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, 20182020
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 CORPORATION
(Exact name of Registrant as specified in its charter)
| | | | | |
| |
| Tennessee | 62-1120025 |
Tennessee | 62-1120025
|
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | | | | |
| |
| | |
| | | | |
| 1915 Snapps Ferry Road | Building N | Greeneville | TN | 37745 |
Greeneville, Tennessee | 37745 |
| (Address of principal executive offices) | (Zip Code) |
(423) 636-7000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| |
| |
| 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 |
| | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the Registrant (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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No o
Indicate by check mark if disclosurewhether the registrant has filed a report on and attestation to its management's assessment of delinquent filers pursuant to Item 405the effectiveness of Regulation S-K is not contained herein, and will not be contained, toits internal control over financial reporting under Section 404(b) of the best of Registrant’s knowledge, in definitive proxySarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oissued its audit report. ☑
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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 $1,695,536,388$1,007,054,447 as of June 30, 2018.2020.
The number of shares outstanding of the Registrant’s common stock (as of February 14, 2019)19, 2021): 28,788,55627,529,073.
Documents Incorporated By Reference
Portions of the proxy statement for the 20192021 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
|
| | | | | | | |
| Table of Contents |
| | |
| Forward Air Corporation | Page
Number |
| |
| Part I. | | |
| Item 1. | | |
| | |
Part I. | | |
Item 1.1A. | | |
| | |
Item 1A.1B. | | |
| | |
Item 1B. | | |
| | |
| Item 2. | | |
| | |
| Item 3. | | |
| | |
| Item 4. | | |
| | |
| Part II. | | |
| | |
| Item 5. | | |
| | |
| Item 6. | | |
| | |
| Item 7. | | |
| | |
| Item 7A. | | |
| | |
| Item 8. | | |
| | |
| Item 9. | | |
| | |
| Item 9A. | | |
| | |
| Item 9B. | | |
| | |
| Part III. | | |
| | |
| Item 10. | | |
| | |
| Item 11. | | |
| | �� |
| Item 12. | | |
| | |
| Item 13. | | |
| | |
| Item 14. | | |
| | |
| Part IV. | | |
| | |
| Item 15. | | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
Introductory Note
This Annual Report on Form 10-K for the fiscal year ended December 31, 20182020 (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 statements regarding the impact of the COVID-19 pandemic on our business, results of operations, future operations and financial condition; any projections of earnings, revenues, payment of dividends, or other financial items or related accounting treatment;treatment, or cost reduction measures; any statementstatements regarding future performance; any statements regarding the availability of cash; any statementstatements regarding the impact of the Ransomware Incident on our business, future operations and results; any statements of plans, strategies, and objectives of management for future operations; any statements regarding future insurance, claims and litigation;litigation and any associated estimates or projections; 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 ESG and sustainability initiatives; any statement regarding certain tax and accounting matters, including the impact on our financial statements; 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 COVID-19 pandemic, our ability to manage our growth and ability to grow, in part, through acquisitions, while being able to successfully integrate such acquisitions, our ability to secure terminal facilities in desirable locations at reasonable rates, more limited liquidity than expected which limits our ability to make key investments, the creditworthiness of our customers and their ability to pay for services rendered, the availability and compensation of qualified independent owner-operators and freight handlers as well as contracted, third-party carriers needed to serve our customers’ transportation needs, the inability of our information systems to handle an increased volume of freight moving through our network, the cybersecurity risks related to our information technology systems, changes in fuel prices, our inability to maintain our historical growth rate including because of a decreased volume of freight or decreased average revenue per pound of freight moving through our network, lossthe availability and compensation of a major customer, whetherqualified Leased Capacity Providers and freight handlers as well as contracted, third-party carriers needed to serve our customers’ transportation needs, our inability to 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, gain market acceptance, increasing competition and pricing pressure, our ability to secure terminal facilities in desirable locations at reasonable rates, labor and employment concerns, our inability to successfully integrate acquisitions, claims for property damage, personal injuries or workers’ compensation, changes in our self-insurance and third-party insurance, seasonality, enforcement of and changes in governmental regulations, environmental, matters, the impact of certaintax, insurance and accounting and tax 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 (“Forward”, the “Company”, “we”, “our”, or “us”) is a leading asset-light freight and logistics company. We provide less-than-truckload (“LTL”), final mile, truckload and intermodal and pool distributiondrayage 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”.
Discontinued Operation
On April 23, 2020, the Board approved a strategy to divest our Pool Distribution segment (“Pool”) within the next year. Pool provides high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. Pool offers this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States. Accordingly, Pool has been classified as assets held for sale as of December 31, 2020 and for all prior periods presented. Pool assets and liabilities are reflected as “Assets and liabilities held for sale” on the Consolidated Balance Sheets in this Form 10-K. In addition, the results of operations for Pool have been presented in this Form 10-K as a discontinued operation and as a result, unless otherwise noted, the discussion in this Form 10-K only focuses on results of continuing operations. The sale of Pool was consummated on February 12, 2021.
Ransomware Incident
In December 2020, we detected a ransomware incident impacting our operational and information technology systems, which caused service delays for many of our customers (“Ransomware Incident”). Promptly upon our detection of the incident, we initiated response protocols, launched an investigation and engaged the services of cybersecurity and forensics professionals. We have also engaged with the appropriate law enforcement authorities. We continue to cooperate with law enforcement in connection with the criminal investigation into those responsible for the Ransomware Incident.
Services Provided
Our services are classified into fourtwo reportable segments: Expedited LTL, Truckload Premium Services (“TLS”), IntermodalFreight and Pool Distribution.Intermodal. For financial information relating to each of our business segments, see Note 10, “Segment11, Segment Reporting” in the Notes to consolidatedour Consolidated Financial Statements included in this Form 10-K.
Expedited LTL.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, final mile solutions, 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, 2018,2020, Expedited LTLFreight accounted for 56.6%84.5% 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, 2018, TLS accounted for 14.6% 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 linehaul service within the LTL space as well as dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. Today, Intermodal operates primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest 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, 2018,2020, Intermodal accounted for 15.2%15.7% of our consolidated revenue.
Pool 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, 2018, Pool Distribution accounted for 14.7% 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:
•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,final mile solutions, expedited truckload, temperature-controlled shipments, warehousing, drayage, final mile solutions, 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 under penetrated markets away from airport locations.
•Pursue Strategic Acquisitions. We continue to evaluate and pursue acquisitions that support our growth strategy that involves organic infrastructure investments, as well as inorganic investments, including acquisitions of complementary businesses. In 2014 we created the foundation for what is our Intermodal segment by acquiring Central States Trucking Co. (“CST”). Since the acquisition of CST, we have completed ten additional intermodal acquisitions including O.S.T. Trucking, Inc. and O.S.T. Logistics Inc. (collectively, “O.S.T.”) in July 2019 and Value Logistics, Inc. (“Value Logistics”) in October 2020. In order to enhance our final mile footprint, we acquired FSA Network, Inc. (“FSA”) in April 2019, Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn
Star Logistics, LLC (collectively, “Linn Star”) in January 2020 and CLW Delivery, Inc. (“CLW”) in October 2020.
•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, which created the foundation for what is now our Intermodal segment. Since our acquisition of CST in 2014, we have completed eight additional intermodal acquisitions including Multi-Modal Transport Inc. ("MMT") and Southwest Freight Distributors (“Southwest”), both acquired in 2018.
Operations
The following describes in more detail the operations of each of our reportable segments: Expedited LTL, Truckload Premium Services, IntermodalFreight and Pool Distribution.Intermodal.
Expedited LTLFreight
Overview
Our Expedited LTLFreight segment provides expedited regional, inter-regional and national LTL, and final mile and truckload services. We market our Expedited LTLFreight services primarily to freight and logistics intermediaries (such as freight forwarders and third-party logistics companies) and, airlines (such as integrated air cargo carriers, and passenger and cargo airlines) 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 airports in the United States and Canada and maintain regularly scheduled transportation service between major cities. Our Expedited LTLFreight network encompasses approximately 92% of all continental U.S. zip codes, with service in Canada.
Shipments
During 2018,2020, approximately 30.8%29% of the freight handled by Expeditedour LTL network was for overnight delivery, approximately 55.4%57% 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 was approximately 50.2 46.3 million
pounds per week in 2018.2020. During 2018,2020, our average shipment weighed approximately 614605 pounds. Although we impose no significant size or weight restrictions, we focus our marketing and price structure on shipments of 200 poundspounds 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 2004.2006.
| | | | Average Weekly |
| | | Volume in Pounds |
| Year | | Year | (In millions) |
| |
| Average Weekly | |
| Volume in Pounds | |
| Year | (In millions) | |
| 2004 | 28.7 | |
| 2005 | 31.2 | |
| | 2006 | 32.2 | 2006 | 32.2 |
| 2007 | 32.8 | 2007 | 32.8 |
| 2008 | 34.2 | 2008 | 34.2 |
| 2009 | 28.5 | 2009 | 28.5 |
| 2010 | 32.6 | 2010 | 32.6 |
| 2011 | 34.0 | 2011 | 34.0 |
| 2012 | 34.9 | 2012 | 34.9 |
| 2013 | 35.4 | 2013 | 35.4 |
| 2014 | 37.4 | 2014 | 37.4 |
| 2015 | 47.2 | 2015 | 47.2 |
| 2016 | 46.5 | 2016 | 46.5 |
| 2017 | 49.5 | 2017 | 49.5 |
| 2018 | 50.2 | 2018 | 50.2 |
| 2019 | | 2019 | 48.6 |
| 2020 | | 2020 | 46.3 |
Transportation
Our licensed property broker places our customers’ cargo with qualified motor carriers, including our own, and other third-party transportation companies. Expedited LTLFreight’s licensed motor carrier contracts with independent contractor fleets, owner-operators and other third-party transportation capacity providers for most of its transportation services. TheOur independent contractor fleet owners and owner-operators lease their equipment to the Company’s motor carrier (“Leased Capacity Providers”) and 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-operatorsour Leased Capacity Providers between our terminals.
We seek to establish long-term relationships with owner-operatorsLeased Capacity Providers to assure dependable service and availability. We believe Expedited LTLFreight has experienced significantly higher average retention of owner-operatorsLeased Capacity Providers 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.Leased Capacity Providers. To enhance our relationship with the owner-operators,Leased Capacity Providers, Expedited LTLFreight seeks to pay rates that are generally above prevailing market rates and our owner-operatorsLeased Capacity Providers often are able to negotiate a consistent work schedule for their drivers. Usually, owner-operatorsLeased Capacity Providers 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-operatorsLeased Capacity Providers and, in turn, increasing the retention rate of owner-operators.Leased Capacity Providers.
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 (including TLS).volume. Of the $360.7$583.5 million incurred for Expedited LTL'sFreight's transportation during 2018,2020, we purchased 46.5%44% from the owner-operatorsLeased Capacity Providers of our licensed motor carrier, 3.7%35% from our company fleet and 49.9%21% from other surface transportation providers.
All of our LTL Expedited Freight independent contractor tractors are equipped with in-cab communication devices, which enable us to communicate with our drivers, plan and monitor shipment progress and monitor and record our drivers’ hours of service. We use the real-time global positioning data obtained from these devices to improve customer and driver service.
Other Services
Expedited 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 109
locations nationwide. Expedited Freight is also increasingly integrating these deliveries into its LTL customers increasingly demand more than the movement of freight from their transportation providers.pickup and delivery and terminal operations so as to increase network density and lower overall LTL unit costs.
To meet these demands, we continually seek ways to customizeExpedited Freight offers truckload services which include expedited truckload brokerage, dedicated fleet services, as well as high security and add newtemperature-controlled logistics services.
Other Expedited LTLFreight services allow customers to access the following services from a single source:
•customs brokerage;
final mile solutions;
•warehousing, dock and office space;
•hotshot or ad-hoc ultra expeditedad hoc ultra-expedited services; and
•shipment consolidation and handling, such as shipment build-up and break-down and reconsolidation of air or ocean pallets or containers.
Customers
Our Expedited Freight wholesale customer base is primarily comprised of freight forwarders, third-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 2018, LTL's2020, Expedited Freight’s ten largest customers accounted for approximately 41%59% of its operating revenue and had one customer with revenue greater than 10% of LTLExpedited Freight operating revenue for 2018. No single2020. One customer accounted for more than 10% of our consolidated revenue.
Truckload Premium ServicesIntermodal
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 2004.
|
| |
| | Average Weekly Miles |
| Year | (In thousands) |
| 2004 | 260 |
| 2005 | 248 |
| 2006 | 331 |
| 2007 | 529 |
| 2008 | 676 |
| 2009 | 672 |
| 2010 | 788 |
| 2011 | 876 |
| 2012 | 1,005 |
| 2013 | 1,201 |
| 2014 | 1,185 |
| 2015 | 1,459 |
| 2016 | 1,756 |
| 2017 | 1,902 |
| 2018 | 1,547 |
Transportation
TLS utilizes a 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 serve our life science and high value cargo customers. In many instances, our customers request team (driver) service. Through team service, we are able to provide quicker, more secure, transit service to our TLS customers.
We seek to establish long-term relationships with owner-operators and company drivers to assure dependable service and availability. To enhance our relationship with the owner-operators and our company drivers, TLS strives to set its owner-operator and company driver pay rates above prevailing market rates. TLS has established specific guidelines relating to safety records, driving experience and personal evaluations that we use to qualify and select our drivers (leased and employed).
In addition to our owner-operators and company fleet, we also purchase transportation from other surface transportation providers (including Expedited LTL) to serve our customers’ needs. TLS’ brokerage operation has relationships with over 6,008 qualified carriers. Of the $155.0 million incurred for TLS transportation during 2018, we purchased 28.5% from the owner-operators of our licensed motor carrier, 6.6% from our company fleet and 64.9% from other surface transportation providers.
We have access to a pool of trailers and we utilize a variety of equipment in our TLS operations including dry van, refrigerated, and roller-bed trailers, as well as straight trucks and cargo vans. We service our life science and high-security cargo customers with industry-leading TAPA (Transported Asset Protection Association) Level 1 certified equipment that has layered security measures to prevent theft, qualified and calibrated refrigerated trailers, and temperature systems that minimize the chance of damage to cargo caused by temperature excursions. All of the TLS trailers have global positioning trailer-tracking technology that allows us to more effectively manage our trailer pool.
All of our TLS company and independent contractor tractors are equipped with in-cab communication devices, which enable us to communicate with our drivers, plan and monitor shipment progress and monitor and record our drivers’ hours of service. We use the real-time global positioning data obtained from these devices to improve customer and driver service.
Customers
Our customer base is primarily comprised of freight forwarders, third-party logistics companies, integrated air cargo carriers, passenger and cargo airlines, and LTL carriers, including our own LTL Expedited segment, as well as retail, life-science companies, and their distributors. TLS’ customers include Fortune 500 pharmaceutical manufacturers and distributors, as well as transportation companies. In 2018, TLS’ ten largest customers accounted for approximately 67% of its operating revenue and had three customers with revenue greater than 10% of TLS operating revenue each. No single customer accounted for more than 10% of our consolidated revenue.
Intermodal
Overview
Our Intermodal segment provides first- and last-mile high value intermodal container drayage services. We market our Intermodal services primarily to import and export customers. Intermodal offers first- and last-mile transportation of freight both to and from seaports and railheads through 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 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"(“POD”) and Signature Capture capability via tablets;
•All drivers receive dispatch orders on hand-held units and are trackable via GPS; and
•Daily container visibility and per diem management reports.
Operations
Intermodal’s primary office is located in Oak Brook, Illinois. Intermodal’s network consists of 2024 locations primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest and Mid-Atlantic United States.
Transportation
Intermodal utilizes a mix of Company-employed drivers, owner-operatorsLeased Capacity Providers and third-party carriers. During 2018,2020, approximately 21.0%73% of Intermodal’s direct transportation expenses were provided by Leased Capacity Providers, 24% by Company-employed drivers, 76.6% by owner-operators and 2.4% was provided3% by third-party carriers.
All of our Intermodal company and independent contractor tractors are equipped with computer tablets, which enable us to communicate with our drivers, plan and monitor shipment progress and monitor our drivers’ hours of service. We use the real-time global positioning data obtained from these devices to improve customer and driver service and provide a high level of shipment visibility to our customers (including immediate POD signature capture). We believe that our technology is a key differentiator and enables us to provide a higher level of service than our competitors.
Customers
Intermodal’s customer base is primarily comprised of international freight forwarders, passenger and cargo airlines, beneficial cargo owners and steamship lines. In 2018,2020, Intermodal’s ten largest customers accounted for approximately 33%32% of its operating revenue and had no customers with revenue greater than 10% of Intermodal operating revenue for 2018. No single customer accounted for more than 10% of our consolidated revenue.2020.
Pool Distribution
Overview
Our Pool Distribution (or “Pool”) segment provides pool distribution services through a network of terminals and service locations 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.
Transportation
Pool Distribution provides transportation services through a mix of Company-employed drivers, owner-operators and third-party carriers. The mix of sources utilized to provide Pool transportation services is dependent on the individual markets and related customer routes. During 2018, approximately 32.1% of Pool's direct transportation expenses were provided by Company-employed drivers, 35.0% by owner-operators and 32.9% was provided by third-party carriers.
Customers
Pool Distribution’s customer base is primarily composed of national and regional retailers and distributors. Pool’s ten largest customers accounted for approximately 77% of Pool Distribution’s 2018 operating revenue and had two customers with revenue greater than 10% of Pool Distribution’s 2018 operating revenue. No single customer accounted for more than 10% of our consolidated revenue.
Competition
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.
We believe competition in our segments is based primarily on quality service, available capacity, on-time delivery, flexibility, reliability, security, transportation rates, location of facilities, and business relationships, and we believe we compete favorably with other transportation service companies. To that end, we believe our Expedited 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 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 EquipmentWorkforce
As of December 31, 2018, we had 4,362 full-time employees, 1,553 of whom were freight handlers. Also, as of that date, we had an additional 1,007 part-time employees, of whom the majority were freight handlers. None of our employees are covered by a collective bargaining agreement. We recognize that our workforce, including our freight handlers, is one of our most valuable assets.asset. We strive to put people at the center of everything we do by empowering our workforce to improve their lives and realize their full potential. The recruitment, training and retention of qualified employees are essential to support our continued growth and to meet the service requirements of our customers.
As of December 31, 2020, we had 3,774 full-time employees, 918 of whom were freight handlers and an additional 370 part-time employees, the majority of whom were freight handlers. In 2020, none of our employees were covered by a collective bargaining agreement.
Roadway Health and Safety
We are committed to educating our people and promoting driver health and wellness through routine communication campaigns and information designed to improve knowledge and produce safer results. Drivers of our Leased Capacity Providers complete a three-day safety orientation as part of their onboarding where they are assigned several training courses. Safety trainings may also be assigned on an ongoing basis, based on driving behaviors.
We invest in a variety of programs focused on improving and maintaining driver health and wellness. We provide drivers access to a fatigue management service with the goal of reducing fatigue-related accidents and encouraging healthy, restful sleep. We have implemented fleet safety equipment, including electronic monitoring systems, to track driver safety, well-being, and health through monitoring of speed and proper hours-of-service-required rest breaks.
We provide a quarterly safety bonus and annual vehicle giveaway to incentivize our Leased Capacity Providers to promote safe driving practices. These initiatives celebrate drivers of our Leased Capacity Providers who have zero moving violations or accidents each quarter. Drivers who obtain four quarterly bonuses are eligible to win a new vehicle. In 2020, 325 divers qualified for the vehicle giveaway, a 172% increase since the inception of the program in 2018. Looking ahead, we will continue to identify and promote opportunities to adopt health and wellness practices for the drivers of our Leased Capacity Providers.
Workplace Health and Safety
We are committed to maintaining safe facilities for our employees and independent contractors. We are also committed to evaluating our practices and training our employees and independent contractors to prevent workplace incidents.
Beyond our roadway safety focus, we employ, maintain, and monitor a robust health and safety program for all of our workers, which establishes procedures and policies to prevent workplace incidents. Policies and procedures exist to investigate accidents and monitor lessons learned, driving continuous improvement in the health and safety practices across our facilities. All of our employees are assigned to 36 training courses as part of onboarding and employees may be assigned additional refresher trainings based on corrective action or identified risk.
Diversity and Inclusion
We are committed to creating an even more diverse, equitable, and inclusive work environment than we have today. Our commitment to a diverse and inclusive workplace begins at the top, starting with our Board. Diversity in race, ethnicity, and gender are important factors in evaluating candidates for board nominees and since July 2017, we have added three female directors to our Board. We believe diverse backgrounds and experiences are important to provide a range of perspectives to overcome challenges, improve business performance, and support good decision making.
The skills and talents of our diverse workforce drive our performance and we respect the value they bring to our business. We strive for a diverse and inclusive environment where everyone can contribute and thrive. We have an ongoing commitment to ensure we have a diverse workforce and Board presence. We understand that a welcoming workplace attracts top talent, which drives performance and profitability. We seek candidates from all backgrounds, to continue to build our industry’s most qualified workforce.
In 2020, we created a Diversity and Inclusion (“D&I”) Council to promote employee inclusion and engagement through initiatives that celebrate the diversity of our employees. As an organization that puts people at the center of everything we do, our vision is increased employee engagement and retention in part through enhanced D&I practices. Our assessment identified several D&I improvement activities that foster an inclusive environment:
•Incorporate additional D&I training into our education programs for employees and leadership.
•Engage our employees in the celebration of diversity. We plan to launch a series of Employee Resource Groups to foster an inclusive environment and better understand our colleagues’ backgrounds.
•Assess our current benefits program to identify improvement opportunities to support our increasingly diverse employees’ unique needs.
Our employees are also offered three D&I trainings throughout the year, Understanding Diversity, Generational Awareness, and Emotional Intelligence.
Compensation and Benefits
One of the most important ways we support our employees and their families is through a comprehensive benefits package for all full-time employees. Our employees have access to the following:
•Competitive Benefits. We provide a strong benefit package to employees that includes health care insurance, dental insurance, vision insurance, Company-paid life insurance, paid time off, Company-paid holidays, family medical leave, and a 401(k) with a Company match.
•Wellness Program. The Employee Wellness Program provides access to annual medical screenings and health fairs, at no cost to the employee, to help keep employees healthy. Additionally, the Employee Wellness Program provides discounted gym memberships, free weight loss and smoking cessation programs, a healthy pregnancy program with incentives, and an Employee Assistance program.
•Work / Life Balance. We understand that a work / life balance is important to our employees. We are consistently improving our paid time off benefits for all of our employees, which allows us to retain and recruit quality employees.
Beyond our benefits package, career advancement has always been at the forefront for our employees and we truly pride ourselves with being able to promote from within. Our continuous learning workshops range from customer service to leadership and beyond. We strive to provide meaningful development opportunities for 100% of our employee population.
Equipment
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. As of December 31, 2018,2020, we had 6,1826,009 owned trailers in our fleet with an average age of approximately 4.3five years. In addition, as of December 31, 2018,2020, we also had 465162 leased trailers in our fleet. As of December 31, 2018,2020, we had 585232 owned tractors and straight trucks in our fleet, with an average age of approximately 6.1eight years. In addition, as of December 31, 2018,2020, we also had 600567 leased tractors and straight trucks in our fleet.
Environmental Protection Effortsand Community Support
At Forward, we embrace a comprehensive definition of sustainability that addresses Environmental, Social, and Governance factors (“ESG”). To our employees, our communities, our customers, our suppliers, and our investors, each impact area matters.
In 2019, Forward’s Board amended the Corporate Governance and Nominating (“CG&N”) Committee Charter to oversee our efforts related to environmental, social, and governance matters, and management of sustainability-related risks and opportunities. At least twice a year, the CG&N Committee is updated on each of these topics and provides feedback and recommendations that it deems appropriate.
At the beginning of 2020, Forward’s leadership created and staffed the Head of Corporate ESG role to provide oversight of Forward’s ESG vision, strategic planning, performance management and improvement activities. Shortly after, Forward initiated an ESG market analysis and benchmarking exercise that explored the ESG issues that most impact transportation and logistics industries and marketplaces.
In second quarter of 2020, we began to conduct an ESG assessment, starting with a third-party stakeholder assessment that served as a basis for identifying and prioritizing ESG topics most relevant to our industry, our business, and our stakeholders. The assessment’s findings yielded initial topics that we recognized as important. We followed with a more in-depth assessment of risks and opportunities, utilizing Sustainable Accounting Standards Board (“SASB”) standards as a guide, in order to further refine our disclosure topics and gain stakeholder alignment. SASB identifies Forward as part of the “Airfreight and Logistics” industry; we decided to also incorporate the disclosure topics under “Road Transportation” to assure that all relevant topics for our business were represented in this analysis.
This more detailed assessment yielded clarity of our ESG topics and prioritization based on the degree of both qualitative and quantitative impact to our business. We identified ten ESG topic priority areas relevant to Forward’s business and mapped each to widely adopted ESG reporting standards as identified by SASB. Within these ten topic areas, we identified specific related risks and opportunities, and aligned on improvement activities.
The following are the ten ESG topic priority areas we identified relevant to our business and the foundation for our sustainability approach:
•Roadway Health & Safety; Workplace Health & Safety; Independent Contractor Practices; Diversity & Inclusion Practices; Community Impact & Partnerships; Measure & Disclose; Information Security; Responsible Supplier Practices; GHG Emissions Reduction Practices; and Air Quality Practices
Beyond our roadway safety focus, Forward employs, maintains, and monitors a robust Health and Safety program for all of our workers which establishes procedures and policies to prevent workplace incidents. As part of our assessment, we have identified improvement activities to develop a comprehensive Emergency Preparedness Plan (“EPP”) for all our facilities. The EPP is under development and in compliance with OSHA 29 CFR 1910 standards and FMCSA 49 CFR. When completed in 2021, we will distribute and maintain this EPP for employees and independent contractors alike, across our facilities and corporate offices.
We are committed to supporting and giving back to the communities where we live and work, particularly through the support of our employee Veterans, and to the community of Veterans in North America.
We continue to support our Veterans through our charitable organization, Operation: Forward Freedom, a manifestation of our Company’s ongoing commitment to Veteran-related causes. Operation Forward Freedom’s largest fundraising event is intended to be The Inaugural Drive for Hope Golf tournament. In 2020, the Inaugural Drive For Hope Golf Tournament was postponed due to COVID-19.
We also partner with non-profit organizations that positively impact our communities and our industry. Through our partnership with Truckers Against Trafficking, we have conducted training for over-the-road drivers to educate and equip them with the tools needed to combat human trafficking.
Forward Airpartners with Women in Trucking to encourage and promote the employment of women within our industry. Our team of drivers is currently comprised of 15% women, roughly twice the U.S. industry average, and we continue to seek opportunities to improve upon that percentage.
Forward is committed to protecting thepromoting a healthier natural environment by striving for continuous environmental improvements in all aspects of our business.
Forward is currently reducing emissions and we have taken a varietyenergy consumption through several ongoing programs, including:
•installation of stepsLED lighting in various facilities;
•installation of skirts on all of our trailers to improve the sustainabilityfuel efficiency; and
•and employment of electric forklifts for our operations. We are implementing new practicesintermodal and technologies, improving our training, and incorporating sustainability objectives in our growth strategies.final mile facilities.
As
Forward is also aligning with industry certifications, continuing to be a partner ofSmartWay certified company. SmartWay is a certification from the U.S. Environmental Protection Agency ("EPA"(“EPA”) SmartWay program since 2008, Forward Air has continued to adopt new environmentally safe policies and innovations to improveverifying company compliance with EPA regulations, including fuel efficiency ranges and reduce emissions. For example, we actively seek to utilize equipment with reduced environmental impact. We utilize trailers with light weight composites and employ trailer skirts to decrease aerodynamic drag, both of which improve fuel efficiency. We are also increasing our use of electronic forklifts and transitioning to automatic transmission tractors, which will decrease our fuel consumption.emission standards.
Through vendor partnerships, we are implementing new solutions to manage waste and improve recycling across our facilities. Annually, we recycle tons of dunnage and thousands of aluminum load bars. Forward Air also participates in ReCaps, providing and purchasing recycled trailer tires. We recognize the value in describing our sustainability focus and plan to publish our first ESG report in the first quarter of 2021. We are committed to making our results count across the country and will continue to update our future disclosures accordingly.
Risk Management and Litigation
Under U.S. Department of Transportation (“DOT”)DOT regulations, we are liable for bodily injury and property damage and personal injuries caused by owner-operatorsLeased Capacity Providers and Company-employedemployee drivers while they are operating equipment under our various motor carrier authorities. The potential liability associated with any accident can be severe and occurrences are unpredictable.
For vehicle liability, we retain a portion of the risk. Below is a summary of our risk retention on our behalf. Additionally,vehicle liability insurance coverage maintained by us through $10.0 million (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Risk Retention | | Frequency | | Layer | | Policy Term |
| Expedited Freight¹ | | | | | | | | |
| LTL business | | $ | 3.00 | | | Occurrence/Accident² | | $0 to $3.0 | | 10/1/2020 to 10/1/2021 |
| Truckload business | | $ | 2.00 | | | Occurrence/Accident² | | $0 to $2.0 | | 10/1/2020 to 10/1/2021 |
| LTL and Truckload businesses | | $ | 6.00 | | | Policy Term Aggregate³ | | $3.0 to $5.0 | | 10/1/2020 to 10/1/2021 |
| LTL and Truckload businesses | | $ | 5.00 | | | Policy Term Aggregate³ | | $5.0 to $10.0 | | 10/1/2020 to 10/1/2021 |
| | | | | | | | |
| Intermodal | | $ | 0.25 | | | Occurrence/Accident² | | $0 to $0.25 | | 4/1/2020 to 10/1/2021 |
| | | | | | | | |
¹ Excluding the Final Mile business, which is primarily a brokered service.
² For each and every accident, we are responsible for damages and defense up to these amounts, regardless of the number of claims associated with any accident.
³ During the Policy Term, we are responsible for damages and defense within the stated Layer up to the stated, aggregate amount of Risk Retention before insurance will respond.
Also, from time to time, when brokering freight, we may face claims for the drivers employed and engaged by the third-party transportation“negligent selection” of outside, contracted carriers we contract withthat are involved in accidents, which may result in serious personal injuries. The resulting types and/or amounts of damages may be excluded by or exceed the amount of insurance coverage maintained by the contracted carrier. Although these drivers are not our employees, all of these drivers are employees, owner-operators, or independent contractors working for carriers and from time to time, claims may be asserted against us for their actions, or for our actions in retaining them.
We currentlywe maintain third-party liability insurance coverage thatwith a $0.1 million deductible per occurrence for most of our brokered services. Additionally, we believe is adequate to cover third-party claims. We havemaintain workers’ compensation insurance with a self-insured retention ("SIR") of $3.0$0.5 million per occurrence for vehicle and general liability claims and will be responsible for any damages and personal injuries below that self-insured amount. We are also responsible for varying annual aggregate deductible amounts of liability for claims in excess of the SIR/deductible. For the policy year that began April 1, 2018, we have an annual $6.0 million aggregate deductible for claims between $3.0 million and $5.0 million. We also have a $2.5 million aggregate deductible for claims between $5.0 million and $10.0 million. As a result, we are responsible for the first $7.5 million per claim, until we meet the $6.0 million aggregate deductible for claims between $3.0 million and $5.0 million and the $2.5 million aggregate deductible for claims between $5.0 million and $10.0 million.occurrence. We cannot guarantee that our SIRself-insurance retention levels will not increase and/or that we may have to agree to more unfavorable policy terms as a result of market conditions, poor claims experience or other factors. This insurance covers claims for the LTL Expedited and Pool Distribution segments. TLS maintains separate liability insurance coverage for claims between $0 and $5.0 million, and for the policy year that began April 1, 2018, TLS had no SIR for claims in this layer. Intermodal maintains separate liability insurance coverage for all liability claims. For the policy year that began April 1, 2018, Intermodal had an SIR of $50 thousand for each claim.
We may also be subject to claims for workers’ compensation. We maintain workers’ compensation insurance coverage that we believe is adequate to cover such claims. We have a 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 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 limitedthe DOT.The DOT and the Federal Motor Carrier Safety Administration (“FMCSA”), an agency within the DOT, manages a Compliance, Safety, Accountability initiative (“CSA”) which governs matters such as safety requirements and compliance, registration to engage in motor carrier operations, drivers’ hours of service (“HOS”) requirements, and certain mergers, consolidations, and acquisitions. We are also subject to laws and regulations under the DOT.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 introduced 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, Precision Execution Safe. On-Time. Accurate. Reliable SM, and 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-K. other reports and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended from time to time. We are an electronic filer and the SEC maintains an Internet site at www.sec.gov that contains these reports and other information filed electronically. We make available free of charge through the Investor Relations portion of our website such 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 26, 2021 are listed below. The ages listed below are as of December 31, 2020.
The following are our executive officers: | | | | | | | | | | | | | | |
Item 1A.Name | Risk Factors | Age | | Position |
| Thomas Schmitt | | 55 | | President, Chief Executive Officer and Executive Chairman |
| Michael J. Morris | | 52 | | Chief Financial Officer and Treasurer |
| Michael L. Hance | | 48 | | Chief Legal Officer & Secretary |
| Chris C. Ruble | | 58 | | Chief Operating Officer |
| Scott E. Schara | | 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 LTL, including Final Mile 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.
Scott E. Schara has served as Chief Commercial Officer since August 2020. Prior to joining the Company, Mr. Schara served as Chief Commercial Officer of Coyote Logistics Inc. (“Coyote Logistics”) since June 2019 and in other various leadership positions of increasing responsibility since he began his career at Coyote Logistics in 2010, including President, Global Sales and Executive Vice President, Strategic Accounts. From 2008 to 2010, Mr. Schara served as Assistant Vice President of Enterprise Development at Hub Group, Inc. (“Hub Group”) and as Regional Sales Manager at Hub Group from 2005 to 2008. Mr. Schara held various other leadership positions at Alliance Shippers, Inc. from 2004 to 2005, The Home Depot, Inc. from 2000 to 2004 and at Exel Logistics, Inc. from 1995 to 2000.
Other information required by this item is incorporated herein by reference to our proxy statement for the 2021 Annual Meeting of Shareholders (the “2021 Proxy Statement”). The 2021 Proxy Statement will be filed with the SEC not later than 120 days subsequent to December 31, 2020.
Item 1A.Risk Factors
The following are important risk factors that could affect our financial performance and could cause actual results for future periods to 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 telephone conferences and webcasts open to the public. You should carefully consider the following factors and consider these in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements and related Notes in Item 8.
Risks Relating to Our Business and Operations
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 type, 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.
Our profitability could be negatively impacted if our pricing structure proves to be inaccurate.
The price we charge our customers for the services we provide is based on our calculations of, among other things, the costs of providing those services. The Company’s assessment of its costs and resulting pricing structure is subject to effectively identifying and measuring the impact of a number of key operational variables including, but not limited to volumes, operational efficiencies, length of haul, the mix of fixed versus variable costs, productivity and other factors. If we are incorrect in our assumptions and do not accurately calculate or predict the costs to us to provide our services, we could experience lower margins than anticipated, loss of business, or be unable to offer competitive products and services.
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-operatorsLeased Capacity Providers, other third-party transportation capacity providers, 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-operatorsthird-party transportation capacity providers for most of our transportation capacity needs. In 2018, owner-operators provided 49.2%2020, 47.5% of our purchased transportation.transportation capacity was provided by Leased Capacity Providers. Competition for owner-operatorsLeased Capacity Providers is intense, and sometimes there are shortages of available owner-operators.in the marketplace. In addition, a decline in the availability of trucks, tractors and trailers for owner-operator purchase or use by Leased Capacity Providers may negatively affect our ability to hire, attract or retain available owner-operators.obtain the needed transportation capacity. We also need a large number of employee 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,or Leased Capacity Providers, we may be forced to increase wages and benefits for our employeesor to increase the cost at which we contract with our owner-operators,Leased Capacity Providers, 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 timethe transportation capacity provided by Leased Capacity Providers, we purchase transportation from other third-party motor carriers at a higher cost. As with owner-operators,Leased Capacity Providers, 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-operatorsLeased Capacity Providers 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-operatorsLeased Capacity Providers 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-operatorsindependent contractor transportation capacity providers like our Leased Capacity Providers are “employees,” rather than “independent contractors.” In addition, the topicAdditionally, we are aware of certain judicial decisions and recently enacted state laws that could bring about major reforms in the classification of individualsworkers, including the California legislature’s 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 passage of California AB 5 and ongoing litigation regarding its applicability to motor carriers regulated by the U.S. Department of Transportation, 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 Leased Capacity Providers 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 maintainOur results of operations will be materially and adversely affected if our information technology systems,new service offerings do not gain market acceptance or if we fail to successfully implement new technology or enhancements, we may be at a competitive disadvantage and experience a decreaseresult in revenues.the loss of our current customer base.
We rely heavily on our information technology systems to efficiently run our business, and they are a key componentOne element of our growth strategy and competitive advantage.is to expand our service offerings to customers. As a result, we have added additional services in the past few years. We expectmay not succeed in making our customers to continue to demand more sophisticated, fully integrated information systems from their transportation providers. To keep pace with changing technologiessufficiently aware of existing and future services or in creating customer demands, we must correctly interpret and address market trends and enhance the features and functionality of our information technology systems in response to these trends, which may lead to significant ongoing software development costs. We may be unable to accurately determine the needs of our customers and the trends in the transportation services industry or to design and implement the appropriate features and functionality of our information technology systems in a timely and cost-effective manner, which could put us at a competitive disadvantage and result in a decline in our efficiency, decreased demand for our services and a corresponding decrease in our revenues. In addition, we could incur software development costs for technology that is ultimately not deployed and thus, would require us to write-off these costs, which would negatively impact our financial results. Furthermore, as technology improves, our customers may be able to find alternatives to our services for matching shipments with available freight hauling capacity.
Our information technology systems can also play an integral role in managing our internal freight and transportation information and creating additional revenue opportunities including assessing available backhaul capacity. A failure to capture and utilize our internal freight and transportation information may impair our ability to service our existing customers or grow
revenue.
Our information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant system failures and electrical outages in the past. While we take measures to ensure our major systems have redundant capabilities, our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, data leakage, human error, break-ins, cyber-attacks and similar events. The occurrence of anyacceptance of these events could disrupt or damage our information technology systems and hamper our internal operations, impede our customers’ accessservices at the prices we would want to our information technology systems and adversely impact our customer service, volumes, and revenues and result in increased cost.charge. In addition, we may be required to incur significant costsdevote substantial resources to protect against damage caused by these disruptionseducate 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 security breaches in the future.
Our information technology systems are subjectmay not be able to cybersecurity risks, some of which are beyondbring new services to market as quickly, effectively or price-competitively as our control.
We depend on the proper functioning and availability of our information systems in operating our business, including communications and data processing systems. It is important that the data processed by these systems remains confidential, as it often includes competitive customer information, confidential customer transaction data, employee records, and key financial and operational results and statistics. Some of our software applications are utilized by third parties who provide outsourced administrative functions, which exposescompetitors. In addition, new services may alienate existing customers or cause us to additional cybersecurity risks. Althoughlose business to our information systems are protected through physical and software safeguards as well as backup systems considered appropriate by management,competitors. If any of the foregoing occurs, it is difficult to fully protect against the possibility of damage or breach created by cybersecurity attacks or other security attacks in every potential circumstance that may arise. As cybersecurity attacks are increasing in frequency and sophistication it becomes even more difficult to protect against a breach of our information systems.
Cybersecurity incidents that impact the availability, reliability, speed, accuracy, or other proper functioning of these information systems could have a significant impact on our operations. Failure to prevent or mitigate data loss or system intrusions from cybersecurity attacks, including system failure, security breach, disruption by malware, or other damage, could expose us or our vendors or customers to a risk of loss or misuse of such information, interrupt or delay our operations, damage our reputation, cause a loss of customers, result in litigation or potential liability for us and otherwise harm our business. 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.
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.
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.operations.
We are subject to risks associated with the availability and price of fuel. Fuel prices have fluctuated dramatically over recent years. Future fluctuations in the availability and price of fuel could adversely affect our 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, disruption or failure of technology or information systems, price and supply decisions by oil producing countries and cartels, terrorist activities, armed conflict and world supply and demand imbalance. Over timeFor example, we have been able to mitigatein recent years expanded our “final mile” service offering through the impactacquisition of the fluctuations throughassets 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 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 Energyability to compete and our fuel surcharge table. Our fuel surcharge revenue is the result of our fuel surcharge rates and the tonnage transiting our networks. 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 fuel surcharge revenue. Fuel shortages, changes in fuel prices and the potential volatility in fuel surcharge revenue may adversely impact our results of operations and overall profitability.gain market share.
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, 2018,2020, our top 10ten customers, based on revenue, accounted for approximately 31%39% of our revenue. One of our Expedited Freight customers accounted for more than 10% of revenues in that segment and more than 10% of consolidated revenues. These customers can impact our revenues and profitability based on factors such as: industry trends related to e-commerce that may apply downward pricing pressures on the rates our customers can charge; the seasonality associated with the fourth quarter holiday season; business combinations and the overall growth of a customer's underlying business; and any disruptions to our customer’s businesses. These customers could choose to divert all or a portion of their business with us to one of our competitors, demand pricing concessions for our services, require us to provide enhanced services that increase our costs, or develop their own shipping and distribution capabilities. Our Expedited LTL, TLS Freight
and Intermodal segments typically do not have long-term contracts with their customers. While our Pool segment business may involve a long-term written contract, those contracts may contain cancellation clauses, and there is no assurance that our current customers will continue to utilize our services or continue at the same levels. A reduction in, or termination of, our services by one or more of our major customers could have a material adverse effect on our business and operating results.
We 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.
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 to our third and fourth quarters. This trend is dependent on numerous factors including economic conditions, customer demand and weather. Because revenue is directly related to the available working days of shippers, national holidays and the number of business days during a given period may 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 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, 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, including severe weather and public health issues, such as pandemics, occurring in the United States or abroad, could result in the temporary lack of an adequate work force and the temporary disruption in the transport of goods to or 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 revenues.
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 $145.0 million of recorded net definite-lived intangible assets on our consolidated balance sheet at December 31, 2020. 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 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 exceeds the estimated fair value of the assets.
We also have recorded goodwill of $245.0 million on our consolidated balance sheet at December 31, 2020. 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 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, Internet matching services and Internet and third-party freight brokers, and new entrants to the market. In addition, customers can bring in-house some of the services we provide to them. We believe competition is based primarily on quality service, available capacity, on-time delivery, flexibility, reliability and security, transportation rates as well as the ability to acquire and maintain terminal facilities in desirable locations at reasonable rates. Many of our competitors periodically reduce their rates to gain business, especially during times of economic decline. In the past several years, several of our competitors have reduced their rates to unusually low levels that we believe are unsustainable in the long-term, but that may materially adversely affect our business in the short-term. In 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.
OurThe ongoing coronavirus outbreak, and measures taken in response thereto, has and could continue to have a material adverse effect on our business, results of operations will be materially and financial condition.
Our business is highly susceptible to changes in economic conditions. Our products and services are directly tied to the production and sale of goods and, more generally, to the North American economy. The COVID-19 pandemic has adversely affected if our new service offerings do not gain market acceptance or resultimpacted economic activity and conditions worldwide and created significant volatility and disruption to financial markets. Efforts to control the spread of COVID-19 led governments and other authorities to impose restrictions which resulted in the loss of our current customer base.
One element of our growth strategy is to expand our service offerings to customers.business closures and disrupted supply chains worldwide. As a result, wetransportation and supply chain companies such as ours experienced slowdowns and reduced demand for our services.
Although our business and operations have added additional servicesreturned to pre-COVID levels, the situation surrounding COVID-19 remains fluid and may be further impacted by the policies of President Biden’s administration and the availability and success of a vaccine. The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition in 2021 will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the past few years. We may not succeed in makingduration, spread, severity and impact of the COVID-19 outbreak, the effects of the outbreak on our customers sufficiently awareand suppliers and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and
operating conditions can resume.
We periodically evaluate factors including, but not limited to, macroeconomic conditions, changes in our industry and the markets in which we operate and our market capitalization, as well as our reporting units’ expected future financial performance for purposes of existingevaluating asset impairments, including goodwill. We believe that the impact of COVID-19 may negatively affect certain key assumptions used in our analysis; however, we will need to assess the severity and future services or in creating customer acceptancenature of these services at the prices we would wantlong-term impacts to charge. In addition,determine if we may be required to devote substantial resources to educaterecord charges for asset impairments in the future.
Volatility in fuel prices, shortages of fuel or the ineffectiveness of 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 couldfuel surcharge program can have a material adverse effect on our results of operations.operations and profitability.
We are subject to risks associated with the availability and price of fuel. Fuel prices have grownfluctuated 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 fuel surcharge revenue is the result of our fuel surcharge rates and the tonnage transiting our networks. 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 grow,reduce margins for certain lines of business. In addition to changing fuel prices, fluctuations in part, through acquisitions, which involve various risks,volumes and werelated load factors may not be ablesubject us to identify or acquire companies consistent withvolatility in our growth strategy or successfully integrate acquired businesses intofuel surcharge revenue. Fuel shortages, changes in fuel prices and the potential volatility in fuel surcharge revenue may adversely impact our operations.results of operations and overall profitability.
We have grown through acquisitions,Risks Relating to Information Technology and we intend to pursue opportunities to expand our business by acquiring other companies in the future. Acquisitions involve risks, including those relating to:Systems
identification of appropriate acquisition candidates;
negotiation of acquisitions on favorable terms and valuations;
integration of acquired businesses and personnel;
implementation of proper business and accounting controls;
ability to obtain financing, at favorable terms or at all;
diversion of management attention;
retention of employees and customers;
non-employee driver attrition;
unexpected liabilities;
detrimental issues not discovered during due diligence.
Acquisitions also may affect our short-term cash flow and net income as we expend funds, potentially increase indebtedness and incur additional expenses. If we are not ablefail to identify or acquire companies consistent withmaintain our growth strategy,information technology systems, or if we fail to successfully integrate any acquired companies into our operations,implement new technology or enhancements, we may not achieve anticipated increasesbe at a competitive disadvantage and experience a decrease in revenue, cost savings and economies of scale, our operating results may actually decline and acquired goodwill and intangibles may become impaired.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 dependent upon Cloud infrastructure providers, Software as a Service, global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant system failures and outages in the past. While we take measures to ensure our major systems have redundant capabilities, our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, data leakage, human error, break-ins, cyber-attacks and similar events. The occurrence of any of these events could disrupt or damage our information technology systems and hamper our internal operations, impede our customers’ access to our information technology systems and adversely impact our customer service, volumes, and revenues and result in increased cost. In addition, we may be required to recordincur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Our business is subject to cybersecurity risks.
On December 15, 2020, we detected a material non-cash charge to income ifRansomware Incident impacting our recorded intangible assets or goodwill are determined to be impaired.
operational and information technology systems, which caused service delays for our customers. We have $113.7 millionincurred unexpected costs and impacts from the Ransomware Incident, and may in the future, incur costs in connection with this Ransomware Incident and any future cybersecurity incidents, including infrastructure investments, remediation efforts and legal claims resulting from the above. For more information regarding this Ransomware Incident, see Item 1, Business andItem 7, Management’s Discussion and Analysis of recorded net definite-lived intangible assetsFinancial Condition and Results of Operations.
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, such as the Ransomware Incident on December 15, 2020, continue to grow. Cybersecurity risks could include, but are not limited to, malicious software, attempts to gain unauthorized access to our consolidated balance sheet atdata 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,
•Subject us to various penalties and fees by third parties,
•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 another cybersecurity event occurs, such as the Ransomware Incident on December 31, 2018. Our definite-lived intangible assets primarily represent15, 2020, 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 value ofpublic, adversely impacting our customer service, employee relationships and non-compete agreements that were recorded in conjunctionour reputation. Furthermore, any failure to comply with our various acquisitions. We review our long-lived assets,data privacy, security or other laws and regulations, such as the California Consumer Privacy Act, which took effect in January 2020, could result in claims, legal or regulatory proceedings, inquires or investigations.
While we continue to make efforts to evaluate and improve our definite-lived intangible assets,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 impairment whenever events or changes in circumstances indicatea prolonged period of time, and there can be no assurance that the carrying amount may notactions and controls that we implement, or which we cause third-party service providers to implement, will be recoverable. Impairment is recognized on these assets when the estimated fair value is less than the carrying value. If such measurement indicates impairment,sufficient to protect our systems, information or other property. Additionally, customers or third parties upon whom we would be required to record a non-cash impairment charge to our consolidated statement of comprehensive income in the amount that the carrying value of these assets exceed the estimated fair value of the assets.
We also have recorded goodwill of $199.1 million on our consolidated balance sheet at December 31, 2018. 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,rely face similar threats, 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 affectdirectly or indirectly impact our business operating results and financial condition.
Our future performance depends, in significant part, upon the continued serviceoperations. The occurrence 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 onea cyber-incident or more of these or other key personnelattack could have a material adverse effect on our business, operating results and financial condition if we are unableand results of operations.
Risks Relating 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.Regulatory Environment
Claims for property damage, personal injuries or workers’ compensation and related expenses could significantly reduce our earnings.
Under DOT regulations, we are liable for bodily injury and property damage and personal injuries caused by owner-operatorsLeased Capacity Providers and Company-employedemployee drivers while they are operating equipment under our various motor carrier authorities. The potential liability associated with any accident can be severe and occurrences are unpredictable.
For vehicle liability, we retain a portion of the risk. Below is a summary of our risk retention on our behalf. Additionally,vehicle liability insurance coverage maintained by us through $10.0 million (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Risk Retention | | Frequency | | Layer | | Policy Term |
| Expedited Freight¹ | | | | | | | | |
| LTL business | | $ | 3.00 | | | Occurrence/Accident² | | $0 to $3.0 | | 10/1/2020 to 10/1/2021 |
| Truckload business | | $ | 2.00 | | | Occurrence/Accident² | | $0 to $2.0 | | 10/1/2020 to 10/1/2021 |
| LTL and Truckload businesses | | $ | 6.00 | | | Policy Term Aggregate³ | | $3.0 to $5.0 | | 10/1/2020 to 10/1/2021 |
| LTL and Truckload businesses | | $ | 5.00 | | | Policy Term Aggregate³ | | $5.0 to $10.0 | | 10/1/2020 to 10/1/2021 |
| | | | | | | | |
| Intermodal | | $ | 0.25 | | | Occurrence/Accident² | | $0 to $0.25 | | 4/1/2020 to 10/1/2021 |
| | | | | | | | |
¹ Excluding the Final Mile business, which is primarily a brokered service.
² For each and every accident, we are responsible for damages and defense up to these amounts, regardless of the number of claims associated with any accident.
³ During the Policy Term, we are responsible for damages and defense within the stated Layer up to the stated, aggregate amount of Risk Retention before insurance will respond.
Also, from time to time, when brokering freight, we may face claims for the drivers employed and engaged by the third-party transportation“negligent selection” of outside, contracted carriers we contract withthat 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 currentlywe maintain third-party liability insurance coverage thatwith a $0.1 million deductible per occurrence for most of our brokered services. Additionally, we believe is adequate to cover third-party claims. We havemaintain workers’ compensation insurance with a self-insured retention ("SIR") of $3.0$0.5 million per occurrence for vehicle and general liability claims and will be responsible for any damages and personal injuries below that self-insured amount. We are also responsible for varying annual aggregate deductible amounts of liability for claims in excess of the SIR/deductible. For the policy year that began April 1, 2018, we have an annual $6.0 million aggregate deductible for claims between $3.0 million and $5.0 million. We also have a $2.5 million aggregate deductible for claims between $5.0 million and $10.0 million. As a result, we are responsible for the first $7.5 million per claim, until we meet the $6.0 million aggregate deductible for claims between $3.0 million and $5.0 million and the $2.5 million aggregate deductible for claims between $5.0 million and $10.0 million. This insurance covers claims for the LTL Expedited and Pool Distribution segments. TLS maintains separate liability insurance coverage for claims between $0 and $5.0 million, and for the policy year that began April 1, 2018, TLS had no SIR for claims in this layer. Intermodal maintains separate liability insurance coverage for all liability claims. For the policy year that began April 1, 2018, Intermodal had an SIR of $50 thousand for each claim.occurrence. We cannot guarantee that our SIRself-insurance retention levels will not increase and/or that we may have to agree to more unfavorable policy terms as a result of market conditions, poor claims experience or other factors.
We may also be subject to claims for workers’ compensation. We maintain workers’ compensation insurance coverage that we believe is adequate to cover such claims. We have a 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 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.
Further, as we focus on growing our final mile solutions business that includes in-home installation of appliances and other over-the-threshold services, 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.” Our largeBecause of these significant self-insured retention limits can make ourexposures, insurance and claims expense higher or more volatile.may fluctuate significantly from period-to-period. Additionally, if our third-partyability to obtain and maintain adequate insurance carriers or underwriters leaveand the cost of such insurance may be affected by significant claims and conditions in the insurance market over which we have no control. In recent years the trucking sector, as wasindustry has experienced significant increases in the case during 2017,cost of liability insurance and in the median verdict of trucking accidents. If the cost of insurance increases, we may decide to discontinue certain insurance coverage, reduce our level of coverage or if they decline to renew us as an insured, it could materially increase our deductibles/retentions to offset the cost increase. In addition, our existing types and levels of insurance costscoverage could become difficult or collateral requirements,impossible to obtain in the future. The occurrence of an event that is not fully covered by insurance, the loss of insurance coverage or create difficultiesa material increase in findingthe cost of insurance in excesscould have a material adverse effect on our business, financial condition, results 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.operations and cash flows.
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. 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 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 to our third and fourth quarters. This trend is dependent on numerous factors including economic conditions, customer demand and weather. Because revenue is directly related to the available working days of shippers, national holidays and the number of business days during a given period may 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 and disasters.
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, 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 natural or man-made can also adversely affect our performance by reducing demand and reducing our ability to transport freight, which could result in decreased revenue and increased operating expenses.
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 the United States-Mexico-Canada Agreement (“USMCA”), a trade agreement between the United States, Mexico and Canada to replace NAFTA, which took effect on July 1, 2020. There can be no assurance that the ongoing transition from NAFTA to the USMCA will not adversely impact our business or disrupt our operations. 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.
In December 2010, the Federal Motor Carrier Safety Administration (“FMCSA”)FMCSA established the Compliance Safety Accountability (“CSA”)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”)HOS regulations which govern the work hours of commercial drivers and adopted a rule that requires commercial drivers who use paper log books to maintain
hours-of-service records with electronic logging devices (“ELDs”) and will require commercial drivers who use automatic on-board recording devices (“AOBRDs”) to record HOS to use ELDs by December 2019. The vast majorityAs of our companies’ fleets utilize AOBRDs, and we are currently in the process of updatingDecember 2019, our fleets were updated to meet the ELD requirement deadline of December 2019.requirements. At any given time, there are also other proposals for safety-related standards that are pending legislative or administrative approval or adoption. If additional or more stringent standards are adopted, such may result in a reduction of the pool of qualified drivers available to us and to other motor carriers in our industry. If we experience safety and fitness violations, our safety and fitness scores could be adversely impacted, and our fleets could be ranked poorly as compared to our peers. A reduction in our safety and fitness scores or those of our contracted drivers could also reduce our competitiveness in relation to other companies that have higher scores. Additionally, competition for qualified drivers and motor carriers with favorable safety ratings may increase and thus result in increases in driver-related compensation costs.
In addition, there may be changes in applicable federal or state tax or other laws or interpretations of those laws. If this happens, we may incur additional taxes, as well as higher workers’ compensation and employee benefit costs, and possibly penalties and interest for prior periods. This could have an adverse effect on our results of operations.
We are subject to various environmental laws and regulations including legislative and regulatory responses to climate change, 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, 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-operatorsLeased Capacity Providers 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”)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-operatorsLeased Capacity Providers 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 London Interbank Offered Rate (“LIBOR”), announced its intention to phase out LIBOR by the London interbank offered rate, is the basic rateend of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally.2021. We use LIBOR as a reference rate in our revolving credit facility to calculate interest due to our lender. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. IfTo address the transition away from LIBOR, ceaseswe have amended our revolving credit facility to exist, we may needinclude provisions to renegotiate our credit agreement with our lender. Thisaddress establishing a replacement benchmark rate. There is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases or volatility in risk-free benchmark rates, or borrowing costs to borrowers, any of which could have ana material adverse effect on our financing costs.business, result of operations and financial condition.
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. We also lease our executive headquarters in Atlanta, Georgia.
We lease and maintain 143152 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. In addition, we have operations in 2522 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.”
There were approximately 638770 shareholders of record of our Common Stock as of January 16, 2019.15, 2021.
Subsequent to December 31, 2018,2020, our Board of Directors declared a cash dividend of $0.18$0.21 per share that will be paid in the first quarter of 2019.2021 to the shareholders on record on March 4, 2021. 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 20182020 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 20132015 and ending on the last trading day of December 2018.2020. The graph assumes a base investment of $100 made on December 31, 20132015 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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| Forward Air Corporation | $ | 100 |
|
| $ | 115 |
|
| $ | 98 |
|
| $ | 108 |
|
| $ | 131 |
|
| $ | 125 |
|
| Nasdaq Trucking and Transportation Stocks Index | 100 |
|
| 139 |
|
| 117 |
|
| 142 |
|
| 178 |
|
| 161 |
|
| Nasdaq Global Select Stock Market Index | 100 |
|
| 114 |
|
| 121 |
|
| 130 |
|
| 167 |
|
| 161 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Forward Air Corporation | $ | 100 | | | $ | 94 | | | $ | 114 | | | $ | 109 | | | $ | 139 | | | $ | 179 | |
| Nasdaq Trucking and Transportation Stocks Index | 100 | | | 103 | | | 128 | | | 116 | | | 140 | | | 166 | |
| Nasdaq Global Select Stock Market Index | 100 | | | 114 | | | 147 | | | 141 | | | 200 | | | 258 | |
Issuer Purchases of Equity Securities
None.
|
| | | | | | | | | | | | | |
| Period |
| Total Number of Shares Purchased |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Program |
| Maximum Number of Shares that May Yet Be Purchased Under the Program (1) (2) |
| October 1-31, 2018 |
| 15,000 |
|
| $ | 59.1 |
|
| 15,000 |
|
| 1,039,048 |
|
| November 1-30, 2018 |
| 285,151 |
|
| 61.7 |
|
| 285,151 |
|
| 753,897 |
|
| December 1-31, 2018 |
| 44,502 |
|
| 59.7 |
|
| 44,502 |
|
| 709,395 |
|
| Total |
| 344,653 |
|
| $ | 61.3 |
|
| 344,653 |
|
| 709,395 |
|
(1) On 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.
(2) On February 5, 2019, the Board of Directors canceled the Company’s remaining 2016 share repurchase authorization and approved a stock repurchase authorization for up to 5.0 million shares of the Company’s common stock.
Item 6. Selected Financial Data
The following table sets forth our selected financial data.data on a continuing operations basis. The selected financial data should be read in conjunction with our "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and our consolidated financial statements and notes thereto, included elsewhere in this report.
| | | | | | | | | | | | | | Year ended |
| | Year ended | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, |
| | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | |
| Continuing Operations | | Continuing Operations | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | | (As Adjusted) | | (As Adjusted) | | (As Adjusted) | | (As Adjusted) | |
| | (In thousands, except per share data) | | | (In thousands, except per share data) |
| Income Statement Data: | | | | | | | | | | Income Statement Data: | |
| Operating revenue | $ | 1,320,886 |
| | $ | 1,169,346 |
| | $ | 1,030,210 |
| | $ | 987,894 |
| | $ | 824,654 |
| Operating revenue | | $ | 1,269,573 | | | $ | 1,215,187 | | | $ | 1,137,613 | | | $ | 1,008,754 | | | $ | 886,847 | |
| Income from operations | 122,031 |
| | 108,757 |
| | 59,703 |
| | 81,674 |
| | 96,325 |
| |
| Operating margin (1) | 9.2 | % | | 9.3 | % | | 5.8 | % | | 8.3 | % | | 11.7 | % | |
| Income from continuing operations | | Income from continuing operations | | 73,924 | | | 112,416 | | | 117,216 | | | 103,178 | | | 58,547 | |
Operating margin 1 | | Operating margin 1 | | 5.8 | % | | 9.3 | % | | 10.3 | % | | 10.2 | % | | 6.6 | % |
| | | | | | | | | | | |
| Net income from continuing operations | | Net income from continuing operations | | $ | 52,767 | | | $ | 82,322 | | | $ | 88,563 | | | $ | 83,941 | | | $ | 26,935 | |
| (Loss) income from discontinued operation, net of tax | | (Loss) income from discontinued operation, net of tax | | (29,034) | | | 4,777 | | | 3,488 | | | 3,314 | | | 576 | |
| Net income | 92,051 |
| | 87,255 |
| | 27,505 |
| | 55,516 |
| | 61,120 |
| Net income | | $ | 23,733 | | | $ | 87,099 | | | $ | 92,051 | | | $ | 87,255 | | | $ | 27,505 | |
| Net income per share: | | | | | | | | | | |
| Basic | $ | 3.14 |
| | $ | 2.90 |
| | $ | 0.90 |
| | $ | 1.79 |
| | $ | 1.98 |
| |
| Diluted | $ | 3.12 |
| | $ | 2.89 |
| | $ | 0.90 |
| | $ | 1.78 |
| | $ | 1.95 |
| |
| | Basic net income (loss) per share: | | Basic net income (loss) per share: | |
| Continuing operations | | Continuing operations | | $ | 1.90 | | | $ | 2.89 | | | $ | 3.02 | | | $ | 2.79 | | | $ | 0.88 | |
| Discontinued operation | | Discontinued operation | | (1.05) | | | 0.17 | | | 0.12 | | | 0.11 | | | 0.02 | |
| Net income per share | | Net income per share | | $ | 0.84 | | | $ | 3.06 | | | $ | 3.14 | | | $ | 2.90 | | | $ | 0.90 | |
| | Diluted net income (loss) per share: | | Diluted net income (loss) per share: | |
| Continuing operations | | Continuing operations | | $ | 1.89 | | | $ | 2.87 | | | $ | 3.00 | | | $ | 2.78 | | | $ | 0.88 | |
| Discontinued operation | | Discontinued operation | | (1.05) | | | 0.17 | | | 0.12 | | | 0.11 | | | 0.02 | |
| Net income per share | | Net income per share | | $ | 0.84 | | | $ | 3.04 | | | $ | 3.12 | | | $ | 2.89 | | | $ | 0.90 | |
| | | | | | | | | | | | | | | | | | | | |
| Cash dividends declared per common share | $ | 0.63 |
| | $ | 0.60 |
| | $ | 0.51 |
| | $ | 0.48 |
| | $ | 0.48 |
| Cash dividends declared per common share | | $ | 0.75 | | | $ | 0.72 | | | $ | 0.63 | | | $ | 0.60 | | | $ | 0.51 | |
| | | | | | | | | | | |
| Balance Sheet Data (at end of period): | | | | | | | | | | Balance Sheet Data (at end of period): | |
| Total assets | $ | 760,215 |
| | $ | 692,622 |
| | $ | 644,048 |
| | $ | 702,327 |
| | $ | 541,493 |
| Total assets | | $ | 1,047,393 | | | $ | 990,878 | | | $ | 760,215 | | | $ | 692,622 | | | $ | 637,336 | |
| | Long-term obligations, net of current portion | 47,335 |
| | 40,588 |
| | 725 |
| | 28,856 |
| | 1,275 |
| Long-term obligations, net of current portion | | 117,408 | | | 72,249 | | | 47,335 | | | 40,588 | | | 725 | |
| Shareholders' equity | 553,244 |
| | 532,699 |
| | 498,344 |
| | 509,497 |
| | 463,064 |
| Shareholders' equity | | 547,329 | | | 577,182 | | | 553,244 | | | 532,699 | | | 498,344 | |
| | | | | | | | | | | |
| (1) Income from operations as a percentage of operating revenue | |
| Note: Prior period balances have been adjusted to confirm with revenue guidance issued in 2014 (Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers). See additional discussion in Note 1, Accounting Policies to our Consolidated Financial Statements. | |
1 Income from operations as a percentage of operating revenue | | 1 Income from operations as a percentage of operating revenue |
|
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Overview and Executive Summary
Our services are classified into fourWe have two reportable segments: Expedited LTL, TLS, IntermodalFreight and Pool Distribution.Intermodal. In the fourth quarter of 2019, we changed our reportable segments to reflect how the chief operating decision maker allocates resources and evaluates performance. We have recast our financial information and disclosures for the prior periods as if the current presentation had been in effect throughout all periods presented.
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, final mile solutions, 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, 2020, Expedited Freight accounted for 84.5% 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, 2020, Intermodal accounted for 15.7% 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.
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
AppointmentRansomware Incident
In December 2020, we detected the Ransomware Incident which impacted our operational and information technology systems. The Ransomware Incident caused service delays for many of New Presidentour customers. Promptly upon detecting the Ransomware Incident, we initiated our response protocols, launched an investigation and Chief Executive Officerengaged the services of cybersecurity and forensic professionals. We also engaged with the appropriate law enforcement authorities.
Effective September 1, 2018 ("Effective Date"), Thomas SchmittWe contained the incident and recovered from it, resuming normal operations with our customers within several days of the incident. However, operations were adversely affected by the inefficiencies caused by the Ransomware Incident and fourth quarter 2020 revenue was namedalso adversely affected as we were unable to fulfill a portion of customer demand during the Company's Presidentquarter.
In addition, we incurred $1.6 million of expense in the fourth quarter of 2020 associated with the Ransomware Incident consisting primarily of payments to third-party service providers and Chief Executive Officerconsultants, including investigation and Bruce A. Campbell, our then President and Chief Executive Officer, assumed the positionlegal fees, all of Executive Chairman. The Company's Board of Directors (the "Board") appointed Mr. Schmittwhich were expensed as incurred.
We expect to incur additional costs related to the Board as of the Effective Date. On February 5, 2019, Mr. Campbell informed the Board of his intent to retire from his position as Executive Chairman of the Company and decisionRansomware Incident in 2021, but these are not to stand for re-election to the Board immediately preceding the Company’s 2019 annual meeting of shareholders (the “2019 Annual Meeting”) which is expected to occur on May 7, 2019. The Board and Mr. Campbell agreed that he will continue to serve the Company as a consultant for 24 months following his retirement. Following Mr. Campbell’s retirement, Tom Schmitt is expected to become the Chairman of the Board and Craig Carlock is expected to become the Company’s Lead Independent Director, subject to their reelection to the Board at the Company’s 2019 Annual Meeting.be significant.
IntermodalExpedited Freight Acquisitions
As part of ourthe Company’s strategy to expand our Intermodal operations,final mile pickup and delivery operations:
•In October 2020, the Company acquired substantially all of the assets of CLW Delivery, Inc. (“CLW”) for $5.5 million. CLW specializes in last mile logistics and in-home installation services for national retailers and manufacturers.
•In January 2016,2020, the Company acquired certain assets and liabilities of Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC (collectively, “Linn Star”) for $57.2 million. This acquisition increased the Company’s Final Mile capabilities with an additional 20 locations.
•In April 2019, we acquired certain assets of AceFSA for $1.7$27.0 million in cash and additional contingent consideration (“earn-out”) based upon future revenue generation. The earn-out opportunity is $15.0 million and in August 2016, we acquired certain assetshad a fair value of Triumph for $10.1$6.9 million and an earnoutas of $1.3 million paid in September 2017. In May 2017, we acquired certain assets of Atlantic for $22.5 million and in October 2017, we acquired certain assets of KCL for $0.7 million. In July 2018, we acquired certain assets of MMT for $3.7 million and in October 2018 we acquired certain assets of Southwest for $16.3 million. These acquisitions provideDecember 31, 2020. This acquisition provides an opportunity for our IntermodalExpedited Freight segment to expand its final mile service offering into additional geographic markets, orform relationships with new customers, and add volumes to our existing locations. The assets, liabilities, and operating results of these acquisitionsthis 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.
Intermodal Acquisitions
As part of our strategy to expand our Intermodal operations, in July 2018, we acquired certain assets of Multi-Modal Transport Inc. (“MMT”) for $3.7 million, in October 2018 we acquired certain assets of Southwest Freight Distributors, Inc. (“Southwest”) for $16.3 million and in July 2019 we acquired certain assets and liabilities of O.S.T. for $12.0 million. O.S.T. is a drayage company and provides the Intermodal segment with an expanded footprint on the East Coast, with locations in the Pennsylvania, Maryland, Virginia, South Carolina and Georgia markets. In October 2020, we purchased Value Logistics for $2.0 million. These transactions were funded using cash flows from operations and provide an opportunity for our Intermodal segment to expand into additional geographic markets and add volumes to our existing locations. The assets, liabilities, and operating results of these acquisitions have been included in our consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment.
See Note 3, Acquisitions, Goodwill and Other Long-Lived Assets, to our Consolidated Financial Statements for more information about our acquisitions.
In 2013,Sale of Pool
On February 12, 2021, we acquired TQI Holdings, Inc.sold the Pool segment to Ten Oaks Group for an estimated total consideration of $65.4$20 million, consisting of $8 million upfront cash payment and establishedup to a $12 million earnout based on 2021 EBITDA attainment. On April 23, 2020, the Total Quality, Inc. reporting unit ("TQI"). In conjunction with our policyBoard approved a strategy to annually test goodwilldivest Pool Distribution (“Pool”) within the next year. Pool provides high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. Pool offers this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States. Accordingly, Pool has been classified as assets held for impairmentsale as of June 30, 2016,December 31, 2020 and for all prior periods presented. Pool assets and liabilities are reflected as “Assets and liabilities held for sale” on the Consolidated Balance Sheets in this Form 10-K.
COVID-19
Our business is highly susceptible to changes in economic conditions. Our products and services are directly tied to the production and sale of goods and, more generally, to the North American economy. The COVID-19 pandemic has adversely impacted economic activity and conditions worldwide and created significant volatility and disruption to financial markets. Efforts to control the spread of COVID-19 led governments and other authorities to impose restrictions which resulted in business closures and disrupted supply chains worldwide. As a result, transportation and supply chain companies such as ours experienced slowdowns and reduced demand for our services.
In 2020, we determined there were indicatorssaw deterioration in volumes across all of potential impairmentour segments and implemented cost reduction and efficiency improvement measures to mitigate the decline in volumes. Notwithstanding our efforts, extended stay at home orders and closures had a material negative impact on our revenues and earnings during the early part of the goodwillpandemic with volumes returning to normalized levels by the third quarter of 2020.
Although our business and other long lived assets assignedoperations have returned to pre-COVID levels, the situation surrounding COVID-19 remains fluid and may be further impacted by the policies of President Biden’s administration and the availability and success of a vaccine. The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition in 2021 will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the acquisitionduration, spread, severity and impact of TQI Holdings, Inc. This determination was basedthe COVID-19 outbreak, the effects of the outbreak on TQI'sour customers and suppliers and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and
operating conditions can resume.
In addition, although we believe we have sufficient capital and liquidity to manage our business over the short and long term, our liquidity may be materially affected if conditions in the credit and financial markets deteriorate as a result of COVID-19 including failure by us or our customers to secure any necessary financing in a timely manner.
We periodically evaluate factors including, but not limited to, macroeconomic conditions, changes in our industry and the markets in which we operate and our market capitalization, as well as our reporting units’ expected future financial performance falling notably shortfor purposes of previous projections.evaluating asset impairments, including goodwill. We believe that the impact of COVID-19 may negatively affect certain key assumptions used in our analysis; however, we will need to assess the severity and nature of the long-term impacts to determine if we may be required to record charges for asset impairments in the future.
Results from Fixed Asset Useful Life and Salvage Value Study
We periodically evaluate the reasonableness of the useful lives and salvage values of our equipment. During the third quarter of 2019, we identified indicators that the useful lives of our owned tractors and trailers extended beyond initial estimates. As a result, we changed the useful life of our trailers from seven to ten years and tractors from five to ten years. In addition, we reduced TQI's projected cash flowsthe salvage value of our tractors from 25% to 10%.
The change in estimate was made on a prospective basis beginning July 1, 2019, and consequently the estimate of TQI's fair value no longer exceeded its respective carrying value. Based on the resultsimpact of the impairment test, duringchange was a $2.6 million reduction in depreciation for the second quarteryear ended December 31, 2019.
Results from Operations
The following table sets forth our consolidated historical financial data for the years ended December 31, 20182020 and 20172019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2020 | | 2019 | | Change | | Percent Change |
| | | (As Adjusted) | | | | |
| Operating revenue: | | | | | | | |
| Expedited Freight | $ | 1,072.3 | | | $ | 1,000.9 | | | $ | 71.4 | | | 7.1 | % |
| Intermodal | 199.6 | | | 217.7 | | | (18.1) | | | (8.3) | |
| | | | | | | |
| Eliminations and other operations | (2.3) | | | (3.4) | | | 1.1 | | | 32.4 | |
| Operating revenue | 1,269.6 | | | 1,215.2 | | | 54.4 | | | 4.5 | |
| Operating expenses: | | | | | | | |
| Purchased transportation | 650.7 | | | 586.1 | | | 64.6 | | | 11.0 | |
| Salaries, wages, and employee benefits | 270.8 | | | 258.0 | | | 12.8 | | | 5.0 | |
| Operating leases | 69.7 | | | 63.1 | | | 6.6 | | | 10.5 | |
| Depreciation and amortization | 37.1 | | | 36.4 | | | 0.7 | | | 1.9 | |
| Insurance and claims | 34.9 | | | 38.7 | | | (3.8) | | | (9.8) | |
| Fuel expense | 12.2 | | | 17.8 | | | (5.6) | | | (31.5) | |
| Other operating expenses | 120.3 | | | 102.7 | | | 17.6 | | | 17.1 | |
| Total operating expenses | 1,195.7 | | | 1,102.8 | | | 92.9 | | | 8.4 | |
| Income (loss) from continuing operations: | | | | | | | |
| Expedited Freight | 71.3 | | | 103.6 | | | (32.3) | | | (31.2) | |
| Intermodal | 16.4 | | | 23.7 | | | (7.3) | | | (30.8) | |
| | | | | | | |
| Other operations | (13.8) | | | (14.9) | | | 1.1 | | | 7.4 | |
| Income from continuing operations | 73.9 | | | 112.4 | | | (38.5) | | | (34.3) | |
| Other expense: | | | | | | | |
| Interest expense, net | (4.5) | | | (2.7) | | | (1.8) | | | (66.7) | |
| | | | | | | |
| Total other expense | (4.5) | | | (2.7) | | | (1.8) | | | 66.7 | |
| Income from continuing operations before income taxes | 69.4 | | | 109.7 | | | (40.3) | | | (36.7) | |
| Income tax expense | 16.6 | | | 27.4 | | | (10.8) | | | (39.4) | |
| Net income from continuing operations | 52.8 | | | 82.3 | | | (29.5) | | | (35.8) | |
| (Loss) income from discontinued operation, net of tax | (29.1) | | | 4.8 | | | (33.9) | | | (706.3) | |
| Net income and comprehensive income | $ | 23.7 | | | $ | 87.1 | | | $ | (63.4) | | | (72.8) | % |
|
| | | | | | | | | | | | | | |
| Year ended December 31, |
| 2018 | | 2017 | | Change | | Percent Change |
| | | | (As Adjusted) | | | | |
| Operating revenue: |
|
| |
|
| |
|
| |
|
|
| Expedited LTL | $ | 747.6 |
| | $ | 655.8 |
| | $ | 91.8 |
| | 14.0 | % |
| Truckload Premium Services | 192.6 |
| | 201.7 |
| | (9.1 | ) | | (4.5 | ) |
| Intermodal | 201.0 |
| | 154.7 |
| | 46.3 |
| | 29.9 |
|
| Pool Distribution | 194.1 |
| | 168.5 |
| | 25.6 |
| | 15.2 |
|
| Eliminations and other operations | (14.4 | ) | | (11.4 | ) | | (3.0 | ) | | 26.3 |
|
| Operating revenue | 1,320.9 |
| | 1,169.3 |
| | 151.6 |
| | 13.0 |
|
| Operating expenses: |
| |
| |
| |
|
| Purchased transportation | 613.6 |
| | 545.1 |
| | 68.5 |
| | 12.6 |
|
| Salaries, wages, and employee benefits | 300.2 |
| | 265.8 |
| | 34.4 |
| | 12.9 |
|
| Operating leases | 75.7 |
| | 63.8 |
| | 11.9 |
| | 18.7 |
|
| Depreciation and amortization | 42.2 |
| | 41.1 |
| | 1.1 |
| | 2.7 |
|
| Insurance and claims | 35.2 |
| | 29.6 |
| | 5.6 |
| | 18.9 |
|
| Fuel expense | 23.1 |
| | 16.5 |
| | 6.6 |
| | 40.0 |
|
| Other operating expenses | 108.8 |
| | 98.6 |
| | 10.2 |
| | 10.3 |
|
| Total operating expenses | 1,198.8 |
| | 1,060.5 |
| | 138.3 |
| | 13.0 |
|
| Income (loss) from operations: |
|
| |
|
| |
| |
|
| Expedited LTL | 96.4 |
| | 88.0 |
| | 8.4 |
| | 9.5 |
|
| Truckload Premium Services | 5.1 |
| | 3.2 |
| | 1.9 |
| | 59.4 |
|
| Intermodal | 23.3 |
| | 13.0 |
| | 10.3 |
| | 79.2 |
|
| Pool Distribution | 5.9 |
| | 6.4 |
| | (0.5 | ) | | (7.8 | ) |
| Other operations | (8.6 | ) | | (1.8 | ) | | (6.8 | ) | | 377.8 |
|
| Income from operations | 122.1 |
| | 108.8 |
| | 13.3 |
| | 12.2 |
|
| Other expense: |
| |
| |
| |
|
| Interest expense | (1.8 | ) | | (1.2 | ) | | (0.6 | ) | | 50.0 |
|
| Total other expense | (1.8 | ) | | (1.2 | ) | | (0.6 | ) | | 50.0 |
|
| Income before income taxes | 120.3 |
| | 107.6 |
| | 12.7 |
| | 11.8 |
|
| Income taxes | 28.2 |
| | 20.3 |
| | 7.9 |
| | 38.9 |
|
| Net income and comprehensive income | $ | 92.1 |
| | $ | 87.3 |
| | $ | 4.8 |
| | 5.5 | % |
Note: Prior period balances have been adjusted to conform with revenue guidance issued in 2014 (ASU 2014-09, Revenue from Contracts with Customers). See additional discussion in Note 1, Accounting Policies to our Consolidated Financial Statements.
Revenues
During the year ended December 31, 2018,2020, revenue increased 13.0%4.5% compared to the year ended December 31, 2017.2019. The revenue increase was primarily driven by increased revenue from our LTL Expedited Freight segment of $91.8$71.4 million, partially offset by the decreased revenue from our Intermodal segment of $18.1 million. The increase in the Expedited Freight segment was driven by the final mile revenue resulting from the acquisition of FSA in April 2019 and Linn Star in January 2020. Both the Expedited Freight segment and the Intermodal segment were impacted by decreased volumes due to the impacts of COVID-19. The results for our two reportable segments are discussed in detail in the following sections.
Operating Expenses
Operating expenses increased $92.9 million primarily driven by purchased transportation increases of $64.6 million; other operating expenses of $17.6 million and salaries, wages and employee benefits increases of $12.8 million. Purchased transportation includes Leased Capacity Providers and third-party carriers, while Company-employed drivers are included in salaries, wages and employee benefits. Purchased transportation expense increased due to the utilization of more third-party carriers as it relates to the Expedited Freight segment. Other operating expenses increased primarily due to additional expenses related to vehicle liability claims, severance, litigation reserves and the ransomware incident. Salaries, wages and employee benefits increased primarily due to additional salaries resulting from acquisitions.
Income from Continuing Operations and Segment Operations
Income from continuing operations decreased $38.5 million, or 34.3%, from the year ended December 31, 2019 to $73.9 million for the year ended December 31, 2020. The decrease was primarily driven by decreases at our Expedited Freight segment and Intermodal segment of $32.3 million and $7.3 million, respectively. The results for our two reportable segments are discussed in detail in the following sections.
Interest Expense, net
Interest expense, net was $4.5 million for the year ended December 31, 2020 compared to $2.7 million for the same period in 2019. The increase in interest expense, net was primarily attributable to additional borrowings on our revolving credit facility and to a lesser extent an interest rate increase associated with the April 2020 amendment to our revolving credit facility.
Income Taxes on a Continuing Basis
The combined federal and state effective tax rate for the year ended December 31, 2020 was 23.9% compared to a rate of 25.0% for the same period in 2019. The lower effective tax rate for the year ended December 31, 2020 was primarily the result of an increased benefit from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act as well as lower Net Operating Loss utilization in 2020.
(Loss) Income from Discontinued Operation, net of tax
(Loss) income from discontinued operation, net of tax decreased $33.9 million to a $29.1 million loss for the year ended December 31, 2020 from $4.8 million of income for the year ended December 31, 2019. (Loss) income from discontinued operations includes the Company's Pool business and, as discussed above, Pool's operations were negatively impacted by COVID-19 as many of its customers were affected by retail mall closures. In addition, during the fourth quarter of 2020, a non-cash impairment charge of $28.4 million was recorded to reflect the net assets held for sale at fair value less costs to sell.
Net Income
As a result of the foregoing factors, net income decreased by $63.4 million, or 72.8%, to $23.7 million for the year ended December 31, 2020 compared to $87.1 million for the same period in 2019.
Expedited Freight - Year Ended December 31, 2020 compared to Year Ended December 31, 2019
The following table sets forth our historical financial data of the Expedited Freight segment for the years ended December 31, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expedited Freight Segment Information |
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | |
| Year ended |
| December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2020 1 | | Revenue | | 2019 | | Revenue | | Change | | Change |
| | | | | (As Adjusted) | | | | | | |
| Operating revenue: | | | | | | | | | | | |
Network 2 | $ | 625.5 | | | 58.4 | % | | $ | 675.2 | | | 67.5 | % | | $ | (49.7) | | | (7.4) | % |
| Truckload | 193.8 | | | 18.1 | | | 196.9 | | 19.7 | | | (3.1) | | | (1.6) | |
| Final Mile | 224.5�� | | | 20.9 | | | 100.6 | | 10.1 | | | 123.9 | | | 123.2 | |
| Other | 28.5 | | | 2.7 | | | 28.2 | | 2.8 | | | 0.3 | | | 1.1 | |
| Total operating revenue | 1,072.3 | | | 100.0 | | | 1,000.9 | | | 100.0 | | | 71.4 | | | 7.1 | |
| | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 583.5 | | | 54.5 | | | 511.5 | | | 51.1 | | | 72.0 | | | 14.1 | |
| Salaries, wages and employee benefits | 218.4 | | | 20.4 | | | 200.7 | | | 20.1 | | | 17.7 | | | 8.8 | |
| Operating leases | 53.7 | | | 5.0 | | | 46.6 | | | 4.7 | | | 7.1 | | | 15.2 | |
| Depreciation and amortization | 27.0 | | | 2.5 | | | 27.4 | | | 2.7 | | | (0.4) | | | (1.5) | |
| Insurance and claims | 24.0 | | | 2.2 | | | 23.6 | | | 2.4 | | | 0.4 | | | 1.7 | |
| Fuel expense | 6.8 | | | 0.6 | | | 10.2 | | | 1.0 | | | (3.4) | | | (33.3) | |
| Other operating expenses | 87.6 | | | 8.2 | | | 77.3 | | | 7.7 | | | 10.3 | | | 13.3 | |
| Total operating expenses | 1,001.0 | | | 93.4 | | | 897.3 | | | 89.6 | | | 103.7 | | | 11.6 | |
| Income from operations | $ | 71.3 | | | 6.6 | % | | $ | 103.6 | | | 10.4 | % | | $ | (32.3) | | | (31.2) | % |
| | | | | | | | | | | |
1 Includes revenues and operating expenses from the acquisition of FSA and Linn Star, which were acquired in April 2019 and January 2020, respectively. FSA results are partially included in the prior period. Linn Star results are not included in the prior period. |
2 Network revenue is comprised of all revenue, including linehaul, pickup and/or delivery, and fuel surcharge revenue, excluding accessorial, Truckload and Final Mile revenue. |
| | | | | | | | | | | | | | | | | | | | |
| Expedited Freight Operating Statistics | | | |
| | | | | | | | |
| Year ended | | | |
| December 31, | | December 31, | | Percent | | | |
| 2020 | | 2019 | | Change | | | |
| | | (As Adjusted) | | | | | |
| | | | | | | | |
| Business days | 256 | | | 255 | | | 0.4 | % | | | |
| | | | | | | | |
Tonnage 1,2 | | | | | | | | |
| Total pounds | 2,369,551 | | | 2,479,291 | | | (4.4) | | | | |
| Pounds per day | 9,256 | | | 9,723 | | | (4.8) | | | | |
| | | | | | | | |
Shipments 1,2 | | | | | | | | |
| Total shipments | 3,918 | | | 3,990 | | | (1.8) | | | | |
| Shipments per day | 15.3 | | | 15.6 | | | (1.9) | | | | |
| | | | | | | | |
| | | | | | | | |
| Weight per shipment | 605 | | | 621 | | | (2.6) | | | | |
| | | | | | | | |
Revenue per hundredweight 3 | $ | 26.75 | | | $ | 27.21 | | | (1.7) | | | | |
Revenue per hundredweight, excluding fuel 3 | $ | 23.21 | | | $ | 22.90 | | | 1.4 | | | | |
| | | | | | | | |
Revenue per shipment 3 | $ | 160 | | | $ | 171 | | | (6.4) | | | | |
Revenue per shipment, excluding fuel 3 | $ | 138 | | | $ | 144 | | | (4.2) | | | | |
Network revenue from door-to-door shipments as a percentage of network revenue 3,4 | 48.0 | % | | 40.0 | % | | 20.0 | | | | |
Network gross margin 5 | 50.8 | % | | 55.0 | % | | (7.6) | % | | | |
| | | | | | | | |
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 Freight operating revenue increased $71.4 million, or 7.1%, to $1,072.3 million for the year ended December 31, 2020 from $1,000.9 million for the same period of 2019. The change was primarily due to the increase in the final mile revenue of $123.9 million, partially offset by the decreases in network and truckload revenue. Final mile revenue increased due to the acquisitions of FSA in April 2019 and Linn Star in January 2020.
Network revenue decreased $49.7 million due lower tonnage and shipments as a result of the impacts of COVID-19 as well as the Ransomware Incident. For the network revenue, total shipments declined 1.8% as compared to the prior year, tonnage declined 4.4% as compared to the prior year and revenue per hundredweight declined 1.7% as compared to the prior year. In addition, fuel surcharge revenue decreased $21.4 million, or 20.4%, because of lower fuel prices and decreased tonnage.
Truckload revenue decreased $3.1 million primarily due to a decline in rates driven by both the spot market and contract rate customers, and lower tonnage resulting from the adverse impact of COVID-19.
Purchased Transportation
Expedited Freight purchased transportation increased by $72.0 million, or 14.1%, to $583.5 million for the year ended December 31, 2020 from $511.5 million for the year ended December 31, 2019. As a percentage of segment operating revenue, Expedited Freight purchased transportation was 54.5% during the year ended December 31, 2020 compared to 51.1% for the same period of 2019. Expedited Freight purchased transportation includes Leased Capacity Providers and third-party carriers, while Company-employed drivers are included in salaries, wages and benefits. The increase in purchased transportation as a percentage of segment operating revenue was mostly due to an increase in our cost per mile as a result of increased utilization of third-party carriers, which are typically more costly than Leased Capacity Providers. Also, due to the acquisitions of FSA and Linn Star, the final mile purchased transportation increased over the same period of 2019.
Salaries, Wages, and Benefits
Expedited Freight salaries, wages and employee benefits increased by $17.7 million, or 8.8%, to $218.4 million for the year ended December 31, 2020 from $200.7 million in the same period of 2019. Salaries, wages and employee benefits were 20.4% of Expedited Freight’s operating revenue for the year ended December 31, 2020 compared to 20.1% for the same period of 2019. The increase was primarily due to the acquisitions of FSA and Linn Star, which accounted for$19.3 million of the increase, and a credit for group health insurance premiums received in the prior year in the amount of $5.1 million. These increases were partially offset by cost-control measures enacted in response to COVID-19.
Operating Leases
Expedited Freight operating leases increased $7.1 million, or 15.2%, to $53.7 million for the year ended December 31, 2020 from $46.6 million for the year ended December 31, 2019. Operating leases were 5.0% of Expedited Freight’s operating revenue for the year ended December 31, 2020 compared to 4.7% for the year ended December 31, 2019. The increase was primarily due to additional facility leases related to the acquisitions of FSA and Linn Star in the amount of $6.2 million and in new tractor rentals in the amount of $1.3 million.
Depreciation and Amortization
Expedited Freight depreciation and amortization decreased $0.4 million, or 1.5%, to $27.0 million for the year ended December 31, 2020 from $27.4 million for the year ended December 31, 2019. Depreciation and amortization expense as a percentage of Expedited Freight operating revenue was 2.5% in the year ended December 31, 2020 compared to 2.7% for the year ended December 31, 2019.
Insurance and Claims
Expedited Freight insurance and claims expense increased $0.4 million, or 1.7%, to $24.0 million for the year ended December 31, 2020 from $23.6 million for the year ended December 31, 2019. Insurance and claims as a percentage of Expedited Freight’s operating revenue was 2.2% for the year ended December 31, 2020 compared to 2.4% for the year ended December 31, 2019. The increase in expense was primarily attributable to an increase in vehicle insurance premiums, partially offset by favorable claims. 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 decreased $3.4 million, or 33.3%, to $6.8 million for the year ended December 31, 2020 from $10.2 million in the year ended December 31, 2019. Fuel expense was 0.6% of Expedited Freight’s operating revenue for the years ended December 31, 2020 and 1.0% for 2019. Expedited Freight fuel expenses decreased due to lower fuel prices.
Other Operating Expenses
Expedited Freight other operating expenses increased $10.3 million, or 13.3%, to $87.6 million for the year ended December 31, 2020 from $77.3 million for the year ended December 31, 2019. Expedited Freight other operating expenses were 8.2% of operating revenue for the year ended December 31, 2020 compared to 7.7% for the year ended December 31, 2019. Other operating expenses include equipment maintenance, facility expenses, legal and professional fees and other over-the-road costs. The increase was primarily attributable to a $8.1 million increase in parts costs related to final mile installations, $5.4 million increase in facility expenses due to the acquisitions of FSA and Linn Star and a $0.5 million increase in the fair value of the earn-out liability from the FSA acquisition due to higher than anticipated revenues.
Income from Operations
Expedited Freight income from operations decreased by $32.3 million, or 31.2%, to $71.3 million for the year ended December 31, 2020 compared to $103.6 million for the year ended December 31, 2019. Expedited Freight’s income from operations was 6.6% of operating revenue for the year ended December 31, 2020 compared to 10.4% for the year ended December 31, 2019. The decrease in income from operations was primarily due to lower tonnage, shipments and revenue per hundredweight due to the adverse impacts of COVID-19 and the Ransomware Incident. To a lesser extent, additional costs from the acquisitions of FSA and Linn Star contributed to the decrease through continued integration efforts into the Expedited Freight segment.
Intermodal - Year Ended December 31, 2020 compared to Year Ended December 31, 2019
The following table sets forth our historical financial data of the Intermodal segment for the years ended December 31, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Intermodal Segment Information |
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | |
| Year ended |
| December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2020 | | Revenue | | 2019 | | Revenue | | Change | | Change |
| | | | | | | | | | | |
| Operating revenue | $ | 199.6 | | | 100.0 | % | | $ | 217.7 | | | 100.0 | % | | $ | (18.1) | | | (8.3) | % |
| | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 68.7 | | | 34.3 | | | 76.9 | | | 35.3 | | | (8.2) | | | (10.7) | |
| Salaries, wages and employee benefits | 48.7 | | | 24.4 | | | 52.9 | | | 24.3 | | | (4.2) | | | (7.9) | |
| Operating leases | 16.3 | | | 8.2 | | | 16.4 | | | 7.5 | | | (0.1) | | | (0.6) | |
| Depreciation and amortization | 9.9 | | | 5.0 | | | 8.9 | | | 4.1 | | | 1.0 | | | 11.2 | |
| Insurance and claims | 7.9 | | | 4.0 | | | 6.7 | | | 3.1 | | | 1.2 | | | 17.9 | |
| Fuel expense | 5.4 | | | 2.7 | | | 7.6 | | | 3.5 | | | (2.2) | | | (28.9) | |
| Other operating expenses | 26.3 | | | 13.2 | | | 24.6 | | | 11.3 | | | 1.7 | | | 6.9 | |
| Total operating expenses | 183.2 | | | 91.8 | | | 194.0 | | | 89.1 | | | (10.8) | | | (5.6) | |
| Income from operations | $ | 16.4 | | | 8.2 | % | | $ | 23.7 | | | 10.9 | % | | $ | (7.3) | | | (30.8) | % |
| | | | | | | | | | | |
1 Includes revenues and operating expenses from the acquisition of OST, which was acquired in July 2019 and is partially included in the prior period |
| | | | | | | | | | | | | | | | | |
| Intermodal Operating Statistics |
| |
| Year ended |
| December 31, | | December 31, | | Percent |
| 2020 | | 2019 | | Change |
| | | | | |
| | | | | |
| Drayage shipments | 301,454 | | | 313,817 | | | (3.9) | % |
| Drayage revenue per shipment | $ | 563 | | | $ | 599 | | | (6.0) | |
| Number of locations | 24 | | | 21 | | | 14.3 | % |
Revenues
Intermodal operating revenue decreased $18.1 million, or 8.3%, to $199.6 million for the year ended December 31, 2020 from $217.7 million for the same period in 2019. The decrease in Intermodal operating revenue was primarily attributable to a 6.0% decrease in drayage revenue per shipment from prior year, decreased fuel surcharge revenue because of lower fuel prices and a decline in linehaul shipments, partially offset by an increase in per diem revenue.
Purchased Transportation
Intermodal purchased transportation decreased $8.2 million, or 10.7%, to $68.7 million for the year ended December 31, 2020 from $76.9 million for the same period in 2019. Intermodal purchased transportation as a percentage of revenue was 34.3% for the year ended December 31, 2020 compared to 35.3% for the year ended December 31, 2019. Intermodal purchased transportation includes Leased Capacity Providers 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 due to operating efficiencies.
Salaries, Wages, and Benefits
Intermodal salaries, wages and employee benefits decreased $4.2 million, or 7.9%, to $48.7 million for the year ended December 31, 2020 from $52.9 million for the year ended December 31, 2019. As a percentage of Intermodal operating revenue, salaries, wages and benefits remained essentially flat at 24.4% for the year ended December 31, 2020 compared to 24.3% for the same period in 2019.
Operating Leases
Intermodal operating leases remained relatively flat only decreasing by $0.1 million, or 0.6% to $16.3 million for the year ended December 31, 2020 from $16.4 million for the same period in 2019. Operating leases were 8.2% of Intermodal operating revenue for the year ended December 31, 2020 compared to 7.5% in the same period of 2019.
Depreciation and Amortization
Intermodal depreciation and amortization increased $1.0 million, or 11.2%, to $9.9 million for the year ended December 31, 2020 from $8.9 million for the same period in 2019. Intermodal depreciation and amortization expense as a percentage of Intermodal operating revenue was 5.0% for the year ended December 31, 2020 compared to 4.1% for the same period of 2019. Depreciation and amortization increased due to the equipment acquired from OST as well as the acquired intangibles as part of the acquisition of OST.
Insurance and Claims
Intermodal insurance and claims expense increased $1.2 million, or 17.9%, to $7.9 million for the year ended December 31, 2020 from $6.7 million for the year ended December 31, 2019. Intermodal insurance and claims were 4.0% of operating revenue for the year ended December 31, 2020 compared to 3.1% for the same period in 2019. 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 decreased $2.2 million, or 28.9%, to $5.4 million for the year ended December 31, 2020 from $7.6 million in the same period of 2019. Fuel expenses were 2.7% of Intermodal operating revenue for the year ended December 31, 2020 compared to 3.5% in the same period of 2019. Intermodal fuel expense decreased because of lower fuel prices.
Other Operating Expenses
Intermodal other operating expenses increased $1.7 million, or 6.9%, to $26.3 million for the year ended December 31, 2020 from $24.6 million for the same period of 2019. Intermodal other operating expenses as a percentage of revenue for the year ended December 31, 2020 were 13.2% compared to 11.3% for the same period of 2019. The increase in Intermodal other
operating expense was primarily because of an increase in non recoverable per diem and rail storage expenses incurred as a result of the Ransomware Incident.
Income from Operations
Intermodal’s income from operations decreased by $7.3 million, or 30.8%, to $16.4 million for the year ended December 31, 2020 compared to $23.7 million for the same period in 2019. Income from operations as a percentage of Intermodal operating revenue was 8.2% for the year ended December 31, 2020 compared to 10.9% in the same period of 2019. The deterioration in operating income was primarily attributable to losing leverage on fixed costs such as salaries, wages and benefits, operating leases, depreciation and amortization and insurance due to the impact of COVID-19.
Other operations - Year Ended December 31, 2020 compared to Year Ended December 31, 2019
Other operating activity decreased from a $14.9 million operating loss during the year ended December 31, 2019 to a $13.8 million operating loss during the year ended December 31, 2020. The year ended December 31, 2020 included self-insurance reserves for vehicle claims of $4.9 million which were related to an increase to our loss development factors for claims. The remaining loss was primarily attributable to a $3.1 million litigation reserve, $1.6 million related to the Ransomware Incident for professional fees, severance of $1.0 million and $3.4 million of corporate costs previously allocated to the Pool segment that are not part of the discontinued operation. These costs represent corporate costs that will remain with the Company after the Pool business is divested.
The $14.9 million operating loss included in other operations and corporate activities for 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, and $1.1 million of corporate costs previously allocated to the Pool segment that are not part of the discontinued operation.
Results of Operations
The following table sets forth our historical financial data for the years ended December 31, 2019 and 2018 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2019 | | 2018 | | Change | | Percent Change |
| (As Adjusted) | | (As Adjusted) | | | | |
| Operating revenue: | | | | | | | |
| Expedited Freight | $ | 1,000.9 | | | $ | 941.9 | | | $ | 59.0 | | | 6.3 | % |
| Intermodal | 217.7 | | | 201.0 | | | 16.7 | | | 8.3 | |
| | | | | | | |
| Eliminations and other operations | (3.4) | | | (5.3) | | | 1.9 | | | 35.8 | |
| Operating revenue | 1,215.2 | | | 1,137.6 | | | 77.6 | | | 6.8 | |
| Operating expenses: | | | | | | | |
| Purchased transportation | 586.1 | | | 564.3 | | | 21.8 | | | 3.9 | |
| Salaries, wages, and employee benefits | 258.0 | | | 229.6 | | | 28.4 | | | 12.4 | |
| Operating leases | 63.1 | | | 58.2 | | | 4.9 | | | 8.4 | |
| Depreciation and amortization | 36.4 | | | 35.8 | | | 0.6 | | | 1.7 | |
| Insurance and claims | 38.7 | | | 29.6 | | | 9.1 | | | 30.7 | |
| Fuel expense | 17.8 | | | 16.2 | | | 1.6 | | | 9.9 | |
| Other operating expenses | 102.7 | | | 86.7 | | | 16.0 | | | 18.5 | |
| Total operating expenses | 1,102.8 | | | 1,020.4 | | | 82.4 | | | 8.1 | |
| Income (loss) from continuing operations: | | | | | | | |
| Expedited Freight | 103.6 | | | 103.7 | | | (0.1) | | | (0.1) | |
| Intermodal | 23.7 | | | 23.3 | | | 0.4 | | | 1.7 | |
| | | | | | | |
| Other operations | (14.9) | | | (9.8) | | | (5.1) | | | (52.0) | |
| Income from continuing operations | 112.4 | | | 117.2 | | | (4.8) | | | (4.1) | |
| Other expense: | | | | | | | |
| Interest expense, net | (2.7) | | | (1.8) | | | (0.9) | | | 50.0 | |
| | | | | | | |
| Total other expense | (2.7) | | | (1.8) | | | (0.9) | | | 50.0 | |
| Income from continuing operations before income taxes | 109.7 | | | 115.4 | | | (5.7) | | | (4.9) | |
| Income tax expense | 27.4 | | | 26.8 | | | 0.6 | | | 2.2 | |
| Net income from continuing operations | 82.3 | | | 88.6 | | | (6.3) | | | (7.1) | |
| Income from discontinued operation, net of tax | 4.8 | | | 3.5 | | | 1.3 | | | 37.1 | |
| Net income and comprehensive income | $ | 87.1 | | | $ | 92.1 | | | $ | (5.0) | | | (5.4) | % |
Revenues
During the year ended December 31, 2019, revenue increased 6.8% compared to the year ended December 31, 2018. The revenue increase was primarily driven by increased revenue from our Expedited Freight segment of $59.0 million driven by increased networkfinal mile revenue fuel surcharge revenue and other terminal based revenue overprimarily from the prior year.acquisition of FSA in April 2019. The Company'sCompany’s other segments also had revenue growth over prior year with the exception of the TLS Segment whereyear. Intermodal revenue decreasedincreased 8.3%, primarily due to deliberate sheddingthe acquisition of lower margin business.OST.
Our fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and volume transiting our network. During the year ended December 31, 2018, total fuel surcharge revenue increased 49.5% as compared to the same period in 2017, mostly due to increased fuel prices, rate increases and increased volumes across the network.
Operating Expenses
Operating expenses increased $138.3 million primarily driven by purchased transportation increasesResults of $68.5 million and salaries, wages and employee benefits increases of $34.4 million. 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
As a result of the above, operating income increased $13.3 million, or 12.2%, from 2017 to $122.1 million for the year ended December 31, 2018. The results for our four 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 as of December 31, 2017 following the enactment of the Tax Cuts and Jobs Act.
Net Income
As a result of the foregoing factors, net income increased by $4.8 million, or 5.5%, to $92.1 million for the year ended December 31, 2018 compared to $87.3 million for the same period in 2017.
Expedited LTL - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
The following table sets forth our historical financial data of the Expedited LTL segment for the years ended December 31, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| Expedited LTL Segment Information |
| (In millions) |
| (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended |
| December 31, |
| Percent of |
| December 31, |
| Percent of |
|
|
| Percent |
| | 2018 |
| Revenue |
| 2017 |
| Revenue |
| Change |
| Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 747.6 |
|
| 100.0 | % |
| $ | 655.8 |
|
| 100.0 | % |
| $ | 91.8 |
|
| 14.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| Purchased transportation | 347.4 |
|
| 46.5 |
|
| 290.1 |
|
| 44.2 |
|
| 57.3 |
|
| 19.8 |
|
| Salaries, wages and employee benefits | 163.8 |
|
| 21.9 |
|
| 146.5 |
|
| 22.3 |
|
| 17.3 |
|
| 11.8 |
|
| Operating leases | 41.4 |
|
| 5.5 |
|
| 36.7 |
|
| 5.6 |
|
| 4.7 |
|
| 12.8 |
|
| Depreciation and amortization | 22.5 |
|
| 3.0 |
|
| 22.1 |
|
| 3.4 |
|
| 0.4 |
|
| 1.8 |
|
| Insurance and claims | 14.3 |
|
| 1.9 |
|
| 15.4 |
|
| 2.3 |
|
| (1.1 | ) |
| (7.1 | ) |
| Fuel expense | 6.2 |
|
| 0.8 |
|
| 3.8 |
|
| 0.6 |
|
| 2.4 |
|
| 63.2 |
|
| Other operating expenses | 55.6 |
|
| 7.4 |
|
| 53.2 |
|
| 8.1 |
|
| 2.4 |
|
| 4.5 |
|
| Total operating expenses | 651.2 |
|
| 87.1 |
|
| 567.8 |
|
| 86.6 |
|
| 83.4 |
|
| 14.7 |
|
| Income from operations | $ | 96.4 |
|
| 12.9 | % |
| $ | 88.0 |
|
| 13.4 | % |
| $ | 8.4 |
|
| 9.5 | % |
|
| | | | | | | | | | |
| Expedited LTL Operating Statistics |
| | | | | | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
| Business days | 255 |
| | 254 |
| | 0.4 | % |
| | | | | | |
| Tonnage | | | | | |
| Total pounds ¹ | 2,562,205 |
| | 2,478,059 |
| | 3.4 |
|
| Pounds per day ¹ | 10,048 |
| | 9,756 |
| | 3.0 |
|
| | | | | | |
| Shipments | | | | | |
| Total shipments ¹ | 4,173 |
| | 4,048 |
| | 3.1 |
|
| Shipments per day ¹ | 16.4 |
| | 15.9 |
| | 3.1 |
|
Total shipments with pickup and/or delivery 1 | 1,002 |
| | 945 |
| | 6.0 |
|
| | | | | | |
| Weight per shipment | 614 |
| | 612 |
| | 0.3 |
|
| | | | | | |
| Revenue per hundredweight | $ | 26.06 |
| | $ | 23.91 |
| | 9.0 |
|
| Revenue per hundredweight, ex fuel | $ | 22.01 |
| | $ | 21.30 |
| | 3.3 |
|
| | | | | | |
| Revenue per shipment | $ | 160 |
| | $ | 146 |
| | 9.6 |
|
| Revenue per shipment, ex fuel | $ | 135 |
| | $ | 130 |
| | 3.8 | % |
| | | | | | |
| ¹ - In thousands | | | | | |
Revenues
Expedited LTL operating revenue increased $91.8 million, or 14.0%, to $747.6 million for the year ended December 31, 2018 from $655.8 million for the same period of 2017. This increase was due to increased network revenue, fuel surcharge revenue and other terminal based revenue over the prior year. Network revenue increased $37.7 million due to a 3.1% increase in shipments, a 3.4% increase in tonnage and a 3.3% increase in revenue per hundredweight, ex fuel over prior year. The increase in tonnage was due to an increase in class-rated shipments and the increase in revenue per hundredweight was due to increased shipment size and revenue per shipment. Fuel surcharge revenue increased $39.1 million largely due to rate increases to our fuel surcharges and increases in fuel prices and tonnage volumes. Other terminal based revenue, which includes dedicated local pickup and delivery services, warehousing and terminal handling, increased $15.0 million, or 23.9%, to $77.4 million for the year ended December 31, 2018 from $62.4 million in the same period of 2017. The increase in other terminal revenue was mainly attributable to increases in certain final mile, dedicated local pickup and delivery revenues.
Purchased Transportation
Expedited LTL purchased transportation increased by $57.3 million, or 19.8%, to $347.4 million for the year ended December 31, 2018 from $290.1 million for the year ended December 31, 2017. As a percentage of segment operating revenue, Expedited LTL purchased transportation was 46.5% during the year ended December 31, 2018 compared to 44.2% for the same period of 2017. The increase is mostly due to an increase in our cost per mile as a result of increased utilization of third-party transportation providers, which are typically more costly than owner-operators and rate increases to owner-operators.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Expedited LTL increased by $17.3 million, or 11.8%, to $163.8 million for the year ended December 31, 2018 from $146.5 million in the same period of 2017. Salaries, wages and employee benefits were 21.9% of Expedited LTL’s operating revenue for the year ended December 31, 2018 compared to 22.3% for the same period of 2017. The decrease in salaries, wages and employee benefits as a percentage of revenue was primarily attributable to a 0.5% decrease in health insurance costs as a percentage of revenue and a 0.2% decrease in Expedited LTL terminal and management salaries as a percentage of revenue. The decrease in salaries as a percentage of revenue is the impact of additional revenue on fixed salaries and improved operating efficiencies. These decreases were slightly offset by increased use of Company-employed drivers for transportation services.
Operating Leases
Operating leases increased $4.7 million, or 12.8%, to $41.4 million for the year ended December 31, 2018 from $36.7 million for the year ended December 31, 2017. Operating leases were 5.5% of Expedited LTL’s operating revenue for the year ended December 31, 2018 compared to 5.6% for the year ended December 31, 2017. The increase in cost is due to a $3.8 million increase in tractor rentals and leases and $2.2 million of additional facility lease expenses partly offset by a $1.4 million decrease in trailer leases and equipment rentals. Tractor leases increased due to the increased usage of Company-employed drivers mentioned above and facility leases increased due to the expansion of certain facilities. Trailer leases and equipment rentals decreased due to prior year rentals and leases that were replaced with purchased units.
Depreciation and Amortization
Expedited LTL depreciation and amortization increased $0.4 million, or 1.8%, to $22.5 million for the year ended December 31, 2018 from $22.1 million for the year ended December 31, 2017. Depreciation and amortization expense as a percentage of Expedited LTL operating revenue was 3.0% in the year ended December 31, 2018 compared to 3.4% for the year ended December 31, 2017. The decrease as a percentage of revenue was due to lower amortization expenses partly offset by the purchase of new trailers during 2018. The lower amortization expense was due to the completion of the useful life for an acquired customer relationship.
Insurance and Claims
Expedited LTL insurance and claims expense decreased $1.1 million, or 7.1%, to $14.3 million for the year ended December 31, 2018 from $15.4 million for the year ended December 31, 2017. Insurance and claims as a percentage of Expedited LTL’s operating revenue was 1.9% for the year ended December 31, 2018 compared to 2.3% for the year ended December 31, 2017. The decrease as a percentage of revenue was attributable to lower vehicle liability claims and insurance premiums. At a consolidated level, vehicle claims reserves increased; see discussion in the "Other operations" section below.
Fuel Expense
Expedited LTL fuel expense increased $2.4 million, or 63.2%, to $6.2 million for the year ended December 31, 2018 from $3.8 million in the year ended December 31, 2017. Fuel expense was 0.8% of Expedited LTL’s operating revenue for the years ended December 31, 2018 compared to 0.6% for the same period in 2017. LTL fuel expenses increased due to higher year-over-year fuel prices and increased Company-employed driver miles.
Other Operating Expenses
Expedited LTL other operating expenses increased $2.4 million, or 4.5%, to $55.6 million for the year ended December 31, 2018 from $53.2 million for the year ended December 31, 2017. Expedited LTL other operating expenses were 7.4% of operating revenue for the year ended December 31, 2018 compared to 8.1% for the year ended December 31, 2017. Other operating expenses include equipment maintenance, terminal and office expenses, professional fees and other over-the-road costs. The decrease as percentage of revenue was primarily the result of lower owner-operator costs, such as tolls, and lower maintenance due to the increased utilization of brokered transportation mentioned above. Additional decrease as a percentage of revenue was due to the year ended December 31, 2018 including the recovery of previously reserved receivables, while the same period of 2017 included an increase in receivables allowance.
Income from Operations
Expedited LTL income from operations increased by $8.4 million, or 9.5%, to $96.4 million for the year ended December 31, 2018 compared to $88.0 million for the year ended December 31, 2017. Expedited LTL’s income from operations was 12.9% of operating revenue for the year ended December 31, 2018 compared to 13.4% for the year ended December 31, 2017. The increase in income from operations was due to increases in revenue due to higher shipments, tonnage and fuel surcharge revenue. These improvements were mostly offset by increased utilization of third-party transportation providers, which caused the deterioration in income from operations as a percentage of revenue.
Truckload Premium Services - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
The following table sets forth our historical financial data for the Truckload Premium Services segment for the years ended December 31, 20182019 and 20172018 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2019 | | 2018 | | Change | | Percent Change |
| (As Adjusted) | | (As Adjusted) | | | | |
| Operating revenue: | | | | | | | |
| Expedited Freight | $ | 1,000.9 | | | $ | 941.9 | | | $ | 59.0 | | | 6.3 | % |
| Intermodal | 217.7 | | | 201.0 | | | 16.7 | | | 8.3 | |
| | | | | | | |
| Eliminations and other operations | (3.4) | | | (5.3) | | | 1.9 | | | 35.8 | |
| Operating revenue | 1,215.2 | | | 1,137.6 | | | 77.6 | | | 6.8 | |
| Operating expenses: | | | | | | | |
| Purchased transportation | 586.1 | | | 564.3 | | | 21.8 | | | 3.9 | |
| Salaries, wages, and employee benefits | 258.0 | | | 229.6 | | | 28.4 | | | 12.4 | |
| Operating leases | 63.1 | | | 58.2 | | | 4.9 | | | 8.4 | |
| Depreciation and amortization | 36.4 | | | 35.8 | | | 0.6 | | | 1.7 | |
| Insurance and claims | 38.7 | | | 29.6 | | | 9.1 | | | 30.7 | |
| Fuel expense | 17.8 | | | 16.2 | | | 1.6 | | | 9.9 | |
| Other operating expenses | 102.7 | | | 86.7 | | | 16.0 | | | 18.5 | |
| Total operating expenses | 1,102.8 | | | 1,020.4 | | | 82.4 | | | 8.1 | |
| Income (loss) from continuing operations: | | | | | | | |
| Expedited Freight | 103.6 | | | 103.7 | | | (0.1) | | | (0.1) | |
| Intermodal | 23.7 | | | 23.3 | | | 0.4 | | | 1.7 | |
| | | | | | | |
| Other operations | (14.9) | | | (9.8) | | | (5.1) | | | (52.0) | |
| Income from continuing operations | 112.4 | | | 117.2 | | | (4.8) | | | (4.1) | |
| Other expense: | | | | | | | |
| Interest expense, net | (2.7) | | | (1.8) | | | (0.9) | | | 50.0 | |
| | | | | | | |
| Total other expense | (2.7) | | | (1.8) | | | (0.9) | | | 50.0 | |
| Income from continuing operations before income taxes | 109.7 | | | 115.4 | | | (5.7) | | | (4.9) | |
| Income tax expense | 27.4 | | | 26.8 | | | 0.6 | | | 2.2 | |
| Net income from continuing operations | 82.3 | | | 88.6 | | | (6.3) | | | (7.1) | |
| Income from discontinued operation, net of tax | 4.8 | | | 3.5 | | | 1.3 | | | 37.1 | |
| Net income and comprehensive income | $ | 87.1 | | | $ | 92.1 | | | $ | (5.0) | | | (5.4) | % |
|
| | | | | | | | | | | | | | | | | | | | |
Truckload Premium Services Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 192.6 |
| | 100.0 | % | | $ | 201.7 |
| | 100.0 | % | | $ | (9.1 | ) | | (4.5 | )% |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 144.8 |
| | 75.2 |
| | 153.7 |
| | 76.2 |
| | (8.9 | ) | | (5.8 | ) |
| Salaries, wages and employee benefits | 19.1 |
| | 9.9 |
| | 20.4 |
| | 10.1 |
| | (1.3 | ) | | (6.4 | ) |
| Operating leases | 0.5 |
| | 0.3 |
| | 0.9 |
| | 0.5 |
| | (0.4 | ) | | (44.4 | ) |
| Depreciation and amortization | 6.4 |
| | 3.3 |
| | 6.3 |
| | 3.1 |
| | 0.1 |
| | 1.6 |
|
| Insurance and claims | 4.5 |
| | 2.4 |
| | 5.4 |
| | 2.7 |
| | (0.9 | ) | | (16.7 | ) |
| Fuel expense | 3.3 |
| | 1.7 |
| | 3.3 |
| | 1.6 |
| | — |
| | — |
|
| Other operating expenses | 8.9 |
| | 4.6 |
| | 8.5 |
| | 4.2 |
| | 0.4 |
| | 4.7 |
|
| Total operating expenses | 187.5 |
| | 97.4 |
| | 198.5 |
| | 98.4 |
| | (11.0 | ) | | (5.5 | ) |
| Income from operations | $ | 5.1 |
| | 2.6 | % | | $ | 3.2 |
| | 1.6 | % | | $ | 1.9 |
| | 59.4 | % |
|
| | | | | | | | | | |
| Truckload Premium Services Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
Total Miles 1 | 78,889 |
| | 96,598 |
| | (18.3 | )% |
| Empty Miles Percentage | 9.0 | % | | 9.6 | % | | (6.3 | ) |
| Tractors (avg) | 315 |
| | 386 |
| | (18.4 | ) |
Miles per tractor per week 2 | 2,178 |
| | 2,700 |
| | (19.3 | ) |
| | | | | | |
| Revenue per mile | $ | 2.35 |
| | $ | 2.02 |
| | 16.3 |
|
| Cost per mile | $ | 1.89 |
| | $ | 1.66 |
| | 13.9 | % |
| | | | | | |
| ¹ - In thousands | | | | | |
2 - Calculated using Company driver and owner-operator miles |
Revenues
TLS revenue decreased $9.1 million, or 4.5%, to $192.6 million for
During the year ended December 31, 2018 from $201.7 million in the same period of 2017. TLS revenue decreased due to a 18.3% decrease in overall miles mostly offset by a 16.3% increase in average revenue per mile. The decrease in overall miles was due to deliberate shedding of lower margin business as well as reduced fleet capacity versus the prior year period. The increased revenue per mile was primarily driven by rate increases to existing customers, higher fuel surcharges and, to a lesser extent, the aforementioned shedding of lower margin business.
Purchased Transportation
Purchased transportation costs for our TLS revenue decreased $8.9 million, or 5.8%, to $144.8 million for the year ended December 31, 2018 from $153.7 million for the year ended December 31, 2017. For the year ended December 31, 2018, TLS purchased transportation costs represented 75.2% of TLS revenue compared to 76.2% for the same period in 2017. TLS purchased transportation includes owner-operators and third-party carriers, while company-employed drivers are included in salaries, wages and benefits. The decrease in purchased transportation was attributable to an 18.4% decrease in purchased transportation miles mostly offset by a 14.6% increase in cost per mile during the year ended December 31, 2018 compared to the same period in 2017. The decrease in TLS purchased transportation miles was attributable to the revenue activity discussed above. The increase in cost per mile was due to increased utilization of third-party carriers, which are more costly than owner-operators.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of TLS decreased by $1.3 million, or 6.4%, to $19.1 million in the year ended December 31, 2018 from $20.4 million in the same period of 2017. Salaries, wages and employee benefits were 9.9% of TLS’s operating revenue in the year ended December 31, 2018 compared to 10.1% for the same period of 2017. The slight decrease in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to a decrease in Company-employed driver miles partly offset by an increase in employee incentives and share-based compensation.
Operating Leases
Operating leases decreased $0.4 million, or 44.4%, to $0.5 million for the year ended December 31, 2018 from $0.9 million for the same period in 2017. Operating leases were 0.3% of TLS operating revenue for the year ended December 31, 2018 compared to 0.5% for the same period of 2017. The decrease was due to a decrease in trailer rentals, as TLS utilized purchased trailers during 2018 compared to rentals in the same period in 2017.
Depreciation and Amortization
Depreciation and amortization increased $0.1 million, or 1.6%, to $6.4 million for the year ended December 31, 2018 from $6.3 million for the year ended December 31, 2017. Depreciation and amortization expense as a percentage of TLS operating revenue was 3.3% for the year ended December 31, 2018 compared to 3.1% for the same period in 2017. The increase was due to increased trailer depreciation on trailers purchased during 2018 and a full year of depreciation for new operating software placed in service during the fourth quarter of 2017. These increases were partly offset by lower amortization expense following the completion of the useful life for an acquired customer relationship.
Insurance and Claims
TLS insurance and claims decreased $0.9 million, or 16.7%, to $4.5 million for the year ended December 31, 2018 from $5.4 million for the year ended December 31, 2017. As a percentage of operating revenue, insurance and claims was 2.4% for the year ended December 31, 2018 compared to 2.7% for the year ended December 31, 2017. The decrease was due to lower vehicle liability claims. At a consolidated level, vehicle claims reserves increased; see discussion in the "Other operations" section below.
Fuel Expense
TLS fuel expense was $3.3 million for the year ended December 31, 2018 and 2017. Fuel expenses were 1.7% of TLS operating revenue during the year ended December 31, 2018 compared to 1.6% for the year ended December 31, 2017. The increase as a percentage of revenue was mostly attributable to higher year-over-year fuel prices partly offset by a decrease in Company-employed driver miles.
Other Operating Expenses
TLS other operating expenses increased $0.4 million, or 4.7%, to $8.9 million for the year ended December 31, 2018 compared to $8.5 million for the year ended December 31, 2017. TLS other operating expenses were 4.6% of operating revenue for the year ended December 31, 2018 compared to 4.2% for the year ended December 31, 2017. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other costs of transiting shipments. The increase in other operating expenses was due to an increase in driver recruiting expenses.
Income from Operations
TLS income from operations increased $1.9 million, or 59.4%, to $5.1 million in income from operations for the year ended December 31, 2018 compared to $3.2 million for the same period in 2017. TLS income from operations was 2.6% of operating revenue for the year ended December 31, 2018 compared to 1.6% for the year ended December 31, 2017. The improvement in income from operations was due to rate increases and higher fuel surcharges to existing customers, the deliberate shedding of lower margin business and lower vehicle claims reserves.
Intermodal - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
The following table sets forth our historical financial data of the Intermodal segment for the years ended December 31, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Intermodal Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 201.0 |
| | 100.0 | % | | $ | 154.7 |
| | 100.0 | % | | $ | 46.3 |
| | 29.9 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 77.1 |
| | 38.4 |
| | 63.6 |
| | 41.1 |
| | 13.5 |
| | 21.2 |
|
| Salaries, wages and employee benefits | 43.9 |
| | 21.8 |
| | 34.0 |
| | 22.0 |
| | 9.9 |
| | 29.1 |
|
| Operating leases | 15.9 |
| | 7.9 |
| | 13.5 |
| | 8.7 |
| | 2.4 |
| | 17.8 |
|
| Depreciation and amortization | 6.3 |
| | 3.1 |
| | 5.8 |
| | 3.8 |
| | 0.5 |
| | 8.6 |
|
| Insurance and claims | 5.8 |
| | 2.9 |
| | 4.2 |
| | 2.7 |
| | 1.6 |
| | 38.1 |
|
| Fuel expense | 6.6 |
| | 3.3 |
| | 3.9 |
| | 2.5 |
| | 2.7 |
| | 69.2 |
|
| Other operating expenses | 22.1 |
| | 11.0 |
| | 16.7 |
| | 10.8 |
| | 5.4 |
| | 32.3 |
|
| Total operating expenses | 177.7 |
| | 88.4 |
| | 141.7 |
| | 91.6 |
| | 36.0 |
| | 25.4 |
|
| Income from operations | $ | 23.3 |
| | 11.6 | % | | $ | 13.0 |
| | 8.4 | % | | $ | 10.3 |
| | 79.2 | % |
|
| | | | | | | | | | |
| Intermodal Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
| Drayage shipments | 305,239 |
| | 233,093 |
| | 31.0 | % |
| Drayage revenue per shipment | $ | 567 |
| | $ | 554 |
| | 2.3 |
|
| Number of locations | 20 |
| | 19 |
| | 5.3 | % |
Revenues
Intermodal operating2019, revenue increased $46.3 million, or 29.9%, to $201.0 million for the year ended December 31, 2018 from $154.7 million for the same period in 2017. The increases in operating revenue was primarily attributable to a full year of revenue from Atlantic, which was acquired in May 2017, the impact of increased fuel surcharges and increased rental and storage revenues.
Purchased Transportation
Intermodal purchased transportation increased $13.5 million, or 21.2%, to $77.1 million for the year ended December 31, 2018 from $63.6 million for the same period in 2017. Intermodal purchased transportation as a percentage of revenue was 38.4% for the year ended December 31, 20186.8% compared to 41.1% for the year ended December 31, 2017. The decrease in Intermodal purchased transportation as a percentage of revenue was attributable to a change in revenue mix, as Intermodal had higher increases to revenue lines that did not require the use of purchased transportation. This was partly offset by a higher utilization of owner-operators as opposed to Company-employed drivers during 2018 compared to the same period of 2017, as Atlantic utilized more owner-operators than Company-employed drivers.
Salaries, Wages, and Benefits
Intermodal salaries, wages and employee benefits increased $9.9 million, or 29.1%, to $43.9 million for the year ended December 31, 2018 compared to $34.0 million for the year ended December 31, 2017. As a percentage of Intermodal operating revenue, salaries, wages and benefits decreased to 21.8% for the year ended December 31, 2018 compared to 22.0% for the same period in 2017. The improvement in salaries, wages and employee benefits as a percentage of revenue was attributable to lower workers' compensation and health insurance costs as a percentage of revenue partly offset by higher employee incentives and share-based compensation.
Operating Leases
Operating leases increased $2.4 million, or 17.8% to $15.9 million for the year ended December 31, 2018 from $13.5 million for the same period in 2017. Operating leases were 7.9% of Intermodal operating revenue for the year ended December 31, 2018 compared to 8.7% in the same period of 2017. Operating leases decreased as a percentage of revenue since revenue that does not require trailer rentals increased at a faster pace than those that required trailer rental charges. The decrease as a percentage of revenue is also attributable to utilization of owned equipment acquired from Atlantic and the increase in revenue out-pacing the increase in facility rents.
Depreciation and Amortization
Depreciation and amortization increased $0.5 million, or 8.6%, to $6.3 million for the year ended December 31, 2018 from $5.8 million for the same period in 2017. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.1% for the year ended December 31, 2018 compared to 3.8% for the same period of 2017. The increase in depreciation and amortization is due the amortization of intangible assets acquired during 2017 and 2018. Depreciation and amortization decreased as a percentage of revenue since revenue that does not require equipment increased at a faster pace than those that required equipment.
Insurance and Claims
Intermodal insurance and claims expense increased $1.6 million, or 38.1%, to $5.8 million for the year ended December 31, 2018 from $4.2 million for the year ended December 31, 2017. Intermodal insurance and claims were 2.9% of operating revenue for the year ended December 31, 2018 compared to 2.7% for the same period in 2017. The increase in Intermodal insurance and claims was attributable to higher insurance premiums for the additional volumes and higher claims reserves. See additional discussion over the consolidated increase in self-insurance reserves related to vehicle claims in the "Other operations" section below.
Fuel Expense
Intermodal fuel expense increased $2.7 million, or 69.2%, to $6.6 million for the year ended December 31, 2018 from $3.9 million in the same period of 2017. Fuel expenses were 3.3% of Intermodal operating revenue for the year ended December 31, 2018 compared to 2.5% in the same period of 2017. Intermodal fuel expenses increased due to higher year-over-year fuel prices and increased Company-employed driver activity.
Other Operating Expenses
Intermodal other operating expenses increased $5.4 million, or 32.3%, to $22.1 million for the year ended December 31, 2018 compared to $16.7 million for the same period of 2017. Intermodal other operating expenses as a percentage of revenue for the year ended December 31, 2018 were 11.0% compared to 10.8% for the same period of 2017. The increase in Intermodal other operating expenses was due mostly due to a $4.6 million increase in container related rental and storage charges associated with revenue increases discussed previously. The remaining increase was due to increased equipment maintenance, facility costs and professional fees. These increases were partly offset by a $0.5 million reduction in the earn-out liability for the Atlantic acquisition during 2018.
Income from Operations
Intermodal’s income from operations increased by $10.3 million, or 79.2%, to $23.3 million for the year ended December 31, 2018 compared to $13.0 million for the same period in 2017. Income from operations as a percentage of Intermodal operating revenue was 11.6% for the year ended December 31, 2018 compared to 8.4% in the same period of 2017. The increase in operating income as a percentage of revenue was primarily attributable to the increase in high-margin storage and fuel revenues and a full year of the Atlantic acquisition.
Pool Distribution - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
The following table sets forth our historical financial data of the Pool Distribution segment for the years ended December 31, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Pool Distribution Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2018 | | Revenue | | 2017 | | Revenue | | Change | | Change |
| | | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 194.1 |
| | 100.0 | % | | $ | 168.5 |
| | 100.0 | % | | $ | 25.6 |
| | 15.2 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 57.4 |
| | 29.6 |
| | 47.5 |
| | 28.2 |
| | 9.9 |
| | 20.8 |
|
| Salaries, wages and employee benefits | 71.3 |
| | 36.7 |
| | 62.7 |
| | 37.2 |
| | 8.6 |
| | 13.7 |
|
| Operating leases | 17.6 |
| | 9.1 |
| | 13.3 |
| | 7.9 |
| | 4.3 |
| | 32.3 |
|
| Depreciation and amortization | 6.9 |
| | 3.6 |
| | 6.8 |
| | 4.0 |
| | 0.1 |
| | 1.5 |
|
| Insurance and claims | 4.6 |
| | 2.4 |
| | 4.7 |
| | 2.8 |
| | (0.1 | ) | | (2.1 | ) |
| Fuel expense | 7.0 |
| | 3.6 |
| | 5.5 |
| | 3.3 |
| | 1.5 |
| | 27.3 |
|
| Other operating expenses | 23.4 |
| | 12.1 |
| | 21.6 |
| | 12.8 |
| | 1.8 |
| | 8.3 |
|
| Total operating expenses | 188.2 |
| | 97.0 |
| | 162.1 |
| | 96.2 |
| | 26.1 |
| | 16.1 |
|
| Income from operations | $ | 5.9 |
| | 3.0 | % | | $ | 6.4 |
| | 3.8 | % | | $ | (0.5 | ) | | (7.8 | )% |
|
| | | | | | | | | | |
| Pool Distribution Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2018 | | 2017 | | Change |
| | | | (As Adjusted) | | |
| | | | | | |
Cartons 1 | 92,976 |
| | 82,196 |
| | 13.1 | % |
| Revenue per carton | $ | 2.09 |
| | $ | 2.05 |
| | 2.0 |
|
| Terminals | 28 |
| | 28 |
| | — |
|
| | | | | | |
1 In thousands | | | | | |
Revenues
Pool operating revenue increased $25.6 million, or 15.2%, to $194.1 million for the year ended December 31, 2018 from $168.5 million for the year ended December 31, 2017. The revenue increase was due to increased volumes from previously existing customers, new business and rate increases.
Purchased Transportation
Pool purchased transportation increased $9.9 million, or 20.8%, to $57.4 million for the year ended December 31, 2018 from $47.5 million for the year ended December 31, 2017. Pool purchased transportation as a percentage of revenue was 29.6% for the year ended December 31, 2018 compared to 28.2% for the same period in 2017. The increase in Pool purchased transportation as a percentage of revenue was attributable to increased rates charged by, and increased utilization of, third-party carriers to cover the increases in revenue.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Pool increased by $8.6 million, or 13.7%, to $71.3 million for the year ended December 31, 2018 from $62.7 million for the year ended December 31, 2017. As a percentage of Pool operating revenue, salaries, wages and benefits were 36.7% for the year ended December 31, 2018 compared to 37.2% for the same period in 2017. The decrease in salaries, wages and benefits as a percentage of revenue was the result of decreases in employee incentives, driver pay and group health insurance costs partly offset by increased dock pay. Dock pay deteriorated as a percentage of revenue as increasing revenue volumes required the use of more costly contract labor.
Operating Leases
Operating leases increased $4.3 million, or 32.3%, to $17.6 million for the year ended December 31, 2018 from $13.3 million for the year ended December 31, 2017. Operating leases were 9.1% of Pool operating revenue for the year ended December 31, 2018 compared to 7.9% for the year ended December 31, 2017. Operating leases increased as a percentage of revenue due to increases in facility lease expenses and tractor leases for the additional revenue discussed above and the use of leased tractors to replace old purchased equipment. The increase in facility lease expenses is mostly due to a $1.0 million charge to vacate a facility.
Depreciation and Amortization
Depreciation and amortization increased $0.1 million, or 1.5%, to $6.9 million for the year ended December 31, 2018 compared to $6.8 million for the same period in 2017. Depreciation and amortization expense as a percentage of Pool operating revenue was 3.6% for the year ended December 31, 2018 compared to 4.0% for the year ended December 31, 2017. The decrease in Pool depreciation and amortization as a percentage of revenue was due to the increase in leased tractors mentioned above instead of purchased equipment, partly offset by increased trailer depreciation on trailers purchased during 2018.
Insurance and Claims
Pool insurance and claims decreased $0.1 million, or 2.1%, to $4.6 million for the year ended December 31, 2018 from $4.7 million for the year ended December 31, 2017. As a percentage of operating revenue, insurance and claims was 2.4% for the year ended December 31, 2018 compared to 2.8% for the year ended December 31, 2017. The decrease as a percentage of revenue was due to a $0.5 million reimbursement of legal fees in the year ended December 31, 2018 for expenses incurred in prior periods. The decrease as a percentage of revenue was also due to a decrease in vehicle liability claims. At a consolidated level, vehicle claims reserves increased; see discussion in the "Other operations" section below.
Fuel Expense
Pool fuel expense increased $1.5 million, or 27.3%, to $7.0 million for the year ended December 31, 2018 from $5.5 million for the year ended December 31, 2017. Fuel expenses were 3.6% of Pool operating revenue during the year ended December 31, 2018 compared to 3.3% for the year ended December 31, 2017. Pool fuel expenses increased due to higher year-over-year fuel prices, higher revenue volumes and increased Company-employed driver miles.
Other Operating Expenses
Pool other operating expenses increased $1.8 million, or 8.3%, to $23.4 million for the year ended December 31, 2018 compared to $21.6 million for the year ended December 31, 2017. Pool other operating expenses were 12.1% of operating revenue for the year ended December 31, 2018 compared to 12.8% for the year ended December 31, 2017. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other over-the-road costs. As a percentage of revenue the decrease was attributable to a 0.6% decrease in equipment maintenance costs and a 0.3% decrease in agent terminal handling costs. These decreases were partly offset by a 0.1% increase as a percentage of revenue in recruiting expenses.
Income from Operations
Pool income from operations decreased by $0.5 million, or 7.8% to $5.9 million for the year ended December 31, 2018 from $6.4 million for the year ended December 31, 2017. Pool income from operations was 3.0% of operating revenue for the year ended December 31, 2018 compared to 3.8% of operating revenue for the year ended December 31, 2017. The deterioration in Pool operating income was primarily the result of increased utilization of and higher rates charged by third-party carriers and increasing revenue volumes required the use of more costly contract labor. Pool's operating income also decreased due to the one-time charge to vacate a facility during 2018.
Other operations - Year Ended December 31, 2018 compared to Year Ended December 31, 2017
Other operating activity declined from a $1.8 million operating loss during the year ended December 31, 2017 to a $8.6 million operating loss during the year ended December 31, 2018. The year ended December 31, 2018 included a $6.0revenue increase was primarily driven by increased revenue from our Expedited Freight segment of $59.0 million increasedriven by increased final mile revenue primarily from the acquisition of FSA 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.April 2019. The loss wasCompany’s other segments also attributable to $1.2 million in costs relatedhad revenue growth over prior year. Intermodal revenue increased 8.3%, primarily due to the CEO transition, comprisedacquisition of recruiting fees and retention share awards.OST.
The $1.8 million operating loss for the year ending December 31, 2017 included a $1.2 million reserve for vehicle and workers' compensation claims, $0.9 million of executive severance costs and $0.4 million of turn in costs from old Towne equipment. These costs were partly offset by $0.7 million of indemnification funds received related to the Towne acquisition. These costs and benefits were kept at the corporate level and not passed through to our operating segments.
Results of Operations
The following table sets forth our historical financial data for the years ended December 31, 20172019 and 20162018 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2019 | | 2018 | | Change | | Percent Change |
| (As Adjusted) | | (As Adjusted) | | | | |
| Operating revenue: | | | | | | | |
| Expedited Freight | $ | 1,000.9 | | | $ | 941.9 | | | $ | 59.0 | | | 6.3 | % |
| Intermodal | 217.7 | | | 201.0 | | | 16.7 | | | 8.3 | |
| | | | | | | |
| Eliminations and other operations | (3.4) | | | (5.3) | | | 1.9 | | | 35.8 | |
| Operating revenue | 1,215.2 | | | 1,137.6 | | | 77.6 | | | 6.8 | |
| Operating expenses: | | | | | | | |
| Purchased transportation | 586.1 | | | 564.3 | | | 21.8 | | | 3.9 | |
| Salaries, wages, and employee benefits | 258.0 | | | 229.6 | | | 28.4 | | | 12.4 | |
| Operating leases | 63.1 | | | 58.2 | | | 4.9 | | | 8.4 | |
| Depreciation and amortization | 36.4 | | | 35.8 | | | 0.6 | | | 1.7 | |
| Insurance and claims | 38.7 | | | 29.6 | | | 9.1 | | | 30.7 | |
| Fuel expense | 17.8 | | | 16.2 | | | 1.6 | | | 9.9 | |
| Other operating expenses | 102.7 | | | 86.7 | | | 16.0 | | | 18.5 | |
| Total operating expenses | 1,102.8 | | | 1,020.4 | | | 82.4 | | | 8.1 | |
| Income (loss) from continuing operations: | | | | | | | |
| Expedited Freight | 103.6 | | | 103.7 | | | (0.1) | | | (0.1) | |
| Intermodal | 23.7 | | | 23.3 | | | 0.4 | | | 1.7 | |
| | | | | | | |
| Other operations | (14.9) | | | (9.8) | | | (5.1) | | | (52.0) | |
| Income from continuing operations | 112.4 | | | 117.2 | | | (4.8) | | | (4.1) | |
| Other expense: | | | | | | | |
| Interest expense, net | (2.7) | | | (1.8) | | | (0.9) | | | 50.0 | |
| | | | | | | |
| Total other expense | (2.7) | | | (1.8) | | | (0.9) | | | 50.0 | |
| Income from continuing operations before income taxes | 109.7 | | | 115.4 | | | (5.7) | | | (4.9) | |
| Income tax expense | 27.4 | | | 26.8 | | | 0.6 | | | 2.2 | |
| Net income from continuing operations | 82.3 | | | 88.6 | | | (6.3) | | | (7.1) | |
| Income from discontinued operation, net of tax | 4.8 | | | 3.5 | | | 1.3 | | | 37.1 | |
| Net income and comprehensive income | $ | 87.1 | | | $ | 92.1 | | | $ | (5.0) | | | (5.4) | % |
|
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | Change | | Percent Change |
| | (As Adjusted) | | (As Adjusted) | | | | |
| Operating revenue: | | | | | | | |
| Expedited LTL | $ | 655.8 |
| | $ | 596.5 |
| | $ | 59.3 |
| | 9.9 | % |
| Truckload Premium Services | 201.8 |
| | 181.0 |
| | 20.8 |
| | 11.5 |
|
| Intermodal | 154.7 |
| | 105.7 |
| | 49.0 |
| | 46.4 |
|
| Pool Distribution | 168.5 |
| | 151.9 |
| | 16.6 |
| | 10.9 |
|
| Eliminations and other operations | (11.4 | ) | | (4.9 | ) | | (6.5 | ) | | 132.7 |
|
| Operating revenue | 1,169.4 |
| | 1,030.2 |
| | 139.2 |
| | 13.5 |
|
| Operating expenses: | | | | | | | |
| Purchased transportation | 545.1 |
| | 460.8 |
| | 84.3 |
| | 18.3 |
|
| Salaries, wages, and employee benefits | 265.8 |
| | 242.3 |
| | 23.5 |
| | 9.7 |
|
| Operating leases | 63.8 |
| | 60.5 |
| | 3.3 |
| | 5.5 |
|
| Depreciation and amortization | 41.1 |
| | 38.2 |
| | 2.9 |
| | 7.6 |
|
| Insurance and claims | 29.6 |
| | 25.4 |
| | 4.2 |
| | 16.5 |
|
| Fuel expense | 16.5 |
| | 13.2 |
| | 3.3 |
| | 25.0 |
|
| Other operating expenses | 98.7 |
| | 87.7 |
| | 11.0 |
| | 12.5 |
|
| Impairment of goodwill, intangibles and other assets | — |
| | 42.4 |
| | (42.4 | ) | | (100.0 | ) |
| Total operating expenses | 1,060.6 |
| | 970.5 |
| | 90.1 |
| | 9.3 |
|
| Income (loss) from operations: | | | | | | | |
| Expedited LTL | 88.0 |
| | 83.1 |
| | 4.9 |
| | 5.9 |
|
| Truckload Premium Services | 3.2 |
| | (35.4 | ) | | 38.6 |
| | NM |
|
| Intermodal | 13.0 |
| | 11.1 |
| | 1.9 |
| | 17.1 |
|
| Pool Distribution | 6.4 |
| | 3.6 |
| | 2.8 |
| | 77.8 |
|
| Other operations | (1.8 | ) | | (2.7 | ) | | 0.9 |
| | (33.3 | ) |
| Income from operations | 108.8 |
| | 59.7 |
| | 49.1 |
| | 82.2 |
|
| Other expense: | | | | | | | |
| Interest expense | (1.2 | ) | | (1.6 | ) | | 0.4 |
| | (25.0 | ) |
| Total other expense | (1.2 | ) | | (1.6 | ) | | 0.4 |
| | (25.0 | ) |
| Income before income taxes | 107.6 |
| | 58.1 |
| | 49.5 |
| | 85.2 |
|
| Income taxes | 20.3 |
| | 30.6 |
| | (10.3 | ) | | (33.7 | ) |
| Net income and comprehensive income | $ | 87.3 |
| | $ | 27.5 |
| | $ | 59.8 |
| | 217.5 | % |
Note: Prior period balances have been adjusted to confirm with revenue guidance issued in 2014 (ASU 2014-09, Revenue from Contracts with Customers). See additional discussion in Note 1, Accounting Policies to our Consolidated Financial Statements.
Revenues
During the year ended December 31, 2017,2019, revenue increased 13.5%6.8% compared to the year ended December 31, 2016.2018. The revenue increase was primarily driven by increased revenue from our LTL Expedited Freight segment of $59.3$59.0 million driven by increased networkfinal mile revenue fuel surchargeprimarily from the acquisition of FSA in April 2019. The Company’s other segments also had revenue and other terminal based revenuegrowth over the prior year. Revenue alsoIntermodal revenue increased $49.0 million in our Intermodal segment8.3%, primarily attributabledue to the acquisition of Atlantic, Triumph and Ace and the impact of increased fuel surcharges.OST.
Our fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and volume transiting our network. During the year ended December 31, 2017, total fuel surcharge revenue increased 41.9% as compared to the same period in 2016, mostly due to increased fuel prices and increased volumes in the Expedited LTL, Intermodal and Pool Distribution segments.
Operating Expenses
Operating expenses increased $90.1$82.4 million primarily driven by purchased transportation increases of $84.3$21.8 million and salaries, wages and employee benefits increases of $23.5 million, offset by a $42.4 million impairment discussed further$28.4 million. Company-employed drivers are included in the TLS segment section below.salaries, wages and benefits, while purchased transportation includes Leased Capacity Providers and third-party carriers. Purchased transportation increased primarily due to increased volumes, andbut decreased as a percentage of revenue due to increased utilization of third-party transportation providers,Leased Capacity Providers and Company-employed drivers, which are typically moreless costly than owner-operators.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 from Continuing Operations and Segment Operations
As a result of the above, operating income increased $49.1Income from continuing operations decreased $4.8 million, or 82.2%4.1%, from 2016the year ended December 31, 2018 to $108.8$112.4 million for the year ended December 31, 2017.2019 primarily driven by a $0.1 million decrease from our Expedited Freight segment and a $0.4 million increase from our Intermodal segment, offset by a $5.1 million decrease in other operations due to a $6.5 million vehicle claims reserve recorded in 2019 for pending vehicular claims. Our Expedited Freight segment operating income decreased $0.4 million due to lower tonnage, higher insurance premiums and a large vehicle claim reserve, mostly offset by improvements in purchased transportation on increased utilization of Leased Capacity Providers and Company-employed drivers and contributions from FSA. Our Intermodal segment saw a slight increase. The results for our fourtwo reportable segments are discussed in detail in the following sections.
Interest Expense, net
Interest expense, net was $1.2$2.7 million for the year ended December 31, 20172019 compared to $1.6$1.8 million for the same period in 2016.2018. The decreaseincrease in interest expense, net was attributable to principal payments made on the term loan partly offset byadditional borrowings on our revolving credit facility.
Income Taxes on a Continuing Basis
The combined federal and state effective tax rate for the year ended December 31, 20172019 was 18.9%24.9% compared to a rate of 52.7%23.2% for the same period in 2016.2018. The lowerhigher effective tax rate for 2017 isthe year ended December 31, 2019 was primarily the result of increased executive compensation in the enactmentcurrent 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 Tax CutsAlternative Fuel Credit by the Internal Revenue Service on December 20, 2019 and Jobs Act,the result of increased share-based compensation vesting when compared to the same period in 2018, which loweredwas impacted by forfeited performance shares.
Income from Discontinued Operation, net of tax
Income from discontinued operation, net of tax increased $1.3 million to $4.8 million for the value of our net deferred tax liabilities. Also,year ended December 31, 2019 from $3.5 million for the 2016 effective tax rate reflectedyear ended December 31, 2018. Income from discontinued operation includes the impairment of goodwill in the second quarter of 2016 that is non-deductible for tax purposes.Company’s Pool business.
Net Income
As a result of the foregoing factors, net income increaseddecreased by $59.8$5.0 million, or 217.5%5.4%, to $87.3$87.1 million for the year ended December 31, 20172019 compared to $27.5$92.1 million for the same period in 2016.2018.
Expedited LTLFreight - Year Ended December 31, 20172019 compared to Year Ended December 31, 20162018
The following table sets forth our historical financial data of the Expedited LTLFreight segment for the years ended December 31, 20172019 and 20162018 (in millions):
| | | Expedited LTL Segment Information | |
| Expedited Freight Segment Information | | Expedited Freight Segment Information |
| (In millions) | (In millions) | (In millions) |
| (Unaudited) | (Unaudited) | (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 | | 2019 | | Revenue | | 2018 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | | | (As Adjusted) | | (As Adjusted) | |
| Operating revenue | $ | 655.8 |
| | 100.0 | % | | $ | 596.5 |
| | 100.0 | % | | $ | 59.3 |
| | 9.9 | % | |
| Operating revenue: | | Operating revenue: | | | | | | | | | | | |
Network 1 | | Network 1 | $ | 675.2 | | | 67.5 | % | | $ | 677.4 | | | 71.9 | % | | $ | (2.2) | | | (0.3) | % |
| Truckload | | Truckload | 196.9 | | 19.7 | | | 196.9 | | 20.9 | | | — | | | — | |
| Final Mile | | Final Mile | 100.6 | | 10.1 | | | 39.4 | | 4.2 | | | 61.2 | | | 155.3 | |
| Other | | Other | 28.2 | | 2.8 | | | 28.2 | | 3.0 | | | — | | | — | |
| Total operating revenue | | Total operating revenue | 1,000.9 | | | 100.0 | | | 941.9 | | | 100.0 | | | 59.0 | | | 6.3 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | Operating expenses: | |
| Purchased transportation | 290.0 |
| | 44.2 |
| | 250.7 |
| | 42.0 |
| | 39.3 |
| | 15.7 |
| Purchased transportation | 511.5 | | | 51.0 | | | 491.2 | | | 52.1 | | | 20.3 | | | 4.1 | |
| Salaries, wages and employee benefits | 146.6 |
| | 22.4 |
| | 139.2 |
| | 23.3 |
| | 7.4 |
| | 5.3 |
| Salaries, wages and employee benefits | 200.7 | | | 20.1 | | | 183.0 | | | 19.4 | | | 17.7 | | | 9.7 | |
| Operating leases | 36.7 |
| | 5.6 |
| | 34.5 |
| | 5.8 |
| | 2.2 |
| | 6.4 |
| Operating leases | 46.6 | | | 4.7 | | | 42.1 | | | 4.5 | | | 4.5 | | | 10.7 | |
| Depreciation and amortization | 22.1 |
| | 3.4 |
| | 21.9 |
| | 3.7 |
| | 0.2 |
| | 0.9 |
| Depreciation and amortization | 27.4 | | | 2.7 | | | 29.2 | | | 3.1 | | | (1.8) | | | (6.2) | |
| Insurance and claims | 15.4 |
| | 2.3 |
| | 13.2 |
| | 2.2 |
| | 2.2 |
| | 16.7 |
| Insurance and claims | 23.6 | | | 2.4 | | | 18.6 | | | 2.0 | | | 5.0 | | | 26.9 | |
| Fuel expense | 3.8 |
| | 0.6 |
| | 3.3 |
| | 0.6 |
| | 0.5 |
| | 15.2 |
| Fuel expense | 10.2 | | | 1.0 | | | 9.5 | | | 1.0 | | | 0.7 | | | 7.4 | |
| Other operating expenses | 53.2 |
| | 8.1 |
| | 50.6 |
| | 8.5 |
| | 2.6 |
| | 5.1 |
| Other operating expenses | 77.3 | | | 7.7 | | | 64.6 | | | 6.9 | | | 12.7 | | | 19.7 | |
| Total operating expenses | 567.8 |
| | 86.6 |
| | 513.4 |
| | 86.1 |
| | 54.4 |
| | 10.6 |
| Total operating expenses | 897.3 | | | 89.6 | | | 838.2 | | | 89.0 | | | 59.1 | | | 7.1 | |
| Income from operations | $ | 88.0 |
| | 13.4 | % | | $ | 83.1 |
| | 13.9 | % | | $ | 4.9 |
| | 5.9 | % | Income from operations | $ | 103.6 | | | 10.4 | % | | $ | 103.7 | | | 11.0 | % | | $ | (0.1) | | | (0.1) | % |
| 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 | | 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 |
|
| | | | | | | | | | |
| Expedited LTL Operating Statistics |
| | | | | | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
| Business days | 254 |
| | 255 |
| | (0.4 | )% |
| | | | | | |
| Tonnage | | | | | |
| Total pounds ¹ | 2,478,059 |
| | 2,339,632 |
| | 5.9 |
|
| Pounds per day ¹ | 9,756 |
| | 9,175 |
| | 6.3 |
|
| | | | | | |
| Shipments | | | | | |
| Total shipments ¹ | 4,048 |
| | 3,770 |
| | 7.4 |
|
| Shipments per day ¹ | 15.9 |
| | 14.8 |
| | 7.4 |
|
Total shipments with pickup and/or delivery 1 | 945 |
| | 782 |
| | 20.8 |
|
| | | | | | |
| Weight per shipment | 612 |
| | 621 |
| | (1.4 | ) |
| | | | | | |
| Revenue per hundredweight | $ | 23.91 |
| | $ | 23.30 |
| | 2.6 |
|
| Revenue per hundredweight, ex fuel | $ | 21.30 |
| | $ | 21.25 |
| | 0.2 |
|
| | | | | | |
| Revenue per shipment | $ | 146 |
| | $ | 145 |
| | 0.7 |
|
| Revenue per shipment, ex fuel | $ | 130 |
| | $ | 132 |
| | (1.5 | )% |
| | | | | | |
| ¹ - In thousands | | | | | |
| | | | | | | | | | | | | | | | | |
| Expedited Freight Operating Statistics |
| | | | | |
| Year ended |
| December 31, | | December 31, | | Percent |
| 2019 | | 2018 | | Change |
| (As Adjusted) | | (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, excluding fuel 3 | $ | 22.90 | | | $ | 22.09 | | | 3.7 | |
| | | | | |
Revenue per shipment 3 | $ | 171 | | | $ | 163 | | | 4.9 | |
Revenue per shipment, excluding 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 LTLFreight operating revenue increased $59.3$59.0 million, or 9.9%6.3%, to $655.8$1,000.9 million for the year ended December 31, 20172019 from $596.5$941.9 million for the same period of 2016. This2018. The increase was due to increased networkfinal mile revenue fuel surchargeof $61.2 million. Network revenue and other terminal based revenue overalso had a modest decrease compared to the prior year. Final mile revenue increased primarily due to the acquisition of FSA in April 2019.
Network revenue increased $30.9decreased $2.2 million due to a 7.4% increase4.4% decrease in shipments and a 5.9% increase3.2% decrease in tonnage partly
offset by a 1.5% decrease4.1% increase in revenue per shipment, ex fuelhundredweight over prior year. The increasedecrease in shipments and 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 legacy airport-to-airport shipments. The increase in revenue per shipment, ex fuel. Additionally, fuel surcharge revenue increased $16.6 million largelyhundredweight was due to the increase in fuel prices increased shipment size
and volume increases. Other terminal based revenues, which includes dedicated local pickup and delivery services, warehousing and terminal handling, increased $11.8 million, or 23.2%, to $62.4 million in 2017 from $50.7 million in the same period of 2016. The increase in other terminal revenue was mainly attributable to increases in dedicated local pickup and delivery.per shipment.
Purchased Transportation
Expedited LTL’sFreight purchased transportation increased by $39.3$20.3 million, or 15.7%4.1%, to $290.0$511.5 million for the year ended December 31, 20172019 from $250.7$491.2 million for the year ended December 31, 2016.2018. As a percentage of segment operating revenue, Expedited LTLFreight purchased transportation was 44.2%51.0% during the year ended December 31, 20172019 compared to 42.0%52.1% for the same period of 2016. The increase is mostly2018. Expedited Freight purchased transportation includes Leased Capacity Providers 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 6.0% increase300 basis point decrease in ourNetwork purchased transportation as a percentage of revenue as linehaul cost per mile ex fuel. The higher cost per mile is due todecreased on increased utilization of Leased Capacity Providers and Company-employed drivers over more costly third-party transportation providers, which are typically more costly than owner-operators.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
Salaries,Expedited Freight salaries, wages and employee benefits of Expedited LTL increased by $7.4$17.7 million, or 5.3%9.7%, to $146.6$200.7 million for the year ended December 31, 20172019 from $139.2$183.0 million in the same period of 2016.2018. Salaries, wages and employee benefits were 22.4%20.1% of Expedited LTL’sFreight’s operating revenue for the year ended December 31, 20172019 and 19.4% for the year ended December 31, 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 $4.5 million, or 10.7%, to $46.6 million for the year ended December 31, 2019 from $42.1 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 23.3%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 $1.8 million, or 6.2%, to $27.4 million for the year ended December 31, 2019 from $29.2 million for the year ended December 31, 2018. Depreciation and amortization expense as a percentage of Expedited Freight operating revenue was 2.7% 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 2016. Theits 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 salaries, wagestractor depreciation, as older units were replaced with tractor leases mentioned above. The net decrease of trailer and employee benefitstractor 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 $5.0 million, or 26.9%, to $23.6 million for the year ended December 31, 2019 from $18.6 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 year ended December 31, 2019 and December 31, 2018. Expedited Freight fuel expenses increased due to higher Company-employed driver miles.
Other Operating Expenses
Expedited Freight other operating expenses increased $12.7 million, or 19.7%, to $77.3 million for the year ended December 31, 2019 from $64.6 million for the year ended December 31, 2018. Expedited Freight other operating expenses were 7.7% 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 0.7% decrease$2.8 million increase in direct Expedited LTLparts 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 management salaries as a percentage of revenueoffice expenses and a 0.2% decrease in health insuranceother over-the-road 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.including tolls.
Income from Operations
Operating Leases
Operating leases increased $2.2Expedited Freight income from operations decreased by $0.1 million, or 6.4%0.1%, to $36.7$103.6 million for the year ended December 31, 2017 from $34.52019 compared to $103.7 million for the year ended December 31, 2016. Operating leases were 5.6% of2018. Expedited LTL’s operating revenue for the year ended December 31, 2017 compared to 5.8% for the year ended December 31, 2016. The increase in cost is due to $1.2 million of additional facility lease expenses and a $1.1 million increase in truck, trailer and equipment rentals and leases. Facility leases increased due to the expansion of certain facilities. Vehicle leases increased due to the replacement of older owned power equipment with leased power equipment.
Depreciation and Amortization
Expedited LTL depreciation and amortization increased $0.2 million, or 0.9%, to $22.1 million for the year ended December 31, 2017Freight’s income from $21.9 million for the year ended December 31, 2016. Depreciation and amortization expense as a percentage of Expedited LTL operating revenueoperations was 3.4% in the year ended December 31, 2017 compared to 3.7% for the year ended December 31, 2016. The decrease as a percentage of revenue was due to the increase in equipment leasing mentioned above instead of purchased equipment.
Insurance and Claims
Expedited LTL insurance and claims expense increased $2.2 million, or 16.7%, to $15.4 million for the year ended December 31, 2017 from $13.2 million for the year ended December 31, 2016. Insurance and claims as a percentage of Expedited LTL’s operating revenue was 2.3% for the year ended December 31, 2017 compared to 2.2% for the year ended December 31, 2016. The increase was partly attributable to a $0.7 million increase in insurance premiums associated with our insurance plan renewals and a $2.0 million increase in vehicle accident claim reserves. These increases were partly offset by decreases in vehicle damage and cargo claims.
Fuel Expense
Expedited LTL fuel expense increased $0.5 million, or 15.2%, to $3.8 million for the year ended December 31, 2017 from $3.3 million in the year ended December 31, 2016. Fuel expense was 0.6% of Expedited LTL’s operating revenue for the years ended December 31, 2017 and 2016. LTL fuel expenses increased due to higher year-over-year fuel prices.
Other Operating Expenses
Expedited LTL other operating expenses increased $2.6 million, or 5.1%, to $53.2 million for the year ended December 31, 2017 from $50.6 million for the year ended December 31, 2016. Expedited LTL other operating expenses were 8.1%10.4% of operating revenue for the year ended December 31, 20172019 compared to 8.5%11.0% for the year ended December 31, 2016. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees, and other costs of transiting our network. The decrease as percentage of revenue was primarily the result of a decrease in legal fees mostly related to indemnification funds received related to the Towne acquisition and lower costs of transiting our network due to the use of third-party transportation previously mentioned. The prior period also included a corporate event that did not occur in 2017. These improvements were partly offset by an increase in receivables allowance.
Income from Operations
Expedited LTL income from operations increased by $4.9 million, or 5.9%, to $88.0 million for the year ended December 31, 2017 compared to $83.1 million for the year ended December 31, 2016. Expedited LTL’s income from operations was 13.4% of operating revenue for the year ended December 31, 2017 compared to 13.9% for the year ended December 31, 2016. Deterioration in income from operations as a percentage of revenue was due to an increased utilization of third-party transportation providers partly offset by higher tonnage driving increased revenue. The fuel surcharge revenue increase was also due to increased fuel prices.
Truckload Premium Services - Year Ended December 31, 2017 compared to Year Ended December 31, 2016
The following table sets forth our historical financial data of the Truckload Premium Services segment for the years ended December 31, 2017 and 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Truckload Premium Services Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 201.8 |
| | 100.0 | % | | $ | 181.0 |
| | 100.0 | % | | $ | 20.8 |
| | 11.5 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 153.8 |
| | 76.2 |
| | 132.1 |
| | 73.0 |
| | 21.7 |
| | 16.4 |
|
| Salaries, wages and employee benefits | 20.4 |
| | 10.1 |
| | 19.3 |
| | 10.7 |
| | 1.1 |
| | 5.7 |
|
| Operating leases | 0.9 |
| | 0.4 |
| | 0.3 |
| | 0.2 |
| | 0.6 |
| | 200.0 |
|
| Depreciation and amortization | 6.3 |
| | 3.1 |
| | 6.5 |
| | 3.6 |
| | (0.2 | ) | | (3.1 | ) |
| Insurance and claims | 5.4 |
| | 2.7 |
| | 4.8 |
| | 2.7 |
| | 0.6 |
| | 12.5 |
|
| Fuel expense | 3.3 |
| | 1.6 |
| | 2.6 |
| | 1.4 |
| | 0.7 |
| | 26.9 |
|
| Other operating expenses | 8.5 |
| | 4.3 |
| | 8.4 |
| | 4.6 |
| | 0.1 |
| | 1.2 |
|
| Impairment of goodwill, intangibles and other assets | — |
| | — |
| | 42.4 |
| | 23.4 |
| | (42.4 | ) | | 100.0 |
|
| Total operating expenses | 198.6 |
| | 98.4 |
| | 216.4 |
| | 119.6 |
| | (17.8 | ) | | (8.2 | ) |
| Income (loss) from operations | $ | 3.2 |
| | 1.6 | % | | $ | (35.4 | ) | | (19.6 | )% | | $ | 38.6 |
| | NM |
|
|
| | | | | | | | | | |
| Truckload Premium Services Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
Total Miles 1 | 96,598 |
| | 89,540 |
| | 7.9 | % |
| Empty Miles Percentage | 9.6 | % | | 11.5 | % | | (16.5 | ) |
| Tractors (avg) | 386 |
| | 437 |
| | (11.7 | ) |
Miles per tractor per week 2 | 2,700 |
| | 2,565 |
| | 5.3 |
|
| | | | | | |
| Revenue per mile | $ | 2.02 |
| | $ | 1.98 |
| | 2.0 |
|
| Cost per mile | $ | 1.66 |
| | $ | 1.56 |
| | 6.4 | % |
| | | | | | |
| ¹ - In thousands | | | | | |
2 - Calculated using Company driver and owner-operator miles |
Revenues
TLS revenue increased $20.8 million, or 11.5%, to $201.8 million for the year ended December 31, 2017 from $181.0 million in the same period of 2016. The increase in TLS revenue was attributable to new business wins which resulted in a 7.9% increase in miles driven to support revenue.
Purchased Transportation
Purchased transportation costs for our TLS revenue increased $21.7 million, or 16.4%, to $153.8 million for the year ended December 31, 2017 from $132.1 million for the year ended December 31, 2016. For the year ended December 31, 2017, TLS purchased transportation costs represented 76.2% of TLS revenue compared to 73.0% for the same period in 2016. The increase in TLS purchased transportation was attributable to a 7.2% increase in non-Company miles driven and a 7.2% increase in non-Company cost per mile during the year ended December 31, 2017 compared to the same period in 2016. The increase in TLS miles driven was attributable to new business wins previously mentioned. The increase in cost per mile was due to TLS utilizing more costly third-party transportation providers to cover miles. The increase in TLS purchased transportation as a percentage of revenue was attributable to TLS revenue per mile not increasing in proportion with the increase in TLS cost per mile.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of TLS increased by $1.1 million, or 5.7%, to $20.4 million in the year ended December 31, 2017 from $19.3 million in the same period of 2016. Salaries, wages and employee benefits were 10.1% of TLS’s operating revenue in the year ended December 31, 2017 compared to 10.7% for the same period of 2016.2018. The decrease in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to the increase in revenue outpacing the increase in pay to Company drivers and office staff.
Operating Leases
Operating leases increased $0.6 million, or 200.0%, to $0.9 million for the year ended December 31, 2017 from $0.3 million for the same period in 2016. Operating leases were 0.4% of TLS operating revenue for the year ended December 31, 2017 compared to 0.2% for the same period of 2016. The $0.6 million increase in cost is due to additional trailer rentals for the new business wins mentioned above.
Depreciation and Amortization
Depreciation and amortization decreased $0.2 million, or 3.1%, to $6.3 million for the year ended December 31, 2017 from $6.5 million for the year ended December 31, 2016. Depreciation and amortization expense as a percentage of TLS operating revenue was 3.1% for the year ended December 31, 2017 compared to 3.6% for the same period in 2016. The decrease was due to the impairment of TQI intangible assets in the second quarter of 2016 leading to lower on-going amortization expense. This decrease was partially offset by increased trailer depreciation on trailers purchased during 2017.
Insurance and Claims
TLS insurance and claims increased $0.6 million, or 12.5%, to $5.4 million for the year ended December 31, 2017 from $4.8 million for the year ended December 31, 2016. As a percentage of operating revenue, insurance and claims was 2.7% for the year ended December 31, 2017 and 2016. The increase was due to higher vehicle accident claim reserves. The increase was also attributable to higher insurance premiums associated with our insurance plan renewals and higher cargo claims partly offset by a benefit from a prior period insurance premium audit.
Fuel Expense
TLS fuel expense increased $0.7 million, or 26.9%, to $3.3 million for the year ended December 31, 2017 from $2.6 million for the year ended December 31, 2016. Fuel expenses were 1.6% of TLS operating revenue during the year ended December 31, 2017 compared to 1.4% for the year ended December 31, 2016. The increase as a percentage of revenue was mostly attributable to higher year-over-year fuel prices and the increase in Company driver miles.
Other Operating Expenses
TLS other operating expenses increased $0.1 million, or 1.2%, to $8.5 million for the year ended December 31, 2017 compared to $8.4 million for the year ended December 31, 2016. TLS other operating expenses were 4.3% of operating revenue for the year ended December 31, 2017 compared to 4.6% for the year ended December 31, 2016. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other costs of transiting shipments. The increase was attributable to a $0.2 million increase in equipment maintenance and a $0.1 million increase in transit costs. These increases were mostly offset by a $0.2 million decrease in losses on destroyed equipment.
Impairment of goodwill, intangibles and other assets
In the second quarter of 2016, we determined there were indicators of potential impairment of goodwill and other long lived assets acquired in the TQI acquisition. Based on our analysis we recorded $42.4 million in total impairment charges related to TQI’s goodwill and other long lived assets. During the year ended December 31, 2017, there were no impairment charges recognized.
Income from Operations
TLS results from operations increased by $38.6 million to $3.2 million in income from operations for the year ended December 31, 2017 compared to a $35.4 million loss from operations for the same period in 2016. Excluding the impairment charges, the deterioration in results from operations was due to lower tonnage, higher insurance premiums and a large vehicle claim reserve, mostly offset by improvements in Network gross margin on increased utilization of third-party transportation providers which led to the increase in cost per mile outpacing the increase in revenue per mile.Leased Capacity Providers and Company-employed drivers and contributions from FSA.
Intermodal - Year Ended December 31, 20172019 compared to Year Ended December 31, 20162018
The following table sets forth our historical financial data of the Intermodal segment for the years ended December 31, 20172019 and 20162018 (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 | | | 3.8 | | | 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 | % |
|
| | | | | | | | | | | | | | | | | | | | |
Intermodal Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 154.7 |
| | 100.0 | % | | $ | 105.7 |
| | 100.0 | % | | $ | 49.0 |
| | 46.4 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 63.6 |
| | 41.1 |
| | 38.1 |
| | 36.0 |
| | 25.5 |
| | 66.9 |
|
| Salaries, wages and employee benefits | 34.0 |
| | 22.0 |
| | 25.2 |
| | 23.8 |
| | 8.8 |
| | 34.9 |
|
| Operating leases | 13.5 |
| | 8.7 |
| | 12.0 |
| | 11.4 |
| | 1.5 |
| | 12.5 |
|
| Depreciation and amortization | 5.8 |
| | 3.8 |
| | 3.9 |
| | 3.7 |
| | 1.9 |
| | 48.7 |
|
| Insurance and claims | 4.2 |
| | 2.7 |
| | 3.0 |
| | 2.8 |
| | 1.2 |
| | 40.0 |
|
| Fuel expense | 3.9 |
| | 2.5 |
| | 2.5 |
| | 2.4 |
| | 1.4 |
| | 56.0 |
|
| Other operating expenses | 16.7 |
| | 10.8 |
| | 9.9 |
| | 9.4 |
| | 6.8 |
| | 68.7 |
|
| Total operating expenses | 141.7 |
| | 91.6 |
| | 94.6 |
| | 89.5 |
| | 47.1 |
| | 49.8 |
|
| Income from operations | $ | 13.0 |
| | 8.4 | % | | $ | 11.1 |
| | 10.5 | % | | $ | 1.9 |
| | 17.1 | % |
|
| | | | | | | | | | |
| Intermodal Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
| Drayage shipments | 235,356 |
| | 127,716 |
| | 84.3 | % |
| Drayage revenue per Shipment | $ | 554 |
| | $ | 546 |
| | 1.5 |
|
| Number of Locations | 19 |
| | 13 |
| | 46.2 | % |
Revenues
Intermodal operating revenue increased $49.0$16.7 million, or 46.4%8.3%, to $154.7$217.7 million for the year ended December 31, 20172019 from $105.7$201.0 million for the same period in 2016.2018. The increases in operating revenue wereincrease was primarily attributable to the increase in drayage shipments from the acquisition of Atlantic, Triumph and AceO.S.T. that occurred in July 2019 and the impactacquisition of increasedSouthwest that occurred in November 2018. The increase was also attributable to revenue rate increases and fuel surcharges.surcharge revenue on higher drayage shipments and higher fuel surcharge rates.
Purchased Transportation
Intermodal purchased transportation increased $25.5decreased $0.2 million, or 66.9%0.3%, to $63.6$76.9 million for the year ended December 31, 20172019 from $38.1$77.1 million for the same period in 2016.2018. Intermodal purchased transportation as a percentage of revenue was 41.1%35.3% for the year ended December 31, 20172019 compared to 36.0%38.4% for the year ended December 31, 2016.2018. Intermodal purchased transportation includes Leased Capacity Providers and third-party carriers, while Company-employed drivers are included in salaries, wages and benefits. The increasedecrease in Intermodal purchased transportation as a percentage of revenue was attributable to the Atlantic acquisition, which had a higherincreased utilization of owner-operators as opposedCompany-employed drivers compared to Company-employed drivers. The increase is also attributable to rate increases to our owner-operators.the same period in 2018 and operating efficiencies.
Salaries, Wages, and Benefits
Intermodal salaries, wages and employee benefits increased $8.8$9.0 million, or 34.9%20.5%, to $34.0$52.9 million for the year ended December 31, 20172019 compared to $25.2$43.9 million for the year ended December 31, 2016.2018. As a percentage of Intermodal operating revenue, salaries, wages and benefits decreased to 22.0%24.3% for the year ended December 31, 20172019 compared to 23.8%21.8% for the same period in 2016.2018. The improvement2.5% increase in salaries, wages and employee benefits as a percentage of revenue was primarily dueattributable to leveraging thea 1.3% increase in revenue on officefrom utilization of Company-employed drivers and a 1.3% increase from higher administrative salaries, leading to a 0.8% decreasewages and benefits as a percentage of revenue. The improvement isincrease as a percentage of revenue was also dueattributable to a 0.5%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 for lower workers'in incentive and share based compensation to employees and health insurance costsa 0.2% improvement in dock pay as a percentage of revenue. The increase in administrative salaries, wages and an additional 0.5% decreasebenefits as a percentage of revenue was due to dock efficiencies.additional headcount from the acquisitions of O.S.T., Southwest and MMT.
Operating Leases
OperatingIntermodal operating leases increased $1.5$0.5 million, or 12.5%3.1% to $13.5$16.4 million for the year ended December 31, 20172019 from $12.0$15.9 million for the same period in 2016.2018. Operating leases were 8.7%7.5% of Intermodal operating revenue for the year ended December 31, 20172019 compared to11.4%to 7.9% 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.2018. The decrease as a percentage of revenue is alsowas attributable to utilizationa 0.7% decrease in trailer rental charges as a percentage of owned equipmentrevenue. This decrease as a percentage of revenue was partly offset by increases in facility rent from acquired as part of Atlanticcompanies and tractor rentals and leases to correspond with the increase in revenue out-pacing the increase in facility rents.Company-employed driver usage mentioned above.
Depreciation and Amortization
DepreciationIntermodal depreciation and amortization increased $1.9$2.6 million, or 48.7%41.3%, to $5.8$8.9 million for the year ended December 31, 20172019 from $3.9$6.3 million for the same period in 2016.2018. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.8%4.1% for the year ended December 31, 20172019 compared to 3.7%3.8% for the same period of 2016.2018. The higherincrease 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 and intangible assets acquired with Atlantic, Triumph and Ace.from O.S.T..
Insurance and Claims
Intermodal insurance and claims expense increased $1.2$0.9 million, or 40.0%15.5%, to $4.2$6.7 million for the year ended December 31, 20172019 from $3.0$5.8 million for the year ended December 31, 2016.2018. Intermodal insurance and claims were 2.7%3.1% of operating revenue for the year ended December 31, 20172019 compared to 2.8%2.9% for the same period in 2016.2018. The increase in Intermodal insurance and claims was primarily attributable to higheran increase in vehicle insurance premiums and increasedpremiums. See additional discussion over the consolidated increase in self-insurance reserves related to vehicle accident claim reserves due to an increased vehicle fleet as a resultclaims in the “Other Operations” section below.
Fuel Expense
Intermodal fuel expense increased $1.4$1.0 million, or 56.0%15.2%, to $3.9$7.6 million for the year ended December 31, 20172019 from $2.5$6.6 million in the same period of 2016.2018. Fuel expenses were 2.5%3.5% of Intermodal operating revenue for the year ended December 31, 20172019 compared to 2.4%3.3% in the same period of 2016.2018. 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.Company-employed driver usage mentioned above.
Other Operating Expenses
Intermodal other operating expenses increased $6.8$2.5 million, or 68.7%11.3%, to $16.7$24.6 million for the year ended December 31, 20172019 compared to $9.9$22.1 million for the same period of 2016.2018. Intermodal other operating expenses as a percentage of revenue for the year ended December 31, 20172019 were 10.8%11.3% compared to 9.4%11.0% for the same period of 2016.2018. The increase in Intermodal other operating expensesexpense was due mostly due to a $3.8$1.0 million increase in container related rental and storage charges associated with revenue increases discussed previously.and a $0.6 million increase in acquisition related legal and professional fees. In 2018, a $0.5 million reduction in the earn-out liability for the Atlantic acquisition was recorded. A similar benefit in the earn-out liability was not recorded in 2019. The remaining increase was due to increased terminal and office expenses and other variableover-the-road costs, such as maintenance and tolls, corresponding with the increases in revenue, and legal and professional fees related to the acquisition of Atlantic.including tolls.
Income from Operations
Intermodal’s income from operations increased by $1.9$0.4 million, or 17.1%1.7%, to $13.0$23.7 million for the year ended December 31, 20172019 compared to $11.1$23.3 million for the same period in 2016.2018. Income from operations as a percentage of Intermodal operating revenue was 8.4%10.9% for the year ended December 31, 20172019 compared to 10.5%11.6% in the same period of 2016.2018. The increase in operating income in total dollars was primarily attributable to the Atlantic, Triumphacquisitions of O.S.T., Southwest and Ace acquisitions. The decreaseMMT. 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 was attributable to increased amortization associated with Intermodal's acquisitions, lower margins on acquired business and acquisition related legal and professional fees.
Pool Distribution - Year Ended December 31, 2017 compared to Year Ended December 31, 2016
The following table sets forth our historical financial data of the Pool Distribution segment for the years ended December 31, 2017 and 2016 (in millions):
revenue.
|
| | | | | | | | | | | | | | | | | | | | |
Pool Distribution Segment Information
|
| (In millions) |
| (Unaudited) |
| | | | | | | | | | | | |
| | Year ended |
| | December 31, | | Percent of | | December 31, | | Percent of | | | | Percent |
| | 2017 | | Revenue | | 2016 | | Revenue | | Change | | Change |
| | (As Adjusted) | | | | (As Adjusted) | | | | | | |
| Operating revenue | $ | 168.5 |
| | 100.0 | % | | $ | 151.9 |
| | 100.0 | % | | $ | 16.6 |
| | 10.9 | % |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Purchased transportation | 47.5 |
| | 28.2 |
| | 43.2 |
| | 28.4 |
| | 4.3 |
| | 10.0 |
|
| Salaries, wages and employee benefits | 62.7 |
| | 37.2 |
| | 56.8 |
| | 37.4 |
| | 5.9 |
| | 10.4 |
|
| Operating leases | 13.3 |
| | 7.9 |
| | 12.7 |
| | 8.5 |
| | 0.6 |
| | 4.7 |
|
| Depreciation and amortization | 6.8 |
| | 4.0 |
| | 6.0 |
| | 3.9 |
| | 0.8 |
| | 13.3 |
|
| Insurance and claims | 4.7 |
| | 2.8 |
| | 4.4 |
| | 2.9 |
| | 0.3 |
| | 6.8 |
|
| Fuel expense | 5.5 |
| | 3.3 |
| | 4.9 |
| | 3.2 |
| | 0.6 |
| | 12.2 |
|
| Other operating expenses | 21.6 |
| | 12.8 |
| | 20.3 |
| | 13.4 |
| | 1.3 |
| | 6.4 |
|
| Total operating expenses | 162.1 |
| | 96.2 |
| | 148.3 |
| | 97.6 |
| | 13.8 |
| | 9.3 |
|
| Income from operations | $ | 6.4 |
| | 3.8 | % | | $ | 3.6 |
| | 2.4 | % | | $ | 2.8 |
| | 77.8 | % |
|
| | | | | | | | | | |
| Pool Distribution Operating Statistics |
| | |
| | Year ended |
| | December 31, | | December 31, | | Percent |
| | 2017 | | 2016 | | Change |
| | (As Adjusted) | | (As Adjusted) | | |
| | | | | | |
Cartons 1 | 82,196 |
| | 69,742 |
| | 17.9 | % |
| Revenue per Carton | $ | 2.05 |
| | $ | 2.18 |
| | (6.0 | ) |
| Terminals | 28 |
| | 29 |
| | (3.4 | )% |
| | | | | | |
1 In thousands | | | | | |
Revenues
Pool operating revenue increased $16.6 million, or 10.9%, to $168.5 million for the year ended December 31, 2017 from $151.9 million for the year ended December 31, 2016. The revenue increase was due to increased fuel surcharge revenues, increased volumes from previously existing customers, new business and rate increases.
Purchased Transportation
Pool purchased transportation increased $4.3 million, or 10.0%, to $47.5 million for the year ended December 31, 2017 from $43.2 million for the year ended December 31, 2016. Pool purchased transportation as a percentage of revenue was 28.2% for the year ended December 31, 2017 compared to 28.4% for the same period in 2016. The improvement in Pool purchased transportation as a percentage of revenue was attributable to an increased utilization of owner-operators over more costly third-party carriers and revenue increases associated with rate increases.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Pool increased by $5.9 million, or 10.4%, to $62.7 million for the year ended December 31, 2017 from $56.8 million for the year ended December 31, 2016. As a percentage of Pool operating revenue, salaries, wages and benefits were 37.2% for the years ended December 31, 2017 compared to 37.4% for the same period in 2016. As a percentage of revenue, increases in dock pay and employee incentive were more than offset by decreases in Company-employed driver pay as a percentage of revenue. Dock pay increased as a percentage of revenue as increasing revenue volumes required the use of more costly contract labor. While Company-employed driver pay increased in total cost on higher miles, it decreased as a percentage of revenue due to increases in revenues not requiring Company-employed drivers, such as fuel.
Operating Leases
Operating leases increased $0.6 million, or 4.7%, to $13.3 million for the year ended December 31, 2017 from $12.7 million for the year ended December 31, 2016. Operating leases were 7.9% of Pool operating revenue for the year ended December 31, 2017 compared to 8.5% for the year ended December 31, 2016. Operating leases increased due to additional truck and trailer leases and rentals used to provide capacity for additional business wins throughout the network, partially offset by reduced facility rent driven by higher rent in 2016 attributable to the transition and relocation of certain terminals. The decrease as a percentage of revenue is attributable to increased revenue.
Depreciation and Amortization
Depreciation and amortization increased $0.8 million, or 13.3%, to $6.8 million for the year ended December 31, 2017 compared to $6.0 million for the same period in 2016. Depreciation and amortization expense as a percentage of Pool operating revenue was 4.0% for the year ended December 31, 2017 compared to 3.9% for the year ended December 31, 2016. The increase in Pool depreciation and amortization was due to the allocation of trailer depreciation, which reflects Pool's increased utilization of our trailer fleet. This increase was partly offset by a decrease in tractor depreciation due to the increased use of rentals and leases mentioned above.
Insurance and Claims
Pool insurance and claims increased $0.3 million, or 6.8%, to $4.7 million for the year ended December 31, 2017 from $4.4 million for the year ended December 31, 2016. As a percentage of operating revenue, insurance and claims was 2.8% for the year ended December 31, 2017 compared to 2.9% for the year ended December 31, 2016. The decrease as a percentage of revenue was due to a decrease in cargo claims, partly offset by increases in vehicle accident claim reserves.
Fuel Expense
Pool fuel expense increased $0.6 million, or 12.2%, to $5.5 million for the year ended December 31, 2017 from $4.9 million for the year ended December 31, 2016. Fuel expenses were 3.3% of Pool operating revenue during the year ended December 31, 2017 compared to 3.2% for the year ended December 31, 2016. Pool fuel expenses increased due to higher year-over-year fuel prices and higher revenue volumes.
Other Operating Expenses
Pool other operating expenses increased $1.3 million, or 6.4%, to $21.6 million for the year ended December 31, 2017 compared to $20.3 million for the year ended December 31, 2016. Pool other operating expenses were 12.8% of operating revenue for the year ended December 31, 2017 compared to 13.4% for the year ended December 31, 2016. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other over-the-road costs. As a percentage of revenue the decrease was attributable to a 0.3% decrease in dock and facility related costs, a 0.2% decrease in legal and professional fees and 0.2% decrease due to improved agent station margins. These improvements were partly offset by losses incurred on the sale of old equipment. The dock and facility related cost improvements were mainly attributable to 2016 including the startup of new business, while similar costs were not incurred in 2017. The decrease in legal fees is primarily related to costs associated with a 2016 Department of Transportation safety audit that were not incurred in 2017.
Income from Operations
Pool income from operations increased by $2.8 million, or 77.8% to $6.4 million for the year ended December 31, 2017 from $3.6 million for the year ended December 31, 2016. Pool income from operations was 3.8% of operating revenue for the year ended December 31, 2017 compared to 2.4% of operating revenue for the year ended December 31, 2016. The improvement in Pool income from operations was primarily the result of higher revenue volumes, current year rate increases, purchased transportation efficiencies and lower facility costs.
Other operations - Year Ended December 31, 20172019 compared to Year Ended December 31, 20162018
Other operating activity improveddeclined from a $2.7$9.8 million operating loss during the year ended December 31, 20162018 to a $1.8an $14.9 million operating loss during the year ended December 31, 2017.2019. The year ended December 31, 2017, includes $1.22019 included $6.5 million in vehicular reserves for unfavorable development of second quarter 2019 claims and increases to our loss development reservesfactors for vehicle and workers'workers’ compensation claims $0.9of $2.8 million of executive severance costs and $0.4 of turn$0.3 million, respectively. The loss was also attributed to $3.6 million 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.CEO transition.
The $2.7$9.8 million in operating loss included in other operations and corporate activities for the year endedending December 31, 2016, was primarily for $1.72018 included a $6.0 million increase in self-insurance reserves related to existing vehicular claims and $0.8 million in loss developmentself- insurance reserves resulting from our semi-annual actuarial analyses of our workers' compensation claims. Other operations forThe loss was also attributable to $1.1 million in costs related to 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.CEO transition, comprised of recruiting fees and retention share awards.
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 judgments, estimates and assumptions that affect the reported amounts reported inof assets and liabilities, the consolidateddisclosure of contingent assets and liabilities at the date of the financial statements and accompanying notes.the reported amounts of revenues and expenses during the reporting period. 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. The significant accounting policies followed in the preparation of the financial statements are detailed in Note 1 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.”
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 considersWe believe that our application of the policies on discussed below involves significant levels of judgment, estimates and complexity. Due to the levels of judgment, complexity and period of time over which many of these items are resolved, actual results could differ from those estimated at the time of preparation of the financial statements. Adjustments to these estimates would impact our financial position and future results of operations.
Self-Insurance Loss Reserves
We provide for the estimated costs of vehicle liability and workers’ compensation claims both reported and for claims incurred but not reported. The amount of self-insurance loss reserves and loss adjustment expenses is determined based on an estimation process that uses information obtained from both our-specific and industry data, as well as general economic information. We estimate our self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and through actuarial analysis to determine an estimate of probable losses on claims incurred but not reported. If the events underlying the claims have occurred as of the balance sheet date, then losses are recognized immediately. Historically, we have experienced both favorable and unfavorable development of claim estimates.
The estimation process for self-insurance loss exposure requires management to continuously monitor and evaluate the life cycle of claims. Using data obtained from this monitoring and our assumptions about the emerging trends, management develops an 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. We utilize quarterly actuarial analyses to evaluate open claims and estimate the ongoing development exposure.
As of December 31, 2020 and 2019, we recorded insurance reserves of $72.7 million and $66.2 million, respectively, inclusive of reserves in excess of the self-insured retention limit that are expected to be reimbursed from insurance carriers. Additionally, we recognized a receivable for insurance proceeds and a corresponding claims payable for vehicle liability and workers’ compensation claims in excess of the self-insured retention limit in the amount of $36.7 million and $34.1 million as of December 31, 2020 and 2019, respectively.
Business Combinations and Goodwill
Acquisitions are accounted for using the purchase method. Upon the acquisition of a business, the fair value of the assets acquired and Other Intangible Assets toliabilities assumed must be critical. See Note 1, Accounting Policies to our Consolidated Financial Statements for a discussion over these critical accounting policiesestimated. This requires judgments regarding the identification of acquired assets and estimates,
liabilities assumed, some of which may not have been previously recorded by the acquired business, as well as judgments regarding the valuation of all identified acquired assets and assumed liabilities. The assets acquired and liabilities assumed are determined by reviewing the operations, interviewing management and reviewing the financial and contractual information of the acquired business. Consideration is typically paid in the form of cash paid upon closing or contingent consideration paid upon satisfaction of a discussionfuture obligation. If contingent consideration is included in the purchase price, we value that consideration as of recent accounting pronouncements.the acquisition date and it is recorded to goodwill.
Once the acquired assets and assumed liabilities are identified, the fair value of the assets and liabilities are estimated using a variety of approaches that require significant judgments. For example, intangible assets are typically valued using a discounted cash flow (“DCF”) analysis, which requires estimates of the future cash flows that are attributable to the intangible asset. A DCF analysis also requires significant judgments regarding the selection of discount rates that are intended to reflect the risks that are inherent in the projected cash flows, the determination of terminal growth rates, and judgments about the useful life and pattern of use of the underlying intangible asset. The valuation of acquired property, plant and equipment requires judgments about current market values, replacement costs, the physical and functional obsolescence of the assets and their remaining useful lives. A failure to appropriately assign a fair value 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 the excess of purchase price over the fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized but rather we conduct 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. Intangible assets are amortized over their useful lives.
Assets Classified as Held for Sale
We evaluate our assets held for sale upon meeting the criteria for held for sale classification and in each subsequent reporting period to determine whether the fair value, less costs to sell, exceeds the net carrying value. The fair value is estimated based on a combination of an income approach using a discounted cash flow model, and a market approach, which considers comparable companies. Estimates of future cash flows are based on various factors, including current operating results, expected market trends and competitive influences. We make various assumptions regarding future cash flows, market multiples, growth rates and discount rates in our estimate of the fair value of assets held for sale. These assumptions require significant judgments and the conclusions reached could vary significantly based upon these judgments.
Liquidity and Capital Resources
We have historically financed our working capital needs, including capital expenditures, with cash flows from operations and borrowings under our seniorrevolving credit facility line of credit.
Year Ended December 31, 2018 Cash Flows compared to December 31, 2017 Cash Flows
Net cash provided by operating activities totaled approximately $152.6 million for the year ended December 31, 2018 compared to approximately $103.4 million for the year ended December 31, 2017. The $49.2 million increase in cash provided by operating activities is mainly attributable to a $25.5 million increase in net earnings after consideration of non-cash items and a $21.3 million improvement in the collection of receivables, primarily related to 2017 receivables increasing for revenues related to the Atlantic acquisition. The remaining increase was due to a decrease in estimated income tax payments.
Net cash used in investing activities was approximately $55.5 million for the year ended December 31, 2018 compared with approximately $59.2 million during the year ended December 31, 2017. Investing activities during the year ended December 31, 2018 consisted primarily of net capital expenditures of $35.2 million primarily for new trailers, information technology and sorting equipment and $20.0 million used to acquire Southwest and MMT. Investing activities during the year ended December 31, 2017 consisted primarily of net capital expenditures of $35.8 million primarily for new trailers, forklifts and information technology and $23.1 million used to acquire Atlantic and KCL. The proceeds from disposal of property and equipment during the year ended December 31, 2018 and 2017 were primarily from sales of older trailers.
Net cash used in financing activities totaled approximately $75.3 million for the year ended December 31, 2018 compared with net cash used in financing activities of $48.8 million for the year ended December 31, 2017. The $26.5 million increase was attributable to a $48.0 million decrease in netfacility. We believe that borrowings fromunder our revolving credit facility, partly offset by a $28.0 million decrease in payments ontogether with available cash and internally generated funds, will be sufficient to support our term loanworking capital, capital expenditures and a $14.5 million decrease in payments on our line of credit. Additionally, there was a $3.5 million decrease in cash from employee stock transactions and related tax benefits. The year ended December 31, 2018 also included $66.1 million used to repurchase shares of our common stock, which was a $17.1 million increase from the $49.0 million used to repurchase shares of common stockdebt service requirements for the same period of 2017. The remaining changeforeseeable future.
We use LIBOR as a reference rate 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, 2018 compared to the same period in 2017.
Year Ended December 31, 2017 Cash Flows compared to December 31, 2016 Cash Flows
Net cash provided by operating activities totaled approximately $103.4 million for the year ended December 31, 2017 compared to approximately $130.4 million for the year ended December 31, 2016. The $27.0 million decrease in cash provided by operating activities is mainly attributable to a $23.4 million increase in accounts receivable and a $23.5 million increase in income tax payments. These decreases were partly offset by a $9.8 million increase in net earnings after consideration of non-cash items and $10.1 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.
Net cash used in investing activities was approximately $59.2 million for the year ended December 31, 2017 compared to approximately $52.4 million during the year ended December 31, 2016. Investing activities during the year ended December 31, 2017 consisted primarily of $23.1 million used to acquire Atlantic and a small Intermodal acquisition and net capital expenditures of $35.8 million primarily for new trailers, forklifts and information technology. Investing activities during the year ended December 31, 2016 consisted primarily of $11.8 million used to acquire Ace 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. The proceeds from disposal of property and equipment during the year ended December 31, 2017 and 2016 were primarily from sales of older trailers and vehicles.
Net cash used in financing activities totaled approximately $48.8 million for the year ended December 31, 2017 compared to net cash used in financing activities of $102.8 million for the year ended December 31, 2016. The $54.0 million change in cash from financing activities was attributable to $55.0 million in borrowings from our revolving credit facility and a $13.0 million decrease in payments on the term loan and revolver. These increases in cash were partly offset by a $9.0 million increase in share repurchases, a $2.5 million increase in our quarterly cash dividend and a $2.5 million decrease in cash from employee stock transactions. The year ended December 31, 2017 also included $49.0 million used to repurchase shares of our Common Stock, compared to $40.0 million used to repurchase shares of our Common Stock during the year ended December 31, 2016. Dividends increasedcalculate interest due to our Board of Directors increasinglender. In the quarterly cash dividend from $0.12 per share forevent the first three quarters of 2016 to $0.15 per share during the fourth quarter of 2016 and all quarters in 2017.
Credit Facility
On September 29, 2017, the Company entered into a five-year senior unsecuredLIBOR is no longer published, we have amended our revolving credit facility (the “Facility”) withto include provisions to address establishing a replacement benchmark rate.
In April 2020, we entered into an amendment to the revolving credit facility, which increased the maximum aggregate principal amount of $150.0 million, with a sublimit of $30.0 million for letters ofto $225.0 million. The senior credit and a sublimit of $30.0 million for swing line loans. The Facilityfacility may be increased by up to $100.0$25.0 million to a maximum aggregate principal amount of $250.0 million pursuant to the terms of the amended 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 anddefault. We 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 Company’s ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization, as set forth in the credit agreement. Payments of interest for each loan that is based on the LIBOR Rate are due in arrears on the last day of the interest period applicable to such loan (with interest periods of one, two or three months being available, at the Company’s option). Payments of interest on loans that are not based on the LIBOR Rate are due on the last day of each quarter ended March 31, June 30, September 30 and December 31 of each year. All unpaid amounts of principal and interest are due at maturity. As of December 31, 2018, the Company had $47.5 million in borrowings outstanding under the revolving credit facility, $10.7 million utilized for outstanding letters of credit and $91.8 million of available borrowing capacity under the revolving credit facility. The interest rate on the outstanding borrowings under the facility was 4.1% at December 31, 2018.
The Facility contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, material judgment defaults, and the occurrence of certain
change of control events. The occurrence of an event of default may result in, among other things, the termination of the Facilities, acceleration of repayment obligations and the exercise of remedies by the lenders with respect to the Company and its subsidiaries that are party to the Facility. The Facility also contains financial covenants and other covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of the required lenders, to engage in certain mergers, consolidations, asset sales, dividends and stock repurchases, investments, and other transactions or to incur liens or indebtedness in excess of agreed thresholds, as set forth in the credit agreement. As of December 31, 2018, the Company was in compliance with the aforementioned covenants.financial covenants contained in the senior credit facility and expect to continue to maintain such compliance. Should we ever encounter difficulties, our historical relationship with our lenders has been strong and we anticipate their continued support of our business. Refer to Note 4 to the Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information regarding our revolving credit facility.
Share RepurchasesCash Flows
On July 21, 2016, our BoardYear Ended December 31, 2020 Cash Flows compared to December 31, 2019 Cash Flows
Continuing Operations
Net cash provided by operating activities of Directors approvedcontinuing operations totaled approximately $96.1 million for the year ended December 31, 2020 compared to approximately $145.5 million for the year ended December 31, 2019. The $49.4 million decrease in cash provided by operating activities of continuing operations is mainly attributable to a stock repurchase authorization$34.9 million decrease in net earnings after consideration of non-cash items and a $14.5 million decrease in cash from operating assets and liabilities.
Net cash used in investing activities of continuing operations was approximately $81.5 million for up to 3.0the year ended December 31, 2020 compared with approximately $58.3 million shares of the Company's Common Stock. In connection with this action, the board canceled the Company's 2014 repurchase plan. Under the 2016 repurchase plan, during the year ended December 31, 2017, we repurchased 947,819 shares2019. Continuing investing activities during the year ended December 31, 2020 included the acquisition of Linn Star for $55.9 million. Investing activities of continuing operations during the year ended December 31, 2019 included the acquisitions of FSA for $27.0 million and O.S.T. for $12.0 million. In addition, the year ended December 31, 2020 included net capital expenditures of $20.3 million, of which approximately $9.8 million related to an organic investment to expand the capacity of the Company's national hub in Columbus, Ohio (“CMH”), which the Company announced on July 27, 2020. The year ended December 31, 2019 included net capital expenditures of $22.0 million primarily for new trailers, information technology and facility equipment. The proceeds from disposal of property and equipment during the years ended December 31, 2020 and 2019 were primarily from sales of older trailers.
Net cash used in financing activities of continuing operations totaled approximately $39.1 million for the year ended December 31, 2020 compared with net cash used in financing activities of continuing operations of $48.1 million for the year ended December 31, 2019. The $8.2 million decrease in cash used in continuing financing activities was attributable to a $45.0 million increase in net borrowings on the revolving credit facility and a $11.0 million decrease in the repurchase of common stockstock. These decreases in cash used were partially offset by a $20.0 million repayment on the revolving credit facility, a $20.5 million increase in distributions to a subsidiary held for $49.0sale (Pool) and a $5.3 million orpayment on the FSA earn-out.
Discontinued Operation
Net cash used in discontinued operating activities was approximately $11.4 million for the year ended December 31, 2020 compared to net cash provided by discontinued operating activities was approximately $13.5 million for the year ended December 31, 2019. The $24.9 million decrease in cash provided by discontinued operating activities was primarily attributable to a decrease in discontinued net earnings after consideration of non-cash items. The non-cash items for the year ended December 31, 2020 included an averageimpairment charge of $51.68 per share. Under$28.4 million to impair Pool's goodwill balance of $5.4 million and the 2016 repurchase plan,establishment of a valuation allowance of $23.0 million against Pool's assets held for sale.
Net cash used in discontinued investing activities was approximately $1.2 million for the year ended December 31, 2020 compared to approximately $5.5 million during the year ended December 31, 2019. The $4.3 million decrease in cash used in discontinued operations was due to changes in net capital expenditures primarily for trailers and facility equipment. Proceeds from disposal of property and equipment during the year ended December 31, 2020 and 2019 were primarily from sales of older tractors and trailers.
Net cash provided by financing activities was approximately $12.6 million for the year ended December 31, 2020 compared to net cash used in discontinued financing activities of $7.9 million for the year ended December 31, 2019. The $20.5 million increase in cash provided by discontinued financing activities was attributable to contributions from the parent as discussed above.
Year Ended December 31, 2019 Cash Flows compared to December 31, 2018 Cash Flows
Continuing Operations
Net cash provided by operating activities of continuing operations totaled approximately $145.5 million for the year ended December 31, 2019 compared to approximately $142.4 million for the year ended December 31, 2018. The $3.1 million increase in cash provided by operating activities of continuing operations was mainly attributable to an improvement in the collection of receivables and a decrease in estimated income tax payments. This increase was partly offset by a decrease in accounts payable and accrued expenses, an increase in prepaid expenses due to the purchase of cloud-based software and a decrease in net earnings after consideration of non-cash items.
Net cash used in investing activities of continuing operations was approximately $58.3 million for the year ended December 31, 2019 compared with approximately $52.2 million during the year ended December 31, 2018. Investing activities during the year ended December 31, 2019 consisted primarily of FSA for $27.0 million, O.S.T. for $12.0 million and net capital expenditures of $22.0 million primarily for new trailers, information technology and facility equipment. Investing activities during the year ended December 31, 2018 we repurchased 1,109,270consisted primarily of net capital expenditures of $39.6 million primarily for new trailers, information technology and sorting equipment and $20.0 million used to acquire Southwest and MMT. The proceeds from disposal of property and equipment during the year ended December 31, 2019 and 2018 were primarily from sales of older trailers.
Net cash used in financing activities of continuing operations totaled approximately $48.1 million for the year ended December 31, 2019 compared with net cash used in financing activities of $68.4 million for the year ended December 31, 2018. The $20.3 million decrease was attributable to a $13.0 million increase in net borrowings from our revolving credit facility. The year ended December 31, 2019 also included $56.2 million used to repurchase shares of our common stock, which was a $9.9 million decrease from the $66.1 million used to repurchase shares of common stock for $66.1the same period of 2018. These were partly offset by a $2.0 million orincrease in payments of cash dividends due to an averageincrease in dividend per 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 decrease 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 and related tax benefits and a $0.7 million increase in payments of $59.61debt and finance lease obligations as well as a $1.0 million increase in contributions from a subsidiary held for sale (Pool).
Discontinued Operation
Net cash provided by discontinued operating activities was approximately $13.5 million for the year ended December 31, 2019 compared to net cash provided by discontinued operating activities of approximately $10.2 million for the year ended December 31, 2018. The $3.3 million increase in cash provided by discontinued operating activities was primarily attributable to an increase in discontinued net earnings after consideration of non-cash items.
Net cash used in discontinued investing activities was approximately $5.5 million for the year ended December 31, 2019 compared to approximately $3.2 million during the year ended December 31, 2018. The $2.3 million increase in cash used in discontinued operation was due to changes in net capital expenditures primarily for trailers and facility equipment. Proceeds from disposal of property and equipment during the years ended December 31, 2020 and 2019 were primarily from sales of older tractors and trailers.
Net cash used in discontinued financing activities was approximately $7.9 million for the year ended December 31, 2019 compared to net cash used in discontinued financing activities of $6.9 million for the year ended December 31, 2018. The
$1.0 million increase in cash used in discontinued financing activities was attributable to distributions to the parent as discussed above.
Share Repurchase Program
During 2020 and 2019, we repurchased 0.8 million and 0.9 million shares of our common stock, respectively, for approximately $45.2 million and $56.2 million, respectively, through open market transactions. All shares received were retired upon receipt, and the excess of the purchase price over par value per share. Asshare was recorded to “Retained Earnings” within our Consolidated Balance Sheets.
Contractual Obligations
The future payments required under our significant contractual obligations as of December 31, 2018, 709,395 shares remain that may be repurchased.2020 are as follows:
On February 5, 2019, our Board of Directors canceled the Company’s remaining 2016 share repurchase authorization and approved a stock repurchase authorization for up to five million shares of the Company’s common stock. The amount and timing of any repurchases under the Company’s new repurchase authorization will be at such prices as determined by management of the Company. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. Stock repurchases may be commenced or suspended from time to time for any reason. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due Period (in millions) |
| | | | | | | | | | 2026 and |
| | Total | | 2021 | | 2022-2023 | | 2024-2025 | | Thereafter |
| Senior credit facility | | $ | 112.5 | | | $ | — | | | $ | 112.5 | | | $ | — | | | $ | — | |
| Operating lease obligations | | 149.4 | | | 48.7 | | | 62.5 | | | 28.7 | | | 9.5 | |
| Finance lease obligations | | 7.2 | | | 2.0 | | | 3.4 | | | 1.8 | | | — | |
| Unconditional purchase obligations | | 2.6 | | | 2.6 | | | — | | | — | | | — | |
| Other short-term and long-term obligations | | 0.5 | | | 0.3 | | | 0.1 | | | 0.1 | | | — | |
| | | | | | | | | | |
| Total contractual cash obligations | | $ | 272.2 | | | $ | 53.6 | | | $ | 178.5 | | | $ | 30.6 | | | $ | 9.5 | |
Dividends
During each quarter of 2017 and the first three quarters of 2018, our Board of Directors declared a cash dividend of $0.15 per share. During the fourth quarter of 2018 our Board of Directors declared a quarterly cash dividend of $0.18 per share. We expect to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by our Board of Directors.
We believe that our available cash, investments, expected cash generated from future operations and borrowings under the available credit facility will be sufficient to satisfy our anticipated cash needs for at least the next twelve months. However, we continue to evaluate and pursue acquisitions that can increase our penetration 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, 2018,2020, we had letters of credit outstanding from banks totaling $10.7$18.3 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, 2018 (in thousands) are summarized below:
|
| | | | | | | | | | | | | | | | | | | | |
| Contractual Obligations |
| Payment Due Period (in millions) |
|
|
|
|
|
|
|
|
|
| 2024 and |
|
| Total |
| 2019 |
| 2020-2021 |
| 2022-2023 |
| Thereafter |
| Capital lease obligations |
| $ | 0.4 |
|
| $ | 0.3 |
|
| $ | 0.1 |
|
| $ | — |
|
| $ | — |
|
| Equipment purchase commitments |
| 14.3 |
|
| 14.3 |
|
| — |
|
| — |
|
| — |
|
| Operating leases |
| 159.3 |
|
| 51.4 |
|
| 70.6 |
|
| 25.8 |
|
| 11.5 |
|
| Total contractual cash obligations |
| $ | 174.0 |
|
| $ | 66.0 |
|
| $ | 70.7 |
|
| $ | 25.8 |
|
| $ | 11.5 |
|
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 principallyexpense is, in part, sensitive to changes inthe general level of interest rates for borrowingsrates. Borrowings outstanding under our senior unsecured credit facility. The revolving credit had $47.5facility was approximately $112.5 million outstanding at December 31, 20182020 and bearbears interest at variable rates. However, aA hypothetical increase in our credit facility borrowing rate of 150 basis points or an increase in the total effective interest rate from 3.4% to 4.9%, would increase our annual interest expense by approximately $0.6$1.7 million and would have decreased our annual cash flow from operations by approximately $0.6$1.7 million.
Our only other debt is capitalare finance lease obligations totaling $0.4$6.8 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 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, 2018.2020. 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, 2018.2020. In making this assessment, management used the framework set forth by the Committee on Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework ("“2013 Framework"Framework”). Based on our assessment, we have concluded, as of December 31, 2018,2020, 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, 2018,2020, has issued an attestation report on the Company’s internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarterNone.
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, 2018,2020, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria)“COSO criteria”). In our opinion, Forward Air Corporation (the Company)“Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the consolidated balance sheets as of December 31, 20182020 and 2017,2019, the related consolidated statements of comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2018,2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "financial statements"“financial statements”) and our report dated February 20, 201926, 2021 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 20, 201926, 2021 |
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, 2018.
The following are our executive officers: |
| | | | |
Name | | Age | | Position |
Bruce A. Campbell | | 67 | | Executive Chairman |
Thomas Schmitt | | 53 | | President, Chief Executive Officer and Director |
Michael J. Morris | | 50 | | Chief Financial Officer, Senior Vice President and Treasurer |
Michael L. Hance | | 47 | | Senior Vice President, Chief Legal Officer & Secretary |
Chris C. Ruble | | 56 | | Chief Operating Officer - Expedited LTL, TLS and Pool Distribution |
Matthew J. Jewell | | 52 | | President - Intermodal |
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 Executive Chairman since September 2018 and as a director since April 1993. From October 2003 to September 2018, Mr. Campbell served as President and Chief Executive Officer and as Chairman of the Board since May 2007.
Thomas Schmitt has served as President, Chief Executive Officer and Director since September 2018. From June 2015 to September 2018, Mr. Schmitt was a member of the senior management of Schenker AG, and most recently held the title of Chief Commercial Officer. Prior to joining Schenker, from January 2013 to June 2015, he served as Chief Executive Officer and President of AquaTerra Corporation. Prior to AquaTerra, Mr. Schmitt held various senior executive positions including Chief Executive Officer and President of Purolator, Inc. and Chief Executive Officer and President of Fedex Global Supply Chain Services from 1998 to 2010. Mr. Schmitt was a Senior Engagement Manager at McKinsey & Company from 1993 to 1998.
Michael J. Morris has served as Chief Financial Officer, Senior Vice President 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 Senior Vice President, Chief Legal Officer and Secretary since May 2014. From May 2010 until May 2014, he served as Senior Vice President of Human Resources and General Counsel. From January 2008 until May 2010, he served as Senior Vice President and General Counsel, and from August 2006 until January 2008, he served as Vice President and Staff Counsel. Before joining us, Mr. Hance practiced law with the law firms of Baker, Donelson, Bearman, Caldwell and Berkowitz, P.C. from October 2003 until August 2006 and with Bass, Berry & Sims, PLC from September 1999 to September 2003.
Chris C. Ruble was appointed to Chief Operating Officer for the Company's Expedited LTL, TLS and Pool Distribution segments, effective June 2018. Mr. Ruble was President - Expedited Services from January 2016 to June 2018, Executive Vice President, Operations from August 2007 to January 2016, and Senior Vice President, Operations from October 2001 until August 2007. He was a Regional Vice President from September 1997 to October 2001 and a regional manager from February 1997 to September 1997, after starting with the Company as a terminal manager in January 1996. From June 1986 to August 1995, Mr. Ruble served in various management capacities at Roadway Package System, Inc.
Matthew J. Jewell was appointed to President of the Intermodal business, effective June 2018. Mr. Jewell was 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 informationInformation required by this item is incorporated herein by reference to our proxy statement for the 20192021 Annual Meeting of Shareholders (the “2019“2021 Proxy Statement”). The 20192021 Proxy Statement will be filed with the SEC not later than 120 days subsequent to December 31, 2018.2020.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 20192021 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 20192021 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 20192021 Proxy Statement.
Item 14. Principle Accounting Fees and Services
The information required by this item is incorporated herein by reference to the 20192021 Proxy Statement.
Part IV
Item 15. Exhibits, Financial Statement Schedules
| |
(a)(1) and (2) | List of Financial Statements and 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.
(a)(3) List of Exhibits.
The response to this portion of Item 15 is submitted as a separate section of this report.
(b) Exhibits.
The response to this portion of Item 15 is submitted as a separate section of this report.
| |
(c) | Financial Statement Schedules. |
(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 26, 2021 | | By: | /s/ Michael J. Morris |
| | | | Michael J. Morris |
| | | | Chief Financial Officer and Treasurer |
| | | | (Principal Financial Officer and Duly Authorized Officer) |
| | | | |
| | | | |
| | | Forward Air Corporation | |
| | | | |
Date: | February 20, 2019 | | By: | /s/ Michael J. Morris |
| | | | Michael J. Morris |
| | | | Chief Financial Officer, Senior Vice President |
| | | | and Treasurer (Principal Financial 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/ Thomas Schmitt | | Chairman, President and Chief Executive Officer | | February 26, 2021 |
| Thomas Schmitt | | (Principal Executive Officer) | | |
| | | | |
| /s/ Michael J. Morris | | Chief Financial Officer and Treasurer | | February 26, 2021 |
| Michael J. Morris | | (Principal Financial Officer) | | |
| | | | |
| /s/ R. Craig Carlock | | Lead Director | | February 26, 2021 |
| R. Craig Carlock | | | | |
| | | | |
| /s/ Ronald W. Allen | | Director | | February 26, 2021 |
| Ronald W. Allen | | | | |
| | | | |
Signature/s/ Ana B. Amicarella | | TitleDirector | | DateFebruary 26, 2021 |
/s/ Thomas SchmittAna B. Amicarella | | President, Chief Executive Officer and Director | | February 20, 2019 |
Thomas Schmitt
| | (Principal Executive Officer) | | |
| /s/ Valerie A. Bonebrake | | Director | | February 26, 2021 |
/s/ Michael J. MorrisValerie A. Bonebrake | | Chief Financial Officer, Senior Vice President | | February 20, 2019 |
Michael J. Morris | | and Treasurer (Principal Financial Officer) | | |
| | | | |
/s/ Bruce A. Campbell | | Executive Chairman | | February 20, 2019 |
Bruce A. Campbell
| | | | |
| | | | |
| /s/ C. Robert Campbell | | Lead Director | | February 20, 201926, 2021 |
| C. Robert Campbell | | | | |
| | | | |
/s/ Ronald W. Allen | | Director | | February 20, 2019 |
Ronald W. Allen | | | | |
| | | | |
/s/ Ana B. Amicarella | | Director | | February 20, 2019 |
Ana B. Amicarella
| | | | |
| | | | |
/s/ Valerie A. Bonebrake | | Director | | February 20, 2019 |
Valerie A. Bonebrake | | | | |
| | | | |
/s/ R. Craig Carlock | | Director | | February 20, 2019 |
R. Craig Carlock | | | | |
| | | | |
| /s/ C. John Langley, Jr. | | Director | | February 20, 201926, 2021 |
| C. John Langley, Jr. | | | | |
| | | | |
| /s/ G. Michael Lynch | | Director | | February 20, 201926, 2021 |
| G. Michael Lynch | | | | |
| | | | |
| /s/ Laurie A. Tucker | | Director | | February 26, 2021 |
| Laurie A. Tucker | | | | |
| | | | |
/s/ W. GilGilbert West | | Director | | February 20, 201926, 2021 |
| 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, 20182020
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)“Company”) as of December 31, 20182020 and 2017,2019, the related consolidated statements of comprehensive income, shareholders'shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018,2020, 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"statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2020, 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)(“PCAOB”), Forward Air Corporation’s internal control over financial reporting as of December 31, 2018,2020, 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 20, 201926, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.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 communicating 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 $72.7 million at December 31, 2020 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 Sheet. 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. | | | |
| | | | |
|
| | | | | | | | | | | | | |
/s/ Ernst & Young LLPHow 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 2020, the Company acquired certain net assets of Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC (collectively, “Linn Star”) for total net consideration of $57.2 million, as disclosed in Note 3 to the consolidated financial statements. This transaction was accounted for as a business combination.
| | | |
| Auditing the Company's accounting for its business combination was complex due to the significant judgment required by management to determine the fair value of the acquired assets and liabilities, especially the customer relationship intangible assets of $29.8 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 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). These significant assumptions are forward looking and could be affected by future economic and market conditions. | | | |
| | | | |
How We have servedAddressed the Matter in Our Audit | We tested internal controls over management’s review of the recognition and measurement of consideration transferred and customer-related intangible assets acquired, including management’s review over the valuation models and underlying assumptions used to develop such estimates.
| | | |
| To test the estimated fair value of the customer-related intangible assets, our audit procedures included, among others, evaluating the Company's use of the income approach (the excess earnings method) and testing the significant assumptions described above, including the completeness and accuracy of the underlying data. 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 valuation specialists to assist in our evaluation of certain of the significant assumptions described above. | | | |
| | | | |
| Valuation of Assets Classified as Held for Sale | | | |
| Description of the Matter | During 2020, the Company approved a strategy to divest its Pool business within the next year. As described in Note 2 to the consolidated financial statements, the financial statements reflect the Pool business as assets held for sale for all periods presented. Due to the decision to divest the Pool business, the Company measured the net assets of the Pool business at the lower of fair value less costs to sell or carrying value each reporting period. In conjunction with this assessment, the Company recorded an impairment charge of $28.4 million for the year ended December 31, 2020 to reduce the carrying value to the estimated fair value less cost to sell.
| | | |
| Auditing the Company’s fair value less cost to sell of the Pool business was complex due to the significant judgment required by management to determine the fair value of the Pool business. Fair value is estimated by management based on an income approach using a discounted cash flow model as well as a market-based approach. Fair value estimated by these methods is sensitive to significant assumptions such as the Company‘s auditor since 1991.amount and timing of discounted future cash flows, perpetual growth rates, the use of comparable market multiples of various financial measures affected by expected future market or economic conditions, including increased uncertainty due to the effects of COVID-19. | | | |
|
Atlanta, Georgia |
February 20, 2019 | | |
| | | | | | | | | | | | | | |
| How We Addressed the Matter in Our Audit | We tested internal controls over management’s review of the valuation methods, as well as the significant inputs and assumptions discussed above used in determining the fair value of the Pool business.
| | | |
| To test the estimated fair value of the Pool business, our audit procedures included, among others, assessing the methodologies used and testing the significant assumptions discussed above, including the completeness and accuracy of the underlying data used by the Company. We compared the significant assumptions to current industry, market and economic trends and historical financial results. We performed sensitivity analyses of significant assumptions to evaluate the change in the fair value resulting from changes in the inputs and assumptions. We also assessed the historical accuracy of management’s projections. In addition, we involved valuation specialists to assist in our evaluation of certain of the significant assumptions described above. | | | |
| | | | |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1991
Atlanta, GA
February 26, 2021
|
| | | | | | | |
| Forward Air Corporation |
| Consolidated Balance Sheets |
| (Dollars in thousands) |
| | December 31,
2018 | | December 31,
2017 |
| | | | (As Adjusted) |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 25,657 |
| | $ | 3,893 |
|
| Accounts receivable, less allowance of $2,081 in 2018 and $3,006 in 2017 | 156,359 |
| | 147,948 |
|
| Inventories | 2,240 |
| | 1,425 |
|
| Prepaid expenses and other current assets | 11,763 |
| | 9,954 |
|
| Income tax receivable | 5,063 |
| | 4,428 |
|
| Total current assets | 201,082 |
| | 167,648 |
|
| Property and equipment: | |
| | |
|
| Land | 16,928 |
| | 16,928 |
|
| Buildings | 65,919 |
| | 65,870 |
|
| Equipment | 311,573 |
| | 291,181 |
|
| Leasehold improvements | 14,165 |
| | 12,604 |
|
| Construction in progress | 5,315 |
| | 12,652 |
|
| Total property and equipment | 413,900 |
| | 399,235 |
|
| Less accumulated depreciation and amortization | 204,005 |
| | 193,123 |
|
| Net property and equipment | 209,895 |
| | 206,112 |
|
| Goodwill and other acquired intangibles: | |
| | |
|
| Goodwill | 199,092 |
| | 191,671 |
|
| Other acquired intangibles, net of accumulated amortization of $80,666 in 2018 and $71,527 in 2017 | 113,661 |
| | 111,247 |
|
| Total net goodwill and other acquired intangibles | 312,753 |
| | 302,918 |
|
| Other assets | 36,485 |
| | 15,944 |
|
| Total assets | $ | 760,215 |
| | $ | 692,622 |
|
| | | | | | | | | | | |
| Forward Air Corporation |
| Consolidated Balance Sheets |
| (In thousands, except share data) |
| | December 31,
2020 | | December 31,
2019 |
| | | |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 40,254 | | | $ | 64,749 | |
| Accounts receivable, less allowance of $2,273 in 2020 and $2,053 in 2019 | 156,490 | | | 136,214 | |
| | | |
| Prepaid expenses | 21,410 | | | 14,454 | |
| Other current assets | 6,740 | | | 5,949 | |
| Current assets held for sale | 21,002 | | | 14,952 | |
| Total current assets | 245,896 | | | 236,318 | |
| Property and equipment: | | | |
| Land | 26,365 | | | 16,928 | |
| Buildings | 65,923 | | | 65,919 | |
| Equipment | 270,429 | | | 276,000 | |
| Leasehold improvements | 13,747 | | | 12,879 | |
| Construction in progress | 4,055 | | | 1,845 | |
| Total property and equipment | 380,519 | | | 373,571 | |
| Less accumulated depreciation and amortization | 190,652 | | | 180,815 | |
| Net property and equipment | 189,867 | | | 192,756 | |
| Operating lease right-of-use assets | 123,338 | | | 105,170 | |
| | | |
| Goodwill | 244,982 | | | 215,699 | |
| Other acquired intangibles, net of accumulated amortization of $93,009 in 2020 and $79,520 in 2019 | 145,032 | | | 124,857 | |
| | | |
| Other assets | 45,181 | | | 39,374 | |
| Noncurrent assets held for sale | 53,097 | | | 76,704 | |
| Total assets | $ | 1,047,393 | | | $ | 990,878 | |
The accompanying notes are an integral part of the consolidated financial statements.
|
| | | | | | | |
| Forward Air Corporation |
| Consolidated Balance Sheets (Continued) |
| (Dollars in thousands) |
| | December 31,
2018 | | December 31,
2017 |
| | | | (As Adjusted) |
| Liabilities and Shareholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 34,630 |
| | $ | 30,723 |
|
| Accrued payroll and related items | 16,959 |
| | 13,230 |
|
| Insurance and claims accruals | 12,648 |
| | 11,999 |
|
| Payables to owner-operators | 7,424 |
| | 6,322 |
|
| Collections on behalf of customers | 261 |
| | 329 |
|
| Other accrued expenses | 2,492 |
| | 2,869 |
|
| Income taxes payable | — |
| | 320 |
|
| Current portion of capital lease obligations | 309 |
| | 359 |
|
| Total current liabilities | 74,723 |
| | 66,151 |
|
| Capital lease obligations, less current portion | 54 |
| | 365 |
|
| Long-term debt, less current portion | 47,281 |
| | 40,223 |
|
| Other long-term liabilities | 47,739 |
| | 24,104 |
|
| Deferred income taxes | 37,174 |
| | 29,080 |
|
| Commitments and contingencies (Note 7) |
|
| |
|
|
| Shareholders’ equity: | |
| | |
|
| Preferred stock, $0.01 par value: Authorized shares - 5,000,000; no shares issued | — |
| | — |
|
| Common stock, $0.01 par value: Authorized shares - 50,000,000; issued and outstanding shares - 28,534,935 in 2018 and 29,454,062 in 2017 | 285 |
| | 295 |
|
| Additional paid-in capital | 210,296 |
| | 195,346 |
|
| Retained earnings | 342,663 |
| | 337,058 |
|
| Total shareholders’ equity | 553,244 |
| | 532,699 |
|
| Total liabilities and shareholders’ equity | $ | 760,215 |
| | $ | 692,622 |
|
| | | | | | | | | | | |
| Forward Air Corporation |
| Consolidated Balance Sheets (Continued) |
| (In thousands, except share data) |
| | December 31,
2020 | | December 31,
2019 |
| | | |
| Liabilities and Shareholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 38,371 | | | $ | 25,411 | |
| Accrued payroll and related items | 18,545 | | | 13,176 | |
| Insurance and claims accruals | 17,994 | | | 14,329 | |
| Payables to leased capacity providers | 14,725 | | | 13,649 | |
| | | |
| Other current liabilities | 10,580 | | | 8,318 | |
| | | |
| Current portion of finance lease obligations | 1,801 | | | 1,421 | |
| Current portion of operating lease liabilities | 43,680 | | | 35,886 | |
| | | |
| Current liabilities held for sale | 25,924 | | | 24,974 | |
| Total current liabilities | 171,620 | | | 137,164 | |
| Finance lease obligations, less current portion | 5,010 | | | 4,909 | |
| Operating lease liabilities, less current portion | 80,346 | | | 69,678 | |
| Long-term debt, less current portion and debt issuance costs | 112,398 | | | 67,340 | |
| Other long-term liabilities | 54,129 | | | 56,448 | |
| Deferred income taxes | 41,986 | | | 41,214 | |
| Noncurrent liabilities held for sale | 34,575 | | | 36,943 | |
| Commitments and contingencies (Note 8) | 0 | | 0 |
| Shareholders’ equity: | | | |
| Preferred stock, $0.01 par value: Authorized shares - 5,000,000; no shares issued or outstanding in 2020 and 2019 | 0 | | | 0 | |
| Common stock, $0.01 par value: Authorized shares - 50,000,000; issued and outstanding shares - 27,316,434 in 2020 and 27,850,233 in 2019 | 273 | | | 279 | |
| Additional paid-in capital | 242,916 | | | 226,869 | |
| Retained earnings | 304,140 | | | 350,034 | |
| Total shareholders’ equity | 547,329 | | | 577,182 | |
| Total liabilities and shareholders’ equity | $ | 1,047,393 | | | $ | 990,878 | |
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 |
| | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| | | | (As Adjusted) | | (As Adjusted) |
| Operating revenue | $ | 1,320,886 |
| | $ | 1,169,346 |
| | $ | 1,030,210 |
|
| | | | | | |
| Operating expenses: | |
| | |
| | |
|
| Purchased transportation | 613,636 |
| | 545,091 |
| | 460,796 |
|
| Salaries, wages and employee benefits | 300,230 |
| | 265,842 |
| | 242,270 |
|
| Operating leases | 75,677 |
| | 63,799 |
| | 60,492 |
|
| Depreciation and amortization | 42,183 |
| | 41,055 |
| | 38,210 |
|
| Insurance and claims | 35,180 |
| | 29,578 |
| | 25,392 |
|
| Fuel expense | 23,121 |
| | 16,542 |
| | 13,233 |
|
| Other operating expenses | 108,828 |
| | 98,682 |
| | 87,672 |
|
| Impairment of goodwill and other intangible assets | — |
| | — |
| | 42,442 |
|
| Total operating expenses | 1,198,855 |
| | 1,060,589 |
| | 970,507 |
|
| Income from operations | 122,031 |
| | 108,757 |
| | 59,703 |
|
| | | | | | |
| Other expense: | |
| | |
| | |
|
| Interest expense | (1,783 | ) | | (1,209 | ) | | (1,597 | ) |
| Other, net | (2 | ) | | (11 | ) | | 4 |
|
| Total other expense | (1,785 | ) | | (1,220 | ) | | (1,593 | ) |
| Income before income taxes | 120,246 |
| | 107,537 |
| | 58,110 |
|
| Income taxes | 28,195 |
| | 20,282 |
| | 30,605 |
|
| Net income and comprehensive income | $ | 92,051 |
| | $ | 87,255 |
| | $ | 27,505 |
|
| | | | | | |
| Net income per share: | |
| | |
| | |
|
| Basic | $ | 3.14 |
|
| $ | 2.90 |
|
| $ | 0.90 |
|
| Diluted | $ | 3.12 |
|
| $ | 2.89 |
|
| $ | 0.90 |
|
| | | | | | |
| Dividends per share: | $ | 0.63 |
| | $ | 0.60 |
| | $ | 0.51 |
|
| | | | | | | | | | | | | | | | | |
| Forward Air Corporation |
| Consolidated Statements of Comprehensive Income |
| (In thousands, except per share data) |
| |
| | Year ended |
| | December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Operating revenue | $ | 1,269,573 | | | $ | 1,215,187 | | | $ | 1,137,613 | |
| | | | | |
| Operating expenses: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Purchased transportation | 650,664 | | | 586,140 | | | 564,313 | |
| Salaries, wages and employee benefits | 270,785 | | | 258,001 | | | 229,634 | |
| Operating leases | 69,720 | | | 63,092 | | | 58,189 | |
| Depreciation and amortization | 37,125 | | | 36,394 | | | 35,831 | |
| Insurance and claims | 34,912 | | | 38,733 | | | 29,569 | |
| Fuel expense | 12,166 | | | 17,759 | | | 16,160 | |
| Other operating expenses | 120,277 | | | 102,652 | | | 86,701 | |
| | | | | |
| Total operating expenses | 1,195,649 | | | 1,102,771 | | | 1,020,397 | |
| Income from continuing operations | 73,924 | | | 112,416 | | | 117,216 | |
| | | | | |
| Other expense: | | | | | |
| Interest expense, net | (4,561) | | | (2,711) | | | (1,783) | |
| Other, net | (3) | | | (1) | | | (2) | |
| Total other expense | (4,564) | | | (2,712) | | | (1,785) | |
| Income before income taxes | 69,360 | | | 109,704 | | | 115,431 | |
| Income tax expense | 16,593 | | | 27,382 | | | 26,868 | |
| Net income from continuing operations | 52,767 | | | 82,322 | | | 88,563 | |
| (Loss) income from discontinued operation, net of tax | (29,034) | | | 4,777 | | | 3,488 | |
| Net income and comprehensive income | $ | 23,733 | | | $ | 87,099 | | | $ | 92,051 | |
| | | | | |
| Basic net income per share: | | | | | |
| Continuing operations | $ | 1.90 | | | $ | 2.89 | | | $ | 3.02 | |
| Discontinued operation | (1.05) | | | 0.17 | | | 0.12 | |
Net income per share 1 | $ | 0.84 | | | $ | 3.06 | | | $ | 3.14 | |
| | | | | |
| Diluted net income per share: | | | | | |
| Continuing operations | $ | 1.89 | | | $ | 2.87 | | | $ | 3.00 | |
| Discontinued operation | (1.05) | | | 0.17 | | | 0.12 | |
| Net income per share | $ | 0.84 | | | $ | 3.04 | | | $ | 3.12 | |
| | | | | |
| Dividends per share: | $ | 0.75 | | | $ | 0.72 | | | $ | 0.63 | |
1 Rounding may impact summation of amounts.
The accompanying notes are an integral part of the consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | |
| Forward Air Corporation |
| Consolidated Statements of Shareholders' Equity |
| (In thousands, except share data) |
| | Common Stock | | Additional
Paid-in
Capital | | Retained Earnings | | Total
Shareholders'
Equity |
| | Shares | | Amount | | | |
| | | | | | | | (As Adjusted) | | (As Adjusted) |
| Balance at December 31, 2015 (As Reported) | 30,544 |
| | $ | 305 |
| | $ | 160,855 |
| | $ | 348,895 |
| | $ | 510,055 |
|
| Cumulative effect of new accounting standard | — |
| | — |
| | — |
| | (558 | ) | | (558 | ) |
| Balance at December 31, 2015 | 30,544 |
| | 305 |
| | 160,855 |
| | 348,337 |
| | 509,497 |
|
| Net income and comprehensive income for 2016 (As Adjusted) | — |
| | — |
| | — |
| | 27,505 |
| | 27,505 |
|
| Exercise of stock options | 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 |
| | 318,533 |
| | 498,346 |
|
| Net income and comprehensive income for 2017 (As Adjusted) | — |
| | — |
| | — |
| | 87,255 |
| | 87,255 |
|
| Exercise of stock options | 206 |
| | 2 |
| | 7,270 |
| | — |
| | 7,272 |
|
| Conversion of deferred stock | 10 |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued under employee stock purchase plan | 10 |
| | — |
| | 458 |
| | — |
| | 458 |
|
| Share-based compensation | — |
| | — |
| | 8,103 |
| | — |
| | 8,103 |
|
| Dividends ($0.60 per share) | — |
| | — |
| | 4 |
| | (18,056 | ) | | (18,052 | ) |
| Cash settlement of share-based awards for minimum tax withholdings | (35 | ) | | — |
| | — |
| | (1,700 | ) | | (1,700 | ) |
| Share repurchases | (948 | ) | | (9 | ) | | — |
| | (48,974 | ) | | (48,983 | ) |
| Vesting of previously non-vested shares | 121 |
| | 1 |
| | (1 | ) | | — |
| | — |
|
| Balance at December 31, 2017 | 29,454 |
| | 295 |
| | 195,346 |
| | 337,058 |
| | 532,699 |
|
| Net income and comprehensive income for 2018 (As Adjusted) | — |
| | — |
| | — |
| | 92,051 |
| | 92,051 |
|
| Exercise of stock options | 95 |
| | 1 |
| | 3,920 |
| | — |
| | 3,921 |
|
| Other | — |
| | — |
| | — |
| | (30 | ) | | (30 | ) |
| Common stock issued under employee stock purchase plan | 9 |
| | — |
| | 479 |
| | — |
| | 479 |
|
| Share-based compensation | — |
| | — |
| | 10,549 |
| | — |
| | 10,549 |
|
| Dividends ($0.63 per share) | — |
| | — |
| | 3 |
| | (18,430 | ) | | (18,427 | ) |
| Cash settlement of share-based awards for minimum tax withholdings | (33 | ) | | (1 | ) | | — |
| | (1,871 | ) | | (1,872 | ) |
| Share repurchases | (1,109 | ) | | (11 | ) | | — |
| | (66,115 | ) | | (66,126 | ) |
| Vesting of previously non-vested shares | 119 |
| | 1 |
| | (1 | ) | | — |
| | — |
|
| Income tax benefit from stock options exercised | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2018 | 28,535 |
| | $ | 285 |
| | $ | 210,296 |
| | $ | 342,663 |
| | $ | 553,244 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward Air Corporation |
| Consolidated Statements of Shareholders' Equity |
| (In thousands) |
| | Common Stock | | Additional
Paid-in
Capital | | Retained Earnings | | Total
Shareholders’
Equity |
| | Shares | | Amount | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance at December 31, 2017 | 29,454 | | | $ | 295 | | | $ | 195,346 | | | $ | 337,058 | | | $ | 532,699 | |
| Net income | — | | | — | | | — | | | 92,051 | | | 92,051 | |
| Stock options exercised | 95 | | | 1 | | | 3,920 | | | — | | | 3,921 | |
| Other | — | | | — | | | — | | | (30) | | | (30) | |
| Common stock issued under employee stock purchase plan | 9 | | | — | | | 479 | | | — | | | 479 | |
| Share-based compensation expense | — | | | — | | | 10,549 | | | — | | | 10,549 | |
| Payment of dividends to shareholders | — | | | — | | | 3 | | | (18,430) | | | (18,427) | |
| Payment of minimum tax withholdings on share-based awards | (33) | | | (1) | | | — | | | (1,871) | | | (1,872) | |
| Repurchases and retirement of common stock | (1,109) | | | (11) | | | — | | | (66,115) | | | (66,126) | |
| Issuance of share-based awards | 119 | | | 1 | | | (1) | | | — | | | — | |
| | | | | | | | | |
| Balance at December 31, 2018 | 28,535 | | | 285 | | | 210,296 | | | 342,663 | | | 553,244 | |
| Net income | — | | | — | | | — | | | 87,099 | | | 87,099 | |
| Stock options exercised | 99 | | | 1 | | | 4,049 | | | — | | | 4,050 | |
| Other | — | | | — | | | (1) | | | (1) | | | (2) | |
| Common stock issued under employee stock purchase plan | 12 | | | — | | | 614 | | | — | | | 614 | |
| Share-based compensation expense | — | | | — | | | 11,907 | | | — | | | 11,907 | |
| Payment of dividends to shareholders | — | | | — | | | 6 | | | (20,500) | | | (20,494) | |
| Payment of minimum tax withholdings on share-based awards | (50) | | | — | | | — | | | (3,032) | | | (3,032) | |
| Repurchases and retirement of common stock | (915) | | | (9) | | | — | | | (56,195) | | | (56,204) | |
| Issuance of share-based awards | 169 | | | 2 | | | (2) | | | — | | | — | |
| | | | | | | | | |
| Balance at December 31, 2019 | 27,850 | | | 279 | | | 226,869 | | | 350,034 | | | 577,182 | |
| Net income | — | | | — | | | — | | | 23,733 | | | 23,733 | |
| Stock options exercised | 89 | | | 1 | | | 4,236 | | | — | | | 4,237 | |
| | | | | | | | | |
| Common stock issued under employee stock purchase plan | 15 | | | — | | | 664 | | | — | | | 664 | |
| Share-based compensation expense | — | | | — | | | 11,138 | | | — | | | 11,138 | |
| Payment of dividends to shareholders | — | | | — | | | 10 | | | (20,879) | | | (20,869) | |
| Payment of minimum tax withholdings on share-based awards | (59) | | | — | | | — | | | (3,508) | | | (3,508) | |
| Repurchases and retirement of common stock | (787) | | | (8) | | | — | | | (45,240) | | | (45,248) | |
| Issuance of share-based awards | 208 | | | 1 | | | (1) | | | — | | | — | |
| | | | | | | | | |
| Balance at December 31, 2020 | 27,316 | | | $ | 273 | | | $ | 242,916 | | | $ | 304,140 | | | $ | 547,329 | |
| | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
|
| | | | | | | | | | | |
| Forward Air Corporation |
| Consolidated Statements of Cash Flows |
| (In thousands) |
| | Year ended |
| | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| | | | (As Adjusted) | | (As Adjusted) |
| Operating activities: | | | | | |
| Net income | $ | 92,051 |
| | $ | 87,255 |
| | $ | 27,505 |
|
| Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
| | |
|
| Depreciation and amortization | 42,183 |
| | 41,055 |
| | 38,210 |
|
Impairment of goodwill, intangible and other assets
| — |
| | — |
| | 42,442 |
|
| Change in fair value of earn-out liability | (455 | ) | | — |
| | — |
|
| Share-based compensation | 10,549 |
| | 8,103 |
| | 8,334 |
|
| (Gain) loss on disposal of property and equipment | (171 | ) | | 1,281 |
| | 291 |
|
| Provision for loss on receivables | 139 |
| | 1,814 |
| | 258 |
|
| Provision for revenue adjustments | 3,628 |
| | 3,055 |
| | 2,020 |
|
| Deferred income taxes | 8,094 |
| | (12,068 | ) | | 3,412 |
|
| Tax benefit for stock options exercised | — |
| | — |
| | (1,732 | ) |
| Changes in operating assets and liabilities | |
| | |
| | |
|
| Accounts receivable | (12,178 | ) | | (33,457 | ) | | (10,077 | ) |
| Prepaid expenses and other assets | (2,565 | ) | | (1,204 | ) | | 283 |
|
| Income taxes | (1,256 | ) | | (3,480 | ) | | 20,177 |
|
| Accounts payable and accrued expenses | 12,535 |
| | 11,010 |
| | (772 | ) |
| Net cash provided by operating activities | 152,554 |
| | 103,364 |
| | 130,351 |
|
| | | | | | |
| Investing activities: | |
| | |
| | |
|
| Proceeds from disposal of property and equipment | 7,059 |
| | 2,440 |
| | 1,929 |
|
| Purchases of property and equipment | (42,293 | ) | | (38,265 | ) | | (42,186 | ) |
| Acquisition of business, net of cash acquired | (19,987 | ) |
| (23,140 | ) |
| (11,800 | ) |
| Other | (242 | ) | | (222 | ) | | (337 | ) |
| Net cash used in investing activities | (55,463 | ) | | (59,187 | ) | | (52,394 | ) |
| | | | | | |
| Financing activities: | |
| | |
| | |
|
| Payments of debt and capital lease obligations | (302 | ) | | (42,790 | ) | | (55,768 | ) |
| Proceeds from senior credit facility | 7,000 |
| | 55,000 |
| | — |
|
| Proceeds from exercise of stock options | 3,921 |
| | 7,272 |
| | 8,148 |
|
| Payments of cash dividends | (18,427 | ) | | (18,052 | ) | | (15,529 | ) |
| Repurchase of common stock (repurchase program) | (66,126 | ) | | (48,983 | ) | | (39,983 | ) |
| Common stock issued under employee stock purchase plan | 479 |
| | 458 |
| | 442 |
|
| Cash settlement of share-based awards for tax withholdings | (1,872 | ) | | (1,700 | ) | | (1,800 | ) |
| Tax benefit for stock options exercised | — |
| | — |
| | 1,732 |
|
| Net cash used in financing activities | (75,327 | ) | | (48,795 | ) | | (102,758 | ) |
| Net increase (decrease) in cash | 21,764 |
| | (4,618 | ) | | (24,801 | ) |
| Cash at beginning of year | 3,893 |
| | 8,511 |
| | 33,312 |
|
| Cash at end of year | $ | 25,657 |
| | $ | 3,893 |
| | $ | 8,511 |
|
| | | | | | | | | | | | | | | | | |
| Forward Air Corporation |
| Consolidated Statements of Cash Flows |
| (In thousands) |
| | Year ended |
| | December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| | | | | |
| Operating activities: | | | | | |
| Net income from continuing operations | $ | 52,767 | | | $ | 82,322 | | | $ | 88,563 | |
| Adjustments to reconcile net income of continuing operations to net cash provided by operating activities of continuing operations: | | | | | |
| Depreciation and amortization | 37,125 | | | 36,394 | | | 35,831 | |
| | | | | |
| Change in fair value of earn-out liability | 379 | | | (33) | | | (455) | |
| Share-based compensation expense | 11,033 | | | 11,715 | | | 10,191 | |
| Provision for revenue adjustments | 4,751 | | | 3,339 | | | 3,624 | |
| Deferred income tax provision | 772 | | | 7,089 | | | 7,590 | |
| Other | 587 | | | 1,497 | | | (189) | |
| Changes in operating assets and liabilities, net of effects from the purchase of acquired companies: | | | | | |
| Accounts receivable | (25,739) | | | 653 | | | (8,702) | |
| Prepaid expenses, other current assets and other assets | (9,424) | | | (4,662) | | | (3,754) | |
| Accounts payable, accrued expenses and other long-term liabilities | 23,854 | | | 7,212 | | | 9,703 | |
| Net cash provided by operating activities of continuing operations | 96,105 | | | 145,526 | | | 142,402 | |
| | | | | |
| Investing activities: | | | | | |
| Proceeds from sale of property and equipment | 2,413 | | | 2,661 | | | 6,969 | |
| Purchases of property and equipment | (20,268) | | | (22,007) | | | (39,564) | |
| Purchase of businesses, net of cash acquired | (63,651) | | | (39,000) | | | (19,987) | |
| Other | — | | | — | | | 357 | |
| Net cash used in investing activities of continuing operations | (81,506) | | | (58,346) | | | (52,225) | |
| | | | | |
| Financing activities: | | | | | |
| | | | | |
| Repayments of finance lease obligations | (1,446) | | | (946) | | | (302) | |
| Repayments of senior credit facility | (20,000) | | | — | | | — | |
| Proceeds from senior credit facility | 65,000 | | | 20,000 | | | 7,000 | |
| Proceeds from issuance of common stock upon stock option exercises | 4,237 | | | 4,050 | | | 3,921 | |
| Payment of earn-out liability | (5,284) | | | — | | | — | |
| Payments of dividends to stockholders | (20,869) | | | (20,494) | | | (18,427) | |
| Repurchases and retirement of common stock | (45,248) | | | (56,204) | | | (66,126) | |
| Common stock issued under employee stock purchase plan | 664 | | | 614 | | | 479 | |
| Payment of minimum tax withholdings on share-based awards | (3,508) | | | (3,032) | | | (1,872) | |
| (Distributions to) contributions from subsidiary held for sale | (12,640) | | | 7,924 | | | 6,914 | |
| | | | | |
| Net cash used in financing activities of continuing operations | (39,094) | | | (48,088) | | | (68,413) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net (decrease) increase in cash of continuing operations | (24,495) | | | 39,092 | | | 21,764 | |
| | | | | |
| Cash from discontinued operation: | | | | | |
| Net cash (used in) provided by operating activities of discontinued operation | (11,439) | | | 13,472 | | | 10,152 | |
| Net cash used in investing activities of discontinued operation | (1,201) | | | (5,548) | | | (3,238) | |
| Net cash provided by (used in) financing activities of discontinued operation | 12,640 | | | (7,924) | | | (6,914) | |
| (Decrease) increase in cash and cash equivalents | (24,495) | | | 39,092 | | | 21,764 | |
| Cash and cash equivalents at beginning of period of continuing operations | 64,749 | | | 25,657 | | | 3,893 | |
| Cash at beginning of period of discontinued operation | 0 | | | 0 | | | 0 | |
| (Decrease) increase in cash and cash equivalents | (24,495) | | | 39,092 | | | 21,764 | |
| Less: cash at beginning of period of discontinued operation | 0 | | | 0 | | | 0 | |
| Cash and cash equivalents at end of period of continuing operations | $ | 40,254 | | | $ | 64,749 | | | $ | 25,657 | |
| | | | | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of the consolidated financial statements
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20182020
(In thousands, except share and per share data)
1. Operations and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
Forward Air Corporation'sCorporation (“Forward Air” or the Company”, “We”, “Our”“Company”) services are classified into four principalis a leading asset-light freight and logistics company. The Company has 2 reportable segments: Expedited LTL, Truckload Premium ServicesFreight and Intermodal. The Company conducts business in the United States (“TLS”U.S.”), Intermodal and Pool Distribution ("Pool") (See note 10).Canada.
Through theThe Expedited LTLFreight segment we operateoperates a comprehensive national network to provideproviding 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, final mile solutions, customs brokerage and other handling. Because of our roots in serving the deferred air freight market, our terminal network is located at or near airports in the United States and Canada.
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 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.
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.
The accompanyingCompany’s consolidated financial statements of the Company include Forward Air Corporation and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
On April 23, 2020, the Board of Director’s (the “Board”) of the Company approved a strategy to divest of the Pool Distribution (“Pool”) business within the next year. Prior to the decision to divest of Pool, the Company had 3 reportable segments: Expedited Freight, Intermodal and Pool. As a result of the strategy to divest of Pool, the results of operations for Pool are presented as a discontinued operation on the Consolidated Statements of Comprehensive Income, and assets and liabilities are reflected as “Assets and liabilities held for sale” on the Consolidated Balance Sheets for all periods presented. Amounts for all periods discussed below reflect the results of operations, financial condition and cash flows from the Company’s continuing operations, unless otherwise noted. Refer to Note 2, Discontinued Operation and Held for Sale, for further discussion.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accountingU.S. principles generally accepted in the United Statesaccounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts reported inof assets and liabilities and disclosure of contingent assets and liabilities at the consolidateddate of the financial statements and accompanying notes.expenses during the reporting period. 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, 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
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.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
The Company monitors the manual revenue adjustments closely through the employment of various controls that are in place to ensure that revenue recognition is not compromised. During 2018, average revenue adjustments per month were approximately $302 on average revenue per month of approximately $110,074 (0.3% of monthly revenue). In order to estimate the allowance for revenue adjustments related to ending accounts receivable, the Company prepares an analysis that considers average monthly revenue adjustments and the average lag for identifying and quantifying these revenue adjustments. Based on this analysis, the Company establishes an allowance covering approximately 35-85 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
Under U.S. Department of Transportation (“DOT”) regulations, the Company is liable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on our behalf. Additionally, from time to time, the drivers employed and engaged by the third-party transportation carriers we contract with are involved in accidents, which may result in serious personal injuries. The resulting types and/or amounts of damages may be excluded by or exceed the amount of insurance coverage maintained by the contracted carrier. Although these drivers are not our employees, all of these drivers are employees, owner-operators, or independent contractors working for carriers and, from time to time, claims may be asserted against us for their actions, or for our actions in retaining them.
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 vehicle and general liability claims and will be responsible for any damages and personal injuries below that self-insured amount. The Company is also responsible for varying annual aggregate deductible amounts of liability for claims in excess of the SIR/deductible. For the policy year that began April 1, 2018, the Company had an annual $6,000 aggregate deductible for claims between $3,000 and $5,000. The Company also had a $2,500 aggregate deductible for claims between $5,000 and $10,000. As a result, the Company is responsible for the first $7,500 per claim, until it meets the $6,000 aggregate deductible for claims between $3,000 and $5,000 and the $2,500 aggregate deductible for claims between $5,000 and $10,000. This insurance covers claims for the LTL Expedited and Pool Distribution segments. TLS maintains separate liability insurance coverage for claims between $0 and $5,000, and for the policy year that began April 1, 2018, TLS had no SIR for claims in this layer. Intermodal maintains separate liability insurance coverage for all liability claims. For the policy year that began April 1, 2018, Intermodal had an SIR of $50 for each claim.
The Company may also be subject to claims for workers’ compensation. The Company maintains workers’ compensation insurance 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 it is a qualified self-insured entity with an approximately $500 SIR.
The amount of self-insurance loss reserves and loss adjustment expenses is determined based on an estimation process that uses information obtained from both company-specific and industry data, as well as general economic information. The estimation process for self-insurance loss exposure requires management to continuously monitor and evaluate the life cycle of claims. Using data obtained from this monitoring and the Company’s assumptions about the emerging trends, management develops information about the size of ultimate claims based on its historical experience and other available market information. The most significant assumptions used in the estimation process include determining the trend in loss costs, the expected consistency in the frequency and severity of claims incurred but not yet reported, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. The Company utilizes a quarterly actuarial analyses to evaluate open claims and estimate the ongoing development exposure.
As of December 31, 2018, we have recognized an insurance proceeds receivable and claims payable of $28,520 for open vehicle and workers’ compensation claims in excess of our stop-loss limits. As of December 31, 2017, we recognized an insurance proceeds receivable and claims payable of $8,133 for open vehicle and workers’ compensation claims in excess of our stop-loss limits. These balances are recorded in other assets and other long-term liabilities, respectively, in the Company's consolidated balance sheets.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
Revenue and Expense Recognition
The Company's revenue is generated from providing transportation and related services to customers in accordance with contractual agreements, bill of lading ("BOL") contracts and general tariff provisions. Related services include accessorial charges such as terminal handling, storage, equipment rentals and customs brokerage. These services are distinct and are accounted for as separate performance obligations. Generally, the Company's performance obligations begin when a customer's BOL is received and are satisfied when the delivery of a shipment and related services is completed. The Company recognizes revenue for its services over time to coincide with when its customers simultaneously receive and consume the benefits of these services. Performance obligations are short-term with transit days less than a week. Upon delivery of a shipment or related service, customers are billed and remit payment according to payment terms.
Revenue is categorized by line of business as the Company believes this best depicts the nature, timing and amount of revenue and cash flows. For all lines of business, the Company reports revenue on a gross basis as it is the principal in the transaction. In addition, the Company has discretion in setting its service pricing and as a result, the amount earned for these services varies. The Company also has the discretion to select its drivers and other vendors for the services provided to its customers. These factors, discretion in setting prices and discretion in selecting drivers and other vendors, further support reporting revenue on a gross basis. See additional discussion in the Recent Accounting Pronouncements section of this Note and in Note 10, Segment Reporting.
All expenses are recognized when incurred. Purchased transportations expenses are typically due to the 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
Cash as of December 31, 2020 and 2019 of $25,246 and $64,749, respectively, consisted of cash on hand and bank deposits. The Company considers all highly liquid investments with aan original maturity of three months or less when purchased to be cash and cash equivalents. Cash equivalents as of December 31, 2020 of $15,008 consisted of money market deposits.
Allowance for Doubtful Accounts and Revenue Adjustments
The Company has a broad range of customers, including freight forwarders, third-party logistics (“3PL”) companies, passenger and cargo airlines, steamship lines, and retailers, located across a diverse geography. 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, in order to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes a general reserve based on a percentage of revenue to ensure accounts receivables are properly recorded at the net amount expected to be collected. Management evaluates the collectability of its accounts receivables at least quarterly and sets the reserve based on historical and current collection history and reasonable and supportable forecasts about any expected changes to our collection experience in the future due to changing economic conditions. 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
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
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.
The Company records an allowance for revenue adjustments resulting from future billing rate changes. The adjustments arise: (a) when small rate changes (“spot quotes”) are granted to customers that differ from the standard rates in the billing system; (b) when freight requires dimensionalization or is reweighed which results in a different rate; (3) when billing errors occur; and (4) when data entry errors occur. 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. During 2020, average revenue adjustments per month were approximately $396 on average revenue per month of approximately $105,798 (0.4% of monthly revenue). The Company estimates an allowance for revenue adjustments based on historical experience, trends and current information. More specifically, the Company considers the average monthly revenue adjustments as well as the average lag for identifying and quantifying the revenue adjustments. The average amount of revenue adjustments per month can vary in relation to the level of revenue or based on other factors (such as personnel issues that could result in excessive manual errors or in excessive spot quotes being granted). Both the average monthly revenue adjustments and the average lag assumptions are continually evaluated for appropriateness.
Inventories
Inventories of tires, replacement parts, supplies, and fuel for equipment are statedvalued at the lower of cost or market utilizingnet realizable value, using first-in, first-out method. Net realizable value is the FIFO (first-in, first-out) method of determining cost. Inventories of tires and replacement parts are not materialestimated selling price in the aggregate.ordinary course of business. Replacement parts are expensed when placed in service, while tires are capitalized and amortized over their expectedestimated useful life. Replacement parts and tiresExpenses related to the utilization of inventories are included as a component of otherrecorded in “Other operating expenses” in the consolidated statementsConsolidated Statements of comprehensive income.Comprehensive Income.
Property and Equipment
Property and equipment are statedrecorded at cost. Expenditures for normal repaircost, less accumulated depreciation and maintenance are expensed as incurred.amortization. Depreciation of property and equipment is calculated based upon the cost of the asset, reduced by its estimated salvage value, using theprovided on a straight-line methodbasis over the estimated useful lives, as follows:
which are reviewed periodically and have the following ranges: |
| | | | | | | |
| Buildings | | 30-40 years |
| Equipment | | 3-10 years |
| Leasehold improvements | | Lesser of Useful Life or Initial Lease Term |
Land is not depreciated and construction in progress is not depreciated until ready for service. Depreciation is not recorded during the period in which a long-lived asset or disposal group is classified as held for sale. Expenditures for maintenance and repairs are charged to expense as incurred.
Software Development
The Company incurs costs related to internally developed software or software acquired for eachinternal use. Depending on the applicable stage of the threesoftware development, costs may be capitalized or expensed as incurred. Capitalized costs are amortized on a straight-line basis over the five-year estimated useful life. As of December 31, 2020, capitalized software costs and accumulated amortization were $23,480 and $16,025, respectively, and as of December 31, 2019, capitalized software costs and accumulated amortization were $21,536 and $14,133, respectively. Capitalized software costs, net of accumulated amortization was recorded in "Property and equipment" on the Consolidated Balance Sheets. Software development cost amortization was $2,053, $1,714 and $1,779 for the years ended December 31, 2018, 20172020, 2019 and 2016 was $33,044, $30,8622018, respectively. The Company estimates amortization of existing software development costs will be $1,988 for 2021, $1,749 for 2022, $1,472 for 2023, $1,124 for 2024 and $28,088 respectively.$507 for 2025.
Goodwill
The Company reviews its long-lived assetsevaluates goodwill for impairment whenever eventsannually, as of June 30, or changes inmore frequently when an event occurs or circumstances change that indicate that the carrying amountvalue may not be recoverable. Impairment is recognized on assets classified as held and used whenIn order to test for impairment, 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,Company compares the estimated fair value of the asset is comparedreporting unit to its net bookcarrying value, including goodwill. If the estimated fair value of the reporting unit is lower than its carrying value, the goodwill is adjusted by the amount by which the carrying value exceeds the estimated fair value, limited to measure the impairment charge, if any. Whenamount of goodwill. The Company has the criteria have been met for long-lived assetsoption to be classified as held for sale, the assets are recorded at the
perform a qualitative assessment of
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
lowergoodwill in order to determine whether it is more likely than not the estimated fair value of the reporting unit is less than the carrying value, including goodwill.
Self-Insurance Loss Reserves
Under U.S. Department of Transportation (“DOT”) regulations, the Company is liable for bodily injury and property damage caused by Leased Capacity Providers and employee drivers while they are operating equipment under the Company’s various motor carrier authorities. The potential liability associated with any accident can be severe and occurrences are unpredictable.
For vehicle liability, the Company retains a portion of the risk. Below is a summary of the Company’s risk retention on vehicle liability insurance coverage maintained by the Company through $10,000:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Company
Risk Retention | | Frequency | | Layer | | Policy Term |
| Expedited Freight¹ | | | | | | | | |
| LTL business | | $ | 3,000 | | | Occurrence/Accident² | | $0 to $3,000 | | 10/1/2020 to 10/1/2021 |
| Truckload business | | $ | 2,000 | | | Occurrence/Accident² | | $0 to $2,000 | | 10/1/2020 to 10/1/2021 |
| LTL and Truckload businesses | | $ | 6,000 | | | Policy Term Aggregate³ | | $3,000 to $5,000 | | 10/1/2020 to 10/1/2021 |
| LTL and Truckload businesses | | $ | 5,000 | | | Policy Term Aggregate³ | | $5,000 to $10,000 | | 10/1/2020 to 10/1/2021 |
| | | | | | | | |
| Intermodal | | $ | 250 | | | Occurrence/Accident² | | $0 to $250 | | 4/1/2020 to 10/1/2021 |
| | | | | | | | |
¹ Excluding the Final Mile business, which is primarily a brokered service.
² For each and every accident, the Company is responsible for damages and defense up to these amounts, regardless of the number of claims associated with any accident.
³ During the Policy Term, the Company is responsible for damages and defense within the stated Layer up to the stated, aggregate amount of Company Risk Retention before insurance will respond.
Also, from time to time, when brokering freight, the Company may face claims for the “negligent selection” of outside, contracted carriers that are involved in accidents, and the Company maintains third-party liability insurance coverage with a $100 deductible per occurrence for most of its brokered services. Additionally, the Company maintains workers’ compensation insurance with a self-insured retention of $500 per occurrence.
The Company provides for the estimated costs of vehicle liability and workers’ compensation claims both reported and for claims incurred but not reported. 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 through actuarial analysis to determine an estimate of probable losses on claims incurred but not reported. If the events underlying the claims have occurred as of the balance sheet date, then losses are recognized immediately.
As of December 31, 2020 and 2019, the Company recorded insurance reserves of $72,650 and $66,176, respectively, inclusive of reserves in excess of the self-insured retention limit that are expected to be reimbursed from insurance carriers. As of December 31, 2020, $20,342 was recorded in “Insurance and claims accruals” and $52,308 was recorded in “Other long-term liabilities” in the Consolidated Balance Sheets. As of December 31, 2019, $16,366 was recorded in “Insurance and claims accruals” and $49,810 was recorded in “Other long-term liabilities” in the Consolidated Balance Sheets.
The Company recognized a receivable for insurance proceeds and a corresponding claims payable for vehicle liability and workers’ compensation claims in excess of the self-insured retention limit. As of December 31, 2020 and 2019, the Company recorded $36,743 and $34,091, respectively, in “Other assets” and “Other long-term liabilities” in the Consolidated Balance Sheets.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
Revenue Recognition
Revenue is recognized when the Company satisfies the performance obligation by the delivery of a shipment in accordance with contractual agreements, bill of lading (“BOL”) and general tariff provisions. The amount of revenue recognized is measured as the consideration the Company expects to receive in exchange for those services pursuant to a contract with a customer. A contract exists once the Company enters into a contractual agreement with a customer. The Company does not recognize revenue in cases where collectibility is not probable, and defers recognition until collection is probable or fair market value (less selling costs). See additional discussionpayment is received.
The Company generates revenue from the delivery of a shipment and the completion of related services. Revenue for the delivery of a shipment is recorded over time to coincide with when customers simultaneously receive and consume the benefits of the delivery services. Accordingly, revenue billed to a customer for the transportation of freight are recognized over the transit period as the performance obligation to the customer is satisfied. The Company determines the transit period for a shipment based on the pick-up date and the delivery date, which may be estimated if delivery has not occurred as of a reporting period. The determination of the transit period and how much of it has been completed as of a given reporting date may require the Company to make judgments that impact the timing of revenue recognized. For delivery of shipments with a pick-up date in Note 2, Acquisition, Goodwillone reporting period and Other Long-Lived Assets.a delivery date in another reporting period, the Company recognizes revenue based on relative transit time in each reporting period. A portion of the total revenue to be billed to the customer after completion of a delivery is recognized in each reporting period based on the percentage of total transit time that has been completed at the end of the applicable reporting period. Upon delivery of a shipment or related service, customers are billed according to the applicable payment terms. Related services are a separate performance obligation and include accessorial charges such as terminal handling, storage, equipment rentals and customs brokerage.
Operating Revenue is classified based on the line of business as the Company believes this best depicts the nature, timing and amount of revenue and cash flows. For all lines of business, the Company records revenue on a gross basis as it is the principal in the transaction as the Company has discretion to determine the amount of consideration. Additionally, the Company has the discretion to select drivers and other vendors for the services provided to customers. These factors, discretion in the amount of consideration and the selection of drivers and other vendors, support revenue recognized on a gross basis.
Leases
CertainEffective, January 1, 2019, the Company adopted Accounting Standards Codification 842, Leases, ("ASC 842"). Under ASC 842, lessees are required to record an asset (right-of-use asset or finance lease asset) and a lease liability. ASC 842 allows for two types of leases for recognition purposes: operating leases include rent increases duringand finance leases. Operating leases result in the initialrecognition of a single lease term. For these leases, the Company recognizes the related rental expensesexpense on a straight-line basis over the lease term, ofwhile finance leases result in an accelerated expense. The Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period. Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease which includes any rent holiday period,term while operating lease liabilities represent the Company’s obligation to make lease payments for the lease term. All leases greater than 12 months result in the recognition of a right-of-use asset and records the difference between the amounts charged to operations and amount paid as rent as a rent liability. Leasehold improvements are amortized over the shorter of the estimated useful life or the initial term of the lease. Reserves for idle facilities are initially measuredliability at the fairlease commencement date based on the present value of the portion of the lease payments associated withover the vacated facilities, reduced bylease term. The present value of the lease payments is calculated using the applicable weighted-average discount rate. The weighted-average discount rate is based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company estimates an applicable incremental borrowing rate. The incremental borrowing rate is estimated sublease rentals. See Recent Accounting Pronouncements for expected changes tobased on the contractual lease accounting. In addition, see further discussion in Note 6, Operating Leases.term and the Company’s collateral borrowing rate.
Business Combinations
Upon the acquisition of a business, the fair value of the assets acquired and liabilities assumed must be estimated. This requires judgments regarding the identification of acquired assets and liabilities assumed, some of which may not have been previously recorded by the acquired business, as well as judgments regarding the valuation of all identified acquired assets and assumed liabilities. The assets acquired and liabilities assumed are determined by reviewing the operations, interviewing management and reviewing the financial and contractual information of the acquired business. Consideration is typically paid in the form of cash paid upon closing or contingent consideration paid upon satisfaction of a future obligation. If contingent consideration is included in the purchase price, the Company values that consideration as of the acquisition date and it is recorded to goodwill.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
Once the acquired assets and assumed liabilities are identified, the fair valuesvalue of the assets and liabilities are estimated using a variety of approaches that require significant judgments. For example, intangible assets are typically valued using a discounted cash flow (“DCF”) analysis, which requires estimates of the future cash flows that are attributable to the intangible asset. A DCF analysis also requires significant judgments regarding the selection of discount rates that are intended to reflect the risks that are inherent in the projected cash flows, the determination of terminal growth rates, and judgments about the useful life and pattern of use of the underlying intangible asset. The valuation of acquired property, plant and equipment requires judgments about current market values, replacement costs, the physical and functional obsolescence of the assets and their remaining useful lives. A failure to appropriately assign fair values to acquired assets and assumed liabilities could significantly impact the amount and timing of future depreciation and amortization expense, as well as significantly overstate or understate assets or liabilities.
GoodwillIncome Taxes
Income taxes are accounted for under the asset and Other Intangible Assetsliability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
GoodwillThe Company is recordedinvolved in various tax matters, with respect to some of which the outcome is uncertain. We establish reserves to remove some or all of the tax benefit of any of our tax positions at costthe time we determine that it becomes uncertain the tax position is not more likely than not to be sustained, the tax position is more likely than not to be sustained, but for a lesser amount, or the tax position is more likely than not to be sustained, but not in the financial period in which the tax position was originally taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the more likely than not recognition threshold would be recognized in income tax expense in the first period when the uncertainty disappears under any one of the following conditions: the tax position is more likely than not to be sustained, the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or the statute of limitations for the tax position has expired. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in “Interest expense, net” and “Other operating expenses”, respectively.
Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during each period. Restricted shares have non-forfeitable rights to dividends and as a result, are considered participating securities for purposes of computing net income per common share pursuant to the two-class method. Net income allocated to participating securities was $385 in 2020, $945 in 2019 and $881 in 2018. Diluted net income per common share assumes the exercise of outstanding stock options and the vesting of performance share awards using the treasury stock method when the effects of such assumptions are dilutive.
Share-Based Compensation
The Company grants awards under the stock-based compensation plans to certain employees of the Company. The awards include stock options, restricted shares and performance shares. The fair value of the stock options is estimated on the grant date using the Black-Scholes option pricing model, and share-based compensation expense is recognized on a straight-line basis over the three-year vesting period. The fair value of the restricted shares is the quoted market value of the Company’s common stock on the grant date, and the share-based compensation expense is recognized on a straight-line basis over the vesting period. For certain performance shares, the fair value is the quote market value of the Company’s common stock on the grant date less the present value of the expected dividends not received during the relevant period. For these performance shares, the share-based compensation expense is recognized on a straight-line basis over the three-year vesting period based on the excessprojected assessment of purchase price over the level of performance that will be achieved. 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 includeother performance shares that have a significant change in business climate or a loss of significant customers. Other intangible assets are amortized over their useful lives. Results of impairment testing are described in Note 2, Acquisition, Goodwill and Other Long-Lived Assets.
Acquisitions are accounted for using the purchase method. The definite-lived intangible assetsfinancial target of the Company resulting from acquisition activity andCompany’s total shareholder return as compared to the related amortization are described in Note 2, Acquisition, Goodwill and Other Long-Lived Assets.
Software Development
Costs related to software developed or acquired for internal use are expensed or capitalized basedtotal shareholder return of a selected peer group, is estimated on the applicable stage of software development and any capitalized costs are amortized over their estimated useful life.grant date using a Monte Carlo simulation model. The Company typically uses a five-year straight line amortization for the capitalized amounts of software development costs. At December 31, 2018 and 2017 the Company had $21,492 and $19,567, respectively, of capitalized software development costs included in property and equipment. Accumulated amortization on these assets was $15,611 and $13,706 at December 31, 2018 and 2017, respectively. Included in depreciationshare-based compensation expense is amortization of capitalized software development costs. Amortization of
recognized on a
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
straight-line basis over the three-year vesting period. All share-based compensation expense is recognized in salaries, wages and employee benefits on the Consolidated Statements of Comprehensive Income. Refer to Note 5, Stockholders’ Equity, Stock Incentive Plan and Net Income Per Share, for further discussion.
capitalized software development
Ransomware Incident
In December 2020, the Company detected a ransomware incident impacting its operational and information technology systems, which caused service delays for many of its customers (“Ransomware Incident”). Promptly upon its detection of the incident, the Company initiated response protocols, launched an investigation and engaged the services of cybersecurity and forensics professionals. The Company has also engaged with the appropriate law enforcement authorities. The Company continues to cooperate with law enforcement in connection with the criminal investigation into those responsible for the yearsRansomware Incident.
Through December 31, 2020, the Company recorded $1,560 of expenses related to the Ransomware Incident. We have classified these expenses as “Other operating expenses” in the Consolidated Statements of Comprehensive Income for the year ended December 31, 2018, 20172020. Expenses include costs to investigate and 2016 was $1,905, $1,816remediate the Ransomware Incident and $1,658 respectively.
As of December 31, 2018 the estimated amortization expense for the next five years of capitalized software development costs is as follows:
|
| | | |
| 2019 | $ | 1,605 |
|
| 2020 | 1,263 |
|
| 2021 | 932 |
|
| 2022 | 653 |
|
| 2023 | 382 |
|
| Total | $ | 4,835 |
|
Income Taxes
The Company accounts for income taxes using the liability method, whereby deferred tax assetslegal and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any,other professional services related to unrecognized tax benefits in interest expense and operating expenses, respectively. See additional discussion in the Note 5, Income Taxes.incident, all of which were expensed as incurred.
Net Income Per Share
The Company calculates net income per share in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, Earnings per Share (“ASC 260”). Under ASC 260, basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. The Company's non-vested shares contain non-forfeitable rights to dividends and are therefore considered participating securities for purposes of computing net income per share pursuant to the two-class method. Net income allocated to participating securities was $881 in 2018, $700 in 2017 and $210 in 2016. Net losses are not allocated to participating securities in periods in which the Company incurs a net loss. Diluted net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding after considering the additional dilution from any dilutive non-participating securities. The Company's non-participating securities include options and performance shares.
Share-Based Payments
The Company’s general practice has been to make a single annual grant of share-based compensation to key employees and to make other grants only in connection with new employment or promotions. In addition, the Company makes annual grants to non-employee directors in conjunction with their annual election to our Board of Directors or at the time of their appointment to the Board of Directors. For employees, the Company has granted stock options, non-vested shares and performance shares. For non-employee directors, the Company has generally issued non-vested shares.
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.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
The following table contains the weighted-average assumptions used to estimate the fair value of options granted. These assumptions are subjective and changes in these assumptions can materially affect the fair value estimate.
|
| | | | | | | | |
| December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Expected dividend yield | 1.1 | % |
| 1.3 | % |
| 1.0 | % |
| Expected stock price volatility | 24.4 | % |
| 28.5 | % |
| 28.9 | % |
| Weighted average risk-free interest rate | 2.7 | % |
| 2.0 | % |
| 1.3 | % |
| Expected life of options (years) | 6.1 |
|
| 5.9 |
|
| 5.8 |
|
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.
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.
|
| | | | | | | | |
| | | Year ended | | |
| December 31,
2018 | | December 31,
2017 |
| December 31,
2016 |
| Expected stock price volatility | 24.3 | % | | 24.7 | % |
| 22.3 | % |
| Weighted average risk-free interest rate | 2.2 | % | | 1.4 | % |
| 0.8 | % |
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. See Note 4, Shareholders' Equity, Stock Options and Net Income per Share for additional discussion.
Recent Accounting Pronouncements
In January 2017,June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13 ("ASU No. 2017-04, Intangibles - Goodwill2016-13"), Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology previously used to measure credit losses for most financial assets and Other (Topic 350): "Simplifyingrequires the Accounting for Goodwill Impairment."use of a forward-looking expected loss model. Under theASU 2016-13, credit losses are recognized when it is probable a loss has been incurred. The new standard a goodwill impairment loss willrequires financial assets to be measured at amortized costs less a reserve, equal to the net amount by which a reporting unit's carrying amount exceeds its fair value, notexpected to exceed the carrying amount of goodwill, thus no longer requiring the two-step method. The guidance requires prospective adoption and will be collected. ASU 2016-13 is effective for annual or interim goodwill impairment tests in fiscal yearsperiods beginning after December 15, 2019. Early2019, including interim periods within those fiscal years, with early adoption permitted. In April 2019, the FASB issued Accounting Standards Update 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which provides, among other things, targeted improvements to certain aspects of this guidance is permittedaccounting for interim or annual goodwill impairment tests performedcredit losses addressed by ASU 2016-13. In November 2019, the FASB issued Accounting Standards Update 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (“ASU 2019-11”), which clarifies the treatment of expected recoveries for amounts previously written-off on testingpurchased receivables, provides transition relief for troubled debt restructurings and allows for certain disclosure simplifications of accrued interest. The effective dates after January 1, 2017. Wefor both ASU 2019-04 and ASU 2019-11 are the same as the effective date for ASU 2016-13. The Company adopted this guidancestandard, and its subsequent modifications, as of January 1, 2018 and do not expect any impact to2020, which resulted in the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which will require lessees to recognizeCompany revising its allowance for doubtful accounts policy on a right-of-use asset with a corresponding lease liability on their balance sheet for most leases classified as operating leases under previous guidance. Lessors will be required to recognize a net lease investment for most leases. Additional qualitative and quantitative disclosures will also be required. We adoptedprospective basis. The adoption of this standard as of January 1, 2019 and therefore, the fulldid not have a material impact of this new guidance will be reflected inon the Company’s first quarter 2019results of operations, financial statementscondition and disclosures.cash flows.
2. Discontinued Operation and Held for Sale
As previously disclosed in Note 1, on April 23, 2020, the Company made a decision to divest of Pool. The Pool business met the criteria for held for sale classification. As a result, changesthe assets and liabilities of Pool are presented separately under the captions “Current assets held for sale”, “Noncurrent assets held for sale”, “Current liabilities held for sale” and “Noncurrent liabilities held for sale” in the Consolidated Balance Sheets as of December 31, 2020 and 2019. The results of Pool were reclassified to processes“(Loss) income from discontinued operation, net of tax” in the Consolidated Statements of Comprehensive Income for the years ended December, 31, 2020, 2019 and internal controls2018. Certain corporate overhead and other costs previously allocated to meet the standard’sPool for segment reporting purposes did not qualify for classification within discontinued operation and disclosure requirements have been implemented.reallocated to continuing operations. These costs were reclassified to the eliminations and other column in the segment reconciliation in Note 11, Segment Reporting.
We elected severalUpon meeting the criteria for held for sale classification and in each subsequent reporting period, the Company evaluated whether Pool’s estimated fair value, less costs to sell, exceeded the net carrying value. The annual goodwill impairment analysis conducted as of June 30, 2020 indicated that the fair value in excess of the practical expedients permitted undercarrying value related to the transition guidance withinPool reporting unit was approximately 5% and in the new standard. The practical expedients we elected will allow usthird quarter of 2020, the Company concluded the estimated fair value, less costs to carryforward our conclusions over whether any expired or existing contracts contain a lease, to carryforward historical lease classification,sell, exceeded the net carrying value and to carryforward our evaluationthere were no indicators of initial direct costsimpairment for any existing leases. In addition, we elected the practical expedients to combine lease and non-lease components and to keep leases
Pool reporting unit.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
However, in response to the longer than expected macroeconomic conditions caused by the COVID-19 pandemic and status of negotiations to sell the Pool business, a strategic review of the business was completed in the fourth quarter of 2020 along with revised forecasts to include updated market conditions and strategic operating decisions. The revised forecasts indicated an initial termimpairment of 12 months or less off the entire goodwill balance sheet. For leases with an initial term of 12 months or less, we will recognize the corresponding lease expense on a straight-line basis over the lease term.
We applied the transition requirementsPool reporting unit was necessary as of January 1, 2019 and will not present comparativeDecember 31, 2020. A non-cash charge of approximately $5,406 was recorded as an “Impairment charge” in the summarized discontinued operation financial statements as allowed perinformation for the guidance.year ended December 31, 2020. In addition, we will recognizethe Company recorded a cumulative-effect adjustmentvaluation allowance against the net assets held for sale to write down the carrying value to the opening balanceestimated fair value less costs to sell. A non-cash valuation allowance of retained earningsapproximately $22,978 was recorded as an “Impairment charge” in the first quarter 2019summarized discontinued operation financial statements as allowed per the guidance. We estimate our adoption of the standard will result in the recognition of right-of-use assets and corresponding lease liabilities of approximately $130,000 to $150,000 in the first quarter 2019 financial statements. This asset and corresponding liability could vary to the extent the Company enters into new leases during the quarter. This standard is not expected to materially affect our operating results or liquidity.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provided guidance on revenue from contracts with customers that superseded 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 effectiveinformation for the interim and annual periods beginning on or afteryear ended December 15, 2017 and we adopted this guidance as of January 1, 2018. 31, 2020.
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 implemented the use of full retrospective presentation, which required the Company to adjust each prior reporting period presented to conform to the current year presentation. While evaluating principal versus agent relationships under the new standard, we determined that we will transition the fuel surcharge revenue stream from an agent to principal relationship. This caused this revenue stream and associated costs to be recognized on a gross basis that have historically been recognized on a net basis.
In addition,fair value was estimated based on a reviewcombination of our customer shipping arrangements, we have concluded that revenue recognition for our performance obligations should be over time. This is because the customer will simultaneously receivean income approach using a discounted cash flow model, and consume the benefitsa market approach, which considers comparable companies. Estimates of our services as we perform them over the related service period. A performance obligation is performed over time if an entity determines that another entity would not need to substantially reperform the work completed to date if another entity were to fulfill the remaining performance obligation to the applicable customer. Applying this guidance to our shipping performance obligations, if we were to move a customer’s freight partially to its destination but were unable to complete the remaining obligation, a replacement vendor would only have to complete the transit as opposed to initiating at shipment origin. Therefore, we believe our customers simultaneously receive and consume the benefits we provide and as a result we will recognize the revenue for each shipment over the course of timefuture cash flows are based on percentagevarious factors, including current operating results, expected market trends and competitive influences. Refer to Note 3, Acquisitions, Goodwill, Intangible Assets and Other Long-Lived Assets for further discussion about the estimation of days in transit. All performance obligations related to the Company's services are completed within twelve months or less. Therefore,fair value.
On February 12, 2021, the Company has electedcompleted the practical expedient permitted under this guidance to not disclose the portion of revenue related to the performance obligations that are unsatisfied, or partially unsatisfied, assale of the end of the reporting period.Pool business for $8,000 in cash and up to a $12,000 earn-out based on an earnings before interest, taxes, depreciation and amortization attainment. See Note 13, Subsequent Events, for further discussion.
Our revenue from contracts with customers is disclosed within our four reportable segments: Expedited LTL, TLS, Intermodal and Pool. This is consistent with our disclosures in earnings releases and annual reports and with the information regularly reviewed by the chief operating decision maker for evaluating financial performance.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
The impactSummarized Held for Sale and Discontinued Operation Financial Information
A summary of implementing this guidance using the full retrospective approach on the prior period balance sheetcarrying amounts of major classes of assets and statements of comprehensive incomeliabilities, which are shownincluded in assets and liabilities held for sale in the "As Adjusted" columns of the following tables:Consolidated Balance Sheets, is as follows:
| | | | | | | | | | | |
|
|
|
|
| | December 31,
2020 | | December 31,
2019 |
| Assets | | | |
| Current assets: | | | |
| | | |
| Accounts receivable, less allowance of $86 in 2020 and $48 in 2019 | $ | 19,740 | | | $ | 13,983 | |
| Other current assets | 1,262 | | | 969 | |
| | | |
| Total current assets held for sale | $ | 21,002 | | | $ | 14,952 | |
| | | |
| Property and equipment | $ | 48,905 | | | $ | 53,166 | |
| Less accumulated depreciation and amortization | 28,890 | | | 32,891 | |
| Net property and equipment | 20,015 | | | 20,275 | |
| Operating lease right-of-use assets | 46,865 | | | 46,487 | |
| Goodwill | 0 | | | 5,406 | |
| Other acquired intangibles, net of accumulated amortization of $12,679 in 2020 and $12,359 in 2019 | 2,621 | | | 2,941 | |
| | | |
| Deferred income taxes | 3,253 | | | 0 | |
| Other assets | 3,321 | | | 1,595 | |
| Valuation allowance on assets held for sale | (22,978) | | | 0 | |
| Total noncurrent assets held for sale | $ | 53,097 | | | $ | 76,704 | |
| | | |
| | | |
| Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 4,002 | | | $ | 4,575 | |
| Accrued expenses | 5,070 | | | 5,668 | |
| Other current liabilities | 27 | | | 2 | |
| | | |
| Current portion of operating lease liabilities | 16,825 | | | 14,729 | |
| Total current liabilities held for sale | $ | 25,924 | | | $ | 24,974 | |
| | | |
| | | |
| Operating lease liabilities, less current portion | $ | 30,024 | | | $ | 31,847 | |
| Other long-term liabilities | 4,551 | | | 2,368 | |
| Deferred income taxes | 0 | | | 2,728 | |
| Total noncurrent liabilities held for sale | $ | 34,575 | | | $ | 36,943 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
|
| | | | | | | | | | | | |
| | | As of December 31, 2017 |
| | | (In thousands) |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| Balance Sheet: | | | | | | |
| Accounts receivable, net | | $ | 143,041 |
| | $ | 4,907 |
| | $ | 147,948 |
|
| Accounts payable | | 24,704 |
| | 6,019 |
| | 30,723 |
|
| Deferred income taxes | | 29,403 |
| | (323 | ) | | 29,080 |
|
| Retained earnings | | 337,848 |
| | (790 | ) | | 337,058 |
|
| | | | | | | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, 2017 |
| | | (In thousands, except per share data) |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| Statement of Comprehensive Income: | | | | | | |
| Operating revenue | | | | | | |
| Expedited LTL | | $ | 619,779 |
| | $ | 36,059 |
| | $ | 655,838 |
|
| Truckload Premium Services | | 179,320 |
| | 22,432 |
| | 201,752 |
|
| Intermodal | | 148,907 |
| | 5,777 |
| | 154,684 |
|
| Pool Distribution | | 164,221 |
| | 4,262 |
| | 168,483 |
|
| Eliminations and other operations | | (11,411 | ) | | — |
| | (11,411 | ) |
| Consolidated operating revenue | | 1,100,816 |
| | 68,530 |
| | 1,169,346 |
|
| | | | | | | |
| Operating expenses | | 992,144 |
| | 68,445 |
| | 1,060,589 |
|
| Income from operations | | 108,672 |
| | 85 |
| | 108,757 |
|
| Income taxes | | 20,131 |
| | 151 |
| | 20,282 |
|
| Net income | | 87,321 |
| | (66 | ) | | 87,255 |
|
| Diluted earnings per share | | $ | 2.89 |
| | $ | — |
| | $ | 2.89 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
A summary of the results of operations classified as a discontinued operation, net of tax, in the Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | Year ended | | |
| | December 31,
2020 | | | | December 31,
2019 | | December 31,
2018 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Operating revenue | $ | 141,433 | | | | | $ | 195,208 | | | $ | 183,273 | | | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | | |
| Purchased transportation | 33,979 | | | | | 52,867 | | | 49,323 | | | |
| Salaries, wages and employee benefits | 65,695 | | | | | 77,162 | | | 70,596 | | | |
| Operating leases | 21,982 | | | | | 18,918 | | | 17,488 | | | |
| Depreciation and amortization | 1,657 | | | | | 5,715 | | | 6,352 | | | |
| Insurance and claims | 6,205 | | | | | 6,707 | | | 5,611 | | | |
| Fuel expense | 4,279 | | | | | 6,462 | | | 6,961 | | | |
| Other operating expenses | 17,587 | | | | | 20,969 | | | 22,126 | | | |
| Impairment charge | 28,384 | | | | | 0 | | | 0 | | | |
| Total operating expenses | 179,768 | | | | | 188,800 | | | 178,457 | | | |
| (Loss) income from discontinued operation before income taxes | (38,335) | | | | | 6,408 | | | 4,816 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Income tax (benefit) expense | (9,301) | | | | | 1,631 | | | 1,328 | | | |
| | | | | | | | | |
| (Loss) income from discontinued operation, net of tax | $ | (29,034) | | | | | $ | 4,777 | | | $ | 3,488 | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, 2016 |
| | | (In thousands, except per share data) |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| Statement of Comprehensive Income: | | | | | | |
| Operating revenue | | | | | | |
| Expedited LTL | | $ | 570,778 |
| | $ | 25,761 |
| | $ | 596,539 |
|
| Truckload Premium Services | | 164,272 |
| | 16,735 |
| | 181,007 |
|
| Intermodal | | 103,671 |
| | 1,993 |
| | 105,664 |
|
| Pool Distribution | | 148,661 |
| | 3,191 |
| | 151,852 |
|
| Eliminations and other operations | | (4,852 | ) | | — |
| | (4,852 | ) |
| Consolidated operating revenue | | 982,530 |
| | 47,680 |
| | 1,030,210 |
|
| | | | | | | |
| Operating expenses | | 922,551 |
| | 47,956 |
| | 970,507 |
|
| Income from operations | | 59,979 |
| | (276 | ) | | 59,703 |
|
| Income taxes | | 30,716 |
| | (111 | ) | | 30,605 |
|
| Net income | | 27,670 |
| | (165 | ) | | 27,505 |
|
| Diluted earnings per share | | $ | 0.90 |
| | $ | — |
| | $ | 0.90 |
|
2.3. Acquisitions, Goodwill, Intangible Assets and Other Long-Lived Assets
IntermodalExpedited Freight Acquisitions
As partIn April 2019, the Company acquired certain assets and liabilities of FSA Network, Inc., doing business as FSA Logistix (“FSA”), for $26,798, net of cash acquired of $202, and an earn-out of up to $15,000. FSA, with management offices in Fort Lauderdale, Florida and Southlake, Texas, specializes in last mile logistics for a wide range of American companies, including national retailers, manufacturers, eTailers and third-party logistics companies. FSA has operations in the Company's strategyEast, Midwest, Southwest and West regions. The acquisition of FSA provides the Company the opportunity to expand its Intermodalfinal mile service offering into additional geographic markets, form relationships with new customers, add volumes to existing locations and generate synergies within the Company. The acquisition was financed by cash flows from operations. The results of operations of FSA have been included in the Company’s consolidated financial statements as of and from the date of acquisition. The associated goodwill has been included in the Company’s Expedited Freight reportable segment.
The purchase agreement for FSA included an earn-out of up to $15,000 based on the achievement of certain revenue milestones over 2 one-year periods, beginning May 1, 2019. The estimated the fair value of the earn-out liability on the date of acquisition was $11,803. The fair value was based on the estimated two-year performance of the acquired customer revenue and was calculated using a Monte Carlo simulation model. The weighted-average assumptions under the Monte Carlo simulation model were as follows for the year ended December 31, 2020 and 2019:
| | | | | | | | | | |
| | FSA Earn-Out |
| | December 31, 2020 | December 31, 2019 | |
| | | | |
| Risk-free rate | | 1.4% | 2.2% | |
| Revenue discount rate | | 3.2% | 4.4% | |
| Revenue volatility | | 8.0% | 5.0% | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
The fair value of the earn-out liability was adjusted at each reporting period based on changes in the expected cash flows and related assumptions used in the Monte Carlo simulation model. During the year ended December 31, 2020 and 2019, the fair value of the earn-out changed by $379 and ($33), respectively, and the changes in fair value were recorded in “Other operating expenses” in the Consolidated Statements of Comprehensive Income. The first one-year period ended in the second quarter of 2020 and the Company paid $5,284 based on the terms of the purchase agreement. The second one-year period will end in the second quarter of 2021. As of December 31, 2020 and 2019, the fair value of the earn-out liability was $6,865 and $11,770, respectively, which was reflected in "Other current liabilities" and "Other long-term liabilities" in the Consolidated Balance Sheets.
In January 2016,2020, the Company acquired certain assets and liabilities of Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC (collectively, “Linn Star”) for $55,931, net cash acquired of $1,308. Linn Star, headquartered in Cedar Rapids, Iowa, specializes in last mile logistics and in-home installation services for a range of national retailers and manufacturers. Linn Star has operations primarily in the Midwest and Southwest regions. The acquisition of Linn Star supports the Company’s strategic growth plan by expanding the footprint of the Final Mile business into additional markets. The acquisition was financed by cash flows from operations. The results of operations of Linn Star have been included in the Company’s consolidated financial statements as of and from the date of acquisition. The associated goodwill has been included in the Company’s Expedited Freight reportable segment.
On October 11, 2020, the Company acquired certain assets of Ace Cargo, LLC ("Ace"CLW Delivery, Inc. (“CLW”) for $1,700,$5,500. CLW, headquartered in Johnson City, Tennessee, specializes in last mile logistics and in August 2016,in-home installation services for national retailers and manufacturers. The acquisition of CLW supports the Company acquired certain assetsCompany’s strategic growth plan by expanding the footprint of Triumph Transport, Inc. and Triumph Repair Service, Inc. (together referred to as “Triumph”) for $10,100 and an earnout of $1,250 paid in September 2017. These acquisitions provided an opportunity for our Intermodal operations to expandthe Final Mile business into additional Midwest markets.
In May 2017, the Company acquired certain assets of Atlantic Trucking Company, Inc., Heavy Duty Equipment Leasing, LLC, Atlantic Logistics, LLC and Transportation Holdings, Inc. (together referred to as “Atlantic” in this note) for $22,500 and an earnout of $135 paid in the fourth quarter of 2018. The acquisition was fundedfinanced by a combinationcash flows from operations. The results of cash on hand and funds from our revolving credit facility. Atlantic was a privately held provideroperations 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 footprintCLW have been included in the southeastern region. In October 2017,Company’s consolidated financial statements as of and from the Company acquired certain assetsdate of Kansas City Logistics, LLC ("KCL") for $640 and an earnout of $100 paidacquisition. The associated goodwill has been included in the second quarter of 2018. KCL provides CST with an expanded footprint in the Kansas and Missouri markets.Company’s Expedited Freight reportable segment.
Intermodal Acquisitions
In July 2018, the Company acquired certain assets of Multi-Modal Transport Inc. ("MMT"(“MMT”) for $3,737$3,737. MMT, headquartered in Saint Paul, Minnesota, provides intermodal drayage services. MMT has locations in Iowa, Minnesota, North Dakota, South Dakota and Wisconsin. The acquisition of MMT supports the Company’s strategic growth plan by expanding the footprint of the Intermodal business into additional markets. The acquisition was financed by cash flows from operations. The results of MMT have been included in the Company’s consolidated financial statements as of and from the date of acquisition. The associated goodwill has been included in the Company’s Intermodal reportable segment.
In October 2018, the Company acquired certain assets of Southwest Freight Distributors, Inc. (“Southwest”) for $16,250. Southwest, is aheadquartered in Dallas, Texas, based premiumprovides intermodal drayage provider.services. The MMT acquisition providesof Southwest supports the Company’s strategic growth plan by expanding the footprint of the Intermodal with an expanded footprint in the Minnesota, North Dakota, South Dakota, Iowa and Wisconsin markets, and the Southwestbusiness into Texas. The acquisition provides an expanded footprint in Texas. Both MMT and Southwest also provide access to several strategic customer relationships.
was financed by cash flows from operations. The assets, liabilities, and operating results of these collective acquisitionsSouthwest have been included in the Company'sCompany’s consolidated financial statements as of and from their datesthe date of acquisition. The associated goodwill has been included in the Company’s Intermodal reportable segment.
In July 2019, the Company acquired certain assets and liabilities of O.S.T. Logistics, Inc. and O.S.T. Trucking Co., Inc. (collectively, “O.S.T.”) for $12,000. O.S.T., headquartered in Baltimore, Maryland, provides intermodal drayage services. O.S.T. has locations in Florida, Georgia, South Carolina and Virginia. The acquisition andof O.S.T. supports the Company’s strategic growth plan by expanding the footprint of the Intermodal business into additional markets. The acquisition was financed by cash flows from operations. The results of operations of O.S.T. have been included in the Company’s consolidated financial statements as of and from the date of acquisition. The associated goodwill has been included in the Company’s Intermodal reportable segment.
Fair Value of Assets Acquired and Liabilities Assumed
Assets acquired and liabilities assumed as of the acquisition date are presented in the following table:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(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):
| |
| Ace & Triumph | Atlantic | KCL | MMT | Southwest | | | MMT | | Southwest | | FSA | | O.S.T. | | Linn Star | | CLW |
| January & August 2016 | May 7, 2017 | October 22, 2017 | July 25, 2018 | October 28, 2018 | | | July 25, 2018 | | October 28, 2018 | | April 21, 2019 | | July 14, 2019 | | January 12, 2020 | | October 11, 2020 |
| Tangible assets: |
|
| | Tangible assets: | | | | | | | | | | | | |
| Cash | | Cash | | $ | — | | | $ | — | | | $ | 202 | | | $ | — | | | $ | 1,308 | | | $ | — | |
| | Other receivables | | Other receivables | | — | | | — | | | 1,491 | | | — | | | — | | | — | |
| Prepaid expenses and other current assets | | Prepaid expenses and other current assets | | | — | | | — | | | 1,182 | | | — | |
| Property and equipment | $ | 1,294 |
| $ | 1,821 |
| $ | 223 |
| $ | 81 |
| $ | 933 |
| Property and equipment | | 81 | | | 933 | | | 40 | | | 10,371 | | | 605 | | | — | |
| | Right-of-use lease assets | | Right-of-use lease assets | | — | | | — | | | 3,209 | | | 1,672 | | | 10,011 | | | 811 | |
| | Total tangible assets | 1,294 |
| 1,821 |
| 223 |
| 81 |
| 933 |
| Total tangible assets | | 81 | | | 933 | | | 4,942 | | | 12,043 | | | 13,106 | | | 811 | |
| Intangible assets: |
|
| | Intangible assets: | | | | | | | | | | | | |
| Non-compete agreements | 139 |
| 1,150 |
| 6 |
| 43 |
| 650 |
| Non-compete agreements | | 43 | | | 650 | | | 900 | | | 850 | | | 450 | | | 1,000 | |
| | Customer relationships | 5,335 |
| 13,400 |
| 234 |
| 1,659 |
| 9,200 |
| Customer relationships | | 1,659 | | | 9,200 | | | 17,900 | | | 5,700 | | | 29,800 | | | 1,500 | |
| Goodwill | 6,282 |
| 6,719 |
| 277 |
| 1,954 |
| 5,467 |
| Goodwill | | 1,954 | | | 5,467 | | | 19,963 | | | 2,050 | | | 25,234 | | | 3,000 | |
| Total intangible assets | 11,756 |
| 21,269 |
| 517 |
| 3,656 |
| 15,317 |
| Total intangible assets | | 3,656 | | | 15,317 | | | 38,763 | | | 8,600 | | | 55,484 | | | 5,500 | |
| Total assets acquired | 13,050 |
| 23,090 |
| 740 |
| 3,737 |
| 16,250 |
| Total assets acquired | | 3,737 | | | 16,250 | | | 43,705 | | | 20,643 | | | 68,590 | | | 6,311 | |
|
| | | | | | | | | | | | | | |
| Liabilities assumed: |
| | Liabilities assumed: | | |
| Current liabilities | — |
| 590 |
| 100 |
| — |
| — |
| Current liabilities | | — | | | — | | | 8,466 | | | — | | | 1,340 | | | — | |
| Other liabilities | 1,250 |
| — |
| — |
| — |
| — |
| Other liabilities | | — | | | — | | | 5,030 | | | — | | | — | | | — | |
| Operating lease liabilities | | Operating lease liabilities | | — | | | — | | | 3,209 | | | 1,672 | | | 10,011 | | | 811 | |
| Finance lease obligations | | Finance lease obligations | | — | | | — | | | — | | | 6,971 | | | — | | | — | |
| | Total liabilities assumed | 1,250 |
| 590 |
| 100 |
| — |
| — |
| Total liabilities assumed | | — | | | — | | | 16,705 | | | 8,643 | | | 11,351 | | | — | |
| Net assets acquired | $ | 11,800 |
| $ | 22,500 |
| $ | 640 |
| $ | 3,737 |
| $ | 16,250 |
| Net assets acquired | | $ | 3,737 | | | $ | 16,250 | | | $ | 27,000 | | | $ | 12,000 | | | $ | 57,239 | | | $ | 5,500 | |
The weighted-average useful life of acquired definite-lived intangible assets haveas of the acquisition date are summarized in the following useful lives:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Useful Lives | | | | |
| Ace & Triumph |
| Atlantic | | KCL | | MMT | | SouthwestFSA | | O.S.T. | | Linn Star | | CLW |
| Customer relationships | | | | | | | | | 15 years |
| 10 years | | 15 years | | 157 years | | 15 years | | 10 years |
| Non-compete agreements | | | | | | | | | 5 years |
| 3 years | | 1 year | | 5 years |
| | 2 years | | 4 years | | 3 years | | | | | | | | | |
The fair value of the customer relationshipsGoodwill, Intangible Assets and non-compete agreements were estimated using an income approach (level 3). Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To 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.Other Long-Lived Assets
Goodwill
The Company conducted its annual impairment assessments and tests of goodwill for eachimpairment, at the reporting unit as of June 30, 2018. The first step of the goodwill impairment test is the Company's assessment of qualitative factors to determine whether it is more likely than notlevel, annually and when events or circumstances indicate that the fair value of a reporting unit may be below its carrying value. A reporting unit is lessan operating segment or one level below an operating segment, for example, a component. The Company’s reporting units are not its reportable segments.
Goodwill is evaluated annually as of June 30 for impairment using a qualitative assessment or a quantitative one-step assessment. If the Company elects to perform a qualitative assessment and determines the fair value of its reporting units more likely than not exceed the carrying value of their net assets, no further evaluation is necessary. For reporting unit's carrying amount, including goodwill. When performingunits where the qualitativeCompany performs a one-step quantitative assessment, the Company considerscompares the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performancefair value of each reporting unit, litigation and new legislation. Ifwhich is determined based on the qualitative assessments, the Company believes it more likely than not thata combination of an income approach using a discounted cash flow model, and a market approach, which considers comparable companies, to its respective carrying value of net assets, including goodwill. If the fair value of athe reporting unit exceeds its carrying value of net assets, the goodwill is lessnot considered impaired. If the carrying value of net assets is higher than the fair value of the reporting unit'sunit, the impairment charge is the amount by which the carrying value exceeds the reporting unit’s fair value.
The Company reviews its long-lived assets, which include intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation for recoverability is performed at a level where independent cash flows may be attributed to either an asset or periodically as deemed appropriate by management,asset group. If the Company will preparedetermines that the carrying amount of an estimation ofasset or asset group is not recoverable based on the respective reporting unit's fair value utilizing a quantitative approach.
expected
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
If a quantitative fair value estimationundiscounted future cash flows of the asset or asset group, an impairment loss is required,recorded equal to the Company estimatesexcess of the carrying amounts over the estimated fair value of the applicable reporting units based on a combinationlong-lived assets. Estimates of a market approach, 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 beyondare based on various factors, including current operating results, expected market trends and competitive influences. The Company also evaluates the projection period. Both valuesamortization periods assigned to its intangible assets to determine whether events or changes in circumstances warrant revised estimates of useful lives. Assets to be disposed of by sale are discounted using a rate which reflects our best estimatereported at the lower of the weighted average cost of capital of a market participant, and is adjusted for appropriate risk factors. The Company 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 unitscarrying amount or fair value, less estimated costs to ensure reductions of the present value of the projected cash flows by at least 10% would not adversely impact thesell.
The results of the Company’s goodwill and long-lived assets 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 used 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, 2018, the Company had five reporting units - Expedited LTL, TLX Forward Air, Intermodal, Pool Distribution and Total Quality, Inc. ("TQI"). The TLX Forward Air and the TQI reporting units were assigned to the Truckload Premium Services reportable segment. Currently, there is no goodwill assigned to the TLX Forward Air reporting unit. Our 2018 calculations for LTL, Pool Distribution, Intermodal and TQI indicated that,analyses conducted as of June 30, 2020, 2019 and 2018 indicated that no reduction in the fair valuecarrying amount of eachthe Company’s goodwill and long-lived assets was required.
Changes in the carrying amount of goodwill during the years ended December 31, 2020 and 2019 are summarized as follows:
| | | | | | | | | | | | | | | | | |
| Expedited Freight | | Intermodal | | Consolidated |
| Balance as of December 31, 2018 | $ | 117,071 | | | $ | 76,615 | | | $ | 193,686 | |
| Acquisitions | 19,963 | | | 2,050 | | | 22,013 | |
| Balance as of December 31, 2019 | 137,034 | | | 78,665 | | | 215,699 | |
| Acquisitions | 28,234 | | | 1,049 | | | 29,283 | |
| Balance as of December 31, 2020 | $ | 165,268 | | | $ | 79,714 | | | $ | 244,982 | |
The Company’s accumulated goodwill impairment is approximately $25,686 related to impairment charges the Company recorded during 2016 pertaining to its TLS reporting unit. The TLS reporting unit exceededoperates within the Expedited Freight reportable segment. As of December 31, 2020, approximately $165,839 of goodwill is deductible for tax purposes.
Other Acquired Intangibles
The Company amortizes certain acquired identifiable intangible assets on a straight-line basis over their estimated useful lives, which range from 1 to 20 years. The acquired intangible assets have a weighted-average useful life as follows:
| | | | | | | | |
| Intangible Assets | | Weighted-Average Useful Life |
| Customer relationships | | 15 years |
| Non-compete agreements | | 4 years |
| Trade names | | 4 years |
For the years ended December 31, 2020, 2019 and 2018, acquired intangible asset amortization was $13,489, $10,183 and $8,109, respectively. The Company estimates amortization of existing intangible assets will be $13,464 in 2021, $12,964 in 2022, $12,729 in 2023, $12,604 in 2024, and $12,506 in 2025.
Changes in the carrying value by approximately 349.0%, 182.0%, 73.0%amount of acquired intangible assets during 2020 and 36.0%, respectively.2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Customer relationships1 | $ | 228,416 | | | $ | (85,930) | | | $ | 142,486 | | | $ | 196,225 | | | $ | (73,868) | | | $ | 122,357 | |
| Non-compete agreements | 8,125 | | | (5,579) | | | 2,546 | | | 6,652 | | | (4,152) | | | 2,500 | |
| Trade names | 1,500 | | | (1,500) | | | — | | | 1,500 | | | (1,500) | | | — | |
| Total | $ | 238,041 | | | $ | (93,009) | | | $ | 145,032 | | | $ | 204,377 | | | $ | (79,520) | | | $ | 124,857 | |
For our June 30, 2018 analysis, the significant assumptions used for the income approach were projected net cash flows and the following discount and long-term growth rates:
|
| | | | | | | | | | | |
| | Expedited LTL | | Pool | | Intermodal | | TQI |
| Discount rate | 12.0 | % | | 15.5 | % | | 14.0 | % | | 16.5 | % |
| Long-term growth rate | 4.0 | % | | 4.0 | % | | 4.0 | % | | 4.0 | % |
The estimates used to calculate the fair1Carrying value of each reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of the reporting unit's fair value and goodwill impairment for the reporting unit.
As of July 1, 2018, the TLX Forward Air and TQI reporting units were fully integrated into the Truckload Premium Services reporting unit. As a result, as of December 31, 2018 we had four reporting units - Expedited LTL, Truckload Premium Services, Intermodal2020 and Pool Distribution. The Company conducted a qualitative assessment as2019 is inclusive of December 31, 2018 and no indicators$16,501 of impairment were identified.
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.
accumulated impairment.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
The following is a summary of the changes in goodwill for Intermodal and the Company for the year ended December 31, 2018. There were no changes to Expedited LTL, Truckload Premium or Pool Distribution during the year ended December 31, 2018. Approximately $119,948 of goodwill is deductible for tax purposes.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expedited LTL |
| Truckload Premium |
| Pool Distribution | | Intermodal |
| Total |
|
| Accumulated |
|
| Accumulated |
|
| Accumulated | | | Accumulated |
|
|
| Goodwill | Impairment |
| Goodwill | Impairment |
| Goodwill | Impairment | | Goodwill | Impairment |
| Net |
| Ending balance, December 31, 2017 | $ | 97,593 |
| $ | — |
| | $ | 45,164 |
| $ | (25,686 | ) | | $ | 12,359 |
| $ | (6,953 | ) | | $ | 69,194 |
| $ | — |
| | $ | 191,671 |
|
| MMT acquisition | — |
| — |
| | — |
| — |
| | — |
| — |
| | 1,954 |
| — |
| | 1,954 |
|
| Southwest acquisition | — |
| — |
| | — |
| — |
| | — |
| — |
| | 5,467 |
| — |
| | 5,467 |
|
| Ending balance, December 31, 2018 | $ | 97,593 |
| $ | — |
| | $ | 45,164 |
| $ | (25,686 | ) | | $ | 12,359 |
| $ | (6,953 | ) | | $ | 76,615 |
| $ | — |
| | $ | 199,092 |
|
Other Acquired Intangibles
Through acquisitions, the Company acquired customer relationships, non-compete agreements and trade names having weighted-average useful lives of 15.0, 4.5 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, 2018, 2017 and 2016 was $9,138, $10,193 and $10,122, respectively.
As of December 31, 2018, definite-lived intangible assets are comprised of the following:
|
| | | | | | | | | | | | | | | |
| | Acquired Intangibles | | Accumulated Amortization | | Accumulated Impairment | | Net Acquired Intangibles |
| Customer relationships | $ | 204,226 |
| | $ | 75,585 |
| | $ | 16,501 |
| | $ | 112,140 |
|
| Non-compete agreements | 5,102 |
| | 3,581 |
| | — |
| | 1,521 |
|
| Trade name | 1,500 |
| | 1,500 |
| | — |
| | — |
|
| Total | $ | 210,828 |
| | $ | 80,666 |
| | $ | 16,501 |
| | $ | 113,661 |
|
As of December 31, 2017, definite-lived intangible assets are comprised2020, the Company had $112,500 in borrowings outstanding under the revolving credit facility, $18,326 utilized for outstanding letters of credit and $94,174 of available borrowing capacity under the following:
|
| | | | | | | | | | | | | | | |
| | Acquired Intangibles | | Accumulated Amortization | | Accumulated Impairment | | Net Acquired Intangibles |
| Customer relationships | $ | 193,209 |
| | $ | 66,986 |
| | $ | 16,501 |
| | $ | 109,722 |
|
| Non-compete agreements | 4,566 |
| | 3,074 |
| | — |
| | 1,492 |
|
| Trade name | 1,500 |
| | 1,467 |
| | — |
| | 33 |
|
| Total | $ | 199,275 |
| | $ | 71,527 |
| | $ | 16,501 |
| | $ | 111,247 |
|
revolving credit facility. As of December 31, 2019, the Company had $67,500 in borrowings outstanding under the revolving credit facility, $13,970 utilized for outstanding letters of credit and $68,530 of available borrowing capacity under the revolving credit facility. The estimated amortization expense forinterest rate on the next five years on definite-lived intangible assetsoutstanding borrowings under the revolving credit facility was 3.25% and 3.2% as of December 31, 2018 is as follows:2020 and 2019, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Customer relationships | $ | 9,350 |
|
| $ | 9,350 |
|
| $ | 9,207 |
|
| $ | 9,007 |
|
| $ | 8,659 |
|
| Non-compete agreements | 516 |
|
| 486 |
|
| 438 |
|
| 81 |
|
| — |
|
| Total | $ | 9,866 |
|
| $ | 9,836 |
|
| $ | 9,645 |
|
| $ | 9,088 |
|
| $ | 8,659 |
|
Additionally, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment is recognized on assets classified as held and used when the sum of undiscounted estimated cash flows expected to result from the use of the asset is less than the carrying value. If such measurement indicates a possible impairment, the estimated fair value of the asset is compared to its net book value to measure the impairment charge, if any. In conjunction with the June 30, 2016 TQI goodwill impairment assessment the Company determined
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
there were indicators that TQI's customer relationship and non-compete intangible assets were impaired, as the undiscounted cash flows associated with the applicable assets no longer exceeded the related assets' net book values. The Company estimated the fair value of the customer relationship and non-compete assets using an income approach (level 3). Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To estimate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believed the level and timing of cash flows appropriately reflected market participant assumptions. As a result of these estimates the Company recorded an impairment charge of $16,501 related to TQI customer relationships during the year ended December 31, 2016. The Company incurred no such impairment charges during the years ended December 31, 2017 or 2018.
3. Debt and Capital Lease Obligations
Credit Facilities
On 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 maturity date of the Facility is September 29, 2022. In April 2020, the Company entered into an amendment to the Facility, which increased the maximum aggregate principal amount to $225,000. The Facility may be increased by up to $100,000$25,000 to a maximum aggregate principal amount of $250,000 pursuant to the terms of the amended 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.
Under the amended Facility, and satisfaction of other conditions precedent and are subject tointerest accrues on 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 facilityamounts outstanding under the credit agreement dated as of February 4, 2015, as amended, which was terminated as offacility, at the date of the new Facility.
Unless the Company elects otherwise under the credit agreement, interest on borrowings under the Facility isCompany’s option, at either (1) London Interbank Offered Rate (“LIBOR”) rate, not less than 1.00%, plus a margin ranging from 2.25% to 2.75% based on the Company’s leverage ratio, or (2) base rate, which cannot be less than 3.00%. The base rate is the highest of (a)(i) the federal funds rate, (notnot less than 0%)zero, plus 0.5%0.50%, (b)(ii) the administrative agent's prime rate and (c)(iii) the LIBOR Raterate, not less than 1.00%, plus 1.0%1.00%, in each case plus a margin that can rangeranging from 0.3%0.25% to 0.8% with respect to the Facility depending0.75% based on the Company’s ratio of consolidated funded indebtedness to earnings beforeleverage ratio. Previously, under the Facility, interest taxes, depreciation and amortization, as set forth inaccrued on the amounts outstanding under the credit agreement. Paymentsfacility, at the Company’s option, at either (1) LIBOR plus a margin ranging from 1.25% to 1.75% based on the Company’s leverage ratio, or (2) the base rate, which was equal to the highest of interest(i) the federal funds rate, not less than zero, plus 0.50%, (ii) the administrative agent’s prime rate and (iii) the LIBOR rate plus 1.00%, plus a margin ranging from 0.25% to 0.75% based on the Company’s leverage ratio. Interest is payable in arrears for each loan that is based on the LIBOR Rate are due in arrearsrate on the last day of the interest period applicable to sucheach loan, (withand interest periods of one, two or three months being available, at the Company’s option). Payments of interestis payable in arrears on loans that are not based on the LIBOR Rate are duerate on the last day of each quarter ended March 31, June 30, September 30 and December 31 of each year. All unpaid amounts of principal and interest are due at maturity. As of December 31, 2018, the Company had $47,500 in borrowings outstanding under the revolving credit facility, $10,650 utilized for outstanding letters of credit and $91,850 of available borrowing capacity under the revolving credit facility. The interest rate on the outstanding borrowings under the facility was 4.1% at December 31, 2018.quarter.
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 Company also has to fulfill financial covenants with respect to a leverage ratio and an interest coverage ratio. As of December 31, 2018,2020, the Company was in compliance with the aforementioned covenants.
Capital Leases
Primarily through acquisitions, the Company assumed several equipment leases that met the criteria for classification as a capital lease. The leased equipment is being amortized over the shorter of the lease term or useful life.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
Property and equipment include the following amounts for assets under capital leases:
|
| | | | | | | | |
| | December 31,
2018 | | December 31,
2017 |
| Equipment | | $ | 635 |
| | $ | 635 |
|
| Accumulated amortization | | (518 | ) | | (413 | ) |
| | $ | 117 |
| | $ | 222 |
|
Amortization of assets under capital leases is included in depreciation and amortization expense.
Future minimum payments, by year and in the aggregate, under non-cancelable capital leases with initial or remaining terms of one year or more consist of the following at December 31, 2018:
|
| | | | |
| 2019 | | $ | 325 |
|
| 2020 | | 60 |
|
| Total | | 385 |
|
| Less amounts representing interest | | 22 |
|
| Present value of net minimum lease payments (including current portion of $309) | | $ | 363 |
|
Interest Payments
Cash payments for interest payments duringwere $4,580, $2,711 and $1,783 for the years ended December 31, 2020, 2019 and 2018, 2017 and 2016 were $1,841, $1,193 and $1,770, respectively. No interest was capitalized during the yearsyear ended December 31, 2018, 20172020, 2019 and 2016.2018.
4. Shareholders'5. Shareholders’ Equity, Stock OptionsIncentive Plan and Net Income per Share
Preferred Stock
There are 5,000,0005,000 shares of preferred stock with a par value of $0.01$0.01 authorized, but no shares have been issued to date.
Cash Dividends
During the fourth quarter of 2018,2020, the Company’s Board of Directors declared and the Company has paid a quarterly cash dividend of $0.18$0.21 per share of Common Stock.common share. During the first, second and third quarters of 2018,2020, each quarter of 20172019 and the fourth quarter of 2016, the Company's Board of Directors declared a cash dividend of $0.15 per share of Common Stock. During the first, second and third quarters of 2016, the Company's Board of Directors declared a cash dividend of $0.12 per share of Common Stock. On February 5, 2019, the Company’s Board of Directors declared a $0.18 per share dividend that will be paid in the first quarter of 2019. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.
Repurchase of Common Stock
On July 21, 2016, our Board of Directors approved a stock repurchase plan that authorized the repurchase of up to 3,000,000 shares of the Company's Common Stock. Under the 2016 repurchase plan, during the year ended December 31, 2018, we repurchased 1,109,270 shares of Common Stock for $66,126, or $59.61 per share. As of December 31, 2018, 709,395 shares remain that may be repurchased.
On February 5, 2019, our Board of Directors canceled the Company’s remaining 2016 share repurchase authorization and approved a stock repurchase authorization for up to 5,000,000 shares of the Company’s common stock. The amount and timing of any repurchases under the Company’s new repurchase authorization will be at such prices as determined by management of the Company. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. Stock repurchases may be commenced or suspended from time to time for any reason.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
fourth quarter of 2018, the Company’s Board of Directors declared and the Company has paid a quarterly cash dividend of $0.18 per common share. During the first, second and third quarters of 2018, the Company's Board of Directors declared and the Company has paid a quarterly cash dividend of $0.15 per common share.
Share-Based CompensationOn February 2, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per common share that will be paid in the first quarter of 2021.
Share Repurchase Program
On July 21, 2016, the Company’s Board of Directors approved a stock repurchase program for up to 3,000 shares of the Company’s common stock (the “2016 Repurchase Plan”). On February 5, 2019, the Board of Directors canceled the Company’s 2016 Repurchase Plan and approved a revised stock repurchase plan authorizing up to 5,000 shares of the Company’s common stock (the “2019 Repurchase Plan”). The 2019 Repurchase Plan expires when the shares authorized for repurchase are exhausted or the 2019 Repurchase Plan is canceled.
During the year ended December 31, 2020, the Company repurchased through open market transactions 787 shares of common stock for $45,248, or $57.53 per share, and during the year ended December 31, 2019, the Company repurchased through open market transactions 913 shares of common stock for $56,204, or $61.59 per share. All shares received were retired upon receipt, and the excess of the purchase price over the par value per share was recorded to "Retained Earnings" in the Consolidated Balance Sheets.
As of December 31, 2020, the remaining shares to be repurchased under the 2019 Repurchase Plan were approximately 3,368 shares.
Stock Incentive Plan
In May 2016, with the approval of shareholders, the Company adopted the 2016 Omnibus Incentive Compensation Plan (the “Omnibus Plan”) for the issuance of up 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, 2018, there were2020, approximately 1,266,219965 shares remainingremain available for grant under the Omnibus Plan.
Employee Activity - Stock Options
The following table summarizesCertain executives are eligible to receive grants of stock options. Employees may exercise the Company’s employee stock options outstandingat anytime after the grant is vested but no later than seven years after the date of grant. Stock options vest over a three-year period from the date of grant. The shared-based compensation expense associated with these options is amortized ratably over the vesting period. The Company estimated the fair value of the grants using the Black-Scholes option-pricing model.
The weighted-average assumptions under the Black-Scholes option-pricing model were as of December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
| Outstanding |
|
|
| Exercisable |
|
|
|
|
|
| Weighted- |
| Weighted- |
|
|
| Weighted- |
| Range of |
| Number |
| Average |
| Average |
| Number |
| Average |
| Exercise |
| Outstanding |
| Remaining |
| Exercise |
| Exercisable |
| Exercise |
| Price |
| (000) |
| Contractual Life |
| Price |
| (000) |
| Price |
| $ | 36.90 |
| - | 37.14 |
|
| 36 |
|
| 1.0 |
| $ | 37.11 |
|
| 36 |
|
| $ | 37.11 |
|
| 41.32 |
| - | 44.90 |
|
| 135 |
|
| 3.5 |
| 43.39 |
|
| 101 |
|
| 43.33 |
|
| 45.34 |
| - | 48.32 |
|
| 116 |
|
| 5.0 |
| 47.76 |
|
| 42 |
|
| 47.61 |
|
| 50.71 |
| - | 53.73 |
|
| 53 |
|
| 3.4 |
| 51.13 |
|
| 49 |
|
| 50.95 |
|
| 57.18 |
| - | 60.42 |
|
| 98 |
|
| 6.1 |
| 58.78 |
|
| 2 |
|
| 57.18 |
|
| 64.26 |
| - | 64.26 |
|
| 100 |
|
| 6.7 |
| 64.26 |
|
| — |
|
| — |
|
| $ | 36.90 |
| - | 64.26 |
|
| 538 |
|
| 4.7 |
| $ | 51.37 |
|
| 230 |
|
| $ | 44.89 |
|
The following tables summarize the Company’s employee stock option activity and related informationfollows for the years ended December 31, 2018, 20172020 and 2016:2018. The Company did not grant stock options during the year ended December 31, 2019.
| | | | | | | | | | | | | |
| December 31,
2020 | | | | December 31,
2018 |
| Expected dividend yield | 1.1 | % | | | | 1.1 | % |
| Expected stock price volatility | 24.1 | % | | | | 24.4 | % |
| Risk-free interest rate | 1.5 | % | | | | 2.7 | % |
| Expected life of options (years) | 5.9 | | | | 6.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | | Average | | | | Average | | | | Average |
| | Options | | Exercise | | Options | | Exercise | | Options | | Exercise |
| | (000) | | Price | | (000) | | Price | | (000) | | Price |
| Outstanding at beginning of year | 440 |
| | $ | 45 |
| | 564 |
| | $ | 41 |
| | 786 |
| | $ | 32 |
|
| Granted | 193 |
| | 62 |
| | 128 |
| | 48 |
| | 137 |
| | 44 |
|
| Exercised | (95 | ) | | 41 |
| | (206 | ) | | 35 |
| | (346 | ) | | 24 |
|
| Forfeited | — |
| | — |
| | (46 | ) | | 46 |
| | (13 | ) | | 35 |
|
| Outstanding at end of year | 538 |
| | $ | 51 |
| | 440 |
| | $ | 45 |
| | 564 |
| | $ | 41 |
|
| Exercisable at end of year | 230 |
| | $ | 45 |
| | 226 |
| | $ | 42 |
| | 331 |
| | $ | 37 |
|
| Weighted-average fair value of options granted during the year | $ | 16 |
| | | | $ | 13 |
| | | | $ | 12 |
| | |
| Aggregate intrinsic value for options exercised | $ | 1,992 |
| | | | $ | 3,569 |
| | | | $ | 7,803 |
| | |
| Average aggregate intrinsic value for options outstanding | $ | 4,550 |
| | | | | | | | | | |
| Average aggregate intrinsic value for exercisable options | $ | 3,439 |
| | | | | | | | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
The following table sets forth the exercise price range, number of shares, weighted-average exercise price and remaining contractual lives by groups of similar price on a continuing basis as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted- | | Outstanding | | | | Exercisable |
| | | | | | Average | | Weighted- | | | | Weighted- |
| Range of | | Number of Shares Outstanding | | Remaining | | Average | | Number of Shares Exercisable | | Average |
| Exercise | | | Contractual Life | | Exercise | | | Exercise |
| Price | | | (in years) | | Price | | | Price |
| $ | 43.67 | | - | $ | 44.90 | | | 59 | | | 2.1 | | $ | 43.70 | | | 59 | | | $ | 43.70 | |
| 47.82 | | - | 48.32 | | | 68 | | | 3.1 | | 47.86 | | | 68 | | | 47.86 | |
| 50.71 | | - | 53.73 | | | 26 | | | 1.6 | | 51.31 | | | 26 | | | 51.31 | |
| 57.18 | | - | 60.42 | | | 70 | | | 4.1 | | 58.73 | | | 45 | | | 58.64 | |
| 64.26 | | - | 65.96 | | | 136 | | | 5.0 | | 64.71 | | | 67 | | | 64.26 | |
| $ | 43.67 | | - | $ | 65.96 | | | 359 | | | 3.7 | | $ | 55.88 | | | 265 | | | $ | 53.23 | |
Stock option activity and related information on a continuing basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | Average | | | | Average | | | | Average |
| Stock | | Exercise | | Stock | | Exercise | | Stock | | Exercise |
| Options | | Price | | Options | | Price | | Options | | Price |
| | | | | | | | | | | |
| Outstanding at beginning of year | 417 | | | $ | 53.37 | | | 512 | | | $ | 51.49 | | | 417 | | | $ | 44.55 | |
| Granted | 36 | | | 65.96 | | | — | | | — | | | 190 | | | 61.72 | |
| Exercised | (89) | | | 47.72 | | | (87) | | | 42.24 | | | (95) | | | 41.42 | |
| Forfeited | (5) | | | 59.73 | | | (8) | | | 53.76 | | | — | | | — | |
| Outstanding at end of year | 359 | | | $ | 55.79 | | | 417 | | | $ | 53.37 | | | 512 | | | $ | 51.49 | |
| Exercisable at end of year | 265 | | | $ | 53.20 | | | 262 | | | $ | 50.03 | | | 213 | | | $ | 44.66 | |
| Weighted-average fair value of stock options granted during the year | $ | 14.79 | | | | | $ | — | | | | | $ | 15.82 | | | |
| Aggregate intrinsic value for stock options exercised | $ | 1,568 | | | | | $ | 2,196 | | | | | $ | 1,992 | | | |
| Average aggregate intrinsic value for stock options outstanding | $ | 970 | | | | | | | | | | | |
| Average aggregate intrinsic value for exercisable stock options | $ | 1,435 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Share-based compensation expense for stock options | $ | 1,163 | | | $ | 1,556 | | | $ | 1,521 | |
| Tax benefit for stock options exercised | $ | 287 | | | $ | 392 | | | $ | 384 | |
| Unrecognized compensation expense for stock options | $ | 784 | | | | | |
| Weighted average period over which unrecognized compensation expense will be recognized (years) | 1.3 | | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Shared-based compensation for options | $ | 1,578 |
|
| $ | 1,313 |
|
| $ | 1,473 |
|
| Tax benefit for option compensation | $ | 398 |
|
| $ | 466 |
|
| $ | 546 |
|
| Unrecognized compensation cost for options | $ | 3,128 |
|
|
|
|
|
|
Weighted average period over which unrecognized compensation will be recognized (years)
| 2.2 |
| | | | |
The following table sets forth the exercise price range, number of shares, weighted-average exercise price and remaining contractual lives by groups of similar price on a discontinued basis as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted- | | Outstanding | | | | Exercisable |
| | | | | | Average | | Weighted- | | | | Weighted- |
| Range of | | Number of Shares Outstanding | | Remaining | | Average | | Number of Shares Exercisable | | Average |
| Exercise | | | Contractual Life | | Exercise | | | Exercise |
| Price | | | (in years) | | Price | | | Price |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| $ | 47.82 | | - | $ | 58.40 | | | 14 | | | 3.5 | | $ | 52.22 | | | 14 | | | $ | 52.22 | |
Stock option activity and related information on a discontinued basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| 2020 | | 2019 | | 2018 |
| | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | Average | | | | Average | | | | Average |
| Stock | | Exercise | | Stock | | Exercise | | Stock | | Exercise |
| Options | | Price | | Options | | Price | | Options | | Price |
| | | | | | | | | | | |
| Outstanding at beginning of year | 14 | | | $ | 52.15 | | | 26 | | | $ | 49.00 | | | 22 | | | $ | 47.49 | |
| Granted | — | | | — | | | — | | | — | | | 4 | | | 58.40 | |
| Exercised | — | | | — | | | (12) | | | 45.46 | | | — | | | — | |
| Forfeited | — | | | — | | | — | | | — | | | — | | | — | |
| Outstanding at end of year | 14 | | | $ | 52.15 | | | 14 | | | $ | 52.15 | | | 26 | | | $ | 49.00 | |
| Exercisable at end of year | 14 | | | $ | 52.15 | | | 9 | | | $ | 51.35 | | | 17 | | | $ | 47.74 | |
| Weighted-average fair value of stock options granted during the year | $ | — | | | | | $ | — | | | | | $ | 16 | | | |
| Aggregate intrinsic value for stock options exercised | $ | — | | | | | $ | 193 | | | | | $ | — | | | |
| Average aggregate intrinsic value for stock options outstanding | $ | 54 | | | | | | | | | | | |
| Average aggregate intrinsic value for exercisable stock options | $ | 54 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Share-based compensation expense for stock options | $ | 22 | | | $ | 41 | | | $ | 57 | |
| Tax benefit for stock options exercised | $ | 6 | | | $ | 11 | | | $ | 14 | |
| Unrecognized compensation expense for stock options | $ | — | | | | | |
| Weighted average period over which unrecognized compensation expense will be recognized (years) | — | | | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
Employee Activity – Non-vested sharesRestricted Shares
Non-vestedThe Company’s primary long-term incentive plan is a restricted share grantsaward plan that entitles employees to employees vestreceive a share of the Company’s common stock subject to vesting requirements based on continued employment. Shares granted under the restricted share award plan are restricted from sale or transfer until vesting, and restrictions lapse in three equal installments beginning one year after the date of grant. Dividends are paid in cash on a current basis throughout the vesting period. The compensation expense associated with these awards is amortized ratably over a three-yearthe requisite service period. The following tables summarize the Company's employee non-vestedAll forfeitures are recognized as incurred.
Restricted share activity and related information:information on a continuing basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | Average | | | | Average | | | | Average |
| Restricted | | Grant Date | | Restricted | | Grant Date | | Restricted | | Grant Date |
| Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value |
| | | | | | | | | | | |
| Outstanding at beginning of year | 264 | | | $ | 58.34 | | | 302 | | | $ | 54.92 | | | 216 | | | $ | 46.73 | |
| Granted | 116 | | | 65.88 | | | 112 | | | 59.49 | | | 192 | | | 59.88 | |
| Vested | (150) | | | 57.40 | | | (126) | | | 51.50 | | | (102) | | | 47.04 | |
| Forfeited | (17) | | | 62.39 | | | (24) | | | 56.69 | | | (4) | | | 52.01 | |
| Outstanding at end of year | 213 | | | $ | 62.78 | | | 264 | | | $ | 58.34 | | | 302 | | | $ | 54.92 | |
| | | | | | | | | | | |
| Total fair value of shares vested during the year | $ | 9,180 | | | | | $ | 7,684 | | | | | $ | 5,758 | | | |
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Share-based compensation expense for restricted shares | $ | 7,310 | | | $ | 7,936 | | | $ | 6,633 | |
| Tax benefit for the vesting of restricted shares | $ | 1,747 | | | $ | 1,951 | | | $ | 1,660 | |
| Unrecognized compensation expense for restricted shares | $ | 7,767 | | | | | |
| Weighted average period over which unrecognized compensation expense will be recognized (years) | 1.7 | | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31, 2018 |
| December 31, 2017 |
| December 31, 2016 |
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Weighted- |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding and non-vested at beginning of year | 227 |
|
| $ | 47 |
|
| 222 |
|
| $ | 45 |
|
| 191 |
|
| $ | 46 |
|
| Granted | 202 |
|
| 60 |
|
| 126 |
|
| 48 |
|
| 134 |
|
| 44 |
|
| Vested | (107 | ) |
| 56 |
|
| (105 | ) |
| 45 |
|
| (94 | ) |
| 44 |
|
| Forfeited | (7 | ) |
| 52 |
|
| (16 | ) |
| 47 |
|
| (9 | ) |
| 45 |
|
| Outstanding and non-vested at end of year | 315 |
|
| $ | 55 |
|
| 227 |
|
| $ | 47 |
|
| 222 |
|
| $ | 45 |
|
| Aggregate grant date fair value | $ | 17,295 |
|
|
|
| $ | 10,618 |
|
|
|
| $ | 10,108 |
|
|
|
| Total fair value of shares vested during the year | $ | 6,040 |
|
|
|
| $ | 5,040 |
|
|
|
| $ | 4,064 |
|
|
|
Restricted share activity and related information on a discontinued basis was as follows: |
| | | | | | | | | | | |
| Year ended |
| December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Shared-based compensation for non-vested shares | $ | 6,874 |
|
| $ | 5,045 |
|
| $ | 4,614 |
|
| Tax benefit for non-vested share compensation | $ | 1,732 |
|
| $ | 1,791 |
|
| $ | 1,712 |
|
| Unrecognized compensation cost for non-vested shares | $ | 11,003 |
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 1.8 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| 2020 | | 2019 | | 2018 |
| | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | Average | | | | Average | | | | Average |
| Restricted | | Grant Date | | Restricted | | Grant Date | | Restricted | | Grant Date |
| Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value |
| | | | | | | | | | | |
| Outstanding at beginning of year | 13 | | | $ | 54.93 | | | 13 | | | $ | 55.16 | | | 11 | | | $ | 46.71 | |
| Granted | 6 | | | 63.24 | | | 5 | | | 59.07 | | | 10 | | | 59.46 | |
| Vested | (10) | | | 58.43 | | | (5) | | | 48.85 | | | (5) | | | 47.00 | |
| Forfeited | (1) | | | 63.49 | | | 0 | | | 0 | | | (3) | | | 51.68 | |
| Outstanding at end of year | 8 | | | $ | 60.83 | | | 13 | | | $ | 54.93 | | | 13 | | | $ | 55.16 | |
| | | | | | | | | | | |
| Total fair value of shares vested during the year | $ | 625 | | | | | $ | 270 | | | | | $ | 282 | | | |
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Share-based compensation expense for restricted shares | $ | 71 | | | $ | 65 | | | $ | 241 | |
| Tax benefit for the vesting of restricted shares | $ | 71 | | | $ | 66 | | | $ | 72 | |
| Unrecognized compensation expense for restricted shares | $ | 270 | | | | | |
| Weighted average period over which unrecognized compensation expense will be recognized (years) | 1.8 | | | | |
Employee Activity – Performance sharesShares
In 2018, 2017Certain executives and 2016, the Company grantedkey employees are eligible to receive grants of performance awards. The performance share agreement provides for awards of 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 ofCompany’s common stock shares based on achieving certain financial targets, such as targets for earnings before interest, taxes, depreciation and amortization, and the three year performance of the Company'sCompany’s total shareholder return as compared to the total shareholder return of a selected peer group. No shares may be issued ifgroup, as determined by the Company total shareholder return outperforms 25% or lessCompany’s Board of Directors. Performance targets are set at the peer group, butbeginning of each three-year measurement period. The share awards are earned over the vesting period, and the number of shares issued mayearned is determined based on the cumulative results for the measurement period. The performance agreement provides for employees to earn 0% to 200% of the target awards depending on the actual performance achieved, with no shares earned if performance is below the established minimum target. Performance shares do not receive dividends until the shares are vested. Awards earned are paid in shares of common stock of the Company at the end of the vesting period. The compensation expense associated with these awards is amortized ratably over the vesting period. Depending on the financial target, the compensation expense is based on the projected assessment of the level of performance that will be doubled ifachieved. All forfeitures are recognized as incurred.
The grant-date fair value of performance shares granted with a financial target based on the CompanyCompany’s total shareholder return performs better than 90% ofwas estimated using a Monte Carlo simulation. The weighted average assumptions under the peer group.
Monte Carlo simulation model were as follows for the years ended December 31, 2020, 2019 and 2018:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
| | | | | | | | | | | | | | | | | |
| | | Year ended | | |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Expected stock price volatility | 23.5 | % | | 23.4 | % | | 24.3 | % |
| Weighted average risk-free interest rate | 1.4 | % | | 2.5 | % | | 2.2 | % |
The following tables summarize the Company's employee performance
Performance share activity assuming median share awards,was as follows and related information:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Weighted- |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Non-vested |
| Average |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| Shares |
| Grant Date |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding and non-vested at beginning of year | 69 |
|
| $ | 58 |
|
| 80 |
|
| $ | 55 |
|
| 77 |
|
| $ | 52 |
|
| Granted | 18 |
|
| 72 |
|
| 27 |
|
| 56 |
|
| 29 |
|
| 49 |
|
| Additional shares awarded based on performance | — |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
| 40 |
|
| Vested | — |
|
| — |
|
| — |
|
| — |
|
| (33 | ) |
| 40 |
|
| Forfeited | (22 | ) |
| 67 |
|
| (38 | ) |
| 51 |
|
| — |
|
| — |
|
| Outstanding and non-vested at end of year | 65 |
|
| $ | 58 |
|
| 69 |
|
| $ | 58 |
|
| 80 |
|
| $ | 55 |
|
| Aggregate grant date fair value | $ | 3,795 |
|
|
|
| $ | 3,980 |
|
|
|
| $ | 4,373 |
|
|
|
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Shared-based compensation for performance shares | $ | 1,263 |
|
| $ | 1,045 |
|
| $ | 1,447 |
|
| Tax benefit for performance share compensation | $ | 318 |
|
| $ | 371 |
|
| $ | 537 |
|
| Unrecognized compensation cost for performance shares | $ | 1,415 |
|
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 1.7 |
| | | | |
Employee Activity – Employee Stock Purchase Plan
Under the ESPP, at December 31, 2018,is presented as if the Company is authorizedwere to issue up toachieve its target level of performance, on a remaining 362,404 shares of Common Stock to employees of the Company. For the years ended December 31, 2018, 2017 and 2016, participants under the ESPP purchased 9,455, 9,954, and 11,174 shares, respectively, at an average price of $50.63, $46.01, and $39.50 per share, respectively. The weighted-average fair value of each purchase right under the ESPP granted for the years ended December 31, 2018, 2017 and 2016, which is equal to the discount from the market value of the Common Stock at the end of each six month purchase period, was $6.26, $9.26, and $6.46 per share, respectively. Share-based compensation expense of $59, $92, and $72 was recognized in salaries, wages and employee benefits, during the years ended December 31, 2018, 2017 and 2016, respectively.continuing basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | Average | | | | Average | | | | Average |
| Performance | | Grant Date | | Performance | | Grant Date | | Performance | | Grant Date |
| Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value |
| | | | | | | | | | | |
| Outstanding at beginning of year | 58 | | | $ | 62.44 | | | 62 | | | $ | 58.40 | | | 66 | | | $ | 57.63 | |
| Granted | 38 | | | 69.15 | | | 28 | | | 61.42 | | | 17 | | | 72.30 | |
| Additional shares awarded based on actual performance level achieved | 13 | | | 51.13 | | | — | | | — | | | — | | | — | |
| Vested | (33) | | | 51.13 | | | (22) | | | 63.57 | | | — | | | — | |
| Forfeited | (11) | | | 66.37 | | | (10) | | | 62.77 | | | (21) | | | 67.28 | |
| Outstanding at end of year | 65 | | | $ | 67.62 | | | 58 | | | $ | 62.44 | | | 62 | | | $ | 58.40 | |
| | | | | | | | | | | |
Non-employee Directors – Non-vested shares | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Share-based compensation expense for performance shares | $ | 1,242 | | | $ | 1,103 | | | $ | 1,208 | |
| Tax benefit for vesting of performance shares | $ | 306 | | | $ | 278 | | | $ | 304 | |
| Unrecognized compensation expense for performance shares | $ | 2,095 | | | | | |
| Weighted average period over which unrecognized compensation expense will be recognized (years) | 1.9 | | | | |
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 on the earlier of (a) the day immediately prior to the first Annual Meeting that occurs after the Grant Date or (b) the first anniversary of the Grant Date so long as the non-employee director’s service with the Company does not earlier terminate. Each director may elect to defer receipt of the shares
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
Performance share activity was as follows and is presented as if the Company were to achieve its target level of performance, on a discontinued basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| 2020 | | 2019 | | 2018 |
| | | Weighted- | | | | Weighted- | | | | Weighted- |
| | | Average | | | | Average | | | | Average |
| Performance | | Grant Date | | Performance | | Grant Date | | Performance | | Grant Date |
| Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value |
| | | | | | | | | | | |
| Outstanding at beginning of year | 4 | | | $ | 62.05 | | | 3 | | | $ | 57.90 | | | 3 | | | $ | 57.03 | |
| Granted | 1 | | | 69.15 | | | 2 | | | 61.03 | | | 1 | | | 72.30 | |
| Additional shares awarded based on actual performance level achieved | 1 | | | 51.13 | | | — | | | — | | | — | | | — | |
| Vested | (2) | | | 51.13 | | | (1) | | | 63.57 | | | — | | | — | |
| Forfeited | (4) | | | 65.69 | | | — | | | — | | | (1) | | | 67.28 | |
| Outstanding at end of year | — | | | $ | — | | | 4 | | | $ | 62.05 | | | 3 | | | $ | 57.90 | |
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Share-based compensation expense for performance shares | $ | (8) | | | $ | 73 | | | $ | 55 | |
| Tax benefit for the vesting of performance shares | $ | (2) | | | $ | 18 | | | $ | 14 | |
| Unrecognized compensation expense for performance shares | $ | — | | | | | |
| Weighted average period over which unrecognized compensation expense will be recognized (years) | — | | | | | |
Employee Activity – Employee Stock Purchase Plan
Under the 2005 Employee Stock Purchase Plan (the “ESPP”), the Company is authorized to issue up to a remaining 335 shares of common stock to 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 2 lump sum contributions.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
Employee stock purchase plan activity and related information was as follows on a continuing basis:
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31, | | December 31, | | December 31, |
| 2020 | | 2019 | | 2018 |
| Shares purchased by employees | 14 | | | 11 | | | 8 | |
| Average purchase price | $ | 44.24 | | | $ | 51.50 | | | $ | 50.62 | |
Weighted-average fair value of each purchase under the ESPP granted 1 | $ | 20.99 | | | $ | 13.68 | | | $ | 6.26 | |
| Share-based compensation expense for ESPP shares | $ | 292 | | | $ | 150 | | | $ | 54 | |
| | | | | |
1 Equal to the discount from the market value of the common stock at the end of each six month purchase period |
Employee stock purchase plan activity and related information was as follows on a discontinued basis:
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31, | | December 31, | | December 31, |
| 2020 | | 2019 | | 2018 |
| Shares purchased by employees | 1 | | | 1 | | | 1 | |
| Average purchase price | $ | 44.35 | | | $ | 51.39 | | | $ | 50.64 | |
Weighted-average fair value of each purchase under the ESPP granted 1 | $ | 18.11 | | | $ | 13.48 | | | $ | 6.27 | |
| Share-based compensation expense for ESPP shares | $ | 20 | | | $ | 13 | | | $ | 5 | |
| | | | | |
1 Equal to the discount from the market value of the common stock at the end of each six month purchase period |
Non-employee Director Activity – Restricted Shares
Under the Amended and Restated Non-Employee Director Stock Plan (the “Amended Plan”), approved in May 2007 and further amended in February 2013 and January 2016, up to 360 common shares may be issued. As of December 31, 2020, approximately 92 shares remain available for grant under a non-vested share awardthe Amended Plan.
Under the Amended Plan, each non-employee director receives an annual grant of restricted shares of the Company’s common stock. The restricted shares vest on the earlier of (a) the day immediately prior to the first annual shareholder meeting that occurs after the grant date or (b) one year after the grant date. Each director may elect to defer receipt of the common shares until the director terminates service ondeparts from the Company’s Board of Directors. If a director elects to defer receipt, the Company will issue deferred stock units toin which the director which do not represent actual ownership in shares and the director willdoes not have voting rights or other incidents of ownership until the shares are issued. However, the Company will credit the director withEach deferred stock unit is eligible for a dividend equivalent payments in the form of additional deferredrestricted stock units for each cash dividend payment madepaid by the Company.
In May 2016, with the approval of shareholders, the Company further amended the Amended Plan to reserve for issuance an additional 160,000 common shares, increasing the total number of reserved common shares under the Amended Plan to 360,000. As of December 31, 2018, there were approximately 132,313 shares remaining available for grant.
The following tables summarize the Company's non-employee non-vested share activity and related information:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| Non-vested |
|
|
| Non-vested |
|
|
| Non-vested |
|
|
| Shares and |
| Weighted- |
| Shares and |
| Weighted- |
| Shares and |
| Weighted- |
| Deferred |
| Average |
| Deferred |
| Average |
| Deferred |
| Average |
| Stock Units |
| Grant Date |
| Stock Units |
| Grant Date |
| Stock Units |
| Grant Date |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
| (000) |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding and non-vested at beginning of year | 11 |
|
| $ | 52 |
|
| 16 |
|
| $ | 44 |
|
| 15 |
|
| $ | 51 |
|
| Granted | 16 |
|
| 59 |
|
| 14 |
|
| 52 |
|
| 16 |
|
| 44 |
|
| Vested | (12 | ) |
| 52 |
|
| (16 | ) |
| 44 |
|
| (15 | ) |
| 51 |
|
| Forfeited | — |
|
| — |
|
| (3 | ) |
| 49 |
|
| — |
|
| — |
|
| Outstanding and non-vested at end of year | 15 |
|
| $ | 59 |
|
| 11 |
|
| $ | 52 |
|
| 16 |
|
| $ | 44 |
|
| Aggregate grant date fair value | $ | 920 |
|
|
|
| $ | 742 |
|
|
|
| $ | 688 |
|
|
|
| Total fair value of shares vested during the year | $ | 615 |
|
|
|
| $ | 809 |
|
|
|
| $ | 639 |
|
|
|
|
| | | | | | | | | | | |
| Year ended |
| December 31,
2018 |
| December 31,
2017 |
| December 31,
2016 |
| Shared-based compensation for non-vested shares | $ | 775 |
|
| $ | 608 |
|
| $ | 728 |
|
| Tax benefit for non-vested share compensation | $ | 195 |
|
| $ | 216 |
|
| $ | 263 |
|
| Unrecognized compensation cost for non-vested shares | $ | 360 |
|
|
|
|
|
|
| Weighted average period over which unrecognized compensation will be recognized (years) | 0.4 |
| | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
Non-employee director restricted share activity and related information was as follows on a continuing basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| | | | | | | | | | | |
| Restricted | | Weighted- | | Restricted | | Weighted- | | Restricted | | Weighted- |
| Shares and | | Average | | Shares and | | Average | | Shares and | | Average |
| Deferred | | Grant Date | | Deferred | | Grant Date | | Deferred | | Grant Date |
| Stock Units | | Fair Value | | Stock Units | | Fair Value | | Stock Units | | Fair Value |
| | | | | | | | | | | |
| Outstanding at beginning of year | 16 | | | $ | 62.17 | | | 15 | | | $ | 58.50 | | | 11 | | | $ | 52.00 | |
| Granted | 24 | | | 42.88 | | | 16 | | | 62.17 | | | 16 | | | 58.58 | |
| Vested | (16) | | | 62.00 | | | (15) | | | 64.05 | | | (12) | | | 52.09 | |
| Forfeited | — | | | — | | | — | | | — | | | — | | | — | |
| Outstanding at end of year | 24 | | | $ | 42.88 | | | 16 | | | $ | 62.17 | | | 15 | | | $ | 58.50 | |
| | | | | | | | | | | |
| Total fair value of shares vested during the year | $ | 771 | | | | | $ | 970 | | | | | $ | 615 | | | |
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Share-based compensation expense for restricted shares | $ | 1,026 | | | $ | 970 | | | $ | 775 | |
| Tax benefit for the vesting of restricted shares | $ | 253 | | | $ | 244 | | | $ | 195 | |
| Unrecognized compensation expense for restricted shares | $ | 376 | | | | | |
| Weighted average period over which unrecognized compensation expense will be recognized (years) | 0.4 | | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
Net Income (Loss) per Share
The following table sets forth the computationA reconciliation of net income perattributable to Forward Air and weighted-average common shares outstanding for purposes of calculating basic and diluted share:net income per share during the years ended December 31, 2020, 2019 and 2018 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | | | | | |
| | | | | | | | | | | |
| Numerator: | | | | | | | | | | | |
| Net income and comprehensive income from continuing operations | $ | 52,767 | | | $ | 82,322 | | | $ | 88,563 | | | | | | | |
| Net (loss) income and comprehensive (loss) income from discontinued operation | (29,034) | | | 4,777 | | | 3,488 | | | | | | | |
| Net income attributable to Forward Air | $ | 23,733 | | | $ | 87,099 | | | $ | 92,051 | | | | | | | |
| | | | | | | | | | | |
| Income allocated to participating securities | (385) | | | (945) | | | (881) | | | | | | | |
| | | | | | | | | | | |
| Numerator for basic and diluted net income per share for continuing operations | $ | 52,382 | | | $ | 81,377 | | | $ | 87,682 | | | | | | | |
| Numerator for basic and diluted net (loss) income per share for discontinued operation | $ | (29,034) | | | $ | 4,777 | | | $ | 3,488 | | | | | | | |
| | | | | | | | | | | |
| Denominator: | | | | | | | | | | | |
| Denominator for basic net income per share - weighted-average number of common shares outstanding | 27,631 | | | 28,195 | | | 29,076 | | | | | | | |
| Dilutive stock options and performance share awards | 66 | | | 113 | | | 114 | | | | | | | |
| Denominator for diluted net income per share - weighted-average number of common shares and common share equivalents outstanding | 27,697 | | | 28,308 | | | 29,190 | | | | | | | |
| | | | | | | | | | | |
| Basic net income (loss) per share: | | | | | | | | | | | |
| Continuing operations | $ | 1.90 | | | $ | 2.89 | | | $ | 3.02 | | | | | | | |
| Discontinued operation | (1.05) | | | 0.17 | | | 0.12 | | | | | | | |
Net income per share1 | $ | 0.84 | | | $ | 3.06 | | | $ | 3.14 | | | | | | | |
| | | | | | | | | | | |
| Diluted net income (loss) per share: | | | | | | | | | | | |
| Continuing operations | $ | 1.89 | | | $ | 2.87 | | | $ | 3.00 | | | | | | | |
| Discontinued operation | (1.05) | | | 0.17 | | | 0.12 | | | | | | | |
| Net income per share | $ | 0.84 | | | $ | 3.04 | | | $ | 3.12 | | | | | | | |
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
| | | | (As Adjusted) | | (As Adjusted) |
| Numerator: | | | | | |
| Net income and comprehensive income | $ | 92,051 |
| | $ | 87,255 |
| | $ | 27,505 |
|
| Income allocated to participating securities | (881 | ) | | (700 | ) | | (210 | ) |
| Numerator for basic and diluted income per share - net income | 91,170 |
| | 86,555 |
| | 27,295 |
|
| | | | | |
| Denominator: | | | | | |
| Denominator for basic net income per share - weighted-average shares (in thousands) | 29,076 |
| | 29,867 |
| | 30,283 |
|
| Effect of dilutive stock options (in thousands) | 80 |
| | 64 |
| | 130 |
|
| Effect of dilutive performance shares (in thousands) | 34 |
| | 33 |
| | 31 |
|
| Denominator for diluted net income per share - adjusted weighted-average shares (in thousands) | 29,190 |
| | 29,964 |
| | 30,444 |
|
| Basic net income per share | $ | 3.14 |
| | $ | 2.90 |
| | $ | 0.90 |
|
| Diluted net income per share | $ | 3.12 |
| | $ | 2.89 |
| | $ | 0.90 |
|
The number of instruments that could potentially dilute net income per basic share in the future, butshares that were not included in the computationcalculation of net income per diluted share because to do so would have been anti-dilutive for the periods presented,years ended December 31, 2020, 2019 and 2018 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | | | | | |
| Anti-dilutive stock options | 206 | | | 183 | | | 126 | | | | | | | |
| Anti-dilutive performance shares | 15 | | | 0 | | | 16 | | | | | | | |
| Anti-dilutive restricted shares and deferred stock units | 3 | | | 0 | | | 9 | | | | | | | |
| Total anti-dilutive shares | 224 | | | 183 | | | 151 | | | | | | | |
|
| | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Anti-dilutive stock options (in thousands) | 126 |
| | 172 |
| | 310 |
|
| 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) | 151 |
| | 172 |
| | 310 |
|
5.6. Income Taxes
Tax Reform
On December 22, 2017, President Trump signed into law H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (this legislation is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act provided for significant changes in the U.S. Internal Revenue Code of 1986, as amended. The U.S. Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.
Beginning on January 1, 2018, the U.S. Tax Act lowered the U.S. corporate income tax rate from 35% to 21% on our U.S. earnings from that date and beyond. The revaluation of our U.S. deferred tax assets and liabilities to the 21% corporate tax rate reduced our net U.S. deferred income tax liability by approximately $15,901 which is reflected as a reduction in our income tax expense in our results for the quarter and year ended December 31, 2017.
On December 22, 2017, the SEC staff issued SAB 118 that allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 22, 2018, the Company has completed its accounting for all of the enactment-date income tax effects of the U.S. Tax Act. The Company made no adjustments to the provisional amounts recorded at December 31, 2017.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
Income Taxes
The provision for income taxes consists of the following:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | (As Adjusted) | | (As Adjusted) |
| Current: | | | | | |
| Federal | $ | 16,572 |
| | $ | 28,556 |
| | $ | 24,139 |
|
| State | 3,559 |
| | 4,043 |
| | 3,052 |
|
| | 20,131 |
| | 32,599 |
| | 27,191 |
|
| Deferred: | | | | | |
|
| Federal | 7,194 |
| | (11,860 | ) | | 3,145 |
|
| State | 870 |
| | (457 | ) | | 269 |
|
| | 8,064 |
| | (12,317 | ) | | 3,414 |
|
| | $ | 28,195 |
| | $ | 20,282 |
| | $ | 30,605 |
|
The tax benefit associated with the exercise of stock options and the vesting of non-vested shares recorded to additional paid in capital during the year ended December 31, 2016 was $1,732 and is reflected as an increase in additional paid-in capital in the accompanying consolidated statements of shareholders’ equity. For 2018 and 2017, FASB guidance required the recognition of the income tax effects of awards in the income statement when the awards vest or are settled thus eliminating additional paid in capital ("APIC") pools.
The historical income tax expense differs from the amounts computed by applying the federal statutory rate of 21.0% for 2018 and 35.0% for 2017 and 2016 to income before income taxes as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | (As Adjusted) | | (As Adjusted) |
| Tax expense at the statutory rate | $ | 25,252 |
| | $ | 37,637 |
| | $ | 20,399 |
|
| State income taxes, net of federal benefit | 3,685 |
| | 2,339 |
| | 2,229 |
|
| Share-based compensation | (50 | ) | | (366 | ) | | — |
|
| Qualified stock options | 12 |
| | 32 |
| | (88 | ) |
| Other permanent differences | 163 |
| | 252 |
| | 474 |
|
| TQI goodwill impairment | — |
| | — |
| | 8,990 |
|
| Deferred tax asset valuation allowance | 35 |
| | 78 |
| | (2 | ) |
| Federal qualified property deductions | — |
| | (2,075 | ) | | (1,311 | ) |
| Federal income tax credits | (207 | ) | | (58 | ) | | — |
|
| Non-taxable acquisitions | — |
| | (568 | ) | | — |
|
| Rate impact on deferred tax liabilities | — |
| | (15,901 | ) | | — |
|
| Other | (695 | ) | | (1,088 | ) | | (86 | ) |
| | $ | 28,195 |
| | $ | 20,282 |
| | $ | 30,605 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(In thousands, except share and per share data)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets are as follows:
|
| | | | | | | |
| December 31,
2018 | | December 31,
2017 |
| | | | (As Adjusted) |
| Deferred tax assets: | | | |
| Accrued expenses | $ | 10,362 |
| | $ | 8,228 |
|
| Allowance for doubtful accounts | 535 |
| | 777 |
|
| Share-based compensation | 3,526 |
| | 3,002 |
|
| Accruals for income tax contingencies | 217 |
| | 251 |
|
| Net operating loss carryforwards | 2,906 |
| | 4,733 |
|
| Total deferred tax assets | 17,546 |
| | 16,991 |
|
| Valuation allowance | (395 | ) | | (360 | ) |
| Total deferred tax assets, net of valuation allowance | 17,151 |
| | 16,631 |
|
| Deferred tax liabilities: | | | |
| Tax over book depreciation | 25,606 |
| | 19,402 |
|
| Intangible assets | 10,904 |
| | 11,108 |
|
| Prepaid expenses deductible when paid | 3,902 |
| | 3,460 |
|
| Goodwill | 13,913 |
| | 11,741 |
|
| Total deferred tax liabilities | 54,325 |
| | 45,711 |
|
| Net deferred tax liabilities | $ | (37,174 | ) | | $ | (29,080 | ) |
Total cash income tax payments, net of refunds, during fiscal years 2018, 2017 and 2016 were $21,064, $36,110 and $10,628, respectively.
The Company has considered the weight of all available evidence in determining the need for a valuation allowance against each of the Company’s various deferred tax assets and believes the Company’s history of income is a significant weight of evidence supporting the realization of all of the Company’s federal and most state deferred tax assets. In addition, the Company believes all existing deferred tax liabilities will reverse in a manner that generates enough taxable income to realize an offsetting amount of deferred tax assets. Given the historical positive performance of the Company for having more than ten consecutive years of profitability, the Company expects to fully utilize the vast majority of its deferred tax assets and has concluded that the only valuation allowance needed relates to state net operating loss carryforwards, as noted below.
As a result of the Towne acquisition the Company has approximately $10,258, $18,586 and $27,050 of federal net operating losses as of December 31, 2018, 2017 and 2016 respectively, that will expire between 2020 and 2030. The Company expects to be able to fully utilize these federal net operating losses before they expire.
At December 31, 2018 and 2017, the Company had state net operating loss carryforwards of $18,148 and $18,126, respectively, that will expire between 2018 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 increased $35 during 2018 and $78 during 2017.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
(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:
2013.
|
| | | |
| | Liability for |
| | Unrecognized Tax |
| | Benefits |
| 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 |
|
| Reductions for settlement with state taxing authorities | (271 | ) |
| Reductions for tax positions of prior years | (40 | ) |
| Additions for tax positions of current year | 35 |
|
| Balance at December 31, 2018 | $ | 1,058 |
|
Included in the liability for unrecognized tax benefits at December 31, 2018 and December 31, 2017 are tax positions of $1,058 and $1,334, respectively, which represents tax positions where the realization of the ultimate benefit is uncertain and the disallowance of which would affect the Company’s annual effective income tax rate.
In addition, at December 31, 2018 and December 31, 2017, the Company had accrued penalties associated with unrecognized tax benefits of $61 and $105, respectively. At December 31, 2018 and December 31, 2017, the Company also had accrued interest associated with unrecognized tax benefits of $143 and $201, respectively.
6. Operating Leases
The Company leases certain facilities under noncancellable operating leases that expire in various years through 2026. Certain leases may be renewed for periods varying from one to ten years. The Company has entered into or assumed through acquisition several operating leases for tractors, straight trucks and trailers with original lease terms between three and five years. These leases expire in various years through 2023 and may not be renewed beyond the original term.
Sublease rental income was $1,724, $1,923 and $1,517 in 2018, 2017 and 2016, respectively. In 2019, the Company expects to receive aggregate future minimum rental payments under noncancellable subleases of approximately $1,155. Noncancellable subleases expire between 2019 and 2021.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
Future
The provision for income taxes by location of the taxing jurisdiction for the years ended December 31, 2020, 2019 and 2018 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | | | |
| | | | | | | | | |
| Current: | | | | | | | | | |
| Federal | $ | 11,914 | | | $ | 15,612 | | | $ | 15,643 | | | | | |
| State | 3,907 | | | 4,681 | | | 3,635 | | | | | |
| | 15,821 | | | 20,293 | | | 19,278 | | | | | |
| Deferred: | | | | | | | | | |
| Federal | 922 | | | 5,766 | | | 6,826 | | | | | |
| State | (150) | | | 1,323 | | | 764 | | | | | |
| | 772 | | | 7,089 | | | 7,590 | | | | | |
| | $ | 16,593 | | | $ | 27,382 | | | $ | 26,868 | | | | | |
A reconciliation of income taxes computed at the U.S. federal statutory income tax rate (21% for 2020, 2019 and 2018) to the provision for income taxes reflected in the Company’s Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | | | |
| | | | | | | | | |
| Tax expense at the statutory rate | $ | 14,566 | | | $ | 23,038 | | | $ | 24,241 | | | | | |
| State income taxes, net of federal income tax benefit | 2,602 | | | 4,594 | | | 3,659 | | | | | |
| | | | | | | | | |
| Share-based compensation | (298) | | | (587) | | | (50) | | | | | |
| Other permanent differences | 48 | | | (5) | | | 139 | | | | | |
| | | | | | | | | |
| Non-deductible compensation | 751 | | | 421 | | | 13 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Change in income tax contingency reserves | (400) | | | — | | | — | | | | | |
| Federal income tax credits | (37) | | | (83) | | | (186) | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other | (639) | | | 4 | | | (948) | | | | | |
| | $ | 16,593 | | | $ | 27,382 | | | $ | 26,868 | | | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
The significant components of the deferred tax assets and liabilities at December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 | | | | |
| | | | | | | |
| Deferred tax assets: | | | | | | | |
| Accrued expenses | $ | 12,095 | | | $ | 7,245 | | | | | |
| Allowance for doubtful accounts | 577 | | | 527 | | | | | |
| Operating lease liabilities | 31,309 | | | 26,989 | | | | | |
| | | | | | | |
| Share-based compensation | 3,554 | | | 3,881 | | | | | |
| Accruals for income tax contingencies | 166 | | | 185 | | | | | |
| | | | | | | |
| Net operating loss carryforwards | 671 | | | 1,089 | | | | | |
| Total gross deferred tax assets | 48,372 | | | 39,916 | | | | | |
| Valuation allowance | (395) | | | (395) | | | | | |
| Total net deferred tax assets | 47,977 | | | 39,521 | | | | | |
| Deferred tax liabilities: | | | | | | | |
| Tax over book depreciation | 24,964 | | | 23,795 | | | | | |
| Prepaid expenses | 6,499 | | | 4,043 | | | | | |
| Operating lease right-of-use assets | 31,277 | | | 26,992 | | | | | |
| Goodwill | 17,368 | | | 15,337 | | | | | |
| Intangible assets | 9,855 | | | 10,568 | | | | | |
| Total deferred tax liabilities | 89,963 | | | 80,735 | | | | | |
| Net deferred tax liabilities | $ | (41,986) | | | $ | (41,214) | | | | | |
The Company paid income taxes, net of refunds, of $13,463, $19,959 and $20,894 for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company maintains a valuation allowance to reserve against its state net operating loss carryforwards. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assessed the likelihood that its deferred tax assets would be recovered from estimated future taxable income and available tax planning strategies. In making this assessment, all available evidence was considered including economic climate, as well as reasonable tax planning strategies. The Company believes it is more likely than not that it will realize its remaining net deferred tax assets, net of the valuation allowance, in future years.
As a result of the Towne acquisition, the Company had approximately $2,000 and $10,258 of federal net operating losses as of December 31, 2019 and 2018, respectively. The Company fully utilized the federal net operating losses in 2020.
At December 31, 2020 and 2019, the Company had a state net operating loss carryforward of $16,926, and at December 31, 2018, the Company had a state net operating loss carryforward of $18,148, that expire between 2020 and 2031. The state net operating loss carryforwards are limited to the future taxable income of separate legal entities. The valuation allowance on the state net operating loss carryforwards increased $35 during 2018. No change in the valuation allowance during 2020 and 2019.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
A reconciliation of the beginning and ending amount of unrecognized tax benefits as of and during the years ended December 31, 2020 and 2019 is as follows:
| | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| 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 | |
| Reductions for settlement with state taxing authorities | (466) | |
| |
| Additions for tax positions of current year | 23 | |
| Balance at December 31, 2020 | $ | 544 | |
The Company recognizes income tax benefits from uncertain tax positions where the realization of the ultimate benefit is uncertain. At December 31, 2020 and 2019, the Company had $544 and $987, respectively, of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. At December 31, 2020 and 2019, the Company had accrued interest and penalties related to unrecognized tax benefits of $168 and $281, respectively.
7. Leases
The Company leases certain facilities under noncancelable operating leases. The Company has entered into or assumed through acquisitions operating and finance leases for equipment including tractors, straight trucks, forklifts and trailers. Equipment under a finance lease is amortized over the shorter of the lease term or its estimated useful life.
The Company subleases certain facilities to independent third parties. Since the Company is not relieved of its obligation under these leases, a right-of-use lease asset and corresponding operating lease liability is recorded. Sublease rental income was approximately $1,628, $1,634 and $1,213 in 2020, 2019 and 2018, respectively. In 2021, the Company expects to receive aggregate future minimum rental payments under noncancellablenoncancelable subleases of approximately $929. Noncancelable subleases expire between 2021 and 2024.
The Company does not recognize a right-of-use asset or lease liability with respect to operating leases with an initial lease term of 12 months or less, and recognizes expense on such leases on a straight-line basis over the lease term. The Company does not account for lease components separately from nonlease components. The Company has certain leases that include one or more options to renew, with renewal periods ranging from one to ten years. The exercise of the lease renewal options is at the discretion of the Company and are included in the determination of the right-of-use asset and operating lease liability when the option is reasonably certain of being exercised. The depreciable life of right-of-use assets and leasehold improvements are limited by the expected lease term. The Company has certain lease agreements for equipment that include variable rental payments based on estimated mileage. The variable rental payments are adjusted for periodically based on actual mileage. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
In addition, the Company has contracts with Leased Capacity Providers. These contracts explicitly identify the tractors that should be operated by the Leased Capacity Providers and therefore, the Company concluded the contracts contain an embedded lease. The compensation of the Leased Capacity Providers, as specified in the contract, is variable based upon a rate per shipment and a rate per mile. Given the structure of the compensation, the variable amounts are excluded from the calculation of the right-of-use lease asset and corresponding operating lease liability. Instead, the variable amounts are disclosed as variable lease costs in the table below. For the years ended December 31, 2020, 2019 and 2018, approximately $325,542, $328,282 and $286,571, respectively, of variable lease costs related to the embedded leases were recorded in “Purchased transportation” in the Consolidated Statements of Comprehensive Income.
The following table summarizes the Company's lease costs for the years ended December 31, 2020 and 2019, and other information:
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
| | | | | | | | | | | | |
| Year ended | |
| December 31,
2020 | | December 31,
2019 | |
| Lease cost | | | | |
| Finance lease cost: | | | | |
| Amortization of leased assets | $ | 1,560 | | | $ | 1,019 | | |
| Interest on leased liabilities | 197 | | | 129 | | |
| Operating lease cost | 50,561 | | | 44,403 | | |
| Short-term lease cost | 8,921 | | | 9,958 | | |
| Variable lease cost | 339,148 | | | 339,923 | | |
| Sublease income | (1,628) | | | (1,634) | | |
| Total lease cost | $ | 398,759 | | | $ | 393,798 | | |
| | | | |
| Other information | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from finance leases | $ | 197 | | | $ | 129 | | |
| Operating cash flows from operating leases | $ | 50,263 | | | $ | 44,328 | | |
| Financing cash flows from finance leases | $ | 1,446 | | | $ | 946 | | |
| Leased assets obtained in exchange for finance lease obligations | $ | 1,927 | | | $ | 8,188 | | |
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | 72,454 | | | $ | 181,069 | | |
| Weighted-average remaining lease term - finance leases (in years) | 4.0 | | 4.6 | |
| Weighted-average remaining lease term - operating leases (in years) | 3.7 | | 3.7 | |
| Weighted-average discount rate - finance leases | 3.1 | % | | 3.4 | % | |
| Weighted-average discount rate - operating leases | 3.2 | % | | 3.4 | % | |
The aggregate future minimum lease payments under noncancelable operating and finance leases with remaining terms in excess ofgreater than one year consistedas of the following at December 31, 2018:2020 were as follows:
| | | | | | | | | | | | | | |
| Payment Due Period | | Operating Leases | | Finance Leases |
| 2021 | | $ | 48,748 | | | $ | 1,979 | |
| 2022 | | 36,035 | | | 1,775 | |
| 2023 | | 26,414 | | | 1,633 | |
| 2024 | | 19,140 | | | 1,220 | |
| 2025 | | 9,560 | | | 612 | |
| Thereafter | | 9,548 | | | 5 | |
| Total minimum lease payments | | 149,445 | | | 7,224 | |
| Less: imputed interest | | (25,419) | | | (413) | |
| Present value of future minimum lease payments | | 124,026 | | | 6,811 | |
| Less: current portion of lease obligations | | (43,680) | | | (1,801) | |
| Long-term lease obligations | | $ | 80,346 | | | $ | 5,010 | |
|
| | | |
| 2019 | $ | 51,380 |
|
| 2020 | 40,999 |
|
| 2021 | 29,598 |
|
| 2022 | 16,612 |
|
| 2023 | 9,234 |
|
| Thereafter | 11,459 |
|
| Total | $ | 159,282 |
|
7.8. Commitments and Contingencies
From timeCommitments
As of December 31, 2020, the Company had unconditional purchase obligations of $2,551 to time, thepurchase forklifts during 2021.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
Contingencies
The Company is party to ordinary, routine litigationvarious legal claims and actions incidental to and arising in the normal course ofits business. The Company does not believe that anybelieves none of these pendingclaims or actions, either individually or in the aggregate, will haveis material to its business or financial statements as a material adverse effect onwhole, including its financial condition, results of operations or cash flows.and financial condition.
The primaryCompany is liable for claims in the Company’s business relaterelated to vehicle liability, workers’ compensation, property damage vehicle liability and employee medical benefits. Most of the Company’s insuranceInsurance coverage provides for self-insurance levelsthe Company with primary and excess coverage, which managementthe Company believes is sufficient to adequately protect the Company from catastrophic claims. Such
For vehicle liability, the Company retains a portion of the risk. Below is a summary of the Company’s risk retention on vehicle liability insurance coverage abovemaintained by the applicable self-insurance levels continuesCompany through $10,000:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Company
Risk Retention | | Frequency | | Layer | | Policy Term |
| Expedited Freight¹ | | | | | | | | |
| LTL business | | $ | 3,000 | | | Occurrence/Accident² | | $0 to $3,000 | | 10/1/2020 to 10/1/2021 |
| Truckload business | | $ | 2,000 | | | Occurrence/Accident² | | $0 to $2,000 | | 10/1/2020 to 10/1/2021 |
| LTL and Truckload businesses | | $ | 6,000 | | | Policy Term Aggregate³ | | $3,000 to $5,000 | | 10/1/2020 to 10/1/2021 |
| LTL and Truckload businesses | | $ | 5,000 | | | Policy Term Aggregate³ | | $5,000 to $10,000 | | 10/1/2020 to 10/1/2021 |
| | | | | | | | |
| Intermodal | | $ | 250 | | | Occurrence/Accident² | | $0 to $250 | | 4/1/2020 to 10/1/2021 |
| | | | | | | | |
¹ Excluding the Final Mile business, which is primarily a brokered service.
² For each and every accident, the Company is responsible for damages and defense up to bethese amounts, regardless of the number of claims associated with any accident.
³ During the Policy Term, the Company is responsible for damages and defense within the stated Layer up to the stated, aggregate amount of Company Risk Retention before insurance will respond.
Also, from time to time, when brokering freight, the Company may face claims for the “negligent selection” of outside, contracted carriers that are involved in accidents, and the Company maintains third-party liability insurance coverage with a $100 deductible per occurrence for most of its brokered services. Additionally, the Company maintains workers’ compensation insurance with a self-insured retention of $500 per occurrence.
Insurance coverage in excess of the self-insured retention limit is an important part of the Company'sCompany’s risk management process.
In The Company believes the opinion of management, adequate provision has been maderecorded reserves are sufficient for all incurred claims up to the self-insured retention limits, including provisionan estimate for estimated claims incurred but not reported.
The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing hindsight and actuarial analysis to determine an estimate of probable losses on claims incurred but not reported. Such losses should be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates.
Because of the uncertainty of Since the ultimate resolution of outstanding claims as well as uncertainty regarding claims incurred but not reported is uncertain, it is possible that management’s provisionthe reserves recorded for these losses could change materially in the near term. However, noan estimate can currentlycannot be made of the range of additional loss that is at least reasonably possible. During the year ended December 31, 2019, the Company recorded a $7,500 reserve for a vehicular claim related to one incident.
On December 15, 2020, the Company detected a Ransomware Incident impacting the Company’s operational and information technology systems, which caused service delays for the Company’s customers. Any failure to comply with data privacy, security or other laws and regulations could result in claims, legal or regulatory proceedings, inquires or investigations.
As of December 31, 2018, the Company had commitments to purchase trailers and forklifts for approximately $14,305 during 2019.
8.9. Employee Benefit Plan
The Company hassponsors a retirement savings plan (the “401(k) Plan”). The 401(k) Plan is aqualified 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. Forcovering substantially all periods presented, employer contributions were made at employees. Under the defined contribution plan, the Company contributes 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 twosubject to certain limits. The Company contributed approximately $1,683, $1,554 and $1,311 for the years of serviceended December 31, 2020, 2019 and continue vesting 20.0% per year until fully vested. The Company’s matching contributions expensed in 2018,, 2017 and 2016 were approximately $1,713, $1,441 and $1,056, respectively.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
9. Financial Instruments
Off Balance Sheet Risk
At December 31, 2018, the Company had letters of credit outstanding totaling $10,650.
10. Fair Value of Financial Instruments
The following methodsCompany categorizes its assets and liabilities into one of three levels based on the assumptions were used byin valuing the Company in estimating itsasset or liability. Estimates of fair value disclosuresfinancial assets and liabilities are based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In accordance with this guidance, fair value measurements are classified under the following hierarchy:
•Level 1 - Quoted prices in active markets for financial instruments:identical assets or liabilities.
Accounts receivable•Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and accounts payable:model-derived valuations in which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 - Model-derived valuations in which one or more significant inputs are unobservable.
As previously discussed in Note 3, Acquisitions, Goodwill, Intangible Assets and Long-Lived Assets, the fair value of the earn-out liability was determined using a Monte-Carlo simulation model. The carrying amounts reportedsignificant inputs used in the balance sheet formodel are derived from a combination of observable and unobservable market data. Observable inputs used in the Monte Carlo simulation model include the risk-free rate and the revenue volatility while unobservable inputs used in the Monte Carlo simulation model include the revenue discount rate and the estimated revenue projections.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019 are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Earn-out liability | | $ | — | | | $ | — | | | $ | 6,865 | | | $ | 6,865 | |
| | | | | | | | |
| | As of December 31, 2019 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Earn-out liability | | $ | — | | | $ | — | | | $ | 11,770 | | | $ | 11,770 | |
| | | | | | | | |
Cash and cash equivalents, accounts receivable, and accounts payable are valued at their carrying amounts in the Company’s Consolidated Balance Sheets, due to the immediate or short-term maturity of these financial instruments.
The carrying amount of long-term debt under the Company’s credit facility approximate their fair value based on their short-term nature.
The Company’s revolving credit facility and term loan bear variable interestthe borrowing rates plus additional basis points based upon covenants relatedcurrently available to total indebtedness to earnings. As the term loan bears a variable interest rate and there have been no significant changes to our credit rating, the carrying value approximates fair value. Using interest rate quotes and discounted cash flows, the Company for a loan with similar terms and average maturity.
As of December 31, 2020, the estimated the fair value of the Company’s finance lease obligation, based on current borrowing rates, was $7,009, compared to its outstanding capital lease obligations as follows:
|
| | | | | | | | | | | | | | | |
| | December 31,
2018 | | December 31,
2017 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Capital lease obligations | $ | 363 |
| | $ | 374 |
| | $ | 724 |
| | $ | 744 |
|
The Company'scarrying value of $6,811. As of December 31, 2019, the estimated fair value estimates for the above financial instruments are classified within level 3 of the Company’s finance lease obligation, based on current borrowing rates, was $6,318, compared to its carrying value of $6,330.
In addition to assets and liabilities that are recorded at fair value hierarchy as defined inon a recurring basis, the FASB Codification.
10. Segment Reporting
The Company has four reportable segments basedrecords assets and liabilities at fair value on information available to and used by the chief operating decision maker. Expedited LTL operates a comprehensive national network that provides expedited regional, inter-regional and national LTL and final mile services. The TLS segment provides expedited truckload brokerage, dedicated fleet services and high security and temperature-controlled logistics services. The Intermodal segment primarily provides first- and last-mile highnonrecurring basis. Assets are recorded at fair 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 chargedon a deductible that corresponds with our corporate deductibles disclosed in Note 1. However, any losses beyond our deductibles and any loss development factors applied to our outstanding claimsnonrecurring basis as a result of actuary analysis are not passed to the segments, but recordedan impairment charge or assets held for sale. The losses on assets measured 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 basedfair value on usage. The expense associated with shared operating assets, such as trailers, are allocated between operating segments based on usage. However, the carrying value of the asset'sa nonrecurring, discontinued operation basis are 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.summarized below:
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
Goodwill impairment charge1 | | $ | 5,406 | | | $ | — | |
Valuation allowance on assets held for sale1 | | 22,978 | | | — | |
| | | | |
1 See Note 2, Discontinued Operation and Canada.
Held for Sale.
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
11. Segment Reporting
The following tables summarizeCompany has 2 reportable segments: Expedited Freight and Intermodal. The Company evaluates segment information aboutperformance based on income from operations. Segment results from operationsinclude intersegment revenues and shared costs. Costs related to the corporate headquarters, shared services and shared assets, used bysuch as trailers, are allocated to each segment based on usage. Shared assets are not allocated to each segment, but rather the chief operating decision makershared assets, such as trailers, are allocated to the Expedited Freight segment.
The accounting policies applied to each segment are the same as those described in the Summary of Significant Accounting Policies as disclosed in Note 1, except for certain self-insurance loss reserves related to vehicle liability and workers’ compensation. Each segment is allocated an insurance premium and deductible that corresponds to the Companyself-insured retention limit for that particular segment. Any self-insurance loss exposure beyond the deductible allocated to each segment is recorded in making decisions regarding allocation of assets and resources as of and for the years ended December 31, 2018, 2017 and 2016.Eliminations & Other.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018 | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated |
| External revenues | | $ | 740,332 |
| | $ | 186,114 |
| | $ | 193,690 |
| | $ | 200,750 |
| | $ | — |
| | $ | 1,320,886 |
|
| Intersegment revenues | | 7,230 |
| | 6,468 |
| | 427 |
| | 256 |
| | (14,381 | ) | | — |
|
| Depreciation and amortization | | 22,523 |
| | 6,429 |
| | 6,900 |
| | 6,329 |
| | 2 |
| | 42,183 |
|
| Share-based compensation expense | | 7,761 |
| | 696 |
| | 453 |
| | 984 |
| | 655 |
| | 10,549 |
|
| Interest expense | | 1 |
| | (21 | ) | | — |
| | 58 |
| | 1,745 |
| | 1,783 |
|
| Income (loss) from operations | | 96,385 |
| | 5,055 |
| | 5,870 |
| | 23,266 |
| | (8,545 | ) | | 122,031 |
|
| Total assets | | 478,888 |
| | 71,163 |
| | 64,306 |
| | 167,002 |
| | (21,144 | ) | | 760,215 |
|
| Capital expenditures | | 38,520 |
| | 190 |
| | 2,729 |
| | 854 |
| | — |
| | 42,293 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2017 (As Adjusted) | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated |
| External revenues | | $ | 652,304 |
| | $ | 194,402 |
| | $ | 168,194 |
| | $ | 154,446 |
| | $ | — |
| | $ | 1,169,346 |
|
| Intersegment revenues | | 3,534 |
| | 7,350 |
| | 289 |
| | 238 |
| | (11,411 | ) | | — |
|
| Depreciation and amortization | | 22,103 |
| | 6,328 |
| | 6,773 |
| | 5,848 |
| | 3 |
| | 41,055 |
|
| Share-based compensation expense | | 6,776 |
| | 378 |
| | 387 |
| | 562 |
| | — |
| | 8,103 |
|
| Interest expense | | 3 |
| | 2 |
| | — |
| | 48 |
| | 1,156 |
| | 1,209 |
|
| Income (loss) from operations | | 87,969 |
| | 3,215 |
| | 6,378 |
| | 12,963 |
| | (1,768 | ) | | 108,757 |
|
| Total assets | | 440,823 |
| | 65,829 |
| | 55,970 |
| | 149,150 |
| | (19,150 | ) | | 692,622 |
|
| Capital expenditures | | 36,650 |
| | 33 |
| | 1,068 |
| | 514 |
| | — |
| | 38,265 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2016 ( As Adjusted) | | Expedited LTL | | Truckload Premium Services | | Pool Distribution | | Intermodal | | Eliminations & Other | | Consolidated |
| External revenues | | $ | 593,472 |
| | $ | 179,989 |
| | $ | 151,245 |
| | $ | 105,504 |
| | $ | — |
| | $ | 1,030,210 |
|
| Intersegment revenues | | 3,067 |
| | 1,018 |
| | 607 |
| | 160 |
| | (4,852 | ) | | — |
|
| Depreciation and amortization | | 21,919 |
| | 6,441 |
| | 5,975 |
| | 3,876 |
| | (1 | ) | | 38,210 |
|
| Share-based compensation expense | | 7,209 |
| | 332 |
| | 334 |
| | 459 |
| | — |
| | 8,334 |
|
| Impairment of goodwill and other intangible assets | | — |
| | 42,442 |
| | — |
| | — |
| | — |
| | 42,442 |
|
| Interest expense | | 1,687 |
| | 3 |
| | — |
| | 83 |
| | (176 | ) | | 1,597 |
|
| Income (loss) from operations | | 83,142 |
| | (35,409 | ) | | 3,633 |
| | 11,060 |
| | (2,723 | ) | | 59,703 |
|
| Total assets | | 443,077 |
| | 53,695 |
| | 50,271 |
| | 130,295 |
| | (33,290 | ) | | 644,048 |
|
| Capital expenditures | | 37,501 |
| | 1,828 |
| | 2,637 |
| | 220 |
| | — |
| | 42,186 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182020
(In thousands, except share and per share data)
Segment results from operations for the years ended December 31, 2020, 2019 and 2018 are as follows.
11. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 | | | | | | Expedited Freight | | Intermodal | | | | Eliminations & Other | | Consolidated |
| External revenues | | | | | | $ | 1,070,106 | | | $ | 199,567 | | | | | $ | — | | | $ | 1,269,673 | |
| Intersegment revenues | | | | | | 2,195 | | | 36 | | | | | (2,331) | | | (100) | |
| Depreciation | | | | | | 19,824 | | | 3,693 | | | | | 120 | | | 23,637 | |
| Amortization | | | | | | 7,203 | | | 6,285 | | | | | — | | | 13,488 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | | | | 71,266 | | | 16,391 | | | | | (13,733) | | | 73,924 | |
| Total assets | | | | | | 905,081 | | | 221,963 | | | | | (153,750) | | | 973,294 | |
| Purchases of property and equipment | | | | | | 19,820 | | | 448 | | | | | — | | | 20,268 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019 (As Adjusted) | | | | | | Expedited Freight | | Intermodal | | | | Eliminations & Other | | Consolidated |
| External revenues | | | | | | $ | 997,877 | | | $ | 217,606 | | | | | $ | — | | | $ | 1,215,483 | |
| Intersegment revenues | | | | | | 3,057 | | | 105 | | | | | (3,458) | | | (296) | |
| Depreciation | | | | | | 23,087 | | | 3,086 | | | | | 38 | | | 26,211 | |
| Amortization | | | | | | 4,335 | | | 5,848 | | | | | — | | | 10,183 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | | | | 103,640 | | | 23,679 | | | | | (14,903) | | | 112,416 | |
| Total assets | | | | | | 717,555 | | | 206,576 | | | | | (24,909) | | | 899,222 | |
| Purchases of property and equipment | | | | | | 21,290 | | | 717 | | | | | — | | | 22,007 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018 (As Adjusted) | | | | | | Expedited Freight | | Intermodal | | | | Eliminations & Other | | Consolidated |
| External revenues | | | | | | $ | 937,289 | | | $ | 200,750 | | | | | $ | — | | | $ | 1,138,039 | |
| Intersegment revenues | | | | | | 4,678 | | | 256 | | | | | (5,360) | | | (426) | |
| Depreciation | | | | | | 25,707 | | | 1,719 | | | | | 296 | | | 27,722 | |
| Amortization | | | | | | 3,499 | | | 4,610 | | | | | — | | | 8,109 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | | | | 103,652 | | | 23,266 | | | | | (9,702) | | | 117,216 | |
| Total assets | | | | | | 555,501 | | | 167,002 | | | | | (10,193) | | | 712,310 | |
| Purchases of property and equipment | | | | | | 38,710 | | | 854 | | | | | — | | | 39,564 | |
Revenue from the individual services within the Expedited Freight segment for the years ended December 31, 2020, 2019 and 2018 are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended | | Year ended | | Year ended |
| | | December 31,
2020 | | December 31,
2019 | | December 31,
2018 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Expedited freight revenue: | | | | | | | | |
| Network | | $ | 625,517 | | | $ | 675,312 | | | $ | 677,416 | | | |
| Truckload | | $ | 194,058 | | | $ | 196,855 | | | $ | 196,980 | | | |
| Final Mile | | $ | 224,475 | | | $ | 100,555 | | | $ | 39,400 | | | |
| Other | | 28,251 | | | 28,212 | | | 28,171 | | | |
| Total | | $ | 1,072,301 | | | $ | 1,000,934 | | | $ | 941,967 | | | |
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
12. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 20182020 and 2017: 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | $ | 305,557 | | | $ | 281,678 | | | $ | 331,997 | | | $ | 350,341 | |
| Net income from continuing operations | | $ | 11,417 | | | $ | 9,225 | | | $ | 16,992 | | | $ | 15,133 | |
| Loss from discontinued operation, net of tax | | (3,042) | | | (6,071) | | | (345) | | | (19,576) | |
| Net income | | $ | 8,375 | | | $ | 3,154 | | | $ | 16,647 | | | $ | (4,443) | |
| | | | | | | | |
| Basic net income (loss) per share: | | | | | | | | |
| Continuing operations | | $ | 0.41 | | | $ | 0.33 | | | $ | 0.61 | | | $ | 0.55 | |
| Discontinued operation | | (0.11) | | | (0.22) | | | (0.01) | | | (0.72) | |
| Net income per share | | $ | 0.30 | | | $ | 0.11 | | | $ | 0.60 | | | $ | (0.17) | |
| | | | | | | | |
| Diluted net income (loss) per share: | | | | | | | | |
| Continuing operations | | $ | 0.41 | | | $ | 0.33 | | | $ | 0.61 | | | $ | 0.55 | |
| Discontinued operation | | (0.11) | | | (0.22) | | | (0.01) | | | (0.72) | |
| Net income per share | | $ | 0.30 | | | $ | 0.11 | | | $ | 0.60 | | | $ | (0.17) | |
| | | | | | | | |
| | 2019 |
| | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | $ | 278,961 | | | $ | 302,887 | | | $ | 313,683 | | | $ | 319,656 | |
| Net income from continuing operations | | $ | 17,688 | | | $ | 21,244 | | | $ | 21,054 | | | $ | 22,336 | |
| Income from discontinued operation, net of tax | | 719 | | | 1,086 | | | 1,141 | | | 1,832 | |
| Net income | | $ | 18,407 | | | $ | 22,330 | | | $ | 22,195 | | | $ | 24,168 | |
| | | | | | | | |
| Basic net income per share: | | | | | | | | |
| Continuing operations | | $ | 0.61 | | | $ | 0.74 | | | $ | 0.74 | | | $ | 0.79 | |
| Discontinued operation | | 0.03 | | | 0.04 | | | 0.04 | | | 0.07 | |
| Net income per share | | $ | 0.64 | | | $ | 0.78 | | | $ | 0.78 | | | $ | 0.86 | |
| | | | | | | | |
| Diluted net income per share: | | | | | | | | |
| Continuing operations | | $ | 0.61 | | | $ | 0.74 | | | $ | 0.74 | | | $ | 0.79 | |
| Discontinued operation | | 0.03 | | | 0.04 | | | 0.04 | | | 0.07 | |
Net income per share 1 | | $ | 0.64 | | | $ | 0.78 | | | $ | 0.78 | | | $ | 0.85 | |
| | | | | | | | |
1 Rounding may impact summation of amounts. | | | | | | | | |
| | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | 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 |
|
| | | | | | | | | |
| | | 2017 |
| | | (As Adjusted) |
| | | March 31 | | June 30 | | September 30 | | December 31 |
| Operating revenue | | $ | 262,046 |
| | $ | 283,876 |
| | $ | 298,289 |
| | $ | 325,136 |
|
| Income from operations | | 23,743 |
| | 29,996 |
| | 27,176 |
| | 27,843 |
|
| Net income | | 14,581 |
| | 19,666 |
| | 18,328 |
| | 34,681 |
|
| | | | | | | | | |
| Net income per share: | | | | | | | | |
| Basic | | $ | 0.48 |
| | $ | 0.65 |
| | $ | 0.61 |
| | $ | 1.17 |
|
| Diluted | | $ | 0.48 |
| | $ | 0.65 |
| | $ | 0.61 |
| | $ | 1.16 |
|
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2020
(In thousands, except per share data)
13. Subsequent Events
Intermodal Acquisition
On February 5, 2021, the Company entered into an agreement to acquire substantially all of the assets of Proficient Transport for $15,000 in cash and a potential earn-out up to $2,000.
Sale of Pool
On February 12, 2021, the Company sold Pool to Ten Oaks Group, for total consideration of $20,000, consisting of an $8,000 upfront cash payment and a potential earn-out up to $12,000.
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 Operating Revenue | | Deductions
-Described | | Balance at
End of
Period |
| Year ended December 31, 2020 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,316 | | | $ | 567 | | | $ | — | | | $ | 615 | | 2 | $ | 1,268 | |
Allowance for revenue adjustments 1 | | 737 | | | — | | | 4,751 | | | 4,483 | | 3 | 1,005 | |
| Deferred tax valuation allowance | | 395 | | | 0 | | | — | | | — | | | 395 | |
| | 2,448 | | | 567 | | | 4,751 | | | 5,098 | | | 2,668 | |
| Year ended December 31, 2019 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,290 | | | $ | 752 | | | $ | — | | | $ | 726 | | 2 | $ | 1,316 | |
Allowance for revenue adjustments 1 | | 755 | | | — | | | 3,339 | | | 3,357 | | 3 | 737 | |
| Deferred tax valuation allowance | | 395 | | | 0 | | | — | | | — | | | 395 | |
| | 2,440 | | | 752 | | | 3,339 | | | 4,083 | | | 2,448 | |
| Year ended December 31, 2018 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,540 | | | $ | 122 | | | $ | — | | | $ | 1,372 | | 2 | $ | 1,290 | |
Allowance for revenue adjustments 1 | | 451 | | | — | | | 3,624 | | | 3,320 | | 3 | 755 | |
| Deferred tax valuation allowance | | 360 | | | 35 | | | — | | | — | | | 395 | |
| | 3,351 | | | 157 | | | 3,624 | | | 4,692 | | | 2,440 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| 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, 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 |
|
| Year ended December 31, 2016 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,310 |
| | $ | 258 |
| | $ | — |
| | $ | 259 |
| (2) | $ | 1,309 |
|
Allowance for revenue adjustments (1) | | 1,095 |
| | — |
| | 2,020 |
| | 2,710 |
| (3) | 405 |
|
| Income tax valuation | | 284 |
| | (2 | ) | | — |
| | — |
| | 282 |
|
| | | 2,689 |
| | 256 |
| | 2,020 |
| | 2,969 |
| | 1,996 |
|
(1)1 Represents an allowance for revenue adjustments to accounts receivable due to disputed rates, accessorial charges and other aspects of previously billed shipments.resulting from future billing rate changes.
(2)2 Represents uncollectible accounts written off, net of recoveriesrecoveries.
(3)3 Represents adjustments to billed accounts receivable
receivable.
|
| | | | | | | |
| EXHIBIT INDEX |
| No. | | Exhibit |
| 3.1 | | |
| 3.2 | | |
| 4.1 | | |
10.14.2 | * | |
| 10.1 | * | |
| 10.2 | | |
| 10.3 | * | |
10.4 | | |
10.510.4 | * | |
10.6 | * | |
10.7 | * | |
10.8 | * | |
10.9 | * | |
10.10 | * | |
10.11 | * | |
|
| 10.5 | | |
10.14 | * | |
10.1510.6 | * | |
10.16 | * | |
10.1710.7 | * | |
10.1810.8 | * | |
10.19 | | |
10.2010.9 | * | |
10.2110.10 | * | |
10.2210.11 | * | |
10.23 | * | |
10.24 | * | |
10.25 | * | |
10.26 | * | |
10.2710.12 | * | |
10.2810.13 | * | |
10.2910.14 | * | |
10.3010.15 | * | |
|
| 10.18 | | |
10.33 | * | |
10.3410.19 | * | |
10.3510.20 | * | |
10.3610.21 | * | |
10.3710.22 | * | |
10.3810.23 | * | |
10.3910.24 | * | |
10.4010.25 | | |
10.4110.25A | * | First Amendment dated April 16, 2020 to Credit Agreement dated September 29, 2017 by and among Forward Air Corporation and Forward Air, Inc., as borrowers, certain subsidiaries of the borrowers as guarantors, Bank of America, N.A., as administrative agent and lender, U.S. Bank National Association, as lender, and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 1, 2020) |
| 10.26 | * | |
10.4210.27 | * | |
10.4310.28 | * | |
10.4410.29 | * | |
10.4510.30 | * | |
10.4610.31 | * | |
21.110.32 | | |
| 10.33 | | |
| | | | | | | | |
| 10.34 | | |
| 10.35 | | |
| 10.36 | * | |
| 10.37 | * | |
| 21.1 | | |
| 23.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 32.2 | | |
*Denotes a management contract or compensatory plan or arrangement.
