and claims expense higher or more volatile. Additionally, if our third-party insurance carriers or underwriters leave the trucking sector, as was the case during 2017, or if they decline to renew us as an insured, it could materially increase our insurance costs or collateral
requirements, or create difficulties in finding insurance in excess of our self-insured retention limits. Additionally, we could find it necessary to raise our self-insured retention, pay higher premiums or decrease our aggregate coverage limits when our policies are renewed or replaced.replaced, any of which will negatively impact our earnings.
We accrue for the costs of the uninsured portion of pending claims, based on the nature and severity of individual claims and historical claims development trends. Estimating the number and severity of claims, as well as related judgment or settlement amounts is inherently difficult. This, along with legal expenses, incurred but not reported claims, and other uncertainties can cause unfavorable differences between actual self-insurance costs and our reserve estimates.
We have grown and may grow, in part, through acquisitions, which involve various risks, and we may not be ableOur business is subject to identify or acquire companies consistent with our growth strategy or successfully integrate acquired businesses into our operations.seasonal trends.
We have grown through acquisitions, and we intend to pursue opportunities to expand our business by acquiring other companies in the future. Acquisitions involve risks, including those relating to:
identification of appropriate acquisition candidates;
negotiation of acquisitions on favorable terms and valuations;
integration of acquired businesses and personnel;
implementation of proper business and accounting controls;
ability to obtain financing, at favorable terms or at all;
diversion of management attention;
retention of employees and customers;
unexpected liabilities;
potential erosion of operating profits as new acquisitions may be unable to achieve profitability comparable with our core airport-to-airport business; and
detrimental issues not discovered during due diligence.
Acquisitions also may affect our short-term cash flow and net income as we expend funds, potentially increase indebtedness and incur additional expenses. If we are not able to identify or acquire companies consistent with our growth strategy, or if we fail to successfully integrate any acquired companies into our operations, we may not achieve anticipated increases in revenue, cost savings and economies of scale,Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. Our first and second quarters have traditionally been the weakest compared to our third and fourth quarters. This trend is dependent on numerous factors including economic conditions, customer demand and weather. Because revenue is directly related to the available working days of shippers, national holidays and the number of business days during a given period may actually decline and acquired goodwill may become impaired.
Severe economic downturns like the recession experienced in 2008 and 2009 can result in weaker demand for ground transportation services, which may have a significant negativealso create seasonal impact on our results of operations. After the winter holiday season and during the remaining winter months, our freight volumes are typically lower because some customers reduce shipment levels. In addition, a substantial portion of our revenue is derived from customers in industries whose shipping patterns are tied closely to consumer demand which can sometimes be difficult to predict
During 2008 and 2009, we experienced significantly weaker demand foror are based on just-in-time production schedules. Therefore, our airport-to-airport and pool distribution services asrevenue is, to a result of the severe downturn in the economy. During the time in question, we adjusted the sizelarge degree, affected by factors that are outside of our owner-operator fleet and reduced employee headcount to compensate for the drop in demand. No assurancecontrol. There can be givenno assurance that reductionsour historic operating patterns will continue in owner-operators and employeesfuture periods as we cannot influence or other steps we may take during similar times in the future will be adequate to offset the effectsforecast many of reduced demand. If we experience another economic downturn it may have a significant negative impact on ourthese factors.
Our results of operations.
Extreme or unusualoperations may be affected by harsh weather conditions can disrupt our operations, impact freight volumes and increase our costs, all of which could adversely affect our results of operations.disasters.
Certain weatherweather-related conditions such as ice and snow can disrupt our operations. IncreasesOur operating expenses have historically been higher in the costwinter months because of operations, such as towingcold temperatures and other adverse winter weather conditions, which result in decreased fuel efficiency, increased cold weather-related maintenance activities, frequently occur during the winter months. Natural disasters such as hurricanescosts of revenue equipment and flooding canincreased insurance and claims costs. Harsh weather could also impactreduce our ability to transport freight, volumes and negatively impact our results of operations. Any such event affecting one of our key locationswhich could result in a significant interruption indecreased revenues. Disasters, whether natural or disruption of our business.
We could be required to record a material non-cash charge to income if our recorded intangible assets or goodwill are determined to be impaired.
We have $127.8 million of recorded net definite-lived intangible assets on our consolidated balance sheet at December 31, 2015. Our definite-lived intangible assets primarily represent the value of customer relationships and non-compete agreements that were recorded in conjunction with our various acquisitions. We review our long-lived assets, such as our definite-lived
intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is recognized on these assets when the sum of undiscounted estimated cash flows expected to result from the use of the asset is less than the carrying value. If such measurement indicates an impairment, we would be required to record a non-cash impairment charge to our consolidated statement of comprehensive income in the amount that the carrying value of these assets exceed the estimated fair value of the assets.
Weman-made can also have recorded goodwill of $205.6 million on our consolidated balance sheet at December 31, 2015. Goodwill is assessed for impairment annually (or more frequently if circumstances indicate possible impairment) for each of our reporting units. This assessment includes comparing the fair value of each reporting unit to the carrying value of the assets assigned to each reporting unit. If the carrying value of the reporting unit was to exceed our estimated fair value of the reporting unit, we would then be required to estimate the fair value of the individual assets and liabilities within the reporting unit to ascertain the amount of fair value of goodwill and any potential impairment. If we determine that our fair value of goodwill is less than the related book value, we could be required to record a non-cash impairment charge to our consolidated statement of comprehensive income, which could have a material adverse effect on our earnings.
We may have difficulty effectively managing our growth, which could adversely affect our results of operations.
Our growth plans will place significant demands on our managementperformance by reducing demand and operating personnel. Our ability to manage our future growth effectively will require us to regularly enhance our operating and management information systems and to continue to attract, retain, train, motivate and manage key employees. If we are unable to manage our growth effectively, our business, results of operations and financial condition may be adversely affected.
If we fail to maintain and enhance our information technology systems, we may lose orders and customers or incur costs beyond expectations.
We must maintain and enhance our information technology systems to remain competitive and effectively handle higher volumes of freight through our networks. We expect customers to continue to demand more sophisticated, fully integrated information systems from their transportation providers. If we are unable to maintain and enhance our information systems to handle our freight volumes and meet the demands of our customers, our business and results of operations will be adversely affected. If our information systems are unable to handle higher freight volumes and increased logistics services, our service levels and operating efficiency may decline. This may lead to a loss of customers and a decline in the volume of freight we receive from customers.
Our information technology systems are subject to risks that we cannot control.
Our information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant system failures and electrical outages in the past. While we take measures to ensure our major systems have redundant capabilities, our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, break-ins, cyber-attacks and similar events. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. The occurrence of any of these events could disrupt or damage our information technology systems and hamper our internal operations,reducing our ability to provide services to our customerstransport freight, which could result in decreased revenue and the ability of our customers to access our information technology systems. A material network breach in the security of our information technology systems could include the theft of our intellectual property or trade secrets, personal information of our employees and confidential information of certain customers. To the extent that any disruptions or security breach results in a loss or damage to our data, or in inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, reduce the demand for our services, lead to claims against us and ultimately harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.increased operating expenses.
We operate in a regulated industry, and increased costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.
The DOT and various state and federal agencies have been granted broad regulatory powers over our business in the United States, and we are licensed by the DOT and U.S. Customs. Additionally, our Canada business activities are subject to the similar laws and regulations of Canada and its provinces. If we fail to comply with any applicable regulations, our licenses may be revoked or we could be subject to substantial fines or penalties and to civil and criminal liability.
The transportation industry is subject to legislative and regulatory changes that can affect the economics of our business by requiring changes in operating practices or influencing the demand for, and the cost of providing, transportation services.
Heightened security concernsthe carriers’ drivers. The FMCSA has also implemented changes to the hours of service (“HOS”) regulations which govern the work hours of commercial drivers and adopted a rule that requires commercial drivers who use paper log books to maintain hours-of-service records with electronic logging devices (“ELDs”) and will require commercial drivers who use automatic on-board recording devices (“AOBRDs”) to record HOS to use ELDs by December 2019. The vast majority of our companies’ fleets utilize AOBRDs, and we are currently in the process of updating our fleets to meet the ELD requirement deadline of December 2019. At any given time, there are also other proposals for safety-related standards that are pending legislative or administrative approval or adoption. If additional or more stringent standards are adopted, such may continue to result in increased regulations, includinga reduction of the implementationpool of various security measures, checkpointsqualified drivers available to us and to other motor carriers in our industry. If we experience safety and fitness violations, our safety and fitness scores could be adversely impacted and our fleets could be ranked poorly as compared to our peers. A reduction in our safety and fitness scores or travel restrictions on trucks.those of our contracted drivers could also reduce our competitiveness in relation to other companies that have higher scores. Additionally, competition for qualified drivers and motor carriers with favorable safety ratings may increase and thus result in increases in driver-related compensation costs.
In addition, there may be changes in applicable federal or state tax or other laws or interpretations of those laws. If this happens, we may incur additional taxes, as well as higher workers’ compensation and employee benefit costs, and possibly penalties and interest for prior periods. This could have an adverse effect on our results of operations.
We are subject to various environmental laws and regulations, and costs of compliance with, or liabilities for violations of, existing or future laws and regulations could significantly increase our costs of doing business.
Our operations are subject to environmental laws and regulations dealing with, among other things, the handling of hazardous materials, and discharge and retention of stormwater.stormwater, and emissions from our vehicles. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage, environmental damage, and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable environmental laws or regulations, it could significantly increase our cost of doing business. Under specific environmental laws and regulations, we could be held responsible for all of the costs relating to any contamination at our past or present terminals and at third-party waste disposal sites. If we fail to comply with applicable environmental laws and regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.
In addition, as global warming issues become more prevalent, federal and local governments and our customers are beginning to respond to these issues. This increased focus on sustainability may result in new regulations and customer requirements that could negatively affect us. This could cause us to incur additional direct costs or to make changes to our operations in order
to comply with any new regulations and customer requirements, as well as increased indirect costs or loss of revenue resulting from, among other things, our customers incurring additional compliance costs that affect our costs and revenues. We could also lose revenue if our customers divert business from us because we have not complied with their sustainability requirements. These costs, changes and loss of revenue could have a material adverse effect on our business, financial condition and results of operations. Even without any new legislation or regulation, increased public concern regarding greenhouse gases emitted by transportation carriers could harm the reputations of companies operating in the transportation logistics industries and shift consumer demand toward more locally sourced products and away from our services.
WeThe FMCSA’s CSA initiative could adversely impact our ability to hire qualified drivers or contract with qualified owner-operators or third-party carriers, meet our growth projections and maintain our customer relationships, each of which could adversely impact our results of operations.
The FMCSA’s Compliance, Safety, Accountability initiative (“CSA”) is an enforcement and compliance program designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver. These measurements are scored and used by the FMCSA to identify potential safety risks and to direct enforcement action. CSA scores are dependent upon safety and compliance experience, which could change at any time. In addition, the safety standards prescribed in CSA could change and our ability as well as our independent contractors’ ability to maintain an acceptable score could be adversely impacted. Public disclosure of certain CSA scores was restricted through the enactment of the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”) on December 4, 2015; however, the FAST Act does not restrict public disclosure of all data collected by the FMCSA. If we receive unacceptable CSA scores, and this data is made available to the public, our senior management team, and therelationships with our customers could be damaged, which could result in a loss of any such personnel could materially and adversely affect our business.
Our future performance depends, in significant part, uponThe requirements of CSA could also shrink the continued serviceindustry’s pool of our senior management team. We cannot be certain that we can retain these employees. The loss ofdrivers as those with unfavorable scores could leave the services of one or more of these or other key personnel could haveindustry. As a material adverse effect on our business, operating results and financial condition. We must continueresult, the costs to developattract, train and retain qualified drivers, owner-operators or third-party carriers could increase. In addition, a core groupshortage of management personnelqualified drivers could increase driver turnover, decrease asset utilization, limit growth and address issuesadversely impact our results of succession planning if we are to realize our goal of growing our business. We cannot be certain that we will be able to do so.operations.
If our employees were to unionize, our operating costs would likely increase.
None of our employees is currently represented by a collective bargaining agreement. However, we have no assurance that our employees will not unionize in the future, which could increase our operating costs and force us to alter our operating methods. This could have a material adverse effect on our operating results.
Our charter and bylaws and provisions of Tennessee law could discourage or prevent a takeover that may be considered favorable.
Our charter and bylaws and provisions of Tennessee law may discourage, delay or prevent a merger, acquisition or change in control that may be considered favorable. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors and take other corporate actions. Among other things, these provisions:
authorize us to issue preferred stock, the terms of which may be determined at the sole discretion of our Board of Directors and may adversely affect the voting or economic rights of our shareholders; and
establish advance notice requirements for nominations for election to the Board of Directors and for proposing matters that can be acted on by shareholders at a meeting.
Our charter and bylaws and provisions of Tennessee law may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices for our Common Stock and also could limit the price that investors are willing to pay in the future for shares of our Common Stock.
Our financing costs may be adversely affected by changes in LIBOR.
LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We use LIBOR as a reference rate in our revolving credit facility to calculate interest due to our lender. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate our credit agreement with our lender. This could have an adverse effect on our financing costs.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Properties
Management believesWe believe that we have adequate facilities for conducting our business, including properties owned and leased. Management further believes that in the event replacement property is needed, it will be available on terms and at costs substantially similar to the terms and costs experienced by competitors within the transportation industry.
We lease our 37,500 square foot headquarters in Greeneville, Tennessee from the Greeneville-Greene County Airport Authority. The initial lease term ended in 2006, and the lease has two ten-year and one five-year renewal options. During 2007, we renewed the lease through 2016. We lease a 22,250 square foot facility for our national call center which is also located in Greeneville, Tennesee. The call center lease was initiated in August 2015 and has an approximate seven year term expiring in June 2022.
We own our Columbus, Ohio central sorting facility.facility which is used by our Expedited LTL and TLS segments. The expanded Columbus, Ohio facility is 125,000 square feet with 168 trailer doors. This premier facility can unload, sort and load upwards of 3.7 million pounds in five hours. In addition to the expansion, we process-engineered the freight sorting in the expanded building to improve handling efficiencies. The benefits include reductions in the distance each shipment moves in the building to speed up the transfer process, less handling of freight to further improve service integrity and flexibility to operate multiple sorts at the same time.
We also own facilities near Dallas/Fort Worth, Texas, Chicago, Illinois and Atlanta, Georgia.Georgia, all of which are used by the Expedited LTL segment. The Dallas/Fort Worth, Texas facility has over 216,000 square feet with 134 trailer doors and approximately 28,000 square feet of office space. The Chicago, Illinois facility is over 125,000 square feet with 110 trailer doors and over 10,000 square feet of office space. The Atlanta, Georgia facility is over 142,000 square feet with 118 trailer doors and approximately 12,000 square feet of office space. We lease our shared services headquarters in Greeneville, Tennessee. During 2016, we renewed the lease through 2023. We also lease our executive headquarters in Atlanta, Georgia.
We lease and maintain 102143 additional terminals, office spaces and other properties located in major cities throughout the United States and Canada. Lease terms for these terminals are typically for three to fiveseven years. As a result of the Towne acquisition, we currently have 152 idle facilities that we are still leasing. Our plan is to buyout or sublease these remaining facilities. In addition, we have operations in 2725 cities operated by independent agents who handle freight for us on a commission basis.
Item 3. Legal Proceedings
From time to time, we are a party to ordinary, routine litigation incidental to and arising in the normal course of our business, most of which involve claims for personal injury, property damage related to the transportation and handling of freight, or workers’ compensation. We do not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or cash flow.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our Common Stock trades on The NASDAQNasdaq Global Select Stock Market™ under the symbol “FWRD.” The following table sets forth the high and low sales prices for Common Stock as reported by The NASDAQ Global Select Stock Market™ for each full quarterly period within the two most recent fiscal years.
|
| | | | | | | | | | | | |
| 2015 | | High | | Low | | Dividends |
| First Quarter | | $ | 57.65 |
| | $ | 43.30 |
| | $ | 0.12 |
|
| Second Quarter | | 54.99 |
| | 50.21 |
| | 0.12 |
|
| Third Quarter | | 53.30 |
| | 41.44 |
| | 0.12 |
|
| Fourth Quarter | | 50.47 |
| | 40.52 |
| | 0.12 |
|
| | | | | | | |
| 2014 | | High | | Low | | Dividends |
| First Quarter | | $ | 46.66 |
| | $ | 41.36 |
| | $ | 0.12 |
|
| Second Quarter | | 48.08 |
| | 42.09 |
| | 0.12 |
|
| Third Quarter | | 48.93 |
| | 44.45 |
| | 0.12 |
|
| Fourth Quarter | | 51.37 |
| | 43.60 |
| | 0.12 |
|
According to a position listing thereThere were approximately 531638 shareholders of record of our Common Stock as of January 15, 2016.16, 2019.
Subsequent to December 31, 2015,2018, our Board of Directors declared a cash dividend of $0.12$0.18 per share that will be paid in the first quarter of 2016.2019. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.
There are no material restrictions on our ability to declare dividends.
None of our securities were sold during fiscal year 20152018 without registration under the Securities Act.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2015 with respect to shares of our Common Stock that may be issued under existing equity compensation plans, the 1999 Stock Option and Incentive Plan (the “1999 Plan”), the Amended and Restated Stock Option and Incentive Plan (“1999 Amended Plan”), the Non-Employee Director Stock Option Plan (the “NED Plan”), the 2000 Non-Employee Director Award (the “2000 NED Award”), the 2005 Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated Non-Employee Director Stock Plan (the “Amended Plan”). Our shareholders have approved each of these plans.
|
| | | | | | | | | | |
| Equity Compensation Plan Information |
| Plan Category |
| Number of Securities to be Issued upon Exercise or Vesting of Outstanding/Unvested Shares, Options, Warrants and Rights |
| Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |
| Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans |
|
|
|
| (a) |
| (b) |
| Equity Compensation Plans Approved by Shareholders |
| 1,069,022 |
|
| $ | 32 |
|
| 1,436,612 |
|
| Equity Compensation Plans Not Approved by Shareholders |
| — |
|
| — |
|
| — |
|
| Total |
| 1,069,022 |
|
| $ | 32 |
|
| 1,436,612 |
|
| |
(a) | Excludes purchase rights accruing under the ESPP, which has an original shareholder-approved reserve of 500,000 shares. Under the ESPP, each eligible employee may purchase up to 2,000 shares of Common Stock at semi-annual intervals each year at a purchase price per share equal to 90.0% of the lower of the fair market value of the Common Stock at close of (i) the first trading day of an option period or (ii) the last trading day of an option period. |
| |
(b) | Includes shares available for future issuance under the ESPP. As of December 31, 2015, an aggregate of 392,987 shares of Common Stock were available for issuance under the ESPP. |
Stock Performance Graph
The following graph compares the percentage change in the cumulative shareholder return on our Common Stock with The NASDAQNasdaq Trucking and Transportation Stocks Index and The NASDAQNasdaq Global Select Stock Market™ Index commencing on the last trading day of December 20102013 and ending on the last trading day of December 2015.2018. The graph assumes a base investment of $100 made on December 31, 20102013 and the respective returns assume reinvestment of all dividends. The comparisons in this graph are required by the SEC and, therefore, are not intended to forecast or necessarily be indicative of any future return on our Common Stock.
The performance graph and related information shall not be deemed “soliciting material” or be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
| |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 | 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| Forward Air Corporation | $ | 100 |
|
| $ | 113 |
|
| $ | 123 |
|
| $ | 155 |
|
| $ | 177 |
|
| $ | 152 |
| $ | 100 |
|
| $ | 115 |
|
| $ | 98 |
|
| $ | 108 |
|
| $ | 131 |
|
| $ | 125 |
|
| Nasdaq Trucking and Transportation Stocks Index | 100 |
|
| 85 |
|
| 89 |
|
| 111 |
|
| 154 |
|
| 130 |
| 100 |
|
| 139 |
|
| 117 |
|
| 142 |
|
| 178 |
|
| 161 |
|
| Nasdaq Global Select Stock Market Index | 100 |
|
| 99 |
|
| 114 |
|
| 158 |
|
| 180 |
|
| 191 |
| 100 |
|
| 114 |
|
| 121 |
|
| 130 |
|
| 167 |
|
| 161 |
|
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | |
| Period |
| Total Number of Shares Purchased |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Program |
| Maximum Number of Shares that May Yet Be Purchased Under the Program (1) |
| October 1-31, 2015 |
| — |
|
| $ | — |
|
| — |
|
| — |
|
| November 1-30, 2015 |
| 217,814 |
|
| 46 |
|
| 217,814 |
|
| 695,617 |
|
| December 1-31, 2015 |
| — |
|
| — |
|
| — |
|
| — |
|
| Total |
| 217,814 |
|
| $ | 46 |
|
| 217,814 |
|
| 695,617 |
|
|
| | | | | | | | | | | | | |
| Period |
| Total Number of Shares Purchased |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Program |
| Maximum Number of Shares that May Yet Be Purchased Under the Program (1) (2) |
| October 1-31, 2018 |
| 15,000 |
|
| $ | 59.1 |
|
| 15,000 |
|
| 1,039,048 |
|
| November 1-30, 2018 |
| 285,151 |
|
| 61.7 |
|
| 285,151 |
|
| 753,897 |
|
| December 1-31, 2018 |
| 44,502 |
|
| 59.7 |
|
| 44,502 |
|
| 709,395 |
|
| Total |
| 344,653 |
|
| $ | 61.3 |
|
| 344,653 |
|
| 709,395 |
|
(1) On February 7, 2014,July 21, 2016, the Board of Directors approved a stock repurchase program for up to 2.03.0 million shares of the Company's common stock.
(2) On February 5, 2019, the Board of Directors canceled the Company’s remaining 2016 share repurchase authorization and approved a stock repurchase authorization for up to 5.0 million shares of the Company’s common stock.
Item 6. Selected Financial Data
The following table sets forth our selected financial data. The selected financial data should be read in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes thereto, included elsewhere in this report.
| | | | | | | | | | | | | | | | | | | | | Year ended |
| | Year ended | December 31, | | December 31, | | December 31, | | December 31, | | December 31, |
| | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | | (As Adjusted) | | (As Adjusted) | | (As Adjusted) | | (As Adjusted) |
| | (In thousands, except per share data) | (In thousands, except per share data) |
| Income Statement Data: | | | | | | | | | | | | | | | | | | |
| Operating revenue | $ | 959,125 |
| | $ | 780,959 |
| | $ | 652,481 |
| | $ | 584,446 |
| | $ | 536,402 |
| $ | 1,320,886 |
| | $ | 1,169,346 |
| | $ | 1,030,210 |
| | $ | 987,894 |
| | $ | 824,654 |
|
| Income from operations | 81,772 |
| | 96,406 |
| | 84,355 |
| | 83,532 |
| | 77,110 |
| 122,031 |
| | 108,757 |
| | 59,703 |
| | 81,674 |
| | 96,325 |
|
| Operating margin (1) | 8.5 | % | | 12.3 | % | | 12.9 | % | | 14.3 | % | | 14.4 | % | 9.2 | % | | 9.3 | % | | 5.8 | % | | 8.3 | % | | 11.7 | % |
| | | | | | | | | | | | | | | | | | | |
| Net income | 55,575 |
| | 61,169 |
| | 54,467 |
| | 52,668 |
| | 47,199 |
| 92,051 |
| | 87,255 |
| | 27,505 |
| | 55,516 |
| | 61,120 |
|
| Net income per share: | | | | | | | | | | | | | | | | | | |
| Basic | $ | 1.80 |
| | $ | 1.99 |
| | $ | 1.81 |
| | $ | 1.82 |
| | $ | 1.62 |
| $ | 3.14 |
| | $ | 2.90 |
| | $ | 0.90 |
| | $ | 1.79 |
| | $ | 1.98 |
|
| Diluted | $ | 1.78 |
| | $ | 1.96 |
| | $ | 1.77 |
| | $ | 1.78 |
| | $ | 1.60 |
| $ | 3.12 |
| | $ | 2.89 |
| | $ | 0.90 |
| | $ | 1.78 |
| | $ | 1.95 |
|
| | | | | | | | | | | | | | | | | | | |
| Cash dividends declared per common share | $ | 0.48 |
| | $ | 0.48 |
| | $ | 0.40 |
| | $ | 0.34 |
| | $ | 0.28 |
| $ | 0.63 |
| | $ | 0.60 |
| | $ | 0.51 |
| | $ | 0.48 |
| | $ | 0.48 |
|
| | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | |
| Total assets | $ | 700,171 |
| | $ | 539,309 |
| | $ | 506,269 |
| | $ | 399,187 |
| | $ | 341,151 |
| $ | 760,215 |
| | $ | 692,622 |
| | $ | 644,048 |
| | $ | 702,327 |
| | $ | 541,493 |
|
| Long-term obligations, net of current portion | 28,856 |
| | 1,275 |
| | 3 |
| | 58 |
| | 333 |
| 47,335 |
| | 40,588 |
| | 725 |
| | 28,856 |
| | 1,275 |
|
| Shareholders' equity | 510,055 |
| | 463,563 |
| | 435,865 |
| | 351,671 |
| | 286,902 |
| 553,244 |
| | 532,699 |
| | 498,344 |
| | 509,497 |
| | 463,064 |
|
| | | | | | | | | | | | | | | | | | | |
(1) Income from operations as a percentage of operating revenue | | Note: Prior period balances have been adjusted to confirm with revenue guidance issued in 2014 (Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers). See additional discussion in Note 1, Accounting Policies to our Consolidated Financial Statements. | | Note: Prior period balances have been adjusted to confirm with revenue guidance issued in 2014 (Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers). See additional discussion in Note 1, Accounting Policies to our Consolidated Financial Statements. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview and Executive Summary
Our operations can be broadlyservices are classified into three principalfour reportable segments: Forward Air, Forward Air Solutions (“FASI”)Expedited LTL, TLS, Intermodal and Total Quality ("TQI").Pool Distribution.
Through our Forward Airthe Expedited LTL segment, we operate a comprehensive national network to provide time-definite surface transportationexpedited regional, inter-regional and related logistics services to the North American expedited ground freight market. Our licensed property broker utilizes qualified motor carriers, including our own, and other third-party transportation companies, to offer ournational LTL services. Expedited LTL offers customers local pick-up and delivery (Forward Air Complete®) and scheduled surface transportationother services including shipment consolidation and deconsolidation, warehousing, final mile solutions, customs brokerage and other handling. Because of cargo as a cost-effective, reliable alternative to air transportation. We transport cargo that must be delivered at a specific time, but is less time-sensitive than traditional air freight. This type of cargo is frequently referred toour roots in serving the transportation industry as deferred air freight. We operatefreight market, our Forward Air segment through aterminal network of terminalsis located onat or near airports in 91 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and 12 regional hubs serving key markets. We also offerCanada.
Through our customers an array of logistics and other services including:TLS segment, we provide expedited truckload brokerage, (“TLX”); intermodal drayage; dedicated fleets; warehousing; customs brokerage;fleet services, as well as high security and shipment consolidation, deconsolidationtemperature-controlled logistics services in the United States and handling.Canada.
FASIOur Intermodal segment provides poolfirst- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers dedicated contract and CFS warehouse and handling services. Intermodal operates primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest. We plan to grow Intermodal’s geographic footprint through acquisitions as well as greenfield start-ups where we do not have an acceptable acquisition target.
In our Pool Distribution segment, we provide high-frequency handling and distribution servicesof time sensitive product to numerous destinations within a specific geographic region. We offer this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. Our primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains. We service these customers through a network of terminals and service centers located in 28 cities.
TQI is a provider of maximum security and temperature-controlled logistics services, primarily truckload services, to the life sciences sector (pharmaceutical and biotechnology products). In addition to core pharmaceutical services and other cold chain services, TQI provides truckload and less-than-truckload brokerage transportation services.
Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our ability to increase our earnings depends in significant part on our ability to increase the amount of freight and the revenue per pound for the freight shipped through our networks and to grow other lines of businesses, such as TLX, FASITLS, Intermodal and TQI,Pool Distribution, which will allow us to maintain revenue growth in challenging shipping environments.
Trends and Developments
AcquisitionAppointment of TowneNew President and Chief Executive Officer
On March 9, 2015, we completedEffective September 1, 2018 ("Effective Date"), Thomas Schmitt was named the acquisitionCompany's President and Chief Executive Officer and Bruce A. Campbell, our then President and Chief Executive Officer, assumed the position of CLP Towne Inc. (“Towne”Executive Chairman. The Company's Board of Directors (the "Board"). Towne is a full-service trucking provider offering time-sensitive less-than-truckload shipping, full truckload service, an extensive cartage network, container freight stations and dedicated trucking. For appointed Mr. Schmitt to the acquisition of Towne, we paid $61.9 million in net cash and assumed $59.5 million in debt and capital leases. With the exceptionBoard as of the assumed capital leases,Effective Date. On February 5, 2019, Mr. Campbell informed the assumed debt wasBoard of his intent to retire from his position as Executive Chairman of the Company and decision not to stand for re-election to the Board immediately preceding the Company’s 2019 annual meeting of shareholders (the “2019 Annual Meeting”) which is expected to occur on May 7, 2019. The Board and Mr. Campbell agreed that he will continue to serve the Company as a consultant for 24 months following his retirement. Following Mr. Campbell’s retirement, Tom Schmitt is expected to become the Chairman of the Board and Craig Carlock is expected to become the Company’s Lead Independent Director, subject to their reelection to the Board at the Company’s 2019 Annual Meeting.
Intermodal Acquisitions
As part of our strategy to expand our Intermodal operations, in January 2016, we acquired certain assets of Ace for $1.7 million and in August 2016, we acquired certain assets of Triumph for $10.1 million and an earnout of $1.3 million paid in full after fundingSeptember 2017. In May 2017, we acquired certain assets of the acquisition. The transaction was funded with proceeds from a $125Atlantic for $22.5 million two year term loan.and in October 2017, we acquired certain assets of KCL for $0.7 million. In July 2018, we acquired certain assets of MMT for $3.7 million and in October 2018 we acquired certain assets of Southwest for $16.3 million. These acquisitions provide an opportunity for our Intermodal segment to expand into additional geographic markets or add volumes to our existing locations. The assets, liabilities, and operating results of Townethese acquisitions have been included in the Forward AirCompany's consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment.
Acquisitions of CST and Related CompaniesGoodwill
On February 2, 2014,In 2013, we acquired allTQI Holdings, Inc. for total consideration of $65.4 million and established the Total Quality, Inc. reporting unit ("TQI"). In conjunction with our policy to annually test goodwill for impairment as of June 30, 2016, we determined there were indicators of potential impairment of the outstanding capital stock of Central States Trucking Co.goodwill and Central States Logistics, Inc. (collectively referredother long lived assets assigned to as “CST”). CST provides industry leading container and intermodal drayage services primarily within the Midwest region of the United States. CST also provides dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. We acquired all of the outstanding capital stock of CST in exchange for $83.0 million in net cash and $11.2 million in assumed debt. With the exception of the assumed capital leases, the assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using our cash on hand. The assets, liabilities, and operating results of CST have been included in the Forward Air reportable segment.
The acquisition of CST provides us with a scalable platform for which to enter the intermodal drayage space and thereby continuing to expand and diversify our service offerings. As part of our strategy to scale CST's operations, in September 2014, CST acquired certain assets of Recob Great Lakes Express, Inc. ("RGL") for $1.4 million and in November 2014, acquired Multi-Modal Trucking, Inc. and Multi-Modal Services, Inc. (together referred to as "MMT") for approximately $5.8 million. The acquisition of RGL and MMT's assets provided an opportunity for CST to expand into additional midwest markets.
Acquisition of TQI
On March 4, 2013, we entered into a Stock Purchase Agreement ("Agreement") with all of the shareholders of TQI Holdings, Inc. to acquire 100%This determination was based on TQI's financial performance falling notably short of previous projections. As a result, we reduced TQI's projected cash flows and consequently the estimate of TQI's fair value no longer exceeded its respective carrying value. Based on the results of the outstanding stock. Pursuantimpairment test, during the second quarter of 2016, we recorded impairment charges for goodwill, intangibles and other assets of $42.4 million related to the termsTQI reporting unit, which is part of the Agreement and concurrently with the execution of the Agreement, we acquired all of the outstanding capital stock of TQI Holdings, Inc. in exchange for $45.3 million in net cash,TLS reportable segment.
$20.1 million in assumed debt and an available earn-out of up to $5.0 million. The assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using our cash on hand.
Results from Operations
DuringThe following table sets forth our consolidated historical financial data for the yearyears ended December 31, 2015, we experienced a 22.8% increase in our consolidated operating revenues2018 and a 15.1% deterioration in income from operations, compared to the year ended December 31, 2014.2017 (in millions):
|
| | | | | | | | | | | | | | |
| Year ended December 31, |
| 2018 | | 2017 | | Change | | Percent Change |
| | | | (As Adjusted) | | | | |
| Operating revenue: |
|
| |
|
| |
|
| |
|
|
| Expedited LTL | $ | 747.6 |
| | $ | 655.8 |
| | $ | 91.8 |
| | 14.0 | % |
| Truckload Premium Services | 192.6 |
| | 201.7 |
| | (9.1 | ) | | (4.5 | ) |
| Intermodal | 201.0 |
| | 154.7 |
| | 46.3 |
| | 29.9 |
|
| Pool Distribution | 194.1 |
| | 168.5 |
| | 25.6 |
| | 15.2 |
|
| Eliminations and other operations | (14.4 | ) | | (11.4 | ) | | (3.0 | ) | | 26.3 |
|
| Operating revenue | 1,320.9 |
| | 1,169.3 |
| | 151.6 |
| | 13.0 |
|
| Operating expenses: |
| |
| |
| |
|
| Purchased transportation | 613.6 |
| | 545.1 |
| | 68.5 |
| | 12.6 |
|
| Salaries, wages, and employee benefits | 300.2 |
| | 265.8 |
| | 34.4 |
| | 12.9 |
|
| Operating leases | 75.7 |
| | 63.8 |
| | 11.9 |
| | 18.7 |
|
| Depreciation and amortization | 42.2 |
| | 41.1 |
| | 1.1 |
| | 2.7 |
|
| Insurance and claims | 35.2 |
| | 29.6 |
| | 5.6 |
| | 18.9 |
|
| Fuel expense | 23.1 |
| | 16.5 |
| | 6.6 |
| | 40.0 |
|
| Other operating expenses | 108.8 |
| | 98.6 |
| | 10.2 |
| | 10.3 |
|
| Total operating expenses | 1,198.8 |
| | 1,060.5 |
| | 138.3 |
| | 13.0 |
|
| Income (loss) from operations: |
|
| |
|
| |
| |
|
| Expedited LTL | 96.4 |
| | 88.0 |
| | 8.4 |
| | 9.5 |
|
| Truckload Premium Services | 5.1 |
| | 3.2 |
| | 1.9 |
| | 59.4 |
|
| Intermodal | 23.3 |
| | 13.0 |
| | 10.3 |
| | 79.2 |
|
| Pool Distribution | 5.9 |
| | 6.4 |
| | (0.5 | ) | | (7.8 | ) |
| Other operations | (8.6 | ) | | (1.8 | ) | | (6.8 | ) | | 377.8 |
|
| Income from operations | 122.1 |
| | 108.8 |
| | 13.3 |
| | 12.2 |
|
| Other expense: |
| |
| |
| |
|
| Interest expense | (1.8 | ) | | (1.2 | ) | | (0.6 | ) | | 50.0 |
|
| Total other expense | (1.8 | ) | | (1.2 | ) | | (0.6 | ) | | 50.0 |
|
| Income before income taxes | 120.3 |
| | 107.6 |
| | 12.7 |
| | 11.8 |
|
| Income taxes | 28.2 |
| | 20.3 |
| | 7.9 |
| | 38.9 |
|
| Net income and comprehensive income | $ | 92.1 |
| | $ | 87.3 |
| | $ | 4.8 |
| | 5.5 | % |
Forward Air'sNote: Prior period balances have been adjusted to conform with revenue increased $180.4 million, or 29.5%, but operating income decreased 12.5% forguidance issued in 2014 (ASU 2014-09, Revenue from Contracts with Customers). See additional discussion in Note 1, Accounting Policies to our Consolidated Financial Statements.
Revenues
During the year ended December 31, 2015, compared to the same period in 2014. The increase of Forward Air revenue was the result of higher airport-to-airport volumes mostly attributable to the acquisition of Towne. The decline in operating income was mostly attributable to integration and deal costs related to the Towne acquisition and declining net fuel surcharge revenue. The integration and deal costs were partially offset by the increase in operating income from CST, rate increases implemented in our airport-to-airport business, declining fuel costs and improving efficiencies on the additional revenue from the Towne acquisition.
FASI2018, revenue increased 3.8% during the year ended December 31, 201513.0% compared to the year ended December 31, 2014 while FASI's income from operations deteriorated $1.9 million, or 31.7%, to $4.1 million from $6.0 million in 2014.2017. The decline in FASI operating incomerevenue increase was primarily the resultdriven by increased revenue from our LTL Expedited segment of $91.8 million driven by increased insurance and claims, declines in netnetwork revenue, fuel surcharge revenue partially offset by reduced fuel expense, continuing costs relatedand other terminal based revenue over the prior year. The Company's other segments also had revenue growth over prior year with the exception of the TLS Segment where revenue decreased due to opening a new facility in the second quarterdeliberate shedding of 2015 and relocating certain facilities in the third quarter of 2015.lower margin business.
TQI's revenue decreased $6.4 million, or 13.1%, and operating income decreased 1.9 million, or 44.2%, for the year ended December 31, 2015, compared to the same period in 2014. Operating income as a percentage of revenue decreased to 5.7% for the year ended December 31, 2015 compared to 8.8% for the year ended December 31, 2014. The decrease in operating income in total dollars and as a percentage of revenue was primarily attributable to reduced revenue compounded by added fixed costs related to increases in driver pay packages as well as increased depreciation on tractors purchased in 2015.
Fuel Surcharge
Our net fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and volumesvolume transiting our network. During the year ended December 31, 2015,2018, total net fuel surcharge revenue decreased 24.3%increased 49.5% as compared to the same period in 2014. The decrease in net fuel surcharge revenue for the year ended December 31, 2015 compared to the same periods in 2014 was2017, mostly due to decreasedincreased fuel prices, partially offsetrate increases and increased volumes across the network.
Operating Expenses
Operating expenses increased $138.3 million primarily driven by purchased transportation increases of $68.5 million and salaries, wages and employee benefits increases of $34.4 million. Purchased transportation increased Forward Air business volumes mostlyprimarily due to increased volumes, increased utilization of third-party transportation providers, which are typically more costly than owner-operators and rate increases to owner-operators. Salaries, wages and employee benefits increased primarily due to increased personnel needs to support the Towneadditional volumes.
Operating Income and CST acquisitions. Partially offsetting the decline in net fuel surcharge revenue wasSegment Operations
As a 21.3% decline in fuel expense which was also the result of the declining fuel prices. The decline in fuel prices has continued into 2016.
Results of Operations
The following table sets forth our historical financial data for the years ended December 31, 2015 and 2014 (in millions):
|
| | | | | | | | | | | | | | |
| | Year ended |
| | December 31, | | December 31, | | | | Percent |
| | 2015 | | 2014 | | Change | | Change |
| Operating revenue | $ | 959.1 |
| | $ | 781.0 |
| | $ | 178.1 |
| | 22.8 | % |
| Operating expenses: | | | | | | | |
| Purchased transportation | 408.8 |
| | 334.6 |
| | 74.2 |
| | 22.2 |
|
| Salaries, wages, and employee benefits | 240.6 |
| | 182.1 |
| | 58.5 |
| | 32.1 |
|
| Operating leases | 66.3 |
| | 34.0 |
| | 32.3 |
| | 95.0 |
|
| Depreciation and amortization | 37.1 |
| | 31.1 |
| | 6.0 |
| | 19.3 |
|
| Insurance and claims | 21.5 |
| | 15.7 |
| | 5.8 |
| | 36.9 |
|
| Fuel expense | 15.9 |
| | 20.2 |
| | (4.3 | ) | | (21.3 | ) |
| Other operating expenses | 87.1 |
| | 66.9 |
| | 20.2 |
| | 30.2 |
|
| Total operating expenses | 877.3 |
| | 684.6 |
| | 192.7 |
| | 28.1 |
|
| Income from operations | 81.8 |
| | 96.4 |
| | (14.6 | ) | | (15.1 | ) |
| Other income (expense): | | | | | | | |
| Interest expense | (2.0 | ) | | (0.6 | ) | | (1.4 | ) | | 233.3 |
|
| Other, net | (0.1 | ) | | 0.3 |
| | (0.4 | ) | | (133.3 | ) |
| Total other expense | (2.1 | ) | | (0.3 | ) | | (1.8 | ) | | 600.0 |
|
| Income before income taxes | 79.7 |
| | 96.1 |
| | (16.4 | ) | | (17.1 | ) |
| Income taxes | 24.1 |
| | 34.9 |
| | (10.8 | ) | | (30.9 | ) |
| Net income | $ | 55.6 |
| | $ | 61.2 |
| | $ | (5.6 | ) | | (9.2 | )% |
The following table sets forth our historical financial data by segment for the years ended December 31, 2015 and 2014 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31 |
| | | | Percent of | | | | Percent of | | | | Percent |
| Forward Air | 2015 | | Revenue | | 2014 | | Revenue | | Change | | Change |
| Operating revenue | $ | 792.8 |
| | 82.7 | % | | $ | 612.4 |
| | 78.4 | % | | $ | 180.4 |
| | 29.5 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 358.9 |
| | 45.3 |
| | 277.3 |
| | 45.3 |
| | 81.6 |
| | 29.4 |
|
| Salaries, wages, and employee benefits | 182.0 |
| | 22.9 |
| | 131.7 |
| | 21.5 |
| | 50.3 |
| | 38.2 |
|
| Operating leases | 56.0 |
| | 7.1 |
| | 24.9 |
| | 4.1 |
| | 31.1 |
| | 124.9 |
|
| Depreciation and amortization | 27.0 |
| | 3.4 |
| | 21.7 |
| | 3.5 |
| | 5.3 |
| | 24.4 |
|
| Insurance and claims | 16.8 |
| | 2.1 |
| | 11.8 |
| | 1.9 |
| | 5.0 |
| | 42.4 |
|
| Fuel expense | 7.1 |
| | 0.9 |
| | 8.4 |
| | 1.4 |
| | (1.3 | ) | | (15.5 | ) |
| Other operating expenses | 69.7 |
| | 8.8 |
| | 50.5 |
| | 8.2 |
| | 19.2 |
| | 38.0 |
|
| Income from operations | $ | 75.3 |
| | 9.5 | % | | $ | 86.1 |
| | 14.1 | % | | $ | (10.8 | ) | | (12.5 | )% |
| | | | | | | | | | | | |
| | | | Percent of | | | | Percent of | | | | Percent |
| FASI | 2015 | | Revenue | | 2014 | | Revenue | | Change | | Change |
| Operating revenue | $ | 130.0 |
| | 13.5 | % | | $ | 125.2 |
| | 16.0 | % | | $ | 4.8 |
| | 3.8 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 35.0 |
| | 26.9 |
| | 36.6 |
| | 29.3 |
| | (1.6 | ) | | (4.4 | ) |
| Salaries, wages, and employee benefits | 48.7 |
| | 37.5 |
| | 42.0 |
| | 33.5 |
| | 6.7 |
| | 16.0 |
|
| Operating leases | 10.2 |
| | 7.8 |
| | 9.0 |
| | 7.2 |
| | 1.2 |
| | 13.3 |
|
| Depreciation and amortization | 6.1 |
| | 4.7 |
| | 5.8 |
| | 4.6 |
| | 0.3 |
| | 5.2 |
|
| Insurance and claims | 3.8 |
| | 2.9 |
| | 3.1 |
| | 2.5 |
| | 0.7 |
| | 22.6 |
|
| Fuel expense | 5.4 |
| | 4.2 |
| | 7.3 |
| | 5.8 |
| | (1.9 | ) | | (26.0 | ) |
| Other operating expenses | 16.7 |
| | 12.8 |
| | 15.4 |
| | 12.3 |
| | 1.3 |
| | 8.4 |
|
| Income from operations | $ | 4.1 |
| | 3.2 | % | | $ | 6.0 |
| | 4.8 | % | | $ | (1.9 | ) | | (31.7 | )% |
| | | | | | | | | | | | |
| | | | Percent of | | | | Percent of | | | | Percent |
| TQI | 2015 | | Revenue | | 2014 | | Revenue | | Change | | Change |
| Operating revenue | $ | 42.4 |
| | 4.4 | % | | $ | 48.8 |
| | 6.3 | % | | $ | (6.4 | ) | | (13.1 | )% |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 19.2 |
| | 45.3 |
| | 24.7 |
| | 50.6 |
| | (5.5 | ) | | (22.3 | ) |
| Salaries, wages, and employee benefits | 9.9 |
| | 23.4 |
| | 8.4 |
| | 17.2 |
| | 1.5 |
| | 17.9 |
|
| Operating leases | 0.1 |
| | 0.2 |
| | 0.1 |
| | 0.2 |
| | — |
| | — |
|
| Depreciation and amortization | 4.0 |
| | 9.4 |
| | 3.6 |
| | 7.4 |
| | 0.4 |
| | 11.1 |
|
| Insurance and claims | 0.9 |
| | 2.1 |
| | 0.8 |
| | 1.7 |
| | 0.1 |
| | 12.5 |
|
| Fuel expense | 3.4 |
| | 8.0 |
| | 4.5 |
| | 9.2 |
| | (1.1 | ) | | (24.4 | ) |
| Other operating expenses | 2.5 |
| | 5.9 |
| | 2.4 |
| | 4.9 |
| | 0.1 |
| | 4.2 |
|
| Income from operations | $ | 2.4 |
| | 5.7 | % | | $ | 4.3 |
| | 8.8 | % | | $ | (1.9 | ) | | (44.2 | )% |
| | | | | | | | | | | | |
| | | | Percent of | | | | Percent of | | | | Percent |
| Intercompany Eliminations | 2015 | | Revenue | | 2014 | | Revenue | | Change | | Change |
| Operating revenue | $ | (6.1 | ) | | (0.6 | )% | | $ | (5.4 | ) | | (0.7 | )% | | $ | (0.7 | ) | | 13.0 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | (4.3 | ) | | 70.5 |
| | (4.0 | ) | | 74.1 |
| | (0.3 | ) | | 7.5 |
|
| Other operating expenses | (1.8 | ) | | 29.5 |
| | (1.4 | ) | | 25.9 |
| | (0.4 | ) | | 28.6 |
|
| Income from operations | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | — |
| | — | % |
| | | | | | | | | | | | |
| | | | Percent of | | | | Percent of | | | | Percent |
| Consolidated | 2015 | | Revenue | | 2014 | | Revenue | | Change | | Change |
| Operating revenue | $ | 959.1 |
| | 100.0 | % | | $ | 781.0 |
| | 100.0 | % | | $ | 178.1 |
| | 22.8 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 408.8 |
| | 42.6 |
| | 334.6 |
| | 42.8 |
| | 74.2 |
| | 22.2 |
|
| Salaries, wages, and employee benefits | 240.6 |
| | 25.1 |
| | 182.1 |
| | 23.3 |
| | 58.5 |
| | 32.1 |
|
| Operating leases | 66.3 |
| | 6.9 |
| | 34.0 |
| | 4.4 |
| | 32.3 |
| | 95.0 |
|
| Depreciation and amortization | 37.1 |
| | 3.9 |
| | 31.1 |
| | 4.0 |
| | 6.0 |
| | 19.3 |
|
| Insurance and claims | 21.5 |
| | 2.2 |
| | 15.7 |
| | 2.0 |
| | 5.8 |
| | 36.9 |
|
| Fuel expense | 15.9 |
| | 1.7 |
| | 20.2 |
| | 2.6 |
| | (4.3 | ) | | (21.3 | ) |
| Other operating expenses | 87.1 |
| | 9.1 |
| | 66.9 |
| �� | 8.6 |
| | 20.2 |
| | 30.2 |
|
| Income from operations | $ | 81.8 |
| | 8.5 | % | | $ | 96.4 |
| | 12.3 | % | | $ | (14.6 | ) | | (15.1 | )% |
The following table presents the components of the Forward Air segment’sabove, operating revenue and purchased transportation for the years ended December 31, 2015 and 2014 (in millions):
|
| | | | | | | | | | | | | | | | | |
| | Year ended |
| | December 31, | Percent of | | December 31, | Percent of | | | Percent |
| | 2015 | Revenue | | 2014 | Revenue | | Change | Change |
| Operating Revenue | | | | | | | | |
| Forward Air | | | | | | | | |
| Airport-to-airport | $ | 523.9 |
| 66.1 | % | | $ | 429.4 |
| 70.1 | % | | $ | 94.5 |
| 22.0 | % |
| Logistics services | | | | | | | | |
| Expedited full truckload - TLX | 110.9 |
| 14.0 |
| | 77.7 |
| 12.7 |
| | 33.2 |
| 42.7 |
|
| Intermodal/drayage | 81.7 |
| 10.3 |
| | 55.3 |
| 9.0 |
| | 26.4 |
| 47.7 |
|
| Total Logistics services | 192.6 |
| 24.3 |
| | 133.0 |
| 21.7 |
| | 59.6 |
| 44.8 |
|
| Other Forward Air services | 76.3 |
| 9.6 |
| | 50.0 |
| 8.2 |
| | 26.3 |
| 52.6 |
|
| Forward Air - Total revenue | 792.8 |
| 82.7 |
| | 612.4 |
| 78.4 |
| | 180.4 |
| 29.5 |
|
| TQI - Pharmaceutical services | 42.4 |
| 4.4 |
| | 48.8 |
| 6.3 |
| | (6.4 | ) | (13.1 | ) |
| Forward Air Solutions - Pool distribution | 130.0 |
| 13.5 |
| | 125.2 |
| 16.0 |
| | 4.8 |
| 3.8 |
|
| Intersegment eliminations | (6.1 | ) | (0.6 | ) | | (5.4 | ) | (0.7 | ) | | (0.7 | ) | 13.0 |
|
| Consolidated operating revenue | $ | 959.1 |
| 100.0 | % | | $ | 781.0 |
| 100.0 | % | | $ | 178.1 |
| 22.8 | % |
| | | | | | | | | |
| | Year ended |
| | December 31, | Percent of | | December 31, | Percent of | | | Percent |
| | 2015 | Revenue | | 2014 | Revenue | | Change | Change |
| Purchased Transportation | | | | | | | | |
| Forward Air | | | | | | | | |
| Airport-to-airport | $ | 225.6 |
| 43.1 | % | | $ | 183.3 |
| 42.7 | % | | $ | 42.3 |
| 23.1 | % |
| Logistics services | | | | | | | | |
| Expedited full truckload - TLX | 81.0 |
| 73.0 |
| | 59.8 |
| 77.0 |
| | 21.2 |
| 35.5 |
|
| Intermodal/drayage | 30.6 |
| 37.5 |
| | 21.7 |
| 39.2 |
| | 8.9 |
| 41.0 |
|
| Total Logistics services | 111.6 |
| 57.9 |
| | 81.5 |
| 61.3 |
| | 30.1 |
| 36.9 |
|
| Other Forward Air services | 21.7 |
| 28.4 |
| | 12.5 |
| 25.0 |
| | 9.2 |
| 73.6 |
|
| Forward Air - Total purchased transportation | 358.9 |
| 45.3 |
| | 277.3 |
| 45.3 |
| | 81.6 |
| 29.4 |
|
| TQI - Pharmaceutical services | 19.2 |
| 45.3 |
| | 24.7 |
| 50.6 |
| | (5.5 | ) | (22.3 | ) |
| Forward Air Solutions - Pool distribution | 35.0 |
| 26.9 |
| | 36.6 |
| 29.3 |
| | (1.6 | ) | (4.4 | ) |
| Intersegment eliminations | (4.3 | ) | 70.5 |
| | (4.0 | ) | 74.1 |
| | (0.3 | ) | 7.5 |
|
| Consolidated purchased transportation | $ | 408.8 |
| 42.6 | % | | $ | 334.6 |
| 42.8 | % | | $ | 74.2 |
| 22.2 | % |
Year ended December 31, 2015 compared to Year ended December 31, 2014
Revenues
Operating revenueincome increased by $178.1$13.3 million, or 22.8%, to $959.1 million for the year ended December 31, 2015 from $781.0 million for the year ended December 31, 2014.
Forward Air
Forward Air operating revenue increased $180.4 million, or 29.5%, to $792.8 million from $612.4 million, accounting for 82.7% of consolidated operating revenue for the year ended December 31, 2015. Airport-to-airport revenue, which is the largest component of our consolidated operating revenue, increased $94.5 million, or 22.0%12.2%, from $429.4 million. Airport-to-airport revenue accounted for 66.1% of the Forward Air operating revenue during the years ended December 31, 2015 compared2017 to 70.1%
for the year ended December 31, 2014. The increase is partially attributable to a 26.6% increase in tonnage offset by a 1.1% decrease in our base revenue per pound, excluding net fuel surcharge revenue and Forward Air CompleteTM ("Complete") revenue. This accounted for $84.3 million of the increase in airport-to-airport revenue. The decrease in average base revenue per pound was attributable to the acquisition of Towne, as Towne's base revenue per pound was notably lower than our legacy Forward Air base revenue per pound. Targeted rate increases implemented in September 2015 helped partially mitigate Towne's impact on base revenue per pound. The increase in tonnage is mainly due to the Towne acquisition. The increase in airport-to-airport revenue is also the result of increased revenue from our Complete pick-up and delivery service offset by a decrease in net fuel surcharge revenue. Complete revenue increased $19.3 million, or 33.6%, during the year ended December 31, 2015 compared to the same period of 2014. The increase in Complete revenue was attributable to improved shipping volumes in our airport-to-airport network and a 38.1% increase in the attachment rate of Complete activity to linehaul shipments, both of which were largely attributable to the Towne acquisition. Compared to the same period in 2014, net fuel surcharge revenue decreased largely due to the decline in fuel prices. The decline in net fuel surcharge revenue due to lower fuel prices was partially offset by volume increases related to the acquisition of Towne for a net decrease of $9.1 million during the year ended December 31, 2015 compared to the same period in 2014.
Logistics revenue, which is primarily TLX and intermodal drayage and priced on a per mile basis, increased $59.6 million, or 44.8%, to $192.6$122.1 million for the year ended December 31, 2015 from $133.0 million2018. The results for the year ended December 31, 2014. The increaseour four reportable segments are discussed in logistics revenue was mostly attributable to a $26.4 million increase in intermodal drayage revenue in conjunction with the acquisition of CST and related acquisitions. TLX revenue also increased $33.2 million, or 42.7%, during the year ended December 31, 2015, compared to the same period in 2014. The increase in TLX revenue was driven by a 33.0% increase in miles driven to support TLX revenue and a 7.0% increase in TLX's average revenue per mile. TLX's revenue per mile increased on a shift in business mix that provided a higher revenue per mile due to the required use of more expensive third party transportation providers. The increase in miles was mostly due to business obtained with the Towne acquisition.
Other revenue, which includes warehousing services and terminal handling, accounts for the final component of Forward Air operating revenue. Other revenue increased $26.3 million, or 52.6%, to $76.3 million during the year ended December 31, 2015 from $50.0 million during the year ended December 31, 2014. The increase in Forward Air other revenue was mainly attributable to $22.9 million of other revenue obtained with the acquisition of Towne and $3.4 million increase in local delivery work, warehousing and handling revenues associated with a full year of CST and related acquisitions.
FASI
FASI operating revenue increased $4.8 million, or 3.8%, to $130.0 million for the year ended December 31, 2015 from $125.2 million for the year ended December 31, 2014. The increase was attributable to current year rate increases, increased volume from previously existing customers and new revenue from business wins. These increases were partially offset by a reduction in dedicated linehaul business provided to a customer and a decrease in net fuel surcharge revenue.
TQI
TQI operating revenue decreased $6.4 million, or 13.1%, to $42.4 million for the year ended December 31, 2015 from $48.8 million for the year ended December 31, 2014. TQI has focused its operations on increasing its Company-owned fleet and utilizing this fleet to service our current customers instead of more costly third party providers. This initiative has progressed slower than expected, which has led to decreases in pharma revenue. The decrease in pharmaceuticals was also driven by a distribution awarded and executeddetail in the second quarter of 2014 that did not reoccur in 2015. Further, decreases were also attributable to decreased shipping activity from TQI's brokerage transportation services.
Intercompany Eliminations
Intercompany eliminations increased $0.7 million, or 13.0%, to $6.1 million during the year ended December 31, 2015 from $5.4 million during the year ended December 31, 2014. The intercompany eliminations are the result of truckload, airport-to-airport, and handling services provided between our segments during the years ended December 31, 2015 and 2014.
Purchased Transportation
Purchased transportation increased by $74.2 million, or 22.2%, to $408.8 million for the year ended December 31, 2015 from $334.6 million for the year ended December 31, 2014. As a percentage of total operating revenue, purchased transportation was 42.6% during the year ended December 31, 2015 compared to 42.8% for the year ended December 31, 2014.
Forward Air
Forward Air’s purchased transportation increased by $81.6 million, or 29.4%, to $358.9 million for the year ended December 31, 2015 from $277.3 million for the year ended December 31, 2014. As a percentage of segment operating revenue, Forward Air purchased transportation was 45.3% during the year ended December 31, 2015 and 2014.
Purchased transportation costs for our airport-to-airport network increased $42.3 million, or 23.1%, to $225.6 million for the year ended December 31, 2015 from $183.3 million for the year ended December 31, 2014. For the year ended December 31, 2015, purchased transportation for our airport-to-airport network increased to 43.1% of airport-to-airport revenue from 42.7% for the year ended December 31, 2014. The $42.3 million increase is mostly attributable to an 18.3% increase in miles driven by our network of owner-operators or third party transportation providers and a 6.1% increase in the cost per mile paid to our network of owner-operators or third party transportation providers. The higher miles increased purchased transportation by $26.4 million while the higher cost per mile increased purchased transportation by $3.1 million. The increase in miles was attributable to the increase in revenue activity discussed previously. The increase in airport-to-airport cost per mile was attributable to a rate increase awarded to our network of owner-operators in January 2015 and higher rates charged by third party transportation providers. The remaining $12.8 million increase in airport-to-airport purchased transportation was attributable to increased third party transportation costs associated with the higher Complete revenue discussed above.
Purchased transportation costs for our logistics revenue increased $30.1 million, or 36.9%, to $111.6 million for the year ended December 31, 2015 from $81.5 million for the year ended December 31, 2014. For the year ended December 31, 2015, logistics’ purchased transportation costs represented 57.9% of logistics revenue versus 61.3% for the year ended December 31, 2014. The increase in logistics’ purchased transportation in total dollars was mostly attributable to a $8.9 million increase in intermodal drayage purchased transportation due to 2015 including a full year of CST and related acquisitions. TLX purchased transportation also increased $21.2 million and 35.5%. The increase in TLX purchased transportation was attributable to a 2.3% increase in cost per mile during the year ended December 31, 2015 compared to the same period in 2014 and a 33.0% increase in miles driven during the year ended December 31, 2015 compared to the same period of 2014. The changes in TLX miles driven and cost per mile were attributable to a shift in customer mix that resulted in the increased use of more expensive third party transportation providers and the Towne acquisition. The decline in logistics' purchased transportation as a percentage of revenue was attributable to CST utilizing more Company-employed drivers and less owner-operators and third party transportation providers than our legacy Forward Air operations and improved margins on acquired TLX business.
Purchased transportation costs related to our other revenue increased $9.2 million, or 73.6%, to $21.7 million for the year ended December 31, 2015 from $12.5 million for the year ended December 31, 2014. Other purchased transportation costs as a percentage of other revenue increased to 28.4% of other revenue for the year ended December 31, 2015 from 25.0% for the year ended December 31, 2014. The increase as a percentage of the associated revenue was primarily due to dedicated pick up and delivery activity associated with the Towne acquisition.
FASI
FASI purchased transportation decreased $1.6 million, or 4.4%, to $35.0 million for the year ended December 31, 2015 from $36.6 million for the year ended December 31, 2014. FASI purchased transportation as a percentage of revenue was 26.9% for the year ended December 31, 2015 compared to 29.3% for the year ended December 31, 2014. The improvement in FASI purchased transportation as a percentage of revenue was attributable to improved revenue quality due to customer rate increases initiated in the first quarter of 2015 and reduced usage of more costly third party transportation providers due to the reduction of dedicated linehaul revenue.
TQI
TQI purchased transportation decreased $5.5 million, or 22.3%, to $19.2 million for the year ended December 31, 2015 from $24.7 million for the year ended December 31, 2014. TQI purchased transportation as a percentage of revenue was 45.3% for the year ended December 31, 2015 compared to 50.6% for the year ended December 31, 2014. The decrease in percentage of revenue was due to decreased utilization of more expensive third party transportation providers in favor of Company-employed drivers and owner operators.
Intercompany Eliminations
Intercompany eliminations increased $0.3 million, or 7.5%, to $4.3 million during the year ended December 31, 2015 from $4.0 million during the year ended December 31, 2014. The intercompany eliminations are the result of truckload and airport-to-airport services provided between our segments during the years ended December 31, 2015 and 2014.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits increased $58.5 million, or 32.1%, to $240.6 million for the year ended December 31, 2015 from $182.1 million for the year ended December 31, 2014. As a percentage of total operating revenue, salaries, wages and employee benefits was 25.1% during the year ended December 31, 2015 compared to 23.3% in December 31, 2014.
Forward Air
Salaries, wages and employee benefits of Forward Air increased by $50.3 million, or 38.2%, to $182.0 million for the year ended December 31, 2015 from $131.7 million for the year ended December 31, 2014. Salaries, wages and employee benefits were 22.9% of Forward Air’s operating revenue for the year ended December 31, 2015 compared to 21.5% for the year ended December 31, 2014. Of the $50.3 million increase, approximately $33.9 million was attributable to increased wages associated with the higher shipment volumes discussed previously and 2015 wage increases for previously existing Forward Air employees. Severance and incentives related to the acquisition of Towne accounted for an additional increase of $3.7 million. Another $3.1 million was due to incentive and share based compensation increases to previously existing Forward Air employees as well as a $2.9 million increase in workers' compensation and health insurance costs. The remaining increase in salaries, wages and employee benefits in total dollars and as a percentage of revenue was attributable to $6.7 million of salaries, wages and employee benefits from a full year of CST and related acquisitions. CST salaries, wages and employee benefits are higher as a percentage of revenue than our legacy Forward Air operations due to higher utilization of Company-employed drivers.
FASI
Salaries, wages and employee benefits of FASI increased by $6.7 million, or 16.0%, to $48.7 million for the year ended December 31, 2015 from $42.0 million for the year ended December 31, 2014. As a percentage of FASI operating revenue, salaries, wages and benefits increased to 37.5% for the year ended December 31, 2015 compared to 33.5% for the year ended December 31, 2014. FASI salaries, wages and employee benefits are higher as a percentage of operating revenue than our Forward Air segment, as a larger percentage of FASI transportation services are performed by Company-employed drivers. The $6.7 million increase is partly due to a $4.0 million increase in dock and driver pay to handle the shift in business mix discussed previously. New administrative hires and 2015 pay increases accounted for an additional $1.7 increase from the same period in 2014 and the remaining increase of $1.0 million was due to increases in health insurance and workers' compensation costs.
TQI
Salaries, wages and employee benefits of TQI increased by $1.5 million, or 17.9%, to $9.9 million for the year ended December 31, 2015 from $8.4 million for the year ended December 31, 2014. As a percentage of TQI operating revenue, salaries, wages and benefits increased to 23.4% for the year ended December 31, 2015 compared to 17.2% for the year ended December 31, 2014. Higher utilization of Company-employed drivers and increases to driver pay packages accounted for $1.2 million of the increase in salaries, wages and benefits for the year ended December 31, 2015 compared to the same period in 2014. Company-employed driver utilization increased in conjunction with new tractors purchased during 2015 as TQI moved more loads with Company-employed drivers instead of more costly third party carriers. Higher health insurance and workers' compensation costs accounted for another $0.5 million of the increase. Partially offsetting these increases is a $0.2 million decrease in administrative wages.
Operating Leases
Operating leases increased by $32.3 million, or 95.0%, to $66.3 million for the year ended December 31, 2015 from $34.0 million in the year ended December 31, 2014. Operating leases, the largest component of which is facility rent, were 6.9% of consolidated operating revenue for the year ended December 31, 2015 compared with 4.4% for the year ended December 31, 2014.
Forward Air
Operating leases increased $31.1 million, or 124.9%, to $56.0 million for the year ended December 31, 2015 from $24.9 million for the year ended December 31, 2014. Operating leases were 7.1% of Forward Air’s operating revenue for the year ended December 31, 2015 compared with 4.1% for the year ended December 31, 2014. Following the acquisition of Towne, $12.9 million was incurred primarily for reserves on vacated duplicate facilities and unused equipment leases. The remaining $18.2 million is due to $6.1 million in additional facility lease expenses and a $4.7 million increase in truck, trailer and equipment rentals and leases, all primarily as a result of the Towne acquisition. Facility and equipment leases associated with a full year of CST and related acquisitions accounted for the final $7.4 million of the increase in operating leases.
FASI
Operating leases increased $1.2 million, or 13.3%, to $10.2 million for the year ended December 31, 2015 from $9.0 million for the year ended December 31, 2014. Operating leases were 7.8% of FASI operating revenue for the year ended December 31, 2015 compared with 7.2% for the year ended December 31, 2014. The $1.2 million increase is attributable to a $0.8 million increase in facility rent expense due to the opening of a new terminal in the second quarter of 2015 and certain terminals moving into larger facilities to handle additional business. The remaining $0.4 million increase is due to truck rental expense primarily associated with the new terminal opened in the second quarter of 2015.
TQI
Operating leases were $0.1 million during the years ended December 31, 2015 and 2014. Operating leases were 0.2% of TQI operating revenue for the years ended December 31, 2015 and 2014. The only on-going lease activity was for the TQI corporate headquarters and an occasional truck rental to handle additional freight.
Depreciation and Amortization
Depreciation and amortization increased $6.0 million, or 19.3%, to $37.1 million for the year ended December 31, 2015 from $31.1 million for the year ended December 31, 2014. Depreciation and amortization was 3.9% of consolidated operating revenue for the year ended December 31, 2015 compared to 4.0% for the year ended December 31, 2014.
Forward Air
Depreciation and amortization increased $5.3 million, or 24.4%, to $27.0 million for the year ended December 31, 2015 from $21.7 million for the year ended December 31, 2014. Depreciation and amortization expense as a percentage of Forward Air operating revenue was 3.4% in the year ended December 31, 2015 compared to 3.5% for the year ended December 31, 2014. Amortization on acquired Towne and CST intangible assets increased amortization expense by $2.4 million. The remaining increase was primarily the result of trailers, tractors and forklifts added with the Towne acquisition or purchased during 2015.
FASI
Depreciation and amortization increased $0.3 million, or 5.2%, to $6.1 million for the year ended December 31, 2015 from $5.8 million for the year ended December 31, 2014. Depreciation and amortization expense as a percentage of FASI operating revenue was 4.7% for the year ended December 31, 2015 compared to 4.6% for the year ended December 31, 2014. The increase in FASI depreciation in total dollars and as a percentage of revenue is attributable to information technology equipment, conveyors and conveyor improvements purchased during 2015.
TQI
Depreciation and amortization increased $0.4 million, or 11.1%, to $4.0 million for the year ended December 31, 2015 from $3.6 million for the year ended December 31, 2014. Depreciation and amortization expense as a percentage of TQI operating revenue was 9.4% for the year ended December 31, 2015 compared to 7.4% for the year ended December 31, 2014. The increase in depreciation and amortization is due to the purchase of new tractors during 2015.
Insurance and Claims
Insurance and claims expense increased $5.8 million, or 36.9%, to $21.5 million for the year ended December 31, 2015 from $15.7 million for the year ended December 31, 2014. Insurance and claims was 2.2% of consolidated operating revenue during the year ended December 31, 2015 compared to 2.0% for the year ended December 31, 2014.
Forward Air
Forward Air insurance and claims expense increased $5.0 million, or 42.4%, to $16.8 million for the year ended December 31, 2015 from $11.8 million for the year ended December 31, 2014. Insurance and claims as a percentage of Forward Air’s operating revenue was 2.1% for the year ended December 31, 2015 compared to 1.9% for the year ended December 31, 2014. Approximately $0.9 million of the increase was attributable to insurance and claims associated with a full year of CST and related acquisitions. Legacy Forward Air costs also increased approximately $4.1 million due primarily to a $2.6 million increase in our vehicle claim reserves. The vehicle claim reserves increased due to adverse development of older claims and the corresponding increase to our loss development factors required by our bi-annual actuary analysis of vehicle claims. The remaining
increase is attributable to a $1.3 million increase in vehicle accident damage repairs and a $0.4 million increase in claims related legal and professional fees. These increases were slightly offset by a $0.2 million decrease in cargo claims.
FASI
FASI insurance and claims increased $0.7 million, or 22.6%, to $3.8 million for the year ended December 31, 2015 from $3.1 million for the year ended December 31, 2014. As a percentage of operating revenue, insurance and claims was 2.9% for the year ended December 31, 2015 compared to 2.5% for the year ended December 31, 2014. The increase in FASI insurance and claims in total dollars was attributable to a $0.6 million increase in cargo claims and a $0.2 increase in vehicle accident damage repairs. The increases were slightly offset by a $0.1 million decrease in vehicle insurance premiums as 2014 included a large reserve for a fourth quarter 2014 accident.
TQI
TQI insurance and claims increased $0.1 million, or 12.5%, to $0.9 million for the year ended December 31, 2015 from $0.8 million for the year ended December 31, 2014. As a percentage of operating revenue, insurance and claims was 2.1% for the year ended December 31, 2015 compared to 1.7% for the year ended December 31, 2014. The increase in total dollars was attributable to higher insurance premiums as a result of the increase in tractor count in conjunction with capital expenditures discussed previously.
Fuel Expense
Fuel expense decreased $4.3 million, or 21.3%, to $15.9 million the year ended December 31, 2015 from $20.2 million million for the year ended December 31, 2014. Fuel expense was 1.7% of consolidated operating revenue for the year ended December 31, 2015 compared to 2.6% for the year ended December 31, 2014.
Forward Air
Forward Air fuel expense decreased $1.3 million, or 15.5%, to $7.1 million for the year ended December 31, 2015 from $8.4 million in the year ended December 31, 2014. Fuel expense was 0.9% of Forward Air’s operating revenue for the years ended December 31, 2015 compared to 1.4% for the year ended December 31, 2014. The decrease in fuel expense was attributable to a decrease in fuel price per gallon compared to the same period in 2014. The decrease in fuel prices was partly offset by the impact of the Towne acquisition.
FASI
FASI fuel expense decreased $1.9 million, or 26.0%, to $5.4 million for the year ended December 31, 2015 from $7.3 million for the year ended December 31, 2014. Fuel expenses were 4.2% of FASI operating revenue during the year ended December 31, 2015 compared to 5.8% for the year ended December 31, 2014. FASI fuel expense is significantly higher as a percentage of operating revenue than Forward Air’s fuel expense, as FASI utilizes a higher ratio of Company-employed drivers and Company-owned or leased vehicles in its operations than Forward Air. FASI fuel expenses decreased due to a decline in year-over-year fuel prices.
TQI
TQI fuel expense decreased $1.1 million, or 24.4%, to $3.4 million for the year ended December 31, 2015 from $4.5 million for the year ended December 31, 2014. Fuel expenses were 8.0% of TQI operating revenue during the year ended December 31, 2015 compared to 9.2% for the year ended December 31, 2014. TQI fuel expense is significantly higher as a percentage of operating revenue than Forward Air and FASI's fuel expense, as TQI utilizes a higher ratio of Company-employed drivers and Company-owned vehicles in its operations. The decrease was attributable to a decline in year-over-year fuel prices and was slightly offset by an increase in Company-employed driver miles.
Other Operating Expenses
Other operating expenses increased $20.2 million, or 30.2%, to $87.1 million for the year ended December 31, 2015 from $66.9 million for the year ended December 31, 2014. Other operating expenses were 9.1% of consolidated operating revenue for the year ended December 31, 2015 compared with 8.6% for the year ended December 31, 2014.
Forward Air
Forward Air other operating expenses increased $19.2 million, or 38.0%, to $69.7 million for the year ended December 31, 2015 from $50.5 million for the year ended December 31, 2014. Forward Air other operating expenses were 8.8% of operating revenue for the year ended December 31, 2015 compared to 8.2% for the year ended December 31, 2014. Approximately $5.2 million of the increase was attributable to transaction and integration costs incurred for the acquisition of Towne. Also included in the increase was $2.0 million of other operating expenses associated with a full year of CST and related acquisitions partly offset by 2014 including transaction costs incurred for the acquisition of CST. The remaining increase was attributable to variable costs, such as vehicle maintenance and dock and terminal supplies, which increased in conjunction with the Towne related volume increases discussed previously.
FASI
FASI other operating expenses increased $1.3 million, or 8.4%, to $16.7 million for the year ended December 31, 2015 compared to $15.4 million for the year ended December 31, 2014. FASI other operating expenses were 12.8% of operating revenue for the year ended December 31, 2015 compared to 12.3% for the year ended December 31, 2014. FASI's increase as a percent of revenue was attributable to vehicle and dock maintenance costs, largely due to opening a new facility in the second quarter of 2015 and moving certain facilities in the third quarter of 2015 to accommodate business wins mentioned above.
TQI
TQI other operating expenses increased $0.1 million, or 4.2%, to $2.5 million for the year ended December 31, 2015 compared to $2.4 million for the year ended December 31, 2014. TQI other operating expenses were 5.9% of operating revenue for the year ended December 31, 2015 compared to 4.9% for the year ended December 31, 2014. The increase was attributable to higher vehicle maintenance costs due to the increase in the size of the TQI tractor fleet. TQI's 2015 other operating expenses were reduced by a $0.2 million gain on the sale of old trailers, but 2014 other operating expenses were also lessened by a reduction of expenses associated with a settlement of state tax issues in which the penalties required to be paid were less than the amounts previously accrued.
Intercompany Eliminations
Intercompany eliminations were $1.8 million during the year ended December 31, 2015 compared to $1.4 million for the year ended December 31, 2014. The intercompany eliminations are for agent station services Forward Air and FASI provided each other during the years ended December 31, 2015 and 2014.
Income from Operations
Income from operations decreased by $14.6 million, or 15.1%, to $81.8 million for the year ended December 31, 2015 compared with $96.4 million for the year ended December 31, 2014. Income from operations was 8.5% of consolidated operating revenue for the year ended December 31, 2015 compared with 12.3% for the year ended December 31, 2014.
Forward Air
Forward Air income from operations decreased by $10.8 million, or 12.5%, to $75.3 million for the year ended December 31, 2015 compared with $86.1 million for the year ended December 31, 2014. Forward Air’s income from operations was 9.5% of operating revenue for the year ended December 31, 2015 compared with 14.1% for the year ended December 31, 2014. The deterioration in income from operations was mostly due to $23.5 million of Towne transaction and integration related costs, reduced net fuel surcharge and increased network costs attributable to the Towne acquisition. The deterioration was partially offset by CST's higher operating income as 2015 included a full year of CST and related acquisitions. The integration and transaction costs were also partially mitigated by the impact of rate increases initiated in 2015 as well as improved cost management in the second half of the year.
FASI
FASI income from operations deteriorated by $1.9 million, or 31.7% to $4.1 million for the year ended December 31, 2015 from $6.0 million for the year ended December 31, 2014. FASI income from operations was 3.2% of operating revenue for the year ended December 31, 2015 compared with 4.8% of operating revenue for the year ended December 31, 2014. The decline in FASI operating income was primarily the result of increases in health insurance costs, reduced net fuel surcharge revenue, cargo claims and costs associated with opening a new facility in the second quarter of 2015. Additional costs came from relocating
certain terminals into new, larger facilities in the third quarter of 2015 to accommodate the on-boarding of new business. The decline was also due to the reduction in dedicated linehaul business discussed above.
TQI
TQI income from operations deteriorated by $1.9 million, or 44.2%, to $2.4 million for the year ended December 31, 2015 from $4.3 million for the year ended December 31, 2014. TQI income from operations was 5.7% of operating revenue for the year ended December 31, 2015 compared with 8.8% of operating revenue for the year ended December 31, 2014. Deterioration in income from operations as percentage of revenue was mainly attributable to reduced revenue compounded by added fixed costs related to the increase in Company-employed drivers and Company-owned tractors discussed above.
Interest Expense
Interest expense was $2.0 million for the year ended December 31, 2015 and increased $1.4 million from $0.6 million for the year ended December 31, 2014. Increase in interest expense was attributable to interest expense on the term loan used to finance the Towne acquisition.
Other, Net
Other, net of $0.1 million for the year ended December 31, 2015, primarily represents unrealized losses on trading securities held.
Provision for Income Taxes
The combined federal and state effective tax rate for the year ended December 31, 2015 was 30.2% compared to an effective rate of 36.3% for the year ended December 31, 2014. The reduction in the 2015 effective tax rate was attributable to amending of prior year federal and state income tax returns to take advantage of qualified production property deductions. This reduction was partially offset by non-deductible Towne acquisition costs incurred in 2015.
Net Income
As a result of the foregoing factors, net income decreased by $5.6 million, or 9.2%, to $55.6 million for the year ended December 31, 2015 compared to $61.2 million for the year ended December 31, 2014.
Results of Operations
The following table sets forth our historical financial data for the years ended December 31, 2014 and 2013 (in millions):
|
| | | | | | | | | | | | | | |
| | Year ended |
| | December 31, | | December 31, | | | | Percent |
| | 2014 | | 2013 | | Change | | Change |
| Operating revenue | $ | 781.0 |
| | $ | 652.5 |
| | $ | 128.5 |
| | 19.7 | % |
| Operating expenses: | | | | | | | |
| Purchased transportation | 334.6 |
| | 285.7 |
| | 48.9 |
| | 17.1 |
|
| Salaries, wages, and employee benefits | 182.1 |
| | 151.1 |
| | 31.0 |
| | 20.5 |
|
| Operating leases | 34.0 |
| | 29.3 |
| | 4.7 |
| | 16.0 |
|
| Depreciation and amortization | 31.1 |
| | 23.6 |
| | 7.5 |
| | 31.8 |
|
| Insurance and claims | 15.7 |
| | 12.5 |
| | 3.2 |
| | 25.6 |
|
| Fuel expense | 20.2 |
| | 15.2 |
| | 5.0 |
| | 32.9 |
|
| Other operating expenses | 66.9 |
| | 50.7 |
| | 16.2 |
| | 32.0 |
|
| Total operating expenses | 684.6 |
| | 568.1 |
| | 116.5 |
| | 20.5 |
|
| Income from operations | 96.4 |
| | 84.4 |
| | 12.0 |
| | 14.2 |
|
| Other income (expense): | | | | | | | |
| Interest expense | (0.6 | ) | | (0.5 | ) | | (0.1 | ) | | 20.0 |
|
| Other, net | 0.3 |
| | 0.1 |
| | 0.2 |
| | 200.0 |
|
| Total other expense | (0.3 | ) | | (0.4 | ) | | 0.1 |
| | (25.0 | ) |
| Income before income taxes | 96.1 |
| | 84.0 |
| | 12.1 |
| | 14.4 |
|
| Income taxes | 34.9 |
| | 29.5 |
| | 5.4 |
| | 18.3 |
|
| Net income | $ | 61.2 |
| | $ | 54.5 |
| | $ | 6.7 |
| | 12.3 | % |
The following table sets forth our historical financial data by segment for the years ended December 31, 2014 and 2013 (in millions):
|
| | | | | | | | | | | | | | | | | |
| | Year ended December 31 |
| Forward Air | | | Percent of | | | | Percent of | | | | Percent |
| | 2014 | | Revenue | | 2013 | | Revenue | | Change | | Change |
| Operating revenue | 612.4 |
| | 78.4 | % | | 501.1 |
| | 76.8 | % | | 111.3 |
| | 22.2 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 277.3 |
| | 45.3 |
| | 230.9 |
| | 46.1 |
| | 46.4 |
| | 20.1 |
|
| Salaries, wages, and employee benefits | 131.7 |
| | 21.5 |
| | 105.4 |
| | 21.0 |
| | 26.3 |
| | 25.0 |
|
| Operating leases | 24.9 |
| | 4.1 |
| | 20.2 |
| | 4.0 |
| | 4.7 |
| | 23.3 |
|
| Depreciation and amortization | 21.7 |
| | 3.5 |
| | 16.2 |
| | 3.2 |
| | 5.5 |
| | 34.0 |
|
| Insurance and claims | 11.8 |
| | 1.9 |
| | 8.7 |
| | 1.8 |
| | 3.1 |
| | 35.6 |
|
| Fuel expense | 8.4 |
| | 1.4 |
| | 4.0 |
| | 0.8 |
| | 4.4 |
| | 110.0 |
|
| Other operating expenses | 50.5 |
| | 8.2 |
| | 37.0 |
| | 7.4 |
| | 13.5 |
| | 36.5 |
|
| Income from operations | 86.1 |
| | 14.1 | % | | 78.7 |
| | 15.7 | % | | 7.4 |
| | 9.4 | % |
| | | | | | | | | | | | |
| FASI | | | Percent of | | | | Percent of | | | | Percent |
| | 2014 | | Revenue | | 2013 | | Revenue | | Change | | Change |
| Operating revenue | 125.2 |
| | 16.0 | % | | 113.4 |
| | 17.4 | % | | 11.8 |
| | 10.4 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 36.6 |
| | 29.3 |
| | 34.5 |
| | 30.4 |
| | 2.1 |
| | 6.1 |
|
| Salaries, wages, and employee benefits | 42.0 |
| | 33.5 |
| | 39.3 |
| | 34.7 |
| | 2.7 |
| | 6.9 |
|
| Operating leases | 9.0 |
| | 7.2 |
| | 9.0 |
| | 7.9 |
| | — |
| | — |
|
| Depreciation and amortization | 5.8 |
| | 4.6 |
| | 5.0 |
| | 4.4 |
| | 0.8 |
| | 16.0 |
|
| Insurance and claims | 3.1 |
| | 2.5 |
| | 3.3 |
| | 2.9 |
| | (0.2 | ) | | (6.1 | ) |
| Fuel expense | 7.3 |
| | 5.8 |
| | 7.0 |
| | 6.2 |
| | 0.3 |
| | 4.3 |
|
| Other operating expenses | 15.4 |
| | 12.3 |
| | 13.2 |
| | 11.6 |
| | 2.2 |
| | 16.7 |
|
| Income from operations | 6.0 |
| | 4.8 | % | | 2.1 |
| | 1.9 | % | | 3.9 |
| | 185.7 | % |
| | | | | | | | | | | | |
| TQI | | | Percent of | | | | Percent of | | | | Percent |
| | 2014 | | Revenue | | 2013 | | Revenue | | Change | | Change |
| Operating revenue | 48.8 |
| | 6.3 | % | | 41.8 |
| | 6.4 | % | | 7.0 |
| | 16.7 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 24.7 |
| | 50.6 |
| | 23.2 |
| | 55.5 |
| | 1.5 |
| | 6.5 |
|
| Salaries, wages, and employee benefits | 8.4 |
| | 17.2 |
| | 6.4 |
| | 15.3 |
| | 2.0 |
| | 31.3 |
|
| Operating leases | 0.1 |
| | 0.2 |
| | 0.1 |
| | 0.2 |
| | — |
| | — |
|
| Depreciation and amortization | 3.6 |
| | 7.4 |
| | 2.4 |
| | 5.8 |
| | 1.2 |
| | 50.0 |
|
| Insurance and claims | 0.8 |
| | 1.7 |
| | 0.5 |
| | 1.2 |
| | 0.3 |
| | 60.0 |
|
| Fuel expense | 4.5 |
| | 9.2 |
| | 4.2 |
| | 10.1 |
| | 0.3 |
| | 7.1 |
|
| Other operating expenses | 2.4 |
| | 4.9 |
| | 1.4 |
| | 3.3 |
| | 1.0 |
| | 71.4 |
|
| Income from operations | 4.3 |
| | 8.8 | % | | 3.6 |
| | 8.6 | % | | 0.7 |
| | 19.4 | % |
| | | | | | | | | | | | |
| Intercompany Eliminations | | | Percent of | | | | Percent of | | | | Percent |
| | 2014 | | Revenue | | 2013 | | Revenue | | Change | | Change |
| Operating revenue | (5.4 | ) | | (0.7 | )% | | (3.8 | ) | | (0.6 | )% | | (1.6 | ) | | 42.1 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | (4.0 | ) | | 74.1 |
| | (2.9 | ) | | 76.3 |
| | (1.1 | ) | | 37.9 |
|
| Other operating expenses | (1.4 | ) | | 25.9 |
| | (0.9 | ) | | 23.7 |
| | (0.5 | ) | | 55.6 |
|
| Income from operations | — |
| | — | % | | — |
| | — | % | | — |
| | — | % |
| | | | | | | | | | | | |
| Consolidated | | | Percent of | | | | Percent of | | | | Percent |
| | 2014 | | Revenue | | 2013 | | Revenue | | Change | | Change |
| Operating revenue | 781.0 |
| | 100.0 | % | | 652.5 |
| | 100.0 | % | | 128.5 |
| | 19.7 | % |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 334.6 |
| | 42.8 |
| | 285.7 |
| | 43.8 |
| | 48.9 |
| | 17.1 |
|
| Salaries, wages, and employee benefits | 182.1 |
| | 23.3 |
| | 151.1 |
| | 23.2 |
| | 31.0 |
| | 20.5 |
|
| Operating leases | 34.0 |
| | 4.4 |
| | 29.3 |
| | 4.5 |
| | 4.7 |
| | 16.0 |
|
| Depreciation and amortization | 31.1 |
| | 4.0 |
| | 23.6 |
| | 3.6 |
| | 7.5 |
| | 31.8 |
|
| Insurance and claims | 15.7 |
| | 2.0 |
| | 12.5 |
| | 1.9 |
| | 3.2 |
| | 25.6 |
|
| Fuel expense | 20.2 |
| | 2.6 |
| | 15.2 |
| | 2.3 |
| | 5.0 |
| | 32.9 |
|
| Other operating expenses | 66.9 |
| | 8.6 |
| | 50.7 |
| | 7.8 |
| | 16.2 |
| | 32.0 |
|
| Income from operations | 96.4 |
| | 12.3 | % | | 84.4 |
| | 12.9 | % | | 12.0 |
| | 14.2 | % |
The following table presents the components of the Forward Air segment’s operating revenue and purchased transportation for the years ended December 31, 2014 and 2013 (in millions):
|
| | | | | | | | | | | | | | | | | |
| | Year ended |
| | December 31, | Percent of | | December 31, | Percent of | | | Percent |
| | 2014 | Revenue | | 2013 | Revenue | | Change | Change |
| Operating Revenue | | | | | | | | |
| Forward Air | | | | | | | | |
| Airport-to-airport | $ | 429.4 |
| 70.1 | % | | $ | 393.3 |
| 78.5 | % | | $ | 36.1 |
| 9.2 | % |
| Logistics services | | | | | | | | |
| Expedited full truckload - TLX | 77.7 |
| 12.7 |
| | 74.4 |
| 14.8 |
| | 3.3 |
| 4.4 |
|
| Intermodal/drayage | 55.3 |
| 9.0 |
| | 5.1 |
| 1.0 |
| | 50.2 |
| 984.3 |
|
| Total Logistics services | 133.0 |
| 21.7 |
| | 79.5 |
| 15.8 |
| | 53.5 |
| 67.3 |
|
| Other Forward Air services | 50.0 |
| 8.2 |
| | 28.3 |
| 5.7 |
| | 21.7 |
| 76.7 |
|
| Forward Air - Total revenue | 612.4 |
| 78.4 |
| | 501.1 |
| 76.8 |
| | 111.3 |
| 22.2 |
|
| TQI - Pharmaceutical services | 48.8 |
| 6.3 |
| | 41.8 |
| 6.4 |
| | 7.0 |
| 16.7 |
|
| Forward Air Solutions - Pool distribution | 125.2 |
| 16.0 |
| | 113.4 |
| 17.4 |
| | 11.8 |
| 10.4 |
|
| Intersegment eliminations | (5.4 | ) | (0.7 | ) | | (3.8 | ) | (0.6 | ) | | (1.6 | ) | 42.1 |
|
| Consolidated operating revenue | $ | 781.0 |
| 100.0 | % | | $ | 652.5 |
| 100.0 | % | | $ | 128.5 |
| 19.7 | % |
| | | | | | | | | |
| | Year ended |
| | December 31, | Percent of | | December 31, | Percent of | | | Percent |
| | 2014 | Revenue | | 2013 | Revenue | | Change | Change |
| Purchased Transportation | | | | | | | | |
| Forward Air | | | | | | | | |
| Airport-to-airport | $ | 183.3 |
| 42.7 | % | | $ | 163.3 |
| 41.5 | % | | $ | 20.0 |
| 12.2 | % |
| Logistics services | | | | | | | | |
| Expedited full truckload - TLX | 59.8 |
| 77.0 |
| | 56.2 |
| 75.5 |
| | 3.6 |
| 6.4 |
|
| Intermodal/drayage | 21.7 |
| 39.2 |
| | 3.1 |
| 60.8 |
| | 18.6 |
| 600.0 |
|
| Total Logistics services | 81.5 |
| 61.3 |
| | 59.3 |
| 74.6 |
| | 22.2 |
| 37.4 |
|
| Other Forward Air services | 12.5 |
| 25.0 |
| | 8.3 |
| 29.3 |
| | 4.2 |
| 50.6 |
|
| Forward Air - Total purchased transportation | 277.3 |
| 45.3 |
| | 230.9 |
| 46.1 |
| | 46.4 |
| 20.1 |
|
| TQI - Pharmaceutical services | 24.7 |
| 50.6 |
| | 23.2 |
| 55.5 |
| | 1.5 |
| 6.5 |
|
| Forward Air Solutions - Pool distribution | 36.6 |
| 29.3 |
| | 34.5 |
| 30.4 |
| | 2.1 |
| 6.1 |
|
| Intersegment eliminations | (4.0 | ) | 74.1 |
| | (2.9 | ) | 76.3 |
| | (1.1 | ) | 37.9 |
|
| Consolidated purchased transportation | $ | 334.6 |
| 42.8 | % | | $ | 285.7 |
| 43.8 | % | | $ | 48.9 |
| 17.1 | % |
Year ended December 31, 2014 compared to Year ended December 31, 2013
Revenues
Operating revenue increased by $128.5 million, or 19.7%, to $781.0 million for the year ended December 31, 2014 from $652.5 million for the year ended December 31, 2013.
Forward Air
Forward Air operating revenue increased $111.3 million, or 22.2%, to $612.4 million from $501.1 million, accounting for 78.4% of consolidated operating revenue for the year ended December 31, 2014. Airport-to-airport revenue, which is the largest component of our consolidated operating revenue, increased $36.1 million, or 9.2%, from $393.3 million. Airport-to-airport revenue accounted for 70.1% of the Forward Air’s operating revenue during the years ended December 31, 2014 compared to 78.5% for
the year ended December 31, 2013. An increase in tonnage and increase in our base revenue per pound, excluding net fuel surcharge revenue and Complete revenue, accounted for $27.4 million of the increase in airport-to-airport revenue. Our airport-to-airport business is priced on a per pound basis and the average revenue per pound, excluding the impact of fuel surcharges and Complete, increased 3.2% for the year ended December 31, 2014 versus the year ended December 31, 2013. Tonnage that transited our network increased by 5.5% during the year ended December 31, 2014 compared with the year ended December 31, 2013. The remaining increase in airport-to-airport revenue was attributable to higher Complete pick-up and delivery revenue and net fuel surcharge revenue. Complete pick-up and delivery revenue increased $5.9 million, or 11.3%, during the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in Complete revenue is attributable to an increase in the attachment rate of our Complete service to our standard airport-to-airport linehaul service, to 18.1% in 2014 compared to 17.3% in 2013. Net fuel surcharge revenue increased $2.9 million, or 8.7%, during the year ended December 31, 2014 compared to the same period in 2013. Net fuel surcharge revenue increased largely on improved airport-to-airport tonnage volumes.
Logistics revenue, which is primarily TLX and intermodal drayage and priced on a per mile basis, increased $53.5 million, or 67.3%, to $133.0 million for the year ended December 31, 2014 from $79.5 million for the year ended December 31, 2013. The increase in logistics revenue was mostly attributable to a $50.2 million increase in intermodal drayage revenue in conjunction with the acquisition of CST. TLX revenue also increased $3.3 million, or 4.4%, during the year ended December 31, 2014, compared to the same period in 2013. The increase in TLX revenue was attributable to a 13.9% increase in revenue per mile partially offset by a 8.3% decrease in miles driven to support our TLX revenue. TLX's revenue per mile increased on a shift in business mix that provided a higher revenue per mile due to the required use of more expensive third party transportation providers.
Other revenue, which includes warehousing services and terminal handling, accounts for the final component of Forward Air operating revenue. Other revenue increased $21.7 million, or 76.7%, to $50.0 million during the year ended December 31, 2014 from $28.3 million during the year ended December 31, 2013. The increase in Forward Air other revenue was mainly attributable to $20.3 million in local delivery work, warehousing and handling revenues associated with the acquisition of CST and a $1.4 million increase in our previously existing Forward Air operations.
FASI
FASI operating revenue increased $11.8 million, or 10.4%, to $125.2 million for the year ended December 31, 2014 from $113.4 million for the year ended December 31, 2013. Approximately $5.1 million of the increase in revenue was attributable to new business wins from two new customers that were initiated during February and April 2013. Another $3.0 million of the revenue increase was attributable to new business wins from new customers added during 2014. The remaining increase is the net volume increases from previously existing customers and the impact of rate increases initiated with all customers during the first quarter of 2014. In order to service this new business, FASI opened three new agent stations and two new service centers.
TQI
TQI operating revenue increased $7.0 million, or 16.7%, to $48.8 million for the year ended December 31, 2014 from $41.8 million for the year ended December 31, 2013. Increase in operating revenue attributable to the year ended December 31, 2014 including a full twelve months of activity as opposed to only ten months during 2013 due to the timing of the TQI acquisition. The impact of a full year of operations was partially offset by a decrease in net fuel surcharge revenue.
Intercompany Eliminations
Intercompany eliminations increased $1.6 million, or 42.1%, to $5.4 million during the year ended December 31, 2014 from $3.8 million during the year ended December 31, 2013. The intercompany eliminations are the result of truckload, airport-to-airport, and handling services provided between our segments during the years ended December 31, 2014 and 2013.
Purchased Transportation
Purchased transportation increased by $48.9 million, or 17.1%, to $334.6 million for the year ended December 31, 2014 from $285.7 million for the year ended December 31, 2013. As a percentage of total operating revenue, purchased transportation was 42.8% during the year ended December 31, 2014 compared to 43.8% for the year ended December 31, 2013.
Forward Air
Forward Air purchased transportation increased by $46.4 million, or 20.1%, to $277.3 million for the year ended December 31, 2014 from $230.9 million for the year ended December 31, 2013. As a percentage of segment operating revenue, Forward Air
purchased transportation was 45.3% during the year ended December 31, 2014 compared to 46.1% for the year ended December 31, 2013.
Purchased transportation costs for our airport-to-airport network increased $20.0 million, or 12.2%, to $183.3 million for the year ended December 31, 2014 from $163.3 million for the year ended December 31, 2013. For the year ended December 31, 2014, purchased transportation for our airport-to-airport network increased to 42.7% of airport-to-airport revenue from 41.5% for the year ended December 31, 2013. The $20.0 million increase is mostly attributable to a 6.6% increase in miles driven by our network of owner-operators or third party transportation providers in addition to a 6.0% increase in cost per mile paid to our network of owner-operators or third party transportation providers. The increase in miles increased purchased transportation by $8.4 million while the increase in cost per mile increased purchased transportation $8.2 million. Miles driven by our network of owner-operators or third party transportation providers increased in conjunction with the tonnage increase discussed above and a shift in our customer and route mix. The shift in customer shipping patterns resulted in increased miles run, higher empty miles, and increased usage of third party transportation providers. The shift in customer shipping patterns as well as the need to obtain additional third party power to properly service the higher revenue activity resulted in the increase in the airport-to-airport cost per mile. The remaining $3.4 million increase in airport-to-airport purchased transportation was attributable to increased third party transportation costs associated with the higher Complete volumes discussed above.
Purchased transportation costs for our logistics revenue increased $22.2 million, or 37.4%, to $81.5 million for the year ended December 31, 2014 from $59.3 million for the year ended December 31, 2013. For the year ended December 31, 2014, logistics’ purchased transportation costs represented 61.3% of logistics revenue versus 74.6% for the year ended December 31, 2013. The increase in logistics’ purchased transportation in total dollars was mostly attributable to a $18.6 million increase in intermodal drayage purchased transportation in conjunction with the acquisition of CST. The decline in logistics' purchased transportation as a percentage of revenue was attributable to CST utilizing more Company-employed drivers and less owner-operators and third party transportation providers than our legacy Forward Air operations. TLX purchased transportation also increased $3.6 million and 6.4%. TLX cost per mile increased 15.8% during the year ended December 31, 2014 compared to the same period in 2013, but the increase in cost per mile was partially offset by a 8.3% decrease in miles driven to support our TLX revenue. The changes in TLX miles driven and cost per mile were attributable to the impact of severe weather in the first quarter of 2014 and a shift in customer mix that resulted in the increased use of more expensive third party transportation providers.
Purchased transportation costs related to our other revenue increased $4.2 million, or 50.6%, to $12.5 million for the year ended December 31, 2014 from $8.3 million for the year ended December 31, 2013. Other purchased transportation costs as a percentage of other revenue decreased to 25.0% of other revenue for the year ended December 31, 2014 from 29.3% for the year ended December 31, 2013. Other purchased transportation decreased as a percentage of the associated revenue on increased warehousing and handling revenues associated with the acquisition of CST. These CST services have a lower associated purchased transportation cost.
FASI
FASI purchased transportation increased $2.1 million, or 6.1%, to $36.6 million for the year ended December 31, 2014 from $34.5 million for the year ended December 31, 2013. FASI purchased transportation as a percentage of revenue was 29.3% for the year ended December 31, 2014 compared to 30.4% for the year ended December 31, 2013. The improvement in FASI purchased transportation as a percentage of revenue was attributable to improved revenue quality due to customer rate increases initiated in the first quarter of 2014 and reduced usage of more costly third party transportation providers. With the on boarding of significant new business in the first and second quarters of 2013, FASI was required to utilize more costly third party transportation providers in order to properly service the new business. However, since start-up of the 2013 business FASI has been able to replace third party transportation providers with less costly owner-operators or Company-employed drivers, modify routes for improved load efficiency and obtain rate increases from the related customers.
TQI
TQI purchased transportation increased $1.5 million, or 6.5%, to $24.7 million for the year ended December 31, 2014 from $23.2 million for the year ended December 31, 2013. TQI purchased transportation as a percentage of revenue was 50.6% for the year ended December 31, 2014 compared to 55.5% for the year ended December 31, 2013. The improvement in TQI purchased transportation as a percentage of revenue was largely due to increased utilization of less costly owner-operators and Company-employed drivers and vehicles as opposed to third party transportation providers and operating efficiencies obtained since installing a new operating system at the beginning of 2014.
Intercompany Eliminations
Intercompany eliminations increased $1.1 million, or 37.9%, to $4.0 million during the year ended December 31, 2014 from $2.9 million during the year ended December 31, 2013. The intercompany eliminations are the result of truckload and airport-to-airport services provided between our segments during the years ended December 31, 2014 and 2013.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits increased $31.0 million, or 20.5%, to $182.1 million for the year ended December 31, 2014 from $151.1 million for the year ended December 31, 2013. As a percentage of total operating revenue, salaries, wages and employee benefits was 23.3% during the year ended December 31, 2014 compared to 23.2% in December 31, 2013.
Forward Air
Salaries, wages and employee benefits of Forward Air increased by $ 26.3 million, or 25.0%, to $131.7 million for the year ended December 31, 2014 from $105.4 million for the year ended December 31, 2013. Salaries, wages and employee benefits were 21.5% of Forward Air’s operating revenue for the year ended December 31, 2014 compared to 21.0% for the year ended December 31, 2013. The increase in salaries, wages and employee benefits in total dollars and as a percentage of revenue was partially attributable to $17.4 million of salaries, wages and employee benefits from CST. CST salaries, wages and employee benefits are higher as a percentage of revenue than our legacy Forward Air operations due to higher utilization of Company-employed drivers. The remaining $8.9 million increase is attributable to pre-existing Forward Air operations. Approximately $6.2 million of this increase was attributable to increased wages associated with the higher volumes discussed previously and 2013 and 2014 wage increases. The remaining increase was due to a $1.9 million increase in employee incentives, a $0.5 million increase in share-based compensation and $0.3 million increase in employee insurance costs. Employee incentives were increased in conjunction with certain key employees meeting their 2014 performance goals. Share-based compensation increased in conjunction with our 2014 annual share-based grants to employees. Employee insurances costs increased on Affordable Care Act fees and larger health insurance claims incurred during the year ended December 31, 2014 compared to the year ended December 31, 2013.
FASI
Salaries, wages and employee benefits of FASI increased by $ 2.7 million, or 6.9%, to $42.0 million for the year ended December 31, 2014 from $39.3 million for the year ended December 31, 2013. As a percentage of FASI operating revenue, salaries, wages and benefits decreased to 33.5% for the year ended December 31, 2014 compared to 34.7% for the year ended December 31, 2013. FASI salaries, wages and employee benefits are higher as a percentage of operating revenue than our Forward Air segment, as a larger percentage of FASI transportation services are performed by Company-employed drivers. The increase in salaries, wages and employee benefits in total dollars is largely due to higher wages and benefits which grew in conjunction with the revenue volume increases discussed previously. The improvement as a percentage of revenue was driven by improved dock wages net of increased health insurance costs. The decrease in dock wages was largely the result of installing and improving our terminal conveyor systems. Health insurance costs increased on several large claims incurred during the second and third quarters of 2014.
TQI
Salaries, wages and employee benefits of TQI increased by $2.0 million, or 31.3%, to $8.4 million for the year ended December 31, 2014 from $6.4 million for the year ended December 31, 2013. As a percentage of TQI operating revenue, salaries, wages and benefits increased to 17.2% for the year ended December 31, 2014 compared to 15.3% for the year ended December 31, 2013.The increase in salaries, wages and employee benefits as a percentage of revenue was driven by higher utilization of Company-employed drivers and increased health insurance costs, which accounted for 1.3% and 0.6%, respectively, of the 1.9% increase in salaries, wages and benefits as a percentage of revenue. Company-employed driver utilization increased in conjunction with new tractors purchased during 2014 and was offset by the decrease in purchased transportation discussed previously.
Operating Leases
Operating leases increased by $4.7 million, or 16.0%, to $34.0 million for the year ended December 31, 2014 from $29.3 million in the year ended December 31, 2013. Operating leases, the largest component of which is facility rent, were 4.4% of consolidated operating revenue for the year ended December 31, 2014 compared with 4.5% for the year ended December 31, 2013.
Forward Air
Operating leases increased $4.7 million, or 23.3%, to $24.9 million for the year ended December 31, 2014 from $20.2 million for the year ended December 31, 2013. Operating leases were 4.1% of Forward Air’s operating revenue for the year ended December 31, 2014 compared with 4.0% for the year ended December 31, 2013. Office and equipment rentals associated with CST accounted for $4.4 million of the increase in operating leases. The remaining increase was driven by a $0.3 million increase in office rentals. The increase in office rent was primarily due to relocations to new facilities or expansion of current facilities.
FASI
Operating leases were $9.0 million during the years ended December 31, 2014 and 2013. Operating leases were 7.2% of FASI operating revenue for the year ended December 31, 2014 compared with 7.9% for the year ended December 31, 2013.
TQI
Operating leases were $0.1 million during the years ended December 31, 2014 and 2013. Operating leases were 0.2% of FASI operating revenue for the years ended December 31, 2014 and 2013.
Depreciation and Amortization
Depreciation and amortization increased $7.5 million, or 31.8%, to $31.1 million for the year ended December 31, 2014 from $23.6 million for the year ended December 31, 2013. Depreciation and amortization was 4.0% of consolidated operating revenue for the year ended December 31, 2014 and compared to 3.6% for the year ended December 31, 2013.
Forward Air
Depreciation and amortization decreased $5.5 million, or 34.0%, to $21.7 million for the year ended December 31, 2014 from $16.2 million for the year ended December 31, 2013. Depreciation and amortization expense as a percentage of Forward Air operating revenue was 3.5% in the year ended December 31, 2014 compared to 3.2% for the year ended December 31, 2013. CST depreciation on property and equipment of $0.7 million and amortization on acquired intangibles of $2.6 million accounted for $3.3 million of the increase in depreciation and amortization. The remaining increase was primarily the result of new trailers, tractors and forklifts purchased for during 2014.
FASI
Depreciation and amortization increased $0.8 million, or 16.0%, to $5.8 million for the year ended December 31, 2014 from $5.0 million for the year ended December 31, 2013. Depreciation and amortization expense as a percentage of FASI operating revenue was 4.6% for the year ended December 31, 2014 compared to 4.4% for the year ended December 31, 2013. The increase in FASI depreciation is attributable to new tractors purchased to replace rented trucks, new conveyors and conveyor improvements purchased during 2014.
TQI
Depreciation and amortization increased $1.2 million, or 50.0%, to $3.6 million for the year ended December 31, 2014 from $2.4 million for the year ended December 31, 2013. Depreciation and amortization expense as a percentage of TQI operating revenue was 7.4% for the year ended December 31, 2014 compared to 5.8% for the year ended December 31, 2013. The increase in depreciation and amortization as a percentage of revenue is attributable to new trailers and tractors purchased for TQI during 2014 and software amortization related to TQI's new operating system.
Insurance and Claims
Insurance and claims expense increased $3.2 million, or 25.6%, to $15.7 million for the year ended December 31, 2014 from $12.5 million for the year ended December 31, 2013. Insurance and claims was 2.0% of consolidated operating revenue during the year ended December 31, 2013 compared to 1.9% for the year ended December 31, 2013.
Forward Air
Forward Air insurance and claims expense increased $ 3.1 million, or 35.6%, to $11.8 million for the year ended December 31, 2014 from $8.7 million for the year ended December 31, 2013. Insurance and claims as a percentage of Forward Air’s operating
revenue was 1.9% for the year ended December 31, 2014 compared to 1.8% for the year ended December 31, 2013. Approximately $1.7 million of the increase was attributable to insurance and claims associated with CST. The remaining increase was attributable to a $0.6 million increase in cargo claims, $0.5 million increase in vehicle accident damage repairs, $0.2 million increase in vehicle insurance and accident claims and $0.1 million increase in claims related legal and professional fees.
FASI
FASI insurance and claims decreased $0.2 million. or 6.1%, to $3.1 million for the year ended December 31, 2014 from $3.3 million for the year ended December 31, 2013. As a percentage of operating revenue, insurance and claims was 2.5% for the year ended December 31, 2014 compared to 2.9% for the year ended December 31, 2013. The decrease in FASI insurance and claims was largely attributable to a $0.7 million decrease in cargo claims net of a $0.5 million increase in vehicle insurance and accident claims. The increase in vehicle insurance and accident claims was driven by reserves for an accident that occurred in the fourth quarter of 2014.
TQI
TQI insurance and claims increased $0.3 million, or 60.0%, to $0.8 million for the year ended December 31, 2014 from $0.5 million for the year ended December 31, 2013. As a percentage of operating revenue, insurance and claims was 1.7% for the year ended December 31, 2014 compared to 1.2% for the year ended December 31, 2013. The increase in total dollars was attributable to higher insurance premiums as a result of the increase in tractor count in conjunction with capital expenditures discussed previously.
Fuel Expense
Fuel expense increased $5.0 million, or 32.9%, to $20.2 million the year ended December 31, 2014 from $15.2 million million for the year ended December 31, 2013. Fuel expense was 2.6% of consolidated operating revenue for the year ended December 31, 2014 compared to 2.3% for the year ended December 31, 2013.
Forward Air
Forward Air fuel expense increased $4.4 million, or 110.0%, to $8.4 million for the year ended December 31, 2014 from $4.0 million in the year ended December 31, 2013. Fuel expense was 1.4% of Forward Air’s operating revenue for the years ended December 31, 2014 compared to 0.8% for the year ended December 31, 2013. Approximately $4.3 million was attributable to fuel expense associated with CST. The remaining increase in fuel was attributable to our previously existing operations and increased in conjunction with the volume increases discussed previously.
FASI
FASI fuel expense increased $0.3 million, or 4.3%, to $7.3 million for the year ended December 31, 2014 from $7.0 million for the year ended December 31, 2013. Fuel expenses were 5.8% of FASI operating revenue during the year ended December 31, 2014 compared to 6.2% for the year ended December 31, 2013. FASI fuel expense is significantly higher as a percentage of operating revenue than Forward Air’s fuel expense, as FASI utilizes a higher ratio of Company-employed drivers and Company-owned or leased vehicles in its operations than Forward Air. The increase in FASI fuel expense was mostly the result of increased Company miles associated with the higher business volumes discussed previously and changes in average fuel prices.
TQI
TQI fuel expense increased $0.3 million, or 7.1%, to $4.5 million for the year ended December 31, 2014 from $4.2 million for the year ended December 31, 2013. Fuel expenses were 9.2% of FASI operating revenue during the year ended December 31, 2014 compared to 10.1% for the year ended December 31, 2013. TQI fuel expense is significantly higher as a percentage of operating revenue than Forward Air and FASI's fuel expense, as TQI utilizes a higher ratio of Company-employed drivers and Company-owned vehicles in its operations. The 0.9% decrease as percentage of revenue was attributable to lower year-over-year fuel prices during the second half of 2014 and new vehicles with improved transmissions put in service during the second quarter of 2014 that have reduced TQI's fuel cost per mile.
Other Operating Expenses
Other operating expenses increased $16.2 million, or 32.0%, to $66.9 million for the year ended December 31, 2014 from $50.7 million for the year ended December 31, 2013. Other operating expenses were 8.6% of consolidated operating revenue for the year ended December 31, 2014 compared with 7.8% for the year ended December 31, 2013.
Forward Air
Forward Air other operating expenses increased $13.5 million, or 36.5%, to $50.5 million for the year ended December 31, 2014 from $37.0 million for the year ended December 31, 2013. Forward Air other operating expenses were 8.2% of operating revenue for the year ended December 31, 2014 compared to 7.4% for the year ended December 31, 2013. Approximately $10.9 million of the increase in total dollars, or 0.9% as a percentage of revenue, was attributable to other operating expenses associated with CST. The remaining increase in total dollars was attributable to increased variable costs, such as vehicle maintenance and dock and terminal supplies, which increased in conjunction with the volume increases discussed previously.
FASI
FASI other operating expenses increased $2.2 million, or 16.7%, to $15.4 million for the year ended December 31, 2014 compared to $13.2 million for the year ended December 31, 2013. FASI other operating expenses were 12.3% of operating revenue for the year ended December 31, 2014 compared to 11.6% for the year ended December 31, 2013. The increase in FASI's other operating expenses as a percentage of revenue and in terms of total dollars was driven by a $1.7 million increase in agent station costs. As noted above, we opened additional agent stations to service the new business initiated during the first and second quarters of 2013. Agent station expense grew due to a shift in customer shipping destinations to include more volume to our agent locations. As percentage of revenue the increase in agent stations costs were partially offset by the increase in revenue exceeding the increase in other operating expenses such as vehicle maintenance and dock and terminal supplies.
TQI
TQI other operating expenses increased $1.0 million, or 71.4%, to $2.4 million for the year ended December 31, 2014 compared to $1.4 million for the year ended December 31, 2013. FASI other operating expenses were 4.9% of operating revenue for the year ended December 31, 2014 compared to 3.3% for the year ended December 31, 2013. The increase in other operating expenses as percentage of revenue was attributable to the year ended December 31, 2013 being reduced by a $0.6 million gain on the reduction in the fair value of the earn out liability associated with the acquisition of TQI. The reduction in the liability was the result of reductions in the projected cash flows used to estimate the fair value of the liability. The remaining increase in total dollars was attributable to increased variable costs, such as vehicle maintenance and dock and terminal supplies, which increased in conjunction with the volume increases discussed previously.
Intercompany Eliminations
Intercompany eliminations were $1.4 million during the year ended December 31, 2014 compared to $0.9 million for the year ended December 31, 2013. The intercompany eliminations are for agent station services Forward Air and FASI provided each other during the years ended December 31, 2014 and 2013.
Income from Operations
Income from operations increased by $12.0 million, or 14.2%, to $96.4 million for the year ended December 31, 2014 compared with $84.4 million for the year ended December 31, 2013. Income from operations was 12.3% of consolidated operating revenue for the year ended December 31, 2014 compared with 12.9% for the year ended December 31, 2013.
Forward Air
Forward Air income from operations increased by $7.4 million, or 9.4%, to $86.1 million for the year ended December 31, 2014 compared with $78.7 million for the year ended December 31, 2013. Forward Air’s income from operations was 14.1% of operating revenue for the year ended December 31, 2014 compared with 15.7% for the year ended December 31, 2013. The increase in operating income was attributable to the acquisition of CST which accounted for $7.1 million of operating income. Excluding CST, the remaining increase in operating income was driven by the increase in airport-to-airport revenue largely offset by higher purchased transportation costs.
FASI
FASI income from operations improved by $3.9 million, to $6.0 million for the year ended December 31, 2014 from $2.1 million for the year ended December 31, 2013. FASI income from operations was 4.8% of operating revenue for the year ended December 31, 2014 compared 1.9% of operating revenue for the year ended December 31, 2013. The improvement in operating performance is largely attributable to the increase in revenue as well as improved efficiencies and savings obtained primarily in our dock and total driver costs during the year ended December 31, 2014 compared to the same period in 2013.
TQI
TQI income from operations improved by $0.7 million, or 19.4%, to $4.3 million for the year ended December 31, 2014 from $3.6 million for the year ended December 31, 2013. TQI income from operations was 8.8% of operating revenue for the year ended December 31, 2014 compared 8.6% of operating revenue for the year ended December 31, 2013. Improvement in income from operations as percentage of revenue was attributable to higher revenue and increased utilization of owner-operators and Company-employed drivers as opposed to more costly third party transportation providers. These decreases were largely offset by a $0.6 million gain on the reduction of the earn out liability increasing income from operations for the year ended December 31, 2013.sections.
Interest Expense
Interest expense was $0.6$1.8 million for the year ended December 31, 2014 and increased $0.1 million, or 20.0%, from $0.52018 compared to $1.2 million for the year ended December 31, 2013. Increase is primarilysame period in 2017. The increase in interest expense was attributable to accrued interestadditional borrowings on income tax contingency accruals.our revolving credit facility.
Other, Net
Other, net of $0.3 million for the year ended December 31, 2014, primarily represents interest income earned on excess cash balances and unrealized gains on trading securities held.
Provision for Income Taxes
The combined federal and state effective tax rate for the year ended December 31, 20142018 was 36.3%23.4% compared to an effectivea rate of 35.1%18.9% for the year ended December 31, 2013.same period in 2017. The increase in our effective tax rate was largely duefor 2018 is primarily the result of the enactment of the Tax Cuts and Jobs Act, which lowered the statutory federal income tax rate to 21.0% from 35.0%. The lower effective tax rate for 2017 is the timingresult of deductions for incentive stock options.the impact of lowering the value of our net deferred tax liabilities as of December 31, 2017 following the enactment of the Tax Cuts and Jobs Act.
Net Income
As a result of the foregoing factors, net income increased by $6.7$4.8 million, or 12.3%5.5%, to $61.2$92.1 million for the year ended December 31, 20142018 compared to $54.5$87.3 million for the same period in 2017.
Expedited LTL - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
The following table sets forth our historical financial data of the Expedited LTL segment for the years ended December 31, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| Expedited LTL Segment Information |
| (In millions) |
| (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended |
| December 31, |
| Percent of |
| December 31, |
| Percent of |
|
|
| Percent |
| | 2018 |
| Revenue |
| 2017 |
| Revenue |
| Change |
| Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 747.6 |
|
| 100.0 | % |
| $ | 655.8 |
|
| 100.0 | % |
| $ | 91.8 |
|
| 14.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| Purchased transportation | 347.4 |
|
| 46.5 |
|
| 290.1 |
|
| 44.2 |
|
| 57.3 |
|
| 19.8 |
|
| Salaries, wages and employee benefits | 163.8 |
|
| 21.9 |
|
| 146.5 |
|
| 22.3 |
|
| 17.3 |
|
| 11.8 |
|
| Operating leases | 41.4 |
|
| 5.5 |
|
| 36.7 |
|
| 5.6 |
|
| 4.7 |
|
| 12.8 |
|
| Depreciation and amortization | 22.5 |
|
| 3.0 |
|
| 22.1 |
|
| 3.4 |
|
| 0.4 |
|
| 1.8 |
|
| Insurance and claims | 14.3 |
|
| 1.9 |
|
| 15.4 |
|
| 2.3 |
|
| (1.1 | ) |
| (7.1 | ) |
| Fuel expense | 6.2 |
|
| 0.8 |
|
| 3.8 |
|
| 0.6 |
|
| 2.4 |
|
| 63.2 |
|
| Other operating expenses | 55.6 |
|
| 7.4 |
|
| 53.2 |
|
| 8.1 |
|
| 2.4 |
|
| 4.5 |
|
| Total operating expenses | 651.2 |
|
| 87.1 |
|
| 567.8 |
|
| 86.6 |
|
| 83.4 |
|
| 14.7 |
|
| Income from operations | $ | 96.4 |
|
| 12.9 | % |
| $ | 88.0 |
|
| 13.4 | % |
| $ | 8.4 |
|
| 9.5 | % |
|
| | | | | | | | | | |
| Expedited LTL Operating Statistics |
| | | | | | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
| Business days | 255 |
| | 254 |
| | 0.4 | % |
| | | | | | |
| Tonnage | | | | | |
| Total pounds ¹ | 2,562,205 |
| | 2,478,059 |
| | 3.4 |
|
| Pounds per day ¹ | 10,048 |
| | 9,756 |
| | 3.0 |
|
| | | | | | |
| Shipments | | | | | |
| Total shipments ¹ | 4,173 |
| | 4,048 |
| | 3.1 |
|
| Shipments per day ¹ | 16.4 |
| | 15.9 |
| | 3.1 |
|
Total shipments with pickup and/or delivery 1 | 1,002 |
| | 945 |
| | 6.0 |
|
| | | | | | |
| Weight per shipment | 614 |
| | 612 |
| | 0.3 |
|
| | | | | | |
| Revenue per hundredweight | $ | 26.06 |
| | $ | 23.91 |
| | 9.0 |
|
| Revenue per hundredweight, ex fuel | $ | 22.01 |
| | $ | 21.30 |
| | 3.3 |
|
| | | | | | |
| Revenue per shipment | $ | 160 |
| | $ | 146 |
| | 9.6 |
|
| Revenue per shipment, ex fuel | $ | 135 |
| | $ | 130 |
| | 3.8 | % |
| | | | | | |
| ¹ - In thousands | | | | | |
Revenues
Expedited LTL operating revenue increased $91.8 million, or 14.0%, to $747.6 million for the year ended December 31, 2013.2018 from $655.8 million for the same period of 2017. This increase was due to increased network revenue, fuel surcharge revenue and other terminal based revenue over the prior year. Network revenue increased $37.7 million due to a 3.1% increase in shipments, a 3.4% increase in tonnage and a 3.3% increase in revenue per hundredweight, ex fuel over prior year. The increase in tonnage was due to an increase in class-rated shipments and the increase in revenue per hundredweight was due to increased shipment size and revenue per shipment. Fuel surcharge revenue increased $39.1 million largely due to rate increases to our fuel surcharges and increases in fuel prices and tonnage volumes. Other terminal based revenue, which includes dedicated local pickup and delivery services, warehousing and terminal handling, increased $15.0 million, or 23.9%, to $77.4 million for the year ended December 31, 2018 from $62.4 million in the same period of 2017. The increase in other terminal revenue was mainly attributable to increases in certain final mile, dedicated local pickup and delivery revenues.
Purchased Transportation
Expedited LTL purchased transportation increased by $57.3 million, or 19.8%, to $347.4 million for the year ended December 31, 2018 from $290.1 million for the year ended December 31, 2017. As a percentage of segment operating revenue, Expedited LTL purchased transportation was 46.5% during the year ended December 31, 2018 compared to 44.2% for the same period of 2017. The increase is mostly due to an increase in our cost per mile as a result of increased utilization of third-party transportation providers, which are typically more costly than owner-operators and rate increases to owner-operators.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Expedited LTL increased by $17.3 million, or 11.8%, to $163.8 million for the year ended December 31, 2018 from $146.5 million in the same period of 2017. Salaries, wages and employee benefits were 21.9% of Expedited LTL’s operating revenue for the year ended December 31, 2018 compared to 22.3% for the same period of 2017. The decrease in salaries, wages and employee benefits as a percentage of revenue was primarily attributable to a 0.5% decrease in health insurance costs as a percentage of revenue and a 0.2% decrease in Expedited LTL terminal and management salaries as a percentage of revenue. The decrease in salaries as a percentage of revenue is the impact of additional revenue on fixed salaries and improved operating efficiencies. These decreases were slightly offset by increased use of Company-employed drivers for transportation services.
Operating Leases
Operating leases increased $4.7 million, or 12.8%, to $41.4 million for the year ended December 31, 2018 from $36.7 million for the year ended December 31, 2017. Operating leases were 5.5% of Expedited LTL’s operating revenue for the year ended December 31, 2018 compared to 5.6% for the year ended December 31, 2017. The increase in cost is due to a $3.8 million increase in tractor rentals and leases and $2.2 million of additional facility lease expenses partly offset by a $1.4 million decrease in trailer leases and equipment rentals. Tractor leases increased due to the increased usage of Company-employed drivers mentioned above and facility leases increased due to the expansion of certain facilities. Trailer leases and equipment rentals decreased due to prior year rentals and leases that were replaced with purchased units.
Depreciation and Amortization
Expedited LTL depreciation and amortization increased $0.4 million, or 1.8%, to $22.5 million for the year ended December 31, 2018 from $22.1 million for the year ended December 31, 2017. Depreciation and amortization expense as a percentage of Expedited LTL operating revenue was 3.0% in the year ended December 31, 2018 compared to 3.4% for the year ended December 31, 2017. The decrease as a percentage of revenue was due to lower amortization expenses partly offset by the purchase of new trailers during 2018. The lower amortization expense was due to the completion of the useful life for an acquired customer relationship.
Insurance and Claims
Expedited LTL insurance and claims expense decreased $1.1 million, or 7.1%, to $14.3 million for the year ended December 31, 2018 from $15.4 million for the year ended December 31, 2017. Insurance and claims as a percentage of Expedited LTL’s operating revenue was 1.9% for the year ended December 31, 2018 compared to 2.3% for the year ended December 31, 2017. The decrease as a percentage of revenue was attributable to lower vehicle liability claims and insurance premiums. At a consolidated level, vehicle claims reserves increased; see discussion in the "Other operations" section below.
Fuel Expense
Expedited LTL fuel expense increased $2.4 million, or 63.2%, to $6.2 million for the year ended December 31, 2018 from $3.8 million in the year ended December 31, 2017. Fuel expense was 0.8% of Expedited LTL’s operating revenue for the years ended December 31, 2018 compared to 0.6% for the same period in 2017. LTL fuel expenses increased due to higher year-over-year fuel prices and increased Company-employed driver miles.
Other Operating Expenses
Expedited LTL other operating expenses increased $2.4 million, or 4.5%, to $55.6 million for the year ended December 31, 2018 from $53.2 million for the year ended December 31, 2017. Expedited LTL other operating expenses were 7.4% of operating revenue for the year ended December 31, 2018 compared to 8.1% for the year ended December 31, 2017. Other operating expenses include equipment maintenance, terminal and office expenses, professional fees and other over-the-road costs. The decrease as percentage of revenue was primarily the result of lower owner-operator costs, such as tolls, and lower maintenance due to the increased utilization of brokered transportation mentioned above. Additional decrease as a percentage of revenue was due to the year ended December 31, 2018 including the recovery of previously reserved receivables, while the same period of 2017 included an increase in receivables allowance.
Income from Operations
Expedited LTL income from operations increased by $8.4 million, or 9.5%, to $96.4 million for the year ended December 31, 2018 compared to $88.0 million for the year ended December 31, 2017. Expedited LTL’s income from operations was 12.9% of operating revenue for the year ended December 31, 2018 compared to 13.4% for the year ended December 31, 2017. The increase in income from operations was due to increases in revenue due to higher shipments, tonnage and fuel surcharge revenue. These improvements were mostly offset by increased utilization of third-party transportation providers, which caused the deterioration in income from operations as a percentage of revenue.
Truckload Premium Services - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
The following table sets forth our historical financial data for the Truckload Premium Services segment for the years ended December 31, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Truckload Premium Services Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 192.6 |
| | 100.0 | % | | $ | 201.7 |
| | 100.0 | % | | $ | (9.1 | ) | | (4.5 | )% |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 144.8 |
| | 75.2 |
| | 153.7 |
| | 76.2 |
| | (8.9 | ) | | (5.8 | ) |
| Salaries, wages and employee benefits | 19.1 |
| | 9.9 |
| | 20.4 |
| | 10.1 |
| | (1.3 | ) | | (6.4 | ) |
| Operating leases | 0.5 |
| | 0.3 |
| | 0.9 |
| | 0.5 |
| | (0.4 | ) | | (44.4 | ) |
| Depreciation and amortization | 6.4 |
| | 3.3 |
| | 6.3 |
| | 3.1 |
| | 0.1 |
| | 1.6 |
|
| Insurance and claims | 4.5 |
| | 2.4 |
| | 5.4 |
| | 2.7 |
| | (0.9 | ) | | (16.7 | ) |
| Fuel expense | 3.3 |
| | 1.7 |
| | 3.3 |
| | 1.6 |
| | — |
| | — |
|
| Other operating expenses | 8.9 |
| | 4.6 |
| | 8.5 |
| | 4.2 |
| | 0.4 |
| | 4.7 |
|
| Total operating expenses | 187.5 |
| | 97.4 |
| | 198.5 |
| | 98.4 |
| | (11.0 | ) | | (5.5 | ) |
| Income from operations | $ | 5.1 |
| | 2.6 | % | | $ | 3.2 |
| | 1.6 | % | | $ | 1.9 |
| | 59.4 | % |
|
| | | | | | | | | | |
| Truckload Premium Services Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
Total Miles 1 | 78,889 |
| | 96,598 |
| | (18.3 | )% |
| Empty Miles Percentage | 9.0 | % | | 9.6 | % | | (6.3 | ) |
| Tractors (avg) | 315 |
| | 386 |
| | (18.4 | ) |
Miles per tractor per week 2 | 2,178 |
| | 2,700 |
| | (19.3 | ) |
| | | | | | |
| Revenue per mile | $ | 2.35 |
| | $ | 2.02 |
| | 16.3 |
|
| Cost per mile | $ | 1.89 |
| | $ | 1.66 |
| | 13.9 | % |
| | | | | | |
| ¹ - In thousands | | | | | |
2 - Calculated using Company driver and owner-operator miles |
Revenues
TLS revenue decreased $9.1 million, or 4.5%, to $192.6 million for the year ended December 31, 2018 from $201.7 million in the same period of 2017. TLS revenue decreased due to a 18.3% decrease in overall miles mostly offset by a 16.3% increase in average revenue per mile. The decrease in overall miles was due to deliberate shedding of lower margin business as well as reduced fleet capacity versus the prior year period. The increased revenue per mile was primarily driven by rate increases to existing customers, higher fuel surcharges and, to a lesser extent, the aforementioned shedding of lower margin business.
Purchased Transportation
Purchased transportation costs for our TLS revenue decreased $8.9 million, or 5.8%, to $144.8 million for the year ended December 31, 2018 from $153.7 million for the year ended December 31, 2017. For the year ended December 31, 2018, TLS purchased transportation costs represented 75.2% of TLS revenue compared to 76.2% for the same period in 2017. TLS purchased transportation includes owner-operators and third-party carriers, while company-employed drivers are included in salaries, wages and benefits. The decrease in purchased transportation was attributable to an 18.4% decrease in purchased transportation miles mostly offset by a 14.6% increase in cost per mile during the year ended December 31, 2018 compared to the same period in 2017. The decrease in TLS purchased transportation miles was attributable to the revenue activity discussed above. The increase in cost per mile was due to increased utilization of third-party carriers, which are more costly than owner-operators.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of TLS decreased by $1.3 million, or 6.4%, to $19.1 million in the year ended December 31, 2018 from $20.4 million in the same period of 2017. Salaries, wages and employee benefits were 9.9% of TLS’s operating revenue in the year ended December 31, 2018 compared to 10.1% for the same period of 2017. The slight decrease in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to a decrease in Company-employed driver miles partly offset by an increase in employee incentives and share-based compensation.
Operating Leases
Operating leases decreased $0.4 million, or 44.4%, to $0.5 million for the year ended December 31, 2018 from $0.9 million for the same period in 2017. Operating leases were 0.3% of TLS operating revenue for the year ended December 31, 2018 compared to 0.5% for the same period of 2017. The decrease was due to a decrease in trailer rentals, as TLS utilized purchased trailers during 2018 compared to rentals in the same period in 2017.
Depreciation and Amortization
Depreciation and amortization increased $0.1 million, or 1.6%, to $6.4 million for the year ended December 31, 2018 from $6.3 million for the year ended December 31, 2017. Depreciation and amortization expense as a percentage of TLS operating revenue was 3.3% for the year ended December 31, 2018 compared to 3.1% for the same period in 2017. The increase was due to increased trailer depreciation on trailers purchased during 2018 and a full year of depreciation for new operating software placed in service during the fourth quarter of 2017. These increases were partly offset by lower amortization expense following the completion of the useful life for an acquired customer relationship.
Insurance and Claims
TLS insurance and claims decreased $0.9 million, or 16.7%, to $4.5 million for the year ended December 31, 2018 from $5.4 million for the year ended December 31, 2017. As a percentage of operating revenue, insurance and claims was 2.4% for the year ended December 31, 2018 compared to 2.7% for the year ended December 31, 2017. The decrease was due to lower vehicle liability claims. At a consolidated level, vehicle claims reserves increased; see discussion in the "Other operations" section below.
Fuel Expense
TLS fuel expense was $3.3 million for the year ended December 31, 2018 and 2017. Fuel expenses were 1.7% of TLS operating revenue during the year ended December 31, 2018 compared to 1.6% for the year ended December 31, 2017. The increase as a percentage of revenue was mostly attributable to higher year-over-year fuel prices partly offset by a decrease in Company-employed driver miles.
Other Operating Expenses
TLS other operating expenses increased $0.4 million, or 4.7%, to $8.9 million for the year ended December 31, 2018 compared to $8.5 million for the year ended December 31, 2017. TLS other operating expenses were 4.6% of operating revenue for the year ended December 31, 2018 compared to 4.2% for the year ended December 31, 2017. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other costs of transiting shipments. The increase in other operating expenses was due to an increase in driver recruiting expenses.
Income from Operations
TLS income from operations increased $1.9 million, or 59.4%, to $5.1 million in income from operations for the year ended December 31, 2018 compared to $3.2 million for the same period in 2017. TLS income from operations was 2.6% of operating revenue for the year ended December 31, 2018 compared to 1.6% for the year ended December 31, 2017. The improvement in income from operations was due to rate increases and higher fuel surcharges to existing customers, the deliberate shedding of lower margin business and lower vehicle claims reserves.
Intermodal - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
The following table sets forth our historical financial data of the Intermodal segment for the years ended December 31, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Intermodal Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 201.0 |
| | 100.0 | % | | $ | 154.7 |
| | 100.0 | % | | $ | 46.3 |
| | 29.9 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 77.1 |
| | 38.4 |
| | 63.6 |
| | 41.1 |
| | 13.5 |
| | 21.2 |
|
| Salaries, wages and employee benefits | 43.9 |
| | 21.8 |
| | 34.0 |
| | 22.0 |
| | 9.9 |
| | 29.1 |
|
| Operating leases | 15.9 |
| | 7.9 |
| | 13.5 |
| | 8.7 |
| | 2.4 |
| | 17.8 |
|
| Depreciation and amortization | 6.3 |
| | 3.1 |
| | 5.8 |
| | 3.8 |
| | 0.5 |
| | 8.6 |
|
| Insurance and claims | 5.8 |
| | 2.9 |
| | 4.2 |
| | 2.7 |
| | 1.6 |
| | 38.1 |
|
| Fuel expense | 6.6 |
| | 3.3 |
| | 3.9 |
| | 2.5 |
| | 2.7 |
| | 69.2 |
|
| Other operating expenses | 22.1 |
| | 11.0 |
| | 16.7 |
| | 10.8 |
| | 5.4 |
| | 32.3 |
|
| Total operating expenses | 177.7 |
| | 88.4 |
| | 141.7 |
| | 91.6 |
| | 36.0 |
| | 25.4 |
|
| Income from operations | $ | 23.3 |
| | 11.6 | % | | $ | 13.0 |
| | 8.4 | % | | $ | 10.3 |
| | 79.2 | % |
|
| | | | | | | | | | |
| Intermodal Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
| Drayage shipments | 305,239 |
| | 233,093 |
| | 31.0 | % |
| Drayage revenue per shipment | $ | 567 |
| | $ | 554 |
| | 2.3 |
|
| Number of locations | 20 |
| | 19 |
| | 5.3 | % |
Revenues
Intermodal operating revenue increased $46.3 million, or 29.9%, to $201.0 million for the year ended December 31, 2018 from $154.7 million for the same period in 2017. The increases in operating revenue was primarily attributable to a full year of revenue from Atlantic, which was acquired in May 2017, the impact of increased fuel surcharges and increased rental and storage revenues.
Purchased Transportation
Intermodal purchased transportation increased $13.5 million, or 21.2%, to $77.1 million for the year ended December 31, 2018 from $63.6 million for the same period in 2017. Intermodal purchased transportation as a percentage of revenue was 38.4% for the year ended December 31, 2018 compared to 41.1% for the year ended December 31, 2017. The decrease in Intermodal purchased transportation as a percentage of revenue was attributable to a change in revenue mix, as Intermodal had higher increases to revenue lines that did not require the use of purchased transportation. This was partly offset by a higher utilization of owner-operators as opposed to Company-employed drivers during 2018 compared to the same period of 2017, as Atlantic utilized more owner-operators than Company-employed drivers.
Salaries, Wages, and Benefits
Intermodal salaries, wages and employee benefits increased $9.9 million, or 29.1%, to $43.9 million for the year ended December 31, 2018 compared to $34.0 million for the year ended December 31, 2017. As a percentage of Intermodal operating revenue, salaries, wages and benefits decreased to 21.8% for the year ended December 31, 2018 compared to 22.0% for the same period in 2017. The improvement in salaries, wages and employee benefits as a percentage of revenue was attributable to lower workers' compensation and health insurance costs as a percentage of revenue partly offset by higher employee incentives and share-based compensation.
Operating Leases
Operating leases increased $2.4 million, or 17.8% to $15.9 million for the year ended December 31, 2018 from $13.5 million for the same period in 2017. Operating leases were 7.9% of Intermodal operating revenue for the year ended December 31, 2018 compared to 8.7% in the same period of 2017. Operating leases decreased as a percentage of revenue since revenue that does not require trailer rentals increased at a faster pace than those that required trailer rental charges. The decrease as a percentage of revenue is also attributable to utilization of owned equipment acquired from Atlantic and the increase in revenue out-pacing the increase in facility rents.
Depreciation and Amortization
Depreciation and amortization increased $0.5 million, or 8.6%, to $6.3 million for the year ended December 31, 2018 from $5.8 million for the same period in 2017. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.1% for the year ended December 31, 2018 compared to 3.8% for the same period of 2017. The increase in depreciation and amortization is due the amortization of intangible assets acquired during 2017 and 2018. Depreciation and amortization decreased as a percentage of revenue since revenue that does not require equipment increased at a faster pace than those that required equipment.
Insurance and Claims
Intermodal insurance and claims expense increased $1.6 million, or 38.1%, to $5.8 million for the year ended December 31, 2018 from $4.2 million for the year ended December 31, 2017. Intermodal insurance and claims were 2.9% of operating revenue for the year ended December 31, 2018 compared to 2.7% for the same period in 2017. The increase in Intermodal insurance and claims was attributable to higher insurance premiums for the additional volumes and higher claims reserves. See additional discussion over the consolidated increase in self-insurance reserves related to vehicle claims in the "Other operations" section below.
Fuel Expense
Intermodal fuel expense increased $2.7 million, or 69.2%, to $6.6 million for the year ended December 31, 2018 from $3.9 million in the same period of 2017. Fuel expenses were 3.3% of Intermodal operating revenue for the year ended December 31, 2018 compared to 2.5% in the same period of 2017. Intermodal fuel expenses increased due to higher year-over-year fuel prices and increased Company-employed driver activity.
Other Operating Expenses
Intermodal other operating expenses increased $5.4 million, or 32.3%, to $22.1 million for the year ended December 31, 2018 compared to $16.7 million for the same period of 2017. Intermodal other operating expenses as a percentage of revenue for the year ended December 31, 2018 were 11.0% compared to 10.8% for the same period of 2017. The increase in Intermodal other operating expenses was due mostly due to a $4.6 million increase in container related rental and storage charges associated with revenue increases discussed previously. The remaining increase was due to increased equipment maintenance, facility costs and professional fees. These increases were partly offset by a $0.5 million reduction in the earn-out liability for the Atlantic acquisition during 2018.
Income from Operations
Intermodal’s income from operations increased by $10.3 million, or 79.2%, to $23.3 million for the year ended December 31, 2018 compared to $13.0 million for the same period in 2017. Income from operations as a percentage of Intermodal operating revenue was 11.6% for the year ended December 31, 2018 compared to 8.4% in the same period of 2017. The increase in operating income as a percentage of revenue was primarily attributable to the increase in high-margin storage and fuel revenues and a full year of the Atlantic acquisition.
Pool Distribution - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
The following table sets forth our historical financial data of the Pool Distribution segment for the years ended December 31, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Pool Distribution Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 194.1 |
| | 100.0 | % | | $ | 168.5 |
| | 100.0 | % | | $ | 25.6 |
| | 15.2 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 57.4 |
| | 29.6 |
| | 47.5 |
| | 28.2 |
| | 9.9 |
| | 20.8 |
|
| Salaries, wages and employee benefits | 71.3 |
| | 36.7 |
| | 62.7 |
| | 37.2 |
| | 8.6 |
| | 13.7 |
|
| Operating leases | 17.6 |
| | 9.1 |
| | 13.3 |
| | 7.9 |
| | 4.3 |
| | 32.3 |
|
| Depreciation and amortization | 6.9 |
| | 3.6 |
| | 6.8 |
| | 4.0 |
| | 0.1 |
| | 1.5 |
|
| Insurance and claims | 4.6 |
| | 2.4 |
| | 4.7 |
| | 2.8 |
| | (0.1 | ) | | (2.1 | ) |
| Fuel expense | 7.0 |
| | 3.6 |
| | 5.5 |
| | 3.3 |
| | 1.5 |
| | 27.3 |
|
| Other operating expenses | 23.4 |
| | 12.1 |
| | 21.6 |
| | 12.8 |
| | 1.8 |
| | 8.3 |
|
| Total operating expenses | 188.2 |
| | 97.0 |
| | 162.1 |
| | 96.2 |
| | 26.1 |
| | 16.1 |
|
| Income from operations | $ | 5.9 |
| | 3.0 | % | | $ | 6.4 |
| | 3.8 | % | | $ | (0.5 | ) | | (7.8 | )% |
|
| | | | | | | | | | |
| Pool Distribution Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
Cartons 1 | 92,976 |
| | 82,196 |
| | 13.1 | % |
| Revenue per carton | $ | 2.09 |
| | $ | 2.05 |
| | 2.0 |
|
| Terminals | 28 |
| | 28 |
| | — |
|
| | | | | | |
1 In thousands | | | | | |
Revenues
Pool operating revenue increased $25.6 million, or 15.2%, to $194.1 million for the year ended December 31, 2018 from $168.5 million for the year ended December 31, 2017. The revenue increase was due to increased volumes from previously existing customers, new business and rate increases.
Purchased Transportation
Pool purchased transportation increased $9.9 million, or 20.8%, to $57.4 million for the year ended December 31, 2018 from $47.5 million for the year ended December 31, 2017. Pool purchased transportation as a percentage of revenue was 29.6% for the year ended December 31, 2018 compared to 28.2% for the same period in 2017. The increase in Pool purchased transportation as a percentage of revenue was attributable to increased rates charged by, and increased utilization of, third-party carriers to cover the increases in revenue.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Pool increased by $8.6 million, or 13.7%, to $71.3 million for the year ended December 31, 2018 from $62.7 million for the year ended December 31, 2017. As a percentage of Pool operating revenue, salaries, wages and benefits were 36.7% for the year ended December 31, 2018 compared to 37.2% for the same period in 2017. The decrease in salaries, wages and benefits as a percentage of revenue was the result of decreases in employee incentives, driver pay and group health insurance costs partly offset by increased dock pay. Dock pay deteriorated as a percentage of revenue as increasing revenue volumes required the use of more costly contract labor.
Operating Leases
Operating leases increased $4.3 million, or 32.3%, to $17.6 million for the year ended December 31, 2018 from $13.3 million for the year ended December 31, 2017. Operating leases were 9.1% of Pool operating revenue for the year ended December 31, 2018 compared to 7.9% for the year ended December 31, 2017. Operating leases increased as a percentage of revenue due to increases in facility lease expenses and tractor leases for the additional revenue discussed above and the use of leased tractors to replace old purchased equipment. The increase in facility lease expenses is mostly due to a $1.0 million charge to vacate a facility.
Depreciation and Amortization
Depreciation and amortization increased $0.1 million, or 1.5%, to $6.9 million for the year ended December 31, 2018 compared to $6.8 million for the same period in 2017. Depreciation and amortization expense as a percentage of Pool operating revenue was 3.6% for the year ended December 31, 2018 compared to 4.0% for the year ended December 31, 2017. The decrease in Pool depreciation and amortization as a percentage of revenue was due to the increase in leased tractors mentioned above instead of purchased equipment, partly offset by increased trailer depreciation on trailers purchased during 2018.
Insurance and Claims
Pool insurance and claims decreased $0.1 million, or 2.1%, to $4.6 million for the year ended December 31, 2018 from $4.7 million for the year ended December 31, 2017. As a percentage of operating revenue, insurance and claims was 2.4% for the year ended December 31, 2018 compared to 2.8% for the year ended December 31, 2017. The decrease as a percentage of revenue was due to a $0.5 million reimbursement of legal fees in the year ended December 31, 2018 for expenses incurred in prior periods. The decrease as a percentage of revenue was also due to a decrease in vehicle liability claims. At a consolidated level, vehicle claims reserves increased; see discussion in the "Other operations" section below.
Fuel Expense
Pool fuel expense increased $1.5 million, or 27.3%, to $7.0 million for the year ended December 31, 2018 from $5.5 million for the year ended December 31, 2017. Fuel expenses were 3.6% of Pool operating revenue during the year ended December 31, 2018 compared to 3.3% for the year ended December 31, 2017. Pool fuel expenses increased due to higher year-over-year fuel prices, higher revenue volumes and increased Company-employed driver miles.
Other Operating Expenses
Pool other operating expenses increased $1.8 million, or 8.3%, to $23.4 million for the year ended December 31, 2018 compared to $21.6 million for the year ended December 31, 2017. Pool other operating expenses were 12.1% of operating revenue for the year ended December 31, 2018 compared to 12.8% for the year ended December 31, 2017. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other over-the-road costs. As a percentage of revenue the decrease was attributable to a 0.6% decrease in equipment maintenance costs and a 0.3% decrease in agent terminal handling costs. These decreases were partly offset by a 0.1% increase as a percentage of revenue in recruiting expenses.
Income from Operations
Pool income from operations decreased by $0.5 million, or 7.8% to $5.9 million for the year ended December 31, 2018 from $6.4 million for the year ended December 31, 2017. Pool income from operations was 3.0% of operating revenue for the year ended December 31, 2018 compared to 3.8% of operating revenue for the year ended December 31, 2017. The deterioration in Pool operating income was primarily the result of increased utilization of and higher rates charged by third-party carriers and increasing revenue volumes required the use of more costly contract labor. Pool's operating income also decreased due to the one-time charge to vacate a facility during 2018.
Other operations - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
Other operating activity declined from a $1.8 million operating loss during the year ended December 31, 2017 to a $8.6 million operating loss during the year ended December 31, 2018. The year ended December 31, 2018 included a $6.0 million increase in self-insurance reserves related to existing vehicular claims and $0.8 million in self-insurance reserves resulting from analysis of our workers' compensation claims. The loss was also attributable to $1.2 million in costs related to the CEO transition, comprised of recruiting fees and retention share awards.
The $1.8 million operating loss for the year ending December 31, 2017 included a $1.2 million reserve for vehicle and workers' compensation claims, $0.9 million of executive severance costs and $0.4 million of turn in costs from old Towne equipment. These costs were partly offset by $0.7 million of indemnification funds received related to the Towne acquisition. These costs and benefits were kept at the corporate level and not passed through to our operating segments.
Results of Operations
The following table sets forth our historical financial data for the years ended December 31, 2017 and 2016 (in millions):
|
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | Change | | Percent Change |
| | (As Adjusted) | | (As Adjusted) | | | | |
| Operating revenue: | | | | | | | |
| Expedited LTL | $ | 655.8 |
| | $ | 596.5 |
| | $ | 59.3 |
| | 9.9 | % |
| Truckload Premium Services | 201.8 |
| | 181.0 |
| | 20.8 |
| | 11.5 |
|
| Intermodal | 154.7 |
| | 105.7 |
| | 49.0 |
| | 46.4 |
|
| Pool Distribution | 168.5 |
| | 151.9 |
| | 16.6 |
| | 10.9 |
|
| Eliminations and other operations | (11.4 | ) | | (4.9 | ) | | (6.5 | ) | | 132.7 |
|
| Operating revenue | 1,169.4 |
| | 1,030.2 |
| | 139.2 |
| | 13.5 |
|
| Operating expenses: | | | | | | | |
| Purchased transportation | 545.1 |
| | 460.8 |
| | 84.3 |
| | 18.3 |
|
| Salaries, wages, and employee benefits | 265.8 |
| | 242.3 |
| | 23.5 |
| | 9.7 |
|
| Operating leases | 63.8 |
| | 60.5 |
| | 3.3 |
| | 5.5 |
|
| Depreciation and amortization | 41.1 |
| | 38.2 |
| | 2.9 |
| | 7.6 |
|
| Insurance and claims | 29.6 |
| | 25.4 |
| | 4.2 |
| | 16.5 |
|
| Fuel expense | 16.5 |
| | 13.2 |
| | 3.3 |
| | 25.0 |
|
| Other operating expenses | 98.7 |
| | 87.7 |
| | 11.0 |
| | 12.5 |
|
| Impairment of goodwill, intangibles and other assets | — |
| | 42.4 |
| | (42.4 | ) | | (100.0 | ) |
| Total operating expenses | 1,060.6 |
| | 970.5 |
| | 90.1 |
| | 9.3 |
|
| Income (loss) from operations: | | | | | | | |
| Expedited LTL | 88.0 |
| | 83.1 |
| | 4.9 |
| | 5.9 |
|
| Truckload Premium Services | 3.2 |
| | (35.4 | ) | | 38.6 |
| | NM |
|
| Intermodal | 13.0 |
| | 11.1 |
| | 1.9 |
| | 17.1 |
|
| Pool Distribution | 6.4 |
| | 3.6 |
| | 2.8 |
| | 77.8 |
|
| Other operations | (1.8 | ) | | (2.7 | ) | | 0.9 |
| | (33.3 | ) |
| Income from operations | 108.8 |
| | 59.7 |
| | 49.1 |
| | 82.2 |
|
| Other expense: | | | | | | | |
| Interest expense | (1.2 | ) | | (1.6 | ) | | 0.4 |
| | (25.0 | ) |
| Total other expense | (1.2 | ) | | (1.6 | ) | | 0.4 |
| | (25.0 | ) |
| Income before income taxes | 107.6 |
| | 58.1 |
| | 49.5 |
| | 85.2 |
|
| Income taxes | 20.3 |
| | 30.6 |
| | (10.3 | ) | | (33.7 | ) |
| Net income and comprehensive income | $ | 87.3 |
| | $ | 27.5 |
| | $ | 59.8 |
| | 217.5 | % |
Note: Prior period balances have been adjusted to confirm with revenue guidance issued in 2014 (ASU 2014-09, Revenue from Contracts with Customers). See additional discussion in Note 1, Accounting Policies to our Consolidated Financial Statements.
Revenues
During the year ended December 31, 2017, revenue increased 13.5% compared to the year ended December 31, 2016. The revenue increase was primarily driven by increased revenue from our LTL Expedited segment of Contents$59.3 million driven by increased network revenue, fuel surcharge revenue and other terminal based revenue over the prior year. Revenue also increased $49.0 million in our Intermodal segment primarily attributable to the acquisition of Atlantic, Triumph and Ace and the impact of increased fuel surcharges.
Our fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and volume transiting our network. During the year ended December 31, 2017, total fuel surcharge revenue increased 41.9% as compared to the same period in 2016, mostly due to increased fuel prices and increased volumes in the Expedited LTL, Intermodal and Pool Distribution segments.
Operating Expenses
Operating expenses increased $90.1 million primarily driven by purchased transportation increases of $84.3 million and salaries, wages and employee benefits increases of $23.5 million, offset by a $42.4 million impairment discussed further in the TLS segment section below. Purchased transportation increased primarily due to increased volumes and increased utilization of third-party transportation providers, which are typically more costly than owner-operators. Salaries, wages and employee benefits increased primarily due to increased personnel needs to support the additional volumes.
Operating Income and Segment Operations
As a result of the above, operating income increased $49.1 million, or 82.2%, from 2016 to $108.8 million for the year ended December 31, 2017. The results for our four reportable segments are discussed in detail in the following sections.
Interest Expense
Interest expense was $1.2 million for the year ended December 31, 2017 compared to $1.6 million for the same period in 2016. The decrease in interest expense was attributable to principal payments made on the term loan partly offset by borrowings on our revolving credit facility.
Income Taxes
The combined federal and state effective tax rate for the year ended December 31, 2017 was 18.9% compared to a rate of 52.7% for the same period in 2016. The lower effective tax rate for 2017 is the result of the enactment of the Tax Cuts and Jobs Act, which lowered the value of our net deferred tax liabilities. Also, the 2016 effective tax rate reflected the impairment of goodwill in the second quarter of 2016 that is non-deductible for tax purposes.
Net Income
As a result of the foregoing factors, net income increased by $59.8 million, or 217.5%, to $87.3 million for the year ended December 31, 2017 compared to $27.5 million for the same period in 2016.
Expedited LTL - Year Ended December 31, 2017 compared to Year Ended December 31, 2016
The following table sets forth our historical financial data of the Expedited LTL segment for the years ended December 31, 2017 and 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| Expedited LTL Segment Information |
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 655.8 |
| | 100.0 | % | | $ | 596.5 |
| | 100.0 | % | | $ | 59.3 |
| | 9.9 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 290.0 |
| | 44.2 |
| | 250.7 |
| | 42.0 |
| | 39.3 |
| | 15.7 |
|
| Salaries, wages and employee benefits | 146.6 |
| | 22.4 |
| | 139.2 |
| | 23.3 |
| | 7.4 |
| | 5.3 |
|
| Operating leases | 36.7 |
| | 5.6 |
| | 34.5 |
| | 5.8 |
| | 2.2 |
| | 6.4 |
|
| Depreciation and amortization | 22.1 |
| | 3.4 |
| | 21.9 |
| | 3.7 |
| | 0.2 |
| | 0.9 |
|
| Insurance and claims | 15.4 |
| | 2.3 |
| | 13.2 |
| | 2.2 |
| | 2.2 |
| | 16.7 |
|
| Fuel expense | 3.8 |
| | 0.6 |
| | 3.3 |
| | 0.6 |
| | 0.5 |
| | 15.2 |
|
| Other operating expenses | 53.2 |
| | 8.1 |
| | 50.6 |
| | 8.5 |
| | 2.6 |
| | 5.1 |
|
| Total operating expenses | 567.8 |
| | 86.6 |
| | 513.4 |
| | 86.1 |
| | 54.4 |
| | 10.6 |
|
| Income from operations | $ | 88.0 |
| | 13.4 | % | | $ | 83.1 |
| | 13.9 | % | | $ | 4.9 |
| | 5.9 | % |
|
| | | | | | | | | | |
| Expedited LTL Operating Statistics |
| | | | | | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
| Business days | 254 |
| | 255 |
| | (0.4 | )% |
| | | | | | |
| Tonnage | | | | | |
| Total pounds ¹ | 2,478,059 |
| | 2,339,632 |
| | 5.9 |
|
| Pounds per day ¹ | 9,756 |
| | 9,175 |
| | 6.3 |
|
| | | | | | |
| Shipments | | | | | |
| Total shipments ¹ | 4,048 |
| | 3,770 |
| | 7.4 |
|
| Shipments per day ¹ | 15.9 |
| | 14.8 |
| | 7.4 |
|
Total shipments with pickup and/or delivery 1 | 945 |
| | 782 |
| | 20.8 |
|
| | | | | | |
| Weight per shipment | 612 |
| | 621 |
| | (1.4 | ) |
| | | | | | |
| Revenue per hundredweight | $ | 23.91 |
| | $ | 23.30 |
| | 2.6 |
|
| Revenue per hundredweight, ex fuel | $ | 21.30 |
| | $ | 21.25 |
| | 0.2 |
|
| | | | | | |
| Revenue per shipment | $ | 146 |
| | $ | 145 |
| | 0.7 |
|
| Revenue per shipment, ex fuel | $ | 130 |
| | $ | 132 |
| | (1.5 | )% |
| | | | | | |
| ¹ - In thousands | | | | | |
Revenues
Expedited LTL operating revenue increased $59.3 million, or 9.9%, to $655.8 million for the year ended December 31, 2017 from $596.5 million for the same period of 2016. This increase was due to increased network revenue, fuel surcharge revenue and other terminal based revenue over the prior year. Network revenue increased $30.9 million due to a 7.4% increase in shipments and a 5.9% increase in tonnage, partly offset by a 1.5% decrease in revenue per shipment, ex fuel over prior year. The increase in tonnage is due to a growing percentage of total volume from shipments with higher density attributes and a slightly lower length of haul than our traditional shipments, driving the decrease in revenue per shipment, ex fuel. Additionally, fuel surcharge revenue increased $16.6 million largely due to the increase in fuel prices and volume increases. Other terminal based revenues, which includes dedicated local pickup and delivery services, warehousing and terminal handling, increased $11.8 million, or 23.2%, to $62.4 million in 2017 from $50.7 million in the same period of 2016. The increase in other terminal revenue was mainly attributable to increases in dedicated local pickup and delivery.
Purchased Transportation
Expedited LTL’s purchased transportation increased by $39.3 million, or 15.7%, to $290.0 million for the year ended December 31, 2017 from $250.7 million for the year ended December 31, 2016. As a percentage of segment operating revenue, Expedited LTL purchased transportation was 44.2% during the year ended December 31, 2017 compared to 42.0% for the same period of 2016. The increase is mostly due to a 6.0% increase in our cost per mile, ex fuel. The higher cost per mile is due to increased utilization of third-party transportation providers, which are typically more costly than owner-operators.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Expedited LTL increased by $7.4 million, or 5.3%, to $146.6 million for the year ended December 31, 2017 from $139.2 million in the same period of 2016. Salaries, wages and employee benefits were 22.4% of Expedited LTL’s operating revenue for the year ended December 31, 2017 compared to 23.3% for the same period of 2016. The decrease in salaries, wages and employee benefits as a percentage of revenue was primarily attributable to a 0.7% decrease in direct Expedited LTL terminal and management salaries as a percentage of revenue and a 0.2% decrease in health insurance costs as a percentage of revenue. The decrease in direct pay as a percentage of revenue is the impact of additional revenue on fixed salaries and improved operating efficiencies.
Operating Leases
Operating leases increased $2.2 million, or 6.4%, to $36.7 million for the year ended December 31, 2017 from $34.5 million for the year ended December 31, 2016. Operating leases were 5.6% of Expedited LTL’s operating revenue for the year ended December 31, 2017 compared to 5.8% for the year ended December 31, 2016. The increase in cost is due to $1.2 million of additional facility lease expenses and a $1.1 million increase in truck, trailer and equipment rentals and leases. Facility leases increased due to the expansion of certain facilities. Vehicle leases increased due to the replacement of older owned power equipment with leased power equipment.
Depreciation and Amortization
Expedited LTL depreciation and amortization increased $0.2 million, or 0.9%, to $22.1 million for the year ended December 31, 2017 from $21.9 million for the year ended December 31, 2016. Depreciation and amortization expense as a percentage of Expedited LTL operating revenue was 3.4% in the year ended December 31, 2017 compared to 3.7% for the year ended December 31, 2016. The decrease as a percentage of revenue was due to the increase in equipment leasing mentioned above instead of purchased equipment.
Insurance and Claims
Expedited LTL insurance and claims expense increased $2.2 million, or 16.7%, to $15.4 million for the year ended December 31, 2017 from $13.2 million for the year ended December 31, 2016. Insurance and claims as a percentage of Expedited LTL’s operating revenue was 2.3% for the year ended December 31, 2017 compared to 2.2% for the year ended December 31, 2016. The increase was partly attributable to a $0.7 million increase in insurance premiums associated with our insurance plan renewals and a $2.0 million increase in vehicle accident claim reserves. These increases were partly offset by decreases in vehicle damage and cargo claims.
Fuel Expense
Expedited LTL fuel expense increased $0.5 million, or 15.2%, to $3.8 million for the year ended December 31, 2017 from $3.3 million in the year ended December 31, 2016. Fuel expense was 0.6% of Expedited LTL’s operating revenue for the years ended December 31, 2017 and 2016. LTL fuel expenses increased due to higher year-over-year fuel prices.
Other Operating Expenses
Expedited LTL other operating expenses increased $2.6 million, or 5.1%, to $53.2 million for the year ended December 31, 2017 from $50.6 million for the year ended December 31, 2016. Expedited LTL other operating expenses were 8.1% of operating revenue for the year ended December 31, 2017 compared to 8.5% for the year ended December 31, 2016. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees, and other costs of transiting our network. The decrease as percentage of revenue was primarily the result of a decrease in legal fees mostly related to indemnification funds received related to the Towne acquisition and lower costs of transiting our network due to the use of third-party transportation previously mentioned. The prior period also included a corporate event that did not occur in 2017. These improvements were partly offset by an increase in receivables allowance.
Income from Operations
Expedited LTL income from operations increased by $4.9 million, or 5.9%, to $88.0 million for the year ended December 31, 2017 compared to $83.1 million for the year ended December 31, 2016. Expedited LTL’s income from operations was 13.4% of operating revenue for the year ended December 31, 2017 compared to 13.9% for the year ended December 31, 2016. Deterioration in income from operations as a percentage of revenue was due to an increased utilization of third-party transportation providers partly offset by higher tonnage driving increased revenue. The fuel surcharge revenue increase was also due to increased fuel prices.
Truckload Premium Services - Year Ended December 31, 2017 compared to Year Ended December 31, 2016
The following table sets forth our historical financial data of the Truckload Premium Services segment for the years ended December 31, 2017 and 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Truckload Premium Services Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 201.8 |
| | 100.0 | % | | $ | 181.0 |
| | 100.0 | % | | $ | 20.8 |
| | 11.5 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 153.8 |
| | 76.2 |
| | 132.1 |
| | 73.0 |
| | 21.7 |
| | 16.4 |
|
| Salaries, wages and employee benefits | 20.4 |
| | 10.1 |
| | 19.3 |
| | 10.7 |
| | 1.1 |
| | 5.7 |
|
| Operating leases | 0.9 |
| | 0.4 |
| | 0.3 |
| | 0.2 |
| | 0.6 |
| | 200.0 |
|
| Depreciation and amortization | 6.3 |
| | 3.1 |
| | 6.5 |
| | 3.6 |
| | (0.2 | ) | | (3.1 | ) |
| Insurance and claims | 5.4 |
| | 2.7 |
| | 4.8 |
| | 2.7 |
| | 0.6 |
| | 12.5 |
|
| Fuel expense | 3.3 |
| | 1.6 |
| | 2.6 |
| | 1.4 |
| | 0.7 |
| | 26.9 |
|
| Other operating expenses | 8.5 |
| | 4.3 |
| | 8.4 |
| | 4.6 |
| | 0.1 |
| | 1.2 |
|
| Impairment of goodwill, intangibles and other assets | — |
| | — |
| | 42.4 |
| | 23.4 |
| | (42.4 | ) | | 100.0 |
|
| Total operating expenses | 198.6 |
| | 98.4 |
| | 216.4 |
| | 119.6 |
| | (17.8 | ) | | (8.2 | ) |
| Income (loss) from operations | $ | 3.2 |
| | 1.6 | % | | $ | (35.4 | ) | | (19.6 | )% | | $ | 38.6 |
| | NM |
|
|
| | | | | | | | | | |
| Truckload Premium Services Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
Total Miles 1 | 96,598 |
| | 89,540 |
| | 7.9 | % |
| Empty Miles Percentage | 9.6 | % | | 11.5 | % | | (16.5 | ) |
| Tractors (avg) | 386 |
| | 437 |
| | (11.7 | ) |
Miles per tractor per week 2 | 2,700 |
| | 2,565 |
| | 5.3 |
|
| | | | | | |
| Revenue per mile | $ | 2.02 |
| | $ | 1.98 |
| | 2.0 |
|
| Cost per mile | $ | 1.66 |
| | $ | 1.56 |
| | 6.4 | % |
| | | | | | |
| ¹ - In thousands | | | | | |
2 - Calculated using Company driver and owner-operator miles |
Revenues
TLS revenue increased $20.8 million, or 11.5%, to $201.8 million for the year ended December 31, 2017 from $181.0 million in the same period of 2016. The increase in TLS revenue was attributable to new business wins which resulted in a 7.9% increase in miles driven to support revenue.
Purchased Transportation
Purchased transportation costs for our TLS revenue increased $21.7 million, or 16.4%, to $153.8 million for the year ended December 31, 2017 from $132.1 million for the year ended December 31, 2016. For the year ended December 31, 2017, TLS purchased transportation costs represented 76.2% of TLS revenue compared to 73.0% for the same period in 2016. The increase in TLS purchased transportation was attributable to a 7.2% increase in non-Company miles driven and a 7.2% increase in non-Company cost per mile during the year ended December 31, 2017 compared to the same period in 2016. The increase in TLS miles driven was attributable to new business wins previously mentioned. The increase in cost per mile was due to TLS utilizing more costly third-party transportation providers to cover miles. The increase in TLS purchased transportation as a percentage of revenue was attributable to TLS revenue per mile not increasing in proportion with the increase in TLS cost per mile.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of TLS increased by $1.1 million, or 5.7%, to $20.4 million in the year ended December 31, 2017 from $19.3 million in the same period of 2016. Salaries, wages and employee benefits were 10.1% of TLS’s operating revenue in the year ended December 31, 2017 compared to 10.7% for the same period of 2016. The decrease in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to the increase in revenue outpacing the increase in pay to Company drivers and office staff.
Operating Leases
Operating leases increased $0.6 million, or 200.0%, to $0.9 million for the year ended December 31, 2017 from $0.3 million for the same period in 2016. Operating leases were 0.4% of TLS operating revenue for the year ended December 31, 2017 compared to 0.2% for the same period of 2016. The $0.6 million increase in cost is due to additional trailer rentals for the new business wins mentioned above.
Depreciation and Amortization
Depreciation and amortization decreased $0.2 million, or 3.1%, to $6.3 million for the year ended December 31, 2017 from $6.5 million for the year ended December 31, 2016. Depreciation and amortization expense as a percentage of TLS operating revenue was 3.1% for the year ended December 31, 2017 compared to 3.6% for the same period in 2016. The decrease was due to the impairment of TQI intangible assets in the second quarter of 2016 leading to lower on-going amortization expense. This decrease was partially offset by increased trailer depreciation on trailers purchased during 2017.
Insurance and Claims
TLS insurance and claims increased $0.6 million, or 12.5%, to $5.4 million for the year ended December 31, 2017 from $4.8 million for the year ended December 31, 2016. As a percentage of operating revenue, insurance and claims was 2.7% for the year ended December 31, 2017 and 2016. The increase was due to higher vehicle accident claim reserves. The increase was also attributable to higher insurance premiums associated with our insurance plan renewals and higher cargo claims partly offset by a benefit from a prior period insurance premium audit.
Fuel Expense
TLS fuel expense increased $0.7 million, or 26.9%, to $3.3 million for the year ended December 31, 2017 from $2.6 million for the year ended December 31, 2016. Fuel expenses were 1.6% of TLS operating revenue during the year ended December 31, 2017 compared to 1.4% for the year ended December 31, 2016. The increase as a percentage of revenue was mostly attributable to higher year-over-year fuel prices and the increase in Company driver miles.
Other Operating Expenses
TLS other operating expenses increased $0.1 million, or 1.2%, to $8.5 million for the year ended December 31, 2017 compared to $8.4 million for the year ended December 31, 2016. TLS other operating expenses were 4.3% of operating revenue for the year ended December 31, 2017 compared to 4.6% for the year ended December 31, 2016. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other costs of transiting shipments. The increase was attributable to a $0.2 million increase in equipment maintenance and a $0.1 million increase in transit costs. These increases were mostly offset by a $0.2 million decrease in losses on destroyed equipment.
Impairment of goodwill, intangibles and other assets
In the second quarter of 2016, we determined there were indicators of potential impairment of goodwill and other long lived assets acquired in the TQI acquisition. Based on our analysis we recorded $42.4 million in total impairment charges related to TQI’s goodwill and other long lived assets. During the year ended December 31, 2017, there were no impairment charges recognized.
Income from Operations
TLS results from operations increased by $38.6 million to $3.2 million in income from operations for the year ended December 31, 2017 compared to a $35.4 million loss from operations for the same period in 2016. Excluding the impairment charges, the deterioration in results from operations was due to increased utilization of third-party transportation providers which led to the increase in cost per mile outpacing the increase in revenue per mile.
Intermodal - Year Ended December 31, 2017 compared to Year Ended December 31, 2016
The following table sets forth our historical financial data of the Intermodal segment for the years ended December 31, 2017 and 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Intermodal Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 154.7 |
| | 100.0 | % | | $ | 105.7 |
| | 100.0 | % | | $ | 49.0 |
| | 46.4 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 63.6 |
| | 41.1 |
| | 38.1 |
| | 36.0 |
| | 25.5 |
| | 66.9 |
|
| Salaries, wages and employee benefits | 34.0 |
| | 22.0 |
| | 25.2 |
| | 23.8 |
| | 8.8 |
| | 34.9 |
|
| Operating leases | 13.5 |
| | 8.7 |
| | 12.0 |
| | 11.4 |
| | 1.5 |
| | 12.5 |
|
| Depreciation and amortization | 5.8 |
| | 3.8 |
| | 3.9 |
| | 3.7 |
| | 1.9 |
| | 48.7 |
|
| Insurance and claims | 4.2 |
| | 2.7 |
| | 3.0 |
| | 2.8 |
| | 1.2 |
| | 40.0 |
|
| Fuel expense | 3.9 |
| | 2.5 |
| | 2.5 |
| | 2.4 |
| | 1.4 |
| | 56.0 |
|
| Other operating expenses | 16.7 |
| | 10.8 |
| | 9.9 |
| | 9.4 |
| | 6.8 |
| | 68.7 |
|
| Total operating expenses | 141.7 |
| | 91.6 |
| | 94.6 |
| | 89.5 |
| | 47.1 |
| | 49.8 |
|
| Income from operations | $ | 13.0 |
| | 8.4 | % | | $ | 11.1 |
| | 10.5 | % | | $ | 1.9 |
| | 17.1 | % |
|
| | | | | | | | | | |
| Intermodal Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
| Drayage shipments | 235,356 |
| | 127,716 |
| | 84.3 | % |
| Drayage revenue per Shipment | $ | 554 |
| | $ | 546 |
| | 1.5 |
|
| Number of Locations | 19 |
| | 13 |
| | 46.2 | % |
Revenues
Intermodal operating revenue increased $49.0 million, or 46.4%, to $154.7 million for the year ended December 31, 2017 from $105.7 million for the same period in 2016. The increases in operating revenue were primarily attributable to the acquisition of Atlantic, Triumph and Ace and the impact of increased fuel surcharges.
Purchased Transportation
Intermodal purchased transportation increased $25.5 million, or 66.9%, to $63.6 million for the year ended December 31, 2017 from $38.1 million for the same period in 2016. Intermodal purchased transportation as a percentage of revenue was 41.1% for the year ended December 31, 2017 compared to 36.0% for the year ended December 31, 2016. The increase in Intermodal purchased transportation as a percentage of revenue was attributable to the Atlantic acquisition, which had a higher utilization of owner-operators as opposed to Company-employed drivers. The increase is also attributable to rate increases to our owner-operators.
Salaries, Wages, and Benefits
Intermodal salaries, wages and employee benefits increased $8.8 million, or 34.9%, to $34.0 million for the year ended December 31, 2017 compared to $25.2 million for the year ended December 31, 2016. As a percentage of Intermodal operating revenue, salaries, wages and benefits decreased to 22.0% for the year ended December 31, 2017 compared to 23.8% for the same period in 2016. The improvement in salaries, wages and employee benefits as a percentage of revenue was primarily due to leveraging the increase in revenue on office and administrative salaries leading to a 0.8% decrease as a percentage of revenue. The improvement is also due to a 0.5% decrease as a percentage of revenue for lower workers' compensation and health insurance costs and an additional 0.5% decrease as a percentage of revenue due to dock efficiencies.
Operating Leases
Operating leases increased $1.5 million, or 12.5% to $13.5 million for the year ended December 31, 2017 from $12.0 million for the same period in 2016. Operating leases were 8.7% of Intermodal operating revenue for the year ended December 31, 2017 compared to11.4% in the same period of 2016. Operating leases decreased as a percentage of revenue due to slightly increasing trailer rental charges while other revenue that does not require trailer rentals increased at a more rapid rate. The decrease as a percentage of revenue is also attributable to utilization of owned equipment acquired as part of Atlantic and the increase in revenue out-pacing the increase in facility rents.
Depreciation and Amortization
Depreciation and amortization increased $1.9 million, or 48.7%, to $5.8 million for the year ended December 31, 2017 from $3.9 million for the same period in 2016. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.8% for the year ended December 31, 2017 compared to 3.7% for the same period of 2016. The higher depreciation and amortization was due to equipment and intangible assets acquired with Atlantic, Triumph and Ace.
Insurance and Claims
Intermodal insurance and claims expense increased $1.2 million, or 40.0%, to $4.2 million for the year ended December 31, 2017 from $3.0 million for the year ended December 31, 2016. Intermodal insurance and claims were 2.7% of operating revenue for the year ended December 31, 2017 compared to 2.8% for the same period in 2016. The increase in Intermodal insurance and claims was primarily attributable to higher insurance premiums and increased vehicle accident claim reserves due to an increased vehicle fleet as a result of the acquisitions.
Fuel Expense
Intermodal fuel expense increased $1.4 million, or 56.0%, to $3.9 million for the year ended December 31, 2017 from $2.5 million in the same period of 2016. Fuel expenses were 2.5% of Intermodal operating revenue for the year ended December 31, 2017 compared to 2.4% in the same period of 2016. Intermodal fuel expenses increased due to higher year-over-year fuel prices and revenue volumes. These increases were partially offset by increased utilization of owner-operators.
Other Operating Expenses
Intermodal other operating expenses increased $6.8 million, or 68.7%, to $16.7 million for the year ended December 31, 2017 compared to $9.9 million for the same period of 2016. Intermodal other operating expenses as a percentage of revenue for the year ended December 31, 2017 were 10.8% compared to 9.4% for the same period of 2016. The increase in Intermodal other operating expenses was due mostly due to a $3.8 million increase in container related rental and storage charges associated with revenue increases discussed previously. The remaining increase was due to increased terminal expenses and other variable costs, such as maintenance and tolls, corresponding with the increases in revenue, and legal and professional fees related to the acquisition of Atlantic.
Income from Operations
Intermodal’s income from operations increased by $1.9 million, or 17.1%, to $13.0 million for the year ended December 31, 2017 compared to $11.1 million for the same period in 2016. Income from operations as a percentage of Intermodal operating revenue was 8.4% for the year ended December 31, 2017 compared to 10.5% in the same period of 2016. The increase in operating income was primarily attributable to the Atlantic, Triumph and Ace acquisitions. The decrease in income from operations as a percentage of revenue was attributable to increased amortization associated with Intermodal's acquisitions, lower margins on acquired business and acquisition related legal and professional fees.
Pool Distribution - Year Ended December 31, 2017 compared to Year Ended December 31, 2016
The following table sets forth our historical financial data of the Pool Distribution segment for the years ended December 31, 2017 and 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Pool Distribution Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 168.5 |
| | 100.0 | % | | $ | 151.9 |
| | 100.0 | % | | $ | 16.6 |
| | 10.9 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 47.5 |
| | 28.2 |
| | 43.2 |
| | 28.4 |
| | 4.3 |
| | 10.0 |
|
| Salaries, wages and employee benefits | 62.7 |
| | 37.2 |
| | 56.8 |
| | 37.4 |
| | 5.9 |
| | 10.4 |
|
| Operating leases | 13.3 |
| | 7.9 |
| | 12.7 |
| | 8.5 |
| | 0.6 |
| | 4.7 |
|
| Depreciation and amortization | 6.8 |
| | 4.0 |
| | 6.0 |
| | 3.9 |
| | 0.8 |
| | 13.3 |
|
| Insurance and claims | 4.7 |
| | 2.8 |
| | 4.4 |
| | 2.9 |
| | 0.3 |
| | 6.8 |
|
| Fuel expense | 5.5 |
| | 3.3 |
| | 4.9 |
| | 3.2 |
| | 0.6 |
| | 12.2 |
|
| Other operating expenses | 21.6 |
| | 12.8 |
| | 20.3 |
| | 13.4 |
| | 1.3 |
| | 6.4 |
|
| Total operating expenses | 162.1 |
| | 96.2 |
| | 148.3 |
| | 97.6 |
| | 13.8 |
| | 9.3 |
|
| Income from operations | $ | 6.4 |
| | 3.8 | % | | $ | 3.6 |
| | 2.4 | % | | $ | 2.8 |
| | 77.8 | % |
|
| | | | | | | | | | |
| Pool Distribution Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
Cartons 1 | 82,196 |
| | 69,742 |
| | 17.9 | % |
| Revenue per Carton | $ | 2.05 |
| | $ | 2.18 |
| | (6.0 | ) |
| Terminals | 28 |
| | 29 |
| | (3.4 | )% |
| | | | | | |
1 In thousands | | | | | |
Revenues
Pool operating revenue increased $16.6 million, or 10.9%, to $168.5 million for the year ended December 31, 2017 from $151.9 million for the year ended December 31, 2016. The revenue increase was due to increased fuel surcharge revenues, increased volumes from previously existing customers, new business and rate increases.
Purchased Transportation
Pool purchased transportation increased $4.3 million, or 10.0%, to $47.5 million for the year ended December 31, 2017 from $43.2 million for the year ended December 31, 2016. Pool purchased transportation as a percentage of revenue was 28.2% for the year ended December 31, 2017 compared to 28.4% for the same period in 2016. The improvement in Pool purchased transportation as a percentage of revenue was attributable to an increased utilization of owner-operators over more costly third-party carriers and revenue increases associated with rate increases.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Pool increased by $5.9 million, or 10.4%, to $62.7 million for the year ended December 31, 2017 from $56.8 million for the year ended December 31, 2016. As a percentage of Pool operating revenue, salaries, wages and benefits were 37.2% for the years ended December 31, 2017 compared to 37.4% for the same period in 2016. As a percentage of revenue, increases in dock pay and employee incentive were more than offset by decreases in Company-employed driver pay as a percentage of revenue. Dock pay increased as a percentage of revenue as increasing revenue volumes required the use of more costly contract labor. While Company-employed driver pay increased in total cost on higher miles, it decreased as a percentage of revenue due to increases in revenues not requiring Company-employed drivers, such as fuel.
Operating Leases
Operating leases increased $0.6 million, or 4.7%, to $13.3 million for the year ended December 31, 2017 from $12.7 million for the year ended December 31, 2016. Operating leases were 7.9% of Pool operating revenue for the year ended December 31, 2017 compared to 8.5% for the year ended December 31, 2016. Operating leases increased due to additional truck and trailer leases and rentals used to provide capacity for additional business wins throughout the network, partially offset by reduced facility rent driven by higher rent in 2016 attributable to the transition and relocation of certain terminals. The decrease as a percentage of revenue is attributable to increased revenue.
Depreciation and Amortization
Depreciation and amortization increased $0.8 million, or 13.3%, to $6.8 million for the year ended December 31, 2017 compared to $6.0 million for the same period in 2016. Depreciation and amortization expense as a percentage of Pool operating revenue was 4.0% for the year ended December 31, 2017 compared to 3.9% for the year ended December 31, 2016. The increase in Pool depreciation and amortization was due to the allocation of trailer depreciation, which reflects Pool's increased utilization of our trailer fleet. This increase was partly offset by a decrease in tractor depreciation due to the increased use of rentals and leases mentioned above.
Insurance and Claims
Pool insurance and claims increased $0.3 million, or 6.8%, to $4.7 million for the year ended December 31, 2017 from $4.4 million for the year ended December 31, 2016. As a percentage of operating revenue, insurance and claims was 2.8% for the year ended December 31, 2017 compared to 2.9% for the year ended December 31, 2016. The decrease as a percentage of revenue was due to a decrease in cargo claims, partly offset by increases in vehicle accident claim reserves.
Fuel Expense
Pool fuel expense increased $0.6 million, or 12.2%, to $5.5 million for the year ended December 31, 2017 from $4.9 million for the year ended December 31, 2016. Fuel expenses were 3.3% of Pool operating revenue during the year ended December 31, 2017 compared to 3.2% for the year ended December 31, 2016. Pool fuel expenses increased due to higher year-over-year fuel prices and higher revenue volumes.
Other Operating Expenses
Pool other operating expenses increased $1.3 million, or 6.4%, to $21.6 million for the year ended December 31, 2017 compared to $20.3 million for the year ended December 31, 2016. Pool other operating expenses were 12.8% of operating revenue for the year ended December 31, 2017 compared to 13.4% for the year ended December 31, 2016. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other over-the-road costs. As a percentage of revenue the decrease was attributable to a 0.3% decrease in dock and facility related costs, a 0.2% decrease in legal and professional fees and 0.2% decrease due to improved agent station margins. These improvements were partly offset by losses incurred on the sale of old equipment. The dock and facility related cost improvements were mainly attributable to 2016 including the startup of new business, while similar costs were not incurred in 2017. The decrease in legal fees is primarily related to costs associated with a 2016 Department of Transportation safety audit that were not incurred in 2017.
Income from Operations
Pool income from operations increased by $2.8 million, or 77.8% to $6.4 million for the year ended December 31, 2017 from $3.6 million for the year ended December 31, 2016. Pool income from operations was 3.8% of operating revenue for the year ended December 31, 2017 compared to 2.4% of operating revenue for the year ended December 31, 2016. The improvement in Pool income from operations was primarily the result of higher revenue volumes, current year rate increases, purchased transportation efficiencies and lower facility costs.
Other operations - Year Ended December 31, 2017 compared to Year Ended December 31, 2016
Other operating activity improved from a $2.7 million operating loss during the year ended December 31, 2016 to a $1.8 million operating loss during the year ended December 31, 2017. The year ended December 31, 2017, includes $1.2 million in loss development reserves for vehicle and workers' compensation claims, $0.9 million of executive severance costs and $0.4 of turn in costs from old Towne equipment. These costs were partly offset by $0.7 million of indemnification funds received related to the Towne acquisition. These costs and benefits were kept at the corporate level and not passed through to our operating segments.
The $2.7 million in operating loss included in other operations and corporate activities for the year ended December 31, 2016, was primarily for $1.7 million in loss development reserves resulting from our semi-annual actuarial analyses of our workers' compensation claims. Other operations for the year ended December 31, 2016 also included a $1.0 million increase to our reserve for remaining net payments on duplicate facilities vacated following the Towne acquisition, as several facilities had yet to be sub-leased.
Discussion of Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of financial statements in accordance with GAAP requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions are based on historical experience and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments.
Allowance for Doubtful Accounts
We evaluate the collectibility of Management considers our accounts receivable basedpolicies on a combination of factors. In circumstances in which management is aware of a specific customer’s inability to meet its financial obligations to us (for example, bankruptcy filings or accounts turned over for collection or litigation), we record a specific reserve for these bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for these bad debts based on the length of time the receivables are past due. Specifically, amounts that are 90 days or more past due are reserved at 50% for Forward Air's airport-to-airport and TLX operations, 10% for Forward Air's intermodal drayage operations, 25% for FASI, 10% for TQI's pharmaceutical operations and 50% for TQI's non-pharmaceutical operations. If circumstances change (i.e., we experience higher than expected defaults or an unexpected material adverse change in a customer’s ability to meet its financial obligations to us), the estimates of the recoverability of amounts due to us could be changed by a material amount. Accounts are written off after all means of collection, including legal action, have been exhausted.
Allowance for Revenue Adjustments
Our allowance for revenue adjustments consists of amounts reserved for billing rate changes that are not captured upon load initiation. These adjustments generally arise: (i) when the sales department contemporaneously grants small rate changes (“spot quotes”) to customers that differ from the standard rates in the system; (ii) when freight requires dimensionalization or is reweighed resulting in a different required rate; (iii) when billing errors occur; and (iv) when data entry errors occur. When appropriate, permanent rate changes are initiated and reflected in the system. We monitor the manual revenue adjustments closely through the employment of various controls that are in place to ensure that revenue recognition is not compromised and that fraud does not occur. During 2015, average revenue adjustments per month were approximately $0.4 million, on average revenue per month of approximately $79.9 million (approximately 0.5% of monthly revenue). In order to estimate the allowance for revenue adjustments related to ending accounts receivable, we prepare an analysis that considers average monthly revenue adjustments and the average lag for identifying and quantifying these revenue adjustments. Based on this analysis, we establish an allowance for approximately 35-110 days (dependent upon experience by operating segment in the preceding twelve months) of average revenue adjustments, adjusted for rebates and billing errors. The lag is periodically adjusted based on actual historical experience. Additionally, the average amount of revenue adjustments per month can vary in relation to the level of sales or based on other factors (such as personnel issues that could result in excessive manual errors or in excessive spot quotes being granted). Both of these significant assumptions are continually evaluated for validity.
Self-Insurance Loss Reserves,
Given the nature of Business Combinations and Goodwill and Other Intangible Assets to be critical. See Note 1, Accounting Policies to our operating environment, we are subject to vehicleConsolidated Financial Statements for a discussion over these critical accounting policies and general liability, workers' compensation and employee health insurance claims. To mitigate a portion of these risks, we maintain insurance for individual vehicle and general liability claims exceeding $0.5 million and workers' compensation claims and employee health insurance claims exceeding approximately $0.3 million, except in Ohio, where we are a qualified self-insured entity with an approximately $0.5 million self-insured retention. The amount of self-insurance loss reserves and loss adjustment expenses is determined based on an estimation process that uses information obtained from both company-specific and industry data,estimates, as well as general economic information. The estimation process for self-insurance loss exposure requires management to continuously monitor and evaluate the life cycle of claims. Using data obtained from this monitoring and our assumptions about the emerging trends, management develops information about the size of ultimate claims based on its historical experience and other available market information. The most significant assumptions used in the estimation process include determining the trend in loss costs, the expected consistency in the frequency and severity of claims incurred but not yet reported, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. We utilize semi-annual actuarial analysis to evaluate the open vehicle liability and workers' compensation claims and estimate the ongoing development exposure.
Changes in the inputs described above, such as claim life cycles, severity of claims and trends in loss costs, can result in material changes to our self-insurance loss reserves. Historically, significant changes in one assumption or changes in several
assumptions have resulted in both increases and decreases to self-insurance loss reserves. Based on facts and circumstances one significant claim, such as a dock or vehicle accident, could result in an immediate increase in our self-insurance loss reserves of at least $0.3 million to $0.5 million, our self-insured retention limits. Significant facts and circumstances for a claim would involve the degree of injuries, whether fatalities occurred, the amount of property damage, the degree of our involvement and whether or not our employees or representatives followed our processes and procedures. However, changes in the above variables could also reduce our self-insurance loss reserves. For example, in previous periods we have reduced our workers' compensation loss reserve by over $1.0 million as the result of improvements in our loss experience and in the severity of claims incurred over a certain period of time.
Revenue Recognition
Operating revenue and related costs are recognized as of the date shipments are completed. The transportation rates we charge our customers consist of base transportation rates and fuel surcharge rates. The revenues earned and related direct freight expenses incurred from our base transportation services are recognized on a gross basis in revenue and in purchased transportation. Transportation revenue is recognized on a gross basis as we are the primary obligor. The fuel surcharges billed to customers and paid to owner-operators and third party transportation providers are recorded on a net basis in revenue as we are not the primary obligor with regards to the fuel surcharges.
Income Taxes
We account for income taxes using the liability method, whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled. Also, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in interest expense and operating expenses, respectively.
At December 31, 2015, we had state net operating loss carryforwards of $23.6 million for certain legal entities that will expire between 2016 and 2030. The use of these state net operating losses is limited to the future taxable income of separate legal entities. Based on expectations of future taxable income, management believes that it is more likely than not that the results of operations for the certain legal entities will not generate sufficient taxable income to realize the net operating loss benefits for these state loss carryforwards. As a result, a valuation allowance has been provided for these specific state loss carryforwards. The valuation allowance on these certain state loss carryforwards was approximately $0.3 million at December 31, 2015 and 2014.
See the "Impact of Recent Pronouncements" for additional discussion of new income tax relatedrecent accounting pronouncements.
Valuation of Goodwill
We test our goodwill for impairment annually or more frequently if events or circumstances indicate impairment may exist. Examples of such events or circumstances could include a significant change in business climate or a loss of significant customers. We complete our annual analysis of our reporting units as of the last day of our second quarter, June 30th. We first consider our operating segment and related components in accordance with U.S. GAAP. Goodwill is allocated to reporting units that are expected to benefit from the business combinations generating the goodwill. We have four reporting units - Forward Air, CST, FASI and TQI. In evaluating reporting units, we first assess qualitative factors to determine whether it is more likely than not that the fair value of any of its reporting units is less than its carrying amount, including goodwill. When performing the qualitative assessment, we consider the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performance of each reporting unit, litigation and new legislation. If based on the qualitative assessments, we believe it is more likely than not that the fair value of any reporting unit is less than the reporting unit's carrying amount, or periodically as deemed appropriate by management, we will prepare an estimation of the respective reporting unit's fair value utilizing a quantitative approach. If this estimation of fair value indicates that impairment potentially exists, we will then measure the amount of the impairment, if any. Goodwill impairment exists when the calculated implied fair value of goodwill is less than its carrying value.
We determine the fair value of our reporting units based on a combination of a market approach, which considers comparable companies, and the income approach, using a discounted cash flow model. Under the market approach, valuation multiples are derived based on a selection of comparable companies and applied to projected operating data for each reporting unit to arrive at an indication of fair value. Under the income approach, the discounted cash flow model determines fair value based on the present value of management prepared projected cash flows over a specific projection period and a residual value related to future cash flows beyond the projection period. Both values are discounted using a rate which reflects our best estimate
of the weighted average cost of capital of a market participant, and is adjusted for appropriate risk factors. We believe the most sensitive estimate used in our income approach is the management prepared projected cash flows. Consequently, we perform sensitivity tests to ensure reductions of the present value of the projected cash flows by at least 10% would not adversely impact the results of the goodwill impairment tests. Historically, we have equally weighted the income and market approaches as we believed the quality and quantity of the collected information were approximately equal. The inputs used in the fair value calculations for goodwill are classified within level 3 of the fair value hierarchy as defined in the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.
In 2015, we performed a fair value estimation for each operating segment. Our 2015 calculations for Forward Air, CST, FASI and TQI indicated that, as of June 30, 2015, the fair value of each reporting unit exceeded their carrying value by approximately 217.0%, 20.0%, 93.0% and 16.0%, respectively. Further, due to TQI performance falling notably short of our June 2015 projections, we believed there was indicators of impairment as of December 31, 2015. Therefore, we performed additional fair value estimates, but determined TQI's goodwill was not impaired as of December 31, 2015. For our 2015 analysis, the significant assumptions used for the income approach were 10 years of projected net cash flows and the following discount and long-term growth rates:
|
| | | | | | | | | | | |
| Forward Air |
| CST |
| FASI |
| TQI |
| Discount rate | 13.0 | % |
| 13.5 | % |
| 16.0 | % |
| 16.0 | % |
| Long-term growth rate | 5.0 | % |
| 4.0 | % |
| 5.0 | % |
| 4.0 | % |
These estimates used to calculate the fair value of each reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of the reporting unit's fair value and goodwill impairment for the reporting unit. For example, during the first quarter of 2009, we determined there were indicators of potential impairment of the goodwill assigned to the FASI segment. This determination was based on the continuing economic recession, declines in current market valuations, FASI operating losses in excess of expectations and reductions of projected net cash flows. As a result, we performed an interim impairment test as of March 31, 2009. Based on the results of the interim impairment test, we concluded that an impairment loss was probable and could be reasonably estimated. Consequently, we recorded a goodwill impairment charge of $7.0 million related to the FASI segment during the first quarter of 2009.
Share-Based Compensation
Our general practice has been to make a single annual grant to key employees and to generally make other grants only in connection with new employment or promotions. In addition, we make annual grants to non-employee directors in conjunction with their annual election to our Board of Directors or at the time of their appointment to the Board of Directors. For employees, we have granted stock options, non-vested shares and performance shares. For non-employee directors, we have granted non-vested shares annually beginning in 2006.
Stock options typically expire seven years from the grant date and vest ratably over a three-year period. The share-based compensation for stock options are recognized, net of estimated forfeitures, ratably over the requisite service period, or vesting period. Forfeitures were estimated based on our historical experience. We used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted. The following table contains the weighted-average assumptions used to estimate the fair value of options granted. These assumptions are highly subjective and changes in these assumptions can materially affect the fair value estimate.
|
| | | | | | | | |
| December 31,
2015 |
| December 31,
2014 |
| December 31,
2013 |
| Expected dividend yield | 1.0 | % |
| 1.2 | % |
| 1.2 | % |
| Expected stock price volatility | 33.3 | % |
| 38.5 | % |
| 43.7 | % |
| Weighted average risk-free interest rate | 1.6 | % |
| 1.6 | % |
| 0.9 | % |
| Expected life of options (years) | 5.9 |
|
| 5.3 |
|
| 5.2 |
|
The fair value of non-vested shares issued were estimated using the closing market prices for the business day of the grant. The share-based compensation for the non-vested shares is recognized, net of estimated forfeitures, ratably over the requisite service period or vesting period. Forfeitures are estimated based on our historical experience, but will be adjusted for future changes in forfeiture experience.
We have also granted performance shares to key employees. Under the terms of the performance share agreements, on the third anniversary of the grant date, we will issue to the employees a calculated number of common stock shares based on the three year performance of our common stock share price as compared to the share price performance of a selected peer group. No shares may be issued if the share price performance outperforms 30% or less of the peer group, but the number of shares issued may be doubled if the share price performs better than 90% of the peer group. The share-based compensation for performance shares are recognized, net of estimated forfeitures, ratably over the requisite service period, or vesting period. The fair value of the performance shares was estimated using a Monte Carlo simulation. The following table contains the weighted-average assumptions used to estimate the fair value of performance shares granted. These assumptions are highly subjective and changes in these assumptions can materially affect the fair value estimate.
|
| | | | | | | | |
| | | Year ended | | |
| December 31,
2015 | | December 31,
2014 |
| December 31,
2013 |
| Expected stock price volatility | 23.5 | % | | 32.5 | % |
| 34.5 | % |
| Weighted average risk-free interest rate | 1.0 | % | | 0.7 | % |
| 0.4 | % |
Under the ESPP, which has been approved by our shareholders, we are authorized to issue shares of Common Stock to our employees. These shares may be issued at a price equal to 90% of the lesser of the market value on the first day or the last day of each six-month purchase period. Common Stock purchases are paid for through periodic payroll deductions and/or up to two large lump sum contributions. We recognize share-based compensation on the date of purchase based on the difference between the purchase date fair market value and the employee purchase price.
Operating Leases
Certain operating leases include rent increases during the initial lease term. For these leases, we recognize the related rental expenses on a straight-line basis over the term of the lease, which includes any rent holiday period, and records the difference between the amounts charged to operations and amount paid as rent as a rent liability. Leasehold improvements are amortized over the shorter of the estimated useful life or the initial term of the lease. Reserves for idle facilities are initially measured at fair value of the portion of the lease payments associated with the vacated facilities, reduced by estimated sublease rentals.
Impact of Recent Account Pronouncements
In November 2015, the FASB issued Accounting Standard Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes", an update to ASC 740, Income Taxes (“Update”). Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The FASB also decided to permit earlier application by all entities as of the beginning of any interim or annual reporting period. The FASB further provides that this Update may be applied to all deferred tax liabilities and assets retrospectively to all periods presented. We chose to adopt the Update retrospectively for the year ended December 31, 2015 and reclassified $2.5 million from net current deferred income tax assets to net non-current deferred income tax liabilities as of December 31, 2014.
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017 (early adoption is permitted for interim and annual periods beginning on or after December 15, 2016). The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.
Liquidity and Capital Resources
We have historically financed our working capital needs, including capital expenditures, with cash flows from operations and borrowings under our bank linessenior credit facility line of credit.
Year Ended December 31, 20152018 Cash Flows compared to December 31, 20142017 Cash Flows
Net cash provided by operating activities totaled approximately $85.7$152.6 million for the year ended December 31, 20152018 compared to approximately $91.7$103.4 million for the year ended December 31, 2014.2017. The $6.0$49.2 million decreaseincrease in cash provided by operating activities is mainly attributable to a $41.4 million increase in cash used to fund accounts payable and income tax receivables, net of a $17.8$25.5 million increase in net earnings after consideration of non-cash items and a $17.6$21.3 million increaseimprovement in cash collected from accounts receivable. The increases in cash usedthe collection of receivables, primarily related to 2017 receivables increasing for accounts payable is mainly attributable to cash paid to settle trade payables assumed with the Towne acquisition. Favorable amendments to prior year returns and net operating loss carryforwards acquired with Towne and applied to current year earnings increased the income tax receivable, driving a $22.9 million increase in cash used for income taxes. The increase in net earnings after consideration of non-cash items is primarily attributablerevenues related to the Atlantic acquisition. The remaining increase in deferred income taxeswas due to provisions for bonus tax depreciation offset by a decrease in net income. Decrease in netestimated income was driven by Towne transaction and integration costs previously discussed. The increase in cash received from accounts receivables is attributable to the collection of acquired Towne trade receivables.tax payments.
Net cash used in investing activities was approximately $100.9$55.5 million for the year ended December 31, 20152018 compared with approximately $127.7$59.2 million used in investing activities during the year ended December 31, 2014.2017. Investing activities during the year ended December 31, 20152018 consisted primarily of $61.9net capital expenditures of $35.2 million primarily for new trailers, information technology and sorting equipment and $20.0 million used to acquire TowneSouthwest and net capital expenditures of $38.8 million primarily for new tractors and trailers to replace aging units.MMT. Investing activities during the year ended December 31, 20142017 consisted primarily of $90.2 million used to acquire CST and RGL and MMT and net capital expenditures of $37.5$35.8 million primarily for new trailers, vehiclesforklifts and forkliftsinformation technology and $23.1 million used to replace aging units.acquire Atlantic and KCL. The proceeds from disposal of property and equipment during the year ended December 31, 20152018 and 20142017 were primarily from sales of older trailers and vehicles.trailers.
Net cash provided byused in financing activities totaled approximately $7.1$75.3 million for the year ended December 31, 20152018 compared with net cash used in financing activities of $49.9$48.8 million for the year ended December 31, 2014.2017. The $57.0$26.5 million change in cash from financing activitiesincrease was attributable to $125.0a $48.0 million of proceedsdecrease in net borrowings from executing a two year term loan in conjunction with the Towne acquisitionour revolving credit facility partly offset by a $91.6$28.0 million increasedecrease in payments on debtour term loan and capital leases.a $14.5 million decrease in payments on our line of credit. Additionally, there was a $3.6$3.5 million decrease in cash from employee stock transactions and related tax benefits. Payments on debt and capital leases increased as the result of higher debt assumed and settled with the acquisition of Towne as compared to CST. The year ended December 31, 20152018 also included $20.0$66.1 million used to repurchase shares of our common stock, compared to $40.0which was a $17.1 million increase from the $49.0 million used to repurchase shares of our common stock for the same period of 2017. The remaining change in 2014.financing activity is attributable to a $0.4 million increase in payments of cash dividends due to an increase in fourth quarter dividend per share from $0.15 per share to $0.18 per share partly offset by a decrease in the outstanding share count during the year ended December 31, 2018 compared to the same period in 2017.
Year Ended December 31, 20142017 Cash Flows compared to December 31, 20132016 Cash Flows
Net cash provided by operating activities totaled approximately $91.7$103.4 million for the year ended December 31, 20142017 compared to approximately $90.8$130.4 million for the year ended December 31, 2013.2016. The $0.9$27.0 million increasedecrease in cash provided by operating activities is mainly attributable to a $8.9$23.4 million increase in accounts receivable and a $23.5 million increase in income tax payments. These decreases were partly offset by a $9.8 million increase in net earnings after consideration of non-cash items and a $5.6$10.1 million decreaseincrease in cash used to fund accounts payable and prepaid assets, net of a $13.6 millionassets. The increase in accounts receivablereceivables was attributable to higher revenue across all segments and revenues associated with the revenue growth discussed previously. The decreases in cash used for accounts payable and prepaid assets and the cash received from accounts receivables are attributable to the increased revenue activity discussed previously and the resulting impact on working capital.Atlantic acquisition.
Net cash used in investing activities was approximately $127.7$59.2 million for the year ended December 31, 20142017 compared withto approximately $78.9$52.4 million used in investing activities during the year ended December 31, 2013.2016. Investing activities during the year ended December 31, 20142017 consisted primarily of $90.2$23.1 million used to acquire CST, RGLAtlantic and MMTa small Intermodal acquisition and net capital expenditures of $37.5$35.8 million primarily for new trailers, vehiclesforklifts and forklifts to replace aging units.information technology. Investing activities during the year ended December 31, 20132016 consisted primarily of $45.3$11.8 million used to acquire TQIAce and Triumph, which is included in the Intermodal segment, and net capital expenditures of $33.5$40.3 million primarily for new trailers, vehiclesforklifts, computer hardware and forklifts to replace aging units.internally developed software. The proceeds from disposal of property and equipment during the year ended December 31, 20142017 and 20132016 were primarily from sales of older trailers and vehicles.
Net cash used in financing activities totaled approximately $49.9$48.8 million for the year ended December 31, 20142017 compared withto net cash provided byused in financing activities of $3.3$102.8 million for the year ended December 31, 2013.2016. The $53.2$54.0 million decreasechange in cash from financing activities was attributable to $55.0 million in borrowings from our revolving credit facility and a $13.0 million decrease in payments on the term loan and revolver. These increases in cash were partly offset by a $9.0 million increase in share repurchases, a $2.5 million increase in our quarterly cash dividend and a $2.5 million decrease in cash from employee stock transactions. The year ended December 31, 2017 also included $49.0 million used to repurchase shares of our Common Stock, compared to $40.0 million used to repurchase shares of our common stock, a $21.5 million decline in cash from employee stock transactions and related tax benefits and a $2.7 million increase in dividends paid. These decreases in cash flows were partially offset by a $10.6 million decrease in payments on debt and capital leases. Payments on debt
and capital leases decreased asCommon Stock during the result of lower debt assumed and settled with the acquisition of CST as compared to TQI.year ended December 31, 2016. Dividends increased on new shares issued through stock option exercises anddue to our Board of Directors increasing the quarterly cash dividend from $0.10$0.12 per share for the first three quarters of 2016 to $0.12$0.15 per share during the eachfourth quarter of 2014.2016 and all quarters in 2017.
Liquidity and Capital ResourcesCredit Facility
On February 4, 2015, weSeptember 29, 2017, the Company entered into a five-year senior unsecured revolving credit facility (the “Facility”) with a maximum aggregate principal amount of $275.0 million, including a revolving credit facility of $150.0 million, and a term loan facility of $125 million. The revolving credit facility haswith a sublimit of $25.0$30.0 million for letters of credit and a sublimit of $15.0$30.0 million for swing line loans. The Facility may be increased by up to $100.0 million to a maximum aggregate principal amount of $250.0 million pursuant to the terms of the credit agreement, subject to the lenders’ agreement to increase their commitments or the addition of new lenders extending such commitments. Such increases to the Facility may be in the form of additional revolving credit facilityloans, term loans or a combination thereof, and are contingent upon there being no events of default under the Facility and satisfaction of other conditions precedent and are subject to the other limitations set forth in the credit agreement.
The Facility is scheduled to expiremature in February 2020 and may beSeptember 2022. The proceeds were used to refinance existing indebtedness of the Company and may also be used for working capital, capital expenditures and other general corporate purposes. The Facility refinanced the Company’s obligations for its unsecured credit facility under the credit agreement dated as of February 4, 2015, as amended, which was terminated as of the date of the new Facility.
Unless we electthe Company elects otherwise under the credit agreement, interest on borrowings under the Facility areis based on the highest of (a) the federal funds rate (not less than 0%) plus 0.5%, (b) the administrative agent's prime rate and (c) the LIBOR Rate plus 1.0%, in each case plus a margin that can range from 0.1% to 0.6% with respect to the term loan facility and from 0.3% to 0.8% with respect to the revolving credit facilityFacility depending on the ourCompany’s ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization, as set forth in the credit agreement. Payments of interest for each loan that is based on the LIBOR Rate are due in arrears on the last day of the interest period applicable to such loan (with interest periods of one, two or three months being available, at the Company’s option). Payments of interest on loans that are not based on the LIBOR Rate are due on the last day of each quarter ended March 31, June 30, September 30 and December 31 of each year. All unpaid amounts of principal and interest are due at maturity. As of December 31, 2018, the Company had $47.5 million in borrowings outstanding under the revolving credit facility, $10.7 million utilized for outstanding letters of credit and $91.8 million of available borrowing capacity under the revolving credit facility. The interest rate on the outstanding borrowings under the facility was 4.1% at December 31, 2018.
The Facility contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, material judgment defaults, and the occurrence of certain
change of control events. The occurrence of an event of default may result in, among other things, the termination of the Facilities, acceleration of repayment obligations and the exercise of remedies by the lenders with respect to the Company and its subsidiaries that are party to the Facility. The Facility also contains financial covenants and other covenants that, among other things, restrict ourthe ability of the Company and its subsidiaries, without the approval of the required lenders, to engage in certain mergers, consolidations, asset sales, dividends and stock repurchases, investments, and other transactions or to incur liens or indebtedness in excess of agreed thresholds, as set forth in the credit agreement. As of December 31, 2015, we had no borrowings outstanding under2018, the revolving credit facility. At December 31, 2015, we had utilized $11.0 million of availability for outstanding letters of credit and had $139.0 million of available borrowing capacity outstanding underCompany was in compliance with the revolving credit facility. aforementioned covenants.
In conjunction with the acquisition of Towne (see note 2), we borrowed $125.0 million on the available term loan. The term loan is payable in quarterly installments of 11.1% of the original principal amount of the term loan plus accrued and unpaid interest, and matures in March 2017. The interest rate on the term loan was 1.5% at December 31, 2015. The remaining balance on the term loan was $83.3 million as of December 31, 2015. Of that amount, $55.6 million is a current liability.Share Repurchases
On February 7, 2014,July 21, 2016, our Board of Directors approved a stock repurchase authorization for up to two3.0 million shares of the Company’s common stock.Company's Common Stock. In connection with this action, the board cancelledcanceled the Company’s Repurchase Plan. DuringCompany's 2014 repurchase plan. Under the 2016 repurchase plan, during the year ended December 31, 2015,2017, we repurchased 422,404947,819 shares of common stock for $20.0$49.0 million, or $47.33an average of $51.68 per share. Under the 2016 repurchase plan, during the year ended December 31, 2018, we repurchased 1,109,270 shares of common stock for $66.1 million, or an average of $59.61 per share. As of December 31, 2015, 695,6172018, 709,395 shares remain that may be repurchased.
On February 5, 2019, our Board of Directors canceled the Company’s remaining 2016 share repurchase authorization and approved a stock repurchase authorization for up to five million shares of the Company’s common stock. The amount and timing of any repurchases under the Company’s new repurchase authorization will be at such prices as determined by management of the Company. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. Stock repurchases may be commenced or suspended from time to time for any reason.
Dividends
During each quarter of 2013,2017 and the first three quarters of 2018, our Board of Directors declared a cash dividend of $0.10$0.15 per share of Common Stock.share. During eachthe fourth quarter of 2014 and 2015,2018 our Board of Directors declared a quarterly cash dividend of $0.12$0.18 per share. We expect to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by our Board of Directors.
We believe that our available cash, investments, expected cash generated from future operations and borrowings under the available credit facility will be sufficient to satisfy our anticipated cash needs for at least the next twelve months. However, we continue to evaluate and pursue acquisitions that can increase our penetration ofinto a geographic area, add new customers, add new business verticals, increase freight volume and add new service offerings. In addition, we expect to explore acquisitions that may enable us to offer additional services. Acquisitions may affect our short-term cash flow, liquidity and net income as we expend funds, potentially increase indebtedness and incur additional expenses.
Off-Balance Sheet Arrangements
At December 31, 2015,2018, we had letters of credit outstanding from banks totaling $11.0$10.7 million required primarily by our workers’ compensation and vehicle liability insurance providers.
Contractual Obligations and Commercial Commitments
Our contractual obligations and other commercial commitments as of December 31, 20152018 (in thousands) are summarized below:
| | | Contractual Obligations |
| Payment Due Period |
| Payment Due Period (in millions) |
|
|
|
|
|
|
|
|
|
| 2021 and |
|
|
|
|
|
|
|
|
| 2024 and |
|
| Total |
| 2016 |
| 2017-2018 |
| 2019-2020 |
| Thereafter |
| Total |
| 2019 |
| 2020-2021 |
| 2022-2023 |
| Thereafter |
| Capital lease obligations |
| $ | 1,566 |
|
| $ | 395 |
|
| $ | 786 |
|
| $ | 385 |
|
| — |
|
| $ | 0.4 |
|
| $ | 0.3 |
|
| $ | 0.1 |
|
| $ | — |
|
| $ | — |
|
| Equipment purchase commitments |
| 17,667 |
|
| 17,667 |
|
| — |
|
| — |
|
| — |
|
| 14.3 |
|
| 14.3 |
|
| — |
|
| — |
|
| — |
|
| Operating leases |
| 101,185 |
|
| 34,817 |
|
| 46,421 |
|
| 18,856 |
|
| 1,091 |
|
| 159.3 |
|
| 51.4 |
|
| 70.6 |
|
| 25.8 |
|
| 11.5 |
|
| Term loan payments |
| 84,582 |
|
| 56,626 |
|
| 27,956 |
|
| — |
|
| — |
| |
| Total contractual cash obligations |
| $ | 205,000 |
|
| $ | 109,505 |
|
| $ | 75,163 |
|
| $ | 19,241 |
|
| $ | 1,091 |
|
| $ | 174.0 |
|
| $ | 66.0 |
|
| $ | 70.7 |
|
| $ | 25.8 |
|
| $ | 11.5 |
|
Not included in the above table are $47.5 million in borrowings outstanding under the revolving credit facility, reserves for unrecognized tax benefits of $1.2 million and self insuranceself-insurance claims of $1.3 million and $16.0 million, respectively.$25.8 million. The equipment purchase commitments
are for various trailers, vehicles and forklifts. All of the above commitments are expected to be funded by cash on hand and cash flows from operations.
Forward-Looking Statements
This report contains “forward-looking statements,” as defined in Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are statements other than historical information or statements of current condition and relate to future events or our future financial performance. Some forward-looking statements may be identified by use of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,” “projects” or “expects.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The following is a list of factors, among others, that could cause actual results to differ materially from those contemplated by the forward-looking statements: economic factors such as recessions, inflation, higher interest rates and downturns in customer business cycles, our inability to maintain our historical growth rate because of a decreased volume of freight moving through our network or decreased average revenue per pound of freight moving through our network, increasing competition and pricing pressure, surplus inventories, loss of a major customer, the creditworthiness of our customers and their ability to pay for services rendered, our ability to secure terminal facilities in desirable locations at reasonable rates, the inability of our information systems to handle an increased volume of freight moving through our network, changes in fuel prices, claims for property damage, personal injuries or workers’ compensation, employment matters including rising health care costs, enforcement of and changes in governmental regulations, environmental and tax matters, the handling of hazardous materials, the availability and compensation of qualified independent owner-operators and freight handlers as well as contracted third-party carriers needed to serve our transportation needs and our inability to successfully integrate acquisitions. As a result of the foregoing, no assurance can be given as to future financial condition, cash flows or results of operations. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates principally to changes in interest rates and fuel prices. Our interest rate exposure relates principally to changes in interest rates for borrowings under our senior unsecured credit facility. The revolving credit and term loan facilities had $83.3$47.5 million outstanding at December 31, 20152018 and bear interest at variable rates. However, a hypothetical increase in our credit facility borrowing rate of 150 basis points, or an increase in the total effective interest rate from 1.4%3.4% to 2.9%4.9%, would increase our annual interest expense by approximately $1.0$0.6 million and would have decreased our annual cash flow from operations by approximately $1.0$0.6 million.
Our only other debt is capital lease obligations totaling $1.4$0.4 million. These lease obligations all bear interest at a fixed rate. Accordingly, there is no exposure to market risk related to these capital lease obligations.
We are exposed to the effects of changes in the price and availability of diesel fuel, as more fully discussed in Item 1A, “Risk Factors.”
Our cash and cash equivalents are also subject to market risk, primarily interest-rate and credit risk.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015.2018. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this annual report on Form 10-K has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2015.2018. In making this assessment, management used the framework set forth by the Committee on Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework ("2013 Framework)Framework"). Based on our assessment, we have concluded, as of December 31, 2015,2018, that our internal control over financial reporting was effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements for the year ended December 31, 2015,2018, has issued an attestation report on the Company’s internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of 20152018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and the Board of Directors and Shareholders of Forward Air Corporation
Opinion on Internal Control over Financial Reporting
We have audited Forward Air Corporation’s internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Forward Air Corporation’sCorporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "financial statements") and our report dated February 20, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Forward Air Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015 of Forward Air Corporation and our report dated February 19, 2016 expressed an unqualified opinion thereon.
|
| |
| /s/ Ernst & Young LLP |
Nashville, Tennessee |
| Atlanta, Georgia |
February 19, 2016 | 20, 2019 |
Item 9B. Other Information
Not applicable.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers of the Registrant
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K of the Securities Act and General Instruction G(3) to Form 10-K, the following information is included in Part III of this report. The ages listed below are as of December 31, 2015.2018.
The following are our executive officers: |
| | | | |
| Name | | Age | | Position |
| Bruce A. Campbell | | 6467 | | Chairman, President and Chief Executive OfficerChairman |
Rodney L. BellThomas Schmitt | | 53 | | President, Chief Executive Officer and Director |
| Michael J. Morris | | 50 | | Chief Financial Officer, Senior Vice President and Treasurer |
Craig A. Drum | | 60 | | Senior Vice President, Sales |
| Michael L. Hance | | 4447 | | Senior Vice President, Chief Legal Officer & Secretary |
| Chris C. Ruble | | 56 | | Chief Operating Officer - Expedited LTL, TLS and Pool Distribution |
| Matthew J. Jewell | | 4952 | | President - Logistics Services |
Michael P. McLean | | 42 | | Chief Accounting Officer, Vice President & Controller |
Chris C. Ruble | | 53 | | President - Expedited ServicesIntermodal |
There are no family relationships between any of our executive officers. All officers hold office atuntil the pleasureearliest to occur of their resignation or removal by the Board of Directors.
Bruce A. Campbell has served as Executive Chairman since September 2018 and as a director since April 1993,1993. From October 2003 to September 2018, Mr. Campbell served as President since August 1998, asand Chief Executive Officer since October 2003 and as Chairman of the Board since May 2007.
Thomas Schmitt has served as President, Chief Executive Officer and Director since September 2018. From June 2015 to September 2018, Mr. CampbellSchmitt was a member of the senior management of Schenker AG, and most recently held the title of Chief Operating Officer from April 1990 until October 2003 and Executive Vice President from April 1990 until August 1998.Commercial Officer. Prior to joining us, Mr. CampbellSchenker, from January 2013 to June 2015, he served as ViceChief Executive Officer and President of Ryder-Temperature Controlled Carriage in Nashville, TennesseeAquaTerra Corporation. Prior to AquaTerra, Mr. Schmitt held various senior executive positions including Chief Executive Officer and President of Purolator, Inc. and Chief Executive Officer and President of Fedex Global Supply Chain Services from September 1985 until December 1989.1998 to 2010. Mr. Schmitt was a Senior Engagement Manager at McKinsey & Company from 1993 to 1998.
Rodney L. Bell began servingMichael J. Morris has served as Chief Financial Officer, Senior Vice President and Treasurer insince June 2006.2016. From 2010 to 2015, Mr. Bell, who is a Certified Public Accountant (inactive),Morris was appointed Chief Accounting Officer in February 2006 and continued to serve as Vice President and Controller, positions held since October 2000 and February 1995, respectively. Mr. Bell joined the Company in March 1992 as Assistant Controller after serving as a senior manager with the accounting firm of Adams and Plucker in Greeneville, Tennessee.
Craig A. Drum has served as Senior Vice President Sales since July 2001 after joining usof Finance & Treasurer at Con-way Inc. (“Con-way”) and in January 2000 as Vice President, Sales for one of our subsidiaries. In February 2001, Mr. Drum was promoted2016 he transitioned to be the Senior Vice President of National Accounts. Prior to January 2000, Mr. Drum spent mostFinance & Treasurer at XPO Logistics Inc. (“XPO”) following XPO's acquisition of his 24-year career in air freight with Delta Air Lines, Inc., most recently as the Director of Sales and Marketing - Cargo.Con-way.
Michael L. Hance has served as Senior Vice President, Chief Legal Officer and Secretary since May 2014. From May 2010 until May 2014, he served as Senior Vice President of Human Resources and General Counsel. From January 2008 until May 2010, he served as Senior Vice President and General Counsel, and from August 2006 until January 2008, he served as Vice President and Staff Counsel. Before joining us, Mr. Hance practiced law with the law firms of Baker, Donelson, Bearman, Caldwell and Berkowitz, P.C. from October 2003 until August 2006 and with Bass, Berry & Sims, PLC from September 1999 to September 2003.
Chris C. Ruble was appointed to Chief Operating Officer for the Company's Expedited LTL, TLS and Pool Distribution segments, effective June 2018. Mr. Ruble was President - Expedited Services from January 2016 to June 2018, Executive Vice President, Operations from August 2007 to January 2016, and Senior Vice President, Operations from October 2001 until August 2007. He was a Regional Vice President from September 1997 to October 2001 and a regional manager from February 1997 to September 1997, after starting with the Company as a terminal manager in January 1996. From June 1986 to August 1995, Mr. Ruble served in various management capacities at Roadway Package System, Inc.
Matthew J. Jewell was promotedappointed to President of the Intermodal business, effective June 2018. Mr. Jewell was President - Logistics Services effectivefrom January 2016. Prior2016 to this promotion, he served asJune 2018, Executive Vice President, Intermodal Services & Chief Strategy Officer since May 2014. From January 2008 until
from May 2014 he served asto January 2016, and Executive Vice President and Chief Legal Officer.Officer from January 2008 until May 2014. From July 2002 until January 2008, he served as Senior Vice President and General Counsel. In October 2002, he was also appointed Secretary. From July 2002 until May 2004, Mr. Jewell was also the Senior Vice President, General Counsel and Secretary of Landair Corporation. From January 2000 until joining us in July 2002, Mr. Jewell was a partner with the law firm of Austin & Sparks, P.C. Mr. Jewell was an associate at Dennis, Corry & Porter, L.L.P. from July 1991 to December 1998 and a partner from January 1999 to January 2000.
Michael P. McLean began serving as Chief Accounting Officer, Vice President and Controller in February 2008. From June 2006 until February 2008, Mr. McLean, who is a Certified Public Accountant, served as Vice President of Accounting and Controller. Mr. McLean joined the Company as Vice President, Accounting in February 2006 and served in that position until May 2006. Prior to joining us in February 2006, Mr. McLean served as Director of Financial Reporting at CTI Molecular Imaging, Inc., a publicly-traded medical technology company since February 2003. From July 2001 until January 2003, Mr. McLean was an audit manager with the accounting firm of Coulter & Justus, PC in Knoxville, Tennessee.
Chris C. Ruble was promoted to President - Expedited Services, effective January 2016. Prior to this promotion, he served as Executive Vice President, Operations since August 2007. From October 2001 until August 2007, he served as Senior Vice President, Operations. He was a Regional Vice President from September 1997 to October 2001 and a regional manager from February 1997 to September 1997, after starting with us as a terminal manager in January 1996. From June 1986 to August 1995, Mr. Ruble served in various management capacities at Roadway Package System, Inc.
Other information required by this item with respect to our directors is incorporated herein by reference to our proxy statement for the 20162019 Annual Meeting of Shareholders (the “2016“2019 Proxy Statement”). The 20162019 Proxy Statement will be filed with the SEC not later than 120 days subsequent to December 31, 2015.2018.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 20162019 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item is incorporated herein by reference to the 20162019 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the 20162019 Proxy Statement.
Item 14. Principle Accounting Fees and Services
The information required by this item is incorporated herein by reference to the 20162019 Proxy Statement.
Part IV
Item 15. Exhibits, Financial Statement Schedules
| |
| (a)(1) and (2) | List of Financial Statements and Financial Statement Schedules. |
The response to this portion of Item 15 is submitted as a separate section of this report.
The response to this portion of Item 15 is submitted as a separate section of this report.
The response to this portion of Item 15 is submitted as a separate section of this report.
| |
| (c) | Financial Statement Schedules. |
The response to this portion of Item 15 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
| | | | |
| | | | Forward Air Corporation |
| | | | | |
| Date: | February 19, 201620, 2019 | | By: | /s/ Rodney L. BellMichael J. Morris |
| | | | | Rodney L. BellMichael J. Morris |
| | | | | Chief Financial Officer, Senior Vice President |
| | | | | and Treasurer (Principal Financial Officer) |
| | | | | |
| | | By: | /s/ Michael P. McLean |
| | | | Michael P. McLean |
| | | | Chief Accounting Officer, Vice President |
| | | | and Controller (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
/s/ Bruce A. CampbellThomas Schmitt | | Chairman, President, and Chief Executive | February 19, 2016 |
Bruce A. Campbell Officer and Director | | Officer (PrincipalFebruary 20, 2019 |
Thomas Schmitt
| | (Principal Executive Officer) | |
| | | |
/s/ Rodney L. Bell | | Chief Financial Officer, Senior Vice President | February 19, 2016 |
Rodney L. Bell | | and Treasurer ( Principal Financial Officer) | |
| | | | |
/s/ Michael P. McLeanJ. Morris | | Chief AccountingFinancial Officer, Senior Vice President and | | February 19, 201620, 2019 |
Michael P. McLeanJ. Morris | | Controllerand Treasurer (Principal AccountingFinancial Officer) | | |
| | | | |
| /s/ Bruce A. Campbell | | Executive Chairman | | February 20, 2019 |
Bruce A. Campbell
| | | | |
| | | | |
| /s/ C. Robert Campbell | | Lead Director | | February 19, 201620, 2019 |
| C. Robert Campbell | | | | |
| | | | |
| /s/ Ronald W. Allen | | Director | | February 19, 201620, 2019 |
| Ronald W. Allen | | | | |
| | | | | |
| /s/ Ana B. Amicarella | | Director | | February 20, 2019 |
Ana B. Amicarella
| | | | |
| | | | |
| /s/ Valerie A. Bonebrake | | Director | | February 20, 2019 |
| Valerie A. Bonebrake | | | | |
| | | | |
| /s/ R. Craig Carlock | | Director | | February 19, 201620, 2019 |
| R. Craig Carlock | | | | |
| | | | |
| /s/ C. John Langley, Jr. | | Director | | February 19, 201620, 2019 |
| C. John Langley, Jr. | | | |
| | | |
/s/ Tracy A. Leinbach | | Director | February 19, 2016 |
Tracy A. Leinbach | | | |
| | | | |
/s/ Larry D. Leinweber | | Director | February 19, 2016 |
Larry D. Leinweber | | | |
| | | | |
| /s/ G. Michael Lynch | | Director | | February 19, 201620, 2019 |
| G. Michael Lynch | | | | |
| | | | |
/s/ Douglas M. Madden | | Director | February 19, 2016 |
Douglas M. Madden | | | |
| | | |
/s/ Gary L. PaxtonW. Gil West | | Director | | February 19, 201620, 2019 |
Gary L. PaxtonW. Gil West | | | | |
Annual Report on Form 10-K
Item 8, Item 15(a)(1) and (2), (a)(3), (b) and (c)
List of Financial Statements and Financial Statement Schedule
Financial Statements and Supplementary Data
Certain Exhibits
Financial Statement Schedule
Year Ended December 31, 20152018
Forward Air Corporation
Greeneville, Tennessee
Forward Air Corporation
Form 10-K — Item 8 and Item 15(a)(1) and (2)
Index to Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Forward Air Corporation are included as a separate section of this report:
The following financial statement schedule of Forward Air Corporation is included as a separate section of this report.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and the Board of Directors and Shareholders of Forward Air Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Forward Air Corporation (the Company) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Forward Air Corporationthe Company at December 31, 20152018 and 2014,2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015,2018, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Forward Air Corporation’s internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 201620, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
| |
| /s/ Ernst & Young LLP |
Nashville, Tennessee |
| We have served as the Company‘s auditor since 1991. |
| |
| Atlanta, Georgia |
February 19, 2016 | 20, 2019 |
| | Forward Air Corporation | Consolidated Balance Sheets | (Dollars in thousands) | | | December 31,
2015 | | December 31,
2014 | December 31,
2018 | | December 31,
2017 |
| | | | | (As Adjusted) |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 33,312 |
| | $ | 41,429 |
| $ | 25,657 |
| | $ | 3,893 |
|
| Accounts receivable, less allowance of $2,405 in 2015 and $2,563 in 2014 | 109,165 |
| | 95,326 |
| |
| Accounts receivable, less allowance of $2,081 in 2018 and $3,006 in 2017 | | 156,359 |
| | 147,948 |
|
| Inventories | 1,310 |
| | 1,056 |
| 2,240 |
| | 1,425 |
|
| Prepaid expenses and other current assets | 10,794 |
| | 9,648 |
| 11,763 |
| | 9,954 |
|
| Income tax receivable | 18,876 |
| | — |
| 5,063 |
| | 4,428 |
|
| Total current assets | 173,457 |
| | 147,459 |
| 201,082 |
| | 167,648 |
|
| Property and equipment: | |
| | |
| |
| | |
|
| Land | 16,998 |
| | 16,998 |
| 16,928 |
| | 16,928 |
|
| Buildings | 66,502 |
| | 66,477 |
| 65,919 |
| | 65,870 |
|
| Equipment | 241,391 |
| | 212,216 |
| 311,573 |
| | 291,181 |
|
| Leasehold improvements | 9,228 |
| | 7,957 |
| 14,165 |
| | 12,604 |
|
| Construction in progress | 9,028 |
| | 1,540 |
| 5,315 |
| | 12,652 |
|
| Total property and equipment | 343,147 |
| | 305,188 |
| 413,900 |
| | 399,235 |
|
| Less accumulated depreciation and amortization | 155,859 |
| | 132,699 |
| 204,005 |
| | 193,123 |
|
| Net property and equipment | 187,288 |
| | 172,489 |
| 209,895 |
| | 206,112 |
|
| Goodwill and other acquired intangibles: | |
| | |
| |
| | |
|
| Goodwill | 205,609 |
| | 144,412 |
| 199,092 |
| | 191,671 |
|
| Other acquired intangibles, net of accumulated amortization of $51,212 in 2015 and $40,307 in 2014 | 127,800 |
| | 72,705 |
| |
| Other acquired intangibles, net of accumulated amortization of $80,666 in 2018 and $71,527 in 2017 | | 113,661 |
| | 111,247 |
|
| Total net goodwill and other acquired intangibles | 333,409 |
| | 217,117 |
| 312,753 |
| | 302,918 |
|
| Other assets | 6,017 |
| | 2,244 |
| 36,485 |
| | 15,944 |
|
| Total assets | $ | 700,171 |
| | $ | 539,309 |
| $ | 760,215 |
| | $ | 692,622 |
|
The accompanying notes are an integral part of the consolidated financial statements.
| | Forward Air Corporation | Consolidated Balance Sheets (Continued) | (Dollars in thousands) | | | | December 31,
2018 | | December 31,
2017 |
| | December 31,
2015 | | December 31,
2014 | | | (As Adjusted) |
| Liabilities and Shareholders’ Equity | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 23,334 |
| | $ | 20,572 |
| $ | 34,630 |
| | $ | 30,723 |
|
| Accrued payroll and related items | 10,051 |
| | 8,122 |
| 16,959 |
| | 13,230 |
|
| Insurance and claims accruals | 8,935 |
| | 6,042 |
| 12,648 |
| | 11,999 |
|
| Payables to owner-operators | 7,901 |
| | 4,182 |
| 7,424 |
| | 6,322 |
|
| Collections on behalf of customers | 517 |
| | 374 |
| 261 |
| | 329 |
|
| Other accrued expenses | 2,419 |
| | 2,571 |
| 2,492 |
| | 2,869 |
|
| Income taxes payable | — |
| | 1,292 |
| — |
| | 320 |
|
| Current portion of capital lease obligations | 331 |
| | 276 |
| 309 |
| | 359 |
|
| Current portion of long-term debt | 55,556 |
| | — |
| |
| Total current liabilities | 109,044 |
| | 43,431 |
| 74,723 |
| | 66,151 |
|
| Capital lease obligations, less current portion | 1,074 |
| | 1,275 |
| 54 |
| | 365 |
|
| Long-term debt, less current portion | 27,782 |
| | — |
| 47,281 |
| | 40,223 |
|
| Other long-term liabilities | 12,340 |
| | 8,356 |
| 47,739 |
| | 24,104 |
|
| Deferred income taxes | 39,876 |
| | 22,684 |
| 37,174 |
| | 29,080 |
|
| Commitments and contingencies (Note 7) |
|
| |
|
|
|
| |
|
|
| Shareholders’ equity: | |
| | |
| |
| | |
|
| Preferred stock, $0.01 par value: Authorized shares - 5,000,000; no shares issued | — |
| | — |
| — |
| | — |
|
| Common stock, $0.01 par value: Authorized shares - 50,000,000; issued and outstanding shares - 30,543,864 in 2015 and 30,255,182 in 2014 | 305 |
| | 303 |
| |
| Common stock, $0.01 par value: Authorized shares - 50,000,000; issued and outstanding shares - 28,534,935 in 2018 and 29,454,062 in 2017 | | 285 |
| | 295 |
|
| Additional paid-in capital | 160,855 |
| | 130,107 |
| 210,296 |
| | 195,346 |
|
| Retained earnings | 348,895 |
| | 333,153 |
| 342,663 |
| | 337,058 |
|
| Total shareholders’ equity | 510,055 |
| | 463,563 |
| 553,244 |
| | 532,699 |
|
| Total liabilities and shareholders’ equity | $ | 700,171 |
| | $ | 539,309 |
| $ | 760,215 |
| | $ | 692,622 |
|
The accompanying notes are an integral part of the consolidated financial statements.
| | Forward Air Corporation | Consolidated Statements of Comprehensive Income | (In thousands, except per share data) | | | | |
| | | Year ended |
| | Year ended | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| | December 31,
2015 | | December 31,
2014 | | December 31,
2013 | | | (As Adjusted) | | (As Adjusted) |
| Operating revenue | $ | 959,125 |
| | $ | 780,959 |
| | $ | 652,481 |
| $ | 1,320,886 |
| | $ | 1,169,346 |
| | $ | 1,030,210 |
|
| | | | | | | | | | | |
| Operating expenses: | |
| | |
| | |
| |
| | |
| | |
|
| Purchased transportation | 408,769 |
| | 334,576 |
| | 285,690 |
| 613,636 |
| | 545,091 |
| | 460,796 |
|
| Salaries, wages and employee benefits | 240,604 |
| | 182,105 |
| | 151,097 |
| 300,230 |
| | 265,842 |
| | 242,270 |
|
| Operating leases | 66,272 |
| | 33,994 |
| | 29,310 |
| 75,677 |
| | 63,799 |
| | 60,492 |
|
| Depreciation and amortization | 37,157 |
| | 31,133 |
| | 23,579 |
| 42,183 |
| | 41,055 |
| | 38,210 |
|
| Insurance and claims | 21,483 |
| | 15,736 |
| | 12,619 |
| 35,180 |
| | 29,578 |
| | 25,392 |
|
| Fuel expense | 15,903 |
| | 20,148 |
| | 15,145 |
| 23,121 |
| | 16,542 |
| | 13,233 |
|
| Other operating expenses | 87,165 |
| | 66,861 |
| | 50,686 |
| 108,828 |
| | 98,682 |
| | 87,672 |
|
| Impairment of goodwill and other intangible assets | | — |
| | — |
| | 42,442 |
|
| Total operating expenses | 877,353 |
| | 684,553 |
| | 568,126 |
| 1,198,855 |
| | 1,060,589 |
| | 970,507 |
|
| Income from operations | 81,772 |
| | 96,406 |
| | 84,355 |
| 122,031 |
| | 108,757 |
| | 59,703 |
|
| | | | | | | | | | | |
| Other income (expense): | |
| | |
| | |
| |
| Other expense: | | |
| | |
| | |
|
| Interest expense | (2,047 | ) | | (610 | ) | | (532 | ) | (1,783 | ) | | (1,209 | ) | | (1,597 | ) |
| Other, net | (58 | ) | | 289 |
| | 99 |
| (2 | ) | | (11 | ) | | 4 |
|
| Total other expense | (2,105 | ) | | (321 | ) | | (433 | ) | (1,785 | ) | | (1,220 | ) | | (1,593 | ) |
| Income before income taxes | 79,667 |
| | 96,085 |
| | 83,922 |
| 120,246 |
| | 107,537 |
| | 58,110 |
|
| Income taxes | 24,092 |
| | 34,916 |
| | 29,455 |
| 28,195 |
| | 20,282 |
| | 30,605 |
|
| Net income and comprehensive income | $ | 55,575 |
| | $ | 61,169 |
| | $ | 54,467 |
| $ | 92,051 |
| | $ | 87,255 |
| | $ | 27,505 |
|
| | | | | | | | | | | |
| Net income per share: | |
| | |
| | |
| |
| | |
| | |
|
| Basic | $ | 1.80 |
|
| $ | 1.99 |
|
| $ | 1.81 |
| $ | 3.14 |
|
| $ | 2.90 |
|
| $ | 0.90 |
|
| Diluted | $ | 1.78 |
|
| $ | 1.96 |
|
| $ | 1.77 |
| $ | 3.12 |
|
| $ | 2.89 |
|
| $ | 0.90 |
|
| | | | | | | | | | | |
| Dividends per share: | $ | 0.48 |
| | $ | 0.48 |
| | $ | 0.40 |
| $ | 0.63 |
| | $ | 0.60 |
| | $ | 0.51 |
|
The accompanying notes are an integral part of the consolidated financial statements.
| | Forward Air Corporation | Consolidated Statements of Shareholders' Equity | | (In thousands, except per share data) | |
| (In thousands, except share data) | | (In thousands, except share data) |
| | Common Stock | | Additional
Paid-in
Capital | | Retained Earnings | | Total
Shareholders'
Equity | Common Stock | | Additional
Paid-in
Capital | | Retained Earnings | | Total
Shareholders'
Equity |
| | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2012 | 29,195 |
| | 292 |
| | 64,644 |
| | 286,735 |
| | 351,671 |
| |
| Net income and comprehensive income for 2013 | — |
| | — |
| | — |
| | 54,467 |
| | 54,467 |
| |
| | | | | | | | | (As Adjusted) | | (As Adjusted) |
| Balance at December 31, 2015 (As Reported) | | 30,544 |
| | $ | 305 |
| | $ | 160,855 |
| | $ | 348,895 |
| | $ | 510,055 |
|
| Cumulative effect of new accounting standard | | — |
| | — |
| | — |
| | (558 | ) | | (558 | ) |
| Balance at December 31, 2015 | | 30,544 |
| | 305 |
| | 160,855 |
| | 348,337 |
| | 509,497 |
|
| Net income and comprehensive income for 2016 (As Adjusted) | | — |
| | — |
| | — |
| | 27,505 |
| | 27,505 |
|
| Exercise of stock options | 1,263 |
| | 12 |
| | 32,990 |
| | — |
| | 33,002 |
| 346 |
| | 3 |
| | 8,145 |
| | — |
| | 8,148 |
|
| Common stock issued under employee stock purchase plan | 9 |
| | — |
| | 296 |
| | — |
| | 296 |
| 11 |
| | — |
| | 442 |
| | — |
| | 442 |
|
| Share-based compensation | — |
| | — |
| | 6,178 |
| | — |
| | 6,178 |
| — |
| | — |
| | 8,334 |
| | — |
| | 8,334 |
|
| Dividends ($0.40 per share) | — |
| | — |
| | 7 |
| | (12,148 | ) | | (12,141 | ) | |
| Dividends ($0.51 per share) | | — |
| | — |
| | 6 |
| | (15,535 | ) | | (15,529 | ) |
| Cash settlement of share-based awards for minimum tax withholdings | (23 | ) | | — |
| | — |
| | (866 | ) | | (866 | ) | (42 | ) | | — |
| | — |
| | (1,800 | ) | | (1,800 | ) |
| Share repurchases | (9 | ) | | — |
| | — |
| | (354 | ) | | (354 | ) | (910 | ) | | (9 | ) | | — |
| | (39,974 | ) | | (39,983 | ) |
| Vesting of previously non-vested shares | 87 |
| | 1 |
| | (1 | ) | | — |
| | — |
| 141 |
| | 2 |
| | (2 | ) | | — |
| | — |
|
| Income tax benefit from stock options exercised | — |
| | — |
| | 3,612 |
| | — |
| | 3,612 |
| — |
| | — |
| | 1,732 |
| | — |
| | 1,732 |
|
| Balance at December 31, 2013 | 30,522 |
| | 305 |
| | 107,726 |
| | 327,834 |
| | 435,865 |
| |
| Net income and comprehensive income for 2014 | — |
| | — |
| | — |
| | 61,169 |
| | 61,169 |
| |
| Balance at December 31, 2016 | | 30,090 |
| | 301 |
| | 179,512 |
| | 318,533 |
| | 498,346 |
|
| Net income and comprehensive income for 2017 (As Adjusted) | | — |
| | — |
| | — |
| | 87,255 |
| | 87,255 |
|
| Exercise of stock options | 469 |
| | 5 |
| | 13,230 |
| | — |
| | 13,235 |
| 206 |
| | 2 |
| | 7,270 |
| | — |
| | 7,272 |
|
| Conversion of deferred stock | | 10 |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued under employee stock purchase plan | 9 |
| | — |
| | 354 |
| | — |
| | 354 |
| 10 |
| | — |
| | 458 |
| | — |
| | 458 |
|
| Share-based compensation | — |
| | — |
| | 6,681 |
| | — |
| | 6,681 |
| — |
| | — |
| | 8,103 |
| | — |
| | 8,103 |
|
| Dividends ($0.48 per share) | — |
| | — |
| | 9 |
| | (14,804 | ) | | (14,795 | ) | |
| Dividends ($0.60 per share) | | — |
| | — |
| | 4 |
| | (18,056 | ) | | (18,052 | ) |
| Cash settlement of share-based awards for minimum tax withholdings | | (35 | ) | | — |
| | — |
| | (1,700 | ) | | (1,700 | ) |
| Share repurchases | | (948 | ) | | (9 | ) | | — |
| | (48,974 | ) | | (48,983 | ) |
| Vesting of previously non-vested shares | | 121 |
| | 1 |
| | (1 | ) | | — |
| | — |
|
| Balance at December 31, 2017 | | 29,454 |
| | 295 |
| | 195,346 |
| | 337,058 |
| | 532,699 |
|
| Net income and comprehensive income for 2018 (As Adjusted) | | — |
| | — |
| | — |
| | 92,051 |
| | 92,051 |
|
| Exercise of stock options | | 95 |
| | 1 |
| | 3,920 |
| | — |
| | 3,921 |
|
| Other | | — |
| | — |
| | — |
| | (30 | ) | | (30 | ) |
| Common stock issued under employee stock purchase plan | | 9 |
| | — |
| | 479 |
| | — |
| | 479 |
|
| Share-based compensation | | — |
| | — |
| | 10,549 |
| | — |
| | 10,549 |
|
| Dividends ($0.63 per share) | | — |
| | — |
| | 3 |
| | (18,430 | ) | | (18,427 | ) |
| Cash settlement of share-based awards for minimum tax withholdings | (25 | ) | | — |
| | — |
| | (1,083 | ) | | (1,083 | ) | (33 | ) | | (1 | ) | | — |
| | (1,871 | ) | | (1,872 | ) |
| Share repurchases | (882 | ) | | (9 | ) | | — |
| | (39,963 | ) | | (39,972 | ) | (1,109 | ) | | (11 | ) | | — |
| | (66,115 | ) | | (66,126 | ) |
| Vesting of previously non-vested shares | 162 |
| | 2 |
| | (2 | ) | | — |
| | — |
| 119 |
| | 1 |
| | (1 | ) | | — |
| | — |
|
| Income tax benefit from stock options exercised | — |
| | — |
| | 2,109 |
| | — |
| | 2,109 |
| — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2014 | 30,255 |
| | 303 |
| | 130,107 |
| | 333,153 |
| | 463,563 |
| |
| Net income and comprehensive income for 2015 | — |
| | — |
| | — |
| | 55,575 |
| | 55,575 |
| |
| Exercise of stock options | 605 |
| | 6 |
| | 17,394 |
| | (3,087 | ) | | 14,313 |
| |
| Common stock issued under employee stock purchase plan | 11 |
| | — |
| | 449 |
| | — |
| | 449 |
| |
| Share-based compensation | — |
| | — |
| | 7,486 |
| | — |
| | 7,486 |
| |
| Dividends ($0.48 per share) | — |
| | — |
| | 7 |
| | (14,828 | ) | | (14,821 | ) | |
| Cash settlement of share-based awards for minimum tax withholdings | (38 | ) | | — |
| | — |
| | (1,931 | ) | | (1,931 | ) | |
| Share repurchases | (423 | ) | | (5 | ) | | — |
| | (19,987 | ) | | (19,992 | ) | |
| Vesting of previously non-vested shares | 134 |
| | 1 |
| | (1 | ) | | — |
| | — |
| |
| Income tax benefit from stock options exercised | — |
| | — |
| | 5,413 |
| | — |
| | 5,413 |
| |
| Balance at December 31, 2015 | 30,544 |
| | $ | 305 |
| | $ | 160,855 |
| | $ | 348,895 |
| | $ | 510,055 |
| |
| Balance at December 31, 2018 | | 28,535 |
| | $ | 285 |
| | $ | 210,296 |
| | $ | 342,663 |
| | $ | 553,244 |
|
The accompanying notes are an integral part of the consolidated financial statements.
| | Forward Air Corporation | Consolidated Statements of Cash Flows | (In thousands) | | | Year ended | Year ended |
| | December 31,
2015 | | December 31,
2014 | | December 31,
2013 | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| | | | | (As Adjusted) | | (As Adjusted) |
| Operating activities: | | | | | | | | | | |
| Net income | $ | 55,575 |
| | $ | 61,169 |
| | $ | 54,467 |
| $ | 92,051 |
| | $ | 87,255 |
| | $ | 27,505 |
|
| Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
| | |
| |
| | |
| | |
|
| Depreciation and amortization | 37,157 |
| | 31,133 |
| | 23,579 |
| 42,183 |
| | 41,055 |
| | 38,210 |
|
| Gain on change in fair value of earn-out liability | — |
| | — |
| | (615 | ) | |
Impairment of goodwill, intangible and other assets
| | — |
| | — |
| | 42,442 |
|
| Change in fair value of earn-out liability | | (455 | ) | | — |
| | — |
|
| Share-based compensation | 7,486 |
| | 6,681 |
| | 6,178 |
| 10,549 |
| | 8,103 |
| | 8,334 |
|
| (Gain) loss on disposal of property and equipment | (181 | ) | | (383 | ) | | (454 | ) | (171 | ) | | 1,281 |
| | 291 |
|
| Provision for loss on receivables | 33 |
| | 241 |
| | 423 |
| 139 |
| | 1,814 |
| | 258 |
|
| Provision for revenue adjustments | 4,793 |
| | 2,465 |
| | 2,531 |
| 3,628 |
| | 3,055 |
| | 2,020 |
|
| Deferred income taxes | 14,531 |
| | (3,021 | ) | | 4,856 |
| 8,094 |
| | (12,068 | ) | | 3,412 |
|
| Tax benefit for stock options exercised | (5,413 | ) | | (2,109 | ) | | (3,707 | ) | — |
| | — |
| | (1,732 | ) |
| Changes in operating assets and liabilities, net of acquisition of business | |
| | |
| | |
| |
| Changes in operating assets and liabilities | | |
| | |
| | |
|
| Accounts receivable | 5,403 |
| | (12,193 | ) | | 1,447 |
| (12,178 | ) | | (33,457 | ) | | (10,077 | ) |
| Prepaid expenses and other assets | (1,378 | ) | | (280 | ) | | (215 | ) | (2,565 | ) | | (1,204 | ) | | 283 |
|
| Income taxes | | (1,256 | ) | | (3,480 | ) | | 20,177 |
|
| Accounts payable and accrued expenses | (17,513 | ) | | (199 | ) | | 2,588 |
| 12,535 |
| | 11,010 |
| | (772 | ) |
| Income taxes | (14,771 | ) | | 8,156 |
| | (239 | ) | |
| Net cash provided by operating activities | 85,722 |
| | 91,660 |
| | 90,839 |
| 152,554 |
| | 103,364 |
| | 130,351 |
|
| | | | | | | | | | | |
| Investing activities: | |
| | |
| | |
| |
| | |
| | |
|
| Proceeds from disposal of property and equipment | 1,720 |
| | 1,947 |
| | 1,973 |
| 7,059 |
| | 2,440 |
| | 1,929 |
|
| Purchases of property and equipment | (40,495 | ) | | (39,487 | ) | | (35,439 | ) | (42,293 | ) | | (38,265 | ) | | (42,186 | ) |
| Acquisition of business, net of cash acquired | (61,878 | ) |
| (90,172 | ) |
| (45,328 | ) | (19,987 | ) |
| (23,140 | ) |
| (11,800 | ) |
| Other | (265 | ) | | 2 |
| | (129 | ) | (242 | ) | | (222 | ) | | (337 | ) |
| Net cash used in investing activities | (100,918 | ) | | (127,710 | ) | | (78,923 | ) | (55,463 | ) | | (59,187 | ) | | (52,394 | ) |
| | | | | | | | | | | |
| Financing activities: | |
| | |
| | |
| |
| | |
| | |
|
| Proceeds from term loan | 125,000 |
| | — |
| | — |
| |
| Payments of debt and capital lease obligations | (101,352 | ) | | (9,736 | ) | | (20,375 | ) | (302 | ) | | (42,790 | ) | | (55,768 | ) |
| Payments on line of credit | — |
| | — |
| | — |
| |
| Proceeds from senior credit facility | | 7,000 |
| | 55,000 |
| | — |
|
| Proceeds from exercise of stock options | 14,313 |
| | 13,235 |
| | 33,002 |
| 3,921 |
| | 7,272 |
| | 8,148 |
|
| Payments of cash dividends | (14,821 | ) | | (14,795 | ) | | (12,141 | ) | (18,427 | ) | | (18,052 | ) | | (15,529 | ) |
| Repurchase of common stock (repurchase program) | (19,992 | ) | | (39,972 | ) | | (354 | ) | (66,126 | ) | | (48,983 | ) | | (39,983 | ) |
| Common stock issued under employee stock purchase plan | 449 |
| | 354 |
| | 296 |
| 479 |
| | 458 |
| | 442 |
|
| Cash settlement of share-based awards for minimum tax withholdings | (1,931 | ) | | (1,083 | ) | | (866 | ) | |
| Cash settlement of share-based awards for tax withholdings | | (1,872 | ) | | (1,700 | ) | | (1,800 | ) |
| Tax benefit for stock options exercised | 5,413 |
| | 2,109 |
| | 3,707 |
| — |
| | — |
| | 1,732 |
|
| Net cash provided by (used in) financing activities | 7,079 |
| | (49,888 | ) | | 3,269 |
| |
| Net (decrease) increase in cash | (8,117 | ) | | (85,938 | ) | | 15,185 |
| |
| Net cash used in financing activities | | (75,327 | ) | | (48,795 | ) | | (102,758 | ) |
| Net increase (decrease) in cash | | 21,764 |
| | (4,618 | ) | | (24,801 | ) |
| Cash at beginning of year | 41,429 |
| | 127,367 |
| | 112,182 |
| 3,893 |
| | 8,511 |
| | 33,312 |
|
| Cash at end of year | $ | 33,312 |
| | $ | 41,429 |
| | $ | 127,367 |
| $ | 25,657 |
| | $ | 3,893 |
| | $ | 8,511 |
|
The accompanying notes are an integral part of the consolidated financial statements
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20152018
(In thousands, except share and per share data)
1. Accounting Policies
Basis of Presentation and Principles of Consolidation
Forward Air Corporation's (“the Company”, “We”, “Our”) services can beare classified into threefour principal reportingreportable segments: Forward Air, Forward Air SolutionsExpedited LTL, Truckload Premium Services (“FASI”TLS”), Intermodal and Pool Distribution ("Pool") and Total Quality ("TQI")(See note 10).
Through the Forward AirExpedited LTL segment, the Company provide time-definite transportation and related logistics services to the North American deferred air freight market and its activities can be classified into three categories of service: airport-to-airport, logistics, and other. Forward Air’s airport-to-airport service operateswe operate a comprehensive national network for the time-definite surface transportation ofto provide expedited ground freight. The airport-to-airport serviceregional, inter-regional and national less-than-truckload ("LTL") services. Expedited LTL offers customers local pick-up and delivery and scheduled surface transportation of cargo as a cost effective, reliable alternative to air transportation. Forward Air’s logistics services provide expedited truckload brokerage, intermodal drayage and dedicated fleet services. Forward Air’s other services includeincluding shipment consolidation and deconsolidation, warehousing, final mile solutions, customs brokerage and other handling. The Forward Air segment primarily provides its transportation services through aBecause of our roots in serving the deferred air freight market, our terminal network of terminalsis located at or near airports in the United States and Canada.
FASIThrough our TLS segment, we provide expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-controlled logistics services in the United States and Canada.
Our Intermodal segment provides poolfirst- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers dedicated contract and CFS warehouse and handling services. Today, Intermodal operates primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest.
In our Pool Distribution segment, we provide high-frequency handling and distribution servicesof time sensitive product to numerous destinations within a specific geographic region. We offer this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. FASI’s primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains.
TQI is a provider of maximum security and temperature-controlled logistics services, primarily truckload services, to the life sciences sector (pharmaceutical and biotechnology products). In addition to core pharmaceutical services and other cold chain services, TQI provides truckload and less-than-truckload brokerage transportation services.
The accompanying consolidated financial statements of the Company include Forward Air Corporation and its subsidiaries. Significant intercompanyIntercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas requiring management estimates include the following key financial areas:
Allowance for Doubtful Accounts
The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances in which the Company is aware of a specific customer’s inability to meet its financial obligations to the Company (for example, bankruptcy filings, accounts turned over for collection, or litigation), the Company records a specific reserve for these bad debts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes reserves for these bad debts based on the length of time the receivables are past due. Specifically, amounts that are 90 days or more past due are reserved at 50.0% for Forward Air's airport-to-airport and TLX operations,Expedited LTL, 10.0% for Forward Air's intermodal drayage operations, Intermodal, 25.0% for FASIPool and 10.0% for TQI's pharmaceutical operations andup to 50.0% for TQI's non-pharmaceutical operations.TLS. If circumstances change (i.e., the Company experiences higher than expected defaults or an unexpected material adverse change in a customer’s ability to meet its financial obligations to the Company), the estimates of the recoverability of amounts due to the Company could be changed by a material amount. Accounts are written off after all means of collection, including legal action, have been exhausted.
Allowance for Revenue Adjustments
The Company’s allowance for revenue adjustments consists of amounts reserved for billing rate changes that are not captured upon load initiation. These adjustments are recorded in revenue from operations and generally arise: (1) when the sales department contemporaneously grants small rate changes (“spot quotes”) to customers that differ from the standard rates in the system; (2) when freight requires
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
dimensionalization or is reweighed resulting in a different required rate; (3) when billing errors occur; and (4) when data entry errors occur. When appropriate, permanent rate changes are initiated and reflected in the system.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
The Company monitors the manual revenue adjustments closely through the employment of various controls that are in place to ensure that revenue recognition is not compromised and that fraud does not occur.compromised. During 2015,2018, average revenue adjustments per month were approximately $399$302 on average revenue per month of approximately $79,927 (0.5%$110,074 (0.3% of monthly revenue). In order to estimate the allowance for revenue adjustments related to ending accounts receivable, the Company prepares an analysis that considers average monthly revenue adjustments and the average lag for identifying and quantifying these revenue adjustments. Based on this analysis, the Company establishes an allowance covering approximately 35-11085 days (dependent upon experience in the last twelve months) of average revenue adjustments, adjusted for rebates and billing errors. The lag is periodically adjusted based on actual historical experience. Additionally, the average amount of revenue adjustments per month can vary in relation to the level of sales or based on other factors (such as personnel issues that could result in excessive manual errors or in excessive spot quotes being granted). Both of these significant assumptions are continually evaluated for validity.appropriateness.
Self-Insurance Loss Reserves
Given the natureUnder U.S. Department of the Company’s operating environment,Transportation (“DOT”) regulations, the Company is subjectliable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on our behalf. Additionally, from time to vehicletime, the drivers employed and general liability, workers’ compensation and employee healthengaged by the third-party transportation carriers we contract with are involved in accidents, which may result in serious personal injuries. The resulting types and/or amounts of damages may be excluded by or exceed the amount of insurance claims. To mitigate a portioncoverage maintained by the contracted carrier. Although these drivers are not our employees, all of these risks, thedrivers are employees, owner-operators, or independent contractors working for carriers and, from time to time, claims may be asserted against us for their actions, or for our actions in retaining them.
The Company currently maintains liability insurance coverage that it believes is adequate to cover third-party claims. The Company has a self-insured retention ("SIR") of $3,000 per occurrence for individual vehicle and general liability claims exceeding $500and will be responsible for any damages and personal injuries below that self-insured amount. The Company is also responsible for varying annual aggregate deductible amounts of liability for claims in excess of the SIR/deductible. For the policy year that began April 1, 2018, the Company had an annual $6,000 aggregate deductible for claims between $3,000 and $5,000. The Company also had a $2,500 aggregate deductible for claims between $5,000 and $10,000. As a result, the Company is responsible for the first $7,500 per claim, until it meets the $6,000 aggregate deductible for claims between $3,000 and $5,000 and the $2,500 aggregate deductible for claims between $5,000 and $10,000. This insurance covers claims for the LTL Expedited and Pool Distribution segments. TLS maintains separate liability insurance coverage for claims between $0 and $5,000, and for the policy year that began April 1, 2018, TLS had no SIR for claims in this layer. Intermodal maintains separate liability insurance coverage for all liability claims. For the policy year that began April 1, 2018, Intermodal had an SIR of $50 for each claim.
The Company may also be subject to claims for workers’ compensation. The Company maintains workers’ compensation claims and employee health insurance claims exceeding $250,coverage that it believes is adequate to cover such claims. The Company has a SIR of approximately $350 for each such claim, except in Ohio, where for workers’ compensation we areit is a qualified self-insured entity with a $500 self-insured retention. an approximately $500 SIR.
The amount of self-insurance loss reserves and loss adjustment expenses is determined based on an estimation process that uses information obtained from both company-specific and industry data, as well as general economic information. The estimation process for self-insurance loss exposure requires management to continuously monitor and evaluate the life cycle of claims. Using data obtained from this monitoring and the Company’s assumptions about the emerging trends, management develops information about the size of ultimate claims based on its historical experience and other available market information. The most significant assumptions used in the estimation process include determining the trend in loss costs, the expected consistency in the frequency and severity of claims incurred but not yet reported, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. The Company utilizes a semi-annualquarterly actuarial analyses to evaluate open claims and estimate the ongoing development exposure.
As of December 31, 2018, we have recognized an insurance proceeds receivable and claims payable of $28,520 for open vehicle and workers’ compensation claims in excess of our stop-loss limits. As of December 31, 2017, we recognized an insurance proceeds receivable and claims payable of $8,133 for open vehicle and workers’ compensation claims in excess of our stop-loss limits. These balances are recorded in other assets and other long-term liabilities, respectively, in the Company's consolidated balance sheets.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
Revenue and Expense Recognition
The Company's revenue is generated from providing transportation and related services to customers in accordance with contractual agreements, bill of lading ("BOL") contracts and general tariff provisions. Related services include accessorial charges such as terminal handling, storage, equipment rentals and customs brokerage. These services are distinct and are accounted for as separate performance obligations. Generally, the Company's performance obligations begin when a customer's BOL is received and are satisfied when the delivery of a shipment and related services is completed. The Company recognizes revenue for its services over time to coincide with when its customers simultaneously receive and consume the benefits of these services. Performance obligations are short-term with transit days less than a week. Upon delivery of a shipment or related service, customers are billed and remit payment according to payment terms.
OperatingRevenue is categorized by line of business as the Company believes this best depicts the nature, timing and amount of revenue and related costs are recognized ascash flows. For all lines of the date shipments are completed. The transportation ratesbusiness, the Company charges its customers consist of base transportation rates and fuel surcharge rates. The revenues earned and related direct freight expenses incurred from the Company’s base transportation services are recognized on a gross basis inreports revenue and in purchased transportation. Transportation revenue is recognized on a gross basis as it is the principal in the transaction. In addition, the Company ishas discretion in setting its service pricing and as a result, the primary obligor.amount earned for these services varies. The fuel surcharges billedCompany also has the discretion to customersselect its drivers and paidother vendors for the services provided to owner-operatorsits customers. These factors, discretion in setting prices and third party transportation providers are recordeddiscretion in selecting drivers and other vendors, further support reporting revenue on a net basis asgross basis. See additional discussion in the Company is not the primary obligor with regardsRecent Accounting Pronouncements section of this Note and in Note 10, Segment Reporting.
All expenses are recognized when incurred. Purchased transportations expenses are typically due to the fuel surcharges.owner-operator or third-party transportation provider once the delivery of a shipment and related services is completed. To ensure these expenses are properly recognized when incurred, these costs are recognized over time to coincide with the service performance.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents.
Inventories
Inventories of tires, replacement parts, supplies, and fuel for equipment are stated at the lower of cost or market utilizing the FIFO (first-in, first-out) method of determining cost. Inventories of tires and replacement parts are not material in the aggregate. Replacement parts are expensed when placed in service, while tires are capitalized and amortized over their expected life. Replacement parts and tires are included as a component of other operating expenses in the consolidated statements of comprehensive income.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
Property and Equipment
Property and equipment are stated at cost. Expenditures for normal repair and maintenance are expensed as incurred. Depreciation of property and equipment is calculated based upon the cost of the asset, reduced by its estimated salvage value, using the straight-line method over the estimated useful lives as follows:
|
| | |
| Buildings | | 30-40 years |
| Equipment | | 3-10 years |
| Leasehold improvements | | Lesser of Useful Life or Initial Lease Term |
Depreciation expense for each of the three years ended December 31, 20152018, 20142017 and 20132016 was $26,252, $22,616$33,044, $30,862 and $17,81728,088 respectively.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is recognized on assets classified as held and used when the sum of undiscounted estimated cash flows expected to result from the use of the asset is less than the carrying value. If such measurement indicates a possible impairment, the estimated fair value of the asset is compared to its net book value to measure the impairment charge, if any. When the criteria have been met for long-lived assets to be classified as held for sale, the assets are recorded at the
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
lower of carrying value or fair market value (less selling costs). See additional discussion in Note 2, Acquisition, Goodwill and Other Long-Lived Assets.
Operating Leases
Certain operating leases include rent increases during the initial lease term. For these leases, the Company recognizes the related rental expenses on a straight-line basis over the term of the lease, which includes any rent holiday period, and records the difference between the amounts charged to operations and amount paid as rent as a rent liability. Leasehold improvements are amortized over the shorter of the estimated useful life or the initial term of the lease. Reserves for idle facilities are initially measured at the fair value of the portion of the lease payments associated with the vacated facilities, reduced by estimated sublease rentals. See Recent Accounting Pronouncements for expected changes to lease accounting. In addition, see further discussion in Note 6, Operating Leases.
Business Combinations
Upon the acquisition of a business, the fair value of the assets acquired and liabilities assumed must be estimated. This requires judgments regarding the identification of acquired assets and liabilities assumed, some of which may not have been previously recorded by the acquired business, as well as judgments regarding the valuation of all identified acquired assets and assumed liabilities. The assets acquired and liabilities assumed are determined by reviewing the operations, interviewing management and reviewing the financial and contractual information of the acquired business. Consideration is typically paid in the form of cash paid upon closing or contingent consideration paid upon satisfaction of a future obligation. If contingent consideration is included in the purchase price, the Company values that consideration as of the acquisition date and it is recorded to goodwill.
Once the acquired assets and assumed liabilities are identified, the fair values of the assets and liabilities are estimated using a variety of approaches that require significant judgments. For example, intangible assets are typically valued using a discounted cash flow (“DCF”) analysis, which requires estimates of the future cash flows that are attributable to the intangible asset. A DCF analysis also requires significant judgments regarding the selection of discount rates that are intended to reflect the risks that are inherent in the projected cash flows, the determination of terminal growth rates, and judgments about the useful life and pattern of use of the underlying intangible asset. The valuation of acquired property, plant and equipment requires judgments about current market values, replacement costs, the physical and functional obsolescence of the assets and their remaining useful lives. A failure to appropriately assign fair values to acquired assets and assumed liabilities could significantly impact the amount and timing of future depreciation and amortization expense, as well as significantly overstate or understate assets or liabilities.
Goodwill and Other Intangible Assets
Goodwill is recorded at cost based on the excess of purchase price over the fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized but the Company conducts an annual (or more frequently if circumstances indicate possible impairment) impairment test of goodwill for each reportable segmentreporting unit at June 30 of each year. Examples of such events or circumstances could include a significant change in business climate or a loss of significant customers. Other intangible assets are amortized over their useful lives. Results of impairment testing are described in Note 2, Acquisition, Goodwill and Other Long-Lived Assets.
Acquisitions are accounted for using the purchase method. The definite-lived intangible assets of the Company resulting from acquisition activity and the related amortization are described in Note 2, Acquisition, Goodwill and Other Long-Lived Assets.
Software Development
Costs related to software developed or acquired for internal use are expensed or capitalized based on the applicable stage of software development and any capitalized costs are amortized over their estimated useful life. The Company typically uses a five-year straight line amortization for the capitalized amounts of software development costs. At December 31, 20152018 and 20142017 the Company had $14,866$21,492 and $13,24619,567, respectively, of capitalized software development costs included in property and equipment. Accumulated amortization on these assets was $10,584$15,611 and $9,06513,706 at December 31, 20152018 and 20142017, respectively. Included in depreciation expense is amortization of capitalized software development costs. Amortization of
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
capitalized software development for the years ended December 31, 20152018, 20142017 and 20132016 was $1,526,$1,905, $1,4641,816 and $1,2281,658 respectively.
As of December 31, 20152018 the estimated amortization expense for the next five years of capitalized software development costs is as follows:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
| | | 2016 | $ | 1,439 |
| |
| 2017 | 1,119 |
| |
| 2018 | 861 |
| |
| 2019 | 569 |
| $ | 1,605 |
|
| 2020 | 220 |
| 1,263 |
|
| 2021 | | 932 |
|
| 2022 | | 653 |
|
| 2023 | | 382 |
|
| Total | $ | 4,208 |
| $ | 4,835 |
|
Income Taxes
The Company accounts for income taxes using the liability method, whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in interest expense and operating expenses, respectively.
See the "Recent Accounting Pronouncements" for additional discussion of new income tax related accounting pronouncements.in the Note 5, Income Taxes.
Net Income Per Share
The Company calculates net income per share in accordance with the FASBFinancial Accounting Standards Board ("FASB") Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, Earnings per Share (the “FASB Codification(“ASC 260”). Under the FASB CodificationASC 260, basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. The Company's non-vested shares contain non-forfeitable rights to dividends and are therefore considered participating securities for purposes of computing net income per share pursuant to the two-class method. Net income allocated to participating securities was $369$881 in 2018, $700 in 2017 and $404$210 in 2015 and 2014, respectively.2016. Net losses are not allocated to participating securities in periods in which the Company incurs a net loss. Diluted net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding after considering the additional dilution from any dilutive non-participating securities. The Company's non-participating securities include options and performance shares.
Share-Based Payments
The Company’s general practice has been to make a single annual grant of share-based compensation to key employees and to generally make other grants only in connection with new employment or promotions. In addition, the Company makes annual grants to non-employee directors in conjunction with their annual election to our Board of Directors or at the time of their appointment to the Board of Directors. For employees, the Company has granted stock options, non-vested shares and performance shares. For non-employee directors, the Company has generally issued non-vested shares during the years ended December 31, 2015, 2014 and 2013.shares.
Stock options typically expire seven years from the grant date and vest ratably over a three-year period. The share-based compensation for stock options is recognized net of estimated forfeitures, ratably over the requisite service period, or vesting period. Based on the Company’s historical experience, forfeitures have been estimated. The Company uses the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
The following table contains the weighted-average assumptions used to estimate the fair value of options granted. These assumptions are highly subjective and changes in these assumptions can materially affect the fair value estimate.
| |
| December 31,
2015 |
| December 31,
2014 |
| December 31,
2013 | December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Expected dividend yield | 1.0 | % |
| 1.2 | % |
| 1.2 | % | 1.1 | % |
| 1.3 | % |
| 1.0 | % |
| Expected stock price volatility | 33.3 | % |
| 38.5 | % |
| 43.7 | % | 24.4 | % |
| 28.5 | % |
| 28.9 | % |
| Weighted average risk-free interest rate | 1.6 | % |
| 1.6 | % |
| 0.9 | % | 2.7 | % |
| 2.0 | % |
| 1.3 | % |
| Expected life of options (years) | 5.9 |
|
| 5.3 |
|
| 5.2 |
| 6.1 |
|
| 5.9 |
|
| 5.8 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
The fair value of non-vested shares issued were estimated using the closing market prices for the business day of the grant. The share-based compensation for the non-vested shares is recognized net of estimated forfeitures, ratably over the requisite service period or vesting period. Forfeitures are estimated based on our historical experience, but will be adjusted for future changes in forfeiture experience.
The fair value of the performance shares was estimated using a Monte Carlo simulation. The share-based compensation for performance shares are recognized net of estimated forfeitures, ratably over the requisite service period, or vesting period. The following table contains the weighted-average assumptions used to estimate the fair value of performance shares granted. These assumptions are highly subjective and changes in these assumptions can materially affect the fair value estimate.
| |
| | | Year ended | | | | | Year ended | | |
| December 31,
2015 | | December 31,
2014 |
| December 31,
2013 | December 31,
2018 | | December 31,
2017 |
| December 31,
2016 |
| Expected stock price volatility | 23.5 | % | | 32.5 | % |
| 34.5 | % | 24.3 | % | | 24.7 | % |
| 22.3 | % |
| Weighted average risk-free interest rate | 1.0 | % | | 0.7 | % |
| 0.4 | % | 2.2 | % | | 1.4 | % |
| 0.8 | % |
Under the 2005 Employee Stock Purchase Plan (the “ESPP”), which has been approved by shareholders, the Company is authorized to issue shares of Common Stock to eligible employees. These shares may be issued at a price equal to 90% of the lesser of the market value on the first day or the last day of each six-month purchase period. Common Stock purchases are paid for through periodic payroll deductions and/or up to two large lump sum contributions. The Company recognizerecognizes share-based compensation on the date of purchase based on the difference between the purchase date fair market value and the employee purchase price. See Note 4, Shareholders' Equity, Stock Options and Net Income per Share for additional discussion.
Recent Accounting Pronouncements
In November 2015,January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): "Simplifying the Accounting Standard Update No. 2015-17, "Balance Sheet Classificationfor Goodwill Impairment." Under the new standard, a goodwill impairment loss will be measured at the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of Deferred Taxes", an update to ASC 740, Income Taxes (“Update”). Current GAAPgoodwill, thus no longer requiring the two-step method. The guidance requires an entity to separate deferred income tax liabilitiesprospective adoption and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assetswill be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for annual periodsor interim goodwill impairment tests in fiscal years beginning after December 15, 2017, and interim periods within those annual periods. The FASB also decided to permit earlier application by all entities as2019. Early adoption of the beginning of anythis guidance is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this guidance as of January 1, 2018 and do not expect any impact to the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which will require lessees to recognize a right-of-use asset with a corresponding lease liability on their balance sheet for most leases classified as operating leases under previous guidance. Lessors will be required to recognize a net lease investment for most leases. Additional qualitative and quantitative disclosures will also be required. We adopted this standard as of January 1, 2019 and therefore, the full impact of this new guidance will be reflected in the Company’s first quarter 2019 financial statements and disclosures. As a result, changes to processes and internal controls to meet the standard’s reporting period.and disclosure requirements have been implemented.
We elected several of the practical expedients permitted under the transition guidance within the new standard. The FASB further provides that this Update may be appliedpractical expedients we elected will allow us to all deferred tax liabilitiescarryforward our conclusions over whether any expired or existing contracts contain a lease, to carryforward historical lease classification, and assets retrospectively to all periods presented. The Company chosecarryforward our evaluation of initial direct costs for any existing leases. In addition, we elected the practical expedients to adopt the Update retrospectively for the year ended combine lease and non-lease components and to keep leases
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20152018
(In thousands, except share and reclassified $2,496 from net current deferred income tax assets to net non-current deferred income tax liabilitiesper share data)
with an initial term of 12 months or less off the balance sheet. For leases with an initial term of 12 months or less, we will recognize the corresponding lease expense on a straight-line basis over the lease term.
We applied the transition requirements as of December 31, 2014.January 1, 2019 and will not present comparative financial statements as allowed per the guidance. In addition, we will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the first quarter 2019 financial statements as allowed per the guidance. We estimate our adoption of the standard will result in the recognition of right-of-use assets and corresponding lease liabilities of approximately $130,000 to $150,000 in the first quarter 2019 financial statements. This asset and corresponding liability could vary to the extent the Company enters into new leases during the quarter. This standard is not expected to materially affect our operating results or liquidity.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provided guidance on revenue from contracts with customers that will supersedesuperseded most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017.2017 and we adopted this guidance as of January 1, 2018. The guidance permits the use of either a full retrospective or modified retrospective adoption approach with a cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
2. Acquisitions, Goodwill and Other Long-Lived Assets
Acquisition of Towneadjustment recorded in either scenario as necessary upon transition.
On March 9, 2015,As permitted by the guidance, we implemented the use of full retrospective presentation, which required the Company acquired CLP Towne Inc. (“Towne”) pursuantto adjust each prior reporting period presented to conform to the Agreementcurrent year presentation. While evaluating principal versus agent relationships under the new standard, we determined that we will transition the fuel surcharge revenue stream from an agent to principal relationship. This caused this revenue stream and Planassociated costs to be recognized on a gross basis that have historically been recognized on a net basis.
In addition, based on a review of Merger (the “Merger Agreement”) resulting in Towne becomingour customer shipping arrangements, we have concluded that revenue recognition for our performance obligations should be over time. This is because the customer will simultaneously receive and consume the benefits of our services as we perform them over the related service period. A performance obligation is performed over time if an indirect, wholly-owned subsidiary ofentity determines that another entity would not need to substantially reperform the Company. Forwork completed to date if another entity were to fulfill the acquisition of Towne,remaining performance obligation to the Company paid $61,878 in net cashapplicable customer. Applying this guidance to our shipping performance obligations, if we were to move a customer’s freight partially to its destination but were unable to complete the remaining obligation, a replacement vendor would only have to complete the transit as opposed to initiating at shipment origin. Therefore, we believe our customers simultaneously receive and assumed $59,544 in debtconsume the benefits we provide and capital leases. With the exception of assumed capital leases, the assumed debt was immediately paid in full after funding of the acquisition. Of the total aggregate cash consideration paid, $16,500 was placed into an escrow account, with $2,000 of such amount being available to settle any shortfall in Towne’s net working capital and with $14,500 of such amount being available for a period of time to settle certain possible claims against Towne’s common stockholders for indemnification. To the extent the escrow fund is insufficient, certain equity holders have agreed to indemnify Forward Air, subject to certain limitations set forth in the Merger Agreement, as a result of inaccuracies in or breaches of certain of Towne’s representations, warranties, covenants and agreements and other matters. Forward Air financed the Merger Agreement with a $125,000 2 year term loan available under the senior credit facility discussed in note 5.
Towne was a full-service trucking provider offering time-sensitive less-than-truckload shipping, full truckload service, an extensive cartage network, container freight stations and dedicated trucking. Towne’s airport-to-airport network provided scheduled deliveries to 61 service points. A fleet of approximately 525 independent contractor tractors provided the line-haul between those service points. The acquisition of Towne provides the Forward Air segment with opportunities to expand its service points and service offerings, such as pick up and delivery services. Additional benefits of the acquisition include increased linehaul network shipping density and a significant increase to our owner operator fleet, both of which are key to the profitability of Forward Air.
Towne had 2014 revenue of approximately $230,000. The assets, liabilities, and operating results of Towne have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Forward Air reportable segment. As the operations of Towne were fully integrated into the existing Forward Air network and operations, the Company is not able to providewe will recognize the revenue and operating results from Towne included infor each shipment over the consolidated revenue and results since the datecourse of acquisition.
Effective with the acquisition of Towne, the Company immediately entered into a restructuring plan to remove duplicate costs, primarily in the form of, but not limited to salaries, wages and benefits and facility leases. As a result of these plans, during the year ended December 31, 2015 the Company recognized expense of $2,624 and $11,722 for severance obligations and reserves for idle facilities, respectively. The expenses associated with the severance obligations and idle facilities were recognized in the salaries, wages and benefits and operating lease line items, respectively. The Company also incurred expense of $9,197 for various other integration and transaction related costs which are largely included in other operating expenses.
The Company vacated certain duplicate facilities under long-term non-cancelable leases and recorded contract termination costs. As of December 31, 2015, the Company reserve for remaining payments on vacated facilities was $6,731. The following is a summary of the vacated facility reserve:
|
| | | |
| Acquired Towne Liability | $ | 1,355 |
|
| Reserves for vacated facilities | 11,722 |
|
| Payments | (6,346 | ) |
| Balance at December 31, 2015 | $ | 6,731 |
|
Acquisition of CST
On February 2, 2014, the Company acquired all of the outstanding capital stock of Central States Trucking Co. and Central States Logistics, Inc. (collectively referred to as “CST”). Pursuant to the terms of the Agreement and concurrently with the execution of the Agreement, the Company acquired all of the outstanding capital stock of CST in exchange for $82,998 in net cash and $11,215 in assumed debt. With the exception of capital leases, the assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using the Company's cash on hand. Under the purchase
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
agreement, $10,000 of the purchase price was paid into an escrow account to protect the Company against potential unknown liabilities. The amount held in escrow was remitted to the sellers in February 2015.
CST provides industry leading container and intermodal drayage services primarily within the Midwest region of the United States. CST also provides dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. The acquisition of CST provides us with a scalable platform for which to enter the intermodal drayage space and thereby continuing to expand and diversify our service offerings. As part of our strategy to scale CST's operations, in September 2014, CST acquired certain assets of Recob Great Lakes Express, Inc. ("RGL") for $1,350 and in November 2014, acquired Multi-Modal Trucking, Inc. and Multi-Modal Services, Inc. (together referred to as "MMT") for approximately $5,825 in cash and $1,000 in available earn out. The MMT earn out istime based on acquired operations exceeding 2015 earnings goals, and the earn out was fully accrued aspercentage of December 31, 2014. The acquisition of RGL and MMT's assets provided an opportunity for CST to expand into additional Midwest markets.
The Company incurred total transaction costsdays in transit. All performance obligations related to the acquisitionsCompany's services are completed within twelve months or less. Therefore, the Company has elected the practical expedient permitted under this guidance to not disclose the portion of approximately $900, which were expensed duringrevenue related to the year ended December 31, 2014, in accordance with U.S. GAAP. These transaction costs were primarily included in "Other operating expenses" inperformance obligations that are unsatisfied, or partially unsatisfied, as of the consolidated statementsend of comprehensive income.the reporting period.
The assets, liabilities,Our revenue from contracts with customers is disclosed within our four reportable segments: Expedited LTL, TLS, Intermodal and Pool. This is consistent with our disclosures in earnings releases and annual reports and with the information regularly reviewed by the chief operating results of CST, RGL and MMT ("CST acquisitions") have been included in the Company's consolidateddecision maker for evaluating financial statements from the dates of acquisition and have been assigned to the Forward Air reportable segment. The results of CST, RGL and MMT operations are reflected in the Company's consolidated statements of comprehensive income for the year ended December 31, 2014 from the dates of acquisition are as follows (in thousands, except per share data):performance.
|
| | | |
| Dates of Acquisition to December 31, 2014 |
| Logistics revenue | $ | 52,061 |
|
| Other revenues | 20,253 |
|
| Operating income | 7,525 |
|
| Net income | 4,586 |
|
| Net income per share |
|
| Basic | $ | 0.15 |
|
| Diluted | $ | 0.15 |
|
Acquisition of TQI
On March 4, 2013, the Company entered into a Stock Purchase Agreement ("Agreement") with all of the shareholders of TQI to acquire 100% of the outstanding stock. Pursuant to the terms of the Agreement and concurrently with the execution of the Agreement, the Company acquired all of the outstanding capital stock of TQI in exchange for $45,328 in net cash, $20,113 in assumed debt and an available earn-out of up to $5,000. The assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using the Company's cash on hand. Under the purchase agreement, $4,500 of the purchase price was paid into an escrow account to protect the Company against potential unknown liabilities. The amount held in escrow was remitted to the sellers in September 2014.
Pursuant to the terms of the Agreement, the Company could have paid the former shareholders of TQI additional cash consideration from $0 to $5,000 if certain earnings before interest, taxes, depreciation and amortization ("EBITDA") goals were exceeded. The ultimate payout was based on the level by which TQI operating results exceed specified thresholds as defined by the Agreement in both 2013 and 2014. At the time of acquisition the Company recognized an estimated earn-out liability of $615. The fair value of the earn-out liability (level 3) was estimated using an income approach based on the present value of probability-weighted amounts payable under a range of performance scenarios for 2013 and 2014 and a discount rate of 10.9%. However, based on the most probable outcomes the estimated earn-out liability was reduced to $0 and recognized as a gain in our results from operations during the fourth quarter of 2013. TQI's 2014 EBITDA performance did not exceed the goals established by the Agreement and therefore no earn out payments were required.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20152018
(In thousands, except share and per share data)
The Company incurred total transaction costs related toimpact of implementing this guidance using the acquisition of approximately $943, which was expensed duringfull retrospective approach on the year ended December 31, 2013, in accordance with U.S. GAAP. These transaction costs were primarily included in "Other operating expenses" expense in the consolidatedprior period balance sheet and statements of comprehensive income.income are shown in the "As Adjusted" columns of the following tables:
|
| | | | | | | | | | | | |
| | | As of December 31, 2017 |
| | | (In thousands) |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| Balance Sheet: | | | | | | |
| Accounts receivable, net | | $ | 143,041 |
| | $ | 4,907 |
| | $ | 147,948 |
|
| Accounts payable | | 24,704 |
| | 6,019 |
| | 30,723 |
|
| Deferred income taxes | | 29,403 |
| | (323 | ) | | 29,080 |
|
| Retained earnings | | 337,848 |
| | (790 | ) | | 337,058 |
|
| | | | | | | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, 2017 |
| | | (In thousands, except per share data) |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| Statement of Comprehensive Income: | | | | | | |
| Operating revenue | | | | | | |
| Expedited LTL | | $ | 619,779 |
| | $ | 36,059 |
| | $ | 655,838 |
|
| Truckload Premium Services | | 179,320 |
| | 22,432 |
| | 201,752 |
|
| Intermodal | | 148,907 |
| | 5,777 |
| | 154,684 |
|
| Pool Distribution | | 164,221 |
| | 4,262 |
| | 168,483 |
|
| Eliminations and other operations | | (11,411 | ) | | — |
| | (11,411 | ) |
| Consolidated operating revenue | | 1,100,816 |
| | 68,530 |
| | 1,169,346 |
|
| | | | | | | |
| Operating expenses | | 992,144 |
| | 68,445 |
| | 1,060,589 |
|
| Income from operations | | 108,672 |
| | 85 |
| | 108,757 |
|
| Income taxes | | 20,131 |
| | 151 |
| | 20,282 |
|
| Net income | | 87,321 |
| | (66 | ) | | 87,255 |
|
| Diluted earnings per share | | $ | 2.89 |
| | $ | — |
| | $ | 2.89 |
|
The acquisition allows the Company to expandF-16
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and diversify its complimentary truckload operations while maintaining its goal of offering high-value added services. per share data)
|
| | | | | | | | | | | | |
| | | Year ended December 31, 2016 |
| | | (In thousands, except per share data) |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| Statement of Comprehensive Income: | | | | | | |
| Operating revenue | | | | | | |
| Expedited LTL | | $ | 570,778 |
| | $ | 25,761 |
| | $ | 596,539 |
|
| Truckload Premium Services | | 164,272 |
| | 16,735 |
| | 181,007 |
|
| Intermodal | | 103,671 |
| | 1,993 |
| | 105,664 |
|
| Pool Distribution | | 148,661 |
| | 3,191 |
| | 151,852 |
|
| Eliminations and other operations | | (4,852 | ) | | — |
| | (4,852 | ) |
| Consolidated operating revenue | | 982,530 |
| | 47,680 |
| | 1,030,210 |
|
| | | | | | | |
| Operating expenses | | 922,551 |
| | 47,956 |
| | 970,507 |
|
| Income from operations | | 59,979 |
| | (276 | ) | | 59,703 |
|
| Income taxes | | 30,716 |
| | (111 | ) | | 30,605 |
|
| Net income | | 27,670 |
| | (165 | ) | | 27,505 |
|
| Diluted earnings per share | | $ | 0.90 |
| | $ | — |
| | $ | 0.90 |
|
2. Acquisitions, Goodwill and Other Long-Lived Assets
Intermodal Acquisitions
As part of the Company's strategy to expand its Intermodal operations, in January 2016, the Company acquired certain assets of Ace Cargo, LLC ("Ace") for $1,700, and in August 2016, the Company acquired certain assets of Triumph Transport, Inc. and Triumph Repair Service, Inc. (together referred to as “Triumph”) for $10,100 and an earnout of $1,250 paid in September 2017. These acquisitions provided an opportunity for our Intermodal operations to expand into additional Midwest markets.
In May 2017, the Company acquired certain assets of Atlantic Trucking Company, Inc., Heavy Duty Equipment Leasing, LLC, Atlantic Logistics, LLC and Transportation Holdings, Inc. (together referred to as “Atlantic” in this note) for $22,500 and an earnout of $135 paid in the assumed liabilitiesfourth quarter of TQI2018. The acquisition was funded by a combination of cash on hand and funds from our revolving credit facility. Atlantic was a liability for unrecognized tax benefits for $1,120. The liability is attributable to TQI not filing income tax returns in all jurisdictions in which it operated. The $1,120 consistsprivately held provider of unrecognized tax benefits of $853intermodal, drayage and related penaltiesservices headquartered in Charleston, South Carolina. It also has terminal operations in Atlanta, Charlotte, Houston, Jacksonville, Memphis, Nashville, Norfolk and interest of $174 and $93, respectively.Savannah. These locations allow Intermodal to significantly expand its footprint in the southeastern region. In accordance with the Agreement, the former shareholders of TQI have indemnifiedOctober 2017, the Company against this tax exposure. As a result,acquired certain assets of Kansas City Logistics, LLC ("KCL") for $640 and an earnout of $100 paid in the second quarter of 2018. KCL provides CST with an expanded footprint in the Kansas and Missouri markets.
In July 2018, the Company acquired certain assets of Multi-Modal Transport Inc. ("MMT") for $3,737 and in October 2018, the Company acquired certain assets of Southwest Freight Distributors (“Southwest”) for $16,250. Southwest is a Dallas, Texas based premium drayage provider. The MMT acquisition provides Intermodal with an expanded footprint in the Minnesota, North Dakota, South Dakota, Iowa and Wisconsin markets, and the Southwest acquisition provides an expanded footprint in Texas. Both MMT and Southwest also recognized an offsetting receivable net of the estimated federal tax benefit for $728.provide access to several strategic customer relationships.
The assets, liabilities, and operating results of TQIthese collective acquisitions have been included in the Company's consolidated financial statements from the datetheir dates of acquisition and have been assigned to a new TQIincluded in the Intermodal reportable segment. The results
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data):
|
| | | |
| March 4, 2013 to December 31, 2013 |
| Logistics revenue | $ | 41,842 |
|
| Operating income | 3,600 |
|
| Net income | 1,961 |
|
| Net income per share |
|
| Basic | $ | 0.07 |
|
| Diluted | $ | 0.06 |
|
Allocations of Purchase Prices
The following table presents the allocations of the Towne, CST, RGL, MMT and TQIpreviously discussed purchase prices to the assets acquired and liabilities assumed based on their estimated fair values and resulting residual goodwill (in thousands):
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
| |
| Towne | CST | RGL & MMT | TQI | Ace & Triumph | Atlantic | KCL | MMT | Southwest |
| March 9, 2015 | February 2, 2014 | September & November 2014 | March 4, 2013 | January & August 2016 | May 7, 2017 | October 22, 2017 | July 25, 2018 | October 28, 2018 |
| Tangible assets: | |
|
|
|
|
|
|
|
| |
| Accounts receivable | $ | 24,068 |
| $ | 9,339 |
| $ | — |
| $ | 5,639 |
| |
| Prepaid expenses and other current assets | 2,916 |
| 101 |
| — |
| 1,093 |
| |
| Property and equipment | 2,095 |
| 2,132 |
| 287 |
| 5,103 |
| $ | 1,294 |
| $ | 1,821 |
| $ | 223 |
| $ | 81 |
| $ | 933 |
|
| Other assets | 614 |
| 35 |
| — |
| 728 |
| |
| Deferred income taxes | — |
| — |
| — |
| 947 |
| |
| Total tangible assets | 29,693 |
| 11,607 |
| 287 |
| 13,510 |
| 1,294 |
| 1,821 |
| 223 |
| 81 |
| 933 |
|
| Intangible assets: | |
|
|
|
|
|
|
|
| |
| Non-compete agreements | — |
| 930 |
| 92 |
| 470 |
| 139 |
| 1,150 |
| 6 |
| 43 |
| 650 |
|
| Trade name | — |
| 500 |
| — |
| 1,000 |
| |
| Customer relationships | 66,000 |
| 36,000 |
| 3,590 |
| 22,300 |
| 5,335 |
| 13,400 |
| 234 |
| 1,659 |
| 9,200 |
|
| Goodwill | 61,197 |
| 51,710 |
| 4,206 |
| 45,164 |
| 6,282 |
| 6,719 |
| 277 |
| 1,954 |
| 5,467 |
|
| Total intangible assets | 127,197 |
| 89,140 |
| 7,888 |
| 68,934 |
| 11,756 |
| 21,269 |
| 517 |
| 3,656 |
| 15,317 |
|
| Total assets acquired | 156,890 |
| 100,747 |
| 8,175 |
| 82,444 |
| 13,050 |
| 23,090 |
| 740 |
| 3,737 |
| 16,250 |
|
| |
|
| |
| Liabilities assumed: | |
|
| |
| Current liabilities | 28,920 |
| 6,535 |
| 1,000 |
| 4,725 |
| — |
| 590 |
| 100 |
| — |
| — |
|
| Other liabilities | 3,886 |
| — |
| — |
| 1,735 |
| 1,250 |
| — |
| — |
| — |
| — |
|
| Debt and capital lease obligations | 59,544 |
| 11,215 |
| — |
| 20,113 |
| |
| Deferred income taxes | 2,662 |
| — |
| — |
| 10,543 |
| |
| Total liabilities assumed | 95,012 |
| 17,750 |
| 1,000 |
| 37,116 |
| 1,250 |
| 590 |
| 100 |
| — |
| — |
|
| Net assets acquired | $ | 61,878 |
| $ | 82,997 |
| $ | 7,175 |
| $ | 45,328 |
| $ | 11,800 |
| $ | 22,500 |
| $ | 640 |
| $ | 3,737 |
| $ | 16,250 |
|
The acquired definite-livedefinite-lived intangible assets have the following useful lives:
|
| | | | | | | | | |
| Useful Lives |
| TowneAce & Triumph |
| Atlantic | | CSTKCL |
| RGL & MMT |
| TQISouthwest |
| Customer relationships | 20 years | | 15 years |
| 15 years |
| 15 years | | 15 years | | 10 years |
Non-competes | - | Non-compete agreements | 5 years |
| 5 years |
| 5 years |
Trade names | - | | 2 years |
| -4 years |
| 53 years |
The fair value of the non-compete agreements and customer relationships assetsand non-compete agreements were estimated using an income approach (level 3). Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculateestimate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes thatbelieved the level and timing of cash flows appropriately reflectreflected market participant assumptions. The fair value of the acquired trade names were estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be paid if the Company did not own the applicable names and had to license the trade name. The Company derived the hypothetical royalty income from the projected revenues of CST and TQI. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.
The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if the Towne, CST and TQI acquisitions occurred as of January 1, 2013 (in thousands, except per share data).
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2015 | | December 31,
2014 | | December 31,
2013 |
| Operating revenue | $ | 993,352 |
| | $ | 1,017,005 |
| | $ | 964,673 |
|
| Income from operations | 79,465 |
| | 89,650 |
| | 67,529 |
|
| Net income | 53,096 |
| | 56,092 |
| | 30,363 |
|
| Net income per share | | |
| |
|
| Basic | $ | 1.72 |
| | $ | 1.82 |
| | $ | 1.00 |
|
| Diluted | $ | 1.70 |
| | $ | 1.79 |
| | $ | 0.98 |
|
Goodwill
The following is a summary of the changes in goodwill for the year ended December 31, 2015. Approximately $99,248 of goodwill, not including the goodwill acquired with the TowneCompany conducted its annual impairment assessments and TQI acquisitions, is deductible for tax purposes.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Forward Air |
| FASI |
| TQI |
| Total |
|
| Accumulated |
|
| Accumulated |
|
| Accumulated |
|
|
| Goodwill | Impairment |
| Goodwill | Impairment |
| Goodwill | Impairment |
| Net |
| Beginning balance, December 31, 2014 | $ | 93,842 |
| $ | — |
|
| $ | 12,359 |
| $ | (6,953 | ) |
| $ | 45,164 |
| $ | — |
|
| $ | 144,412 |
|
| Towne acquisition | 61,197 |
| — |
|
| — |
| — |
|
| — |
| — |
|
| 61,197 |
|
| Ending balance, December 31, 2015 | $ | 155,039 |
| $ | — |
|
| $ | 12,359 |
| $ | (6,953 | ) |
| $ | 45,164 |
| $ | — |
|
| $ | 205,609 |
|
The Company conducts an annual (or more frequently if circumstances indicate possible impairment) impairment testtests of goodwill for each reporting unit atas of June 30, of each year.2018. The first step of the goodwill impairment test is the Company assessesCompany's assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, including goodwill. When performing the qualitative assessment, the Company considers the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performance of each reporting unit, litigation and new legislation. If based on the qualitative assessments, the Company believes it more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, or periodically as deemed appropriate by management, the Company will prepare an estimation of the respective reporting unit's fair value utilizing a quantitative approach.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
If a quantitative fair value estimation is required, the Company calculatesestimates the fair value of the applicable reportablereporting units usingbased on a combination of discounted projected cash flows anda market valuations forapproach, which considers comparable companies, and the income approach, using a discounted cash flow model, as of the valuation date. Under the market approach, valuation multiples are derived based on a selection of comparable companies and applied to projected operating data for each reporting unit to arrive at an indication of fair value. Under the income approach, the discounted cash flow model determines fair value based on the present value of management prepared projected cash flows over a specific projection period and a residual value related to future cash flows beyond the projection period. Both values are discounted using a rate which reflects our best estimate of the weighted average cost of capital of a market participant, and is adjusted for appropriate risk factors. The Company'sCompany believes the most sensitive estimate used in the income approach is the management prepared projected cash flows. Consequently, as necessary the Company performs sensitivity tests on select reporting units to ensure reductions of the present value of the projected cash flows by at least 10% would not adversely impact the results of the goodwill impairment tests. Historically, the Company has equally weighted the income and market approaches as it believed the quality and quantity of the collected information were approximately equal. The inputs intoused in the fair value calculationsestimates for goodwill are classified within level 3 of the fair value hierarchy as defined in the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“the FASB Codification”).
If thisthe estimation of fair value indicates thatthe impairment potentially exists, the Company will then measure the amount of the impairment, if any. Goodwill impairment exists when the calculatedestimated implied fair value of goodwill is less than its carrying value. Changes in strategy or market conditions could significantly impact these fair value estimates and require adjustments to recorded asset balances.
Goodwill is allocated to reporting units that are expected to benefit from the business combinations generating the goodwill. As of June 30, 2018, the Company had five reporting units - Expedited LTL, TLX Forward Air, Intermodal, Pool Distribution and Total Quality, Inc. ("TQI"). The Company conducted its annual impairment assessmentsTLX Forward Air and tests ofthe TQI reporting units were assigned to the Truckload Premium Services reportable segment. Currently, there is no goodwill assigned to the TLX Forward Air reporting unit. Our 2018 calculations for each reporting unitLTL, Pool Distribution, Intermodal and TQI indicated that, as of June 30, 20152018, the fair value of each reporting unit exceeded their carrying value by approximately 349.0%, 182.0%, 73.0% and 36.0%, respectively.
For our June 30, 2018 analysis, the significant assumptions used for the income approach were projected net cash flows and the following discount and long-term growth rates:
|
| | | | | | | | | | | |
| | Expedited LTL | | Pool | | Intermodal | | TQI |
| Discount rate | 12.0 | % | | 15.5 | % | | 14.0 | % | | 16.5 | % |
| Long-term growth rate | 4.0 | % | | 4.0 | % | | 4.0 | % | | 4.0 | % |
The estimates used to calculate the fair value of each reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of the reporting unit's fair value and goodwill impairment for the reporting unit.
As of July 1, 2018, the TLX Forward Air and TQI reporting units were fully integrated into the Truckload Premium Services reporting unit. As a result, as of December 31, 2018 we had four reporting units - Expedited LTL, Truckload Premium Services, Intermodal and Pool Distribution. The Company conducted a qualitative assessment as of December 31, 2018 and no indicators of impairment charges were required. Further,identified.
In 2016, due to the financial performance of the TQI performancereporting unit falling notably short of theprevious projections used in our June 2015 impairment assessment, the Company believed there were indicatorsreduced TQI's projected cash flows and as a result the estimate of TQI's fair value no longer exceeded the respective carrying value. Consequently, the Company recorded a goodwill impairment ascharge of $25,686 for the TQI reporting unit during the year ended December 31, 2015. Therefore,2016.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
The following is a summary of the changes in goodwill for Intermodal and the Company performed additional fair value calculations, but determined TQI's goodwill was not impaired as offor the year ended December 31, 2015.2018. There were no changes to Expedited LTL, Truckload Premium or Pool Distribution during the year ended December 31, 2018. Approximately $119,948 of goodwill is deductible for tax purposes.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expedited LTL |
| Truckload Premium |
| Pool Distribution | | Intermodal |
| Total |
|
| Accumulated |
|
| Accumulated |
|
| Accumulated | | | Accumulated |
|
|
| Goodwill | Impairment |
| Goodwill | Impairment |
| Goodwill | Impairment | | Goodwill | Impairment |
| Net |
| Ending balance, December 31, 2017 | $ | 97,593 |
| $ | — |
| | $ | 45,164 |
| $ | (25,686 | ) | | $ | 12,359 |
| $ | (6,953 | ) | | $ | 69,194 |
| $ | — |
| | $ | 191,671 |
|
| MMT acquisition | — |
| — |
| | — |
| — |
| | — |
| — |
| | 1,954 |
| — |
| | 1,954 |
|
| Southwest acquisition | — |
| — |
| | — |
| — |
| | — |
| — |
| | 5,467 |
| — |
| | 5,467 |
|
| Ending balance, December 31, 2018 | $ | 97,593 |
| $ | — |
| | $ | 45,164 |
| $ | (25,686 | ) | | $ | 12,359 |
| $ | (6,953 | ) | | $ | 76,615 |
| $ | — |
| | $ | 199,092 |
|
Other Acquired Intangibles
Through acquisitions, the Company acquired customer relationships, non-compete agreements and trade names having weighted-average useful lives of 15.9, 5.315.0, 4.5 and 4.0 years, respectively. Amortization expense on acquired customer relationships,
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
non-compete agreements and trade names for each of the years ended December 31, 2015, 20142018, 2017 and 20132016 was $10,905, $8,517$9,138, $10,193 and $5,762,$10,122, respectively.
As of December 31, 2015,2018, definite-lived intangible assets are comprised of the following:
| | | | Acquired Intangibles | | Accumulated Amortization | | Net Acquired Intangibles | Acquired Intangibles | | Accumulated Amortization | | Accumulated Impairment | | Net Acquired Intangibles |
| Customer relationships | $ | 174,240 |
| | $ | 47,773 |
| | $ | 126,467 |
| $ | 204,226 |
| | $ | 75,585 |
| | $ | 16,501 |
| | $ | 112,140 |
|
| Non-compete agreements | 3,272 |
| | 2,393 |
| | 879 |
| 5,102 |
| | 3,581 |
| | — |
| | 1,521 |
|
| Trade name | 1,500 |
| | 1,046 |
| | 454 |
| 1,500 |
| | 1,500 |
| | — |
| | — |
|
| Total | $ | 179,012 |
| | $ | 51,212 |
| | $ | 127,800 |
| $ | 210,828 |
| | $ | 80,666 |
| | $ | 16,501 |
| | $ | 113,661 |
|
As of December 31, 2017, definite-lived intangible assets are comprised of the following:
|
| | | | | | | | | | | | | | | |
| | Acquired Intangibles | | Accumulated Amortization | | Accumulated Impairment | | Net Acquired Intangibles |
| Customer relationships | $ | 193,209 |
| | $ | 66,986 |
| | $ | 16,501 |
| | $ | 109,722 |
|
| Non-compete agreements | 4,566 |
| | 3,074 |
| | — |
| | 1,492 |
|
| Trade name | 1,500 |
| | 1,467 |
| | — |
| | 33 |
|
| Total | $ | 199,275 |
| | $ | 71,527 |
| | $ | 16,501 |
| | $ | 111,247 |
|
The estimated amortization expense for the next five years on definite-lived intangible assets as of December 31, 20152018 is as follows:
| |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 | 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Customer relationships | $ | 10,156 |
|
| $ | 10,041 |
|
| $ | 8,536 |
|
| $ | 8,456 |
|
| $ | 8,456 |
| $ | 9,350 |
|
| $ | 9,350 |
|
| $ | 9,207 |
|
| $ | 9,007 |
|
| $ | 8,659 |
|
| Non-compete agreements | 318 |
|
| 310 |
|
| 220 |
|
| 30 |
|
| — |
| 516 |
|
| 486 |
|
| 438 |
|
| 81 |
|
| — |
|
| Trade name | 221 |
|
| 200 |
|
| 33 |
|
| — |
|
| — |
| |
| Total | $ | 10,695 |
|
| $ | 10,551 |
|
| $ | 8,789 |
|
| $ | 8,486 |
|
| $ | 8,456 |
| $ | 9,866 |
|
| $ | 9,836 |
|
| $ | 9,645 |
|
| $ | 9,088 |
|
| $ | 8,659 |
|
Additionally, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is recognized on assets classified as held and used when the sum of undiscounted estimated cash flows expected to result from the use of the asset is less than the carrying value. If such measurement indicates a possible impairment, the estimated fair value of the asset is compared to its net book value to measure the impairment charge, if any. In conjunction with the June 30, 2016 TQI goodwill impairment assessment the Company determined
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
there were indicators that TQI's customer relationship and non-compete intangible assets were impaired, as the undiscounted cash flows associated with the applicable assets no longer exceeded the related assets' net book values. The Company estimated the fair value of the customer relationship and non-compete assets using an income approach (level 3). Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To estimate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believed the level and timing of cash flows appropriately reflected market participant assumptions. As a result of these estimates the Company recorded an impairment charge of $16,501 related to TQI customer relationships during the year ended December 31, 2016. The Company incurred no such impairment charges during the years ended December 31, 2017 or 2018.
3. Debt and Capital Lease Obligations
Credit Facilities
On February 4, 2015,September 29, 2017, the Company entered into a five-year senior unsecured revolving credit facility (the “Facility”) with a maximum aggregate principal amount of $275,000, including a revolving credit facility of $150,000, and a term loan facility of $125,000. The revolving credit facility haswith a sublimit of $25,000$30,000 for letters of credit and a sublimit of $15,000$30,000 for swing line loans. The Facility may be increased by up to $100,000 to a maximum aggregate principal amount of $250,000 pursuant to the terms of the credit agreement, subject to the lenders’ agreement to increase their commitments or the addition of new lenders extending such commitments. Such increases to the Facility may be in the form of additional revolving credit facilityloans, term loans or a combination thereof, and are contingent upon there being no events of default under the Facility and satisfaction of other conditions precedent and are subject to the other limitations set forth in the credit agreement.
The Facility is scheduled to expiremature in February 2020 and may beSeptember 2022. The proceeds were used to refinance existing indebtedness of the Company and may also be used for working capital, capital expenditures and other general corporate purposes. The Facility refinanced the Company’s obligations for its unsecured credit facility under the credit agreement dated as of February 4, 2015, as amended, which was terminated as of the date of the new Facility.
Unless the Company elects otherwise under the credit agreement, interest on borrowings under the Facility areis based on the highest of (a) the federal funds rate (not less than 0%) plus 0.5%, (b) the administrative agent's prime rate and (c) the LIBOR Rate plus 1.0%, in each case plus a margin that can range from 0.1% to 0.6% with respect to the term loan facility and from 0.3% to 0.8% with respect to the revolving credit facilityFacility depending on the Company’s ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization, as set forth in the credit agreement. Payments of interest for each loan that is based on the LIBOR Rate are due in arrears on the last day of the interest period applicable to such loan (with interest periods of one, two or three months being available, at the Company’s option). Payments of interest on loans that are not based on the LIBOR Rate are due on the last day of each quarter ended March 31, June 30, September 30 and December 31 of each year. All unpaid amounts of principal and interest are due at maturity. As of December 31, 2018, the Company had $47,500 in borrowings outstanding under the revolving credit facility, $10,650 utilized for outstanding letters of credit and $91,850 of available borrowing capacity under the revolving credit facility. The interest rate on the outstanding borrowings under the facility was 4.1% at December 31, 2018.
The Facility contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, material judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default may result in, among other things, the termination of the Facilities, acceleration of repayment obligations and the exercise of remedies by the lenders with respect to the Company and its subsidiaries that are party to the Facility. The Facility also contains financial covenants and other covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of the required lenders, to engage in certain mergers, consolidations, asset sales, dividends and stock repurchases, investments, and other transactions or to incur liens or indebtedness in excess of agreed thresholds, as set forth in the credit agreement. As of December 31, 2015,2018, the Company had no borrowings outstanding under the revolving credit facility. At December 31, 2015, the Company had utilized $11,048 of availability for outstanding letters of credit and had $138,952 of available borrowing capacity outstanding under the revolving credit facility.
In conjunctionwas in compliance with the acquisition of Towne (see note 2), the Company borrowed $125,000 on the available term loan. The term loan is payable in quarterly installments of 11.1% of the original principal amount of the term loan plus accrued and unpaid interest, and matures in March 2017. The interest rate on the term loan was 1.5% at December 31, 2015. The remaining balance on the term loan was $83,338 as of December 31, 2015. Of that amount, $55,556 is a current liability as it will be paid during 2016. The remaining $27,782 will be paid in 2017.aforementioned covenants.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
Capital Leases
ThroughPrimarily through acquisitions, the Company assumed several equipment leases that met the criteria for classification as a capital lease. The leased equipment is being amortized over the shorter of the lease term or useful life.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
Property and equipment include the following amounts for assets under capital leases:
| |
| December 31,
2015 |
| December 31,
2014 | | December 31,
2018 | | December 31,
2017 |
| Equipment | $ | 635 |
|
| $ | 793 |
| | $ | 635 |
| | $ | 635 |
|
| Accumulated amortization | (105 | ) |
| (253 | ) | | (518 | ) | | (413 | ) |
| $ | 530 |
|
| $ | 540 |
| | $ | 117 |
| | $ | 222 |
|
Amortization of assets under capital leases is included in depreciation and amortization expense.
Future minimum payments, by year and in the aggregate, under non-cancelable capital leases with initial or remaining terms of one year or more consist of the following at December 31, 2015:2018:
|
| | | | |
| 2016 | | $ | 395 |
|
| 2017 | | 395 |
|
| 2018 | | 391 |
|
| 2019 | | 325 |
|
| 2020 | | 60 |
|
| Thereafter | | — |
|
| Total | | 1,566 |
|
| Less amounts representing interest | | 161 |
|
| Present value of net minimum lease payments (including current portion of $331) | | $ | 1,405 |
|
|
| | | | |
| 2019 | | $ | 325 |
|
| 2020 | | 60 |
|
| Total | | 385 |
|
| Less amounts representing interest | | 22 |
|
| Present value of net minimum lease payments (including current portion of $309) | | $ | 363 |
|
Interest Payments
InterestCash interest payments during 2015, 20142018, 2017 and 20132016 were $2,017, $495$1,841, $1,193 and $482,$1,770, respectively. No interest was capitalized during the years ended December 31, 2015, 20142018, 2017 and 2013.2016.
4. Shareholders' Equity, Stock Options and Net Income per Share
Preferred Stock
There are 5,000,000 shares of preferred stock with a par value of $0.01 authorized, but no shares have been issued to date.
Cash Dividends
During the fourth quarter of 2018, the Company’s Board of Directors declared a cash dividend of $0.18 per share of Common Stock. During the first, second and third quarters of 2018, each quarter of 20152017 and 2014, the Company’sfourth quarter of 2016, the Company's Board of Directors declared a cash dividend of $0.15 per share of Common Stock. During the first, second and third quarters of 2016, the Company's Board of Directors declared a cash dividend of $0.12 per share of Common Stock. During each quarter of 2013, the Company's Board of Directors declared a cash dividend of $0.10 per share of Common Stock. On February 9, 2016,5, 2019, the Company’s Board of Directors declared a $0.12$0.18 per share dividend that will be paid in the first quarter of 2016.2019. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.
Repurchase of Common Stock
On July 21, 2016, our Board of Directors approved a stock repurchase plan that authorized the repurchase of up to 3,000,000 shares of the Company's Common Stock. Under the 2016 repurchase plan, during the year ended December 31, 2018, we repurchased 1,109,270 shares of Common Stock for $66,126, or $59.61 per share. As of December 31, 2018, 709,395 shares remain that may be repurchased.
On February 5, 2019, our Board of Directors canceled the Company’s remaining 2016 share repurchase authorization and approved a stock repurchase authorization for up to 5,000,000 shares of the Company’s common stock. The amount and timing of any repurchases under the Company’s new repurchase authorization will be at such prices as determined by management of the Company. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. Stock repurchases may be commenced or suspended from time to time for any reason.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20152018
(In thousands, except share and per share data)
Repurchase of Common Stock
In July 2007, our Board of Directors approved a stock repurchase program (“Repurchase Plan”) for up to 2,000,000 shares of our common stock. During the year ended December 31, 2013, we repurchased 8,675 shares of common stock under the Repurchase Plan for $354, or $40.84 per share.
Also, on February 7, 2014, our Board of Directors approved a stock repurchase authorization for up to 2,000,000 shares of the Company’s common stock. In connection with this action, the board cancelled the Company’s Repurchase Plan. During the year ended December 31, 2015, we repurchased 422,404 shares of common stock for $19,992, or $47.33 per share. During the year ended December 31, 2014, we repurchased 881,979 shares of common stock for $39,972, or $45.32 per share. As of December 31, 2015, 695,617 shares remain that may be repurchased.
Share-Based Compensation
The Company had previously reserved for issuance 4,500,000 common shares under the 1999 Stock Option and Incentive Plan (the “1999 Plan”). Options issued under the 1999 Plan have seven to ten-year terms and vested over a one to five year period.
In May 2008,2016, with the approval of shareholders, the Company amended and restatedadopted the 1999 Stock Option and2016 Omnibus Incentive Compensation Plan (the “1999 Amended“Omnibus Plan”) to reserve for issuance an additional 3,000,0002,000,000 common shares, increasingshares. Options issued under these plans have seven year terms and vest over a two to three-year period. With the total numberadoption of reserved common sharesthe Omnibus Plan, no further awards will be issued under the 1999 Amended Plan to 7,500,000.Plan. As of December 31, 2015,2018, there were approximately 537,4001,266,219 shares remaining available for grant.grant under the Omnibus Plan.
Employee Activity - Options
The following table summarizes the Company’s employee stock options outstanding as of December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
| Outstanding |
|
|
| Exercisable |
|
|
|
|
|
| Weighted- |
| Weighted- |
|
|
| Weighted- |
| Range of |
| Number |
| Average |
| Average |
| Number |
| Average |
| Exercise |
| Outstanding |
| Remaining |
| Exercise |
| Exercisable |
| Exercise |
| Price |
| (000) |
| Contractual Life |
| Price |
| (000) |
| Price |
| $ | 36.90 |
| - | 37.14 |
|
| 36 |
|
| 1.0 |
| $ | 37.11 |
|
| 36 |
|
| $ | 37.11 |
|
| 41.32 |
| - | 44.90 |
|
| 135 |
|
| 3.5 |
| 43.39 |
|
| 101 |
|
| 43.33 |
|
| 45.34 |
| - | 48.32 |
|
| 116 |
|
| 5.0 |
| 47.76 |
|
| 42 |
|
| 47.61 |
|
| 50.71 |
| - | 53.73 |
|
| 53 |
|
| 3.4 |
| 51.13 |
|
| 49 |
|
| 50.95 |
|
| 57.18 |
| - | 60.42 |
|
| 98 |
|
| 6.1 |
| 58.78 |
|
| 2 |
|
| 57.18 |
|
| 64.26 |
| - | 64.26 |
|
| 100 |
|
| 6.7 |
| 64.26 |
|
| — |
|
| — |
|
| $ | 36.90 |
| - | 64.26 |
|
| 538 |
|
| 4.7 |
| $ | 51.37 |
|
| 230 |
|
| $ | 44.89 |
|
The following tables summarize the Company’s employee stock option activity and related information for the years ended December 31, 20152018, , 20142017 and 20132016:
| | | | 2015 | | 2014 | | 2013 | Year ended |
| | | | Weighted- | | | | Weighted- | | | | Weighted- | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | | | Average | | | | Average | | | | Average | | | Weighted- | | | | Weighted- | | | | Weighted- |
| | Options | | Exercise | | Options | | Exercise | | Options | | Exercise | | | Average | | | | Average | | | | Average |
| | (000) | | Price | | (000) | | Price | | (000) | | Price | Options | | Exercise | | Options | | Exercise | | Options | | Exercise |
| | | | | | | | | | | | | (000) | | Price | | (000) | | Price | | (000) | | Price |
| Outstanding at beginning of year | 1,363 |
| | $ | 28 |
| | 1,732 |
| | $ | 27 |
| | 2,874 |
| | $ | 26 |
| 440 |
| | $ | 45 |
| | 564 |
| | $ | 41 |
| | 786 |
| | $ | 32 |
|
| Granted | 96 |
| | 50 |
| | 106 |
| | 43 |
| | 118 |
| | 38 |
| 193 |
| | 62 |
| | 128 |
| | 48 |
| | 137 |
| | 44 |
|
| Exercised | (659 | ) | | 26 |
| | (450 | ) | | 28 |
| | (1,260 | ) | | 26 |
| (95 | ) | | 41 |
| | (206 | ) | | 35 |
| | (346 | ) | | 24 |
|
| Forfeited | (14 | ) | | 29 |
| | (25 | ) | | 37 |
| | — |
| | — |
| — |
| | — |
| | (46 | ) | | 46 |
| | (13 | ) | | 35 |
|
| Outstanding at end of year | 786 |
| | $ | 32 |
| | 1,363 |
| | $ | 28 |
| | 1,732 |
| | $ | 27 |
| 538 |
| | $ | 51 |
| | 440 |
| | $ | 45 |
| | 564 |
| | $ | 41 |
|
| Exercisable at end of year | 586 |
| | $ | 28 |
| | 1,160 |
| | $ | 26 |
| | 1,514 |
| | $ | 26 |
| 230 |
| | $ | 45 |
| | 226 |
| | $ | 42 |
| | 331 |
| | $ | 37 |
|
| Weighted-average fair value of options granted during the year | $ | 15 |
| | | | $ | 14 |
| | | | $ | 14 |
| | | $ | 16 |
| | | | $ | 13 |
| | | | $ | 12 |
| | |
| Aggregate intrinsic value for options exercised | $ | 16,191 |
| | | | $ | 7,259 |
| | | | $ | 15,477 |
| | | $ | 1,992 |
| | | | $ | 3,569 |
| | | | $ | 7,803 |
| | |
| Average aggregate intrinsic value for options outstanding | $ | 13,001 |
| | | | | | | | | | | $ | 4,550 |
| | | | | | | | | | |
| Average aggregate intrinsic value for exercisable options | $ | 12,332 |
| | | | | | | | | | | $ | 3,439 |
| | | | | | | | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20152018
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
| Outstanding |
|
|
| Exercisable |
|
|
|
|
|
| Weighted- |
| Weighted- |
|
|
| Weighted- |
| Range of |
| Number |
| Average |
| Average |
| Number |
| Average |
| Exercise |
| Outstanding |
| Remaining |
| Exercise |
| Exercisable |
| Exercise |
| Price |
| (000) |
| Contractual Life |
| Price |
| (000) |
| Price |
| $ | 22.47 |
| - | 22.87 |
|
| 326 |
|
| 1.0 |
| $ | 22.50 |
|
| 326 |
|
| $ | 22.50 |
|
| 24.98 |
| - | 28.61 |
|
| 96 |
|
| 2.1 |
| 28.42 |
|
| 96 |
|
| 28.42 |
|
| 36.55 |
| - | 38.23 |
|
| 160 |
|
| 3.7 |
| 36.91 |
|
| 128 |
|
| 36.84 |
|
| 41.80 |
| - | 45.97 |
|
| 118 |
|
| 5.3 |
| 43.22 |
|
| 36 |
|
| 43.13 |
|
| 50.71 |
| - | 52.03 |
|
| 86 |
|
| 6.1 |
| 50.79 |
|
| — |
|
| — |
|
| $ | 22.47 |
| - | 52.03 |
|
| 786 |
|
| 2.9 |
| $ | 32.37 |
|
| 586 |
|
| $ | 27.87 |
|
| |
| Year ended | Year ended |
| December 31,
2015 |
| December 31,
2014 |
| December 31,
2013 | December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Shared-based compensation for options | $ | 1,386 |
|
| $ | 1,302 |
|
| $ | 1,410 |
| $ | 1,578 |
|
| $ | 1,313 |
|
| $ | 1,473 |
|
| Tax benefit for option compensation | $ | 542 |
|
| $ | 497 |
|
| $ | 508 |
| $ | 398 |
|
| $ | 466 |
|
| $ | 546 |
|
| Unrecognized compensation cost for options, net of estimated forfeitures | $ | 1,728 |
|
|
|
|
|
| |
| Unrecognized compensation cost for options | | $ | 3,128 |
|
|
|
|
|
|
Weighted average period over which unrecognized compensation will be recognized (years)
| | 2.2 |
| | | | |
Employee Activity – Non-vested shares
Non-vested share grants to employees vest ratably over a three-year period. The following tables summarize the Company's employee non-vested share activity and related information:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31, 2018 |
| December 31, 2017 |
| December 31, 2016 |
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Weighted- |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding and non-vested at beginning of year | 227 |
|
| $ | 47 |
|
| 222 |
|
| $ | 45 |
|
| 191 |
|
| $ | 46 |
|
| Granted | 202 |
|
| 60 |
|
| 126 |
|
| 48 |
|
| 134 |
|
| 44 |
|
| Vested | (107 | ) |
| 56 |
|
| (105 | ) |
| 45 |
|
| (94 | ) |
| 44 |
|
| Forfeited | (7 | ) |
| 52 |
|
| (16 | ) |
| 47 |
|
| (9 | ) |
| 45 |
|
| Outstanding and non-vested at end of year | 315 |
|
| $ | 55 |
|
| 227 |
|
| $ | 47 |
|
| 222 |
|
| $ | 45 |
|
| Aggregate grant date fair value | $ | 17,295 |
|
|
|
| $ | 10,618 |
|
|
|
| $ | 10,108 |
|
|
|
| Total fair value of shares vested during the year | $ | 6,040 |
|
|
|
| $ | 5,040 |
|
|
|
| $ | 4,064 |
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| 2015 |
| 2014 |
| 2013 |
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Weighted- |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding and non-vested at beginning of year | 190 |
|
| $ | 40 |
|
| 186 |
|
| $ | 35 |
|
| 168 |
|
| $ | 33 |
|
| Granted | 100 |
|
| 51 |
|
| 99 |
|
| 42 |
|
| 98 |
|
| 37 |
|
| Vested | (93 | ) |
| 39 |
|
| (94 | ) |
| 43 |
|
| (68 | ) |
| 37 |
|
| Forfeited | (6 | ) |
| 45 |
|
| (1 | ) |
| 37 |
|
| (12 | ) |
| 36 |
|
| Outstanding and non-vested at end of year | 191 |
|
| $ | 46 |
|
| 190 |
|
| $ | 40 |
|
| 186 |
|
| $ | 35 |
|
| Aggregate grant date fair value | $ | 8,773 |
|
|
|
| $ | 7,585 |
|
|
|
| $ | 6,588 |
|
|
|
| Total fair value of shares vested during the year | $ | 4,694 |
|
|
|
| $ | 4,008 |
|
|
|
| $ | 2,503 |
|
|
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
| |
| Year ended | Year ended |
| December 31,
2015 |
| December 31,
2014 |
| December 31,
2013 | December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Shared-based compensation for non-vested shares | $ | 4,070 |
|
| $ | 3,626 |
|
| $ | 3,058 |
| $ | 6,874 |
|
| $ | 5,045 |
|
| $ | 4,614 |
|
| Tax benefit for non-vested share compensation | $ | 1,591 |
|
| $ | 1,385 |
|
| $ | 1,165 |
| $ | 1,732 |
|
| $ | 1,791 |
|
| $ | 1,712 |
|
| Unrecognized compensation cost for non-vested shares, net of estimated forfeitures | $ | 5,085 |
|
|
|
|
|
| |
| Unrecognized compensation cost for non-vested shares | | $ | 11,003 |
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | | 1.8 |
| | | | |
Employee Activity – Performance shares
In 2015, 20142018, 2017 and 2013,2016, the Company granted performance shares to key employees. Under the terms of the performance share agreements, on the third anniversary of the grant date, the Company will issue to the employees a calculated number of common stock shares based on the three year performance of the Company's common stock share pricetotal shareholder return as compared to the share price performancetotal shareholder return of a selected peer group. No shares may be issued if the Company share price performancetotal shareholder return outperforms 30%25% or less of the peer group, but the number of shares issued may be doubled if the Company share pricetotal shareholder return performs better than 90% of the peer group.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
The following tables summarize the Company's employee performance share activity, assuming median share awards, and related information:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Weighted- |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding and non-vested at beginning of year | 69 |
|
| $ | 58 |
|
| 80 |
|
| $ | 55 |
|
| 77 |
|
| $ | 52 |
|
| Granted | 18 |
|
| 72 |
|
| 27 |
|
| 56 |
|
| 29 |
|
| 49 |
|
| Additional shares awarded based on performance | — |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
| 40 |
|
| Vested | — |
|
| — |
|
| — |
|
| — |
|
| (33 | ) |
| 40 |
|
| Forfeited | (22 | ) |
| 67 |
|
| (38 | ) |
| 51 |
|
| — |
|
| — |
|
| Outstanding and non-vested at end of year | 65 |
|
| $ | 58 |
|
| 69 |
|
| $ | 58 |
|
| 80 |
|
| $ | 55 |
|
| Aggregate grant date fair value | $ | 3,795 |
|
|
|
| $ | 3,980 |
|
|
|
| $ | 4,373 |
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| 2015 |
| 2014 |
| 2013 |
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Weighted- |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding and non-vested at beginning of year | 74 |
|
| $ | 44 |
|
| 88 |
|
| $ | 37 |
|
| 62 |
|
| $ | 36 |
|
| Granted | 27 |
|
| 67 |
|
| 23 |
|
| 48 |
|
| 26 |
|
| 40 |
|
| Additional shares awarded based on performance | — |
|
| — |
|
| 19 |
|
| 30 |
|
| — |
|
| — |
|
| Vested | (24 | ) |
| 45 |
|
| (56 | ) |
| 30 |
|
| — |
|
| — |
|
| Forfeited | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Outstanding and non-vested at end of year | 77 |
|
| $ | 52 |
|
| 74 |
|
| $ | 44 |
|
| 88 |
|
| $ | 37 |
|
| Aggregate grant date fair value | $ | 4,016 |
|
|
|
| $ | 3,279 |
|
|
|
| $ | 3,278 |
|
|
|
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Shared-based compensation for performance shares | $ | 1,263 |
|
| $ | 1,045 |
|
| $ | 1,447 |
|
| Tax benefit for performance share compensation | $ | 318 |
|
| $ | 371 |
|
| $ | 537 |
|
| Unrecognized compensation cost for performance shares | $ | 1,415 |
|
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 1.7 |
| | | | |
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2015 |
| December 31,
2014 |
| December 31,
2013 |
| Shared-based compensation for performance shares | $ | 1,308 |
|
| $ | 1,098 |
|
| $ | 1,055 |
|
| Tax benefit for performance share compensation | $ | 512 |
|
| $ | 419 |
|
| $ | 402 |
|
| Unrecognized compensation cost for performance shares, net of estimated forfeitures | $ | 1,726 |
|
|
|
|
|
|
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
Employee Activity – Employee Stock Purchase Plan
Under the ESPP, at December 31, 2015,2018, the Company is authorized to issue up to a remaining 392,987362,404 shares of Common Stock to employees of the Company. For the years ended December 31, 2015, 20142018, 2017 and 2013,2016, participants under the planESPP purchased 10,805,9,455, 8,5309,954, and 8,80011,174 shares, respectively, at an average price of $41.55,$50.63, $41.5146.01, and $33.6839.50 per share, respectively. The weighted-average fair value of each purchase right under the ESPP granted for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, which is equal to the discount from the market value of the Common Stock at the end of each six month purchase period, was $5.82,$6.26, $7.749.26, and $7.526.46 per share, respectively. Share-based compensation expense of $61,$59, $6692, and $6672 was recognized in salaries, wages and employee benefits, during the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.
Non-employee Directors – Non-vested shares
OnIn May 23, 2006, the Company’s shareholders approved the Company’s 2006 Non-Employee Director Stock Plan (the “2006 Plan”). The Company’s shareholders then approved the Company’s Amended and Restated Non-Employee Director Stock Plan (the “Amended Plan”) on May 22, 2007. The Amended Plan was then further amended and restated on December 17, 2008. Under the Amended Plan, on the first business day after each Annual Meeting of Shareholders, each non-employee director will automatically be granted an award (the “Annual Grant”), in such form and size as the Board determines from year to year. Unless otherwise determined by the Board, Annual Grants will become vested and nonforfeitable one yearon the earlier of (a) the day immediately prior to the first Annual Meeting that occurs after the dateGrant Date or (b) the first anniversary of grantthe Grant Date so long as the non-employee director’s service with the Company does not earlier terminate. Each director may elect to defer receipt of the shares
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
under a non-vested share award until the director terminates service on the Board of Directors. If a director elects to defer receipt, the Company will issue deferred stock units to the director, which do not represent actual ownership
in shares and the director will not have voting rights or other incidents of ownership until the shares are issued. However, the Company will credit the director with dividend equivalent payments in the form of additional deferred stock units for each cash dividend payment made by the Company.
In May 2016, with the approval of shareholders, the Company further amended the Amended Plan to reserve for issuance an additional 160,000 common shares, increasing the total number of reserved common shares under the Amended Plan to 360,000. As of December 31, 2018, there were approximately 132,313 shares remaining available for grant.
The following tables summarize the Company's non-employee non-vested share activity and related information:
| |
| Year ended | Year ended |
| 2015 |
| 2014 |
| 2013 | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| Non-vested |
|
|
| Non-vested |
|
|
| Non-vested |
|
| Non-vested |
|
|
| Non-vested |
|
|
| Non-vested |
|
|
| Shares and |
| Weighted- |
| Shares and |
| Weighted- |
| Shares and |
| Weighted- | Shares and |
| Weighted- |
| Shares and |
| Weighted- |
| Shares and |
| Weighted- |
| Deferred |
| Average |
| Deferred |
| Average |
| Deferred |
| Average | Deferred |
| Average |
| Deferred |
| Average |
| Deferred |
| Average |
| Stock Units |
| Grant Date |
| Stock Units |
| Grant Date |
| Stock Units |
| Grant Date | Stock Units |
| Grant Date |
| Stock Units |
| Grant Date |
| Stock Units |
| Grant Date |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value | (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| | Outstanding and non-vested at beginning of year | 15 |
|
| $ | 44 |
|
| 15 |
|
| $ | 38 |
|
| 20 |
|
| $ | 32 |
| 11 |
|
| $ | 52 |
|
| 16 |
|
| $ | 44 |
|
| 15 |
|
| $ | 51 |
|
| Granted | 14 |
|
| 51 |
|
| 15 |
|
| 44 |
|
| 15 |
|
| 38 |
| 16 |
|
| 59 |
|
| 14 |
|
| 52 |
|
| 16 |
|
| 44 |
|
| Vested | (14 | ) |
| 43 |
|
| (15 | ) |
| 38 |
|
| (20 | ) |
| 32 |
| (12 | ) |
| 52 |
|
| (16 | ) |
| 44 |
|
| (15 | ) |
| 51 |
|
| Forfeited | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (3 | ) |
| 49 |
|
| — |
|
| — |
|
| Outstanding and non-vested at end of year | 15 |
|
| $ | 51 |
|
| 15 |
|
| $ | 44 |
|
| 15 |
|
| $ | 38 |
| 15 |
|
| $ | 59 |
|
| 11 |
|
| $ | 52 |
|
| 16 |
|
| $ | 44 |
|
| Aggregate grant date fair value | $ | 740 |
|
|
|
| $ | 650 |
|
|
|
| $ | 560 |
|
|
| $ | 920 |
|
|
|
| $ | 742 |
|
|
|
| $ | 688 |
|
|
|
| Total fair value of shares vested during the year | $ | 727 |
|
|
|
| $ | 632 |
|
|
|
| $ | 762 |
|
|
| $ | 615 |
|
|
|
| $ | 809 |
|
|
|
| $ | 639 |
|
|
|
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Shared-based compensation for non-vested shares | $ | 775 |
|
| $ | 608 |
|
| $ | 728 |
|
| Tax benefit for non-vested share compensation | $ | 195 |
|
| $ | 216 |
|
| $ | 263 |
|
| Unrecognized compensation cost for non-vested shares | $ | 360 |
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 0.4 |
| | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20152018
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2015 |
| December 31,
2014 |
| December 31,
2013 |
| Shared-based compensation for non-vested shares | $ | 661 |
|
| $ | 589 |
|
| $ | 589 |
|
| Tax benefit for non-vested share compensation | $ | 259 |
|
| $ | 225 |
|
| $ | 225 |
|
| Unrecognized compensation cost for non-vested shares, net of estimated forfeitures | $ | 286 |
|
|
|
|
|
|
Non-employee Directors - Options
In addition to the above activity, each May from 1995 to 2005, options were granted to the non-employee directors of the Company. The options have terms of ten years and are fully exercisable. The following table summarizes the Company’s non-employee stock option activity and related information for the years ended December 31, 2015, 2014 and 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | | Average | | | | Average | | | | Average |
| | Options | | Exercise | | Options | | Exercise | | Options | | Exercise |
| | (000) | | Price | | (000) | | Price | | (000) | | Price |
| | | | | | | | | | | | |
| Outstanding at beginning of year | 8 |
| | $ | 26 |
| | 26 |
| | $ | 23 |
| | 29 |
| | $ | 23 |
|
| Granted | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercised | (8 | ) | | 26 |
| | (18 | ) | | 22 |
| | (3 | ) | | 20 |
|
| Forfeited | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Outstanding and exercisable at end of year | — |
| | $ | — |
| | 8 |
| | $ | 26 |
| | 26 |
| | $ | 23 |
|
| Aggregate intrinsic value for options exercised | $ | 208 |
| | | | $ | 412 |
| | | | $ | 54 |
| | |
| Average aggregate intrinsic value for options outstanding and exercisable | $ | — |
| | | | | | | | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
Net Income per Share
The following table sets forth the computation of net income per basic and diluted share:
| | | | | | | | | 2018 | | 2017 | | 2016 |
| 2015 |
| 2014 |
| 2013 | | | (As Adjusted) | | (As Adjusted) |
| Numerator: |
|
|
|
|
| | | | | |
| Net income and comprehensive income | $ | 55,575 |
|
| $ | 61,169 |
|
| $ | 54,467 |
| $ | 92,051 |
| | $ | 87,255 |
| | $ | 27,505 |
|
| Income allocated to participating securities | (369 | ) | | (404 | ) | | — |
| (881 | ) | | (700 | ) | | (210 | ) |
| Numerator for basic and diluted income per share - net income | 55,206 |
| | 60,765 |
| | 54,467 |
| 91,170 |
| | 86,555 |
| | 27,295 |
|
|
|
|
|
|
| | | | | |
| Denominator: |
|
|
|
|
| | | | | |
| Denominator for basic net income per share - weighted-average shares (in thousands) | 30,728 |
|
| 30,599 |
|
| 30,135 |
| 29,076 |
| | 29,867 |
| | 30,283 |
|
| Effect of dilutive stock options (in thousands) | 277 |
| | 431 |
| | 615 |
| 80 |
| | 64 |
| | 130 |
|
| Effect of dilutive performance shares (in thousands) | 35 |
| | 42 |
| | 12 |
| 34 |
| | 33 |
| | 31 |
|
| Denominator for diluted net income per share - adjusted weighted-average shares (in thousands) | 31,040 |
|
| 31,072 |
|
| 30,762 |
| 29,190 |
| | 29,964 |
| | 30,444 |
|
| Basic net income per share | $ | 1.80 |
|
| $ | 1.99 |
|
| $ | 1.81 |
| $ | 3.14 |
| | $ | 2.90 |
| | $ | 0.90 |
|
| Diluted net income per share | $ | 1.78 |
|
| $ | 1.96 |
|
| $ | 1.77 |
| $ | 3.12 |
| | $ | 2.89 |
| | $ | 0.90 |
|
The number of instruments that could potentially dilute net income per basic share in the future, but that were not included in the computation of net income per diluted share because to do so would have been anti-dilutive for the periods presented, are as follows:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Anti-dilutive stock options (in thousands) | 184 |
| | 99 |
| | 192 |
| 126 |
| | 172 |
| | 310 |
|
| Anti-dilutive performance shares (in thousands) | 24 |
| | — |
| | — |
| 16 |
| | — |
| | — |
|
| Anti-dilutive non-vested shares and deferred stock units (in thousands) | | 9 |
| | — |
| | — |
|
| Total anti-dilutive shares (in thousands) | 208 |
| | 99 |
| | 192 |
| 151 |
| | 172 |
| | 310 |
|
5. Income Taxes
Tax Reform
On December 22, 2017, President Trump signed into law H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (this legislation is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act provided for significant changes in the U.S. Internal Revenue Code of 1986, as amended. The U.S. Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.
Beginning on January 1, 2018, the U.S. Tax Act lowered the U.S. corporate income tax rate from 35% to 21% on our U.S. earnings from that date and beyond. The revaluation of our U.S. deferred tax assets and liabilities to the 21% corporate tax rate reduced our net U.S. deferred income tax liability by approximately $15,901 which is reflected as a reduction in our income tax expense in our results for the quarter and year ended December 31, 2017.
On December 22, 2017, the SEC staff issued SAB 118 that allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 22, 2018, the Company has completed its accounting for all of the enactment-date income tax effects of the U.S. Tax Act. The Company made no adjustments to the provisional amounts recorded at December 31, 2017.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
Income Taxes
The provision for income taxes consists of the following:
| | | | | | | | | | | | | 2018 | | 2017 | | 2016 |
| | 2015 |
| 2014 |
| 2013 | | | (As Adjusted) | | (As Adjusted) |
| Current: | |
| |
| | | | | | |
| Federal | $ | 8,319 |
|
| $ | 33,631 |
|
| $ | 22,466 |
| $ | 16,572 |
| | $ | 28,556 |
| | $ | 24,139 |
|
| State | 1,242 |
|
| 4,306 |
|
| 2,133 |
| 3,559 |
| | 4,043 |
| | 3,052 |
|
| | 9,561 |
|
| 37,937 |
|
| 24,599 |
| 20,131 |
| | 32,599 |
| | 27,191 |
|
| Deferred: | |
|
| |
|
| |
| | | | | |
|
| Federal | 12,477 |
|
| (2,102 | ) |
| 4,367 |
| 7,194 |
| | (11,860 | ) | | 3,145 |
|
| State | 2,054 |
|
| (919 | ) |
| 489 |
| 870 |
| | (457 | ) | | 269 |
|
| | 14,531 |
|
| (3,021 | ) |
| 4,856 |
| 8,064 |
| | (12,317 | ) | | 3,414 |
|
| | $ | 24,092 |
|
| $ | 34,916 |
|
| $ | 29,455 |
| $ | 28,195 |
| | $ | 20,282 |
| | $ | 30,605 |
|
The tax benefit associated with the exercise of stock options and the vesting of non-vested shares recorded to additional paid in capital during the yearsyear ended December 31, 2015, 20142016 was $1,732 and 2013 were $5,413, $2,109 and $3,612, respectively, and areis reflected as an increase in additional paid-in capital in the accompanying consolidated statements of shareholders’ equity. For 2018 and 2017, FASB guidance required the recognition of the income tax effects of awards in the income statement when the awards vest or are settled thus eliminating additional paid in capital ("APIC") pools.
The historical income tax expense differs from the amounts computed by applying the federal statutory rate of 21.0% for 2018 and 35.0% for 2017 and 2016 to income before income taxes as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | (As Adjusted) | | (As Adjusted) |
| Tax expense at the statutory rate | $ | 25,252 |
| | $ | 37,637 |
| | $ | 20,399 |
|
| State income taxes, net of federal benefit | 3,685 |
| | 2,339 |
| | 2,229 |
|
| Share-based compensation | (50 | ) | | (366 | ) | | — |
|
| Qualified stock options | 12 |
| | 32 |
| | (88 | ) |
| Other permanent differences | 163 |
| | 252 |
| | 474 |
|
| TQI goodwill impairment | — |
| | — |
| | 8,990 |
|
| Deferred tax asset valuation allowance | 35 |
| | 78 |
| | (2 | ) |
| Federal qualified property deductions | — |
| | (2,075 | ) | | (1,311 | ) |
| Federal income tax credits | (207 | ) | | (58 | ) | | — |
|
| Non-taxable acquisitions | — |
| | (568 | ) | | — |
|
| Rate impact on deferred tax liabilities | — |
| | (15,901 | ) | | — |
|
| Other | (695 | ) | | (1,088 | ) | | (86 | ) |
| | $ | 28,195 |
| | $ | 20,282 |
| | $ | 30,605 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20152018
(In thousands, except share and per share data)
The historical income tax expense differs from the amounts computed by applying the federal statutory rate of 35.0% to income before income taxes as follows:
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| Tax expense at the statutory rate | $ | 27,883 |
| | $ | 33,630 |
| | $ | 29,373 |
|
| State income taxes, net of federal benefit | 2,178 |
| | 1,879 |
| | 1,876 |
|
| Non-deductible transaction costs | 394 |
|
| — |
|
| — |
|
| Incentive stock options | (120 | ) | | (96 | ) | | (908 | ) |
| Meals and entertainment | 216 |
| | 186 |
| | 139 |
|
| Deferred tax asset valuation allowance | (11 | ) | | 39 |
| | (85 | ) |
| Federal qualified property deductions | (6,066 | ) |
| — |
|
| — |
|
| Federal income tax credits | (732 | ) | | (533 | ) | | (1,023 | ) |
| Other | 350 |
| | (189 | ) | | 83 |
|
| | $ | 24,092 |
| | $ | 34,916 |
| | $ | 29,455 |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets are as follows:
| | | | | | | | | December 31,
2018 | | December 31,
2017 |
| December 31,
2015 |
| December 31,
2014 | | | (As Adjusted) |
| Deferred tax assets: | |
| | | | |
| Accrued expenses | $ | 11,952 |
|
| $ | 6,313 |
| $ | 10,362 |
| | $ | 8,228 |
|
| Allowance for doubtful accounts | 936 |
|
| 1,002 |
| 535 |
| | 777 |
|
| Share-based compensation | 5,242 |
|
| 5,698 |
| 3,526 |
| | 3,002 |
|
| Accruals for income tax contingencies | 268 |
|
| 300 |
| 217 |
| | 251 |
|
| Impairment of goodwill and other intangible assets | 216 |
|
| 534 |
| |
| Net operating loss carryforwards | 13,620 |
|
| 280 |
| 2,906 |
| | 4,733 |
|
| Total deferred tax assets | 32,234 |
|
| 14,127 |
| 17,546 |
| | 16,991 |
|
| Valuation allowance | (284 | ) |
| (273 | ) | (395 | ) | | (360 | ) |
| Total deferred tax assets, net of valuation allowance | 31,950 |
|
| 13,854 |
| 17,151 |
| | 16,631 |
|
| Deferred tax liabilities: | |
| | | | |
| Tax over book depreciation | 28,027 |
|
| 19,222 |
| 25,606 |
| | 19,402 |
|
| Intangible assets | 25,399 |
|
| 3,639 |
| 10,904 |
| | 11,108 |
|
| Prepaid expenses deductible when paid | 5,018 |
|
| 2,488 |
| 3,902 |
| | 3,460 |
|
| Goodwill | 13,382 |
|
| 11,189 |
| 13,913 |
| | 11,741 |
|
| Total deferred tax liabilities | 71,826 |
|
| 36,538 |
| 54,325 |
| | 45,711 |
|
| Net deferred tax liabilities | $ | (39,876 | ) |
| $ | (22,684 | ) | $ | (37,174 | ) | | $ | (29,080 | ) |
Total cash income tax payments, net of refunds, during fiscal years 20152018, 20142017 and 20132016 were $25,264, $30,087$21,064, $36,110 and $25,168,$10,628, respectively.
The Company has considered the weight of all available evidence in determining the need for a valuation allowance against each of the Company’s various deferred tax assets and believes the Company’s history of income is a significant weight of evidence supporting the realization of all of the Company’s federal and most state deferred tax assets. In addition, the Company believes all existing deferred tax liabilities will reverse in a manner that generates enough taxable income to realize an offsetting amount of deferred tax assets. Given the historical positive performance of the Company for having more than ten consecutive years of profitability, the Company expects to fully utilize the vast majority of its deferred tax assets and has concluded that the only valuation allowance needed relates to state net operating loss carryforwards, as noted below.
As a result of the Towne acquisition the Company has approximately $36,034$10,258, $18,586 and $27,050 of federal net operating losses as of December 31, 2015,2018, 2017 and 2016 respectively, that will expire between 2020 and 2030. The Company expects to be able to fully utilize these federal net operating losses before they expire.
At December 31, 20152018 and 20142017, the Company had state net operating loss carryforwards of $23,595$18,148 and $6,500,$18,126, respectively, that will expire between 20152018 and 2029.2030. Also, the use of these state net operating losses is limited to the future taxable income of separate legal entities. Based on expectations of future taxable income, management believes that it is more
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
likely than not that the results of operations for certain separate legal entities will not generate sufficient taxable income to realize portions of these net operating loss benefits for state loss carryforwards. As a result, a valuation allowance has been provided for the state loss carryforwards for these specific legal entities. The valuation allowance on these state loss carryforwards increased $11$35 during 2018 and $39$78 during 20152017.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and 2014, respectively.per share data)
Income Tax Contingencies
The Company, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various states and Canada. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or Canadian examinations by tax authorities for years before 2011.2012.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
| | | | Liability for | Liability for |
| | Unrecognized Tax | Unrecognized Tax |
| | Benefits | Benefits |
| Balance at December 31, 2012 | 277 |
| |
| Additions for tax positions of current year | 209 |
| |
| Additions for tax positions of prior years - TQI | 853 |
| |
| Balance at December 31, 2013 | 1,339 |
| |
| Reductions for settlement with state taxing authorities | (697 | ) | |
| Additions for tax positions of prior years - TQI | 63 |
| |
| Additions for tax positions of current year | 66 |
| |
| Balance at December 31, 2014 | 771 |
| |
| Balance at December 31, 2015 | | $ | 773 |
|
| Reductions for settlement with state taxing authorities | (64 | ) | (247 | ) |
| Additions for tax positions of current year | 66 |
| 56 |
|
| Balance at December 31, 2015 | $ | 773 |
| |
| Balance at December 31, 2016 | | 582 |
|
| Reductions for settlement with state taxing authorities | | (14 | ) |
| Additions for tax positions of prior years | | 400 |
|
| Additions for tax positions of current year | | 366 |
|
| Balance at December 31, 2017 | | 1,334 |
|
| Reductions for settlement with state taxing authorities | | (271 | ) |
| Reductions for tax positions of prior years | | (40 | ) |
| Additions for tax positions of current year | | 35 |
|
| Balance at December 31, 2018 | | $ | 1,058 |
|
Included in the liability for unrecognized tax benefits at December 31, 20152018 and December 31, 20142017 are tax positions of $773$1,058 and $7711,334, respectively, which represents tax positions where the realization of the ultimate benefit is uncertain and the disallowance of which would affect the Company’s annual effective income tax rate.
Included in the liability for unrecognized tax benefitsIn addition, at December 31, 20152018 and December 31, 20142017, arethe Company had accrued penalties of $156 and $170, respectively. The liability forassociated with unrecognized tax benefits at December 31, 2015 and December 31, 2014 also included accrued interest of $371$61 and $414105, respectively. At December 31, 2018 and December 31, 2017, the Company also had accrued interest associated with unrecognized tax benefits of $143 and $201, respectively.
6. Operating Leases
The Company leases certain facilities under noncancellable operating leases that expire in various years through 2024.2026. Certain leases may be renewed for periods varying from one to ten years. The Company has entered into or assumed through acquisition several operating leases for tractors, straight trucks and trailers with original lease terms between three and five years. These leases expire in various years through 20202023 and may not be renewed beyond the original term.
Sublease rental income was $1,611, $980$1,724, $1,923 and $914$1,517 in 2015, 20142018, 2017 and 2013,2016, respectively. In 2016,2019, the Company expects to receive aggregate future minimum rental payments under noncancellable subleases of approximately $159.$1,155. Noncancellable subleases expire between 20162019 and 2019.2021.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
Future minimum rental payments under noncancellable operating leases with initial or remaining terms in excess of one year consisted of the following at December 31, 2015:2018:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
| | | 2016 | $ | 34,817 |
| |
| 2017 | 27,433 |
| |
| 2018 | 18,988 |
| |
| 2019 | 12,211 |
| $ | 51,380 |
|
| 2020 | 6,645 |
| 40,999 |
|
| 2021 | | 29,598 |
|
| 2022 | | 16,612 |
|
| 2023 | | 9,234 |
|
| Thereafter | 1,091 |
| 11,459 |
|
| Total | $ | 101,185 |
| $ | 159,282 |
|
7. Commitments and Contingencies
From time to time, the Company is party to ordinary, routine litigation incidental to and arising in the normal course of business. The Company does not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on its financial condition, results of operations or cash flows.
The primary claims in the Company’s business relate to workers’ compensation, property damage, vehicle liability and employee medical benefits. Most of the Company’s insurance coverage provides for self-insurance levels with primary and excess coverage which management believes is sufficient to adequately protect the Company from catastrophic claims. Such insurance coverage above the applicable self-insurance levels continues to be an important part of the Company's risk management process.
In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured limits, including provision for estimated claims incurred but not reported.
The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing hindsight and actuarial analysis to determine an estimate of probable losses on claims incurred but not reported. Such losses couldshould be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates.
Because of the uncertainty of the ultimate resolution of outstanding claims, as well as uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially in the near term. However, no estimate can currently be made of the range of additional loss that is at least reasonably possible.
As of December 31, 2015,2018, the Company had commitments to purchase various trailers forklifts and other equipmentforklifts for approximately $17,667$14,305 during 2016.2019.
8. Employee Benefit Plan
The Company has a retirement savings plan (the “401(k) Plan”). The 401(k) Plan is a defined contribution plan whereby employees who have completed 90 days of service, a minimum of 1,000 hours of service and are age 21 or older are eligible to participate. The 401(k) Plan allows eligible employees to make contributions of 2.0% to 80.0% of their annual compensation. For all periods presented, employer contributions were made at 25.0% of the employee’s contribution up to a maximum of 6.0% of total annual compensation, except where government limitations prohibit.
Employer contributions vest 20.0% after two years of service and continue vesting 20.0% per year until fully vested. The Company’s matching contributions expensed in 20152018, 20142017 and 20132016 were approximately $1,178,$1,713, $8951,441 and $8231,056, respectively.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
9. Financial Instruments
Off Balance Sheet Risk
At December 31, 2015,2018, the Company had letters of credit outstanding totaling $11,048.$10,650.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value based on their short-term nature.
The Company’s revolving credit facility and term loan bear variable interest rates plus additional basis points based upon covenants related to total indebtedness to earnings. As the term loan bears a variable interest rate and there have been no significant changes to our credit rating, the carrying value approximates fair value. Using interest rate quotes and discounted cash flows, the Company estimated the fair value of its outstanding capital lease obligations as follows:
|
| | | | | | | | | | | | | | | |
| | December 31,
2015 | | December 31,
2014 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Capital lease obligations | $ | 1,405 |
| | $ | 1,434 |
| | $ | 1,551 |
| | $ | 1,578 |
|
|
| | | | | | | | | | | | | | | |
| | December 31,
2018 | | December 31,
2017 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Capital lease obligations | $ | 363 |
| | $ | 374 |
| | $ | 724 |
| | $ | 744 |
|
The Company's fair value calculationsestimates for the above financial instruments are classified within level 3 of the fair value hierarchy as defined in the FASB Codification.
10. Segment Reporting
The Company operates in threehas four reportable segments based on information available to and used by the chief operating decision maker. Forward Air, which includes our Forward AirExpedited LTL operates a comprehensive national network that provides expedited regional, inter-regional and CST operating segments,national LTL and final mile services. The TLS segment provides time-definite transportation and logistics services including expedited truckload brokerage, dedicated fleet services and intermodal drayage. FASI provides pool distribution services primarily to regional and national distributors and retailers. TQI is a provider of maximumhigh security and temperature-controlled logistics services. The Intermodal segment primarily provides first- and last-mile high value intermodal container drayage services primarily truckload services,both to the life sciences sector (pharmaceutical and biotechnology products).from seaports and railheads. Pool Distribution provides high-frequency handling and distribution of time sensitive product to numerous destinations.
TheExcept for certain insurance activity, the accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in Note 11. For workers compensation and vehicle claims each segment is charged an insurance premium and is also charged a deductible that corresponds with our corporate deductibles disclosed in Note 1. However, any losses beyond our deductibles and any loss development factors applied to our outstanding claims as a result of actuary analysis are not passed to the Consolidated Financial Statements. segments, but recorded at the corporate level within Eliminations and Other.
Segment data includes intersegment revenues. Assets and costsCosts of the corporate headquarters and shared services are allocated to the segments based on usage. The expense associated with shared operating assets, such as trailers, are allocated between operating segments based on usage. However, the carrying value of the asset's basis are not allocated. The Company evaluates the performance of its segments based on net income (loss).from operations. The Company’s business is conducted in the U.S. and Canada.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
The following tables summarize segment information about net incomeresults from operations and assets used by the chief operating decision maker of the Company in making decisions regarding allocation of assets and resources as of and for the years ended December 31, 2015, 20142018, 2017 and 2013. 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018 | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated |
| External revenues | | $ | 740,332 |
| | $ | 186,114 |
| | $ | 193,690 |
| | $ | 200,750 |
| | $ | — |
| | $ | 1,320,886 |
|
| Intersegment revenues | | 7,230 |
| | 6,468 |
| | 427 |
| | 256 |
| | (14,381 | ) | | — |
|
| Depreciation and amortization | | 22,523 |
| | 6,429 |
| | 6,900 |
| | 6,329 |
| | 2 |
| | 42,183 |
|
| Share-based compensation expense | | 7,761 |
| | 696 |
| | 453 |
| | 984 |
| | 655 |
| | 10,549 |
|
| Interest expense | | 1 |
| | (21 | ) | | — |
| | 58 |
| | 1,745 |
| | 1,783 |
|
| Income (loss) from operations | | 96,385 |
| | 5,055 |
| | 5,870 |
| | 23,266 |
| | (8,545 | ) | | 122,031 |
|
| Total assets | | 478,888 |
| | 71,163 |
| | 64,306 |
| | 167,002 |
| | (21,144 | ) | | 760,215 |
|
| Capital expenditures | | 38,520 |
| | 190 |
| | 2,729 |
| | 854 |
| | — |
| | 42,293 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2017 (As Adjusted) | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated |
| External revenues | | $ | 652,304 |
| | $ | 194,402 |
| | $ | 168,194 |
| | $ | 154,446 |
| | $ | — |
| | $ | 1,169,346 |
|
| Intersegment revenues | | 3,534 |
| | 7,350 |
| | 289 |
| | 238 |
| | (11,411 | ) | | — |
|
| Depreciation and amortization | | 22,103 |
| | 6,328 |
| | 6,773 |
| | 5,848 |
| | 3 |
| | 41,055 |
|
| Share-based compensation expense | | 6,776 |
| | 378 |
| | 387 |
| | 562 |
| | — |
| | 8,103 |
|
| Interest expense | | 3 |
| | 2 |
| | — |
| | 48 |
| | 1,156 |
| | 1,209 |
|
| Income (loss) from operations | | 87,969 |
| | 3,215 |
| | 6,378 |
| | 12,963 |
| | (1,768 | ) | | 108,757 |
|
| Total assets | | 440,823 |
| | 65,829 |
| | 55,970 |
| | 149,150 |
| | (19,150 | ) | | 692,622 |
|
| Capital expenditures | | 36,650 |
| | 33 |
| | 1,068 |
| | 514 |
| | — |
| | 38,265 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2016 ( As Adjusted) | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated |
| External revenues | | $ | 593,472 |
| | $ | 179,989 |
| | $ | 151,245 |
| | $ | 105,504 |
| | $ | — |
| | $ | 1,030,210 |
|
| Intersegment revenues | | 3,067 |
| | 1,018 |
| | 607 |
| | 160 |
| | (4,852 | ) | | — |
|
| Depreciation and amortization | | 21,919 |
| | 6,441 |
| | 5,975 |
| | 3,876 |
| | (1 | ) | | 38,210 |
|
| Share-based compensation expense | | 7,209 |
| | 332 |
| | 334 |
| | 459 |
| | — |
| | 8,334 |
|
| Impairment of goodwill and other intangible assets | | — |
| | 42,442 |
| | — |
| | — |
| | — |
| | 42,442 |
|
| Interest expense | | 1,687 |
| | 3 |
| | — |
| | 83 |
| | (176 | ) | | 1,597 |
|
| Income (loss) from operations | | 83,142 |
| | (35,409 | ) | | 3,633 |
| | 11,060 |
| | (2,723 | ) | | 59,703 |
|
| Total assets | | 443,077 |
| | 53,695 |
| | 50,271 |
| | 130,295 |
| | (33,290 | ) | | 644,048 |
|
| Capital expenditures | | 37,501 |
| | 1,828 |
| | 2,637 |
| | 220 |
| | — |
| | 42,186 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20152018
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2015 | | Forward Air | | FASI | | TQI | | Eliminations | | Consolidated |
| External revenues | | $ | 788,248 |
| | $ | 128,826 |
| | $ | 42,051 |
| | $ | — |
| | $ | 959,125 |
|
| Intersegment revenues | | 4,623 |
| | 1,169 |
| | 322 |
| | (6,114 | ) | | — |
|
| Depreciation and amortization | | 27,069 |
| | 6,085 |
| | 4,003 |
| | — |
| | 37,157 |
|
| Share-based compensation expense | | 7,200 |
| | 220 |
| | 66 |
| | — |
| | 7,486 |
|
| Interest expense | | 2,042 |
| | — |
| | 5 |
| | — |
| | 2,047 |
|
| Interest income | | 25 |
| | — |
| | — |
| | — |
| | 25 |
|
| Income tax expense | | 21,235 |
| | 1,673 |
| | 1,184 |
| | — |
| | 24,092 |
|
| Net income | | 51,976 |
| | 2,383 |
| | 1,216 |
| | — |
| | 55,575 |
|
| Total assets | | 759,680 |
| | 46,970 |
| | 89,312 |
| | (195,791 | ) | | 700,171 |
|
| Capital expenditures | | 30,540 |
| | 3,983 |
| | 5,972 |
| | — |
| | 40,495 |
|
| | | | | | | | | | | |
| Year ended December 31, 2014 | | Forward Air | | FASI | | TQI | | Eliminations | | Consolidated |
| External revenues | | $ | 608,118 |
| | $ | 124,382 |
| | $ | 48,459 |
| | $ | — |
| | $ | 780,959 |
|
| Intersegment revenues | | 4,219 |
| | 831 |
| | 365 |
| | (5,415 | ) | | — |
|
| Depreciation and amortization | | 21,721 |
| | 5,811 |
| | 3,601 |
| | — |
| | 31,133 |
|
| Share-based compensation expense | | 6,470 |
| | 176 |
| | 35 |
| | — |
| | 6,681 |
|
| Interest expense | | 602 |
| | 2 |
| | 6 |
| | — |
| | 610 |
|
| Interest income | | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Income tax expense | | 31,792 |
| | 2,203 |
| | 921 |
| | — |
| | 34,916 |
|
| Net income | | 53,985 |
| | 3,790 |
| | 3,394 |
| | — |
| | 61,169 |
|
| Total assets | | 604,578 |
| | 45,428 |
| | 88,788 |
| | (199,485 | ) | | 539,309 |
|
| Capital expenditures | | 26,170 |
| | 7,133 |
| | 6,184 |
| | — |
| | 39,487 |
|
| | | | | | | | | | | |
| Year ended December 31, 2013 | | Forward Air | | FASI | | TQI | | Eliminations | | Consolidated |
| External revenues | | $ | 497,993 |
| | $ | 112,766 |
| | $ | 41,722 |
| | $ | — |
| | $ | 652,481 |
|
| Intersegment revenues | | 3,075 |
| | 645 |
| | 120 |
| | (3,840 | ) | | — |
|
| Depreciation and amortization | | 16,222 |
| | 4,945 |
| | 2,412 |
| | — |
| | 23,579 |
|
| Share-based compensation expense | | 5,959 |
| | 140 |
| | 79 |
| | — |
| | 6,178 |
|
| Interest expense | | 513 |
| | 8 |
| | 11 |
| | — |
| | 532 |
|
| Interest income | | 36 |
| | — |
| | 1 |
| | — |
| | 37 |
|
| Income tax expense | | 26,981 |
| | 846 |
| | 1,628 |
| | — |
| | 29,455 |
|
| Net income | | 51,251 |
| | 1,255 |
| | 1,961 |
| | — |
| | 54,467 |
|
| Total assets | | 478,790 |
| | 42,049 |
| | 85,490 |
| | (100,060 | ) | | 506,269 |
|
| Capital expenditures | | 25,017 |
| | 6,901 |
| | 3,521 |
| | — |
| | 35,439 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(In thousands, except share and per share data)
11. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 20152018 and 20142017:
| | | | | 2015 | | 2018 |
| | | March 31 | | June 30 | | September 30 | | December 31 | | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | $ | 205,918 |
| | $ | 249,694 |
| | $ | 247,093 |
| | $ | 256,420 |
| | $ | 302,608 |
| | $ | 330,343 |
| | $ | 331,375 |
| | $ | 356,561 |
|
| Income from operations | | 8,248 |
| | 19,908 |
| | 24,601 |
| | 29,015 |
| | 24,235 |
| | 32,870 |
| | 29,879 |
| | 35,047 |
|
| Net income | | 4,836 |
| | 11,824 |
| | 15,687 |
| | 23,228 |
| | 17,741 |
| | 24,298 |
| | 22,329 |
| | 27,684 |
|
| | | | | | | | | | | | | | | | | |
| Net income per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.16 |
| | $ | 0.38 |
| | $ | 0.51 |
| | $ | 0.75 |
| | $ | 0.60 |
| | $ | 0.83 |
| | $ | 0.76 |
| | $ | 0.95 |
|
| Diluted | | $ | 0.16 |
| | $ | 0.38 |
| | $ | 0.50 |
| | $ | 0.75 |
| | $ | 0.60 |
| | $ | 0.82 |
| | $ | 0.76 |
| | $ | 0.95 |
|
| | | | | | | | | | | | | | | | | |
| | | 2014 | | 2017 |
| | | March 31 | | June 30 | | September 30 | | December 31 | | (As Adjusted) |
| | | | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | $ | 171,569 |
| | $ | 193,852 |
| | $ | 201,477 |
| | $ | 214,061 |
| | $ | 262,046 |
| | $ | 283,876 |
| | $ | 298,289 |
| | $ | 325,136 |
|
| Income from operations | | 16,271 |
| | 27,595 |
| | 26,906 |
| | 25,634 |
| | 23,743 |
| | 29,996 |
| | 27,176 |
| | 27,843 |
|
| Net income | | 10,202 |
| | 17,178 |
| | 16,744 |
| | 17,045 |
| | 14,581 |
| | 19,666 |
| | 18,328 |
| | 34,681 |
|
| | | | | | | | | | | | | | | | | |
| Net income per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.33 |
| | $ | 0.56 |
| | $ | 0.55 |
| | $ | 0.56 |
| | $ | 0.48 |
| | $ | 0.65 |
| | $ | 0.61 |
| | $ | 1.17 |
|
| Diluted | | $ | 0.33 |
| | $ | 0.55 |
| | $ | 0.54 |
| | $ | 0.55 |
| | $ | 0.48 |
| | $ | 0.65 |
| | $ | 0.61 |
| | $ | 1.16 |
|
Forward Air Corporation
Schedule II — Valuation and Qualifying Accounts
(In thousands)
| | | Col. A | | Col. B | | Col. C | | Col. D | | Col. E | | Col. B | | Col. C | | Col. D | | Col. E |
| | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts Described | | Deductions -Describe | | Balance at End of Period | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts Described | | Deductions -Described | | Balance at End of Period |
| Year ended December 31, 2015 | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,155 |
| | $ | 33 |
| | $ | — |
| | $ | 878 |
| (2) | $ | 1,310 |
| |
| Allowance for revenue adjustments | (1) | 408 |
| | 4,793 |
| | — |
| | 4,106 |
| (3) | 1,095 |
| |
| Income tax valuation | | 273 |
| | 11 |
| | — |
| | — |
| | 284 |
| |
| | | 2,836 |
| | 4,837 |
| | — |
| | 4,984 |
| | 2,689 |
| |
| Year ended December 31, 2014 | | | | | | | | | | | |
| Year ended December 31, 2018 | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,583 |
| | $ | 241 |
| | $ | — |
| | $ | (331 | ) | (2) | $ | 2,155 |
| | $ | 2,542 |
| | $ | 139 |
| | $ | — |
| | $ | 1,372 |
| (2) | $ | 1,309 |
|
Allowance for revenue adjustments | (1) | 336 |
| | 2,465 |
| | — |
| | 2,393 |
| (3) | 408 |
| | 464 |
| | — |
| | 3,628 |
| | 3,320 |
| (3) | 772 |
|
| Income tax valuation | | 234 |
| | 39 |
| | — |
| | — |
| | 273 |
| | 360 |
| | 35 |
| | — |
| | — |
| | 395 |
|
| | | 2,153 |
| | 2,745 |
| | — |
| | 2,062 |
| | 2,836 |
| | 3,366 |
| | 174 |
| | 3,628 |
| | 4,692 |
| | 2,476 |
|
| Year ended December 31, 2013 | | | | | | | | | | | |
| Year ended December 31, 2017 | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,149 |
| | $ | 423 |
| | $ | — |
| | $ | (11 | ) | (2) | $ | 1,583 |
| | $ | 1,309 |
| | $ | 1,814 |
| | $ | — |
| | $ | 581 |
| (2) | $ | 2,542 |
|
| Allowance for revenue adjustments | (1) | 295 |
| | 2,531 |
| | — |
| | 2,490 |
| (3) | 336 |
| |
Allowance for revenue adjustments | | | 405 |
| | — |
| | 3,055 |
| | 2,996 |
| (3) | 464 |
|
| Income tax valuation | | 319 |
| | (85 | ) | | — |
| | — |
| | 234 |
| | 282 |
| | 78 |
| | — |
| | — |
| | 360 |
|
| | | 1,763 |
| | 2,869 |
| | — |
| | 2,479 |
| | 2,153 |
| | 1,996 |
| | 1,892 |
| | 3,055 |
| | 3,577 |
| | 3,366 |
|
| Year ended December 31, 2016 | | | | | | | | | | | |
| Allowance for doubtful accounts | | | $ | 1,310 |
| | $ | 258 |
| | $ | — |
| | $ | 259 |
| (2) | $ | 1,309 |
|
Allowance for revenue adjustments (1) | | | 1,095 |
| | — |
| | 2,020 |
| | 2,710 |
| (3) | 405 |
|
| Income tax valuation | | | 284 |
| | (2 | ) | | — |
| | — |
| | 282 |
|
| | | | 2,689 |
| | 256 |
| | 2,020 |
| | 2,969 |
| | 1,996 |
|
(1) Represents an allowance for adjustments to accounts receivable due to disputed rates, accessorial charges and other aspects of previously billed shipments.
(2) Represents uncollectible accounts written off, net of recoveries
(3) Represents adjustments to billed accounts receivable
|
| | |
| EXHIBIT INDEX |
| No. | | Exhibit |
| 3.1 | | |
| 3.2 | | |
| 4.1 | | |
| 10.1 | * | |
| 10.2 | | Lease Agreement, dated as of June 1, 2006, between the Greeneville-Greene County Airport Authority and the registrant (incorporated herein by reference to Exhibit 10.3 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission on February 27, 2007 (File No. 0-22490)) |
10.3 | | |
10.410.3 | * | |
10.510.4 | | Credit |
10.610.5 | * | |
10.710.6 | * | |
10.810.7 | * | |
10.910.8 | * | |
10.1010.9 | * | |
10.1110.10 | * | |
10.1210.11 | * | |
|
10.15 | | |
| 10.14 | * | Form of Restricted Stock Agreement for an award of restricted stock under the registrant's 1999 Stock Option and Incentive Plan, as amended, granted during 2006 (incorporated herein by reference to Exhibit 10.19 to the registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission on March 22, 2006 (File No. 0-22490)) |
10.16 | * | Form of Restricted Stock Agreement under the registrant's Amended and Restated Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.19 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on February 24, 2011 (File No. 0-22490)) |
10.17 | * | Form of Non-Employee Director Restricted Stock Agreement for an award of restricted stock under the registrant's 2006 Non-Employee Director Stock Plan (incorporated herein by reference to Exhibit 99.2 to the registrant's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 19, 2006 (File No. 0-22490)) |
10.18 | * | Form of Performance Share Agreement for performance shares granted in February 2011, under the registrant's Amended and Restated Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, filed with the Securities and Exchange Commission on April 25, 2011 (File No. 0-22490)) |
10.19 | * | |
10.2010.15 | * | |
10.2110.16 | * | |
10.2210.17 | * | |
10.23 | * | Form of Restricted Stock Agreement for an award granted in February 2013, under the registrant's Amended and Restated Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, filed with the Securities and Exchange Commission on April 25, 2013 (File No. 0-22490)) |
10.24 | * | Form on Non-Qualified Stock Option Agreement for an award granted in February 2013, under the registrant's Amended and Restated Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.4 to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, filed with the Securities and Exchange Commission on April 25, 2013 (File No. 0-22490)) |
10.2510.18 | * | |
10.2610.19 | | Stock Purchase Agreement dated March 4, 2013, by and among |
10.27 | | Stock Purchase Agreement dated January 23, 2014, by and among Forward Air Corporation, Central States Trucking Co., Central States Logistics, Inc., Central States, Inc., and the stockholders of Central States, Inc. (incorporated herein by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6, 2014 (File No. 0-22490)) |
10.28 | | First amendment to the Credit Agreement dated February 14, 2012 by and among the Company, certain of its subsidiaries, the lenders referred to therein and Bank of America, N.A., as administrative agentIncentive Plan (incorporated herein by reference to Exhibit 10.1 to the registrant's Currentregistrant’s Quarterly Report on Form 8-K10-Q for the quarterly period ended March 31, 2016, filed with the Securities and Exchange Commission on May 21, 2014April 27, 2016 (File No. 0-22490)) |
|
| 10.20 | * | |
10.29 | | Form of Nonqualified Stock Option Agreement under the registrant’s Amended and Plan of Merger, dated February 4, 2015 byRestated Stock Option and among CLP Towne Inc., Forward Air, Inc., FAC Subsidiary, Inc., ZM Private Equity Fund I, L.P., as the Equity Holders’ Representative, and the Indemnifying Equity Holders party theretoIncentive Plan (incorporated herein by reference to Exhibit 2.110.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 201512, 2016 (File No. 0-22490)) |
| 10.21 | * | |
| 10.22 | * | |
| 10.23 | * | |
| 10.24 | * | |
| 10.25 | * | |
| 10.26 | * | |
| 10.27 | * | |
| 10.28 | * | |
| 10.29 | * | |
| 10.30 | * | |
| 10.31 | * | |
| 10.32 | * | |
|
| | |
| 10.33 | * | |
| 10.34 | * | |
| 10.35 | * | |
| 10.36 | * | |
| 10.37 | * | |
| 10.38 | * | |
| 10.39 | * | |
| 10.40 | | Credit Agreement dated February 4, 2015September 29, 2017 among Forward Air Corporation and Forward Air, Inc., as the borrowers, the subsidiaries of the borrowers identified therein as the guarantors, Bank of America, N.A., First TennesseeU.S. Bank N.A.National Association and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2015 (File No. 0-22490))October 3, 2017) |
10.3110.41 | * | First Amendment dated June 19, 2015 toForm of CEO Nonqualified Stock Option Agreement under the Credit Agreement dated February 4, 2015 among Forward Air Corporation and Forward Air, Inc., as borrowers, the subsidiaries of the borrowers identified therein, Bank of America, N.A., First Tennessee Bank, N.A. and the other lenders party theretoregistrant’s 2016 Omnibus Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.310.4 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on July 24, 2015 (File No. 0-22490))April 26, 2018) |
| 10.42 | * | |
| 10.43 | * | |
| 10.44 | * | |
| 10.45 | * | |
| 10.46 | * | |
| 21.1 | | |
| 23.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 32.2 | | |
*Denotes a management contract or compensatory plan or arrangement.
