UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 20172019
Commission file number: 001-16853000-22490
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 CORPORATIONCORPORATION
(Exact name of Registrant as specified in its charter)
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| Tennessee | 62-1120025
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| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | (I.R.S. Employer Identification No.) |
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| 1915 Snapps Ferry Road | Building N | Greeneville |
Greeneville, TennesseeTN | 37745 |
| (Address of principal executive offices) | (Zip Code) |
(423) (423) 636-7000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| Common Stock, $0.01 par value | FWRD | The Nasdaq Stock Market LLC |
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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. Yesþ 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 oNoþ
Indicate by check mark whether the 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ 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’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. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filerþ | ☑ | Accelerated filero | ☐ | Non-accelerated filero | ☐ | Smaller reporting Companyo | ☐ | Emerging Growth Companyo | ☐ |
If an emerging growth company, indicate by checkmark if the registrant has elected not 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). Yes o☐ No þ
The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $1,581,907,549$1,635,989,687 as of June 30, 2017.2019.
The number of shares outstanding of the Registrant’s common stock (as of February 20, 2018)14, 2020): 29,584,53728,138,584.
Documents Incorporated By Reference
Portions of the proxy statement for the 20182020 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 7.6. | | |
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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, 20172019 (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, orpayment of dividends, other financial items;items or related accounting treatment, or cost reduction measures; 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 claims;litigation; any statements regarding regulation and legislative impacts on our business; any statements concerning proposed or intended, new services, developments or developments;integration measures; 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, including the integration of services and our geographic location; any statement regarding our properties; any statements regarding intended expansion through acquisition or greenfield startups; any statements regarding future business, economic conditions or performance; any statements regarding our environmental initiatives 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 availabilitymanage our growth and compensation of qualified independent owner-operators and freight handlers as well as contracted, third-party carriers neededability to serve our customers’ transportation needs, the inability of our information systemsgrow, in part, through acquisitions, while being able to handle an increased volume of freight moving through our network, changes in fuel prices,successfully integrate such acquisitions, our inability to maintain our historical growth rate because of a decreased volume of freight or decreased average revenue per pound of freight moving through our network, lossthe availability and compensation of a major customer, increasing competitionqualified independent owner-operators and pricing pressure,freight handlers as well as contracted, third-party carriers needed to serve our ability to secure terminal facilities in desirable locations at reasonable rates,customers’ transportation needs, our inability to successfully integrate acquisitions,manage our information systems and inability of our information systems to handle an increased volume of freight moving through our network, the occurrence of cybersecurity risks and events, market acceptance of our service offerings, claims for property damage, personal injuries or workers’ compensation, enforcement of and changes in governmental regulations, environmental, tax, insurance and taxaccounting matters, and the handling of hazardous materials.materials, changes in fuel prices, loss of a major customer, increasing competition and pricing pressure, our dependence on our senior management team and the potential effects of changes in employee status, seasonal trends, the occurrence of certain weather events, restrictions in our charter and bylaws. 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 provide less-than-truckload (“LTL”), final mile, truckload, intermodal drayage and pool distribution services across the United States and in Canada. We offer premium services that typically require precision execution, such as expedited transit, delivery during tight time windows and special handling. 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 common stock is listed on the Nasdaq Global Select Market under the symbol “FWRD”.
Services Provided
Our services are classified into four principalthree reportable segments: Expedited LTL, Truckload Premium Services (“TLS”),Freight, Intermodal and Pool Distribution. For financial information relating to each of our business segments, see Note 10, “SegmentSegment Reporting” in the Notes to consolidatedour Consolidated Financial Statements included in this Form 10-K.
Effective September 1, 2018, Thomas Schmitt was named the Company's President and Chief Executive Officer. Mr. Schmitt is the Company's Chief Operating Decision Maker ("CODM") and is primarily responsible for allocating resources to and assessing the performance of the Company's segments. As a result of this change in leadership, the Company revisited its strategy, and in the fourth quarter of 2019, we consolidated our Truckload Premium Services operations into our Expedited Freight network
operations. This allowed Expedited LTL.Freight to diversify its revenues while simultaneously enhancing its owner-operator and brokerage relationships, which has lowered Expedited Freight’s linehaul and overall unit costs. Due to this change in leadership and the implementation of a new strategy, management determined that a change in the Company’s reportable segments had occurred.
Expedited Freight. We operate a comprehensive national network to provide expedited regional, inter-regional and national LTL services. Expedited LTLFreight offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling. Because ofWe plan to grow our roots in serving the deferred air freight market, our terminal network is located at or near airports in the United StatesLTL and Canada.final mile geographic footprints through greenfield start-ups as well as acquisitions. During the year ended December 31, 2017,2019, Expedited LTLFreight accounted for 56.3%70% of our consolidated revenue.
TLS. 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, 2017, TLS accounted for 16.3% of our consolidated revenue.
Intermodal.Intermodal. We provide first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers 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.Southwest United States. 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. During the year ended December 31, 2017,2019, Intermodal accounted for 13.5%15% of our consolidated revenue.
Pool Distribution.Distribution. We provide high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. We offer this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States. During the year ended December 31, 2017,2019, Pool Distribution accounted for 14.9%15% of our consolidated revenue.
Strategy
Our strategy is to take advantage of our core competencies in precision execution to provide asset-light freight and logistics services in order to profitably grow in the premium or high service level segments of the markets we serve. Principal components of our efforts include:
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| • | Expand Service Offerings. We believe we can increase freight volumes and revenues by offering new and enhanced services that address more of our customers’ premium transportation needs. In the past few years, we have added or enhanced LTL pickup and delivery, final mile solutions, expedited truckload, temperature-controlled shipments, warehousing, drayage, customs brokerage and shipment consolidation and handling services. These services benefit our existing customers and increase our ability to attract new customers. We also believe we can increase freight volumes by providing services to customers like third-party logistics companies and international freight forwarders that have historically represented a small percentage of our customer base and by opening new terminals in underpenetrated markets away from airport locations. |
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| • | Pursue Strategic Acquisitions. We continue to evaluate and pursue acquisitions that can increase our penetration of a geographic area; add new customers, business verticals and services; and increase freight volume. For example, we acquired Central States Trucking Co. (“CST”) in 2014, which created the foundation for what is now our Intermodal segment. Since our acquisition of CST in 2014, we have completed nine additional intermodal acquisitions including O.S.T. Trucking, Inc. and O.S.T. Logistics Inc. (collectively, “O.S.T.”), which we closed in July 2019. We also acquired FSA Network, Inc. ("FSA") in April 2019, which expanded and enhanced our final mile footprint. In addition, in December 2019 we signed an agreement to acquire Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC (collectively, “Linn Star”), which we closed in January 2020. The acquisition of Linn Start expands our final mile footprint to an additional 20 locations. |
Expand Service Offerings. We believe we can increase freight volumes and revenues by offering new and enhanced services that address more of our customers’ premium transportation needs. In the past few years, we have added or enhanced LTL pickup and delivery, customer label integration, expedited truckload, temperature-controlled shipments, warehousing, drayage, customs brokerage and shipment consolidation and handling services. These services benefit our existing customers and increase our ability to attract new customers.
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| • | Enhance Information Systems. We are committed to the development and enhancement of our information systems in order to provide us competitive service advantages and increased productivity. We believe our information systems have and will assist us in capitalizing on new business opportunities with existing and new customers. |
Enhance Information Systems. We are committed to the development and enhancement of our information systems in order to provide us competitive service advantages and increased productivity. We believe our information systems have and will assist us in capitalizing on new business opportunities with existing and new customers.
Pursue Strategic Acquisitions. We continue to evaluate and pursue acquisitions that can increase our penetration of a geographic area; add new customers, business verticals and services; and increase freight volume. For example, we acquired Central States Trucking Co. (“CST”) in 2014. CST provides industry-leading container and intermodal drayage services within the Midwest, Southeast and Southwest regions of the United States. CST also provides linehaul service within the LTL space as well as dedicated contract and CFS warehouse services. Since our acquisition of CST in 2014, CST has completed six acquisitions. In 2017, CST 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”) and certain assets of Kansas City Logistics, LLC ("KCL").
Operations
The following describes in more detail the operations of each of our reportable segments: Expedited LTL, Truckload Premium Services,Freight, Intermodal and Pool Distribution.
Expedited LTLFreight
Overview
Our Expedited LTLFreight segment provides expedited regional, inter-regional and national LTL, final mile and truckload services. We market our Expedited LTLFreight services primarily to freight and logistics intermediaries (such as freight forwarders and third partythird-party logistics companies) and, airlines (such as integrated air cargo carriers, and passenger and cargo airlines) and retailers (such as retailers of heavy bulky appliances). We offer our customers a high level of service with a focus on on-time, damage-free deliveries. Our terminals are located on or near airportsExpedited Freight network encompasses approximately 92% of all continental U.S. zip codes, with service in the United States and Canada and maintain regularly scheduled transportation service between major cities.Canada.
Operations
Our Expedited LTL network consists of terminals located in the following 94 cities:
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City | | Airport Served | | City | | Airport Served |
Albany, NY | | ALB | | Lubbock, TX* | | LBB |
Albuquerque, NM* | | ABQ | | Memphis, TN | | MEM |
Allentown, PA* | | ABE | | McAllen, TX | | MFE |
Amarillo, TX* | | AMA | | Miami, FL | | MIA |
Atlanta, GA | | ATL | | Midland, TX* | | MAF |
Austin, TX | | AUS | | Milwaukee, WI | | MKE |
Baltimore, MD** | | BWI | | Minneapolis, MN | | MSP |
Baton Rouge, LA* | | BTR | | Mobile, AL* | | MOB |
Birmingham, AL* | | BHM | | Moline, IA | | MLI |
Blountville, TN* | | TRI | | Montgomery, AL* | | MGM |
Boston, MA | | BOS | | Nashville, TN | | BNA |
Buffalo, NY | | BUF | | Newark, NJ | | EWR |
Burlington, IA | | BRL | | Newburgh, NY | | SWF |
Cedar Rapids, IA | | CID | | New Orleans, LA | | MSY |
Charleston, SC**** | | CHS | | New York, NY | | JFK |
Charlotte, NC | | CLT | | Norfolk, VA | | ORF |
Chicago, IL | | ORD | | Oklahoma City, OK | | OKC |
Cincinnati, OH | | CVG | | Omaha, NE | | OMA |
Cleveland, OH | | CLE | | Orlando, FL | | MCO |
Columbia, SC* | | CAE | | Pensacola, FL* | | PNS |
Columbus, OH*** | | CMH | | Philadelphia, PA | | PHL |
Corpus Christi, TX* | | CRP | | Phoenix, AZ | | PHX |
Dallas/Ft. Worth, TX | | DFW | | Pittsburgh, PA | | PIT |
Dayton, OH* | | DAY | | Portland, OR | | PDX |
Denver, CO | | DEN | | Raleigh, NC | | RDU |
Des Moines, IA** | | DSM | | Richmond, VA | | RIC |
Detroit, MI | | DTW | | Roanoke, VA | | ROA |
El Paso, TX | | ELP | | Rochester, NY | | ROC |
Evansville, IN | | EVV | | Sacramento, CA | | SMF |
Fort Wayne, IN | | FWA | | Saginaw, MI | | MBS |
Grand Rapids, MI | | GRR | | Salt Lake City, UT | | SLC |
Greensboro, NC | | GSO | | San Antonio, TX | | SAT |
Greenville, SC | | GSP | | San Diego, CA | | SAN |
Hartford, CT | | BDL | | San Francisco, CA | | SFO |
Harrisburg, PA | | MDT | | Seattle, WA | | SEA |
Houston, TX | | IAH | | Shreveport, LA* | | SHV |
Huntsville, AL* | | HSV | | South Bend, IN | | SBN |
Indianapolis, IN | | IND | | St. Louis, MO | | STL |
Jacksonville, FL | | JAX | | Syracuse, NY | | SYR |
Kansas City, MO | | MCI | | Tampa, FL | | TPA |
Knoxville, TN* | | TYS | | Toledo, OH* | | TOL |
Lafayette, LA* | | LFT | | Traverse City, MI* | | TVC |
Laredo, TX | | LRD | | Tucson, AZ* | | TUS |
Las Vegas, NV | | LAS | | Tulsa, OK** | | TUL |
Little Rock, AR* | | LIT | | Washington, DC | | IAD |
Los Angeles, CA | | LAX | | Montreal, Canada* | | YUL |
Louisville, KY | | SDF | | Toronto, Canada | | YYZ |
* Denotes an independent agent location.
** Denotes a location with combined Expedited LTL and Pool Distribution operations.
*** Denotes a location in which Expedited LTL is an agent for Pool Distribution.
****Denotes a location with combined Expedited LTL and Intermodal operations.
Independent agents operate 23 of our Expedited LTL locations. These locations typically handle lower volumes of freight relative to our Company-operated facilities.
Shipments
During 2017,2019, approximately 30.1%32% of the freight handled by Expeditedour LTL network was for overnight delivery, approximately 55.6%55% was for delivery within two to three days and the balance was for delivery in four or more days.
The average weekly volume of freight moving through our Expedited LTL network network was approximately 49.548.6 million pounds per week in 2017.2019. During 2017,2019, our average shipment weighed approximately 623621 pounds. Although we impose no significant size or weight restrictions, we focus our marketing and price structure on shipments of 200 pounds or more.
Expedited LTLFreight generally does not market its services directly to shippers (where such services might compete with our freight and logistics intermediary customers). Also, because Expedited LTLFreight does not place significant size or weight restrictions on shipments, we generally do not compete directly 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 LTL network for each year since 2003.2005.
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| Average Weekly | Average Weekly |
| Volume in Pounds | Volume in Pounds |
| Year | (In millions) | (In millions) |
| 2003 | 25.3 | |
| 2004 | 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 | 46.5 |
| 2017 | 49.5 | 49.5 |
| 2018 | | 50.2 |
| 2019 | | 48.6 |
Purchased Transportation
Our licensed property broker places our customers’ cargo with qualified motor carriers, including our own, and other third-party transportation companies. Expedited LTL’sFreight's 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.
We seek to establish long-term relationships with owner-operators to assure dependable service and availability. Historically,We believe Expedited LTLFreight has experienced significantly higher-than-industryhigher average retention of owner-operators.owner-operators compared to other over-the-road transportation providers. Expedited LTLFreight has established specific guidelines relating to safety records, driving experience and personal evaluations that we use to select our owner-operators. To enhance our relationship with the owner-operators, Expedited LTLFreight seeks to pay rates that are generally above prevailing market rates and our owner-operators often are able to negotiate a consistent work schedule for their drivers. Usually, owner-operators negotiate schedules for their drivers 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, 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. Of the $254.9$562.8 million incurred for Expedited LTL's purchasedFreight's transportation during 2017,2019, we purchased 53.8%45% from the owner-operators of our licensed motor carrier, 7% from our company fleet and 46.2%48% from other surface transportation providers.
All of our Expedited Freight independent contractor tractors are equipped with in-cab communication devices, which enable us to communicate with drivers, plan and monitor shipment progress and monitor and record 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 Freight continues to evolve the capabilities of its network to provide additional value-added services. Expedited Freight also seeks to lower its unit costs by integrating these services into the overall operation of its network.
Expedited Freight offers final mile services which include the delivery and installation of heavy bulky appliances such as washing machines, dryers, dishwashers and refrigerators. Through the acquisition of FSA Logistix in 2019 and acquisition of Linn Star in January 2020, Expedited Freight significantly expanded its final mile geographic footprint and now operates in 83 locations nationwide. Expedited Freight is also increasingly integrating these deliveries into its LTL customers increasingly demand more thanpickup and delivery and terminal operations so as to increase network density and lower overall LTL unit costs.
In the movementfourth quarter of freight from their transportation providers. To meet these demands,2019, we continually seek waysconsolidated our Truckload Premium Services operations into our Expedited Freight network operations. This allowed Expedited Freight to customizediversify its revenues while simultaneously enhancing its owner-operator and add newbrokerage relationships, which has lowered Expedited Freight’s linehaul and overall unit costs. As a result of this consolidation, Expedited Freight offers expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-controlled logistics services.
Other Expedited LTLFreight services allow customers to access the following services from a single source:
customs brokerage;
warehousing, dock and office space;
hotshot or ad-hoc ultra expeditedultra-expedited services; 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 forwarders, third partythird-party logistics (“3PL”) companies, integrated air cargo carriers and passenger, cargo airlines, steamship lines and steamship lines.retailers. Expedited LTL’sFreight’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 LTLFreight an attractive option for 3PL providers, , which is one of the fastest growing segments in the transportation 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 2017, LTL's2019, Expedited Freight's ten largest customers accounted for approximately 31%36% of its operating revenue butand had no customers with revenue greater than 10% of Expedited Freight operating revenue for 2019. No single customer accounted for more than 10% of our consolidated revenue.
Truckload Premium Services
Overview
Our TLS segment is an asset-light provider of transportation management services, including, but not limited to, expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-controlled logistics services. We market our TLS services to 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 located 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 average weekly miles driven for each year since 2003.
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| | Average Weekly Miles |
| Year | (In thousands) |
| 2003 | 211 |
| 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 |
Transportation
TLS utilizes a dedicated fleet of owner-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 services 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).
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 4,400 qualified carriers. Of the $143.0 million incurred for TLS transportation during 2017, we purchased 34.5% from the owner-operators of our licensed motor carrier, 8.2% from our company fleet and 57.3% 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, 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 2017, TLS’ ten largest customers accounted for approximately 77% of its operating revenue but no single customer accounted for more than 10% of our consolidated revenue.
Intermodal
Overview
Our Intermodal segment provides first- and last-mile high value intermodal container drayage services. We market our Intermodal services to import and export customers. Intermodal offers first- and last-mile transportation of freight both to and from seaports and railheads through arailheads. Intermodal also offers dedicated fleetcontract and third party transportation providers.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.Southwest and Mid-Atlantic 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 contrainercontainer visibility and per diem management reports.
Operations
Intermodal’s primary office is located in Oak Brook, Illinois. Intermodal’s network consists of terminals21 locations primarily in the following locations:Midwest and Southeast, with a smaller operational presence in the Southwest United States.
|
| |
City |
Atlanta, GA | Joliet, IL |
Charleston, SC | Kansas City, MO |
Charlotte, NC | Memphis, TN |
Chicago/Joliet, IL | Milwaukee, WI |
Cincinnati, OH | Minneapolis, MN |
Cleveland, OH | Nashville, TN |
Dallas, TX | Norfolk, VA |
Houston, TX | Rochelle, IL |
Indianapolis, IN | Romulus, MI |
Jacksonville, FL | Savannah, GA |
Transportation
Intermodal utilizes a mix of Company-employed drivers, owner-operators and third partythird-party carriers. During 2017,2019, approximately 19.7%73% of Intermodal’s direct transportation expenses were provided by owner-operators, 25% by Company-employed drivers, 78.8%and 2% by owner-operators and 1.5% was provided by third partythird-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 2017,2019, Intermodal’s ten largest customers accounted for approximately 31% of its operating revenue butand had no customers with revenue greater than 10% of Intermodal operating revenue for 2019. No single customer accounted for more than 10% of our consolidated revenue.
Pool Distribution
Overview
Our Pool Distribution (or “Pool”) segment provides pool distribution services through a network of terminals and service locations in 27 cities throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. We market these services to national and regional retailers and distributors.
Operations
Our Pool Distribution network consists of terminals and service locations in the following 27 cities:
|
| |
City |
Albuquerque, NM* | Kansas City, MO |
Atlanta, GA | Lakeland, FL |
Baltimore, MD*** | Las Vegas, NV |
Baton Rouge, LA* | Little Rock, AR* |
Charlotte, NC | Miami, FL |
Chicago, IL* | Montgomery, AL |
Columbus, OH** | Nashville, TN |
Dallas/Ft. Worth, TX | 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*** |
Jeffersonville, OH | |
* Denotes an independent agent station.
** Denotes a location in which Expedited LTL is an agent for Pool Distribution.
*** Denotes a location with combined Expedited LTL and Pool Distribution operations.
Transportation
Pool 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 Pool transportation services is dependent on the individual markets and related customer routes. During 2017,2019, approximately 37.0%36% of Pool's direct transportation expenses were provided by Company-employed drivers, 34.4%third-party carriers, 34% by owner-operators and 28.6%30% was provided by third party carriers.Company-employed drivers.
Customers
Pool Distribution’s customer base is primarily composed of national and regional retailers and distributors. Pool’s threeten largest customers accounted for approximately 41%78% of Pool Distribution’s 20172019 operating revenue but revenues from theseand had three customers do not exceedwith revenue greater than 10% of our consolidatedPool Distribution’s 2019 operating revenue. No other customerssingle customer accounted for more than 10% of Pool’s operatingour consolidated revenue.
Competition
We compete in the North American transportation and logistics services industry, and the markets in which we operate are highly competitive, very fragmented and 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 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.
Our Expedited LTL, TLS and Pool Distribution segmentsFreight segment primarily competecompetes with other national and regional truckload carriers. Expedited LTLFreight 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.airlines. Our Intermodal segment primarily competes with national and regional drayage providers. Our Pool Distribution segment primarily competes with other national and regional truckload carriers.
We believe competition in our segments is based primarily on quality service, available capacity, on-time delivery, flexibility, reliability, and 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 LTLFreight segment has an advantage over other truckload and less-than-truckload carriers because Expedited LTLFreight 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 TLS and Intermodal segments havesegment has 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 enables our Pool Distribution segment to provide consistent, high-quality service to our customers regardless of location, which is a competitive advantage over other 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 levels. We participate in 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. 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 distributionPool Distribution business, whose 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, 2017,2019, we had 3,8574,640 full-time employees, 1,3392,014 of whom were freight handlers. Also, as of that date, we had an additional 1,041840 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 are essential to support our continued growth and to meet the service requirements of our customers.
We manage a trailer pool that is utilized by all of our reportable segments to move freight through our networks. Our trailer pool includes dry van, refrigerated and roller-bed trailers, and substantially all of our trailers are 53 feet long. We own the majority of the trailers we use, but we supplement at times with leased trailers. AtAs of December 31, 2017,2019, we had 5,6806,709 owned trailers in our fleet with an average age of approximately 5.44.4 years. In addition, atas of December 31, 2017,2019, we also had 784469 leased trailers in our fleet. AtAs of December 31, 2017,2019, we had 581426 owned tractors and straight trucks in our fleet, with an average age of approximately 6.46.6 years. In addition, atas of December 31, 2017,2019, we also had 383927 leased tractors and straight trucks in our fleet.
Environmental Protection and Community Support
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. Our initiatives will be focused on reducing overall waste, electricity consumption and carbon emissions, while working to increase employee engagement and community involvement.
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 electric 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 also focus on increasing our landfall diversion rate through our partnership with Waste Harmonics.
In addition, we are a corporate partner of Truckers Against Trafficking, a nonprofit organization that educates, equips, empowers and mobilizes members of the trucking and busing industries to combat human trafficking. On Veteran’s Day 2019, Forward Air also launched Operation: Forward Freedom - providing support to our Veterans primarily through partnering with Hope for the Warriors. Hope for the Warriors is a nonprofit organization that is dedicated to restoring a sense of self, family and hope to United States military veterans. This is an important cause for us as many of our employees, independent contractors, customers and vendors are or have a family member who is a military veteran.
Finally, we joined Women in Trucking in November 2019. Women in Trucking is a nonprofit organization, supporting and celebrating women in the trucking industry. We recognize the value in describing our sustainability focus and will continue to update our future disclosures accordingly. We are committed to making our presence count across the country.
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, and 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 $1.0$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 October 1, 2019, 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 vehicle liability and general liability claims for the Expedited Freight, excluding its truckload operation, and Pool Distribution segments. Truckload maintains separate liability insurance coverage for claims between $0 and $5.0 million, and for the policy year that began April 1, 2019, truckload 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, 2019, Intermodal had an SIR of less than $0.1 million for each claim. We also maintain separate brokerage liability insurance coverage to cover third-party claims for
damages and personal injuries arising from accidents with drivers employed and engaged by third-party transportation carriers, and this policy covering our Expedited LTL and Pool Distribution segments has an SIR of $0.1 million 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 $0.4 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
We are regulated by various United States and state agencies, including but not limited to the DOT.DOT, the Federal Motor Carrier Safety Administration, under the DOT, manages a Compliance, Safety, Accountability initiative (“CSA”) as well as electronic logging devices in commercial motor vehicles, and that states’ jurisdiction with respect to the regulation of operations safety and insurance. We are also subject to laws and regulations under the U.S. Environmental Protection Agency and the Occupational Safety and Health Administration, which regulate safety, the supervision of hazardous materials, water discharges, air emissions, solid waste disposal and the release and cleanup of other substances. These regulatory authorities have broad powers, generally governing matters such as authority to engage in 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. The 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 subject to compliance with cargo-security and transportation regulations issued by the Transportation Security Administration and Customs and Border Protection (“CBP”) within the U.S. Department of Homeland Security, and our domestic customs brokerage operations are licensed by CBP.
We are also subject to employment laws and regulations, including the changing regulatory landscape, with the potential effects of California Assembly Bill 5 (“California AB5”), which would introduce a new test for determining worker classification that is viewed as expanding the scope of employee relationships and narrowing the scope of independent contractor relationships.
Additionally, our Canada business activities are subject to similar requirements imposed by the laws and regulations of Canada, as well as its provincial laws and regulations. Regulatory requirements, and changes in 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®, Keeping Your Business Moving Forward®, Forward Air®, Forward Air Solutions®, Forward Air Complete®, PROUD®, Total Quality, Inc.®, TQI, Inc.®, TQI®, Central States Trucking Co.®, First in “Last Mile” Home Delivery®, FSA Logistix®, FSA Logistix A Final Mile Company®, FSA Network, Inc.®, Forward CST Because it matters, think Forward SM, Forward LTL Because it matters, think Forward SM, Final Forward Mile Because it matters, think Forward SM, Forward Truckload Services Because it matters, think Forward SM, and CSTForward Solutions Because it matters, think ForwardSM. These marks are of significant value to our business.
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, current reports on Form 8-K8-K. other reports and otheramendments 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 oursuch reports as soon as reasonably practicable
after such material is electronically filed with or furnished to the SEC. Our website 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.
Information About our Executive Officers
The current executive officers of the Company, as of February 24, 2020 are listed below. The ages listed below are as of December 31, 2019.
The following are our executive officers: |
| | | | |
| Name | | Age | | Position |
| Thomas Schmitt | | 54 | | President, Chief Executive Officer and Executive Chairman |
| Michael J. Morris | | 51 | | Chief Financial Officer and Treasurer |
| Michael L. Hance | | 48 | | Chief Legal Officer & Secretary |
| Chris C. Ruble | | 57 | | Chief Operating Officer |
| Matthew J. Jewell | | 53 | | Chief Commercial Officer |
There are no family relationships between any of our executive officers. All officers hold office until the earliest to occur of their resignation or removal by the Board of Directors.
Thomas Schmitt has served as President, Chief Executive Officer and director since September 2018 and was elected Chairman of the Board in May 2019. Prior to joining Forward Air, Mr. Schmitt served as Management Board Member and Chief Commercial Officer for DB Schenker, a Global Logistics Company from June 2015 to July 2018. From January 2013 to April 2015, Mr. Schmitt was President, CEO and Director of Aqua Terra, a Canadian provider of natural spring water. From 2010 to 2012, Mr. Schmitt served as President, CEO and Director of Purolator, a Canadian parcel and freight transportation company. Prior to joining Purolator, Mr. Schmitt spent 12 years at FedEx in Memphis, TN where he served as CEO of FedEx Supply Chain and SVP of FedEx Solutions. Prior to his time with FedEx, Mr. Schmitt held senior roles at McKinsey & Company. Mr. Schmitt has been a member of the Xynteo Leadership board since 2018 and a Non-Executive Director of the Ferguson Plc board since February 2019. Mr. Schmitt also served on the board of directors of Dicom Transportation Group from January 2014 to June 2018, Zooplus AG, from June 2013 to May 2016, Univar, Inc., from July 2008 to June 2013 and Cyberport GmbH since June 2015.
Michael J. Morris has served as Chief Financial Officer and Treasurer since June 2016. From 2010 to 2015, Mr. Morris was the Senior Vice President of Finance & Treasurer at Con-way Inc. (“Con-way”) and in 2016 he transitioned to be the Senior Vice President of Finance & Treasurer at XPO Logistics Inc. (“XPO”) following XPO's acquisition of Con-way.
Michael L. Hance has served as 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 has served as Chief Operating Officer for the entire Company since May 2019. Mr. Ruble was Chief Operating Officer for the Company's Expedited Freight, TLS (now part of Expedited Freight) and Pool Distribution segments from June 2018 to May 2019. Prior to this role, 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 has served as Chief Commercial Officer since May 2019. Mr. Jewell was President, Intermodal from June 2018 to May 2019, President, Logistics Services from January 2016 to June 2018, Executive Vice President, Intermodal Services & Chief Strategy Officer from May 2014 to January 2016, and Executive Vice President and Chief Legal 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.
Other information required by this item is incorporated herein by reference to our proxy statement for the 2020 Annual Meeting of Shareholders (the “2020 Proxy Statement”). The 2020 Proxy Statement will be filed with the SEC not later than 120 days subsequent to December 31, 2019.
We routinely encounter and address risks in conducting our business. Some of these risks may cause our future results to be different - sometimes materially different - than we presently anticipate. BelowThe following are material risks we have identifiedimportant risk factors that could adversely affect our business. How we reactfinancial performance and could cause actual results for future periods to material future developments,differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Annual Report on Form 10-K or our other filings with the SEC or in oral presentations such as well as howtelephone 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 competitorsConsolidated Financial Statements and customers react to those developments, could also affect our future results.related Notes in Item 8.
Overall economic conditions that reduce freight volumes could have a material adverse impact on our 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 our customers, interest and currency 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 economic activity in the United States, and as a result, trucking freight volumes may be 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 base 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 lower our base transportation rates based on competitive pricing pressures and market factors.
Some of our customers may face economic difficulties and may 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 working 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 the domestic freight forwarder, Expedited Freight’s primary customer, is disintermediated, and we are not able to transition effectively into servicing other customers, like third-party logistics companies and beneficial cargo owners, our business and financial results could be materially adversely affected.
We may have difficulty effectively managing our growth, which could adversely affect our business, results of operations and financial condition.
Our 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.
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;
integration of information technology systems;
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.
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 2017,2019, owner-operators provided 57.3%56.1% 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 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 topicAdditionally, we are aware of certain judicial decisions and legislative proposals that could bring about major reforms in the classification of individualsworkers, including the California legislature’s recent passage of California Assembly Bill 5 (“California AB 5”). California AB 5 purports to codify a new test for determining worker classification that is broadly viewed as employees orexpanding the scope of employee relationships and narrowing the scope of independent contractorscontractor relationships. Given the recent passage of California AB 5, there is no guidance from regulatory authorities, and there is a significant degree of uncertainty regarding its application. In addition, California AB 5 has gained increased attention amongbeen the plaintiffs’ bar. One or more governmental authoritiessubject of widespread national discussion and it is possible that other jurisdictions may challenge our position that the owner-operators we use are not our employees. enact similar laws.
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 exposure could include prior period compensation, as well as potential liability for employee benefits and tax withholdings. In addition, the topic of the
classification of individuals as employees or independent contractors has gained increased attention among the plaintiffs’ bar and certain states have recently seen numerous class action lawsuits filed against transportation companies that engage independent contractors, some of which 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 our 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, our customers and third parties increasingly store and transmit data by means of connected information technology systems. 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 subject to risks, many of which are outside of our 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, data leakage, human error, 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, impede our customers’ access to our information technology systems and adversely impact our customer service, volumes, and revenues and result in increased cost. Furthermore, a material network breach in the security of our information technology systems could result in the theft of our intellectual property or trade secrets, personal information of our employees and confidential information of our 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.
Our business is subject to cybersecurity risks.
Our operations depend on effective and secure information technology systems. Threats to information technology systems, including as a result of cyber-attacks and cyber incidents, continue to grow. Cybersecurity risks could include, but are not limited to, malicious software, attempts to gain unauthorized access to our data and the unauthorized release, corruption or loss of our data and personal information, interruptions in communication, loss of our intellectual property or theft of our sensitive or proprietary technology, loss or damage to our data delivery systems, or other electronic security, including with our property and equipment.
These cybersecurity risks could:
Disrupt our operations and damage our information technology systems,
Negatively impact our ability to compete,
Enable the theft or misappropriation of funds,
Cause the loss, corruption or misappropriation of proprietary or confidential information, expose us to litigation and
Result in injury to our reputation, downtime, loss of revenue, and increased costs to prevent, respond to or mitigate cybersecurity events.
If a cybersecurity event occurs, it could harm our business and reputation and could result in a loss of customers. Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive customer or vendor data may be exposed to unauthorized persons or to the public, adversely impacting our customer service, employee relationships and our reputation.
While we continue to make efforts to evaluate and improve our systems and particularly the effectiveness of our security program, procedures and systems, it is possible that our business, financial and other systems could be compromised, which could go unnoticed for a prolonged period of time, and there can be no assurance that the actions and controls that we implement, or which we cause third-party service providers to implement, will be sufficient to protect our systems, information or other property. Additionally, customers or third parties upon whom we rely face similar threats, which could directly or indirectly impact our business and operations. The occurrence of a cyber-incident or attack could have a material adverse effect on our business, financial condition and results of operations.
Our results of operations will be materially and adversely affected if our new service offerings do not gain market acceptance or result in the loss of our current customer base.
One element of our growth strategy is 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 future services or in creating customer acceptance of these services at the prices we would want to charge. In addition, we may be required to devote substantial resources to educate our customers, with no assurance that a sufficient number of customers will use our services for commercial success to be achieved. We may not identify trends correctly, or may not be able to bring new services to market as quickly, effectively or price-competitively as our competitors. In addition, new services may alienate existing customers or cause us to lose business to our competitors. If any of the foregoing occurs, it could have a material adverse effect on our results of operations.
For example, we have in recent years expanded our “final mile” service offering through the acquisition of the assets of FSA and Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC (collectively, “Linn Star”). This is a difficult to serve market and we face competition in this market from competitors that have operated in this market for several years, which may hinder our ability to compete and gain market share.
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. We have a self-insured retention ("SIR") of $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, 2019, 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 Expedited Freight, excluding its truckload operation, and Pool Distribution segments. Truckload maintains separate liability insurance coverage for claims between $0 and $5.0 million, and for the policy year that began April 1, 2019, truckload 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, 2019, 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 difficulty effectively managinga SIR of approximately $0.4 million for each such claim, except in Ohio, where we are a qualified self-insured entity with an approximately $0.5 million SIR. We could incur claims in excess of our growth, whichpolicy 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.
Further, as we focus on growing our final mile solutions business that includes in-home installation of appliances, we may become increasingly subject to inherent risks associated with delivery and installation of products. These risks include incidents that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment, or the suspension of our operations.
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.” Because of these significant self-insured exposures, insurance and claims expense may fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-existing reserves, could adversely affect our financial condition and results of operations. Additionally, our ability to obtain and maintain adequate insurance and the cost of such insurance may be affected by significant claims and conditions in the insurance market over which we have no control. If the cost of insurance increases, we may decide to discontinue certain insurance coverage, reduce our level of coverage or increase our deductibles/retentions to offset the cost increase. In addition, our existing types and levels of insurance coverage could become difficult or impossible to obtain in the future. The occurrence of an event that is not fully covered by insurance, the loss of insurance coverage or a material increase in the cost of insurance could have a material adverse effect on our business, financial condition, results of operations and financial condition.cash flows.
Our growth strategy includes increasing freight volume from existing customers, expandingWe 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. We may fail to establish sufficient insurance reserves and adequately estimate for future insurance claims. This, along with legal expenses, incurred but not reported claims, and other uncertainties can cause unfavorable differences between actual self-insurance costs and 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.reserve estimates.
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, which are subject to political, economic and market factors that are outside of our control.fuel. Fuel prices have fluctuated dramatically over recent years. Future fluctuations in the availability and price of fuel could adversely affect our results of operations. Fuel availability and prices can be impacted by factors beyond our control, such as natural or man-made disasters, adverse weather conditions, political events, economic sanctions imposed against oil-producing countries or specific industry participants, disruption or failure of technology or information systems, price and supply decisions by oil producing countries and cartels, terrorist activities, armed conflict, tariffs, sanctions, other changes to trade agreements and world supply and demand imbalance. Over time we have been able to mitigate the impact of the fluctuations through our fuel surcharge 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 and our fuel surcharge table. Our net fuel surcharge revenue is the result of our fuel surcharge rates and the tonnage transiting our networks. The fuel surcharge revenue is then netted with the fuel surcharge we pay to our owner-operators and third party transportation providers. There can be no assurance that our fuel surcharge revenue programs will be effective in the future as the fuel surcharge may not capture the entire amount of the increase in fuel prices. Additionally, 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. Fuel shortages, changes in fuel
prices and the potential volatility in net fuel surcharge revenue may adversely impact our results of operations and overall profitability.
Because a portion of our network costs are fixed, any factors that result in a decrease in the volume or revenue per pound of freight shipped through our 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 will 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, we do not enter into long-term contracts with our customers. Rather, our customer contracts typically allow 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 timing of our capital investments, pricing models and service availability are generally based on our existing and anticipated customer contracts. Any change in one of the foregoing factors that results in a decrease in the volume or revenue per pound of freight shipped will adversely affect our 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, 2017,2019, our top 10 customers, based on revenue, accounted for approximately 26%29% of our revenue. Our Expedited LTL, TLSFreight and Intermodal segments typically do not have long-term contracts with their customers. While our Pool Distribution 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. 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 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, as well as from logistics companies, internetInternet matching services and internetInternet and third partythird-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 an effort to reduce costs, we have seen our customers solicit bids from multiple transportation providers and decide to develop or expand internal capabilities for some of the services that we provide.
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. The development of new information technology systems or business models could result in our disintermediation in certain businesses, such as freight brokerage. 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 competitive pressures may cause a decrease in our volume of freight, require us to lower the prices we charge for our services and adversely affect our results of operations, growth prospects and profitability.
Our results of operations will be materially and adversely affected if our new service offerings do not gain market acceptance or result in the loss of our current customer base.
One element of our growth strategy is 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 future services or in creating customer acceptance of these services at the prices we would want to charge. In addition, we may be required to devote substantial resources to educate our customers, with no assurance that a sufficient number of customers will use our services for
commercial success to be achieved. We may not identify trends correctly, or may not be able to bring new services to market as quickly, effectively or price-competitively as our competitors. In addition, new services may alienate existing customers or cause us to lose business to our competitors. If any of the foregoing occurs, it could have a 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;
unexpected liabilities;
potential erosion of operating profits as new acquisitions may be unable to achieve profitability comparable with our Expedited LTL 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, our operating results may actually decline and acquired goodwill may become impaired.
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 $111.2$127.8 million of recorded net definite-lived intangible assets on our consolidated balance sheet at December 31, 2017.2019. 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 estimated fair value 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 exceedexceeds the estimated fair value of the assets.
We also have recorded goodwill of $191.7$221.1 million on our consolidated balance sheet at December 31, 2017.2019. 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 are dependent on our senior management team and other key employees, and the loss of any 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 material 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 management of our business. If we 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. We have a self-insured retention of $1.0 million per occurrence for vehicle and general liability claims. 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 retention of approximately $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. 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, 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.
Our business is subject to seasonal trends.
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 withto 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 also 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 or are based on just-in-time production schedules. Therefore, our revenue is, to a large degree, affected by factors that are outside of our control. There can be no assurance that our historic operating patterns will continue in future periods as we cannot influence or forecast many of these factors.
Our results of operations may be affected by harsh weather conditions, disasters and disasters.pandemics.
Certain weather-related conditions such as ice and snow can disrupt our operations. Our operating expenses have historically been higher in the winter months because of cold temperatures and other adverse winter weather conditions, (such as explosive cyclogenesis events) which result in decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs. Harsh weather could also reduce our ability to transport freight, which could result in decreased revenues. Disasters, whether naturalincluding severe weather and public health issues, such as pandemics, occurring in the United States or man-made can also adversely affect our performance by reducing demandabroad, could result in the temporary lack of an adequate work force and reducing our abilitythe temporary disruption in the transport of goods to transportor from overseas which could prevent, delay or reduce freight volumes and could have an adverse impact on consumer spending and confidence levels, all of which could result in decreased revenue and increased operating expenses.revenues.
We operate in a regulated industry, and increased costs of compliance with, or liability for violation of, existing or future regulations and enforcement 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.provinces including the effects of NAFTA and any successor agreement. 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.
TheIn December 2010, the Federal Motor Carrier Safety Administration (“FMCSA”) established the Compliance Safety Accountability (“CSA”) motor carrier oversight program under which drivers and fleets are evaluated based on certain safety-related standards. Carriers’ safety and fitness ratings under CSA include the on-road safety performance of the 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 requirementrule that requires commercial drivers who use paper log books to maintain hours-of-service records with electronic driver logs be monitored by Electronic Log Deviceslogging devices (“ELDs”) for most interstateand will require commercial motor vehicle drivers who use automatic on-board recording devices (“AOBRDs”) to record HOS to use ELDs by no later than December 18, 2017. The cost associated with2019. As of December 2019, our fleets were updated to meet the ELD mandate, together withrequirements. At any given time, there are also other regulations, couldproposals for safety-related standards that are pending legislative or administrative approval or adoption. If additional or more stringent standards are adopted, such may result in a reduction inof the pool of owner-operators and other third-party carriersqualified drivers available to us and to serviceother motor carriers in our customers’ demands, whichindustry. 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 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 driver turnover, decrease asset utilization, limit growth and adversely impact our results of operations. Further, heightened security concerns may continue tothus result in increased regulations, including the implementation of various security measures, checkpoints or travel restrictions on trucks.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.storm water, 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.
The 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 relationships with our customers could be damaged, which could result in a loss of business.
The requirements of CSA could also shrink the industry’s pool of drivers as those with unfavorable scores could leave the industry. As a result, the costs to attract, train and retain qualified drivers, owner-operators or third-party carriers could increase. In addition, a shortage of qualified drivers could increase driver turnover, decrease asset utilization, limit growth and adversely impact our results of 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.
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of 2021. We use LIBOR as a reference rate in our revolving credit facility to calculate interest due to our lender. 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
We 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 own our Columbus, Ohio central sorting facility which is used by our Expedited LTL and TLS segments.Freight segment. The 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.
We also own facilities near Dallas/Fort Worth, Texas, Chicago, Illinois and Atlanta, Georgia, all of which are used by the Expedited LTLFreight 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 theThe lease throughon this facility expires in 2023. Our executives are headquartered withinWe also lease our executive headquarters in Atlanta, Georgia and Dallas, Texas facilities.Georgia.
We lease and maintain 130146 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 seven years. As a result of the Towne acquisition, we currently have 2 idle facilities that we are still leasing. Our plan is to buyout or sublease these remaining facilities. In addition, we have operations in 3022 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 Nasdaq 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.
|
| | | | | | | | | | | | |
| 2017 | | High | | Low | | Dividends |
| First Quarter | | $ | 51.51 |
| | $ | 45.86 |
| | $ | 0.15 |
|
| Second Quarter | | 56.52 |
| | 46.35 |
| | 0.15 |
|
| Third Quarter | | 57.68 |
| | 49.98 |
| | 0.15 |
|
| Fourth Quarter | | 59.98 |
| | 49.88 |
| | 0.15 |
|
| | | | | | | |
| 2016 | | High | | Low | | Dividends |
| First Quarter | | $ | 49.01 |
| | $ | 36.00 |
| | $ | 0.12 |
|
| Second Quarter | | 48.69 |
| | 41.48 |
| | 0.12 |
|
| Third Quarter | | 47.78 |
| | 41.70 |
| | 0.12 |
|
| Fourth Quarter | | 50.72 |
| | 40.07 |
| | 0.15 |
|
There were approximately 606681 shareholders of record of our Common Stock as of January 18, 2018.15, 2020.
Subsequent to December 31, 2017,2019, our Board of Directors declared a cash dividend of $0.15$0.18 per share that will be paid in the first quarter of 2018.2020 to the shareholders on record on March 5, 2020. 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 20172019 without registration under the Securities Act.
Stock Performance Graph
The following graph compares the percentage change in the cumulative shareholder return on our Common Stock with The Nasdaq Trucking and Transportation Stocks Index and The Nasdaq Global Select Stock Market™ Index commencing on the last trading day of December 20122014 and ending on the last trading day of December 2017.2019. The graph assumes a base investment of $100 made on December 31, 20122014 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.
| |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 | 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| Forward Air Corporation | $ | 100 |
|
| $ | 125 |
|
| $ | 144 |
|
| $ | 123 |
|
| $ | 135 |
|
| $ | 164 |
| $ | 100 |
|
| $ | 85 |
|
| $ | 94 |
|
| $ | 114 |
|
| $ | 109 |
|
| $ | 139 |
|
| Nasdaq Trucking and Transportation Stocks Index | 100 |
|
| 125 |
|
| 173 |
|
| 146 |
|
| 178 |
|
| 222 |
| 100 |
|
| 84 |
|
| 103 |
|
| 128 |
|
| 116 |
|
| 140 |
|
| Nasdaq Global Select Stock Market Index | 100 |
|
| 138 |
|
| 157 |
|
| 166 |
|
| 179 |
|
| 230 |
| 100 |
|
| 106 |
|
| 114 |
|
| 147 |
|
| 141 |
|
| 200 |
|
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, 2017 |
| — |
|
| $ | — |
|
| — |
|
| — |
|
| November 1-30, 2017 |
| — |
|
| — |
|
| — |
|
| — |
|
| December 1-31, 2017 |
| 121,186 |
|
| 58 |
|
| 121,186 |
|
| 1,818,665 |
|
| Total |
| 121,186 |
|
| $ | 58 |
|
| 121,186 |
|
| 1,818,665 |
|
|
| | | | | | | | | | | | | |
| Period |
| Total Number of Shares Purchased |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| October 1-31, 2019 |
| 50 |
|
| $ | 63.6 |
|
| 50 |
|
| 4,229 |
|
| November 1-30, 2019 |
| 35 |
|
| 70.0 |
|
| 35 |
|
| 4,194 |
|
| December 1-31, 2019 |
| 39 |
|
| 69.3 |
|
| 39 |
|
| 4,155 |
|
| Total |
| 124 |
|
| $ | 67.2 |
|
| 124 |
|
| 4,155 |
|
| | | | | | | | | |
| (1) On February 5, 2019, the Board of Directors canceled the Company’s remaining 2016 share repurchase authorization and approved a share repurchase authorization for up to 5.0 million shares of the Company’s common shares that shall remain in effect until such time as the shares authorized for repurchase are exhausted or until earlier terminated. |
(1) On July 21, 2016, the Board of Directors approved a stock repurchase program for up to 3.0 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, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (In thousands, except per share data) | (In thousands, except per share data) |
| Income Statement Data: | | | | | | | | | | | | | | | | | | |
| Operating revenue | $ | 1,100,816 |
| | $ | 982,530 |
| | $ | 959,125 |
| | $ | 780,959 |
| | $ | 652,481 |
| $ | 1,410,395 |
| | $ | 1,320,886 |
| | $ | 1,169,346 |
| | $ | 1,030,210 |
| | $ | 987,894 |
|
| Income from operations | 108,672 |
| | 59,979 |
| | 81,772 |
| | 96,406 |
| | 84,355 |
| 118,823 |
| | 122,031 |
| | 108,757 |
| | 59,703 |
| | 81,674 |
|
| Operating margin (1) | 9.9 | % | | 6.1 | % | | 8.5 | % | | 12.3 | % | | 12.9 | % | 8.4 | % | | 9.2 | % | | 9.3 | % | | 5.8 | % | | 8.3 | % |
| | | | | | | | | | | | | | | | | | | |
| Net income | 87,321 |
| | 27,670 |
| | 55,575 |
| | 61,169 |
| | 54,467 |
| 87,099 |
| | 92,051 |
| | 87,255 |
| | 27,505 |
| | 55,516 |
|
| Net income per share: | | | | | | | | | | | | | | | | | | |
| Basic | $ | 2.90 |
| | $ | 0.91 |
| | $ | 1.80 |
| | $ | 1.99 |
| | $ | 1.81 |
| $ | 3.06 |
| | $ | 3.14 |
| | $ | 2.90 |
| | $ | 0.90 |
| | $ | 1.79 |
|
| Diluted | $ | 2.89 |
| | $ | 0.90 |
| | $ | 1.78 |
| | $ | 1.96 |
| | $ | 1.77 |
| $ | 3.04 |
| | $ | 3.12 |
| | $ | 2.89 |
| | $ | 0.90 |
| | $ | 1.78 |
|
| | | | | | | | | | | | | | | | | | | |
| Cash dividends declared per common share | $ | 0.60 |
| | $ | 0.51 |
| | $ | 0.48 |
| | $ | 0.48 |
| | $ | 0.40 |
| $ | 0.72 |
| | $ | 0.63 |
| | $ | 0.60 |
| | $ | 0.51 |
| | $ | 0.48 |
|
| | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | |
| Total assets | $ | 687,716 |
| | $ | 641,291 |
| | $ | 699,932 |
| | $ | 539,309 |
| | $ | 506,269 |
| $ | 990,878 |
| | $ | 760,215 |
| | $ | 692,622 |
| | $ | 644,048 |
| | $ | 702,327 |
|
| Long-term obligations, net of current portion | 40,588 |
| | 725 |
| | 28,856 |
| | 1,275 |
| | 3 |
| 72,249 |
| | 47,335 |
| | 40,588 |
| | 725 |
| | 28,856 |
|
| Shareholders' equity | 533,489 |
| | 499,069 |
| | 510,055 |
| | 463,563 |
| | 435,865 |
| 577,182 |
| | 553,244 |
| | 532,699 |
| | 498,344 |
| | 509,497 |
|
| | | | | | | | | | | | | | | | | | | |
(1) Income from operations as a percentage of operating revenue |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview and Executive Summary
OurEffective September 1, 2018, Thomas Schmitt was named the Company's President and Chief Executive Officer. Mr. Schmitt is the Company's Chief Operating Decision Maker ("CODM") and is primarily responsible for allocating resources to and assessing the performance of the Company's segments. As a result of this change in leadership, the Company revisited its strategy as discussed in Item 1 included in this Form 10-K. Due to this change in leadership and implementation of a new strategy, Management changed how it evaluates and manages the business effective in the fourth quarter of 2019 and classifies our services are classified into fourthree reportable segments: Expedited LTL, TLS,Freight, Intermodal and Pool Distribution. The results of our previous Expedited LTL and TLS segments have been consolidated into our Expedited Freight segment. This classification is consistent with how the CODM makes decisions about resource allocation and assesses the Company's performance. The Company has recast its financial information and disclosures for the prior periods to reflect the segment disclosures as if the current presentation had been in effect throughout all periods presented. For financial information relating to each of our business segments, see Note 10, Segment Reporting to our Consolidated Financial Statements.
Through the Expedited LTLFreight segment, we operate a comprehensive national network to provide expedited regional, inter-regional and national LTL services. Expedited LTLFreight offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling. Because ofWe plan to grow our roots in serving the deferred air freight market, our terminal network is located at or near airports in the United StatesLTL and Canada.
Through our TLS segment, we provide expedited truckload brokerage, dedicated fleet services,final mile geographic footprints through greenfield start-ups as well as high security and temperature-controlled logistics services inacquisitions. During the United States and Canada.year ended December 31, 2019, Expedited Freight accounted for 70.1% of our consolidated revenue.
Our Intermodal segment provides first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers dedicated contract and CFScontainer freight station ("CFS") warehouse and handling services. Today, Intermodal operates primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest.Southwest and Mid-Atlantic United States. 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. During the year ended December 31, 2019, Intermodal accounted for 15.4% of our consolidated revenue.
In our Pool Distribution segment, we provide high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. We offer this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States. During the year ended December 31, 2019, Intermodal accounted for 14.7% of our consolidated revenue.
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,services, such as TLS, IntermodalLTL pickup and Pool Distribution,delivery, final mile solutions and intermodal services, which will allow us to maintain revenue growth in challenging shipping environments. In addition, we are continuing to execute synergies across our services, particularly with service offerings in the Expedited Freight segment. Synergistic opportunities include the ability to share resources, particularly our fleet resources.
Trends and Developments
AcquisitionExpedited Freight Acquisitions
As part of Towne
On March 9, 2015,our strategy to expand our final mile pickup and delivery operations, in April 2019, we completed the acquisitionacquired certain assets 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. For the acquisition of Towne, we paid $61.9FSA for $27.0 million in net cash and assumed $59.5additional contingent consideration ("earnout") based upon future revenue generation. The earnout opportunity is $15.0 million in debt and capital leases. The transaction was fundedhad a fair value of $11.8 million as of December 31, 2019. This acquisition provides an opportunity for our Expedited Freight segment to expand its final mile service offering into additional geographic markets, form relationships with proceeds from a $125.0 million two year term loan.new customers, and add volumes to our existing locations. The assets, liabilities, and operating results of Townethis acquisition have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Expedited LTLFreight reportable segment since itssegment. See additional discussion in Note 2, Acquisitions, Goodwill and Other Long-Lived Assets, to our Consolidated Financial Statements.
In addition, in December 2019 we signed an agreement to acquire certain assets of Linn Star for $57.2 million in cash. This acquisition closed in 2015.January 2020. The acquisition of Linn Star expands our final mile footprint to additional 20 locations.
Acquisitions of CST and Related Companies
Intermodal Acquisitions
As part of our strategy to expand our Intermodal operations, in January 2016,July 2018, we acquired certain assets of AceMulti-Modal Transport Inc. (“MMT”) for $1.7$3.7 million, and in August 2016,October 2018 we acquired certain assets of TriumphSouthwest Freight Distributors, Inc. (“Southwest”) for $10.1$16.3 million and an earnout of $1.3 million paid in September 2017. In May 2017,July 2019 we acquired certain assets and liabilities of AtlanticO.S.T. for $22.5 million$12.0 million. O.S.T. is a drayage company and a potential earnout of $1.0 millionprovides the Intermodal segment with an expanded footprint on the East Coast, with locations in the Pennsylvania, Maryland, Virginia, South Carolina and in October 2017, we acquired certain assets of KCL for $0.7 millionGeorgia markets. These transactions were funded using cash flows from operations and a potential earnout of $0.1 million. These acquisitions provide an opportunity for our Intermodal segment to expand into additional geographic markets orand add volumes to our existing locations. The assets, liabilities, and operating results of these acquisitions have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment.
GoodwillResults from Fixed Asset Useful Life and Salvage Value Study
In 2013, we acquired TQI Holdings, Inc. for total consideration of $65.4 million and establishedThe Company evaluates 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 impairmentreasonableness of the goodwilluseful lives and other long livedsalvage values of its assets assigned toon an ongoing basis. During the acquisitionthird quarter of TQI Holdings, Inc. This determination was based on TQI's financial performance falling notably short2019, the Company identified indicators that the useful lives of previous projections.its owned tractors and trailers extended beyond initial expectations. As a result, wemanagement deemed it appropriate to extend the average useful life of its trailers from seven to ten years and its tractors from five to ten years. In addition, management reduced TQI's projected cash flowsthe salvage value of its tractors from 25% to 10%. No changes were made to trailer salvage values. See additional discussion in Note 2, Acquisitions, Goodwill and consequentlyOther Long-Lived Assets, to our Consolidated Financial Statements.
These changes in estimates were made to assets currently owned and originally purchased new since assets purchased used were assigned individual useful lives and salvage values based on their age and condition at purchase. This change in estimate was made on a prospective basis beginning on July 1, 2019. The impact of this study on the estimate of TQI'syear ended December 31, 2019 was a $2.6 million reduction in depreciation.
In addition, during the year ended December 31, 2019, management recorded a $1.2 million reserve against tractors, which reflected tractors where the expected carrying value exceeded its fair value no longer exceeded its respective carrying value. Based on the results of the impairment test, during the second quarteryear. This was recorded in other operating expenses in our Consolidated Statements of 2016, we recorded impairment charges for goodwill, intangibles and other assets of $42.4 million related to the TQI reporting unit, which is part of the TLS reportable segment. Comprehensive Income.
��
Results from Operations
The following table sets forth our consolidated historical financial data for the yearyears ended December 31, 20172019 and 20162018 (in millions):
| | | | | | | | | | | | | | | | Year ended December 31, |
| Year ended December 31, | 2019 | | 2018 | | Change | | Percent Change |
| 2017 |
| 2016 |
| Change |
| Percent Change | | | (As Adjusted) | | | | |
| Operating revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
| Expedited LTL | $ | 619.8 |
|
| $ | 570.8 |
|
| $ | 49.0 |
|
| 8.6 | % | |
| Truckload Premium Services | 179.3 |
|
| 164.3 |
|
| 15.0 |
|
| 9.1 |
| |
| Expedited Freight | | $ | 988.8 |
| | $ | 931.1 |
| | $ | 57.7 |
| | 6.2 | % |
| Intermodal | | 217.7 |
| | 201.0 |
| | 16.7 |
| | 8.3 |
|
| Pool Distribution | 164.2 |
|
| 148.6 |
|
| 15.6 |
|
| 10.5 |
| 207.4 |
| | 194.1 |
| | 13.3 |
| | 6.9 |
|
| Intermodal | 148.9 |
|
| 103.7 |
|
| 45.2 |
|
| 43.6 |
| |
| Eliminations and other operations | (11.4 | ) |
| (4.9 | ) |
| (6.5 | ) |
| 132.7 |
| (3.5 | ) | | (5.3 | ) | | 1.8 |
| | (34.0 | ) |
| Operating revenue | 1,100.8 |
|
| 982.5 |
|
| 118.3 |
|
| 12.0 |
| 1,410.4 |
| | 1,320.9 |
| | 89.5 |
| | 6.8 |
|
| Operating expenses: |
|
|
|
|
|
|
|
| |
| |
| |
|
| Purchased transportation | 478.2 |
|
| 413.4 |
|
| 64.8 |
|
| 15.7 |
| 639.0 |
| | 613.6 |
| | 25.4 |
| | 4.1 |
|
| Salaries, wages, and employee benefits | 264.7 |
|
| 242.0 |
|
| 22.7 |
|
| 9.4 |
| 335.2 |
| | 300.2 |
| | 35.0 |
| | 11.7 |
|
| Operating leases | 63.8 |
|
| 60.5 |
|
| 3.3 |
|
| 5.5 |
| 82.0 |
| | 75.7 |
| | 6.3 |
| | 8.3 |
|
| Depreciation and amortization | 41.1 |
|
| 38.2 |
|
| 2.9 |
|
| 7.6 |
| 42.1 |
| | 42.2 |
| | (0.1 | ) | | (0.2 | ) |
| Insurance and claims | 29.6 |
|
| 25.4 |
|
| 4.2 |
|
| 16.5 |
| 45.5 |
| | 35.2 |
| | 10.3 |
| | 29.3 |
|
| Fuel expense | 16.5 |
|
| 13.2 |
|
| 3.3 |
|
| 25.0 |
| 24.2 |
| | 23.1 |
| | 1.1 |
| | 4.8 |
|
| Other operating expenses | 98.3 |
|
| 87.4 |
|
| 10.9 |
|
| 12.5 |
| 123.6 |
| | 108.8 |
| | 14.8 |
| | 13.6 |
|
| Impairment of goodwill, intangibles and other assets | — |
|
| 42.4 |
|
| (42.4 | ) |
| (100.0 | ) | |
| Total operating expenses | 992.2 |
|
| 922.5 |
|
| 69.7 |
|
| 7.6 |
| 1,291.6 |
| | 1,198.8 |
| | 92.8 |
| | 7.7 |
|
| Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
| |
|
| |
| |
|
| Expedited LTL | 88.1 |
|
| 83.5 |
|
| 4.6 |
|
| 5.5 |
| |
| Truckload Premium Services | 3.2 |
|
| (35.4 | ) |
| 38.6 |
|
| NM |
| |
| Expedited Freight | | 101.0 |
| | 101.4 |
| | (0.4 | ) | | (0.4 | ) |
| Intermodal | | 23.7 |
| | 23.3 |
| | 0.4 |
| | 1.7 |
|
| Pool Distribution | 6.4 |
|
| 3.6 |
|
| 2.8 |
|
| 77.8 |
| 7.3 |
| | 5.9 |
| | 1.4 |
| | 23.7 |
|
| Intermodal | 12.7 |
|
| 11.0 |
|
| 1.7 |
|
| 15.5 |
| |
| Other operations | (1.8 | ) |
| (2.7 | ) |
| 0.9 |
|
| (33.3 | ) | (13.2 | ) | | (8.5 | ) | | (4.7 | ) | | 55.3 |
|
| Income from operations | 108.6 |
|
| 60.0 |
|
| 48.6 |
|
| 81.0 |
| 118.8 |
| | 122.1 |
| | (3.3 | ) | | (2.7 | ) |
| Other expense: |
|
|
|
|
|
|
|
| |
| |
| |
|
| Interest expense | (1.2 | ) |
| (1.6 | ) |
| 0.4 |
|
| (25.0 | ) | (2.7 | ) | | (1.8 | ) | | (0.9 | ) | | 50.0 |
|
| Other, net | — |
|
| — |
|
| — |
|
| — |
| |
| Total other expense | (1.2 | ) |
| (1.6 | ) |
| 0.4 |
|
| (25.0 | ) | (2.7 | ) | | (1.8 | ) | | (0.9 | ) | | 50.0 |
|
| Income before income taxes | 107.4 |
|
| 58.4 |
|
| 49.0 |
|
| 83.9 |
| 116.1 |
| | 120.3 |
| | (4.2 | ) | | (3.5 | ) |
| Income taxes | 20.1 |
|
| 30.7 |
|
| (10.6 | ) |
| (34.5 | ) | 29.0 |
| | 28.2 |
| | 0.8 |
| | 2.8 |
|
| Net income | $ | 87.3 |
|
| $ | 27.7 |
|
| $ | 59.6 |
|
| 215.2 | % | |
| Net income and comprehensive income | | $ | 87.1 |
| | $ | 92.1 |
| | $ | (5.0 | ) | | (5.4 | )% |
Note: Prior period balances have been adjusted to conform with the Company's revised segment reporting classification. See additional discussion above and in Note 10, Segment Reporting to our Consolidated Financial Statements.
Revenues
During the year ended December 31, 2017, we experienced a 12.0% increase in our consolidated revenues2019, revenue increased 6.8% compared to the year ended December 31, 2016. 2018. The revenue increase was primarily driven by increased revenue from our Expedited Freight segment of $57.7 million driven by increased final mile revenue primarily from the acquisition of FSA in April 2019. The Company's other segments also had revenue growth over prior year. Intermodal revenue increased 8.3%, primarily due to the acquisition of OST, and Pool revenue increased 6.9%.
Operating Expenses
Operating expenses increased $92.8 million primarily driven by purchased transportation increases of $25.4 million and salaries, wages and employee benefits increases of $35.0 million. Company-employed drivers are included in salaries, wages and benefits, while purchased transportation includes owner-operators and third-party carriers. Purchased transportation increased primarily due to increased volumes, but decreased as a percentage of revenue due to increased utilization of owner-operators and Company-employed drivers, which are typically less costly than third-party transportation providers. Salaries, wages and employee benefits increased primarily due to additional headcount from acquisitions, increased Company-employed driver utilization and increased personnel needs to support the additional volumes.
Operating Income and Segment Operations
Operating income increased $48.6decreased $3.3 million, or 81.0%2.7%, from 2016the year ended December 31, 2018 to $108.6$118.8 million for the year ended December 31, 2017.
Segment Operations
2019 primarily driven by a $4.7 million increase in loss from operations from Other operations due to a $6.5 million vehicle claims reserve recorded in 2019 for pending vehicular claims. Our Expedited LTL's revenue increased $49.0 million, or 8.6%, whileFreight segment operating income increased $4.6decreased $0.4 million or 5.5% for the year ended December 31, 2017, compared to the same period in 2016. The increase in revenue was due to increasedlower tonnage, increased local pickuphigher insurance premiums and delivery ("Complete") attachment and higher fuel surcharges. The deteriorationa large vehicle claim reserve, mostly offset by improvements in income from
operations as a percentage of revenue was due to anpurchased transportation on increased utilization of third party transportation providers partly offset by increased Complete, fuel surchargeowner-operators and linehaul revenues.Company-employed drivers and contributions from FSA. Our Pool and Intermodal segment saw slight increases. The fuel surcharge increaseresults for our three reportable segments are discussed in detail in the following sections.
Interest Expense
Interest expense was also due to increased fuel prices.
TLS revenue increased $15.0 million, or 9.1%, and operating income increased $38.6$2.7 million for the year ended December 31, 2017,2019 compared to the same period in 2016. The increase in revenue was due to an increase in overall miles from new business wins. The increase of TLS operating income was largely the result of 2016 including $42.4 million in impairment charges related to the TQI reporting unit. 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.
Pool Distribution revenue increased $15.6 million, or 10.5%, while operating income increased $2.8 million, or 77.8%, for the year ended December 31, 2017, compared to the same period in 2016. The revenue increase was due to increased volumes from previously existing customers, new business and rate increases. The improvement in income from operations was primarily the result of higher revenue volumes, current year rate increases, purchased transportation efficiencies and lower facility costs.
Intermodal revenue increased $45.2 million, or 43.6%, and operating income increased $1.7 million, or 15.5%, for the year ended December 31, 2017, compared to the same period in 2016. The increase in revenue and operating income in total dollars was primarily attributable to the Atlantic, Ace and Triumph 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.
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 volume transiting our network. During the year ended December 31, 2017, total net fuel surcharge revenue increased 44.3% as compared to the same period in 2016, mostly due to increased fuel prices and increased volumes in the Expedited LTL, Intermodal and Pool segments.
Interest Expense
Interest expense was $1.2 million for the year ended December 31, 2017 compared to $1.6$1.8 million for the same period of 2016.in 2018. The decreaseincrease in interest expense was attributable to principal payments made on the term loan used to finance the Towne acquisition in March 2015 partly offset byadditional borrowings on our revolving credit facility.
Income Taxes
The combined federal and state effective tax rate for the year ended December 31, 20172019 was 18.7%25.0% compared to a rate of 52.6%23.4% for the same period in 2016.2018. The lowerhigher effective tax rate for the year ended December 31, 2019 was primarily the result of increased executive compensation in the current year, which was not deductible for income tax purposes. This was partly offset by a reduction in taxable income resulting from the reinstatement of the Alternative Fuel Credit by the Internal Revenue Service on December 20, 2019 and the result of increased stock based compensation vesting when compared to the same period in 2018, which was impacted by forfeited performance shares.
Net Income
As a result of the foregoing factors, net income decreased by $5.0 million, or 5.4%, to $87.1 million for the year ended December 31, 2019 compared to $92.1 million for the same period in 2018.
Expedited Freight - Year Ended December 31, 2019 compared to Year Ended December 31, 2018
The following table sets forth our historical financial data of the Expedited Freight segment for the years ended December 31, 2019 and 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| Expedited Freight Segment Information |
| (In millions) |
| (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended |
| December 31, |
| Percent of |
| December 31, |
| Percent of |
|
|
| Percent |
| | 2019 |
| Revenue |
| 2018 |
| Revenue |
| Change |
| Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network 1 | $ | 676.9 |
|
| 68.5 | % |
| $ | 677.4 |
|
| 72.8 | % |
| $ | (0.5 | ) |
| (0.1 | )% |
| Truckload | 184.7 |
| 18.7 |
|
| 186.1 |
| 20.0 |
|
| (1.4 | ) |
| (0.8 | ) |
| Final Mile | 100.6 |
| 10.2 |
|
| 39.4 |
| 4.2 |
|
| 61.2 |
|
| 155.3 |
|
| Other | 26.6 |
| 2.7 |
|
| 28.2 |
| 3.0 |
|
| (1.6 | ) |
| (5.7 | ) |
| Total operating revenue | 988.8 |
|
| 100.0 |
|
| 931.1 |
|
| 100.0 |
|
| 57.7 |
|
| 6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| Purchased transportation | 502.7 |
|
| 50.8 |
|
| 483.1 |
|
| 51.9 |
|
| 19.6 |
|
| 4.1 |
|
| Salaries, wages and employee benefits | 200.6 |
|
| 20.3 |
|
| 182.9 |
|
| 19.6 |
|
| 17.7 |
|
| 9.7 |
|
| Operating leases | 46.7 |
|
| 4.7 |
|
| 42.0 |
|
| 4.5 |
|
| 4.7 |
|
| 11.2 |
|
| Depreciation and amortization | 27.3 |
|
| 2.8 |
|
| 29.0 |
|
| 3.1 |
|
| (1.7 | ) |
| (5.9 | ) |
| Insurance and claims | 23.3 |
|
| 2.4 |
|
| 18.8 |
|
| 2.0 |
|
| 4.5 |
|
| 23.9 |
|
| Fuel expense | 10.2 |
|
| 1.0 |
|
| 9.5 |
|
| 1.0 |
|
| 0.7 |
|
| 7.4 |
|
| Other operating expenses | 77.0 |
|
| 7.8 |
|
| 64.4 |
|
| 6.9 |
|
| 12.6 |
|
| 19.6 |
|
| Total operating expenses | 887.8 |
|
| 89.8 |
|
| 829.7 |
|
| 89.1 |
|
| 58.1 |
|
| 7.0 |
|
| Income from operations | $ | 101.0 |
|
| 10.2 | % |
| $ | 101.4 |
|
| 10.9 | % |
| $ | (0.4 | ) |
| (0.4 | )% |
| | | | | | | | | | | | |
1 Network revenue is comprised of all revenue, including linehaul, pickup and/or delivery, and fuel surcharge revenue, excluding accessorial, truckload and final mile revenue |
Note: Prior period balances have been adjusted to conform with the Company's revised segment reporting classification. See additional discussion above and in Note 10, Segment Reporting to our Consolidated Financial Statements.
|
| | | | | | | | | | |
| Expedited Freight Operating Statistics |
| | | | | | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2019 | | 2018 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
| Business days | 255 |
| | 255 |
| | — | % |
| | | | | | |
Tonnage 1,2 | | | | | |
| Total pounds | 2,479,291 |
| | 2,562,205 |
| | (3.2 | ) |
| Pounds per day | 9,723 |
| | 10,048 |
| | (3.2 | ) |
| | | | | | |
Shipments 1,2 | | | | | |
| Total shipments | 3,990 |
| | 4,173 |
| | (4.4 | ) |
| Shipments per day | 15.6 |
| | 16.4 |
| | (4.9 | ) |
| | | | | | |
| Weight per shipment | 621 |
| | 614 |
| | 1.1 |
|
| | | | | | |
Revenue per hundredweight 3 | $ | 27.21 |
| | $ | 26.15 |
| | 4.1 |
|
Revenue per hundredweight, ex fuel 3 | $ | 22.90 |
| | $ | 22.09 |
| | 3.7 |
|
| | | | | | |
Revenue per shipment 3 | $ | 171 |
| | $ | 163 |
| | 4.9 |
|
Revenue per shipment, ex fuel 3 | $ | 144 |
| | $ | 138 |
| | 4.3 |
|
Network revenue from door-to-door shipments as a percentage of network revenue 3,4 | 40.0 | % |
| 35.3 | % |
| 13.3 |
|
Network gross margin 5 | 55.0 | % | | 52.0 | % | | 5.8 | % |
| | | | | | |
1 In thousands | | | | | |
2 Excludes accessorial, full truckload and final mile products | | | | |
3 Includes intercompany revenue between the Network and Truckload revenue streams |
4 Door-to-door shipments include all shipments with a pickup and/or delivery |
5 Network revenue less network purchased transportation as a percentage of network revenue |
Revenues
Expedited Freight operating revenue increased $57.7 million, or 6.2%, to $988.8 million for the year ended December 31, 2019 from $931.1 million for the same period of 2018. The increase was due to increased final mile revenue of $61.2 million, partly offset by decreases in other and truckload revenue. Network revenue also had a modest decrease compared to the prior year. Final mile revenue increased primarily due to the acquisition of FSA in April 2019. Other revenue, which includes warehousing and terminal handling, decreased $1.6 million due to the lower linehaul tonnage and shipment counts. Truckload revenue decreased $1.4 million due to a 4.0% decrease in average revenue per mile, partly offset by a 0.5% increase in overall miles. The decrease in average revenue per mile was primarily driven by rate pressures from both spot market and contract rate customers.
Network revenue decreased $0.5 million due to a 4.4% decrease in shipments and a 3.2% decrease in tonnage partly offset by a 4.1% increase in revenue per hundredweight over prior year. The decrease in shipments and tonnage was due to a decrease in legacy airport-to-airport shipments. The increase in revenue per hundredweight was due to increased shipment size and revenue per shipment.
Purchased Transportation
Expedited Freight purchased transportation increased by $19.6 million, or 4.1%, to $502.7 million for the year ended December 31, 2019 from $483.1 million for the year ended December 31, 2018. As a percentage of segment operating revenue, Expedited Freight purchased transportation was 50.8% during the year ended December 31, 2019 compared to 51.9% for the same period of 2018. Expedited Freight purchased transportation includes owner-operators and third-party carriers, while Company-employed drivers are included in salaries, wages and benefits. Purchased transportation decreased as a percentage of revenue primarily due to a 300 basis point decrease in Network purchased transportation as a percentage of revenue as linehaul cost per mile decreased on increased utilization of owner-operators and Company-employed drivers over more costly third-party transportation providers. This decrease was offset primarily by an increase in final mile purchased transportation due to the acquisition of FSA and deteriorating truckload purchased transportation due to the previously mentioned revenue rate pressures.
Salaries, Wages, and Benefits
Expedited Freight salaries, wages and employee benefits increased by $17.7 million, or 9.7%, to $200.6 million for the year ended December 31, 2019 from $182.9 million in the same period of 2018. Salaries, wages and employee benefits were 20.3% of Expedited Freight’s operating revenue for the year ended December 31, 2019 compared to 19.6% for the same period of 2018. The increase in total dollars and as a percentage of revenue was primarily due to $14.7 million for additional headcount and employee wages, of which $12.1 million was due to the acquisition of FSA. An additional $6.2 million increase was due to increased utilization of Company-employed drivers to fulfill linehaul and local pickup and delivery services. These increases were partly offset by a $3.9 million decrease of employee incentives.
Operating Leases
Expedited Freight operating leases increased $4.7 million, or 11.2%, to $46.7 million for the year ended December 31, 2019 from $42.0 million for the year ended December 31, 2018. Operating leases were 4.7% of Expedited Freight’s operating revenue for the year ended December 31, 2019 compared to 4.5% for the year ended December 31, 2018. The increase in cost was primarily due to a $2.8 million increase in facility leases mostly from additional facilities acquired from FSA and a $2.9 million increase in tractor rentals and leases to correspond with the increase in Company-employed driver usage mentioned above. These increases were partly offset by a $1.1 million decrease in trailer rentals and leases, as old leases were replaced with purchased trailers.
Depreciation and Amortization
Expedited Freight depreciation and amortization decreased $1.7 million, or 5.9%, to $27.3 million for the year ended December 31, 2019 from $29.0 million for the year ended December 31, 2018. Depreciation and amortization expense as a percentage of Expedited Freight operating revenue was 2.8% in the year ended December 31, 2019 compared to 3.1% for the year ended December 31, 2018. The decrease in total dollars was primarily due to a $1.9 million decrease in trailer depreciation for the year ended December 31, 2019 compared to the same period in 2018 primarily related to extending the useful lives of its trailers from seven to ten years as discussed above. Tractor depreciation decreased $0.6 million for the year ended December 31, 2019 compared to the same period in 2018 primarily due to decreasing the salvage value of tractors from 25% to 10% as discussed above, partly offset by a decrease in tractor depreciation, as older units were replaced with tractor leases mentioned above. The net decrease of trailer and tractor depreciation of $2.5 million was partly offset by a $0.8 million of increased amortization of acquired intangibles from FSA.
Insurance and Claims
Expedited Freight insurance and claims expense increased $4.5 million, or 23.9%, to $23.3 million for the year ended December 31, 2019 from $18.8 million for the year ended December 31, 2018. Insurance and claims as a percentage of Expedited Freight’s operating revenue was 2.4% for the year ended December 31, 2019 compared to 2.0% for the year ended December 31, 2018. The increase was attributable to a $1.0 million vehicle claim reserve recorded in the second quarter of 2019 for pending vehicular claims and a $1.8 million increase in vehicle insurance premiums. The increase was also attributable to higher accident related vehicle damage repairs, cargo claims and claims related fees. See additional discussion over the consolidated increase in self-insurance reserves related to vehicle claims in the "Other operations" section below.
Fuel Expense
Expedited Freight fuel expense increased $0.7 million, or 7.4%, to $10.2 million for the year ended December 31, 2019 from $9.5 million in the year ended December 31, 2018. Fuel expense was 1.0% of Expedited Freight’s operating revenue for the years ended December 31, 2019 and 2018. Expedited Freight fuel expenses increased due to higher Company-employed driver miles.
Other Operating Expenses
Expedited Freight other operating expenses increased $12.6 million, or 19.6%, to $77.0 million for the year ended December 31, 2019 from $64.4 million for the year ended December 31, 2018. Expedited Freight other operating expenses were 7.8% of operating revenue for the year ended December 31, 2019 compared to 6.9% for the year ended December 31, 2018. The increase in total dollars and as a percentage of revenue was primarily attributable to a $2.8 million increase in parts costs for final mile installations due to the acquisition of FSA and a $1.5 million increase in loss on operating assets due to reserves for and sales of tractors. See additional discussion regarding the fixed asset useful life study above. The increase was also attributable to a $1.3 million increase in legal and professional fees and $1.2 million in higher travel-related expenses. Additionally, receivables allowance increased $0.8 million due to the third quarter of 2018 including a recovery of a previously reserved receivable. The remaining increase was due to increased terminal and office expenses and other over-the-road costs, including tolls.
Income from Operations
Expedited Freight income from operations decreased by $0.4 million, or 0.4%, to $101.0 million for the year ended December 31, 2019 compared to $101.4 million for the year ended December 31, 2018. Expedited Freight’s income from operations was 10.2% of operating revenue for the year ended December 31, 2019 compared to 10.9% for the year ended December 31, 2018. The decrease in income from operations was due to lower tonnage, higher insurance premiums and a large vehicle claim reserve, mostly offset by improvements in Network gross margin on increased utilization of owner-operators and Company-employed drivers and contributions from FSA.
Intermodal - Year Ended December 31, 2019 compared to Year Ended December 31, 2018
The following table sets forth our historical financial data of the Intermodal segment for the years ended December 31, 2019 and 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Intermodal Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2019 | | Revenue | | 2018 | | Revenue | | Change | | Change |
| Operating revenue | $ | 217.7 |
| | 100.0 | % | | $ | 201.0 |
| | 100.0 | % | | $ | 16.7 |
| | 8.3 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 76.9 |
| | 35.3 |
| | 77.1 |
| | 38.4 |
| | (0.2 | ) | | (0.3 | ) |
| Salaries, wages and employee benefits | 52.9 |
| | 24.3 |
| | 43.9 |
| | 21.8 |
| | 9.0 |
| | 20.5 |
|
| Operating leases | 16.4 |
| | 7.5 |
| | 15.9 |
| | 7.9 |
| | 0.5 |
| | 3.1 |
|
| Depreciation and amortization | 8.9 |
| | 4.1 |
| | 6.3 |
| | 3.1 |
| | 2.6 |
| | 41.3 |
|
| Insurance and claims | 6.7 |
| | 3.1 |
| | 5.8 |
| | 2.9 |
| | 0.9 |
| | 15.5 |
|
| Fuel expense | 7.6 |
| | 3.5 |
| | 6.6 |
| | 3.3 |
| | 1.0 |
| | 15.2 |
|
| Other operating expenses | 24.6 |
| | 11.3 |
| | 22.1 |
| | 11.0 |
| | 2.5 |
| | 11.3 |
|
| Total operating expenses | 194.0 |
| | 89.1 |
| | 177.7 |
| | 88.4 |
| | 16.3 |
| | 9.2 |
|
| Income from operations | $ | 23.7 |
| | 10.9 | % | | $ | 23.3 |
| | 11.6 | % | | $ | 0.4 |
| | 1.7 | % |
|
| | | | | | | | | | |
| Intermodal Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2019 | | 2018 | | Change |
| | | | | | |
| Drayage shipments | 313,817 |
| | 305,239 |
| | 2.8 | % |
| Drayage revenue per shipment | $ | 599 |
| | $ | 567 |
| | 5.6 |
|
| Number of locations | 21 |
| | 20 |
| | 5.0 | % |
Revenues
Intermodal operating revenue increased $16.7 million, or 8.3%, to $217.7 million for the year ended December 31, 2019 from $201.0 million for the same period in 2018. The increase was primarily attributable to the increase in drayage shipments from the acquisition of O.S.T. that occurred in July 2019 and the acquisition of Southwest that occurred in November 2018. The increase was also attributable to revenue rate increases and fuel surcharge revenue on higher drayage shipments and higher fuel surcharge rates.
Purchased Transportation
Intermodal purchased transportation decreased $0.2 million, or 0.3%, to $76.9 million for the year ended December 31, 2019 from $77.1 million for the same period in 2018. Intermodal purchased transportation as a percentage of revenue was 35.3% for the year ended December 31, 2019 compared to 38.4% for the year ended December 31, 2018. Intermodal purchased transportation includes owner-operators and third-party carriers, while Company-employed drivers are included in salaries, wages and benefits. The decrease in Intermodal purchased transportation as a percentage of revenue was attributable to increased utilization of Company-employed drivers compared to the same period in 2018 and operating efficiencies.
Salaries, Wages, and Benefits
Intermodal salaries, wages and employee benefits increased $9.0 million, or 20.5%, to $52.9 million for the year ended December 31, 2019 compared to $43.9 million for the year ended December 31, 2018. As a percentage of Intermodal operating revenue, salaries, wages and benefits increased to 24.3% for the year ended December 31, 2019 compared to 21.8% for the same period in 2018. The 2.5% increase in salaries, wages and employee benefits as a percentage of revenue was attributable to a 1.3% increase from utilization of Company-employed drivers and a 1.3% increase from higher administrative salaries, wages and benefits as a percentage of revenue. The increase as a percentage of revenue was also attributable to a 0.4% increase in group health insurance and workers compensation as a percentage of revenue. These increases were partly offset by a 0.3% decrease as a percentage of revenue in incentive and share based compensation to employees and a 0.2% improvement in dock pay as a percentage of revenue. The increase in administrative salaries, wages and benefits as a percentage of revenue was due to additional headcount from the acquisitions of O.S.T., Southwest and MMT.
Operating Leases
Intermodal operating leases increased $0.5 million, or 3.1% to $16.4 million for the year ended December 31, 2019 from $15.9 million for the same period in 2018. Operating leases were 7.5% of Intermodal operating revenue for the year ended December 31, 2019 compared to 7.9% in the same period of 2018. The decrease as a percentage of revenue was attributable to a 0.7% decrease in trailer rental charges as a percentage of revenue. This decrease as a percentage of revenue was partly offset by increases in facility rent from acquired companies and tractor rentals and leases to correspond with the increase in Company-employed driver usage mentioned above.
Depreciation and Amortization
Intermodal depreciation and amortization increased $2.6 million, or 41.3%, to $8.9 million for the year ended December 31, 2019 from $6.3 million for the same period in 2018. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 4.1% for the year ended December 31, 2019 compared to 3.1% for the same period of 2018. The increase was due to $1.2 million increase in amortization of acquired intangibles. The increase in depreciation and amortization was also attributable to a $1.4 million increase in depreciation of equipment partly due to the equipment acquired from O.S.T..
Insurance and Claims
Intermodal insurance and claims expense increased $0.9 million, or 15.5%, to $6.7 million for the year ended December 31, 2019 from $5.8 million for the year ended December 31, 2018. Intermodal insurance and claims were 3.1% of operating revenue for the year ended December 31, 2019 compared to 2.9% for the same period in 2018. The increase in Intermodal insurance and claims was primarily attributable to an increase in vehicle insurance premiums. 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 $1.0 million, or 15.2%, to $7.6 million for the year ended December 31, 2019 from $6.6 million in the same period of 2018. Fuel expenses were 3.5% of Intermodal operating revenue for the year ended December 31,
2019 compared to 3.3% in the same period of 2018. Intermodal fuel expenses increased due to increased Company-employed driver usage mentioned above.
Other Operating Expenses
Intermodal other operating expenses increased $2.5 million, or 11.3%, to $24.6 million for the year ended December 31, 2019 compared to $22.1 million for the same period of 2018. Intermodal other operating expenses as a percentage of revenue for the year ended December 31, 2019 were 11.3% compared to 11.0% for the same period of 2018. The increase in Intermodal other operating expense was due mostly to a $1.0 million increase in container related rental and storage charges and a $0.6 million increase in acquisition related legal and professional fees. The increase was also due to 2018 including a $0.5 million reduction in the earn-out liability for the Atlantic acquisition. The remaining increase was due to increased terminal and office expenses and other over-the-road costs, including tolls.
Income from Operations
Intermodal’s income from operations increased by $0.4 million, or 1.7%, to $23.7 million for the year ended December 31, 2019 compared to $23.3 million for the same period in 2018. Income from operations as a percentage of Intermodal operating revenue was 10.9% for the year ended December 31, 2019 compared to 11.6% in the same period of 2018. The increase in operating income in total dollars was primarily attributable to the acquisitions of O.S.T., Southwest and MMT. These increases were partly offset by higher amortization and professional fees related to acquisitions and the prior period including a $0.5 million benefit from the reduction of an earn-out liability, which led to the deterioration in income from operations as a percentage of revenue.
Pool Distribution - Year Ended December 31, 2019 compared to Year Ended December 31, 2018
The following table sets forth our historical financial data of the Pool Distribution segment for the years ended December 31, 2019 and 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Pool Distribution Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2019 | | Revenue | | 2018 | | Revenue | | Change | | Change |
| Operating revenue | $ | 207.4 |
| | 100.0 | % | | $ | 194.1 |
| | 100.0 | % | | $ | 13.3 |
| | 6.9 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 61.7 |
| | 29.7 |
| | 57.4 |
| | 29.6 |
| | 4.3 |
| | 7.5 |
|
| Salaries, wages and employee benefits | 78.7 |
| | 37.9 |
| | 71.3 |
| | 36.7 |
| | 7.4 |
| | 10.4 |
|
| Operating leases | 19.0 |
| | 9.2 |
| | 17.6 |
| | 9.1 |
| | 1.4 |
| | 8.0 |
|
| Depreciation and amortization | 5.9 |
| | 2.8 |
| | 6.9 |
| | 3.6 |
| | (1.0 | ) | | (14.5 | ) |
| Insurance and claims | 6.2 |
| | 3.0 |
| | 4.6 |
| | 2.4 |
| | 1.6 |
| | 34.8 |
|
| Fuel expense | 6.5 |
| | 3.1 |
| | 7.0 |
| | 3.6 |
| | (0.5 | ) | | (7.1 | ) |
| Other operating expenses | 22.1 |
| | 10.7 |
| | 23.4 |
| | 12.1 |
| | (1.3 | ) | | (5.6 | ) |
| Total operating expenses | 200.1 |
| | 96.5 |
| | 188.2 |
| | 97.0 |
| | 11.9 |
| | 6.3 |
|
| Income from operations | $ | 7.3 |
| | 3.5 | % | | $ | 5.9 |
| | 3.0 | % | | $ | 1.4 |
| | 23.7 | % |
|
| | | | | | | | | | |
| Pool Distribution Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2019 | | 2018 | | Change |
| | | | | | |
Cartons 1 | 104,602 |
| | 92,976 |
| | 12.5 | % |
| Revenue per carton | $ | 1.98 |
| | $ | 2.09 |
| | (5.3 | ) |
| Terminals | 30 |
| | 28 |
| | 7.1 |
|
| | | | | | |
1 In thousands | | | | | |
Revenues
Pool operating revenue increased $13.3 million, or 6.9%, to $207.4 million for the year ended December 31, 2019 from $194.1 million for the year ended December 31, 2018. The increase was due to increased volumes from previously existing customers, new business and rate increases partly offset by a lower revenue per carton due to a change in customer mix. The increased volumes from previously existing and new customers was attributable in part to competitors exiting the market.
Purchased Transportation
Pool purchased transportation increased $4.3 million, or 7.5%, to $61.7 million for the year ended December 31, 2019 from $57.4 million for the year ended December 31, 2018. Pool purchased transportation as a percentage of revenue was 29.7% for the year ended December 31, 2019 compared to 29.6% for the same period in 2018. Pool purchased transportation includes owner-operators and third-party carriers, while Company-employed drivers are included in salaries, wages and benefits. The increase in Pool purchased transportation was attributable to increased rates charged by and increased utilization of, third-party carriers to cover the increases in revenue.
Salaries, Wages, and Benefits
Pool salaries, wages and employee benefits increased $7.4 million, or 10.4%, to $78.7 million for the year ended December 31, 2019 from $71.3 million for the year ended December 31, 2018. As a percentage of Pool operating revenue, salaries, wages and benefits were 37.9% for the year ended December 31, 2019 compared to 36.7% for the same period in 2018. The increase was due to higher dock and driver pay and office and administrative pay. Dock pay increased due to increased dedicated revenue volumes, which required the use of more costly contract labor. Office and administrative pay increased due to additional staffing required to service business in new locations, including agent stations that were converted to Company-operated stations. Driver pay increased due to utilization of Company-employed drivers to fulfill the revenue increases.
Operating Leases
Pool operating leases increased $1.4 million, or 8.0%, to $19.0 million for the year ended December 31, 2019 from $17.6 million for the year ended December 31, 2018. Operating leases were 9.2% of Pool operating revenue for the year ended December 31, 2019 compared to 9.1% for the year ended December 31, 2018. Operating leases increased due to increases in tractor leases for the additional revenue discussed above and the use of leased tractors to replace old purchased equipment. The increase was also due to increased facility rent due to terminal expansions and new terminals to handle increased revenue described above. The increases in facility rent were mostly offset by 2018 including a $1.0 million charge to vacate a facility.
Depreciation and Amortization
Pool depreciation and amortization decreased $1.0 million, or 14.5%, to $5.9 million for the year ended December 31, 2019 compared to $6.9 million for the same period in 2018. Depreciation and amortization expense as a percentage of Pool operating revenue was 2.8% for the year ended December 31, 2019 compared to 3.6% for the year ended December 31, 2018. Trailer depreciation decreased $0.5 million compared to the same period in 2018 primarily due to extending the useful life of trailers from seven to ten years as discussed above. Tractor depreciation decreased $0.5 million as older units were replaced with tractor leases mentioned above partly offset by additional depreciation recognized during 2019 following the useful life study reduced the salvage value of tractors from 25% to 10% as discussed above.
Insurance and Claims
Pool insurance and claims increased $1.6 million, or 34.8%, to $6.2 million for the year ended December 31, 2019 from $4.6 million for the year ended December 31, 2018. As a percentage of operating revenue, insurance and claims was 3.0% for the year ended December 31, 2019 compared to 2.4% for the year ended December 31, 2018. The increase in total dollars and as a percentage of revenue was primarily due to increased vehicle insurance premiums and the prior period including a $0.5 million reimbursement for claims related legal fees. See additional discussion over the consolidated increase in self-insurance reserves related to vehicle claims in the "Other operations" section below.
Fuel Expense
Pool fuel expense decreased $0.5 million, or 7.1%, to $6.5 million for the year ended December 31, 2019 from $7.0 million for the year ended December 31, 2018. Fuel expenses were 3.1% of Pool operating revenue during the year ended December 31,
2019 compared to 3.6% for the year ended December 31, 2018. Pool fuel expenses decreased due to lower year-over-year fuel prices, partly offset by increased utilization of Company-employed drivers.
Other Operating Expenses
Pool other operating expenses decreased $1.3 million, or 5.6%, to $22.1 million for the year ended December 31, 2019 compared to $23.4 million for the year ended December 31, 2018. Pool other operating expenses were 10.7% of operating revenue for the year ended December 31, 2019 compared to 12.1% for the year ended December 31, 2018. Other operating expenses included equipment maintenance, terminal and office expenses, professional fees and other over-the-road costs. As a percentage of revenue, the decrease was primarily attributable to a $2.0 million decrease in agent station handling costs due to the conversion of agent stations to Company-operated stations and lower revenue volumes from the remaining agent stations. This decrease was partly offset by increases in terminal and office expenses related to the new terminal locations.
Income from Operations
Pool income from operations increased by $1.4 million, or 23.7% to $7.3 million for the year ended December 31, 2019 from $5.9 million for the year ended December 31, 2018. Pool income from operations was 3.5% of operating revenue for the year ended December 31, 2019 compared to 3.0% of operating revenue for the year ended December 31, 2018. The improvement in Pool operating income in total dollars and as a percentage of revenue was due to increased revenue from new location wins, which included additional volumes from existing customers and new business wins and revenue rate increases. Pool's operating income also improved due to a $1.0 million charge to vacate a facility during 2018.
Other operations - Year Ended December 31, 2019 compared to Year Ended December 31, 2018
Other operating activity declined from an $8.5 million operating loss during the year ended December 31, 2018 to a $13.2 million operating loss during the year ended December 31, 2019. The year ended December 31, 2019 included $6.5 million in vehicular reserves for unfavorable development of second quarter 2019 claims and increases to our loss development factors for vehicle and workers' compensation claims of $2.8 million and $0.3 million, respectively. The loss was also attributed to $3.6 million in costs related to the CEO transition.
The $8.5 million operating loss included in other operations and corporate activities for 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 workers' compensation claims. The loss was also attributable to $1.1 million in costs related to the CEO transition, comprised of recruiting fees and retention share awards.
Results of Operations
The following table sets forth our historical financial data for the years ended December 31, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | Change | | Percent Change |
| | (As Adjusted) | | (As Adjusted) | | | | |
| Operating revenue: | | | | | | | |
| Expedited Freight | $ | 931.1 |
| | $ | 850.4 |
| | $ | 80.7 |
| | 9.5 | % |
| Intermodal | 201.0 |
| | 154.7 |
| | 46.3 |
| | 29.9 |
|
| Pool Distribution | 194.1 |
| | 168.5 |
| | 25.6 |
| | 15.2 |
|
| Eliminations and other operations | (5.3 | ) | | (4.3 | ) | | (1.0 | ) | | 23.3 |
|
| 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 Freight | 101.4 |
| | 91.2 |
| | 10.2 |
| | 11.2 |
|
| Intermodal | 23.3 |
| | 13.0 |
| | 10.3 |
| | 79.2 |
|
| Pool Distribution | 5.9 |
| | 6.4 |
| | (0.5 | ) | | (7.8 | ) |
| Other operations | (8.5 | ) | | (1.8 | ) | | (6.7 | ) | | 372.2 |
|
| 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 | % |
Note: Prior period balances have been adjusted to conform with the Company's revised segment reporting classification. See additional discussion above and in Note 10, Segment Reporting to our Consolidated Financial Statements.
Revenues
During the year ended December 31, 2018, revenue increased 13.0% compared to the year ended December 31, 2017. The revenue increase was primarily driven by increased revenue from our Expedited Freight segment of $80.7 million driven by increased network revenue and other terminal based revenue over the prior year. The company's other segments also had revenue growth over prior year.
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. Company-employed drivers are included in salaries, wages and benefits, while purchased transportation includes owner-operators and third-party carriers. Purchased transportation increased primarily 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 additional volumes.
Operating Income and Segment Operations
Operating income increased $13.3 million, or 12.2%, from the year ended December 31, 2017 to $122.1 million for the year ended December 31, 2018 primarily driven by a $10.2 million increase from our Expedited Freight segment and a $10.3 million increase from our Intermodal segment, offset by a $6.7 million decrease in other operations. The increase in Expedited Freight was primarily due to increased revenue due to higher shipments, tonnage and fuel surcharge revenue. The increase in Intermodal was primarily due to increased high-margin storage and fuel revenues and a full year of its Atlantic acquisition. Other operations decreased primarily due to increased insurance reserves and CEO transition costs. The results for our three reportable segments are discussed in detail in the following sections.
Interest Expense
Interest expense was $1.8 million for the year ended December 31, 2018 compared to $1.2 million for the same period in 2017. The increase in interest expense was attributable to additional borrowings on our revolving credit facility.
Income Taxes
The combined federal and state effective tax rate for the year ended December 31, 2018 was 23.4% compared to a rate of 18.9% for the same period in 2017. The effective tax rate for 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 result of the impact of lowering the value of our net deferred tax liabilities. Also,liabilities as of December 31, 2017 following the 2016 effective tax rate reflectedenactment of the impairment of goodwill in the second quarter of 2016 that is non-deductible for tax purposes.Tax Cuts and Jobs Act.
Net Income
As a result of the foregoing factors, net income increased by $59.6$4.8 million, or 215.2%5.5%, to $87.3$92.1 million for the year ended December 31, 20172018 compared to $27.7$87.3 million for the same period in 2016.2017.
Expedited LTLFreight - Year Ended December 31, 20172018 compared to Year Ended December 31, 20162017
The following table sets forth our historical financial data of the Expedited LTLFreight segment for the yearyears ended December 31, 20172018 and 20162017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| Expedited Freight Segment Information |
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | |
| Operating revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network 1 | $ | 677.4 |
|
| 72.8 | % |
| $ | 603.6 |
|
| 71.0 | % |
| $ | 73.8 |
|
| 12.2 | % |
| Truckload | 186.1 |
| 20.0 |
|
| 195.3 |
| 23.0 |
|
| (9.2 | ) |
| (4.7 | ) |
| Final Mile | 39.4 |
| 4.2 |
|
| 27.8 |
| 3.3 |
|
| 11.6 |
|
| 41.7 |
|
| Other | 28.2 |
| 3.0 |
|
| 23.7 |
| 2.8 |
|
| 4.5 |
|
| 19.0 |
|
| Total operating revenue | 931.1 |
|
| 100.0 |
|
| 850.4 |
|
| 100.0 |
|
| 80.7 |
|
| 9.5 |
|
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 483.1 |
| | 51.9 |
| | 436.7 |
| | 51.4 |
| | 46.4 |
| | 10.6 |
|
| Salaries, wages and employee benefits | 182.9 |
| | 19.6 |
| | 166.9 |
| | 19.6 |
| | 16.0 |
| | 9.6 |
|
| Operating leases | 42.0 |
| | 4.5 |
| | 37.6 |
| | 4.4 |
| | 4.4 |
| | 11.7 |
|
| Depreciation and amortization | 29.0 |
| | 3.1 |
| | 28.4 |
| | 3.3 |
| | 0.6 |
| | 2.1 |
|
| Insurance and claims | 18.8 |
| | 2.0 |
| | 20.8 |
| | 2.4 |
| | (2.0 | ) | | (9.6 | ) |
| Fuel expense | 9.5 |
| | 1.0 |
| | 7.1 |
| | 0.8 |
| | 2.4 |
| | 33.8 |
|
| Other operating expenses | 64.4 |
| | 6.9 |
| | 61.7 |
| | 7.3 |
| | 2.7 |
| | 4.4 |
|
| Total operating expenses | 829.7 |
| | 89.1 |
| | 759.2 |
| | 89.3 |
| | 70.5 |
| | 9.3 |
|
| Income from operations | $ | 101.4 |
| | 10.9 | % | | $ | 91.2 |
| | 10.7 | % | | $ | 10.2 |
| | 11.2 | % |
| | | | | | | | | | | | |
1 Network revenue is comprised of all revenue, including linehaul, pickup and/or delivery, and fuel surcharge revenue, excluding accessorial, truckload and final mile revenue |
Note: Prior period balances have been adjusted to conform with the Company's revised segment reporting classification. See additional discussion above and in Note 10, Segment Reporting to our Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | |
| Expedited LTL Segment Information |
| (In millions) |
| (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended |
| December 31, |
| Percent of |
| December 31, |
| Percent of |
|
|
| Percent |
| | 2017 |
| Revenue |
| 2016 |
| Revenue |
| Change |
| Change |
| Operating revenue | $ | 619.8 |
|
| 100.0 | % |
| $ | 570.8 |
|
| 100.0 | % |
| $ | 49.0 |
|
| 8.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| Purchased transportation | 254.9 |
|
| 41.1 |
|
| 225.1 |
|
| 39.5 |
|
| 29.8 |
|
| 13.2 |
|
| Salaries, wages and employee benefits | 145.9 |
|
| 23.5 |
|
| 139.0 |
|
| 24.4 |
|
| 6.9 |
|
| 5.0 |
|
| Operating leases | 36.7 |
|
| 5.9 |
|
| 34.4 |
|
| 6.0 |
|
| 2.3 |
|
| 6.7 |
|
| Depreciation and amortization | 22.1 |
|
| 3.6 |
|
| 21.9 |
|
| 3.8 |
|
| 0.2 |
|
| 0.9 |
|
| Insurance and claims | 15.4 |
|
| 2.5 |
|
| 13.2 |
|
| 2.3 |
|
| 2.2 |
|
| 16.7 |
|
| Fuel expense | 3.8 |
|
| 0.6 |
|
| 3.3 |
|
| 0.6 |
|
| 0.5 |
|
| 15.2 |
|
| Other operating expenses | 52.9 |
|
| 8.6 |
|
| 50.4 |
|
| 8.8 |
|
| 2.5 |
|
| 5.0 |
|
| Total operating expenses | 531.7 |
|
| 85.8 |
|
| 487.3 |
|
| 85.4 |
|
| 44.4 |
|
| 9.1 |
|
| Income from operations | $ | 88.1 |
|
| 14.2 | % |
| $ | 83.5 |
|
| 14.6 | % |
| $ | 4.6 |
|
| 5.5 | % |
|
| | | | | | | | | | |
| Expedited LTL Operating Statistics |
|
|
|
|
|
|
| Year ended |
| December 31, | | December 31, | | Percent |
| 2017 | | 2016 | | Change |
|
| |
| |
|
| Operating ratio | 85.8 | % | | 85.4 | % | | 0.5 | % |
|
| |
| |
|
| Business days | 254.0 |
| | 255.0 |
| | (0.4 | ) |
| Business weeks | 50.8 |
| | 51.0 |
| | (0.4 | ) |
|
| |
| |
|
| Expedited LTL: |
| |
| |
|
| Tonnage |
| |
| |
|
| Total pounds ¹ | 2,513,055 |
| | 2,370,788 |
| | 6.0 |
|
| Average weekly pounds ¹ | 49,470 |
| | 46,486 |
| | 6.4 |
|
|
| |
| |
|
| Linehaul shipments |
| |
| |
|
| Total linehaul | 4,036,385 |
| | 3,757,275 |
| | 7.4 |
|
| Average weekly | 79,456 |
| | 73,672 |
| | 7.9 |
|
|
| |
| |
|
| Forward Air Complete shipments | 943,396 |
| | 782,425 |
| | 20.6 |
|
| As a percentage of linehaul shipments | 23.4 | % | | 20.8 | % | | 12.5 |
|
|
| |
| |
|
| Average linehaul shipment size | 623 |
| | 631 |
| | (1.3 | ) |
|
| |
| |
|
Revenue per pound 2 |
| |
| |
|
| Linehaul yield | $ | 17.12 |
| | $ | 17.64 |
| | (2.3 | ) |
| Fuel surcharge impact | 1.20 |
| | 0.95 |
| | 1.1 |
|
| Forward Air Complete impact | 3.82 |
| | 3.33 |
| | 2.2 |
|
| Total Expedited LTL yield | $ | 22.14 |
| | $ | 21.92 |
| | 1.0 | % |
|
| |
| |
|
|
| |
| |
|
| ¹ - In thousands |
| |
| |
|
2 - In dollars per hundred pound; percentage change is expressed as a percent of total yield. |
|
| | | | | | | | | | |
| Expedited Freight Operating Statistics |
| | | | | | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
| Business days | 255 |
| | 254 |
| | 0.4 | % |
| | | | | | |
Tonnage 1,2 | | | | | |
| Total pounds | 2,562,205 |
| | 2,478,059 |
| | 3.4 |
|
| Pounds per day | 10,048 |
| | 9,756 |
| | 3.0 |
|
| | | | | | |
Shipments 1,2 | | | | | |
| Total shipments | 4,173 |
| | 4,048 |
| | 3.1 |
|
| Shipments per day | 16.4 |
| | 15.9 |
| | 3.1 |
|
| | | | | | |
| Weight per shipment | 614 |
| | 612 |
| | 0.3 |
|
| | | | | | |
Revenue per hundredweight 3 | $ | 26.15 |
| | $ | 23.91 |
| | 9.4 |
|
Revenue per hundredweight, ex fuel 3 | $ | 22.09 |
| | $ | 21.30 |
| | 3.7 |
|
| | | | | | |
Revenue per shipment 3 | $ | 163 |
| | $ | 146 |
| | 11.6 |
|
Revenue per shipment, ex fuel 3 | $ | 138 |
| | $ | 130 |
| | 6.2 | % |
Network revenue from door-to-door shipments as a percentage of network revenue 3,4 | 35.3 | % |
| 34.9 | % |
| 1.1 |
|
Network gross margin 5 | 52.0 | % | | 54.5 | % | | (4.6 | ) |
| | | | | | |
1 In thousands | | | | | |
2 Excludes accessorial, full truckload and final mile products | | | | |
3 Includes intercompany revenue between the Network and Truckload revenue streams |
4 Door-to-door shipments include all shipments with a pickup and/or delivery |
5 Network revenue less network purchased transportation as a percentage of network revenue |
Revenues
Expedited LTLFreight operating revenue increased $49.0$80.7 million, or 8.6%9.5% , to $619.8$931.1 million for the year ended December 31, 20172018 from $570.8$850.4 million for the same period of 2016. The2017. This increase was due to increased network revenue, final mile revenue and other terminal based revenue over the prior year, partially offset by a decrease in truckload revenue. Network revenue increased $73.8 million due to a 3.1% increase in shipments, a 3.4% increase in tonnage and a 9.4% increase in revenue is mostly the result of increases to Complete activity and fuel surcharge revenues. Linehaul revenue, which is the largest portion of Expedited LTL, increased $12.1 million, or 2.9%, due to the increase in tonnage partly offset by the decrease in linehaul yield noted in the preceding table.per hundredweight over prior year. The increase in tonnage iswas 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 average base revenue per pound.
The $49.0 million revenue increase is primarily the result of a $16.9 million, or 21.4%, increase in Complete revenue. The increase in Complete revenue was attributable to an increase in shipping volumes in our Expedited LTL networkclass-rated shipments and a 12.5% increase in the attachment rate of Complete to linehaul shipments. Additionally, compared to the same period in 2016, net fuel surcharge revenue increased $7.6 million largely due to the increase in revenue per hundredweight was due to increased fuel prices, shipment size and volume increases.revenue per shipment.
Final mile revenue increased $11.6 million primarily due to new business wins in the final mile service offering. Other terminal based revenues,revenue, which includes dedicated local pickup and delivery services, warehousing and terminal handling and warehousing, increased $12.4$4.5 million. Truckload revenue decreased $9.2 million or 24.4%,due to $63.4 million in 2017 from $51.0 million indeliberate shedding of lower margin business as well as reduced fleet capacity versus the same period of 2016. The increase in other terminal revenue was mainly attributable to increases in dedicated local pickup and delivery.prior year period.
Purchased Transportation
Expedited LTL’sFreight purchased transportation increased by $29.8$46.4 million, or 13.2%10.6%, to $254.9$483.1 million for the year ended December 31, 20172018 from $225.1$436.7 million for the year ended December 31, 2016.2017. As a percentage of segment operating revenue, Expedited LTLFreight purchased transportation was 41.1%51.9% during the year ended December 31, 20172018 compared to 39.5%51.4% for the same period of 2016. The increase is mostly due to a 6.3% increase2017. Expedited Freight purchased transportation includes owner-operators and third-party carriers, while Company-employed drivers are included in Expedited LTL cost per mile. The higher cost per mile is due to increased utilization of third party transportation providers, which are more costly than owner-operators.salaries, wages and benefits. The increase as a percentage of revenue is alsowas mostly due to an increase in our cost per mile as a result of increased Complete attachment on higher linehaul volumes. Complete purchasedutilization of third-party transportation has a higher percentage of revenueproviders, which are typically more costly than linehaul.owner-operators, and rate increases to owner-operators.
Salaries, Wages, and Benefits
Salaries,Expedited Freight salaries, wages and employee benefits of Expedited LTL increased by $6.9$16.0 million, or 5.0%9.6%, to $145.9$182.9 million for the year ended December 31, 20172018 from $139.0$166.9 million in the same period of 2016.2017. Salaries, wages and employee benefits were 23.5%19.6% of Expedited LTL’sFreight’s operating revenue for the years ended December 31, 2018 and 2017. Health insurance costs decreased 0.4% as a percentage of revenue, however, was offset by increased driver and dock pay. Driver pay increased due to increased utilization of Company-employed drivers for transportation services and dock pay increased due to the higher tonnage volumes mentioned above.
Operating Leases
Expedited Freight operating leases increased $4.4 million, or 11.7%, to $42.0 million for the year ended December 31, 2018 from $37.6 million for the year ended December 31, 2017. Operating leases were 4.5% of Expedited Freight’s operating revenue for the year ended December 31, 20172018 compared to 24.4% for the same period of 2016. The decrease in salaries, wages and employee benefits as a percentage of revenue was primarily attributable to a 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 $2.3 million, or 6.7%, to $36.7 million4.4% for the year ended December 31, 2017 from $34.4 million for the year ended December 31, 2016. Operating leases were 5.9% of Expedited LTL’s operating revenue for the year ended December 31, 2017 compared with 6.0% for the year ended December 31, 2016.2017. The increase in cost is due to $1.2a $3.9 million increase in tractor rentals and leases and $2.3 million of additional facility lease expenses andpartly offset by a $1.1$1.8 million increasedecrease in truck, trailer leases and equipment rentalsrentals. Tractor leases increased due to the increased usage of Company-employed drivers mentioned above and leases. Facilityfacility leases increased due to the expansion of certain facilities. VehicleTrailer leases increasedand equipment rentals decreased due to the replacement of older owned power equipmentprior year rentals and leases that were replaced with leased power equipment.purchased units.
Depreciation and Amortization
Expedited LTLFreight depreciation and amortization increased $0.2$0.6 million, or 0.9%2.1%, to $22.1$29.0 million for the year ended December 31, 20172018 from $21.9$28.4 million for the year ended December 31, 2016.2017. Depreciation and amortization expense as a percentage of Expedited LTLFreight operating revenue was 3.6%3.1% in the year ended December 31, 20172018 compared to 3.8%3.3% for the year ended December 31, 2016.2017. The decrease as a percentage of revenue was due to lower amortization expenses partly offset by the increase in equipment leasing mentioned above insteadpurchase of purchased equipment.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 LTLFreight insurance and claims expense increased $2.2decreased $2.0 million, or 16.7%9.6%, to $15.4$18.8 million for the year ended December 31, 20172018 from $13.2$20.8 million for the year ended December 31, 2016.2017. Insurance and claims as a percentage of Expedited LTL’sFreight’s operating revenue was 2.5%2.0% for the year ended December 31, 20172018 compared to 2.3%2.4% for the year ended December 31, 2016.2017. The increase in dollarsdecrease as a percentage of revenue was partly attributable to lower vehicle liability claims and insurance premiums. At a $0.7 million increaseconsolidated level, vehicle claims reserves increased; see discussion in insurance premiums associated with our insurancethe "Other operations" section below.
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 LTLFreight fuel expense increased $0.5$2.4 million, or 15.2%33.8%, to $3.8$9.5 million for the year ended December 31, 20172018 from $3.3$7.1 million in the year ended December 31, 2016.2017. Fuel expense was 0.6%1.0% of Expedited LTL’sFreight’s operating revenue for the yearsyear ended December 31, 2017 and 2016. LTL2018 compared to 0.8% for the year ended December 31, 2017. Expedited Freight fuel expenses increased due to higher year-over-year fuel prices.prices and increased Company-employed driver miles.
Other Operating Expenses
Expedited LTLFreight other operating expenses increased $2.5$2.7 million, or 5.0%4.4%, to $52.9$64.4 million for the year ended December 31, 20172018 from $50.4$61.7 million for the year ended December 31, 2016.2017. Expedited LTLFreight other operating expenses were 8.6%6.9% of operating revenue for the year ended December 31, 20172018 compared to 8.8%7.3% for the year ended December 31, 2016.2017. Other operating expenses includesincluded 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 acquisitionlower owner-operator costs, such as tolls, and lower costs of transiting our networkmaintenance due to the useincreased utilization of third partybrokered transportation mentioned above. Additional decrease as a percentage of revenue was due to the year ended December 31, 2018 including the recovery of previously mentioned. The priorreserved receivables, while the same period alsoof 2017 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 LTLFreight income from operations increased by $4.6$10.2 million, or 5.5%11.2%, to $88.1$101.4 million for the year ended December 31, 20172018 compared with $83.5to $91.2 million for the year ended December 31, 2016.2017. Expedited LTL’sFreight’s income from operations was 14.2%10.9% of operating revenue for the year ended December 31, 20172018 compared with 14.6%to 10.7% for the year ended December 31, 2016. Deterioration2017. The increase in income from operations as a percentage of revenue was due to anincreases in revenue due to higher shipments, tonnage and fuel surcharge revenue as well as the deliberate shedding of lower margin truckload business. These improvements were mostly offset by increased utilization of third partythird-party transportation providers partly offset by higher tonnage driving increased Complete, fuel surcharge and linehaul revenues. The fuel surcharge increase was also due to increased fuel prices.providers.
Truckload Premium ServicesIntermodal - Year Ended December 31, 20172018 compared to Year Ended December 31, 20162017
The following table sets forth our historical financial data forof the Truckload Premium ServicesIntermodal segment for the yearyears ended December 31, 20172018 and 20162017 (in millions):
| | Truckload Premium Services Segment Information
| |
Intermodal Segment Information
| | Intermodal Segment Information
|
(In millions) | (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| Operating revenue | $ | 179.3 |
| | 100.0 | % | | $ | 164.3 |
| | 100.0 | % | | $ | 15.0 |
| | 9.1 | % | $ | 201.0 |
| | 100.0 | % | | $ | 154.7 |
| | 100.0 | % | | $ | 46.3 |
| | 29.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | |
| Purchased transportation | 131.3 |
| | 73.2 |
| | 115.4 |
| | 70.2 |
| | 15.9 |
| | 13.8 |
| 77.1 |
| | 38.4 |
| | 63.6 |
| | 41.1 |
| | 13.5 |
| | 21.2 |
|
| Salaries, wages and employee benefits | 20.4 |
| | 11.4 |
| | 19.3 |
| | 11.7 |
| | 1.1 |
| | 5.7 |
| 43.9 |
| | 21.8 |
| | 34.0 |
| | 22.0 |
| | 9.9 |
| | 29.1 |
|
| Operating leases | 0.9 |
| | 0.5 |
| | 0.3 |
| | 0.2 |
| | 0.6 |
| | 200.0 |
| 15.9 |
| | 7.9 |
| | 13.5 |
| | 8.7 |
| | 2.4 |
| | 17.8 |
|
| Depreciation and amortization | 6.3 |
| | 3.5 |
| | 6.5 |
| | 4.0 |
| | (0.2 | ) | | (3.1 | ) | 6.3 |
| | 3.1 |
| | 5.8 |
| | 3.8 |
| | 0.5 |
| | 8.6 |
|
| Insurance and claims | 5.4 |
| | 3.0 |
| | 4.8 |
| | 2.9 |
| | 0.6 |
| | 12.5 |
| 5.8 |
| | 2.9 |
| | 4.2 |
| | 2.7 |
| | 1.6 |
| | 38.1 |
|
| Fuel expense | 3.3 |
| | 1.8 |
| | 2.6 |
| | 1.6 |
| | 0.7 |
| | 26.9 |
| 6.6 |
| | 3.3 |
| | 3.9 |
| | 2.5 |
| | 2.7 |
| | 69.2 |
|
| Other operating expenses | 8.5 |
| | 4.8 |
| | 8.4 |
| | 5.1 |
| | 0.1 |
| | 1.2 |
| 22.1 |
| | 11.0 |
| | 16.7 |
| | 10.8 |
| | 5.4 |
| | 32.3 |
|
Impairment of goodwill, intangibles and other assets
| — |
| | — |
| | 42.4 |
| | 25.8 |
| | (42.4 | ) | | (100.0 | ) | |
| Total operating expenses | 176.1 |
| | 98.2 |
| | 199.7 |
| | 121.5 |
| | (23.6 | ) | | (11.8 | ) | 177.7 |
| | 88.4 |
| | 141.7 |
| | 91.6 |
| | 36.0 |
| | 25.4 |
|
| Income (loss) from operations | $ | 3.2 |
| | 1.8 | % | | $ | (35.4 | ) | | (21.5 | )% | | $ | 38.6 |
| | (109.0 | )% | |
| Income from operations | | $ | 23.3 |
| | 11.6 | % | | $ | 13.0 |
| | 8.4 | % | | $ | 10.3 |
| | 79.2 | % |
|
| | | | | | | | | | |
| Truckload Premium Services Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | | | | | |
Company driver 1 | 7,822 |
| | 6,740 |
| | 16.1 | % |
Owner operator 1 | 45,123 |
| | 50,442 |
| | (10.5 | ) |
Third party 1 | 43,653 |
| | 32,358 |
| | 34.9 |
|
| Total Miles | 96,598 |
| | 89,540 |
| | 7.9 |
|
| | | | | | |
| Revenue per mile | $ | 1.80 |
| | $ | 1.79 |
| | 0.6 |
|
| | | | | | |
| Cost per mile | $ | 1.43 |
| | $ | 1.38 |
| | 3.6 | % |
| | | | | | |
| ¹ - In thousands | | | | | |
|
| | | | | | | | | | |
| Intermodal Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | | | |
| Drayage shipments | 305,239 |
| | 233,093 |
| | 31.0 | % |
| Drayage revenue per Shipment | $ | 567 |
| | $ | 554 |
| | 2.3 |
|
| Number of Locations | 20 |
| | 19 |
| | 5.3 | % |
Revenues
TLS
Intermodal operating revenue increased $15.0$46.3 million, or 9.1%29.9%, to $179.3$201.0 million for the year ended December 31, 20172018 from $164.3$154.7 million infor the same period of 2016.in 2017. The increaseincreases in TLSoperating revenue waswere primarily attributable to new business winsa full year of revenue from Atlantic, which resultedwas acquired in a 7.9% increase in miles driven to support revenue.May 2017, the impact of increased fuel surcharges and increased rental and storage revenues.
Purchased Transportation
PurchasedIntermodal purchased transportation costs for our TLS revenue increased $15.9$13.5 million, or 13.8%21.2%, to $131.3$77.1 million for the year ended December 31, 20172018 from $115.4$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, 2016. For2018 compared to 41.1% for the year ended December 31, 2017, TLS2017. Intermodal purchased transportation costs represented 73.2% of TLS revenue compared to 70.2% for the same periodincludes owner-operators and third-party carriers, while Company-employed drivers are included in 2016.salaries, wages and benefits. The increasedecrease in TLS purchased transportation was attributable to a 7.2% increase in non-Company miles driven and a 4.9% 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 TLSIntermodal purchased transportation as a percentage of revenue was attributable to TLSa change in revenue per milemix, as Intermodal had higher increases to revenue lines that did not increasing in proportion withrequire the increase in TLS cost per mile.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
Salaries,Intermodal salaries, wages and employee benefits of TLS increased by $1.1$9.9 million, or 5.7%29.1%, to $20.4$43.9 million infor the year ended December 31, 2017 from $19.32018 compared to $34.0 million in the same period of 2016. Salaries, wages and employee benefits were 11.4% of TLS’s operating revenue infor the year ended December 31, 20172017. As a percentage of Intermodal operating revenue, salaries, wages and benefits decreased to 21.8% for the year ended December 31, 2018 compared to 11.7%22.0% for the same period of 2016.in 2017. The decreaseimprovement in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to the increase inlower workers' compensation and health insurance costs as a percentage of revenue outpacing the increase in pay to Company driverspartly offset by higher employee incentives and office staff.share-based compensation.
Operating Leases
OperatingIntermodal operating leases increased $0.6$2.4 million, or 200.0%,17.8% to $0.9$15.9 million for the year ended December 31, 20172018 from $0.3$13.5 million for the same period in 2016.2017. Operating leases were 0.5%7.9% of TLSIntermodal operating revenue for the year ended December 31, 20172018 compared to 0.2% for8.7% in the same period of 2016.2017. 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 $0.6 milliondecrease as a percentage of revenue is also attributable to utilization of owned equipment acquired from Atlantic and the increase in cost is due to additional trailer rentals forrevenue out-pacing the new business wins mentioned above.increase in facility rents.
Depreciation and Amortization
DepreciationIntermodal depreciation and amortization decreased $0.2increased $0.5 million, or 3.1%8.6%, to $6.3 million for the year ended December 31, 20172018 from $6.5$5.8 million for the year ended December 31, 2016.same period in 2017. Depreciation and amortization expense as a percentage of TLSIntermodal operating revenue was 3.5%3.1% for the year ended December 31, 20172018 compared to 4.0%3.8% for the same period of 2017. The increase in 2016. The decrease wasdepreciation and amortization is due to the impairmentamortization of TQI intangible assets in the second quarteracquired during 2017 and 2018. Depreciation and amortization decreased as a percentage of 2016 leading to lower on-going amortization expense. This decrease was partially offset byrevenue since revenue that does not require equipment increased trailer depreciation on trailers purchased during 2017.at a faster pace than those that required equipment.
Insurance and Claims
TLSIntermodal insurance and claims expense increased $0.6$1.6 million, or 12.5%38.1%, to $5.4$5.8 million for the year ended December 31, 20172018 from $4.8$4.2 million for the year ended December 31, 2016. As a percentage of operating revenue,2017. Intermodal insurance and claims was 3.0% for the year ended December 31, 2017 compared towere 2.9% for the year ended December 31, 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 1.8% of TLS operating revenue during the year ended December 31, 2017 compared to 1.6% 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 4.8% of operating revenue for the year ended December 31, 20172018 compared to 5.1%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, 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 $0.22018 from $3.9 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, theresame period of 2017. Fuel expenses were no impairment charges recognized.
Income from Operations
TLS results from operations increased by $38.6 million to $3.2 million in income from operations3.3% of Intermodal operating revenue for the year ended December 31, 20172018 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 $35.4$0.5 million lossreduction 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 2016. Excluding the impairment charges, the deterioration in results2017. Income from operations as a percentage of Intermodal operating revenue was due11.6% for the year ended December 31, 2018 compared to increased utilization8.4% in the same period of third party transportation providers which led2017. The increase in operating income as a percentage of revenue was primarily attributable to the increase in cost per mile outpacinghigh-margin storage and fuel revenues and a full year of the increase in revenue per mile.
Atlantic acquisition.
Pool Distribution - Year Ended December 31, 20172018 compared to Year Ended December 31, 20162017
The following table sets forth our historical financial data of the Pool Distribution segment for the yearyears ended December 31, 20172018 and 20162017 (in millions):
| | Pool Distribution Segment Information
| Pool Distribution Segment Information
| Pool Distribution Segment Information
|
(In millions) | (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| Operating revenue | $ | 164.2 |
| | 100.0 | % | | $ | 148.6 |
| | 100.0 | % | | $ | 15.6 |
| | 10.5 | % | $ | 194.1 |
| | 100.0 | % | | $ | 168.5 |
| | 100.0 | % | | $ | 25.6 |
| | 15.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | |
| Purchased transportation | 43.2 |
| | 26.3 |
| | 40.0 |
| | 26.9 |
| | 3.2 |
| | 8.0 |
| 57.4 |
| | 29.6 |
| | 47.5 |
| | 28.2 |
| | 9.9 |
| | 20.8 |
|
| Salaries, wages and employee benefits | 62.7 |
| | 38.2 |
| | 56.8 |
| | 38.2 |
| | 5.9 |
| | 10.4 |
| 71.3 |
| | 36.7 |
| | 62.7 |
| | 37.2 |
| | 8.6 |
| | 13.7 |
|
| Operating leases | 13.3 |
| | 8.1 |
| | 12.7 |
| | 8.6 |
| | 0.6 |
| | 4.7 |
| 17.6 |
| | 9.1 |
| | 13.3 |
| | 7.9 |
| | 4.3 |
| | 32.3 |
|
| Depreciation and amortization | 6.8 |
| | 4.1 |
| | 6.0 |
| | 4.0 |
| | 0.8 |
| | 13.3 |
| 6.9 |
| | 3.6 |
| | 6.8 |
| | 4.0 |
| | 0.1 |
| | 1.5 |
|
| Insurance and claims | 4.7 |
| | 2.9 |
| | 4.4 |
| | 3.0 |
| | 0.3 |
| | 6.8 |
| 4.6 |
| | 2.4 |
| | 4.7 |
| | 2.8 |
| | (0.1 | ) | | (2.1 | ) |
| Fuel expense | 5.5 |
| | 3.3 |
| | 4.8 |
| | 3.2 |
| | 0.7 |
| | 14.6 |
| 7.0 |
| | 3.6 |
| | 5.5 |
| | 3.3 |
| | 1.5 |
| | 27.3 |
|
| Other operating expenses | 21.6 |
| | 13.2 |
| | 20.3 |
| | 13.7 |
| | 1.3 |
| | 6.4 |
| 23.4 |
| | 12.1 |
| | 21.6 |
| | 12.8 |
| | 1.8 |
| | 8.3 |
|
| Total operating expenses | 157.8 |
| | 96.1 |
| | 145.0 |
| | 97.6 |
| | 12.8 |
| | 8.8 |
| 188.2 |
| | 97.0 |
| | 162.1 |
| | 96.2 |
| | 26.1 |
| | 16.1 |
|
| Income from operations | $ | 6.4 |
| | 3.9 | % | | $ | 3.6 |
| | 2.4 | % | | $ | 2.8 |
| | 77.8 | % | $ | 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 |
| | | | | | |
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 $15.6$25.6 million, or 10.5%15.2%, to $164.2$194.1 million for the year ended December 31, 20172018 from $148.6$168.5 million for the year ended December 31, 2016.2017. The revenue increase was due to increased volumes from previously existing customers, new business and rate increases.
Purchased Transportation
Pool purchased transportation increased $3.2$9.9 million, or 8.0%20.8%, to $43.2$57.4 million for the year ended December 31, 20172018 from $40.0$47.5 million for the year ended December 31, 2016.2017. Pool purchased transportation as a percentage of revenue was 26.3%29.6% for the year ended December 31, 20172018 compared to 26.9%28.2% for the same period in 2016.2017. Pool purchased transportation includes owner-operators and third-party carriers, while Company-employed drivers are included in salaries, wages and benefits. The improvementincrease in Pool purchased transportation as a percentage of revenue was attributable to anincreased rates charged by, and increased utilization of, owner-operators over more costly third partythird-party carriers and revenueto cover the increases associated with rate increases.in revenue.
Salaries, Wages, and Benefits
Salaries,Pool salaries, wages and employee benefits of Pool increased by $5.9$8.6 million, or 10.4%13.7%, to $71.3 million for the year ended December 31, 2018 from $62.7 million for the year ended December 31, 2017 from $56.8 million for the year ended December 31, 2016.2017. As a percentage of Pool operating revenue, salaries, wages and benefits were 38.2%36.7% for the years ended December 31, 20172018 compared to 37.2% for the same period in 2017. The decrease in salaries, wages and 2016. Asbenefits as a percentage of revenue increaseswas the result of decreases in dockemployee incentives, driver pay and employee incentive weregroup health insurance costs partly offset by decreases in Company driverincreased dock pay. Dock pay increaseddeteriorated as a percentage of revenue as increasing revenue volumes required the use of more costly contract labor.
Operating Leases
OperatingPool operating leases increased $0.6$4.3 million, or 4.7%32.3%, to $17.6 million for the year ended December 31, 2018 from $13.3 million for the year ended December 31, 2017 from $12.7 million for the year ended December 31, 2016.2017. Operating leases were 8.1%9.1% of Pool operating revenue for the year ended December 31, 20172018 compared with 8.6%to 7.9% for the year ended December 31, 2016.2017. Operating leases increased in total dollars 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 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 attributablemostly due to increased revenue.a $1.0 million charge to vacate a facility.
Depreciation and Amortization
DepreciationPool depreciation and amortization increased $0.8$0.1 million, or 13.3%1.5%, to $6.8$6.9 million for the year ended December 31, 20172018 compared to $6.0$6.8 million for the same period in 2016.2017. Depreciation and amortization expense as a percentage of Pool operating revenue was 4.1%3.6% for the year ended December 31, 20172018 compared to 4.0% for the year ended December 31, 2016.2017. The increasedecrease in Pool depreciation and amortization in total dollarsas a percentage of revenue was due to the allocationincrease in leased tractors mentioned above instead of trailer depreciation, which reflects Pool's increased utilization of our trailer fleet. This increase waspurchased equipment, partly offset by a decrease in tractorincreased trailer depreciation due to the increased use of rentals and leases mentioned above.on trailers purchased during 2018.
Insurance and Claims
Pool insurance and claims increased $0.3decreased $0.1 million, or 6.8%2.1%, to $4.6 million for the year ended December 31, 2018 from $4.7 million for the year ended December 31, 2017 from $4.4 million for the year ended December 31, 2016.2017. As a percentage of operating revenue, insurance and claims was 2.9%2.4% for the year ended December 31, 20172018 compared to 3.0%2.8% for the year ended December 31, 2016.2017. 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 cargovehicle liability claims. At a consolidated level, vehicle claims partly offset by increasesreserves increased; see discussion in vehicle accident claim reserves.the "Other operations" section below.
Fuel Expense
Pool fuel expense increased $0.7$1.5 million, or 14.6%27.3%, to $7.0 million for the year ended December 31, 2018 from $5.5 million for the year ended December 31, 2017 from $4.8 million for the year ended December 31, 2016.2017. Fuel expenses were 3.3%3.6% of Pool operating revenue during the year ended December 31, 20172018 compared to 3.2%3.3% for the year ended December 31, 2016.2017. Pool fuel expenses increased in total dollars due to higher year-over-year fuel prices, and higher revenue volumes.volumes and increased Company-employed driver miles.
Other Operating Expenses
Pool other operating expenses increased $1.3$1.8 million, or 6.4%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 compared to $20.3 million for the year ended December 31, 2016.2017. Pool other operating expenses were 13.2%12.1% of operating revenue for the year ended December 31, 20172018 compared to 13.7%12.8% for the year ended December 31, 2016.2017. Other operating expenses includesinclude 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 dock and facility related costs, a 0.2% decrease in legal and professional fees and 0.2% decrease due to improved agent station margins.terminal handling costs. These improvementsdecreases were partly offset by losses incurred on the salea 0.1% increase as a percentage of old equipment. The dock and facility related cost improvements were mainly attributable to 2016 including the start up of new business, while similar costs were not incurredrevenue 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.recruiting expenses.
Income from Operations
Pool income from operations increaseddecreased by $2.8$0.5 million, or 77.8%7.8% to $5.9 million for the year ended December 31, 2018 from $6.4 million for the year ended December 31, 2017 from $3.6 million for the year ended December 31, 2016.2017. Pool income from operations was 3.9%3.0% of operating revenue for the year ended December 31, 20172018 compared with 2.4%to 3.8% of operating revenue for the year ended December 31, 2016.2017. The improvementdeterioration in Pool operating income from operations was primarily the result of increased utilization of and higher rates charged by third-party carriers and increasing revenue volumes current year rate increases, purchased transportation efficiencies and lowerrequired the use of more costly contract labor. Pool's operating income also decreased due to the one-time charge to vacate a facility costs.during 2018.
IntermodalOther operations - Year Ended December 31, 20172018 compared to Year Ended December 31, 20162017
The following table sets forth our historical financial data of the Intermodal segment for the year 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 |
| Operating revenue | $ | 148.9 |
| | 100.0 | % | | $ | 103.7 |
| | 100.0 | % | | $ | 45.2 |
| | 43.6 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 58.6 |
| | 39.4 |
| | 36.2 |
| | 34.9 |
| | 22.4 |
| | 61.9 |
|
| Salaries, wages and employee benefits | 33.5 |
| | 22.5 |
| | 25.2 |
| | 24.3 |
| | 8.3 |
| | 32.9 |
|
| Operating leases | 13.5 |
| | 9.1 |
| | 12.0 |
| | 11.6 |
| | 1.5 |
| | 12.5 |
|
| Depreciation and amortization | 5.8 |
| | 3.9 |
| | 3.9 |
| | 3.8 |
| | 1.9 |
| | 48.7 |
|
| Insurance and claims | 4.2 |
| | 2.8 |
| | 3.0 |
| | 2.9 |
| | 1.2 |
| | 40.0 |
|
| Fuel expense | 3.9 |
| | 2.6 |
| | 2.5 |
| | 2.4 |
| | 1.4 |
| | 56.0 |
|
| Other operating expenses | 16.7 |
| | 11.2 |
| | 9.9 |
| | 9.5 |
| | 6.8 |
| | 68.7 |
|
| Total operating expenses | 136.2 |
| | 91.5 |
| | 92.7 |
| | 89.4 |
| | 43.5 |
| | 46.9 |
|
| Income from operations | $ | 12.7 |
| | 8.5 | % | | $ | 11.0 |
| | 10.6 | % | | $ | 1.7 |
| | 15.5 | % |
Revenues
Intermodal operating revenue increased $45.2 million, or 43.6%, to $148.9 million for the year ended December 31, 2017 from $103.7 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 $22.4 million, or 61.9%, to $58.6 million for the year ended December 31, 2017 from $36.2 million for the same period in 2016. Intermodal purchased transportation as a percentage of revenue was 39.4% for the year ended December 31, 2017 compared to 34.9% 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 $8.3 million, or 32.9%, to $33.5 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 22.5% for the year ended December 31, 2017 compared to 24.3% 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 9.1% of Intermodal operating revenue for the year ended December 31, 2017 compared with 11.6% 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 3.9% for the year ended December 31, 2017 compared to 3.8% 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 2.8% of operating revenue for the year ended December 31, 2017 compared with 2.9% 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 2.6% 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 11.2% compared to 9.5% 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 $1.7 million, or 15.5%, to $12.7 million for the year ended December 31, 2017 compared with $11.0 million for the same period in 2016. Income from operations as a percentage of Intermodal operating revenue was 8.5% for the year ended December 31, 2017 compared to 10.6% in the same period of 2016. The increase in operating income in total dollars 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.
Other Operations
Other operating activity improveddeclined 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, 2017.2017 to an $8.5 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 $1.1 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 includesincluded a $1.2 million in loss development reservesreserve 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.
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.
Results of Operations
The following table sets forth our historical financial data for the years ended December 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | Change | | Percent Change |
| Operating revenue: | | | | | | | |
| Expedited LTL | $ | 570.8 |
| | $ | 577.0 |
| | $ | (6.2 | ) | | (1.1 | )% |
| Truckload Premium Services | 164.3 |
| | 153.3 |
| | 11.0 |
| | 7.2 |
|
| Pool Distribution | 148.6 |
| | 130.0 |
| | 18.6 |
| | 14.3 |
|
| Intermodal | 103.7 |
| | 104.3 |
| | (0.6 | ) | | (0.6 | ) |
| Eliminations and other operations | (4.9 | ) | | (5.5 | ) | | 0.6 |
| | (10.9 | ) |
| Operating revenue | 982.5 |
| | 959.1 |
| | 23.4 |
| | 2.4 |
|
| Operating expenses: | | | | | | | |
| Purchased transportation | 413.4 |
| | 408.8 |
| | 4.6 |
| | 1.1 |
|
| Salaries, wages, and employee benefits | 242.0 |
| | 240.6 |
| | 1.4 |
| | 0.6 |
|
| Operating leases | 60.5 |
| | 66.3 |
| | (5.8 | ) | | (8.7 | ) |
| Depreciation and amortization | 38.2 |
| | 37.1 |
| | 1.1 |
| | 3.0 |
|
| Insurance and claims | 25.4 |
| | 21.5 |
| | 3.9 |
| | 18.1 |
|
| Fuel expense | 13.2 |
| | 15.9 |
| | (2.7 | ) | | (17.0 | ) |
| Other operating expenses | 87.4 |
| | 87.1 |
| | 0.3 |
| | 0.3 |
|
| Impairment of goodwill, intangibles and other assets | 42.4 |
| | — |
| | 42.4 |
| | 100.0 |
|
| Total operating expenses | 922.5 |
| | 877.3 |
| | 45.2 |
| | 5.2 |
|
| Income (loss) from operations: | | | | | | | |
| Expedited LTL | 83.5 |
| | 79.2 |
| | 4.3 |
| | 5.4 |
|
| Truckload Premium Services | (35.4 | ) | | 13.3 |
| | (48.7 | ) | | (366.2 | ) |
| Pool Distribution | 3.6 |
| | 3.9 |
| | (0.3 | ) | | (7.7 | ) |
| Intermodal | 11.0 |
| | 11.9 |
| | (0.9 | ) | | (7.6 | ) |
| Other operations | (2.7 | ) | | (26.5 | ) | | 23.8 |
| | (89.8 | ) |
| Income from operations | 60.0 |
| | 81.8 |
| | (21.8 | ) | | (26.7 | ) |
| Other expense: | | | | | | | |
| Interest expense | (1.6 | ) | | (2.0 | ) | | 0.4 |
| | (20.0 | ) |
| Other, net | — |
| | (0.1 | ) | | 0.1 |
| | (100.0 | ) |
| Total other expense | (1.6 | ) | | (2.1 | ) | | 0.5 |
| | (23.8 | ) |
| Income before income taxes | 58.4 |
| | 79.7 |
| | (21.3 | ) | | (26.7 | ) |
| Income taxes | 30.7 |
| | 24.1 |
| | 6.6 |
| | 27.4 |
|
| Net income | $ | 27.7 |
| | $ | 55.6 |
| | $ | (27.9 | ) | | (50.2 | )% |
Expedited LTL - Year Ended December 31, 2016 compared to Year Ended December 31, 2015
The following table sets forth our historical financial data of the Expedited LTL segment for the year ended December 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| Expedited LTL Segment Information |
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2016 | | Revenue | | 2015 | | Revenue | | Change | | Change |
| Operating revenue | $ | 570.8 |
| | 100.0 | % | | $ | 577.0 |
| | 100.0 | % | | $ | (6.2 | ) | | (1.1 | )% |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 225.1 |
| | 39.4 |
| | 242.5 |
| | 42.0 |
| | (17.4 | ) | | (7.2 | ) |
| Salaries, wages and employee benefits | 139.0 |
| | 24.4 |
| | 143.2 |
| | 24.8 |
| | (4.2 | ) | | (2.9 | ) |
| Operating leases | 34.4 |
| | 6.0 |
| | 30.7 |
| | 5.3 |
| | 3.7 |
| | 12.1 |
|
| Depreciation and amortization | 21.9 |
| | 3.8 |
| | 21.1 |
| | 3.7 |
| | 0.8 |
| | 3.8 |
|
| Insurance and claims | 13.2 |
| | 2.3 |
| | 10.1 |
| | 1.8 |
| | 3.1 |
| | 30.7 |
|
| Fuel expense | 3.3 |
| | 0.6 |
| | 4.0 |
| | 0.7 |
| | (0.7 | ) | | (17.5 | ) |
| Other operating expenses | 50.4 |
| | 8.8 |
| | 46.2 |
| | 8.0 |
| | 4.2 |
| | 9.1 |
|
| Total operating expenses | 487.3 |
| | 85.4 |
| | 497.8 |
| | 86.3 |
| | (10.5 | ) | | (2.1 | ) |
| Income from operations | $ | 83.5 |
| | 14.6 | % | | $ | 79.2 |
| | 13.7 | % | | $ | 4.3 |
| | 5.4 | % |
|
| | | | | | | | | | |
| Expedited LTL Operating Statistics |
| | | | | | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2016 | | 2015 | | Change |
| | | | | | |
| Operating ratio | 85.4 | % | | 86.3 | % | | (1.0 | )% |
| | | | | | |
| Business days | 255.0 |
| | 255.0 |
| | — |
|
| Business weeks | 51.0 |
| | 51.0 |
| | — |
|
| | | | | | |
| Expedited LTL: | | | | | |
| Tonnage | | | | | |
| Total pounds ¹ | 2,370,788 |
| | 2,408,424 |
| | (1.6 | ) |
| Average weekly pounds ¹ | 46,486 |
| | 47,224 |
| | (1.6 | ) |
| | | | | | |
| Linehaul shipments | | | | | |
| Total linehaul | 3,757,275 |
| | 3,764,310 |
| | (0.2 | ) |
| Average weekly | 73,672 |
| | 73,810 |
| | (0.2 | ) |
| | | | | | |
| Forward Air Complete shipments | 782,425 |
| | 848,325 |
| | (7.8 | ) |
| As a percentage of linehaul shipments | 20.8 | % | | 22.5 | % | | (7.6 | ) |
| | | | | | |
| Average linehaul shipment size | 631 |
| | 640 |
| | (1.4 | ) |
| | | | | | |
Revenue per pound 2 | | | | | |
| Linehaul yield | $ | 17.64 |
| | $ | 17.27 |
| | 1.7 |
|
| Fuel surcharge impact | 0.95 |
| | 1.15 |
| | (0.9 | ) |
| Forward Air Complete impact | 3.33 |
| | 3.33 |
| | — |
|
| Total Expedited LTL yield | $ | 21.92 |
| | $ | 21.75 |
| | 0.8 | % |
| | | | | | |
| | | | | | |
| ¹ - In thousands | | | | | |
2 - In dollars per hundred pound; percentage change is expressed as a percent of total yield. |
Revenues
Expedited LTL operating revenue decreased $6.2 million, or 1.1%, to $570.8 million for the year ended December 31, 2016 from $577.0 million for the same period of 2015. The decrease in revenue is mostly the result of a $7.8 million decrease in net fuel surcharge revenue, Complete revenue and other terminal based revenues, partly offset by a $1.6 million increase in linehaul revenue. The increase in linehaul revenue is attributable to the linehaul yield changes noted in the preceding table. The increase in average linehaul revenue per pound was attributable to targeted rate increases implemented in the fourth quarter of 2015. Tonnage was slightly down primarily due to the attrition of acquired, poorly-priced Towne revenue since 2015 and a sluggish economic environment mostly offset by the tonnage increases attributable to a February 2016 change to our dim-factor standard. This change in dim-factor standard allows us to capture more billable tonnage on certain shipments.
Complete revenue decreased $1.2 million, or 1.6%, during the year ended December 31, 2016 compared to the same period of 2015. The decrease in Complete revenue was attributable to declines in linehaul shipment counts and a 7.6% decrease in the attachment rate of Complete activity to linehaul shipments. These declines in Complete activity are in conjunction with the attrition of Towne revenue discussed above. Compared to the same period in 2015, net fuel surcharge revenue decreased $5.0 million largely due to the decline in fuel prices. Other terminal based revenues, which includes warehousing services and terminal handling, decreased $1.6 million, or 3.0%, to $51.0 million for the year ended December 31, 2016 from $52.6 million in the same period of 2015. The decrease in other terminal revenue was mainly attributable to attrition of acquired Towne activity.
Purchased Transportation
Expedited LTL’s purchased transportation decreased by $17.4 million, or 7.2%, to $225.1 million for the year ended December 31, 2016 from $242.5 million for the year ended December 31, 2015. As a percentage of segment operating revenue, Expedited LTL purchased transportation was 39.4% during the year ended December 31, 2016 compared to 42.0% for the same period of 2015. The decrease in total dollars and as a percentage of revenue is due to a 4.0% decrease in Expedited LTL cost per mile, improved revenue per mile due to yield and dim-factor changes discussed previously and improved network efficiency. The Expedited LTL cost per mile decrease and improvement in network efficiencies were largely the result of higher utilization of owner-operators instead of more costly third party transportation providers.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Expedited LTL decreased by $4.2 million, or 2.9%, to $139.0 million for the year ended December 31, 2016 from $143.2 million in the same period of 2015. Salaries, wages and employee benefits were 24.4% of Expedited LTL’s operating revenue for the year ended December 31, 2016 compared to 24.8% for the same period of 2015. The decrease in salaries, wages and employee benefits in total dollars was primarily attributable to a $9.9 million, or 8.4%, decrease in wages associated with the decrease in shipping volumes discussed previously as well as improved synergies in 2016 compared to 2015. This decrease was partly offset by higher workers' compensation and health insurance costs, which accounted for a $1.3 million and $2.8 million increase, respectively, and a $1.6 million increase to incentives and share based compensation.
Operating Leases
Operating leases increased $3.7 million, or 12.1%, to $34.4 million for the year ended December 31, 2016 from $30.7 million for the year ended December 31, 2015. Operating leases were 6.0% of Expedited LTL’s operating revenue for the year ended December 31, 2016 compared with 5.3% for the year ended December 31, 2015. The increase in cost is due to a $2.6 million increase in facility lease expenses resulting from a full year of Towne activity and $1.1 million of additional truck, trailer and equipment rentals and leases.
Depreciation and Amortization
Expedited LTL depreciation and amortization increased $0.8 million, or 3.8%, to $21.9 million for the year ended December 31, 2016 from $21.1 million for the year ended December 31, 2015. Depreciation and amortization expense as a percentage of Expedited LTL operating revenue was 3.8% in the year ended December 31, 2016 compared to 3.7% for the year ended December 31, 2015. The increase was primarily the result of trailers purchased during 2016, added trailers from the Towne acquisition and information technology upgrades.
Insurance and Claims
Expedited LTL insurance and claims expense increased $3.1 million, or 30.7%, to $13.2 million for the year ended December 31, 2016 from $10.1 million for the year ended December 31, 2015. Insurance and claims as a percentage of Expedited LTL’s operating revenue was 2.3% for the year ended December 31, 2016 compared to 1.8% for the year ended December 31,
2015. The increase was due to a $3.3 million increase in insurance premiums and a $0.4 million increase in cargo claims. These increases were partly offset by a $0.6 million decrease in claims related legal and professional fees. The increase in insurance premiums is driven by higher premiums from our insurance providers a well as the addition of new trailers and equipment discussed above.
Fuel Expense
Expedited LTL fuel expense decreased $0.7 million, or 17.5%, to $3.3 million for the year ended December 31, 2016 from $4.0 million in the year ended December 31, 2015. Fuel expense was 0.6% of Expedited LTL’s operating revenue for the years ended December 31, 2016 compared to 0.7% for the year ended December 31, 2015. Expedited LTL fuel expenses decreased due to the decline in year-over-year fuel prices.
Other Operating Expenses
Expedited LTL other operating expenses increased $4.2 million, or 9.1%, to $50.4 million for the year ended December 31, 2016 from $46.2 million for the year ended December 31, 2015. Expedited LTL other operating expenses were 8.8% of operating revenue for the year ended December 31, 2016 compared to 8.0% for the year ended December 31, 2015. The increase in total dollars and as percentage of revenue was the result of increases in sales promotions for a customer appreciation event during the third quarter of 2016, higher vehicle maintenance expenses and increased costs, such as tolls, associated with our increased utilization of owner-operators. Also, during 2016, additional costs were incurred for the redesign of a new logo and brand image and for legal and professional fees in a successful response to a union movement at one of our locations.
Income from Operations
Expedited LTL income from operations increased by $4.3 million, or 5.4%, to $83.5 million for the year ended December 31, 2016 compared with $79.2 million for the year ended December 31, 2015. Expedited LTL’s income from operations was 14.6% of operating revenue for the year ended December 31, 2016 compared with 13.7% for the year ended December 31, 2015. The improvement in income from operations was mostly due to improved pricing, the change to our dim-factor standard and operating efficiencies in purchased transportation.
Truckload Premium Services - Year Ended December 31, 2016 compared to Year Ended December 31, 2015
The following table sets forth our historical financial data of the Truckload Premium Services segment for the year ended December 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Truckload Premium Services Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2016 | | Revenue | | 2015 | | Revenue | | Change | | Change |
| Operating revenue | $ | 164.3 |
| | 100.0 | % | | $ | 153.3 |
| | 100.0 | % | | $ | 11.0 |
| | 7.2 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 115.4 |
| | 70.2 |
| | 101.0 |
| | 65.9 |
| | 14.4 |
| | 14.3 |
|
| Salaries, wages and employee benefits | 19.3 |
| | 11.7 |
| | 19.1 |
| | 12.5 |
| | 0.2 |
| | 1.0 |
|
| Operating leases | 0.3 |
| | 0.2 |
| | 0.5 |
| | 0.3 |
| | (0.2 | ) | | (40.0 | ) |
| Depreciation and amortization | 6.5 |
| | 4.0 |
| | 6.2 |
| | 4.0 |
| | 0.3 |
| | 4.8 |
|
| Insurance and claims | 4.8 |
| | 2.9 |
| | 2.9 |
| | 1.9 |
| | 1.9 |
| | 65.5 |
|
| Fuel expense | 2.6 |
| | 1.6 |
| | 3.3 |
| | 2.2 |
| | (0.7 | ) | | (21.2 | ) |
| Other operating expenses | 8.4 |
| | 5.1 |
| | 7.0 |
| | 4.6 |
| | 1.4 |
| | 20.0 |
|
Impairment of goodwill, intangibles and other assets
| 42.4 |
| | 25.8 |
| | — |
| | — |
| | 42.4 |
| | 100.0 |
|
| Total operating expenses | 199.7 |
| | 121.5 |
| | 140.0 |
| | 91.3 |
| | 59.7 |
| | 42.6 |
|
| Income from operations | $ | (35.4 | ) | | (21.5 | )% | | $ | 13.3 |
| | 8.7 | % | | $ | (48.7 | ) | | (366.2 | )% |
|
| | | | | | | | | | |
| Truckload Premium Services Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2016 | | 2015 | | Change |
| | | | | | |
Company driver 1 | 6,740 |
| | 7,291 |
| | (7.6 | )% |
Owner operator 1 | 50,442 |
| | 37,597 |
| | 34.2 |
|
Third party 1 | 32,358 |
| | 29,517 |
| | 9.6 |
|
| Total Miles | 89,540 |
| | 74,405 |
| | 20.3 |
|
| | | | | | |
| Revenue per mile | $ | 1.79 |
| | $ | 1.97 |
| | (9.1 | ) |
| | | | | | |
| Cost per mile | $ | 1.38 |
| | $ | 1.44 |
| | (4.2 | )% |
| | | | | | |
| ¹ - In thousands | | | | | |
Revenues
TLS revenue increased $11.0 million, or 7.2%, to $164.3 million for the year ended December 31, 2016 from $153.3 million in the same period of 2015. TLS' revenue increase was the result of a 20.3% mileage increase due to new business wins, partly offset by a 9.1% decrease in revenue per mile. Revenue per mile declined due to the decrease in pharmaceutical revenue
which historically has a higher revenue per mile than traditional truckload business. TLS' revenue per mile also decreased as a result of a shift in business mix away from accounts that require use of more expensive third party transportation providers.
Purchased Transportation
Purchased transportation costs for our TLS revenue increased $14.4 million, or 14.3%, to $115.4 million for the year ended December 31, 2016 from $101.0 million for the year ended December 31, 2015. For the year ended December 31, 2016, TLS purchased transportation costs represented 70.2% of TLS revenue compared to 65.9% for the same period in 2015. The increase in TLS purchased transportation was attributable to a 23.4% increase in non-Company miles driven during the year ended December 31, 2016 compared to the same period in 2015. The increase in miles was slightly offset by a 5.1% decrease in non-Company cost per mile during the year ended December 31, 2016 compared to the same period of 2015. The increase in TLS miles driven was attributable to new business wins discussed above. The decrease in cost per mile was due to TLS' ability to utilize owner-operators to cover the additional miles instead of more costly third party transportation providers. The increase in TLS purchased transportation as a percentage of revenue was attributable to TLS cost per mile not decreasing in proportion with the decline in TLS revenue per mile.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of TLS increased by $0.2 million, or 1.0%, to $19.3 million in the year ended December 31, 2016 from $19.1 million in the same period of 2015. Salaries, wages and employee benefits were 11.7% of TLS’s operating revenue in the year ended December 31, 2016 compared to 12.5% for the same period of 2015. The decrease in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to TLS maintaining relatively flat salaries, wages and employee benefits during a period of revenue growth.
Operating Leases
Operating leases decreased $0.2 million, or 40.0%, to $0.3 million for the year ended December 31, 2016 from $0.5 million for the same period in 2015. Operating leases were 0.2% of TLS operating revenue for the year ended December 31, 2016 compared to 0.3% for the same period of 2015. The decrease in expense is due to reduced trailer rentals.
Depreciation and Amortization
Depreciation and amortization increased $0.3 million, or 4.8%, to $6.5 million for the year ended December 31, 2016 from $6.2 million for the year ended December 31, 2015. Depreciation and amortization expense as a percentage of TLS operating revenue was 4.0% for the years ended December 31, 2016 and 2015. The increase in total dollars was due to trailers purchased during 2016 and a full year of depreciation for tractors purchased during 2015. These increases were partly offset by the impairment of TQI intangible assets in the second quarter of 2016 leading to a lower amortization expense of acquired customer relationships and non-compete agreements.
Insurance and Claims
TLS insurance and claims increased $1.9 million, or 65.5%, to $4.8 million for the year ended December 31, 2016 from $2.9 million for the year ended December 31, 2015. As a percentage of operating revenue, insurance and claims was 2.9% for the year ended December 31, 2016 compared to 1.9% for the year ended December 31, 2015. The increase was due to a $0.8 million increase in vehicle insurance premiums, a $0.9 million increase in vehicle accident claim reserves and a $0.2 increase in vehicle accident damage repairs. The higher insurance premiums were driven by current year insurance renewals.
Fuel Expense
TLS fuel expense decreased $0.7 million, or 21.2%, to $2.6 million for the year ended December 31, 2016 from $3.3 million for the year ended December 31, 2015. Fuel expenses were 1.6% of TLS operating revenue during the year ended December 31, 2016 compared to 2.2% for the year ended December 31, 2015. The decrease was attributable to a decline in year-over-year fuel prices and a decrease in Company-employed driver miles, which are primarily for our pharmaceutical business.
Other Operating Expenses
TLS other operating expenses increased $1.4 million, or 20.0%, to $8.4 million for the year ended December 31, 2016 compared to $7.0 million for the year ended December 31, 2015. TLS other operating expenses were 5.1% of operating revenue for the year ended December 31, 2016 compared to 4.6% for the year ended December 31, 2015. The increase was attributable to
owner-operator and company driver recruiting costs increasing $0.2 million on efforts to add additional drivers throughout the network. An additional $0.5 million was attributable to a $0.2 million loss on destroyed trailers in 2016 compared to a $0.3 million gain on the sale of trailers during 2015. The remaining increase was due to $0.3 million in legal expenses and $0.4 million in additional costs to handle the expanding TLS business mentioned above, such as tolls and vehicle maintenance.
Impairment of goodwill, intangibles and other assets
In conjunction with our policy to test goodwill annually for impairment as of June 30, we determined there were indicators of potential impairment of goodwill and other long lived assets assigned to the TQI reporting unit as of June 30, 2016. Based on our impairment analysis, we recorded $42.4 million in total impairment charges related to TQI’s goodwill and other long lived assets.
Income from Operations
TLS results from operations decreased by $48.7 million to a $35.4 million loss from operations for the year ended December 31, 2016 compared with $13.3 million in income from operations for the same period in 2015. In addition to the impairment charges, the deterioration in results from operations was due to the revenue decline in the pharmaceutical business and TLS revenue per mile declining at a faster pace than our cost per mile.
Pool Distribution - Year Ended December 31, 2016 compared to Year Ended December 31, 2015
The following table sets forth our historical financial data of the Pool Distribution segment for the year ended December 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Pool Distribution Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2016 | | Revenue | | 2015 | | Revenue | | Change | | Change |
| Operating revenue | $ | 148.6 |
| | 100.0 | % | | $ | 130.0 |
| | 100.0 | % | | $ | 18.6 |
| | 14.3 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 40.0 |
| | 26.9 |
| | 35.0 |
| | 26.9 |
| | 5.0 |
| | 14.3 |
|
| Salaries, wages and employee benefits | 56.8 |
| | 38.2 |
| | 48.8 |
| | 37.5 |
| | 8.0 |
| | 16.4 |
|
| Operating leases | 12.7 |
| | 8.5 |
| | 10.2 |
| | 7.8 |
| | 2.5 |
| | 24.5 |
|
| Depreciation and amortization | 6.0 |
| | 4.0 |
| | 6.0 |
| | 4.6 |
| | — |
| | — |
|
| Insurance and claims | 4.4 |
| | 3.0 |
| | 3.7 |
| | 2.8 |
| | 0.7 |
| | 18.9 |
|
| Fuel expense | 4.8 |
| | 3.2 |
| | 5.4 |
| | 4.2 |
| | (0.6 | ) | | (11.1 | ) |
| Other operating expenses | 20.3 |
| | 13.7 |
| | 17.0 |
| | 13.1 |
| | 3.3 |
| | 19.4 |
|
| Total operating expenses | 145.0 |
| | 97.6 |
| | 126.1 |
| | 97.0 |
| | 18.9 |
| | 15.0 |
|
| Income from operations | $ | 3.6 |
| | 2.4 | % | | $ | 3.9 |
| | 3.0 | % | | $ | (0.3 | ) | | (7.7 | )% |
Revenues
Pool operating revenue increased $18.6 million, or 14.3%, to $148.6 million for the year ended December 31, 2016 from $130.0 million for the year ended December 31, 2015. The increase was attributable to new customer business wins, current year rate increases and increased volumes from previously existing customers. These increases were partially offset by a decrease in net fuel surcharge revenue.
Purchased Transportation
Pool purchased transportation increased $5.0 million, or 14.3%, to $40.0 million for the year ended December 31, 2016 from $35.0 million for the year ended December 31, 2015. Pool purchased transportation as a percentage of revenue was 26.9% for the years ended December 31, 2016 and 2015. The $5.0 million increase in Pool purchased transportation was attributable to an increase in owner-operator and third party carrier usage to handle the additional revenue mentioned above.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Pool increased by $8.0 million, or 16.4%, to $56.8 million for the year ended December 31, 2016 from $48.8 million for the year ended December 31, 2015. As a percentage of Pool operating revenue, salaries, wages and benefits increased to 38.2% for the year ended December 31, 2016 compared to 37.5% for the year ended December 31, 2015. The increase in salaries, wages and benefits as a percentage of revenue was the result of a 1.3% increase as a percentage of revenue in dock pay. The increase in dock pay is attributable to dock inefficiencies created by the onboarding of new business. This was partly offset by decreases as a percentage of revenue in administrative salaries, wages and benefits and driver pay.
Operating Leases
Operating leases increased $2.5 million, or 24.5%, to $12.7 million for the year ended December 31, 2016 from $10.2 million for the year ended December 31, 2015. Operating leases were 8.5% of Pool operating revenue for the year ended December 31, 2016 compared with 7.8% for the year ended December 31, 2015. Operating leases increased due to $2.0 million of additional
facility rent expense as certain terminals moved to larger facilities to handle additional business wins. The remaining $0.5 million increase is attributable to higher truck rentals for additional business wins throughout the network.
Depreciation and Amortization
Depreciation and amortization was $6.0 million for the year ended December 31, 2016 and 2015. Depreciation and amortization expense as a percentage of Pool operating revenue was 4.0% for the year ended December 31, 2016 compared to 4.6% for the year ended December 31, 2015. Depreciation and amortization decreased as a percentage of revenue as Pool utilized more truck rentals, owner-operators and purchased transportation instead of Company-owned equipment to provide the capacity for the increase in revenue.
Insurance and Claims
Pool insurance and claims increased $0.7 million, or 18.9%, to $4.4 million for the year ended December 31, 2016 from $3.7 million for the year ended December 31, 2015. As a percentage of operating revenue, insurance and claims was 3.0% for the year ended December 31, 2016 compared to 2.8% for the year ended December 31, 2015. The increase in Pool insurance and claims in total dollars and as a percentage of revenue was attributable to a $0.4 million increase in claims related fees, a $0.3 million increase in insurance premiums and a $0.2 increase in vehicle accident claim reserves. These increases were slightly offset by a $0.2 million decrease in cargo claims.
Fuel Expense
Pool fuel expense decreased $0.6 million, or 11.1%, to $4.8 million for the year ended December 31, 2016 from $5.4 million for the year ended December 31, 2015. Fuel expenses were 3.2% of Pool operating revenue during the year ended December 31, 2016 compared to 4.2% for the year ended December 31, 2015. Pool fuel expenses decreased due to a decline in year-over-year fuel prices, but were partially offset by the impact of higher revenue volumes.
Other Operating Expenses
Pool other operating expenses increased $3.3 million, or 19.4%, to $20.3 million for the year ended December 31, 2016 compared to $17.0 million for the year ended December 31, 2015. Pool other operating expenses were 13.7% of operating revenue for the year ended December 31, 2016 compared to 13.1% for the year ended December 31, 2015. As a percentage of revenue the increase was attributable to a 0.4% increase in dock and facility related costs and a 0.2% increase in legal fees. The dock and facility related cost increase was mainly attributable to the start up of new business. The legal fees are primarily related to a Department of Transportation safety audit.
Income from Operations
Pool income from operations deteriorated by $0.3 million, or 7.7% to $3.6 million for the year ended December 31, 2016 from $3.9 million for the year ended December 31, 2015. Pool income from operations was 2.4% of operating revenue for the year ended December 31, 2016 compared with 3.0% of operating revenue for the year ended December 31, 2015. The decline in Pool operating results was primarily the result of increased facility and dock handling costs for the on-boarding of new business. These increases in expenses were partly negated by the increased revenue from new business wins and current year customer rate increases.
Intermodal - Year Ended December 31, 2016 compared to Year Ended December 31, 2015
The following table sets forth our historical financial data of the Intermodal segment for the year ended December 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Intermodal Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2016 | | Revenue | | 2015 | | Revenue | | Change | | Change |
| Operating revenue | $ | 103.7 |
| | 100.0 | % | | $ | 104.3 |
| | 100.0 | % | | $ | (0.6 | ) | | (0.6 | )% |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 36.2 |
| | 34.9 |
| | 33.8 |
| | 32.4 |
| | 2.4 |
| | 7.1 |
|
| Salaries, wages and employee benefits | 25.2 |
| | 24.3 |
| | 24.4 |
| | 23.4 |
| | 0.8 |
| | 3.3 |
|
| Operating leases | 12.0 |
| | 11.6 |
| | 11.7 |
| | 11.2 |
| | 0.3 |
| | 2.6 |
|
| Depreciation and amortization | 3.9 |
| | 3.8 |
| | 3.8 |
| | 3.6 |
| | 0.1 |
| | 2.6 |
|
| Insurance and claims | 3.0 |
| | 2.9 |
| | 2.6 |
| | 2.5 |
| | 0.4 |
| | 15.4 |
|
| Fuel expense | 2.5 |
| | 2.4 |
| | 3.2 |
| | 3.1 |
| | (0.7 | ) | | (21.9 | ) |
| Other operating expenses | 9.9 |
| | 9.5 |
| | 12.9 |
| | 12.4 |
| | (3.0 | ) | | (23.3 | ) |
| Total operating expenses | 92.7 |
| | 89.4 |
| | 92.4 |
| | 88.6 |
| | 0.3 |
| | 0.3 |
|
| Income from operations | $ | 11.0 |
| | 10.6 | % | | $ | 11.9 |
| | 11.4 | % | | $ | (0.9 | ) | | (7.6 | )% |
Revenues
Intermodal operating revenue decreased $0.6 million, or 0.6%, to $103.7 million for the year ended December 31, 2016 from $104.3 million for the same period in 2015. The decrease in operating revenue was primarily attributable to the negative impact of reduced fuel surcharges, decreased rental and storage revenues and suppressed market conditions. The decrease was partially alleviated by increased volumes associated with the acquisition of Ace and Triumph.
Purchased Transportation
Intermodal purchased transportation increased $2.4 million, or 7.1%, to $36.2 million for the year ended December 31, 2016 from $33.8 million for the same period in 2015. Intermodal purchased transportation as a percentage of revenue was 34.9% for the year ended December 31, 2016 compared to 32.4% for the year ended December 31, 2015. The increase in Intermodal purchased transportation as a percentage of revenue was attributable to higher utilization of owner-operators as opposed to Company-employed drivers in select markets. The increase as a percentage of revenue was also due to a change in business mix as revenues, such as rental and storage revenues, that do not not utilize owner-operators decreased during the year ended December 31, 2016 compared to the same period of 2015.
Salaries, Wages, and Benefits
Intermodal salaries, wages and employee benefits increased $0.8 million, or 3.3%, to $25.2 million for the year ended December 31, 2016 compared to $24.4 million for the year ended December 31, 2015. As a percentage of Intermodal operating revenue, salaries, wages and benefits increased to 24.3% for the year ended December 31, 2016 compared to 23.4% for the same period in 2015. The deterioration in salaries, wages and employee benefits as a percentage of revenue is attributable to increased administrative staffing due to the acquisitions, merit increases and increased workers' compensation and health insurance costs. These increases were partially offset by less reliance on Company-employed drivers.
Operating Leases
Operating leases increased $0.3 million, or 2.6% to $12.0 million for the year ended December 31, 2016 from $11.7 million for the same period in 2015. Operating leases were 11.6% of Intermodal operating revenue for the year ended December 31, 2016 compared with 11.2% in the same period of 2015. Operating leases increased due to a $0.6 million increase in rent expense for additional facilities assumed with the acquisitions, partly offset by a decrease in tractor rentals.
Depreciation and Amortization
Depreciation and amortization increased $0.1 million, or 2.6%, to $3.9 million for the year ended December 31, 2016 from $3.8 million for the same period in 2015. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.8% for the year ended December 31, 2016 compared to 3.6% for the same period of 2015. The increase in depreciation and amortization was due to increased tractor depreciation due to additional tractors acquired from Triumph.
Insurance and Claims
Intermodal insurance and claims expense increased $0.4 million, or 15.4%, to $3.0 million for the year ended December 31, 2016 from $2.6 million for the year ended December 31, 2015. Intermodal insurance and claims were 2.9% of operating revenue for the year ended December 31, 2016 compared with 2.5% for the same period in 2015. The increase in Intermodal insurance and claims was attributable to higher insurance premiums and an increased vehicle fleet as a result of the acquisitions.
Fuel Expense
Intermodal fuel expense decreased $0.7 million, or 21.9%, to $2.5 million for the year ended December 31, 2016 from $3.2 million in the same period of 2015. Fuel expenses were 2.4% of Intermodal operating revenue for the year ended December 31, 2016 compared to 3.1% in the same period of 2015. Intermodal fuel expenses decreased primarily as a result of the year-over-year decline in fuel prices, declining revenue and increased utilization of owner-operators.
Other Operating Expenses
Intermodal other operating expenses decreased $3.0 million, or 23.3%, to $9.9 million for the year ended December 31, 2016 compared to $12.9 million for the same period of 2015. Intermodal other operating expenses for the year ended December 31, 2016 were 9.5% compared to 12.4% for the same period of 2015. The decrease in Intermodal other operating expenses was due mostly to a decline in container related rental and storage charges.
Income from Operations
Intermodal’s income from operations decreased by $0.9 million, or 7.6%, to $11.0 million for the year ended December 31, 2016 compared with $11.9 million for the same period in 2015. Income from operations as a percentage of Intermodal operating revenue was 10.6% for the year ended December 31, 2016 compared to 11.4% in the same period of 2015. The deterioration in operating income was primarily attributable to decreased fuel surcharges, decreased rental and storage revenues and suppressed market conditions. The deterioration was partially offset by the operating income contributed by the Ace and Triumph acquisitions.
Other Operations
Other operations improved from a $26.5 million operating loss during the year ended December 31, 2015 to a $2.7 million operating loss during the year ended December 31, 2016. The year-over-year improvement in other operations and corporate activities was largely due to $23.5 million of Towne acquisition and integration costs included in results for the year ended December 31, 2015 and no similar costs being included in the same period of 2016. The prior year acquisition and integration costs included $2.6 million of severance obligations and $11.7 million in reserves for remaining net payments, on duplicate facilities vacated during the year ended December 31, 2015. The expenses associated with the severance obligations and vacated, duplicate facility costs were recognized in the salaries, wages and benefits and operating lease line items, respectively. During the year ended December 31, 2015, we also incurred expense of $9.2 million for various other integration and transaction related costs which are largely included in other operating expenses. Other operations for the year ended December 31, 2015 also included approximately $3.0 million of additional expenses associated with our semi-annual actuarial analyses of vehicle and workers' compensation claims. 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 have 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. Management considers our policies on Self-Insurance Loss Reserves, Business Combinations and Goodwill and Other Intangible Assets to be critical.
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 Expedited LTL, 10.0% for Intermodal, 25.0% for Pool and up to 50.0% for 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
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. During 2017, average revenue adjustments per month were approximately $0.3 million, on average revenue per month of approximately $91.7 million (approximately 0.3% 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 35-65 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 appropriateness.
Self-Insurance Loss Reserves
GivenUnder U.S. Department of Transportation (“DOT”) regulations, the natureCompany is liable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on the Company's behalf. Additionally, from time to time, the drivers employed and engaged by the third-party transportation carriers the Company contracts with are involved in accidents, which may result in serious personal injuries. The resulting types and/or amounts of our operating environment, wedamages may be excluded by or exceed the amount of insurance coverage maintained by the contracted carrier. Although these drivers are subject to vehicle and general liability, workers' compensation and employee health insurance claims. To mitigate a portionnot Company employees, all of these risks, we maintaindrivers 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 the Company's 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 million per occurrence for individual vehicle and general liability claims exceeding $1.0 million and workers'will be responsible for any damages and personal injuries below that self-insured amount.
The Company may also be subject to claims for workers’ compensation. The Company maintains workers’ compensation claims and employee health insurance claims exceedingcoverage that it believes is adequate to cover such claims. The Company has a SIR of approximately $0.4 million and $0.3 million, respectively,for each such claim, except in Ohio, where for workers' compensation we areit is a qualified self-insured entity with an approximately $0.5 million self-insured retention. 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 Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing actuarial analysis to determine an estimate of probable losses on claims incurred but not reported. Such losses should be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates.
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 ourthe Company’s assumptions about the emerging trends, management develops information about the size ofan estimate 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-annualThe Company utilizes quarterly actuarial analysisanalyses to evaluate the open vehicle liability and workers' compensation claims and estimate the ongoing development exposure.
As of December 31, 2019 and 2018, the Company had insurance reserves of $66.2 million and $54.2 million, respectively, which included reserves in excess of the SIR expected to be reimbursed from third-party insurance carriers. The long-term portion
Changesof this liability is $49.8 million, which is included in “Other long-term liabilities,” and the remainder is included in “Insurance and Claims accruals” on the Company’s Balance Sheets.
As of December 31, 2019, the Company recognized an insurance proceeds receivable and claims payable of $34.1 million for open vehicle and workers’ compensation claims in excess of the Company's stop-loss limits. As of December 31, 2018, the Company recognized an insurance proceeds receivable and claims payable of $28.5 million for open vehicle and workers’ compensation claims in excess of the Company's stop-loss limits. These balances are recorded in other assets and other long-term liabilities, respectively, in the inputs described above, suchCompany's consolidated balance sheets.
Business Combinations and Goodwill
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 claim life cycles, severitywell as judgments regarding the valuation of claimsall identified acquired assets 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 increasesassumed liabilities. The assets acquired and decreases to self-insurance loss reserves. Based on factsliabilities assumed are determined by reviewing the operations, interviewing management and circumstances one significant claim, such as a dock or vehicle accident, could result in an immediate increase in our self-insurance loss reservesreviewing the financial and contractual information of at least $0.3 million to $1.0 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, changesacquired business. Consideration is typically paid 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 resultform of improvements in our loss experience andcash paid upon closing or contingent consideration paid upon satisfaction of a future obligation. If contingent consideration is included in the severity of claims incurred over a certain period of time.
Revenue Recognition
Operating revenue and related costs are recognizedpurchase price, the Company values that consideration as of the acquisition date shipmentsand it is recorded to goodwill.
Once the acquired assets and assumed liabilities are completed. The transportation rates we charge our customers consistidentified, the fair values 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. Please see Recent Accounting Pronouncements for expected changes to revenue recognition.
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 basisestimated using a variety of approaches that require significant judgments. For example, intangible assets and liabilities and are measuredtypically valued 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, 2017, we had state net operating loss carryforwards of $18.1 million for certain legal entities that will expire between 2017 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 $0.4 million at December 31, 2017 and $0.3 million at December 31, 2016.
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 was formerly called the “Tax Cuts and Jobs Act” and is referred to herein as the “U.S. Tax Act”discounted cash flow (“DCF”). The U.S. Tax Act provides 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 lowers 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 $15.9 million analysis, which is reflected as a reduction in our income tax expense in our results for the quarter and year ended December 31, 2017.
The ultimate impact of the U.S. Tax Act on our reported results in 2018 may differ from the estimates provided herein, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the U.S. Tax Act different from that presently contemplated. 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. We are currently analyzing the 2017 Tax Act, and in certain areas, have made reasonablerequires estimates of the effectsfuture 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 is recorded at cost based on our consolidated financial statementsthe excess of purchase price over the fair value of net assets acquired. Goodwill and tax disclosures, includingintangible assets with indefinite lives are not amortized but the changes to our existing deferred tax balances.
Valuation of Goodwill
We test our goodwill for impairment annually orCompany conducts an annual (or more frequently if events or circumstances indicate possible impairment) impairment may exist.test of goodwill for each reporting 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. We complete our annual analysis of our reporting units as of the last day of our second quarter, June 30th. Goodwill is allocated to reporting units that are expected to benefit from the business combinations generating the goodwill. We have five reporting units - Expedited LTL, Truckload Expedited, Intermodal, Pool Distribution and TQI. The Truckload Expedited and the TQI reporting units are included in the Truckload Premium Services reportable segment. 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 the reporting unit 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 estimated 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, as necessary we perform 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, 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.
In 2017, we performed a qualitative analysis on all reporting units. We then prepared a fair value estimation for our TQI reporting unit. We did not perform a fair value estimation for the other reporting units as we did not believe it was more likely than not that their fair value was less than the carrying amount. This was determined based on prior year valuations and qualitative analysis of each reporting unit in 2017. Currently, there is no goodwill assigned to the Truckload Expedited reporting unit. Our 2017 analysis for TQI indicated that, as of June 30, 2017, the fair value of the reporting unit exceeded its carrying value by approximately 15.1%.
In 2016, due to the financial performance of the TQI reporting unit falling notably short of previous projections the Company reduced 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 charge of $25.7 million for the TQI reporting unit during the year ended December 31, 2016.
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 there were indicators that TQI's customer relationship and non-competeOther 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 then estimated the current fair value of the customer relationship and non-compete assets using an income approach (level 3). As a result of these estimates the Company recorded an impairment charge of $16.5 million related to TQI customer relationships during the three months ended June 30, 2016.
For our 2017 TQI analysis, the significant assumptions used in the income approach were 10 years of projected net cash flows, a discount rate of 15.5% and a long-term growth rate of 4.0%. As shown with the 2016 TQI goodwill impairment, 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.
Share-Based Compensation
Our general practice has been to make a single annual grant to key employees and to 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 ratably over the requisite service period, or vesting period. 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,
2017 |
| December 31,
2016 |
| December 31,
2015 |
| Expected dividend yield | 1.3 | % |
| 1.0 | % |
| 1.0 | % |
| Expected stock price volatility | 28.5 | % |
| 28.9 | % |
| 33.3 | % |
| Weighted average risk-free interest rate | 2.0 | % |
| 1.3 | % |
| 1.6 | % |
| Expected life of options (years) | 5.9 |
|
| 5.8 |
|
| 5.9 |
|
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 ratably over the requisite service period or vesting period.
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 total shareholder return as compared to the total shareholder return of a selected peer group. No shares may be issued if the total shareholder return performance outperforms 25% or less of the peer group, but the number of shares issued may be doubled if the total shareholder return performs better than 90% of the peer group. The share-based compensation for performance shares are recognized 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,
2017 | | December 31,
2016 |
| December 31,
2015 |
| Expected stock price volatility | 24.7 | % | | 22.3 | % |
| 23.5 | % |
| Weighted average risk-free interest rate | 1.4 | % | | 0.8 | % |
| 1.0 | % |
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 record the difference between the amounts charged to operations and amount paid as a rent liability. Leasehold improvements are amortized over the shortertheir useful lives. Results of the estimated useful life or the initial term of the lease. Reserves for idle facilitiesimpairment testing are initially measured at fair value of the portion of the lease payments associated with the vacated facilities, reduced by estimated sublease rentals.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles -described in Note 2, Acquisitions, Goodwill and Other (Topic 350): "SimplifyingLong-Lived Assets.
Acquisitions are accounted for using the Accounting for Goodwill Impairment." Under the current guidance for assessing goodwill for impairment, an entity can first assess qualitative factors to determine whether a two-step goodwill impairment test is necessary. Under the new standard, a goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill, thus no longer requiring the two-steppurchase method. The guidance requires prospective adoption and will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption of this guidance is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We plan to adopt this guidance in January 2018 and we do not expect any impact to the consolidated financial statements.
In March 2016, the FASB issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognitiondefinite-lived intangible assets 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 guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for, and we elected, to account for forfeitures as they occur rather than on an estimated basis. We adopted this guidance in January 2017Company resulting from acquisition activity and the elimination of APIC pools resultedrelated amortization are described in approximately $545 of income tax benefit during the full year December 31, 2017. This guidance has been applied prospectivelyNote 2, Acquisitions, Goodwill and no prior periods have been adjusted.Other Long-Lived Assets.
In February 2016, the FASB, issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact of the future adoption of this standard on our consolidated financial statements.
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. The guidance permits the use of either a full retrospective or modified retrospective adoption approach with a cumulative effect adjustment recorded in either scenario as necessary upon transition.
As permitted by the guidance, we will implement the use of full retrospective presentation. While evaluating principal versus agent relationships under the new standard, we determined that we will transition certain revenue streams from an agent to principal relationship. This will cause these revenue streams and their associated costs to be recognized on a gross basis that have historically been recognized on a net basis, increasing revenue and expenses by approximately $66,000 for the year ended December 31, 2017 and $47,000 for the same period of 2016 with no impact on operating income.
In addition, based on a review of our customer shipping arrangements, we currently believe the implementation of this standard will change our revenue recognition policy from recognizing revenue upon shipment completion to recognizing revenue over time based on the progress toward completion of shipments in transit at each period end. While the timing of revenue
recognition will be accelerated, due to the short duration of our transit times and relatively low dollar value of individual shipments, the anticipated impact on our consolidated financial position, revenue and results from operations is not expected to be significant.
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, 20172019 Cash Flows compared to December 31, 20162018 Cash Flows
Net cash provided by operating activities totaled approximately $103.4$159.0 million for the year ended December 31, 20172019 compared to approximately $130.4$152.6 million for the year ended December 31, 2016.2018. The $27.0$6.4 million decreaseincrease in cash provided by operating activities is mainly attributable to a $21.6$14.2 million increaseimprovement in accounts receivablethe collection of receivables, primarily related to lower days sales outstanding for Pool and final mile receivables and a $23.4 million increasedecrease in estimated income tax payments. The decreaseThis increase was partly offset by a $9.1$3.8 million decrease in accounts payable and accrued expenses, a $3.5 million increase in prepaid expenses due to the purchase of cloud-based software and a $2.9 million decrease in net earnings after consideration of non-cash items and $8.9 million increase in cash used to fund accounts payable and prepaid assets. The increase in accounts receivables was attributable to higher revenue across all segments and revenues associated with the Atlantic acquisition.items.
Net cash used in investing activities was approximately $59.2$63.9 million for the year ended December 31, 20172019 compared with approximately $52.4$55.5 million during the year ended December 31, 2016.2018. Investing activities during the year ended December 31, 20172019 consisted primarily of $23.1FSA for $27.0 million, used to acquire Atlantic and a small Intermodal acquisitionO.S.T. for $12.0 million and net capital expenditures of $35.8$24.9 million primarily for new trailers, forkliftsinformation technology and information technology.facility equipment. Investing activities during the year ended December 31, 20162018 consisted primarily of $11.8net capital expenditures of $35.2 million primarily for new trailers, information technology and sorting equipment and $20.0 million used to acquire AceSouthwest and Triumph, which is included in the Intermodal segment, and net capital expenditures of $40.3 million for new trailers, forklifts, computer hardware and internally developed software.MMT. The proceeds from disposal of property and equipment during the year ended December 31, 20172019 and 20162018 were primarily from sales of older trailers and vehicles.tractors.
Net cash used in financing activities totaled approximately $48.8$56.0 million for the year ended December 31, 20172019 compared with net cash used in financing activities of $102.8$75.3 million for the year ended December 31, 2016.2018. The $54.0$19.3 million change in cash from financing activitiesdecrease was attributable to $55.0a $13.0 million increase in net borrowings from our revolving credit facility andfacility. The year ended December 31, 2019 also included $56.2 million used to repurchase shares of our common stock, which was a $13.0$9.9 million decrease in payments onfrom the term loan and revolver.$66.1 million used to repurchase shares of common stock for the same period of 2018. These increases in cash were partly offset by a a $9.0$2.0 million increase in share repurchases, a $2.5 millionpayments of cash dividends due to an increase in our quarterly cash dividend andper share from $0.63 per share in the year ended December 31, 2018 to $0.72 per share in the year ended December 31, 2019, partly offset by a $2.5decrease in the outstanding share count during the year ended December 31, 2019 compared to the same period in 2018. Additionally, there was a $0.9 million decrease in cash from employee stock transactions. The year ended December 31, 2017 also included $49.0transactions and related tax benefits and a $0.7 million used to repurchase sharesincrease in payments of our Common Stock, compared to $40.0 million used to repurchase shares of our Common Stock during the year ended December 31, 2016. Dividends increased due to our Board of Directors increasing the quarterly cash dividend from $0.12 per share for the first three quarters of 2016 to $0.15 per share during the fourth quarter of 2016debt and all quarters in 2017.finance lease obligations.
Year Ended December 31, 20162018 Cash Flows compared to December 31, 20152017 Cash Flows
Net cash provided by operating activities totaled approximately $130.4$152.6 million for the year ended December 31, 20162018 compared to approximately $85.7$103.4 million for the year ended December 31, 2015.2017. The $44.7$49.2 million increase in cash provided by operating activities is mainly attributable to a $7.1$25.5 million increase in net earnings after consideration of non-cash items and a $52.7$21.3 million decreaseimprovement in cash usedthe collection of receivables, primarily related to fund accounts payable and prepaid assets, partially offset by a $15.1 million decrease in cash collected from accounts receivable. The decreases in cash used2017 receivables increasing for accounts payable and prepaid assets is mainly attributablerevenues related to the prior year having cash paidAtlantic acquisition. The remaining increase was due to settle trade payables assumed with the Towne acquisition and reduceda decrease in estimated income tax payments. The decrease in cash received from accounts receivables is attributable to collections on acquired accounts receivable in 2015 related to the Towne acquisition.
Net cash used in investing activities was approximately $52.4$55.5 million for the year ended December 31, 20162018 compared with approximately $100.9$59.2 million during the year ended December 31, 2015.2017. Investing activities during the year ended December 31, 20162018 consisted primarily of $11.8net capital expenditures of $35.2 million primarily for new trailers, information technology and sorting equipment and $20.0 million used to acquire AceSouthwest and Triumph, which is included in the Intermodal segment, and net capital expenditures of $40.3 million for new trailers, forklifts, computer hardware and internally developed software.MMT. Investing activities during the year ended December 31, 20152017 consisted primarily of $61.9net capital expenditures of $35.8 million primarily for new trailers, forklifts and information technology and $23.1 million used to acquire TowneAtlantic and net capital expenditures of $38.8 million for new tractors and trailers to replace aging units.KCL. The proceeds from disposal of property and equipment during the year ended December 31, 20162018 and 20152017 were primarily from sales of older trailers and vehicles.trailers.
Net cash used in financing activities totaled approximately $102.8$75.3 million for the year ended December 31, 20162018 compared with net cash provided byused in financing activities of $7.1$48.8 million for the year ended December 31, 2015.2017. The $109.9$26.5 million change in cash from financing activitiesincrease was attributable to the prior year including $125.0a $48.0 million of proceeds from executing a two year term loan in conjunction with the Towne acquisition. The decrease in cashnet borrowings from term loan proceeds wasour revolving credit facility partly offset by a $45.6
$28.0 million decrease 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 $9.7$3.5 million decrease in cash from employee stock transactions and related tax benefits. Payments on debt and capital leases decreased as 2015 included the settlement of debt assumed with the acquisition of Towne. The year ended December 31, 20162018 also included $40.0$66.1 million used to repurchase shares of our Common Stock, compared to $20.0common stock, which was a $17.1 million increase from the $49.0 million used to repurchase shares of our Common Stockcommon stock for the same period of 2017. The remaining change in 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, 2015. Dividends increased on new shares issued through stock option exercises and our Board of Directors increasing2018 compared to the quarterly cash dividend from $0.12 per share to $0.15 per share during the fourth quarter of 2016.same period in 2017.
Credit Facility
On September 29, 2017, the Company entered intoSee Note 6, Senior Credit Facility, to our Consolidated Financial Statements for a five-year senior unsecured revolving credit facility (the “Facility”) with a maximum aggregate principal amount of $150.0 million, with a sublimit of $30.0 million for letters of credit and a sublimit of $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 termsdiscussion 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 loans, 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 mature in September 2022. 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 existing 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 is 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 0.3% to 0.8% with respect to the Facility 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, 2017, we had $40.5 million in borrowings outstanding under the revolving credit facility, $7.9 million utilized for outstanding letters of credit and $101.6 million of available borrowing capacity under the revolvingsenior credit facility. The interest rate on the outstanding borrowing under the revolving credit facility was 2.9% at December 31, 2017.
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,Share Repurchases 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.Dividends
Our new facility replaced our previously existing unsecured credit facility, which had a maximum aggregate principal amount of $275.0 million, including a revolving credit facility of $150.0 million and a term loan facility of $125.0 million. The previous revolving credit facility was scheduled to expire in February 2020.
On February 7, 2014,See Note 11, Shareholders' Equity, to our BoardConsolidated Financial Statements for a discussion of Directors approved a stock repurchase authorization for up to two million shares of the Company’s Common Stock. In connection with this action, the board cancelled the Company’s remaining stock repurchase authorization under its previous program. During the year ended December 31, 2016, we repurchased 676,773 shares for $30.0 million, or an average of $44.31 perour share on the 2014 plan.
On July 21, 2016, our Board of Directors approved a stock repurchase authorization for up to three million shares of the Company's Common Stock. In connection with this action, the board cancelled the Company's 2014 repurchase plan. During the year ended December 31, 2017, we repurchased 947,819 shares for $49.0 million, or an average of $51.68 per share on the 2016 plan. During the year ended December 31, 2016, we repurchased 233,516 shares of Common Stock for $10.0 million, or $42.80 per share under the 2016 plan. When combining the stock repurchases under the 2014 and 2016 plans, we repurchased 910,289
shares of Common Stock for $40.0 million, or $43.92 per sharedividends during the year ended December 31, 2016. As of December 31, 2017, 1,818,665 shares remain that may be repurchased under the 2016 plan.period.
During each quarter of 2015 and the first, second and third quarters of 2016, our Board of Directors declared a cash dividend of $0.12 per share. During the fourth quarter of 2016 and each quarter of 2017, our Board of Directors declared a cash dividend of $0.15 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 into a geographic area, add new customers, add new business verticals, increase freight volume and add new service offerings. 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, 2017,2019, we had letters of credit outstanding from banks totaling $7.9$14.0 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, 20172019 (in thousands) are summarized below:
| | | Contractual Obligations |
| Payment Due Period (in thousands) |
| Payment Due Period (in millions) |
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| 2023 and |
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| 2025 and |
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| 2018 |
| 2019-2020 |
| 2021-2022 |
| Thereafter |
| Total |
| 2020 |
| 2021-2022 |
| 2023-2024 |
| Thereafter |
| Capital lease obligations |
| $ | 776 |
|
| $ | 391 |
|
| $ | 385 |
|
| $ | — |
|
| — |
| |
| Finance lease obligations | |
| $ | 6.9 |
|
| $ | 1.6 |
|
| $ | 3.0 |
|
| $ | 2.0 |
|
| $ | 0.3 |
|
| Equipment purchase commitments |
| 29,607 |
|
| 29,607 |
|
| — |
|
| — |
|
| — |
|
| 6.4 |
|
| 6.4 |
|
| — |
|
| — |
|
| — |
|
| Operating leases |
| 117,648 |
|
| 42,051 |
|
| 57,085 |
|
| 16,230 |
|
| 2,282 |
|
| 184.7 |
|
| 61.8 |
|
| 78.7 |
|
| 36.9 |
|
| 7.3 |
|
| Total contractual cash obligations |
| $ | 148,031 |
|
| $ | 72,049 |
|
| $ | 57,470 |
|
| $ | 16,230 |
|
| $ | 2,282 |
|
| $ | 198.0 |
|
| $ | 69.8 |
|
| $ | 81.7 |
|
| $ | 38.9 |
|
| $ | 7.6 |
|
Not included in the above table are $40.5$67.5 million in borrowings outstanding under the revolving credit facility, reserves for unrecognized tax benefits of $1.6$1.0 million and self insuranceself-insurance claims of $21.8$34.1 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.
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 had $40.5$67.5 million outstanding at December 31, 20172019 and bearbears 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 2.3%3.7% to 3.8%5.2%, would increase our annual interest expense by approximately $0.4$0.9 million and would have decreased our annual cash flow from operations by approximately $0.4$0.9 million.
Our only other debt is capitalare finance lease obligations totaling $0.7$6.3 million. These lease obligations all bear interest at a fixed rate. Accordingly, there is no exposure to market risk related to these capitalfinance 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.Factors” - under the title “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.”
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, 2017.2019. 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, 2017.2019. 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"). Based on our assessment, we have concluded, as of December 31, 2017,2019, 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, 2017,2019, has issued an attestation report on the Company’s internal control over financial reporting.
Changes in Internal Control over Financial Reporting
As part of the implementation of ASU 2016-02, Leases, as of January 1, 2019, the Company implemented changes to internal controls to meet the standard's reporting and disclosure requirements. Management believes that these controls were effective as of December 31, 2019. There were no other changes in our internal control over financial reporting during the fourth quarter of 2017three months ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors 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, 2017,2019, 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 (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, 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, 20172019 and 2016,2018, the related consolidated statements of comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, 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 23, 201824, 2020 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’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 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.
|
|
| /s/ Ernst & Young LLP |
| |
| Atlanta, Georgia |
February 23, 201824, 2020 |
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, 2017.
The following are our executive officers: |
| | | | |
Name | | Age | | Position |
Bruce A. Campbell | | 66 | | Chairman, President and Chief Executive Officer |
Michael J. Morris | | 49 | | Chief Financial Officer, Senior Vice President and Treasurer |
Michael L. Hance | | 46 | | Senior Vice President, Chief Legal Officer & Secretary |
Matthew J. Jewell | | 51 | | President - Logistics Services |
Chris C. Ruble | | 55 | | President - Expedited Services |
There are no family relationships between any of our executive officers. All officers hold office until the earliest to occur of their resignation or removal by the Board of Directors.
Bruce A. Campbell has served as a director since April 1993, as President since August 1998, as Chief Executive Officer since October 2003 and as Chairman of the Board since May 2007. Mr. Campbell was Chief Operating Officer from April 1990 until October 2003 and Executive Vice President from April 1990 until August 1998. Prior to joining us, Mr. Campbell served as Vice President of Ryder-Temperature Controlled Carriage in Nashville, Tennessee from September 1985 until December 1989.
Michael J. Morris has served as Chief Financial Officer, Senior Vice President and Treasurer in June 2016. From 2010 to 2015, Mr. Morris was the Senior Vice President of Finance & Treasurer at Con-way Inc. (“Con-way”) and in 2016 he transitioned to be the Senior Vice President of Finance & Treasurer at XPO Logistics Inc. (“XPO”) following XPO's acquisition of 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.
Matthew J. Jewell was promoted to President - Logistics Services, effective January 2016. Prior to this promotion, he served as Executive Vice President, Intermodal Services & Chief Strategy Officer since May 2014. From January 2008 until May 2014, he served as Executive Vice President and Chief Legal Officer. 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.
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 informationInformation required by this item is incorporated herein by reference to our proxy statement for the 20182020 Annual Meeting of Shareholders (the “2018“2020 Proxy Statement”). The 20182020 Proxy Statement will be filed with the SEC not later than 120 days subsequent to December 31, 2017.2019.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 20182020 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 20182020 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 20182020 Proxy Statement.
Item 14. Principle Accounting Fees and Services
The information required by this item is incorporated herein by reference to the 20182020 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 23, 201824, 2020 | | By: | /s/ Michael J. Morris |
| | | | | Michael J. Morris |
| | | | | Chief Financial Officer Senior Vice Presidentand Treasurer |
| | | | | (Principal Financial Officer and Treasurer (Principal FinancialDuly Authorized 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 23, 2018 |
Bruce A. Campbell Officer | | Officer (PrincipalFebruary 24, 2020 |
Thomas Schmitt
| | (Principal Executive Officer) | | |
| | | | |
| /s/ Michael J. Morris | | Chief Financial Officer Senior Vice Presidentand Treasurer | | February 23, 201824, 2020 |
| Michael J. Morris | | and Treasurer (Principal(Principal Financial Officer) | | |
| | | | | |
/s/ C. Robert CampbellR. Craig Carlock | | Lead Director | | February 23, 201824, 2020 |
C. Robert CampbellR. Craig Carlock | | | | |
| | | | |
| /s/ Ronald W. Allen | | Director | | February 23, 201824, 2020 |
| Ronald W. Allen | | | | |
| | | | | |
/s/ Ana BurnsB. Amicarella | | Director | | February 23, 201824, 2020 |
Ana BurnsB. Amicarella
| | | | |
| | | | |
| /s/ Valerie A. Bonebrake | | Director | | February 23, 201824, 2020 |
| Valerie A. Bonebrake | | | | |
| | | | | |
/s/ Craig CarlockC. Robert Campbell | | Director | | February 23, 201824, 2020 |
Craig CarlockC. Robert Campbell | | | | |
| | | | |
| /s/ C. John Langley, Jr. | | Director | | February 23, 201824, 2020 |
| C. John Langley, Jr. | | | | |
| | | | |
| /s/ G. Michael Lynch | | Director | | February 23, 201824, 2020 |
| G. Michael Lynch | | | | |
| | | | | |
/s/ Javier PalomarezLaurie A. Tucker | | Director | | February 23, 201824, 2020 |
Javier PalomarezLaurie A. Tucker | | | | |
| | | | |
| /s/ W. Gil West | | Director | | February 24, 2020 |
| W. 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, 20172019
Forward Air Corporation
Greeneville, Tennessee
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
To the Shareholders and the Board of Directors 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, 20172019 and 2016,2018, the related consolidated statements of comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated“consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
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, 2017,2019, 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 23, 201824, 2020 expressed an unqualified opinion thereon.
Adoption of ASC 842, Leases
As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASC 842, Leases.
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.SU.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 frauderror or error.fraud. 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicated the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
| |
| Self-Insurance Loss Reserves |
| Description of the Matter | The liability for self-insurance loss reserves totaled $66.2 million at December 31, 2019 which includes self-insurance reserves for vehicle liability claims. The long-term portion of this liability was included in “Other long-term liabilities,” and the remainder was included in “Insurance and claims” on the Company’s Balance Sheets. As more fully described in Note 1 to the consolidated financial statements, the self-insurance reserves include estimates for both known claims and future claims development and are based on company-specific and industry data, as well as general economic information.
Auditing the Company’s self-insurance reserves for vehicle liability claims was complex, highly subjective and required significant judgment due to the actuarial techniques and significant assumptions used. The Company utilizes actuarial analyses to evaluate open claims and estimate the ongoing development exposure. 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 the expected costs to settle unpaid claims. |
|
| |
| How We Addressed the Matter in Our Audit | We tested internal controls over management’s review of the completeness and accuracy of data inputs used in the actuarial analysis and review of the actuarial assumptions and reserve calculations.
To test the self-insurance loss reserves for vehicle liability claims, our audit procedures included, among others, evaluating the methodologies used and the significant actuarial assumptions discussed above, as well as performing substantive procedures over underlying data and calculations used in the analyses. We tested claims data by agreeing the data to supporting source documentation and payment information. We evaluated whether changes to the reserves for known claims were being recognized timely based on the underlying available data and current estimates. We involved actuarial specialists to assist in our evaluation of the actuarial methodologies used as well as to independently calculate a range of reserve estimates for comparison to the recorded reserves. |
|
| |
| Accounting for Acquisitions |
| Description of the Matter | During 2019, the Company acquired certain net assets of FSA Logistix (“FSA”) and O.S.T. Logistics, Inc. and O.S.T. Trucking Co., Inc. (together referred to as “O.S.T.”) for total net consideration of $39 million and a potential earnout of up to $15 million, as disclosed in Note 2 to the consolidated financial statements. These transactions were accounted for as business combinations.
Auditing the Company's accounting for its business combinations was complex due to the significant estimation required by management to determine the fair value of the acquired assets and liabilities, especially the customer relationship intangible assets of $23.6 million and the contingent consideration liability of $11.8 million. The significant estimation was primarily due to the complexity of the valuation models used by management to measure the fair value of the customer-related intangible assets and the contingent consideration liability and the sensitivity of the respective fair values to changes in the significant underlying assumptions. The Company used a discounted cash flow model to measure the customer-related intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates, operating profit margin and customer attrition rates). The Company used a Monte Carlo simulation to measure the contingent consideration. The significant assumptions used in the simulation included volatility, discount rate, revenue projections and timing of expected payments. These significant assumptions are forward looking and could be affected by future economic and market conditions. |
|
| |
| How We Addressed the Matter in Our Audit | We tested the Company's controls over its accounting for acquisitions. For example, we tested controls over the recognition and measurement of consideration transferred (including contingent consideration) and customer-related intangible assets acquired, including management review controls over the valuation models and underlying assumptions used to develop such estimates.
To test the estimated fair value of the customer-related intangible assets, we performed audit procedures that included, among others, evaluating the Company's use of the income approach (the excess earnings method) and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market and economic trends, assumptions used to value similar assets in other acquisitions, historical results of the acquired business, and other guidelines used by companies within the same industry. We involved our valuation specialists to assist in our evaluation of the significant assumptions and to assist with reconciling the prospective financial information with other prospective financial information prepared by the Company. To test the fair value of the contingent consideration, we performed audit procedures that included, among others, assessing the terms of the arrangement, including the conditions that must be met for the contingent consideration to become payable. We also involved our valuation specialists to assist in evaluating the Company's use of a Monte Carlo simulation and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market and economic trends and to the Company's budgets and forecasts. For the customer-related intangible assets, we also performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair values that would result from changes in the assumptions. |
|
|
| /s/ Ernst & Young LLP |
| |
| We have served as the Company‘s auditor since 1991. |
| |
| Atlanta, Georgia |
February 23, 201824, 2020 |
| | Forward Air Corporation | Consolidated Balance Sheets | (Dollars in thousands) | | | December 31,
2017 | | December 31,
2016 | December 31,
2019 | | December 31,
2018 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 3,893 |
| | $ | 8,511 |
| $ | 64,749 |
| | $ | 25,657 |
|
| Accounts receivable, less allowance of $3,006 in 2017 and $1,714 in 2016 | 143,041 |
| | 116,602 |
| |
| Accounts receivable, less allowance of $2,101 in 2019 and $2,081 in 2018 | | 150,197 |
| | 156,359 |
|
| Inventories | 1,425 |
| | 1,306 |
| 2,132 |
| | 2,240 |
|
| Prepaid expenses and other current assets | 9,955 |
| | 9,851 |
| 15,418 |
| | 11,763 |
|
| Income tax receivable | 4,428 |
| | — |
| 3,822 |
| | 5,063 |
|
| Total current assets | 162,742 |
| | 136,270 |
| 236,318 |
| | 201,082 |
|
| Property and equipment: | |
| | |
| |
| | |
|
| Land | 16,928 |
| | 16,928 |
| 16,928 |
| | 16,928 |
|
| Buildings | 65,870 |
| | 65,857 |
| 65,919 |
| | 65,919 |
|
| Equipment | 291,181 |
| | 273,463 |
| 322,029 |
| | 311,573 |
|
| Leasehold improvements | 12,604 |
| | 10,694 |
| 16,852 |
| | 14,165 |
|
| Construction in progress | 12,652 |
| | 12,079 |
| 5,009 |
| | 5,315 |
|
| Total property and equipment | 399,235 |
| | 379,021 |
| 426,737 |
| | 413,900 |
|
| Less accumulated depreciation and amortization | 193,123 |
| | 178,816 |
| 213,706 |
| | 204,005 |
|
| Net property and equipment | 206,112 |
| | 200,205 |
| 213,031 |
| | 209,895 |
|
| Operating lease right-of-use assets | | 151,657 |
| | — |
|
| Goodwill and other acquired intangibles: | |
| | |
| |
| | |
|
| Goodwill | 191,671 |
| | 184,675 |
| 221,105 |
| | 199,092 |
|
| Other acquired intangibles, net of accumulated amortization of $71,527 in 2017 and $61,334 in 2016 | 111,247 |
| | 106,650 |
| |
| Other acquired intangibles, net of accumulated amortization of $91,879 in 2019 and $80,666 in 2018 | | 127,798 |
| | 113,661 |
|
| Total net goodwill and other acquired intangibles | 302,918 |
| | 291,325 |
| 348,903 |
| | 312,753 |
|
| Other assets | 15,944 |
| | 13,491 |
| 40,969 |
| | 36,485 |
|
| Total assets | $ | 687,716 |
| | $ | 641,291 |
| $ | 990,878 |
| | $ | 760,215 |
|
The accompanying notes are an integral part of the consolidated financial statements.
| | Forward Air Corporation | Consolidated Balance Sheets (Continued) | (Dollars in thousands) | | | December 31,
2017 | | December 31,
2016 | December 31,
2019 | | December 31,
2018 |
| Liabilities and Shareholders’ Equity | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 24,704 |
| | $ | 18,012 |
| $ | 29,986 |
| | $ | 34,630 |
|
| Accrued payroll and related items | 13,230 |
| | 11,522 |
| 16,210 |
| | 16,959 |
|
| Insurance and claims accruals | 11,999 |
| | 10,122 |
| 16,366 |
| | 12,648 |
|
| Payables to owner-operators | 6,322 |
| | 5,597 |
| 14,246 |
| | 7,424 |
|
| Collections on behalf of customers | 329 |
| | 349 |
| 315 |
| | 261 |
|
| Other accrued expenses | 2,869 |
| | 4,243 |
| 2,685 |
| | 2,492 |
|
| Income taxes payable | 320 |
| | 70 |
| |
| Current portion of capital lease obligations | 359 |
| | 347 |
| |
| Current portion of long-term debt | — |
| | 27,665 |
| |
| Current portion of finance lease obligations | | 1,421 |
| | 309 |
|
| Current portion of operating lease obligations | | 50,615 |
| | — |
|
| Current portion contingent consideration | | 5,320 |
| | — |
|
| Total current liabilities | 60,132 |
| | 77,927 |
| 137,164 |
| | 74,723 |
|
| Capital lease obligations, less current portion | 365 |
| | 725 |
| |
| Finance lease obligations, less current portion | | 4,909 |
| | 54 |
|
| Operating lease obligations, less current portion | | 101,525 |
| | — |
|
| Long-term debt, less current portion | 40,223 |
| | — |
| 67,340 |
| | 47,281 |
|
| Other long-term liabilities | 24,104 |
| | 21,699 |
| 58,816 |
| | 47,739 |
|
| Deferred income taxes | 29,403 |
| | 41,871 |
| 43,942 |
| | 37,174 |
|
| 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 - 29,454,062 in 2017 and 30,090,335 in 2016 | 295 |
| | 301 |
| |
| Common stock, $0.01 par value: Authorized shares - 50,000,000; issued and outstanding shares - 27,850,233 in 2019 and 28,534,935 in 2018 | | 279 |
| | 285 |
|
| Additional paid-in capital | 195,346 |
| | 179,512 |
| 226,869 |
| | 210,296 |
|
| Retained earnings | 337,848 |
| | 319,256 |
| 350,034 |
| | 342,663 |
|
| Total shareholders’ equity | 533,489 |
| | 499,069 |
| 577,182 |
| | 553,244 |
|
| Total liabilities and shareholders’ equity | $ | 687,716 |
| | $ | 641,291 |
| $ | 990,878 |
| | $ | 760,215 |
|
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,
2017 | | December 31,
2016 | | December 31,
2015 | December 31,
2019 | | December 31,
2018 | | December 31,
2017 |
| Operating revenue | $ | 1,100,816 |
| | $ | 982,530 |
| | $ | 959,125 |
| $ | 1,410,395 |
| | $ | 1,320,886 |
| | $ | 1,169,346 |
|
| | | | | | | | | | | |
| Operating expenses: | |
| | |
| | |
| |
| | |
| | |
|
| Purchased transportation | 478,167 |
| | 413,355 |
| | 408,769 |
| 639,007 |
| | 613,636 |
| | 545,091 |
|
| Salaries, wages and employee benefits | 264,739 |
| | 242,002 |
| | 240,604 |
| 335,163 |
| | 300,230 |
| | 265,842 |
|
| Operating leases | 63,799 |
| | 60,492 |
| | 66,272 |
| 82,010 |
| | 75,677 |
| | 63,799 |
|
| Depreciation and amortization | 41,055 |
| | 38,210 |
| | 37,157 |
| 42,109 |
| | 42,183 |
| | 41,055 |
|
| Insurance and claims | 29,578 |
| | 25,392 |
| | 21,483 |
| 45,440 |
| | 35,180 |
| | 29,578 |
|
| Fuel expense | 16,542 |
| | 13,233 |
| | 15,903 |
| 24,221 |
| | 23,121 |
| | 16,542 |
|
| Other operating expenses | 98,264 |
| | 87,425 |
| | 87,165 |
| 123,622 |
| | 108,828 |
| | 98,682 |
|
| Impairment of goodwill and other intangible assets | — |
| | 42,442 |
| | — |
| |
| Total operating expenses | 992,144 |
| | 922,551 |
| | 877,353 |
| 1,291,572 |
| | 1,198,855 |
| | 1,060,589 |
|
| Income from operations | 108,672 |
| | 59,979 |
| | 81,772 |
| 118,823 |
| | 122,031 |
| | 108,757 |
|
| | | | | | | | | | | |
| Other income (expense): | |
| | |
| | |
| |
| Other expense: | | |
| | |
| | |
|
| Interest expense | (1,209 | ) | | (1,597 | ) | | (2,047 | ) | (2,711 | ) | | (1,783 | ) | | (1,209 | ) |
| Other, net | (11 | ) | | 4 |
| | (58 | ) | (1 | ) | | (2 | ) | | (11 | ) |
| Total other expense | (1,220 | ) | | (1,593 | ) | | (2,105 | ) | (2,712 | ) | | (1,785 | ) | | (1,220 | ) |
| Income before income taxes | 107,452 |
| | 58,386 |
| | 79,667 |
| 116,111 |
| | 120,246 |
| | 107,537 |
|
| Income taxes | 20,131 |
| | 30,716 |
| | 24,092 |
| 29,012 |
| | 28,195 |
| | 20,282 |
|
| Net income and comprehensive income | $ | 87,321 |
| | $ | 27,670 |
| | $ | 55,575 |
| $ | 87,099 |
| | $ | 92,051 |
| | $ | 87,255 |
|
| | | | | | | | | | | |
| Net income per share: | |
| | |
| | |
| |
| | |
| | |
|
| Basic | $ | 2.90 |
|
| $ | 0.91 |
|
| $ | 1.80 |
| $ | 3.06 |
|
| $ | 3.14 |
|
| $ | 2.90 |
|
| Diluted | $ | 2.89 |
|
| $ | 0.90 |
|
| $ | 1.78 |
| $ | 3.04 |
|
| $ | 3.12 |
|
| $ | 2.89 |
|
| | | | | | | | | | | |
| Dividends per share: | $ | 0.60 |
| | $ | 0.51 |
| | $ | 0.48 |
| $ | 0.72 |
| | $ | 0.63 |
| | $ | 0.60 |
|
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, 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 |
| |
| Net income and comprehensive income for 2016 | — |
| | — |
| | — |
| | 27,670 |
| | 27,670 |
| |
| Exercise of stock options | 346 |
| | 3 |
| | 8,145 |
| | — |
| | 8,148 |
| |
| Common stock issued under employee stock purchase plan | 11 |
| | — |
| | 442 |
| | — |
| | 442 |
| |
| Share-based compensation | — |
| | — |
| | 8,334 |
| | — |
| | 8,334 |
| |
| Dividends ($0.51 per share) | — |
| | — |
| | 6 |
| | (15,535 | ) | | (15,529 | ) | |
| Cash settlement of share-based awards for minimum tax withholdings | (42 | ) | | — |
| — |
| — |
| | (1,800 | ) | | (1,800 | ) | |
| Share repurchases | (910 | ) | | (9 | ) | | — |
| | (39,974 | ) | | (39,983 | ) | |
| Vesting of previously non-vested shares | 141 |
| | 2 |
| | (2 | ) | | — |
| | — |
| |
| Income tax benefit from stock options exercised | — |
| | — |
| | 1,732 |
| | — |
| | 1,732 |
| |
| Balance at December 31, 2016 | 30,090 |
| | 301 |
| | 179,512 |
| | 319,256 |
| | 499,069 |
| 30,090 |
| | $ | 301 |
| | $ | 179,512 |
| | $ | 318,533 |
| | $ | 498,346 |
|
| Net income and comprehensive income for 2017 | — |
| | — |
| | — |
| | 87,321 |
| | 87,321 |
| — |
| | — |
| | — |
| | 87,255 |
| | 87,255 |
|
| Exercise of stock options | 206 |
| | 2 |
| | 7,270 |
| | — |
| | 7,272 |
| 206 |
| | 2 |
| | 7,270 |
| | — |
| | 7,272 |
|
| Conversion of deferred stock | 10 |
| | — |
| | — |
| | — |
| | — |
| 10 |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued under employee stock purchase plan | 10 |
| | — |
| | 458 |
| | — |
| | 458 |
| 10 |
| | — |
| | 458 |
| | — |
| | 458 |
|
| Share-based compensation | — |
| | — |
| | 8,103 |
| | — |
| | 8,103 |
| — |
| | — |
| | 8,103 |
| | — |
| | 8,103 |
|
| Dividends ($0.60 per share) | — |
| | — |
| | 4 |
| | (18,056 | ) | | (18,052 | ) | — |
| | — |
| | 4 |
| | (18,056 | ) | | (18,052 | ) |
| Cash settlement of share-based awards for minimum tax withholdings | (35 | ) | | — |
| — |
| — |
| | (1,699 | ) | | (1,699 | ) | (35 | ) | | — |
| | — |
| | (1,700 | ) | | (1,700 | ) |
| Share repurchases | (948 | ) | | (9 | ) | | — |
| | (48,974 | ) | | (48,983 | ) | (948 | ) | | (9 | ) | | — |
| | (48,974 | ) | | (48,983 | ) |
| Vesting of previously non-vested shares | 121 |
| | 1 |
| | (1 | ) | | — |
| | — |
| 121 |
| | 1 |
| | (1 | ) | | — |
| | — |
|
| Balance at December 31, 2017 | 29,454 |
| | 295 |
| | 195,346 |
| | 337,848 |
| | 533,489 |
| 29,454 |
| | 295 |
| | 195,346 |
| | 337,058 |
| | 532,699 |
|
| Net income and comprehensive income for 2018 | | — |
| | — |
| | — |
| | 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 | | (33 | ) | | (1 | ) | | — |
| | (1,871 | ) | | (1,872 | ) |
| Share repurchases | | (1,109 | ) | | (11 | ) | | — |
| | (66,115 | ) | | (66,126 | ) |
| Vesting of previously non-vested shares | | 119 |
| | 1 |
| | (1 | ) | | — |
| | — |
|
| Balance at December 31, 2018 | | 28,535 |
| | 285 |
| | 210,296 |
| | 342,663 |
| | 553,244 |
|
| Net income and comprehensive income for 2019 | | — |
| — |
| — |
| — |
| — |
| — |
| 87,099 |
| — |
| 87,099 |
|
| Exercise of stock options | | 99 |
|
| 1 |
| — |
| 4,049 |
| — |
| — |
| — |
| 4,050 |
|
| Other | | — |
| — |
| — |
| — |
| (1 | ) | — |
| (1 | ) | — |
| (2 | ) |
| Common stock issued under employee stock purchase plan | | 12 |
| — |
| — |
| — |
| 614 |
| — |
| — |
| — |
| 614 |
|
| Share-based compensation | | — |
|
| — |
| — |
| 11,907 |
| — |
| — |
| — |
| 11,907 |
|
| Dividends ($0.72 per share) | | — |
| — |
| — |
| — |
| 6 |
| — |
| (20,500 | ) | — |
| (20,494 | ) |
| Cash settlement of share-based awards for minimum tax withholdings | | (50 | ) | — |
| — |
| — |
| — |
| — |
| (3,032 | ) | — |
| (3,032 | ) |
| Share repurchases | | (915 | ) | — |
| (9 | ) | — |
| — |
| — |
| (56,195 | ) | — |
| (56,204 | ) |
| Vesting of previously non-vested shares | | 169 |
| — |
| 2 |
| — |
| (2 | ) | — |
| — |
| — |
| — |
|
| Balance at December 31, 2019 | | 27,850 |
|
| $ | 279 |
|
| $ | 226,869 |
|
| $ | 350,034 |
|
| $ | 577,182 |
|
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,
2017 | | December 31,
2016 | | December 31,
2015 | December 31,
2019 | | December 31,
2018 | | December 31,
2017 |
| Operating activities: | | | | | | | | | | |
| Net income | $ | 87,321 |
| | $ | 27,670 |
| | $ | 55,575 |
| $ | 87,099 |
| | $ | 92,051 |
| | $ | 87,255 |
|
| Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
| | |
| |
| | |
| | |
|
| Depreciation and amortization | 41,055 |
| | 38,210 |
| | 37,157 |
| 42,109 |
| | 42,183 |
| | 41,055 |
|
Impairment of goodwill, intangible and other assets
| — |
| | 42,442 |
| | — |
| |
| Change in fair value of earn-out liability | | (33 | ) | | (455 | ) | | — |
|
| Share-based compensation | 8,103 |
| | 8,334 |
| | 7,486 |
| 11,907 |
| | 10,549 |
| | 8,103 |
|
| Loss (gain) on disposal of property and equipment | 1,281 |
| | 291 |
| | (181 | ) | 1,121 |
| | (171 | ) | | 1,281 |
|
| Provision for loss on receivables | 1,814 |
| | 258 |
| | 33 |
| 761 |
| | 139 |
| | 1,814 |
|
| Provision for revenue adjustments | 3,055 |
| | 2,020 |
| | 4,793 |
| 3,342 |
| | 3,628 |
| | 3,055 |
|
| Deferred income taxes | (12,468 | ) | | 3,525 |
| | 14,531 |
| 6,768 |
| | 8,094 |
| | (12,068 | ) |
| Tax benefit for stock options exercised | — |
| | (1,732 | ) | | (5,413 | ) | |
| Changes in operating assets and liabilities, net of acquisition of business | |
| | |
| | |
| |
| Changes in operating assets and liabilities | | |
| | |
| | |
|
| Accounts receivable | (31,308 | ) | | (9,715 | ) | | 5,403 |
| 2,059 |
| | (12,178 | ) | | (33,457 | ) |
| Prepaid expenses and other assets | (1,204 | ) | | 283 |
| | (1,378 | ) | (6,098 | ) | | (2,565 | ) | | (1,204 | ) |
| Income taxes | | 1,284 |
| | (1,256 | ) | | (3,480 | ) |
| Accounts payable and accrued expenses | 8,945 |
| | (1,413 | ) | | (17,513 | ) | 8,700 |
| | 12,535 |
| | 11,010 |
|
| Income taxes | (3,230 | ) | | 20,177 |
| | (14,771 | ) | |
| Net cash provided by operating activities | 103,364 |
| | 130,350 |
| | 85,722 |
| 159,019 |
| | 152,554 |
| | 103,364 |
|
| | | | | | | | | | | |
| Investing activities: | |
| | |
| | |
| |
| | |
| | |
|
| Proceeds from disposal of property and equipment | 2,440 |
| | 1,929 |
| | 1,720 |
| 3,294 |
| | 7,059 |
| | 2,440 |
|
| Purchases of property and equipment | (38,265 | ) | | (42,186 | ) | | (40,495 | ) | (28,209 | ) | | (42,293 | ) | | (38,265 | ) |
| Acquisition of business, net of cash acquired | (23,140 | ) |
| (11,800 | ) |
| (61,878 | ) | (39,000 | ) |
| (19,987 | ) |
| (23,140 | ) |
| Other | (223 | ) | | (336 | ) | | (265 | ) | — |
| | (242 | ) | | (222 | ) |
| Net cash used in investing activities | (59,188 | ) | | (52,393 | ) | | (100,918 | ) | (63,915 | ) | | (55,463 | ) | | (59,187 | ) |
| | | | | | | | | | | |
| Financing activities: | |
| | |
| | |
| |
| | |
| | |
|
| Proceeds from term loan | — |
| | — |
| | 125,000 |
| |
| Payments of debt and capital lease obligations | (42,790 | ) | | (55,768 | ) | | (101,352 | ) | |
| Payments of finance lease obligations | | (946 | ) | | (302 | ) | | (42,790 | ) |
| Proceeds from senior credit facility | 55,000 |
| | — |
| | — |
| 20,000 |
| | 7,000 |
| | 55,000 |
|
| Proceeds from exercise of stock options | 7,272 |
| | 8,148 |
| | 14,313 |
| 4,050 |
| | 3,921 |
| | 7,272 |
|
| Payments of cash dividends | (18,052 | ) | | (15,529 | ) | | (14,821 | ) | (20,494 | ) | | (18,427 | ) | | (18,052 | ) |
| Purchase of common stock under repurchase program | (48,983 | ) | | (39,983 | ) | | (19,992 | ) | |
| Repurchase of common stock (repurchase program) | | (56,204 | ) | | (66,126 | ) | | (48,983 | ) |
| Common stock issued under employee stock purchase plan | 458 |
| | 442 |
| | 449 |
| 614 |
| | 479 |
| | 458 |
|
| Cash settlement of share-based awards for minimum tax withholdings | (1,699 | ) | | (1,800 | ) | | (1,931 | ) | |
| Tax benefit for stock options exercised | — |
| | 1,732 |
| | 5,413 |
| |
| Net cash (used in) provided by financing activities | (48,794 | ) | | (102,758 | ) | | 7,079 |
| |
| Net decrease in cash | (4,618 | ) | | (24,801 | ) | | (8,117 | ) | |
| Cash settlement of share-based awards for tax withholdings | | (3,032 | ) | | (1,872 | ) | | (1,700 | ) |
| Net cash used in financing activities | | (56,012 | ) | | (75,327 | ) | | (48,795 | ) |
| Net increase (decrease) in cash | | 39,092 |
| | 21,764 |
| | (4,618 | ) |
| Cash at beginning of year | 8,511 |
| | 33,312 |
| | 41,429 |
| 25,657 |
| | 3,893 |
| | 8,511 |
|
| Cash at end of year | $ | 3,893 |
| | $ | 8,511 |
| | $ | 33,312 |
| $ | 64,749 |
| | $ | 25,657 |
| | $ | 3,893 |
|
The accompanying notes are an integral part of the consolidated financial statements
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20172019
(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 four3 principal reportable segments: Expedited LTL, Truckload Premium Services (“TLS”),Freight, Intermodal and Pool Distribution ("Pool") (See note 10).
Through the Expedited LTLFreight segment, we operatethe Company operates a comprehensive national network to provide expedited regional, inter-regional and national less-than-truckload ("LTL")LTL services. Expedited LTLFreight offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling.
Through 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.
OurThe Company's Intermodal segment provides first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers dedicated contract and CFSContainer Freight Station (“CFS”) warehouse and handling services. Today, Intermodal operates primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest.Southwest United States.
In ourthe Pool Distribution segment, we providethe Company provides high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. We offerThe Company offers this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States.
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 Expedited LTL,Freight, 10.0% for Intermodal, 25.0% for Pool and up to 50.0% for TLS.Pool. 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 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. 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 2017,2019, average revenue adjustments per month were approximately $255
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
$278 on average revenue per month of approximately $91,735 (0.3%$117,533 (0.2% 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
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
Company establishes an allowance covering approximately 35-6535-105 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 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 the Company's behalf. Additionally, from time to vehicletime, the drivers employed and general liability, workers’ compensation and employee healthengaged by the third-party transportation carriers the Company contracts 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 Company employees, all of these risks,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 the Company's 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 $1,000and 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, 2019, 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 vehicle liability and general liability claims for the Expedited Frieght, excluding its truckload operation, and Pool Distribution segments. Truckload maintains separate liability insurance coverage for claims between $0 and $5,000, and for the policy year that began April 1, 2019, truckload 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, 2019, Intermodal had an SIR of $50 for each claim. The Company also maintains brokerage liability insurance coverage to cover third-party claims for damages and personal injuries arising from accidents with drivers employed and engaged by third-party transportation carriers, and this policy has an SIR of $100 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 $350 and $225, respectively,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 Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing actuarial analysis to determine an estimate of probable losses on claims incurred but not reported. Such losses should be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates.
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 sizean estimate 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, 2019 and 2018, the Company had insurance reserves of $66,176 and $54,228, respectively, which included reserves in excess of the SIR expected to be reimbursed from third-party insurance carriers. The long-term portion of this liability is $49,810, which is included in “Other long-term liabilities,” and the remainder is included in “Insurance and Claims accruals” on the Company’s Balance Sheets.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
As of December 31, 2019, the Company recognized an insurance proceeds receivable and claims payable of $34,091 for open vehicle and workers’ compensation claims in excess of the Company's stop-loss limits. As of December 31, 2018, the Company recognized an insurance proceeds receivable and claims payable of $28,520 for open vehicle and workers’ compensation claims in excess of the Company's stop-loss limits. These balances are recorded in other assets and other long-term liabilities, respectively, in the Company's consolidated balance sheets.
Revenue and Expense Recognition
OperatingThe 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.
Revenue 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 regards to the fuel surcharges. Please see Recent Accounting Pronouncements for expected changessection of this Note and in Note 10, Segment Reporting.
All expenses are recognized when incurred. Purchased transportations expenses are typically due to revenue recognition.the 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. The Company does not hold any restricted cash as of December 31, 2019 or 2018.
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.
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:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
|
| | |
| Buildings | | 30-40 years |
| Equipment | | 3-10 years |
| Leasehold improvements | | Lesser of Useful Life or Initial Lease Term |
Depreciation expense for each
The Company evaluates the reasonableness of the three years ended useful lives and salvage values of its assets on an ongoing basis. Results of this evaluation are described in Note 2, Acquisitions, Goodwill and Other Long-Lived Assets.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, 20162019
(In thousands, except share and 2015 was $30,862, $28,088 and $26,252 respectively.per share data)
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. Results of impairment testing are described in Note 2, Acquisitions, Goodwill and Other Long-Lived Assets.
When the criteria have been met for long-lived assets to be classified as held for sale, the assets are recorded at the lower of carrying value or fair market value (less selling costs).
Leases
The Company holds leases classified as both operating and finance. As of January 1, 2019, the Company adopted ASU 2016-02, Leases, which required the Company to recognize a right-of-use asset and a corresponding lease liability on its balance sheet for most leases classified as operating leases under previous guidance. The Company continues to record a right-of-use asset and corresponding lease liability for leases classified as finance leases under the previous guidance. This standard was adopted using the modified retrospective approach as of January 1, 2019 and comparative financial statements have not been presented as allowed per the guidance. As a result, for leases and subleases with terms greater than 12 months, the Company recorded the related right-of-use asset as the balance of the related lease liability, adjusted for any prepaid or accrued lease payments. The lease liability was recorded at the present value of the lease payments over the term. See additionalfurther discussion in Note 2, Acquisition, Goodwill and Other Long-Lived Assets.6, Leases.
Operating LeasesBusiness Combinations
Certain operating leases include rent increases duringUpon the initial lease term. For these leases, the Company recognizes the related rental expenses onacquisition of 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. Reserves for idle facilities are initially measured atbusiness, the fair value of the portionassets 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 lease payments associated withacquired business. Consideration is typically paid in the vacated facilities, reduced byform 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 sublease rentals. See additional discussionusing 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 Note 2, Acquisition, Goodwillthe projected cash flows, the determination of terminal growth rates, and Other Long-Lived Assets.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 reporting 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,Acquisitions, 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,Acquisitions, Goodwill and Other Long-Lived Assets.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
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. AtAs of December 31, 20172019 and 20162018 the Company had $19,567$24,944 and $16,26821,492, respectively, of capitalized software development costs included in property and equipment. Accumulated amortization on these assets was $10,874$17,190 and $10,71615,611 at December 31, 20172019 and 20162018, respectively. Included in depreciation expense is amortization of capitalized software development costs. Amortization of capitalized software development for the years ended December 31, 20172019, 20162018 and 20152017 was $1,816, $1,870, $1,6581,905 and $1,5261,816 respectively.
As of December 31, 20172019 the estimated amortization expense for the next five years of capitalized software development costs is as follows:
|
| | | |
| 2020 | $ | 1,980 |
|
| 2021 | 1,649 |
|
| 2022 | 1,370 |
|
| 2023 | 1,098 |
|
| 2024 | 740 |
|
| Total | $ | 6,837 |
|
|
| | | |
| 2018 | 2,197 |
|
| 2019 | 1,878 |
|
| 2020 | 1,620 |
|
| 2021 | 1,327 |
|
| 2022 | 716 |
|
| Total | $ | 7,738 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
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 reportThe Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognizeThe Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense and operating expenses, respectively.
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 See additional discussion in the concurrent resolution on the budget for fiscal year 2018”. Please see Note 5, for further discussion on the impact of the U.S. Tax Act.Income Taxes.
Net Income Per Share
The Company calculates net income per share in accordance with the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, Earnings per Share (the “ASC 260”). Under the ASC 260, basicBasic 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 $945 in 2019, $881 in 2018 and $700 in 2017, $212 in 2016 and $369 in 2015.2017. 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 in the first quarter to key employees and to make other grants only in connection with new employment or promotions. In addition,Forms of share-based compensation granted to employees by the Company include stock options, non-vested shares of common stock (“non-vested shares”), and performance shares. The Company also typically makes a single annual grantsgrant of non-vested shares to non-employee directors in conjunction with their annual election to ourthe Company's Board of Directors or at the time of their appointment to the Board of Directors. For employees,
Share-based compensation is based on the Company has granted stock options, non-vested sharesgrant date fair value of the instrument and performance shares. For non-employee directors,is recognized ratably over the Company has generally issued non-vested shares.
requisite service period, or vesting period. 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 ratably over the requisite service period, or vesting period. The Company uses 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 subjective and changes in these assumptions can materially affect the fair value estimate.
|
| | | | | | | | |
| December 31,
2017 |
| December 31,
2016 |
| December 31,
2015 |
| Expected dividend yield | 1.3 | % |
| 1.0 | % |
| 1.0 | % |
| Expected stock price volatility | 28.5 | % |
| 28.9 | % |
| 33.3 | % |
| Weighted average risk-free interest rate | 2.0 | % |
| 1.3 | % |
| 1.6 | % |
| Expected life of options (years) | 5.9 |
|
| 5.8 |
|
| 5.9 |
|
The fair value of non-vested shares issued were estimated using the closing market prices for the business day of the grant. TheAll share-based compensation for the non-vested sharesexpense is recognized ratably over the requisite service period or vesting period.in salaries, wages and employee benefits.
The fair value of the performance shares was estimated using a Monte Carlo simulation. The share-based compensation for performance shares are recognized 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 subjective and changes in these assumptions can materially affect the fair value estimate.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
|
| | | | | | | | |
| | | Year ended | | |
| December 31,
2017 | | December 31,
2016 |
| December 31,
2015 |
| Expected stock price volatility | 24.7 | % | | 22.3 | % |
| 23.5 | % |
| Weighted average risk-free interest rate | 1.4 | % | | 0.8 | % |
| 1.0 | % |
Under the 2005 Employee Stock Purchase Plan (the “ESPP”), 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 recognizes share-based compensation on the date of purchase based on the difference between the purchase date fair market value and the employee purchase price.
Recent Accounting Pronouncements
In January 2017,August 2018, the FASB issued ASU No. 2017-04,2018-15, Intangibles - Goodwill and Other (Topic 350)Internal Use Software (Subtopic 350-40): "Simplifying theCustomers Accounting for Goodwill Impairment." UnderImplementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the current guidancerequirements for assessing goodwillcapitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for impairment, an entity can first assess qualitative factorscapitalizing implementation costs incurred to determine whether a two-step goodwill impairment testdevelop or obtain internal-use software. ASU 2018-15 is necessary. Under the new standard, a goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill, thus no longer requiring the two-step method. The guidance requires prospective adoption and will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this standard beginning with its fourth quarter ending December 31, 2019. EarlyThe adoption of this guidance is permitted for interim or annual goodwill impairment tests performedstandard did not have a material impact on testing dates after January 1, 2017. We plan to adopt this guidance in January 2018 and we do not expect any impact to the consolidatedCompany's financial statements.
In MarchJune 2016, the FASB issued guidance that changesASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the accountingincurred loss methodology previously employed to measure credit losses for certain aspects of share-based payments to employees. The guidancemost financial assets and requires the recognitionuse of a forward-looking expected loss model. Under current accounting guidance, credit losses are recognized when it is probable a loss has been incurred. The updated guidance will require financial assets to be measured at amortized costs less a reserve, equal to 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.net amount expected to be collected. This standard will be effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for, and we elected, to account for forfeitures as they occur rather than on an estimated basis. We adoptedCompany does not expect this guidance in January 2017 and the elimination of APIC pools resulted in approximately $545 of income tax benefit during the full year December 31, 2017. This guidance has been applied prospectively and no prior periodsto have been adjusted.a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition ofrequires lessees to recognize a right-of-use asset with a corresponding lease assets and lease liabilities by lesseesliability on their balance sheet for thosemost leases classified as operating leases under previous guidance. Lessors are required to recognize a net lease investment for most leases. Additional qualitative and quantitative disclosures are also required. The guidance will be effectiveCompany applied the transition requirements as of January 1, 2019. As of December 31, 2019, the Company recorded right-of-use lease assets and corresponding lease liabilities of $151,657 and $152,140, respectively. There was no impact to the Company's Statements of Comprehensive Income or Statements of Cash Flows as a result of the adoption. In addition, comparative financial statements have not been presented as allowed per the guidance. Changes to processes and internal controls to meet the standard’s reporting and disclosure requirements have also been implemented. See Note 6, Leases, for annual reportingadditional discussion over this new standard, including the impact on the Company's financial statements.
2. Acquisitions, Goodwill and Other Long-Lived Assets
Expedited Freight Acquisitions
As part of the Company's strategy to expand final mile pickup and delivery operations, in April 2019, the Company acquired certain assets and liabilities of FSA Network, Inc., doing business as FSA Logistix (“FSA”), for $27,000 and a potential earnout of up to $15,000. This acquisition provides an opportunity for the Expedited Freight segment to expand its final mile service offering into additional geographic markets, form relationships with new customers, add volumes to existing locations and generate synergies with LTL operations. This transaction was funded using cash flows from operations. The assets, liabilities, and operating results of this acquisition have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Expedited Freight reportable segment.
The acquisition agreement provides the sellers an earnout opportunity of up to $15,000 based on the achievement of certain revenue milestones over two one-year periods, beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. We are evaluatingMay 1, 2019. Upon acquisition the impactfair value of the future adoptionearn-out liability was $11,803 and is included in other current and other long-term liabilities in the opening condensed consolidated balance sheet. The earn-out liability was classified as level 3 of this standard on our consolidated financial statements.
In May 2014,the fair value hierarchy as defined in the FASB issued guidanceAccounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“the FASB Codification”) and the value was determined based on estimated revenues and the probability of achieving them. The fair value was based on the 2-year performance of FSA's acquired customer revenue from contracts with customers that will supersede mostand was estimated using a Monte Carlo simulation. The initial and 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 moneyweighted average assumptions used in the transaction price, and allowing estimates of variable consideration to be recognized before contingenciesMonte Carlo simulation are resolvedsummarized 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. The guidance permits the use of either a full retrospective or modified retrospective adoption approach with a cumulative effect adjustment recorded in either scenario as necessary upon transition.following table:
As permitted by the guidance, we will implement the use of full retrospective presentation. While evaluating principal versus agent relationships under the new standard, we determined that we will transition certain revenue streams from an agent to principal relationship. This will cause these revenue streams and their associated costs to be recognized on a gross basis that have historically been recognized on a net basis, increasing revenue and expenses by approximately $66,000 for the year ended December 31, 2017 and $47,000 for the same period of 2016 with no impact on operating income.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
|
| | |
| | FSA Earn-out |
| | April 21, 2019 | December 31, 2019 |
| Risk-free rate | 2.9% | 2.2% |
| Revenue discount rate | 4.4% | 4.4% |
| Revenue volatility | 3.0% | 5.0% |
Since acquisition, the earn-out fair value decreased $33 from $11,803 to $11,770, $5,320 of which is classified as a current liability. The change in fair value flows through the other operating expenses line item as is based on a reviewchanges in expected future cash flows. As of our customer shipping arrangements, we currently believeDecember 31, 2019, the implementationexpected total earn-out to be paid is $12,170. The current portion of this standard will change our revenue recognition policy from recognizing revenue upon shipment completion to recognizing revenue over time based on the progress toward completion of shipments in transit at each period end. While the timing of revenue recognition will be accelerated, due to the short duration of our transit times and relatively low dollar value of individual shipments, the anticipated impact on our consolidated financial position, revenue and results from operationsearn-out is not expected to be significant.
2. Acquisitions, Goodwill and Other Long-Lived Assets
Acquisition of Towne
On March 9, 2015, the Company acquired CLP Towne Inc. (“Towne”) pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) resulting in Towne becoming an indirect, wholly-owned subsidiary of the Company. For the acquisition of Towne, the Company paid $61,878 in net cash and assumed $59,544 in debt 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, with $14,500 of such amount 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. During the second quarter of 2017, we received $2,525 from this escrow for reimbursement of various claims. Approximately $1,621 was credited to operating leases and other operating expenses to offset related costs incurred in previous periods. The remaining $904 was used to establish reserves for various pending claims. Forward Air financed the Merger Agreement with a $125,000 2 year term loan available under the senior credit facility.2020.
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 LTL 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 provided the Expedited LTL segment with opportunities to expand its service points and service offerings, such as pick up and delivery services. Additional benefits of the acquisition included increased linehaul network shipping density and a significant increase to our owner-operator fleet, both of which are key to the profitability of Expedited LTL.
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 were largely included in other operating expenses during 2015.
CSTIntermodal Acquisitions
As part of the Company's strategy to expand its Intermodal operations, in May 2017, wethe 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(collectively, “Atlantic” in this note)) for $22,500 and a potentialan earnout of $1,000.$135 paid in the fourth quarter of 2018. The acquisition was funded by a combination of cash on hand and funds from ourthe revolving credit facility. Atlantic was a privately held provider of intermodal, drayage and related services headquartered in Charleston, South Carolina. It also has terminal operations in Atlanta, Charlotte, Houston, Jacksonville, Memphis, Nashville, Norfolk and Savannah. These locations allow Intermodal to significantly expand its footprint in the southeastern region. In October 2017, we alsothe Company acquired certain assets of Kansas City Logistics, LLC ("KCL") for $640 and a potentialan earnout of $100.$100 paid in the second quarter of 2018. KCL provides CST with an expanded footprint in the Kansas and Missouri markets. During
In July 2018, the year ended December 31, 2016, Atlantic generated approximately $62,300 in revenue. In January 2016, the Company also acquired certain assets of Ace Cargo, LLCMulti-Modal Transport Inc. ("Ace"MMT") for $1,700,$3,737 and in August 2016, weOctober 2018, the Company acquired certain assets of Triumph Transport,Southwest Freight Distributors, Inc. (“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 provide access to several strategic customer relationships.
In July 2019, the Company acquired certain assets and liabilities of O.S.T. Logistics, Inc. and Triumph Repair Service,O.S.T. Trucking Co., Inc. (together referred to as “Triumph”(collectively, “O.S.T.”) for $10,100$12,000. O.S.T. is a drayage company and provides the Intermodal segment with an earnout of $1,250 paidexpanded footprint on the East Coast, with locations in September 2017. the Pennsylvania, Maryland, Virginia, South Carolina and Georgia markets.
These acquisitions provided an opportunity for our Intermodal operations to expand into additional Midwest markets.transactions were funded using cash flows from operations. The assets, liabilities, and operating results of these collective acquisitions have been included in the Company's consolidated financial statements from their dates of acquisition and have been included in the Intermodal reportable segment.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
Allocations of Purchase Prices
The following table presents the allocations of the previously 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, 2019
(In thousands, except share and per share data)
|
| | | | | | | | | | | | |
| Towne | Ace & Triumph | Atlantic | KCL |
| March 9, 2015 | January & August 2016 | May 7, 2017 | October 22, 2017 |
| Tangible assets: | |
|
| | |
| Accounts receivable | $ | 24,068 |
| $ | — |
| $ | — |
| $ | — |
|
| Prepaid expenses and other current assets | 2,916 |
| — |
| — |
| — |
|
| Property and equipment | 2,095 |
| 1,294 |
| 1,821 |
| 223 |
|
| Other assets | 614 |
| — |
| — |
| — |
|
| Total tangible assets | 29,693 |
| 1,294 |
| 1,821 |
| 223 |
|
| Intangible assets: | |
|
| | |
| Non-compete agreements | — |
| 139 |
| 1,150 |
| 6 |
|
| Customer relationships | 66,000 |
| 5,335 |
| 13,400 |
| 234 |
|
| Goodwill | 59,666 |
| 6,282 |
| 6,719 |
| 277 |
|
| Total intangible assets | 125,666 |
| 11,756 |
| 21,269 |
| 517 |
|
| Total assets acquired | 155,359 |
| 13,050 |
| 23,090 |
| 740 |
|
| |
| | |
| Liabilities assumed: | |
| | |
| Current liabilities | 28,920 |
| — |
| 590 |
| 100 |
|
| Other liabilities | 3,886 |
| 1,250 |
| — |
| — |
|
| Debt and capital lease obligations | 59,544 |
| — |
| — |
| — |
|
| Deferred income taxes | 1,131 |
| — |
| — |
| — |
|
| Total liabilities assumed | 93,481 |
| 1,250 |
| 590 |
| 100 |
|
| Net assets acquired | $ | 61,878 |
| $ | 11,800 |
| $ | 22,500 |
| $ | 640 |
|
|
| | | | | | | | | | | | | | | | | | |
| Atlantic | KCL | MMT | Southwest | FSA | O.S.T. |
| May 7, 2017 | October 22, 2017 | July 25, 2018 | October 28, 2018 | April 21, 2019 | July 14, 2019 |
| Tangible assets: | | | | | | |
| Cash | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 202 |
| $ | — |
|
| Other receivables | — |
| — |
| — |
| — |
| 1,491 |
| — |
|
| Property and equipment | 1,821 |
| 223 |
| 81 |
| 933 |
| 40 |
| 10,371 |
|
| Other lease right-of-use assets | — |
| — |
| — |
| — |
| 3,209 |
| 1,672 |
|
| Total tangible assets | 1,821 |
| 223 |
| 81 |
| 933 |
| 4,942 |
| 12,043 |
|
| Intangible assets: | | | | | | |
| Non-compete agreements | 1,150 |
| 6 |
| 43 |
| 650 |
| 900 |
| 850 |
|
| Customer relationships | 13,400 |
| 234 |
| 1,659 |
| 9,200 |
| 17,900 |
| 5,700 |
|
| Goodwill | 6,719 |
| 277 |
| 1,954 |
| 5,467 |
| 19,963 |
| 2,050 |
|
| Total intangible assets | 21,269 |
| 517 |
| 3,656 |
| 15,317 |
| 38,763 |
| 8,600 |
|
| Total assets acquired | 23,090 |
| 740 |
| 3,737 |
| 16,250 |
| 43,705 |
| 20,643 |
|
| | | | | | | |
| Liabilities assumed: | | | | | | |
| Current liabilities | 590 |
| 100 |
| — |
| — |
| 8,466 |
| — |
|
| Other liabilities | — |
| — |
| — |
| — |
| 5,030 |
| — |
|
| Operating lease obligations | — |
| — |
| — |
| — |
| 3,209 |
| 1,672 |
|
| Finance lease obligations | — |
| — |
| — |
| — |
| — |
| 6,971 |
|
| Total liabilities assumed | 590 |
| 100 |
| — |
| — |
| 16,705 |
| 8,643 |
|
| Net assets acquired | $ | 22,500 |
| $ | 640 |
| $ | 3,737 |
| $ | 16,250 |
| $ | 27,000 |
| $ | 12,000 |
|
The above purchase price allocations for FSA and O.S.T. are preliminary as the Company is still in the process of finalizing the valuation of the acquired definite-liveassets and liabilities assumed. The above estimated fair values of assets acquired and liabilities assumed for FSA and O.S.T. are based on the information that was available as of the acquisition date through the date of this filing. The acquired definite-lived intangible assets have the following useful lives:
|
| | | | | | | |
| Useful Lives | | |
| Towne
| | Ace & Triumph |
| | | | | | | | |
| Atlantic | | KCL | | MMT | | Southwest | | FSA | | O.S.T. |
| Customer relationships | 20 years | | 15 years |
| 15 years | | 15 years |
Non-competes | -15 years | | 510 years |
| 15 years | | 10 years |
| Non-compete agreements | 5 years | | 2 years | | 4 years | | 3 years | | 5 years | | 3 years |
The fair value of the non-compete agreements and customer relationships assets 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 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. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.
Goodwill
The Company conducted its annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 2017.2019. The first step of the goodwill impairment test is the Company'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.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
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, 2019
(In thousands, except share and per share data)
If a quantitative fair value estimation is required, the Company estimates the fair value of the applicable reporting 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 the Company's 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 estimates 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 the estimation of fair value indicates the impairment potentially exists, the Company will then measure the amount of the impairment, if any. Goodwill impairment exists when the estimated 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, 2019, the Company had 5 reporting units - Expedited LTL, Truckload, Final Mile, Intermodal and Pool. The Company conducted its annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 20172019 and no impairment charges were required. Further, due to Total Quality, Inc. ("TQI") performance falling shortSee discussion over segments in Note 10, Segment Reporting.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017. Therefore, the Company performed an additional impairment assessment2019
(In thousands, except share and determined TQI's goodwill was not impaired as of December 31, 2017.per share data)
In 2016, due to the financial performance of the TQI reporting unit falling notably short of previous projections the Company reduced 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 charge of $25,686 for the TQI reporting unit during the year ended December 31, 2016.
The following is a summary of the changes in goodwill by reporting unit for the year ended December 31, 2017.2019. Approximately $112,527$141,961 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, 2016 | $ | 97,593 |
| $ | — |
| | $ | 45,164 |
| $ | (25,686 | ) | | $ | 12,359 |
| $ | (6,953 | ) | | $ | 62,198 |
| $ | — |
| | $ | 184,675 |
|
| Atlantic & KCL Acquisitions | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| | $ | 6,996 |
| $ | — |
| | $ | 6,996 |
|
| Ending balance, December 31, 2017 | $ | 97,593 |
| $ | — |
| | $ | 45,164 |
| $ | (25,686 | ) | | $ | 12,359 |
| $ | (6,953 | ) | | $ | 69,194 |
| $ | — |
| | $ | 191,671 |
|
|
| | | | | | | | |
| | Beginning Balance, December 31, 2018 | FSA Acquisition | O.S.T. Acquisition | Ending Balance, December 31, 2019 |
| Expedited LTL | | | | |
| Goodwill | 97,593 |
| — |
| — |
| 97,593 |
|
| Accumulated Impairment | — |
| — |
| — |
| — |
|
| | | | |
|
| TLS | | | |
|
| Goodwill | 45,164 |
| — |
| — |
| 45,164 |
|
| Accumulated Impairment | (25,686 | ) | — |
| — |
| (25,686 | ) |
| | | | |
|
| Final Mile | | | |
|
| Goodwill | — |
| 19,963 |
| — |
| 19,963 |
|
| Accumulated Impairment | — |
| — |
| — |
| — |
|
| | | | | |
| Intermodal | | | |
|
| Goodwill | 76,615 |
| — |
| 2,050 |
| 78,665 |
|
| Accumulated Impairment | — |
| — |
| — |
| — |
|
| | | | | |
| Pool | | | | |
| Goodwill | 12,359 |
| — |
| — |
| 12,359 |
|
| Accumulated Impairment | (6,953 | ) | — |
| — |
| (6,953 | ) |
| | | | | |
| Total | | | | |
| Goodwill | 231,731 |
| 19,963 |
| 2,050 |
| 253,744 |
|
| Accumulated Impairment | (32,639 | ) | — |
| — |
| (32,639 | ) |
| | 199,092 |
| 19,963 |
| 2,050 |
| 221,105 |
|
Other Acquired Intangibles
Through acquisitions, the Company acquired customer relationships, non-compete agreements and trade names having weighted-average useful lives of 15.9, 5.215.4, 4.7 and 4.0 years, respectively. Amortization expense on acquired customer relationships, non-compete agreements and trade names for each of the years ended December 31, 2019, 2018 and 2017 2016was $11,213, $9,138 and 2015 was $10,193, $10,122 and $10,905, respectively.
As of December 31, 2017,2019, definite-lived intangible assets are comprised of the following:
| | | | Acquired Intangibles | | Accumulated Amortization | | Accumulated Impairment | | Net Acquired Intangibles | Acquired Intangibles | | Accumulated Amortization | | Accumulated Impairment | | Net Acquired Intangibles |
| Customer relationships | $ | 193,209 |
| | $ | 66,986 |
| | $ | 16,501 |
| | $ | 109,722 |
| $ | 227,826 |
| | $ | 86,027 |
| | $ | 16,501 |
| | $ | 125,298 |
|
| Non-compete agreements | 4,566 |
| | 3,074 |
| | — |
| | 1,492 |
| 6,852 |
| | 4,352 |
| | — |
| | 2,500 |
|
| Trade name | 1,500 |
| | 1,467 |
| | — |
| | 33 |
| 1,500 |
| | 1,500 |
| | — |
| | — |
|
| Total | $ | 199,275 |
| | $ | 71,527 |
| | $ | 16,501 |
| | $ | 111,247 |
| $ | 236,178 |
| | $ | 91,879 |
| | $ | 16,501 |
| | $ | 127,798 |
|
As of December 31, 2016, definite-lived intangible assets are comprised of the following:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
As of December 31, 2018, definite-lived intangible assets are comprised of the following:
| | | | Acquired Intangibles | | Accumulated Amortization | | Accumulated Impairment | | Net Acquired Intangibles | Acquired Intangibles | | Accumulated Amortization | | Accumulated Impairment | | Net Acquired Intangibles |
| Customer relationships | $ | 179,575 |
| | $ | 57,390 |
| | $ | 16,501 |
| | $ | 105,684 |
| $ | 204,226 |
| | $ | 75,585 |
| | $ | 16,501 |
| | $ | 112,140 |
|
| Non-compete agreements | 3,410 |
| | 2,677 |
| | — |
| | 733 |
| 5,102 |
| | 3,581 |
| | — |
| | 1,521 |
|
| Trade name | 1,500 |
| | 1,267 |
| | — |
| | 233 |
| 1,500 |
| | 1,500 |
| | — |
| | — |
|
| Total | $ | 184,485 |
| | $ | 61,334 |
| | $ | 16,501 |
| | $ | 106,650 |
| $ | 210,828 |
| | $ | 80,666 |
| | $ | 16,501 |
| | $ | 113,661 |
|
The estimated amortization expense for the next five years on definite-lived intangible assets as of December 31, 20172019 is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Customer relationships | $ | 11,113 |
|
| $ | 10,970 |
|
| $ | 10,770 |
|
| $ | 10,422 |
|
| $ | 10,084 |
|
| Non-compete agreements | 949 |
|
| 901 |
|
| 415 |
|
| 180 |
|
| 56 |
|
| Total | $ | 12,062 |
|
| $ | 11,871 |
|
| $ | 11,185 |
|
| $ | 10,602 |
|
| $ | 10,140 |
|
|
| | | | | | | | | | | | | | | | | | | |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Customer relationships | $ | 8,399 |
|
| $ | 8,319 |
|
| $ | 8,319 |
|
| $ | 8,177 |
|
| $ | 7,976 |
|
| Non-compete agreements | 464 |
|
| 289 |
|
| 259 |
|
| 246 |
|
| 78 |
|
| Trade name | 33 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Total | $ | 8,896 |
|
| $ | 8,608 |
|
| $ | 8,578 |
|
| $ | 8,423 |
|
| $ | 8,054 |
|
Additionally, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate 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 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 theestimates 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 useduses cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believedbelieves the level and timing of cash flows appropriately reflected market participant assumptions. As a result of these estimates theThe Company recorded annoted no impairment charge of $16,501 related to TQI customer relationshipsindicators for its definite-lived intangibles during the year ended December 31, 2016. 2019. In addition, no impairment charges were recorded for definite-lived intangibles for the years ended December 31, 2019, 2018 and 2017.
Other Long-Lived Assets
The Company incurred no such impairment chargeevaluates the reasonableness of the useful lives and salvage values of its assets on an ongoing basis. During the third quarter of 2019, the Company deemed it appropriate to extend the average useful life of its trailers from 7 to 10 years and its tractors from 5 to 10 years. In addition, management reduced the average salvage value of its tractors from 25% to 10%. No changes were made to trailer salvage values. These changes in estimates were made to assets currently owned and originally purchased new since assets purchased used were assigned individual useful lives and salvage values based on their age and condition at purchase. This change in estimate was made on a prospective basis beginning on July 1, 2019. The impact of this study on the year ended December 31, 2019 was a $2,700 reduction in depreciation. Depreciation expense for each of the three years ended December 31, 2019, 2018 and 2017 was $30,896, $33,045 and $30,862 respectively.
In addition, management recorded a $1,200 reserve for tractors during the year ended December 31, 2017.2019. This is recorded in other operating expenses in the Company's Consolidated Statements of Comprehensive Income.
3. Debt and Capital Lease Obligations
Credit Facilities
On September 29, 2017, the Company entered into a five-year5-year senior unsecured revolving credit facility (the “Facility”) with a maximum aggregate principal amount of $150,000, with a sublimit of $30,000 for letters of credit and a sublimit of $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 loans,
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
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 mature in September 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 is 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 0.3% to 0.8% with respect to the Facility depending on the
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
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, 2017,2019, the Company had $40,500$67,500 in borrowings outstanding under the revolving credit facility, $7,932$13,970 utilized for outstanding letters of credit and $101,568$68,530 of available borrowing capacity under the revolving credit facility. The interest rate on the outstanding borrowings under the facility was 2.9%3.2% at December 31, 2017.2019.
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.
The Facility replaced the Company's previously existing unsecured credit facility, which had a maximum aggregate principal amount As of $275,000, including a revolving credit facility of $150,000 and a term loan facility of $125,000. The previous revolving credit facility was scheduled to expire in February 2020.
Capital Leases
Primarily through acquisitions,December 31, 2019, the Company assumed several equipment leases that metwas in compliance with the criteria for classification as a capital lease. The leased equipment is being amortized over the shorter of the lease term or useful life.aforementioned covenants.
Property and equipment include the following amounts for assets under capital leases:
|
| | | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Equipment | | $ | 635 |
| | $ | 635 |
|
| Accumulated amortization | | (413 | ) | | (307 | ) |
| | $ | 222 |
| | $ | 328 |
|
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, 2017:
|
| | | | |
| 2018 | | $ | 391 |
|
| 2019 | | 325 |
|
| 2020 | | 60 |
|
| 2021 | | — |
|
| 2022 | | — |
|
| Thereafter | | — |
|
| Total | | 776 |
|
| Less amounts representing interest | | 52 |
|
| Present value of net minimum lease payments (including current portion of $359) | | $ | 724 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
Interest Payments
InterestCash interest payments during 2019, 2018 and 2017 2016were $2,658, $1,841 and 2015 were $1,193, $1,770 and $2,017, respectively. No interest was capitalized during the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
4. Shareholders' Equity, Stock Options and Net Income per Share
Preferred Stock
There are 5,000,0005,000 shares of preferred stock with a par value of $0.01 authorized, but no shares have been issued to date.
Cash Dividends
During each quarter of 20172019 and the fourth quarter of 2016,2018, 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 and each quarter of 2017, 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 and each quarter of 2015, the Company's Board of Directors declared a cash dividend of $0.12 per share of Common Stock. On February 6, 2018,4, 2020, the Company’s Board of Directors declared a $0.15$0.18 per share dividend that will be paid in the first quarter of 2018.2020. 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, ourthe Company's Board of Directors approved a stock repurchase plan that authorized the repurchase ofauthorization for up to 3,000,0003,000 shares of the Company's Common Stock. UnderCompany’s common stock (the "2016 Repurchase Plan"). On February 5, 2019, our Board of Directors canceled the Company’s 2016 Repurchase Plan and approved a new stock repurchase plan authorizing up to 5,000 shares of the Company’s
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
common stock (the “2019 Repurchase Plan”) that shall remain in effect until such time as the shares authorized for repurchase are exhausted or the plan is canceled.
The Company is not obligated to repurchase any specific number of shares and may suspend or cancel the plan at any time. 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.
Under these plans, during the year ended December 31, 2017,2019, we repurchased 947,819913 shares of Common Stock for $48,983,$56,204, or $51.68$61.59 per share. As of December 31, 20172019, 1,818,6654,155 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”). In May 2008, with the approval of shareholders, the Company amended and restated the 1999 Stock Option and Incentive Plan (the “1999 Amended Plan”) to reserve for issuance an additional 3,000,000 common shares, increasing the total number of reserved common shares under the 1999 Amended Plan to 7,500,000. Options issued under these plans have seven to ten-year terms and vested over a one to five year period.
In May 2016, with the approval of shareholders, the Company adopted the 2016 Omnibus Incentive Compensation Plan (the “Omnibus Plan”) to reserve for issuance 2,000,0002,000 common shares. Options issued under these plans have seven year terms and vest over a two to three-year period. With the adoption of the Omnibus Plan, no further awards will be issued under the 1999 Amended Plan. As of December 31, 2017,2019, there were approximately 1,691,5671,141 shares remaining available for grant under the Omnibus Plan.
Employee Activity - Stock Options
Stock option grants to employees generally expire seven years from the grant date and typically vest ratably over a three-year period. All forfeitures were recognized as they occurred. The Company historically used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted. The Company did not make any stock option grants during the year ended December 31, 2019.
The following table contains the weighted-average assumptions used to estimate the fair value of options granted during the years ended December 31, 2018 and 2017 . These assumptions are subjective and changes in these assumptions can materially affect the fair value estimate.
|
| | | | | |
| December 31,
2018 |
| December 31,
2017 |
| Expected dividend yield | 1.1 | % |
| 1.3 | % |
| Expected stock price volatility | 24.4 | % |
| 28.5 | % |
| Weighted average risk-free interest rate | 2.7 | % |
| 2.0 | % |
| Expected life of options (years) | 6.1 |
|
| 5.9 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
The following table summarizes the Company’s employee stock options outstanding as of December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
| 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 |
| 42.48 |
| - | 44.90 |
|
| 93 |
|
| 2.8 |
| 43.63 |
|
| 93 |
|
| 43.63 |
|
| 45.34 |
| - | 48.32 |
|
| 100 |
|
| 4.0 |
| 47.73 |
|
| 69 |
|
| 47.69 |
|
| 50.71 |
| - | 53.73 |
|
| 49 |
|
| 2.4 |
| 51.16 |
|
| 47 |
|
| 51.07 |
|
| 57.18 |
| - | 60.42 |
|
| 88 |
|
| 5.1 |
| 58.80 |
|
| 29 |
|
| 58.68 |
|
| 64.26 |
| - | 64.26 |
|
| 100 |
|
| 5.7 |
| 64.26 |
|
| 33 |
|
| 64.26 |
|
| $ | 42.48 |
| - | 64.26 |
|
| 430 |
|
| 4.2 |
| $ | 53.33 |
|
| 271 |
|
| $ | 50.08 |
|
The following tables summarize the Company’s employee stock option activity and related information for the years ended December 31, 2017, 20162019, 2018 and 2015:2017. The Company did not make any stock option grants during the year ended December 31, 2019.
F-19 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended |
| | December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
| | | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | | Average | | | | Average | | | | Average |
| | Options | | Exercise | | Options | | Exercise | | Options | | Exercise |
| | (000) | | Price | | (000) | | Price | | (000) | | Price |
| Outstanding at beginning of year | 538 |
| | $ | 51 |
| | 440 |
| | $ | 45 |
| | 564 |
| | $ | 41 |
|
| Granted | — |
| | — |
| | 193 |
| | 62 |
| | 128 |
| | 48 |
|
| Exercised | (99 | ) | | 43 |
| | (95 | ) | | 41 |
| | (206 | ) | | 35 |
|
| Forfeited | (8 | ) | | 54 |
| | — |
| | — |
| | (46 | ) | | 46 |
|
| Outstanding at end of year | 431 |
| | $ | 53 |
| | 538 |
| | $ | 51 |
| | 440 |
| | $ | 45 |
|
| Exercisable at end of year | 272 |
| | $ | 50 |
| | 230 |
| | $ | 45 |
| | 226 |
| | $ | 42 |
|
| Weighted-average fair value of options granted during the year | $ | — |
| | | | $ | 16 |
| | | | $ | 13 |
| | |
| Aggregate intrinsic value for options exercised | $ | 2,388 |
| | | | $ | 1,992 |
| | | | $ | 3,569 |
| | |
| Average aggregate intrinsic value for options outstanding | $ | 4,147 |
| | | | | | | | | | |
| Average aggregate intrinsic value for exercisable options | $ | 3,497 |
| | | | | | | | | | |
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2019 |
| December 31,
2018 |
| December 31,
2017 |
| Shared-based compensation for options | $ | 1,597 |
|
| $ | 1,578 |
|
| $ | 1,313 |
|
| Tax benefit for option compensation | $ | 403 |
|
| $ | 398 |
|
| $ | 466 |
|
| Unrecognized compensation cost for options | $ | 1,490 |
|
|
|
|
|
|
Weighted average period over which unrecognized compensation will be recognized (years)
| 1.4 |
| | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | | Average | | | | Average | | | | Average |
| | Options | | Exercise | | Options | | Exercise | | Options | | Exercise |
| | (000) | | Price | | (000) | | Price | | (000) | | Price |
| | | | | | | | | | | | |
| Outstanding at beginning of year | 564 |
| | $ | 41 |
| | 786 |
| | $ | 32 |
| | 1,363 |
| | $ | 28 |
|
| Granted | 128 |
| | 48 |
| | 137 |
| | 44 |
| | 96 |
| | 50 |
|
| Exercised | (206 | ) | | 35 |
| | (346 | ) | | 24 |
| | (659 | ) | | 26 |
|
| Forfeited | (46 | ) | | 46 |
| | (13 | ) | | 35 |
| | (14 | ) | | 29 |
|
| Outstanding at end of year | 440 |
| | $ | 45 |
| | 564 |
| | $ | 41 |
| | 786 |
| | $ | 32 |
|
| Exercisable at end of year | 226 |
| | $ | 42 |
| | 331 |
| | $ | 37 |
| | 586 |
| | $ | 28 |
|
| Weighted-average fair value of options granted during the year | $ | 13 |
| | | | $ | 12 |
| | | | $ | 15 |
| | |
| Aggregate intrinsic value for options exercised | $ | 3,569 |
| | | | $ | 7,803 |
| | | | $ | 16,191 |
| | |
| Average aggregate intrinsic value for options outstanding | $ | 3,387 |
| | | | | | | | | | |
| Average aggregate intrinsic value for exercisable options | $ | 2,259 |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
| 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 |
| 36.55 |
| - | 37.14 |
|
| 83 |
|
| 1.6 |
| 36.85 |
|
| 83 |
|
| 36.85 |
|
| 41.32 |
| - | 44.90 |
|
| 159 |
|
| 4.4 |
| 43.29 |
|
| 90 |
|
| 43.07 |
|
| 45.34 |
| - | 48.32 |
|
| 123 |
|
| 6.0 |
| 47.73 |
|
| 10 |
|
| 46.44 |
|
| 50.71 |
| - | 53.73 |
|
| 70 |
|
| 4.3 |
| 51.03 |
|
| 43 |
|
| 50.81 |
|
| 57.18 |
| - | 57.18 |
|
| 5 |
|
| 7.0 |
| 57.18 |
|
| — |
|
| — |
|
| $ | 36.55 |
| - | 57.18 |
|
| 440 |
|
| 3.5 |
| $ | 44.70 |
|
| 226 |
|
| $ | 42.39 |
|
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2017 |
| December 31,
2016 |
| December 31,
2015 |
| Shared-based compensation for options | $ | 1,313 |
|
| $ | 1,473 |
|
| $ | 1,386 |
|
| Tax benefit for option compensation | $ | 466 |
|
| $ | 546 |
|
| $ | 542 |
|
| Unrecognized compensation cost for options | $ | 1,647 |
|
|
|
|
|
|
Weighted average period over which unrecognized compensation will be recognized (years)
| 1.8 |
| | | | |
Employee Activity – Non-vested sharesShares
The fair value of non-vested shares issued was estimated using the closing market prices for the business day of the grant. The share-based compensation for the non-vested shares is recognized ratably over the requisite service period or vesting period. All forfeitures were recognized as they occurred.
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, 2019 |
| December 31, 2018 |
| December 31, 2017 |
|
|
| 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 | 315 |
|
| $ | 55 |
|
| 227 |
|
| $ | 47 |
|
| 222 |
|
| $ | 45 |
|
| Granted | 117 |
|
| 59 |
|
| 202 |
|
| 60 |
|
| 126 |
|
| 48 |
|
| Vested | (131 | ) |
| 61 |
|
| (107 | ) |
| 56 |
|
| (105 | ) |
| 45 |
|
| Forfeited | (24 | ) |
| 57 |
|
| (7 | ) |
| 52 |
|
| (16 | ) |
| 47 |
|
| Outstanding and non-vested at end of year | 277 |
|
| $ | 58 |
|
| 315 |
|
| $ | 55 |
|
| 227 |
|
| $ | 47 |
|
| Aggregate grant date fair value | $ | 16,181 |
|
|
|
| $ | 17,295 |
|
|
|
| $ | 10,618 |
|
|
|
| Total fair value of shares vested during the year | $ | 7,954 |
|
|
|
| $ | 6,040 |
|
|
|
| $ | 5,040 |
|
|
|
F-20 |
| | | | | | | | | | | |
| Year ended |
| December 31,
2019 |
| December 31,
2018 |
| December 31,
2017 |
| Shared-based compensation for non-vested shares | $ | 8,001 |
|
| $ | 6,874 |
|
| $ | 5,045 |
|
| Tax benefit for non-vested share compensation | $ | 2,016 |
|
| $ | 1,732 |
|
| $ | 1,791 |
|
| Unrecognized compensation cost for non-vested shares | $ | 8,654 |
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 1.7 |
| | | | |
Employee Activity – Performance Shares
The Company annually grants performance shares to key employees. Under the terms of the performance share agreements, following the end of a three-year performance period, the Company will issue to these employees a calculated number of common stock shares based on meeting certain performance targets. For shares granted during the year ended December 31, 2019, 50% of the performance share issuances will be based on meeting earnings before interest, taxes, depreciation and amortization ("EBITDA") per share targets and the remaining 50% of the performance share issuances will be based on the three-year performance of the Company’s total shareholder return ("TSR") as compared to the TSR of a selected peer group. All performance shares granted during the years ended December 31, 2018 and 2017 were based on achieving total shareholder return targets. All forfeitures were recognized as they occurred.
Depending upon the EBITDA per share targets met, 0% to 200% of the granted shares may ultimately be issued. For shares granted based on total shareholder return, 0% of the shares will be issued if the Company's total shareholder return
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| 2017 |
| 2016 |
| 2015 |
|
|
| 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 | 222 |
|
| $ | 45 |
|
| 191 |
|
| $ | 46 |
|
| 190 |
|
| $ | 40 |
|
| Granted | 126 |
|
| 48 |
|
| 134 |
|
| 44 |
|
| 100 |
|
| 51 |
|
| Vested | (105 | ) |
| 45 |
|
| (94 | ) |
| 44 |
|
| (93 | ) |
| 39 |
|
| Forfeited | (16 | ) |
| 47 |
|
| (9 | ) |
| 45 |
|
| (6 | ) |
| 45 |
|
| Outstanding and non-vested at end of year | 227 |
|
| $ | 47 |
|
| 222 |
|
| $ | 45 |
|
| 191 |
|
| $ | 46 |
|
| Aggregate grant date fair value | $ | 10,618 |
|
|
|
| $ | 10,108 |
|
|
|
| $ | 8,773 |
|
|
|
| Total fair value of shares vested during the year | $ | 5,040 |
|
|
|
| $ | 4,064 |
|
|
|
| $ | 4,694 |
|
|
|
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2017 |
| December 31,
2016 |
| December 31,
2015 |
| Shared-based compensation for non-vested shares | $ | 5,045 |
|
| $ | 4,614 |
|
| $ | 4,070 |
|
| Tax benefit for non-vested share compensation | $ | 1,791 |
|
| $ | 1,712 |
|
| $ | 1,591 |
|
| Unrecognized compensation cost for non-vested shares | $ | 6,137 |
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 1.7 |
| | | | |
Employee Activity – Performance shares
In 2017, 2016 and 2015, 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 total shareholder return as compared to the total shareholder return of a selected peer group. No shares may be issued if the Company total shareholder return outperforms 25% or less of the peer group, but 200% of the number of shares issued maywill be doubledissued if the CompanyCompany's total shareholder return performs better than 90% of the peer group.
The fair value of the performance shares granted based on the three year performance of the Company’s total shareholder return 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 using the Monte Carlo simulation. These assumptions are subjective and changes in these assumptions can materially affect the fair value estimate.
|
| | | | | | | | |
| | | Year ended | | |
| December 31,
2019 | | December 31,
2018 |
| December 31,
2017 |
| Expected stock price volatility | 23.4 | % | | 24.3 | % |
| 24.7 | % |
| Weighted average risk-free interest rate | 2.5 | % | | 2.2 | % |
| 1.4 | % |
The following tables summarize the Company's employee performance share activity, assuming median share awards, and related information:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2019 | | December 31,
2018 | | December 31,
2017 |
|
|
| 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 | 65 |
|
| $ | 58 |
|
| 69 |
|
| $ | 58 |
|
| 80 |
|
| $ | 55 |
|
| Granted | 30 |
|
| 61 |
|
| 18 |
|
| 72 |
|
| 27 |
|
| 56 |
|
| Additional shares awarded based on performance | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Vested | (23 | ) |
| 64 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Forfeited | (10 | ) |
| 63 |
|
| (22 | ) |
| 67 |
|
| (38 | ) |
| 51 |
|
| Outstanding and non-vested at end of year | 62 |
|
| $ | 62 |
|
| 65 |
|
| $ | 58 |
|
| 69 |
|
| $ | 58 |
|
| Aggregate grant date fair value | $ | 3,870 |
|
|
|
| $ | 3,795 |
|
|
|
| $ | 3,980 |
|
|
|
F-21 |
| | | | | | | | | | | |
| Year ended |
| December 31,
2019 |
| December 31,
2018 |
| December 31,
2017 |
| Shared-based compensation for performance shares | $ | 1,176 |
|
| $ | 1,263 |
|
| $ | 1,045 |
|
| Tax benefit for performance share compensation | $ | 296 |
|
| $ | 318 |
|
| $ | 371 |
|
| Unrecognized compensation cost for performance shares | $ | 1,529 |
|
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 1.8 |
| | | | |
Employee Activity – Employee Stock Purchase Plan
Under the 2005 Employee Stock Purchase Plan (the "ESPP"), which has been approved by shareholders, the Company is authorized to issue up to a remaining 350 shares of common stock to employees of the Company. 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
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
stock purchases are paid for through periodic payroll deductions and/or up to 2 large lump sum contributions. The following table summarizes the Company's employee stock purchase activity and related information:
|
| | | | | | | | | | | |
| Year ended | | |
| December 31, |
| December 31, | | December 31, |
| 2019 |
| 2018 | | 2017 |
| Shares purchased by participants under plan | 12 |
|
| 9 |
| | 10 |
|
| Average purchase price | $ | 51 |
|
| $ | 51 |
| | $ | 46 |
|
Weighted-average fair value of each purchase right under the ESPP granted 1 | $ | 14 |
|
| $ | 6 |
| | $ | 9 |
|
| Share-based compensation for ESPP shares | $ | 163 |
|
| $ | 59 |
| | $ | 92 |
|
| | | | | | |
1 Equal to the discount from the market value of the common stock at the end of each six month purchase period |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| 2017 |
| 2016 |
| 2015 |
|
|
| 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 | 80 |
|
| $ | 55 |
|
| 77 |
|
| $ | 52 |
|
| 74 |
|
| $ | 44 |
|
| Granted | 27 |
|
| 56 |
|
| 29 |
|
| 49 |
|
| 27 |
|
| 67 |
|
| Additional shares awarded based on performance | — |
|
| — |
|
| 7 |
|
| 40 |
|
| — |
|
| — |
|
| Vested | — |
|
| — |
|
| (33 | ) |
| 40 |
|
| (24 | ) |
| 45 |
|
| Forfeited | (38 | ) |
| 51 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Outstanding and non-vested at end of year | 69 |
|
| $ | 58 |
|
| 80 |
|
| $ | 55 |
|
| 77 |
|
| $ | 52 |
|
| Aggregate grant date fair value | $ | 3,980 |
|
|
|
| $ | 4,373 |
|
|
|
| $ | 4,016 |
|
|
|
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2017 |
| December 31,
2016 |
| December 31,
2015 |
| Shared-based compensation for performance shares | $ | 1,045 |
|
| $ | 1,447 |
|
| $ | 1,308 |
|
| Tax benefit for performance share compensation | $ | 371 |
|
| $ | 537 |
|
| $ | 512 |
|
| Unrecognized compensation cost for performance shares | $ | 1,383 |
|
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 1.7 |
| | | | |
EmployeeNon-employee Director Activity – Employee Stock Purchase Plan
Under the ESPP, at December 31, 2017, the Company is authorized to issue up to a remaining 371,859 shares of Common Stock to employees of the Company. For the years ended December 31, 2017, 2016 and 2015, participants under the ESPP purchased 9,954, 11,174, and 10,805 shares, respectively, at an average price of $46.01, $39.50, and $41.55 per share, respectively. The weighted-average fair value of each purchase right under the ESPP granted for the years ended December 31, 2017, 2016 and 2015, which is equal to the discount from the market value of the Common Stock at the end of each six month purchase period, was $9.26, $6.46, and $5.82 per share, respectively. Share-based compensation expense of $92, $72, and $61 was recognized in salaries, wages and employee benefits, during the years ended December 31, 2017, 2016 and 2015, respectively.
Non-employee Directors – Non-vested sharesShares
In May 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 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
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
credit the director with dividend equivalent payments in the form of additional deferred stock units for each cash dividend payment made by the Company. All forfeitures were recognized as they occurred.
In May 2016, with the approval of shareholders, the Company further amended the Amended Plan to reserve for issuance an additional 160,000160 common shares, increasing the total number of reserved common shares under the Amended Plan to 360,000.360. As of December 31, 2017,2019, there were approximately 148,019116 shares remaining available for grant.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
The following tables summarize the Company's non-employee non-vested share activity and related information:
| |
| Year ended | Year ended |
| 2017 |
| 2016 |
| 2015 | December 31,
2019 | | December 31,
2018 | | December 31,
2017 |
| 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 | 16 |
|
| $ | 44 |
|
| 15 |
|
| $ | 51 |
|
| 15 |
|
| $ | 44 |
| 15 |
|
| $ | 59 |
|
| 11 |
|
| $ | 52 |
|
| 16 |
|
| $ | 44 |
|
| Granted | 14 |
|
| 52 |
|
| 16 |
|
| 44 |
|
| 14 |
|
| 51 |
| 16 |
|
| 62 |
|
| 16 |
|
| 59 |
|
| 14 |
|
| 52 |
|
| Vested | (16 | ) |
| 44 |
|
| (15 | ) |
| 51 |
|
| (14 | ) |
| 43 |
| (15 | ) |
| 64 |
|
| (12 | ) |
| 52 |
|
| (16 | ) |
| 44 |
|
| Forfeited | (3 | ) |
| 49 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (3 | ) |
| 49 |
|
| Outstanding and non-vested at end of year | 11 |
|
| $ | 52 |
|
| 16 |
|
| $ | 44 |
|
| 15 |
|
| $ | 51 |
| 16 |
|
| $ | 62 |
|
| 15 |
|
| $ | 59 |
|
| 11 |
|
| $ | 52 |
|
| Aggregate grant date fair value | $ | 742 |
|
|
|
| $ | 688 |
|
|
|
| $ | 740 |
|
|
| $ | 990 |
|
|
|
| $ | 920 |
|
|
|
| $ | 742 |
|
|
|
| Total fair value of shares vested during the year | $ | 809 |
|
|
|
| $ | 639 |
|
|
|
| $ | 727 |
|
|
| $ | 970 |
|
|
|
| $ | 615 |
|
|
|
| $ | 809 |
|
|
|
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2019 |
| December 31,
2018 |
| December 31,
2017 |
| Shared-based compensation for non-vested shares | $ | 970 |
|
| $ | 775 |
|
| $ | 608 |
|
| Tax benefit for non-vested share compensation | $ | 244 |
|
| $ | 195 |
|
| $ | 216 |
|
| Unrecognized compensation cost for non-vested shares | $ | 368 |
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 0.4 |
| | | | |
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2017 |
| December 31,
2016 |
| December 31,
2015 |
| Shared-based compensation for non-vested shares | $ | 608 |
|
| $ | 728 |
|
| $ | 661 |
|
| Tax benefit for non-vested share compensation | $ | 216 |
|
| $ | 263 |
|
| $ | 259 |
|
| Unrecognized compensation cost for non-vested shares | $ | 215 |
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 0.4 |
| | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
Net Income per Share
The following table sets forth the computation of basic and diluted net income per basic and diluted share:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Net income and comprehensive income | $ | 87,099 |
| | $ | 92,051 |
| | $ | 87,255 |
|
| Income allocated to participating securities | (945 | ) | | (881 | ) | | (700 | ) |
| Numerator for basic and diluted income per share - net income | 86,154 |
| | 91,170 |
| | 86,555 |
|
| | | | | |
| Denominator: | | | | | |
| Denominator for basic net income per share - weighted-average shares (in thousands) | 28,195 |
| | 29,076 |
| | 29,867 |
|
| Effect of dilutive stock options (in thousands) | 82 |
| | 80 |
| | 64 |
|
| Effect of dilutive performance shares (in thousands) | 31 |
| | 34 |
| | 33 |
|
| Denominator for diluted net income per share - adjusted weighted-average shares (in thousands) | 28,308 |
| | 29,190 |
| | 29,964 |
|
| Basic net income per share | $ | 3.06 |
| | $ | 3.14 |
| | $ | 2.90 |
|
| Diluted net income per share | $ | 3.04 |
| | $ | 3.12 |
| | $ | 2.89 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Numerator: | | | | |
|
| Net income and comprehensive income | $ | 87,321 |
| | $ | 27,670 |
| | $ | 55,575 |
|
| Income allocated to participating securities | (700 | ) | | (212 | ) | | (369 | ) |
| Numerator for basic and diluted income per share - net income | 86,621 |
| | 27,458 |
| | 55,206 |
|
| | | | |
|
| Denominator: | | | | |
|
| Denominator for basic net income per share - weighted-average shares (in thousands) | 29,867 |
| | 30,283 |
| | 30,728 |
|
| Effect of dilutive stock options (in thousands) | 64 |
| | 130 |
| | 277 |
|
| Effect of dilutive performance shares (in thousands) | 33 |
| | 31 |
| | 35 |
|
| Denominator for diluted net income per share - adjusted weighted-average shares (in thousands) | 29,964 |
| | 30,444 |
| | 31,040 |
|
| Basic net income per share | $ | 2.90 |
| | $ | 0.91 |
| | $ | 1.80 |
|
| Diluted net income per share | $ | 2.89 |
| | $ | 0.90 |
| | $ | 1.78 |
|
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:
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Anti-dilutive stock options (in thousands) | 183 |
| | 126 |
| | 172 |
|
| Anti-dilutive performance shares (in thousands) | — |
| | 16 |
| | — |
|
| Anti-dilutive non-vested shares and deferred stock units (in thousands) | — |
| | 9 |
| | — |
|
| Total anti-dilutive shares (in thousands) | 183 |
| | 151 |
| | 172 |
|
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Anti-dilutive stock options (in thousands) | 172 |
| | 310 |
| | 184 |
|
| Anti-dilutive performance shares (in thousands) | — |
| | — |
| | 24 |
|
| Total anti-dilutive shares (in thousands) | 172 |
| | 310 |
| | 208 |
|
5. Income Taxes
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 2012.
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 was formerly called the “Tax Cuts and Jobs Act” and is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act providesprovided for significant changes in the U.S. Internal Revenue Code of 1986, as amended. The U.S. Tax Act containscontained provisions with separate effective dates but iswas generally effective for taxable years beginning after December 31, 2017.
Beginning on January 1, 2018, the U.S. Tax Act lowerslowered 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.
The ultimate impact of the U.S. Tax Act on our reported results in 2018 may differ from the estimates provided herein, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the U.S. Tax Act different from that presently contemplated. On December 22, 2017, the SEC staff issued SAB 118 that allowsallowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We currently are analyzingAs of December 22, 2018, the 2017 Tax Act, and in certain areas, have made reasonableCompany completed its accounting
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
estimatesfor all of the enactment-date income tax effects on our consolidated financial statements and tax disclosures, includingof the changesU.S. Tax Act. The Company made no adjustments to our existing deferred tax balances.the provisional amounts recorded at December 31, 2017.
Income Taxes
The provision for income taxes consists of the following:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | |
|
| Federal | $ | 17,319 |
| | $ | 16,572 |
| | $ | 28,556 |
|
| State | 4,925 |
| | 3,559 |
| | 4,043 |
|
| | 22,244 |
| | 20,131 |
| | 32,599 |
|
| Deferred: | | | | |
|
|
| Federal | 5,561 |
| | 7,194 |
| | (11,860 | ) |
| State | 1,207 |
| | 870 |
| | (457 | ) |
| | 6,768 |
| | 8,064 |
| | (12,317 | ) |
| | $ | 29,012 |
| | $ | 28,195 |
| | $ | 20,282 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 |
| 2015 |
| Current: | | | |
| |
| Federal | $ | 28,556 |
| | $ | 24,139 |
|
| $ | 8,319 |
|
| State | 4,043 |
| | 3,052 |
|
| 1,242 |
|
| | 32,599 |
| | 27,191 |
|
| 9,561 |
|
| Deferred: | | | |
|
| |
|
| Federal | (12,011 | ) | | 3,256 |
|
| 12,477 |
|
| State | (457 | ) | | 269 |
|
| 2,054 |
|
| | (12,468 | ) | | 3,525 |
|
| 14,531 |
|
| | $ | 20,131 |
| | $ | 30,716 |
|
| $ | 24,092 |
|
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 years ended December 31, 2016 and 2015 were $1,732 and $5,413, respectively, and are reflected as an increase in additional paid-in capital in the accompanying consolidated statements of shareholders’ equity. For 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 2019 and 2018 and 35.0% for 2017 to income before income taxes as follows:
|
| | | | | | | | | | | |
| | 2019 |
| 2018 |
| 2017 |
| Tax expense at the statutory rate | $ | 24,383 |
| | $ | 25,252 |
| | $ | 37,637 |
|
| State income taxes, net of federal benefit | 4,843 |
| | 3,685 |
| | 2,339 |
|
| Share-based compensation | (587 | ) | | (50 | ) | | (366 | ) |
| Qualified stock options | 34 |
| | 12 |
| | 32 |
|
| Other permanent differences | 189 |
| | 150 |
| | 252 |
|
| Section 162(m) limitation | 421 |
| | 13 |
| | — |
|
| Deferred tax asset valuation allowance | — |
| | 35 |
| | 78 |
|
| Federal qualified property deductions | — |
| | — |
| | (2,075 | ) |
| Federal income tax credits | (183 | ) | | (207 | ) | | (58 | ) |
| Non-taxable acquisitions | — |
| | — |
| | (568 | ) |
| Rate impact on deferred tax liabilities | — |
| | — |
| | (15,901 | ) |
| Other | (88 | ) | | (695 | ) | | (1,088 | ) |
| | $ | 29,012 |
| | $ | 28,195 |
| | $ | 20,282 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Tax expense at the statutory rate | $ | 37,608 |
| | $ | 20,435 |
| | $ | 27,883 |
|
| State income taxes, net of federal benefit | 2,339 |
| | 2,229 |
| | 2,178 |
|
| Non-deductible transaction costs | — |
| | — |
|
| 394 |
|
| Share based compensation | (366 | ) | | — |
| | — |
|
| Incentive stock options | 32 |
| | (88 | ) | | (120 | ) |
| Other permanent differences | 252 |
| | 474 |
| | 216 |
|
| TQI goodwill impairment | — |
| | 8,990 |
| | — |
|
| Deferred tax asset valuation allowance | 78 |
| | (2 | ) | | (11 | ) |
| Federal qualified property deductions | (2,075 | ) | | (1,311 | ) |
| (6,066 | ) |
| Federal income tax credits | (58 | ) | | — |
| | (732 | ) |
| Non-taxable acquisitions | (568 | ) | | — |
| | — |
|
| Rate impact on deferred tax liabilities | (15,901 | ) | | — |
| | — |
|
| Other | (1,210 | ) | | (11 | ) | | 350 |
|
| | $ | 20,131 |
| | $ | 30,716 |
| | $ | 24,092 |
|
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:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
| |
| December 31,
2017 | | December 31,
2016 | December 31,
2019 | | December 31,
2018 |
| Deferred tax assets: | | | | | | |
| Accrued expenses | $ | 7,905 |
| | $ | 9,647 |
| $ | 8,454 |
| | $ | 10,362 |
|
| Allowance for doubtful accounts | 777 |
| | 662 |
| 539 |
| | 535 |
|
| Operating lease obligations | | 38,822 |
| | — |
|
| Share-based compensation | 3,002 |
| | 5,005 |
| 3,881 |
| | 3,526 |
|
| Accruals for income tax contingencies | 251 |
| | 252 |
| 185 |
| | 217 |
|
| Net operating loss carryforwards | 4,733 |
| | 10,231 |
| 1,089 |
| | 2,906 |
|
| Total deferred tax assets | 16,668 |
| | 25,797 |
| 52,970 |
| | 17,546 |
|
| Valuation allowance | (360 | ) | | (282 | ) | (395 | ) | | (395 | ) |
| Total deferred tax assets, net of valuation allowance | 16,308 |
| | 25,515 |
| 52,575 |
| | 17,151 |
|
| Deferred tax liabilities: | | | | | | |
| Tax over book depreciation | 19,402 |
| | 29,416 |
| 26,816 |
| | 25,606 |
|
| Prepaid expenses deductible when paid | | 4,356 |
| | 3,902 |
|
| Operating lease right-of-use assets | | 38,822 |
| | — |
|
| Goodwill | | 16,036 |
| | 13,913 |
|
| Intangible assets | 11,108 |
| | 17,588 |
| 10,487 |
| | 10,904 |
|
| Prepaid expenses deductible when paid | 3,460 |
| | 4,862 |
| |
| Goodwill | 11,741 |
| | 15,520 |
| |
| Total deferred tax liabilities | 45,711 |
| | 67,386 |
| 96,517 |
| | 54,325 |
|
| Net deferred tax liabilities | $ | (29,403 | ) | | $ | (41,871 | ) | $ | (43,942 | ) | | $ | (37,174 | ) |
Total cash income tax payments, net of refunds, during fiscal years 20172019, 20162018 and 20152017 were $20,121, $21,064 and $36,110, $10,628respectively.
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 $25,264, respectively.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 $18,586, $27,050$2,000, $10,258 and $36,034$18,586 of federal net operating losses as of December 31, 2017, 20162019, 2018 and 20152017 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, 20172019, 2018 and 2016,2017 the Company had state net operating loss carryforwards of $18,126$16,926, $18,148 and $18,155,$18,126, respectively that will expire between 20172019 and 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 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 did not change during 2019, and increased $35 during 2018 and $78 during 2017, but the valuation allowance decreased $2 during 2016.2017.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and 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 2012.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
F-26 |
| | | |
| | Liability for |
| | Unrecognized Tax |
| | Benefits |
| 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 |
|
| Reductions for settlement with state taxing authorities | (99 | ) |
| Additions for tax positions of current year | 28 |
|
| Balance at December 31, 2019 | $ | 987 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
|
| | | |
| | Liability for |
| | Unrecognized Tax |
| | Benefits |
| Balance at December 31, 2014 | 771 |
|
| Reductions for settlement with state taxing authorities | (64 | ) |
| Additions for tax positions of current year | 66 |
|
| Balance at December 31, 2015 | 773 |
|
| Reductions for settlement with state taxing authorities | (247 | ) |
| Additions for tax positions of current year | 56 |
|
| 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 |
|
Included in the liability for unrecognized tax benefits at December 31, 20172019 and December 31, 20162018 are tax positions of $1,334$987 and $582,$1,058, 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 inIn addition, at December 31, 2019 and December 31, 2018, the liability forCompany had accrued penalties associated with unrecognized tax benefits at of $104 and $61, respectively. At December 31, 20172019 and December 31, 2016, are2018, the Company also had accrued penalties of $105 and $103, respectively. The liability forinterest associated with unrecognized tax benefits at December 31, 2017of $214 and December 31, 2016 also included accrued interest of $201 and $184,$143, respectively.
6. Operating Leases
As of January 1, 2019, the Company adopted ASU 2016-02, Leases, which required the Company to recognize a right-of-use asset and a corresponding lease liability on its balance sheet for most leases classified as operating leases under previous guidance. The Company adopted the standard using the modified retrospective approach as of January 1, 2019 and comparative financial statements have not been presented as allowed per the guidance.
The Company elected several of the practical expedients permitted under the transition guidance within the new standard. The package of practical expedients elected allowed the Company to carryforward its conclusions over whether any existing contracts contain a lease, to carryforward historical lease classification, and to carryforward its evaluation of initial direct costs for any existing leases. In addition, the Company elected the practical expedients to combine lease and non-lease components and to keep leases with an initial term of 12 months or less, after the consideration of options, off the balance sheet. For these leases with an initial term of 12 months or less, after the consideration of options, the Company recognized the corresponding lease expense on a straight-line basis over the lease term. These practical expedients have been elected for all leases and subleases and will be applied on a go-forward basis.
A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. An entity controls the use of the identified asset if both of the following are true: (1) the entity obtains the right to substantially all of the economic benefits from use of the identified asset and (2) the entity has the right to
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
direct the use of the identified asset. For the years ended December 31, 2019, 2018 and 2017, the Company leased facilities and equipment under operating and finance leases.
The Company leases certainsome of its facilities under noncancellable operating leases that expire in various years through 2025.2026. Certain leases may be renewed for periods varying from one1 to ten10 years. The Company has entered into or assumed through acquisition several equipment operating leases for assets including tractors, straight trucks and trailers with original lease terms between three2 and five6 years. These leases expire in various years through 20232025 and certain leases may not be renewed beyondfor periods varying from 1 to 3 years.
Primarily through acquisitions, the original term. Company assumed equipment leases that met the criteria for classification as a finance lease. In conjunction with the acquisition of O.S.T. in July 2019, discussed further in Note 2, Acquisitions, Goodwill and Other Long-Lived Assets, the Company assumed finance leases with remaining lease terms between 2 and 7 years. These leases expire in various years through 2025 with no options to renew. All other finance leases are not considered material to the Company's financial statements for the years ended December 31, 2019, 2018 and 2017. The finance leased equipment is being amortized over the shorter of the lease term or useful life. This amortization is included in depreciation and amortization expense.
The Company also subleases certain facility leases to independent third parties; however, as the Company is not relieved of its primary obligation under these leases, these assets are included in the right-of-use lease assets and corresponding lease liabilities as of December 31, 2019. Sublease rental income was $2,154, $1,724 and $1,923 $1,517in 2019, 2018 and $1,611 in 2017, 2016 and 2015, respectively. In 2018,2020, the Company expects to receive aggregate future minimum rental payments under noncancellable subleases of approximately $1,206.$1,505. Noncancellable subleases expire between 20182020 and 2021.2024.
Future minimumFor leases and subleases with terms greater than 12 months, the Company recorded the related right-of-use asset as the balance of the related lease liability, adjusted for any prepaid or accrued lease payments. Unamortized initial direct costs and lease incentives were not significant as of December 31, 2019. The lease liability was recorded at the present value of the lease payments over the term. Many of the Company's leases include rental escalation clauses, renewal options and/or termination options that were contemplated in the determination of lease payments under noncancellable operatingwhen appropriate. As of December 31, 2019, the Company was not reasonably certain of exercising any renewal options. Further, as of December 31, 2019, it was reasonably certain that all termination options would not be exercised. As such, there were no adjustments made to its right-of-use lease assets or corresponding liabilities as a result. In addition, the Company does not have any leases with initialresidual value guarantees or remaining termsmaterial restrictions or covenants as of December 31, 2019.
The Company did not separate lease and nonlease components of contracts for purposes of determining the right-of use lease asset and corresponding liability. Additionally, variable lease and variable nonlease components were not contemplated in the calculation of the right-of-use asset and corresponding liability. For facility leases, variable lease costs include the costs of common area maintenance, taxes, and insurance for which the Company pays its lessors an estimate that is adjusted to actual expense on a quarterly or annual basis depending on the underlying contract terms. For equipment leases, variable lease costs may include additional fees for using equipment in excess of one year consistedestimated annual mileage thresholds. Leasehold improvements were also excluded from the calculation of the followingright-of-use asset and corresponding liability. Leasehold improvements are recorded as an asset at cost and are amortized over the shorter of the estimated useful life or the initial term of the lease.
In addition, the Company holds contracts with independent owner-operators. These contracts explicitly identify the tractors to be operated by the independent owner-operators and therefore, the Company concluded that these represent embedded leases. However, the contract compensation is variable based upon a rate per shipment and a rate per mile. As such, these amounts are excluded from the calculation of the right-of-use lease asset and corresponding liability and are instead disclosed as part of variable lease costs below. Costs incurred for independent owner-operators in accordance with these embedded leases are included in purchased transportation on the Company's Statements of Comprehensive Income, totaling $358,185, $316,147 and $317,452 for the years ended December 31, 2017:2019, 2018 and 2017, respectively.
When available, the Company uses the rate implicit in the lease or sublease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement. The incremental borrowing rate is defined as the rate of interest that the Company would have to pay to borrow, on a collateralized basis and over a similar term, an amount equal to the lease payments in a similar economic environment. If using the Company’s incremental borrowing rate, management has elected to utilize a portfolio approach and applies the rates to a portfolio of leases with similar
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
|
| | | |
| 2018 | $ | 42,051 |
|
| 2019 | 34,693 |
|
| 2020 | 22,393 |
|
| 2021 | 11,282 |
|
| 2022 | 4,948 |
|
| Thereafter | 2,281 |
|
| Total | $ | 117,648 |
|
underlying assets and terms. Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
The following table summarizes the Company's lease costs for the year ended December 31, 2019 and related information:
|
| | | |
| | Year ended |
| | December 31,
2019 |
| Lease cost | |
| Finance lease cost: | |
| Amortization of right-of-use assets | $ | 1,019 |
|
| Interest on lease liabilities | 129 |
|
| Operating lease cost | 59,012 |
|
| Short-term lease cost | 12,056 |
|
| Variable lease cost | 373,181 |
|
| Sublease income | 2,154 |
|
| Total lease cost | $ | 447,551 |
|
| | |
| Other information | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows from finance leases | $ | 129 |
|
| Operating cash flows from operating leases | $ | 57,589 |
|
| Financing cash flows from finance leases | $ | 946 |
|
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 8,188 |
|
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 202,278 |
|
| Weighted-average remaining lease term - finance leases (in years) | 4.6 |
|
| Weighted-average remaining lease term - operating leases (in years) | 3.8 |
|
| Weighted-average discount rate - finance leases | 3.4 | % |
| Weighted-average discount rate - operating leases | 4.0 | % |
The table below reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the lease liabilities recorded on the balance sheet as of December 31, 2019:
|
| | | | | | |
| Payment Due Period | Operating Leases | Finance Leases |
| 2020 | $ | 61,804 |
| $ | 1,611 |
|
| 2021 | 46,755 |
| 1,610 |
|
| 2022 | 31,918 |
| 1,342 |
|
| 2023 | 22,088 |
| 1,200 |
|
| 2024 | 14,775 |
| 798 |
|
| Thereafter | 7,351 |
| 268 |
|
| Total minimum lease payments | 184,691 |
| 6,829 |
|
| Less: amount of lease payments representing interest | (32,551 | ) | (499 | ) |
| Present value of future minimum lease payments | 152,140 |
| 6,330 |
|
| Less: current portion of lease obligations | (50,615 | ) | (1,421 | ) |
| Long-term lease obligations | $ | 101,525 |
| $ | 4,909 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
As of December 31, 2019, the Company has certain obligations to lease tractors, which will be delivered throughout 2020. These leases are expected to have terms of approximately 3 to 4 years and are not expected to materially impact the Company's right-of-use lease assets or liabilities as of December 31, 2019.
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 business, financial condition, results of operations or cash flows.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except share and per share data)
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 evaluatingis responsible for the meritsfirst $7,500 per incident until it meets the $6,000 aggregate deductible for incidents resulting in claims between $3,000 and circumstances surrounding individual known$5,000 and the $2,500 aggregate deductible for incidents resulting in claims between $5,000 and by performing hindsight and actuarial analysis$10,000. During the year ended December 31, 2019, the Company recorded a $7,500 reserve for pending vehicular claims related to determine an estimate of probable losses onone incident. Although these claims incurred but not reported. Such losses should be be realized immediately asare still developing, the events underlyingCompany has recorded reserves for the claims have already occurred asup to its self-insured retention limit of $7,500 and therefore, no further impact to the balance sheet dates. Company’s operating results is expected.
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, 2017,2019, the Company had commitments to purchase trailers and forklifts for approximately $29,607$6,376 during 2018.2020.
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 20172019, 20162018 and 20152017 were approximately $1,441, $2,004, $1,0561,713 and $1,1781,441, respectively.
9. Financial Instruments
Off Balance Sheet Risk
At December 31, 2017,2019, the Company had letters of credit outstanding totaling $7,932.$13,970.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
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.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
Revolving credit facility: The Company’s revolving credit facility and term loan bearbears variable interest rates plus additional basis points based upon covenants related to total indebtedness to earnings. As the term loanrevolving credit facility bears a variable interest rate, and there have been no significant changes to our credit rating, the carrying value approximates fair value.
The fair value estimates of earn-outs are discussed in Note 4, Acquisitions and Long-Lived Assets.
Using interest rate quotes and discounted cash flows, the Company estimated the fair value of its outstanding capitalfinance lease obligations as follows:
|
| | | | | | | | | | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Finance lease obligations | $ | 6,330 |
| | $ | 6,318 |
| | $ | 363 |
| | $ | 374 |
|
|
| | | | | | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Capital lease obligations | $ | 724 |
| | $ | 744 |
| | $ | 1,072 |
| | $ | 1,139 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(In thousands, except sharethe finance lease obligations are included within the Equipment section of Property and per share data)
equipment on the Company’s Consolidated Balance Sheet. The Company's fair value estimates for the above financial instruments are classified within level 3 of the fair value hierarchy as defined in the FASB Codification.
10. Segment Reporting
Effective September 1, 2018, Thomas Schmitt was named the Company's President and Chief Executive Officer. Mr. Schmitt is the Company's Chief Operating Decision Maker ("CODM") and is primarily responsible for allocating resources to and assessing the performance of the Company's segments. As a result of this change in leadership, the Company revisited its strategy. Due to this change in leadership and the implementation of a new strategy, Management changed how it evaluates and manages the business effective in the fourth quarter of 2019 and classifies our services into 3 reportable segments: Expedited Freight, Intermodal and Pool Distribution. The results of our previous Expedited LTL and TLS segments have been consolidated into our Expedited Freight segment. This classification is consistent with how the CODM makes decisions about resource allocation and assesses the Company's performance. The Company has four reportablerecast its financial information and disclosures for the prior period to reflect the segment disclosures as if the current presentation had been in effect throughout all periods presented. For financial information relating to each of our business segments, based on information availablesee Note 10, Segment Reporting to and used by the chief operating decision maker. our Consolidated Financial Statements.
Expedited LTLFreight operates a comprehensive national network that providesto provide expedited regional, inter-regional and national LTL services. The TLS segment provides expeditedExpedited Freight offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage dedicated fleetand other handling. Included within the $988,757 of Expedited Freight revenue for the year end December 31, 2019 are defined services including Network revenue of $676,911, Truckload revenue of $184,663, Final Mile revenue of $100,555 and high security and temperature-controlled logistics services. Theother revenue of $26,628. Intermodal segment primarily provides first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Pool Distribution provides high-frequency handling and distribution of time sensitive product to numerous destinations.
Except 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 1. For workers compensation and vehicle claims each segment is charged an insurance premium and is also charged a deductible that corresponds with the 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 segments, but recorded at the corporate level within Eliminations and Other.
Segment data includes intersegment revenues. Costs 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, areis allocated between operating segments based on usage. However, the carrying value of the asset's basis areis not allocated. The Company evaluates the performance of its segments based on income 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, 2019
(In thousands, except share and per share data)
The following tables summarize segment information about results 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, 2017, 20162019, 2018 and 2015. 2017.
| | | Year ended December 31, 2017 | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated | |
| Year ended December 31, 2019 | | | Expedited Freight | | Intermodal |
| Pool Distribution |
| Eliminations & Other |
| Consolidated |
| External revenues | | $ | 616,245 |
| | $ | 171,970 |
| | $ | 163,932 |
| | $ | 148,669 |
| | $ | — |
| | $ | 1,100,816 |
| | $ | 985,697 |
| | $ | 217,606 |
|
| $ | 207,092 |
|
| $ | — |
|
| $ | 1,410,395 |
|
| Intersegment revenues | | 3,534 |
| | 7,350 |
| | 289 |
| | 238 |
| | (11,411 | ) | | — |
| | 3,060 |
| | 105 |
|
| 297 |
|
| (3,462 | ) |
| — |
|
| Depreciation and amortization | | 22,103 |
| | 6,328 |
| | 6,773 |
| | 5,848 |
| | 3 |
| | 41,055 |
| |
| Depreciation | | | 22,993 |
| | 3,086 |
|
| 4,884 |
|
| (67 | ) |
| 30,896 |
|
| Amortization | | | 4,336 |
| | 5,848 |
| | 1,029 |
| | — |
| | 11,213 |
|
| Share-based compensation expense | | 6,776 |
| | 378 |
| | 387 |
| | 562 |
| | — |
| | 8,103 |
| | 8,628 |
| | 1,801 |
|
| 644 |
|
| 834 |
|
| 11,907 |
|
| Interest expense | | 3 |
| | 2 |
| | — |
| | 48 |
| | 1,156 |
| | 1,209 |
| | — |
| | 142 |
|
| — |
|
| 2,569 |
|
| 2,711 |
|
| Income (loss) from operations | | 88,142 |
| | 3,248 |
| | 6,378 |
| | 12,673 |
| | (1,769 | ) | | 108,672 |
| | 101,065 |
| | 23,679 |
|
| 7,275 |
|
| (13,196 | ) |
| 118,823 |
|
| Total assets | | 629,091 |
| | 65,829 |
| | 55,970 |
| | 147,773 |
| | (210,947 | ) | | 687,716 |
| | 713,527 |
| | 206,576 |
|
| 115,638 |
|
| (44,863 | ) |
| 990,878 |
|
| Capital expenditures | | 36,650 |
| | 33 |
| | 1,068 |
| | 514 |
| | — |
| | 38,265 |
| | 22,179 |
| | 717 |
|
| 5,313 |
|
| — |
|
| 28,209 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018 (As Adjusted) | | Expedited Freight | | Intermodal |
| Pool Distribution |
| Eliminations & Other |
| Consolidated |
| External revenues | | $ | 926,446 |
| | $ | 200,750 |
|
| $ | 193,690 |
|
| $ | — |
|
| $ | 1,320,886 |
|
| Intersegment revenues | | 4,678 |
| | 256 |
|
| 427 |
|
| (5,361 | ) |
| — |
|
| Depreciation | | 25,453 |
| | 1,719 |
|
| 5,871 |
|
| 2 |
|
| 33,045 |
|
| Amortization | | 3,499 |
| | 4,610 |
| | 1,029 |
| | — |
| | 9,138 |
|
| Share-based compensation expense | | 8,457 |
| | 984 |
|
| 453 |
|
| 655 |
|
| 10,549 |
|
| Interest expense | | (20 | ) | | 58 |
|
| — |
|
| 1,745 |
|
| 1,783 |
|
| Income (loss) from operations | | 101,440 |
| | 23,266 |
|
| 5,870 |
|
| (8,545 | ) |
| 122,031 |
|
| Total assets | | 550,051 |
| | 167,002 |
|
| 64,306 |
|
| (21,144 | ) |
| 760,215 |
|
| Capital expenditures | | 38,710 |
| | 854 |
|
| 2,729 |
|
| — |
|
| 42,293 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2017 (As Adjusted) | | Expedited Freight | | Intermodal |
| Pool Distribution |
| Eliminations & Other |
| Consolidated |
| External revenues | | $ | 846,706 |
| | $ | 154,446 |
|
| $ | 168,194 |
|
| $ | — |
|
| $ | 1,169,346 |
|
| Intersegment revenues | | 3,701 |
| | 238 |
|
| 289 |
|
| (4,228 | ) |
| — |
|
| Depreciation | | 23,260 |
| | 1,867 |
|
| 5,732 |
|
| 3 |
|
| 30,862 |
|
| Amortization | | 5,171 |
| | 3,981 |
| | 1,041 |
| | — |
| | 10,193 |
|
| Share-based compensation expense | | 7,154 |
| | 562 |
|
| 387 |
|
| — |
|
| 8,103 |
|
| Interest expense | | 5 |
| | 48 |
|
| — |
|
| 1,156 |
|
| 1,209 |
|
| Income (loss) from operations | | 91,184 |
| | 12,963 |
|
| 6,378 |
|
| (1,768 | ) |
| 108,757 |
|
| Total assets | | 506,652 |
| | 149,150 |
|
| 55,970 |
|
| (19,150 | ) |
| 692,622 |
|
| Capital expenditures | | 36,683 |
| | 514 |
|
| 1,068 |
|
| — |
|
| 38,265 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20172019
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2016 | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated |
| External revenues | | $ | 567,711 |
| | $ | 163,254 |
| | $ | 148,054 |
| | $ | 103,511 |
| | $ | — |
| | $ | 982,530 |
|
| 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 | | 83,518 |
| | (35,405 | ) | | 3,633 |
| | 10,956 |
| | (2,723 | ) | | 59,979 |
|
| Total assets | | 632,698 |
| | 53,695 |
| | 50,271 |
| | 129,714 |
| | (225,087 | ) | | 641,291 |
|
| Capital expenditures | | 37,501 |
| | 1,828 |
| | 2,637 |
| | 220 |
| | — |
| | 42,186 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2015 | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated |
| External revenues | | $ | 573,476 |
| | $ | 152,251 |
| | $ | 128,826 |
| | $ | 103,977 |
| | $ | 595 |
| | $ | 959,125 |
|
| Intersegment revenues | | 3,550 |
| | 1,080 |
| | 1,169 |
| | 315 |
| | (6,114 | ) | | — |
|
| Depreciation and amortization | | 21,125 |
| | 6,206 |
| | 6,003 |
| | 3,773 |
| | 50 |
| | 37,157 |
|
| Share-based compensation expense | | 6,088 |
| | 840 |
| | 300 |
| | 258 |
| | — |
| | 7,486 |
|
| Interest expense | | 1,959 |
| | 5 |
| | — |
| | 83 |
| | — |
| | 2,047 |
|
| Income (loss) from operations | | 79,193 |
| | 13,288 |
| | 3,820 |
| | 11,949 |
| | (26,478 | ) | | 81,772 |
|
| Total assets | | 641,360 |
| | 89,312 |
| | 46,970 |
| | 118,081 |
| | (195,791 | ) | | 699,932 |
|
| Capital expenditures | | 29,995 |
| | 5,972 |
| | 3,983 |
| | 545 |
| | — |
| | 40,495 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017
(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, 20172019 and 20162018:
|
| | | | | | | | | | | | | | | | |
| | | 2019 |
| | | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | $ | 321,471 |
| | $ | 345,756 |
| | $ | 361,663 |
| | $ | 381,504 |
|
| Income from operations | | 24,734 |
| | 30,550 |
| | 30,689 |
| | 32,852 |
|
| Net income | | 18,407 |
| | 22,330 |
| | 22,195 |
| | 24,168 |
|
| | | | | | | | | |
| Net income per share: | | | | | | | | |
| Basic | | $ | 0.64 |
| | $ | 0.78 |
| | $ | 0.78 |
| | $ | 0.86 |
|
| Diluted | | $ | 0.64 |
| | $ | 0.78 |
| | $ | 0.78 |
| | $ | 0.85 |
|
| | | | | | | | | |
| | | 2018 |
| | | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | $ | 302,608 |
| | $ | 330,343 |
| | $ | 331,375 |
| | $ | 356,561 |
|
| Income from operations | | 24,235 |
| | 32,870 |
| | 29,879 |
| | 35,047 |
|
| Net income | | 17,741 |
| | 24,298 |
| | 22,329 |
| | 27,684 |
|
| | | | | | | | | |
| Net income per share: | | | | | | | | |
| Basic | | $ | 0.60 |
| | $ | 0.83 |
| | $ | 0.76 |
| | $ | 0.95 |
|
| Diluted | | $ | 0.60 |
| | $ | 0.82 |
| | $ | 0.76 |
| | $ | 0.95 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | |
| | | 2017 |
| | | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | 246,982 |
| | 267,518 |
| | 280,201 |
| | 306,116 |
|
| Income from operations | | 23,189 |
| | 29,809 |
| | 26,898 |
| | 28,776 |
|
| Net income | | 14,243 |
| | 19,550 |
| | 18,155 |
| | 35,374 |
|
| | | | | | | | | |
| Net income per share: | | | | | | | | |
| Basic | | $ | 0.47 |
| | $ | 0.65 |
| | $ | 0.60 |
| | $ | 1.19 |
|
| Diluted | | $ | 0.47 |
| | $ | 0.64 |
| | $ | 0.60 |
| | $ | 1.18 |
|
| | | | | | | | | |
| | | 2016 |
| | | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | 229,548 |
| | 238,637 |
| | 249,552 |
| | 264,793 |
|
| Income from operations | | 21,404 |
| | (14,348 | ) | | 24,700 |
| | 28,223 |
|
| Net income | | 13,099 |
| | (10,066 | ) | | 11,931 |
| | 12,706 |
|
| | | | | | | | | |
| Net income per share: | | | | | | | | |
| Basic | | $ | 0.43 |
| | $ | (0.33 | ) | | $ | 0.39 |
| | $ | 0.42 |
|
| Diluted | | $ | 0.43 |
| | $ | (0.33 | ) | | $ | 0.39 |
| | $ | 0.42 |
|
12. Subsequent Event
On January 12, 2020, the Company acquired substantially all of the assets of Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC (collectively, “Linn Star”) for $57,200. This transaction was funded using cash flows from operations.
Linn Star is a privately-held Final Mile provider headquartered in Cedar Rapids, Iowa. As part of our Company’s strategic growth plan, the acquisition of Linn Star will increase Forward Final Mile’s capabilities significantly while expanding our footprint with an additional 20 locations. The Company anticipates Linn Star will contribute approximately $90,000 of revenue and $6,300 of operating income on an annualized basis.
Forward Air Corporation
Schedule II — Valuation and Qualifying Accounts
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| Col. A | | Col. B | | Col. C | | Col. D | | Col. E |
| | | 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, 2019 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,309 |
| | $ | 761 |
| | $ | — |
| | $ | 726 |
| (2) | $ | 1,344 |
|
Allowance for revenue adjustments (1) | | 772 |
| | — |
| | 3,342 |
| | 3,357 |
| (3) | 757 |
|
| Income tax valuation | | 395 |
| | — |
| | — |
| | — |
| | 395 |
|
| | | 2,476 |
| | 761 |
| | 3,342 |
| | 4,083 |
| | 2,496 |
|
| Year ended December 31, 2018 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,542 |
| | $ | 139 |
| | $ | — |
| | $ | 1,372 |
| (2) | $ | 1,309 |
|
Allowance for revenue adjustments (1) | | 464 |
| | — |
| | 3,628 |
| | 3,320 |
| (3) | 772 |
|
| Income tax valuation | | 360 |
| | 35 |
| | — |
| | — |
| | 395 |
|
| | | 3,366 |
| | 174 |
| | 3,628 |
| | 4,692 |
| | 2,476 |
|
| Year ended December 31, 2017 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,309 |
| | $ | 1,814 |
| | $ | — |
| | $ | 581 |
| (2) | $ | 2,542 |
|
Allowance for revenue adjustments (1) | | 405 |
| | — |
| | 3,055 |
| | 2,996 |
| (3) | 464 |
|
| Income tax valuation | | 282 |
| | 78 |
| | — |
| | — |
| | 360 |
|
| | | 1,996 |
| | 1,892 |
| | 3,055 |
| | 3,577 |
| | 3,366 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Col. A | | Col. B | | Col. C | | Col. D | | Col. E |
| | | 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, 2017 | | | | | | | | | | |
| Allowance for doubtful accounts | | 1,309 |
| | 1,814 |
| | — |
| | 581 |
| (2) | 2,542 |
|
Allowance for revenue adjustments (1) | | 405 |
| | 3,055 |
| | — |
| | 2,996 |
| (3) | 464 |
|
| Income tax valuation | | 282 |
| | 78 |
| | — |
| | — |
| | 360 |
|
| | | 1,996 |
| | 4,947 |
| | — |
| | 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 |
| | 2,276 |
| | — |
| | 2,969 |
| | 1,996 |
|
| 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 |
|
(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 | | |
| 4.2 | | |
| 10.1 | * | |
| 10.2 | | |
| 10.3 | * | |
10.4 | | |
10.5 | * | |
10.6 | * | |
10.710.4 | * | |
10.8 | * | |
10.9 | * | |
10.10 | * | |
10.11 | * | |
|
| | |
10.12 | * | |
10.13 | * | |
10.1410.5 | * | |
10.1510.6 | * | |
10.16 | * | |
10.1710.7 | * | |
10.18 | * | |
10.1910.8 | | Agreement and Plan of Merger, dated February 4, 2015 by 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 thereto (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 5, 2015 (File No. 0-22490)) |
10.20 | | |
10.21 | | First Amendment dated June 19, 2015 to 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 thereto (incorporated herein by reference to Exhibit 10.3 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)) |
10.22 | | |
10.2310.9 | * | |
10.2410.10 | * | |
10.2510.11 | * | |
10.26 | * | |
10.27 | * | |
10.28 | * | |
|
| | |
10.29 | * | |
10.3010.12 | * | |
10.3110.13 | * | |
10.3210.14 | * | |
10.3310.15 | * | |
10.34 |
| | |
| 10.16 | * | |
10.3510.17 | * | |
10.3610.18 | * | |
10.3710.19 | * | |
10.3810.20 | * | |
10.3910.21 | * | |
10.4010.22 | * | |
10.4110.23 | * | |
10.4210.24 | * | |
10.4310.25 | | |
| 10.26 | * | |
| 10.27 | * | |
| 10.28 | * | |
| 10.29 | * | |
| 10.30 | * | |
| 10.31 | * | |
| 10.32 | | |
| 10.33 | | |
| 10.34 | | |
| 10.35 | | |
|
| | |
| 21.1 | | |
| 23.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 32.2 | | |
*Denotes a management contract or compensatory plan or arrangement.
