UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2017
Commission File No. 000-22490

corplogoa03.jpg

FORWARD AIR CORPORATION
(Exact name of registrant as specified in its charter)

Tennessee
 
62-1120025
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
1915 Snapps Ferry Road, Building N
Greeneville, Tennessee
 
37745
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (423) 636-7000
 
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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark 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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x
 
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of April 21, 2017 was 30,214,989.



Table of Contents
 
 
 
Forward Air Corporation
 
 
 
 
 
Page
 
 
Number
Part I.
Financial Information
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

2



Part I.
Financial Information
 
 
Item 1.
Financial Statements (Unaudited).
Forward Air Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash
$
14,335

 
$
8,511

Accounts receivable, less allowance of $1,610 in 2017 and $1,714 in 2016
116,473

 
116,602

Other current assets
8,394

 
11,157

Total current assets
139,202

 
136,270

 
 
 
 
Property and equipment
376,623

 
379,021

Less accumulated depreciation and amortization
182,686

 
178,816

Total property and equipment, net
193,937

 
200,205

Goodwill and other acquired intangibles:
 

 
 

Goodwill
184,675

 
184,675

Other acquired intangibles, net of accumulated amortization of $63,725 in 2017 and $61,334 in 2016
104,259

 
106,650

Total net goodwill and other acquired intangibles
288,934

 
291,325

Other assets
13,795

 
13,491

Total assets
$
635,868

 
$
641,291

 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15,800

 
$
18,012

Accrued expenses
34,007

 
31,833

Income taxes payable
8,326

 
70

Current portion of debt and capital lease obligations
352

 
28,012

Total current liabilities
58,485

 
77,927

 
 
 
 
Long-term debt and capital lease obligations, less current portion
13,529

 
725

Other long-term liabilities
21,440

 
21,699

Deferred income taxes
41,786

 
41,871

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock

 

Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 29,999,920 in 2017 and 30,090,335 in 2016
300

 
301

Additional paid-in capital
182,999

 
179,512

Retained earnings
317,329

 
319,256

Total shareholders’ equity
500,628

 
499,069

Total liabilities and shareholders’ equity
$
635,868

 
$
641,291

 
 
 
 
The accompanying notes are an integral part of the financial statements.


3



Forward Air Corporation
Condensed Consolidated Statements of Comprehensive Income
(In thousands, except per share data)
(Unaudited)
 
 
 
Three months ended
 
March 31,
2017
 
March 31,
2016
Operating revenue
$
246,982

 
$
229,549

 
 
 
 
Operating expenses:
 
 
 
Purchased transportation
103,083

 
96,476

Salaries, wages and employee benefits
61,998

 
58,678

Operating leases
15,601

 
13,868

Depreciation and amortization
10,033

 
9,668

Insurance and claims
5,806

 
5,395

Fuel expense
3,680

 
2,961

Other operating expenses
23,592

 
21,098

Total operating expenses
223,793

 
208,144

Income from operations
23,189

 
21,405

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(282
)
 
(553
)
Other, net
(26
)
 
(29
)
Total other income (expense)
(308
)
 
(582
)
Income before income taxes
22,881

 
20,823

Income tax expense
8,638

 
7,724

Net income and comprehensive income
$
14,243


$
13,099

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.47

 
$
0.43

Diluted
$
0.47

 
$
0.43

 
 
 
 
Dividends per share:
$
0.15

 
$
0.12


The accompanying notes are an integral part of the financial statements.

4



Forward Air Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Three months ended
 
March 31,
2017
 
March 31,
2016
 
 
Operating activities:
 
 
 
Net income
$
14,243

 
$
13,099

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
10,033

 
9,668

Share-based compensation
1,962

 
1,952

Loss on disposal of property and equipment
488

 
93

Provision for loss (recovery) on receivables
22

 
(196
)
Provision for revenue adjustments
718

 
799

Deferred income tax
(85
)
 
5,031

Excess tax benefit for stock options exercised

 
(38
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable
(611
)
 
4,245

Other current assets
2,153

 
2,582

Accounts payable and accrued expenses
8,137

 
206

Net cash provided by operating activities
37,060

 
37,441

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposal of property and equipment
790

 
155

Purchases of property and equipment
(2,652
)
 
(2,688
)
Acquisition of business, net of cash acquired

 
(1,700
)
Other
129

 
22

Net cash used in investing activities
(1,733
)
 
(4,211
)
 
 
 
 
Financing activities:
 
 
 
Payments of debt and capital lease obligations
(27,857
)
 
(13,969
)
Proceeds from senior credit facility
13,000

 

Proceeds from exercise of stock options
1,524

 
881

Payments of cash dividends
(4,539
)
 
(3,678
)
Repurchase of common stock (repurchase program)
(9,996
)
 
(9,995
)
Excess tax benefit for stock options exercised

 
38

Cash settlement of share-based awards for tax withholdings
(1,635
)
 
(1,782
)
Net cash used in financing activities
(29,503
)
 
(28,505
)
Net increase in cash
5,824

 
4,725

Cash at beginning of period
8,511

 
33,312

Cash at end of period
$
14,335

 
$
38,037

 
The accompanying notes are an integral part of the financial statements.



5

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017


1.    Description of Business and Basis of Presentation

Forward Air Corporation is a leading asset-light freight and logistics company. Forward Air Corporation's (“the Company”, “We”, “Our”) services can be classified into four principal reportable segments: Expedited LTL, Truckload Premium Services (“TLS”), Intermodal and Pool Distribution ("Pool") (See note 11).
 
Through the Expedited LTL segment, we operate a comprehensive national network to provide expedited regional, inter-regional and national less-than-truckload ("LTL") services. Expedited LTL offers customers local pick-up and delivery and other services including shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling.

Through our TLS segment, we provide expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-controlled logistics services in the United States and Canada.

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 CFS warehouse and handling services. Today, Intermodal operates primarily in the Midwest, with a smaller operational presence in the Southwest and Southeast.

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 accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company’s operating results are subject to seasonal trends when measured on a quarterly basis; therefore operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and notes thereto included in the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2016.

The accompanying unaudited condensed consolidated financial statements of the Company include Forward Air Corporation and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period financial information to conform to the current year presentation.

2.    Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires 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 guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for, and we elected, to account for forfeitures as they occur rather than on an estimated basis. We adopted this guidance in January 2017 and the elimination of APIC pools resulted in approximately $300 of additional income tax expense during the first quarter of 2017. This guidance has been applied prospectively and no prior periods have been adjusted.

In February 2016, the FASB, issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact of the future adoption of this standard on our consolidated financial statements.
    
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those

6

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017

goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a full retrospective or modified retrospective adoption approach with a cumulative effect adjustment recorded in either scenario as necessary upon transition. Based on a review of our customer shipping arrangements, we currently believe the implementation of this standard will change our revenue recognition policy from recognizing revenue upon shipment completion to recognizing revenue over time based on the progress toward completion of shipments in transit as of each period end. While the timing of revenue recognition will be accelerated, due to the short duration of our transit times the anticipated impact on our consolidated financial position, revenue, results from operations and related disclosures is expected to be minor. At this time we have not determined our transition method.


3.    Acquisitions and Goodwill

Acquisition of Triumph and Ace

As part of the Company's strategy to expand its Intermodal operations, in August 2016, we acquired certain assets of Triumph Transport, Inc. and Triumph Repair Service, Inc. (together referred to as “Triumph”) for $10,100 and a potential earnout of $1,250. The assets, liabilities, and operating results of Triumph have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment.
In January 2016, the Company also acquired certain assets of Ace Cargo, LLC ("Ace") for $1,700. The assets, liabilities, and operating results of Ace have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment.
Allocations of Purchase Prices
The following table presents the allocations of the Triumph and Ace purchase prices to the assets acquired and liabilities assumed based on their estimated fair values and resulting residual goodwill (in thousands):

Triumph & Ace

2016
Tangible assets:


Property and equipment
$
1,294

Total tangible assets
1,294

Intangible assets:


Non-compete agreements
139

Customer relationships
5,335

Goodwill
6,282

Total intangible assets
11,756

Total assets acquired
13,050



Liabilities assumed:

Other liabilities
1,250

Total liabilities assumed
1,250

Net assets acquired
$
11,800





7

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017

The acquired definite-live intangible assets have the following useful lives:

Useful Lives

Triumph & Ace
Customer relationships
15 years
Non-compete agreements
5 years
The fair value of the non-compete agreements and customer relationships assets were estimated using an income approach (level 3). Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To estimate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.
Goodwill
The Company conducts its annual impairment assessments and tests of goodwill for each reporting unit as of June 30.  The first step of the goodwill impairment test is the Company's assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, including goodwill. When performing the qualitative assessment, the Company considers the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performance of each reporting unit, litigation and new legislation. If based on the qualitative assessments, the Company believes it more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, or periodically as deemed appropriate by management, the Company will prepare an estimation of the respective reporting unit's fair value utilizing a quantitative approach.  If a quantitative fair value estimation is required, the Company estimates the fair value of the applicable reporting units, using a combination of discounted projected cash flows and market valuations for comparable companies as of the valuation date.  The Company's inputs into 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 this estimation of fair value indicates that 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.

Our 2016 assessments and calculations for LTL, Intermodal and Pool Distribution indicated that, as of June 30, 2016, the fair value of each reporting unit exceeded their carrying value. However, due to the financial performance of the Total Quality, Inc. ("TQI") reporting unit falling notably short of previous projections, declining revenue from significant customers and strategic initiatives not having the required impact on financial results, 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. As a result of these assessments, the Company concluded that an impairment loss was probable and could be reasonably estimated for the TQI reporting unit, which is included in the TLS reportable segment. Consequently, the Company recorded a goodwill impairment charge of $25,686 for the TQI reporting unit during the three months ended June 30, 2016. During the three months ended March 31, 2017, there were no additional indicators of impairment.

As of March 31, 2017, the carrying values of goodwill for each segment summarized in the table below. There were no changes in the carrying amount of goodwill during the three months ended March 31, 2017. Approximately $105,531 of goodwill is deductible for tax purposes.
 
Expedited LTL
 
TLS
 
Pool Distribution
 
Intermodal
 
Total
 
 
Accumulated
 
 
Accumulated
 
 
Accumulated
 
 
Accumulated
 
 
 
Goodwill
Impairment
 
Goodwill
Impairment
 
Goodwill
Impairment
 
Goodwill
Impairment
 
Net
Ending balance, March 31, 2017
$
97,593

$


$
45,164

$
(25,686
)

$
12,359

$
(6,953
)

$
62,198

$


$
184,675

Additionally, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is recognized on assets classified as held and used when the sum of

8

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017

undiscounted estimated cash flows expected to result from the use of the asset is less than the carrying value. If such measurement indicates a possible impairment, the estimated fair value of the asset is compared to its net book value to measure the impairment charge, if any. In conjunction with the June 30, 2016, TQI goodwill impairment assessment the Company determined there were indicators that TQI's customer relationship and non-compete intangible assets were impaired as the undiscounted cash flows associated with the applicable assets no longer exceeded the related assets' net book values. The Company then estimated the current market values 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 believes that the level and timing of cash flows appropriately reflect 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 three months ended June 30, 2016.

4.    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 employee grants only in connection with new employment or promotions.  Forms of share-based compensation granted to employees by the Company include stock options, non-vested shares of common stock (“non-vested share”), and performance shares.  The Company also typically makes a single annual grant of non-vested shares to non-employee directors in conjunction with the annual election of non-employee directors to the Board of Directors.  Share-based compensation is based on the grant date fair value of the instrument and is recognized ratably over the requisite service period, or vesting period. All share-based compensation expense is recognized in salaries, wages and employee benefits.

Employee Activity - Stock Options
 
Stock option grants to employees generally expire seven years from the grant date and typically vest ratably over a three-year period.  The Company used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted.  The weighted-average fair value of options granted and assumptions used to estimate their fair value during the three months ended March 31, 2017 and 2016 were as follows:

 
 
 
 

Three months ended

March 31,
2017

March 31,
2016
Expected dividend yield
1.3
%

1.0
%
Expected stock price volatility
28.7
%

29.0
%
Weighted average risk-free interest rate
2.0
%

1.3
%
Expected life of options (years)
6.0


6.0

Weighted average grant date fair value
$
13


$
12

 
 
 
 

9

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017


The following tables summarize the Company’s employee stock option activity and related information:


Three months ended March 31, 2017







Weighted-



Weighted-

Aggregate

Average



Average

Intrinsic

Remaining

Options

Exercise

Value

Contractual

(000)

Price

(000)

Term
Outstanding at December 31, 2016
564


$
41





Granted
118


48





Exercised
(47
)

32





Forfeited
(13
)

46





Outstanding at March 31, 2017
622


$
42


$
3,765


4.4
Exercisable at March 31, 2017
381


$
40


$
3,334


3.2
 

Three months ended

March 31,
2017

March 31,
2016
Share-based compensation for options
$
363


$
348

Tax benefit for option compensation
$
134


$
129

Unrecognized compensation cost for options, net of estimated forfeitures
$
2,683


$
2,789

Weighted average period over which unrecognized compensation will be recognized (years)
2.3



 
 
 
 
 
 
 
 
 
 
 
 
Employee Activity - Non-vested Shares

Non-vested share grants to employees vest ratably over a three-year period.  The non-vested shares’ fair values were estimated using closing market prices on the day of grant. The following tables summarize the Company’s employee non-vested share activity and related information:


Three months ended March 31, 2017



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2016
222


$
45



Granted
126


48



Vested
(101
)

45



Forfeited
(5
)

46



Outstanding and non-vested at March 31, 2017
242


$
47


$
11,320



10

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017


Three months ended

March 31,
2017

March 31,
2016
Share-based compensation for non-vested shares
$
1,246


$
1,082

Tax benefit for non-vested share compensation
$
459


$
403

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
10,470


$
9,363

Weighted average period over which unrecognized compensation will be recognized (years)
2.3



 
 
 
 
 
 
 
 
 
 
Employee Activity - Performance Shares

The Company annually grants performance shares to key employees.  Under the terms of the performance share agreements, following the end of a three-year performance period, the Company will issue to the employees a calculated number of common stock shares based on the three year performance of the Company’s total shareholder return as compared to the total shareholder return of a selected peer group.  No shares may be issued if the Company's total shareholder return outperforms 30% or less of the peer group, but the number of shares issued may be doubled if the Company's total shareholder return performs better than 90% of the peer group.  The fair value of the performance shares was estimated using a Monte Carlo simulation. The weighted average assumptions used in the Monte Carlo estimate were as follows:


Three months ended

March 31,
2017

March 31,
2016
Expected stock price volatility
24.7
%

22.3
%
Weighted average risk-free interest rate
1.4
%

0.8
%

The following tables summarize the Company’s employee performance share activity, assuming median share awards, and related information:

Three months ended March 31, 2017



Weighted-

Aggregate

Performance

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2016
80


$
55



Granted
25


56



Forfeited
(29
)

$
50



Outstanding and non-vested at March 31, 2017
76


$
57


$
4,327



Three months ended

March 31,
2017

March 31,
2016
Share-based compensation for performance shares
$
184


$
351

Tax benefit for performance share compensation
$
68


$
131

Unrecognized compensation cost for performance shares, net of estimated forfeitures
$
2,612


$
2,805

Weighted average period over which unrecognized compensation will be recognized (years)
2.2




11

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017

 
 
 
 
 
 
 
 
 
 

Non-employee Director Activity - Non-vested Shares

Grants of non-vested shares to non-employee directors vest ratably over the elected term to the Board of Directors, or approximately one year.  The following tables summarize the Company’s non-employee non-vested share activity and related information:

Three months ended March 31, 2017



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2016
16


$
44



Granted





Vested





Outstanding and non-vested at March 31, 2017
16


$
44


$
688



Three months ended

March 31,
2017

March 31,
2016
Share-based compensation for non-vested shares
$
169


$
171

Tax benefit for non-vested share compensation
$
63


$
64

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
77


$
114

Weighted average period over which unrecognized compensation will be recognized (years)
0.1



 
 
 
 
 
 
 
 
 
 

5.    Senior Credit Facility

On February 4, 2015, the Company entered into a five-year senior, unsecured credit facility (the “Facility”) with a maximum aggregate principal amount of $275,000, including a revolving credit facility of $150,000 and a term loan facility of $125,000. The revolving credit facility has a sublimit of $25,000 for letters of credit and a sublimit of $15,000 for swing line loans. The revolving credit facility is scheduled to expire in February 2020 and may be used to refinance existing indebtedness of the Company and for working capital, capital expenditures and other general corporate purposes. Unless the Company elects otherwise under the credit agreement, interest on borrowings under the Facility are based on the highest of (a) the federal funds rate plus 0.5%, (b) the administrative agent's prime rate and (c) the LIBOR Rate plus 1.0%, in each case plus a margin that can range from 0.1% to 0.6% with respect to the term loan facility and from 0.3% to 0.8% with respect to the revolving credit facility depending on the Company’s ratio of consolidated funded indebtedness to earnings as set forth in the credit agreement. The Facility contains financial covenants and other covenants that, among other things, restrict the ability of the Company, without the approval of the lenders, to engage in certain mergers, consolidations, asset sales, investments, transactions or to incur liens or indebtedness, as set forth in the credit agreement. As of March 31, 2017, we had $13,000 in borrowings outstanding under the revolving credit facility, $7,514 utilized for outstanding letters of credit and $129,486 of available borrowing capacity under the revolving credit facility.  The interest rate on the outstanding borrowing under the revolving credit facility was 2.2% at March 31, 2017.

In March 2015, the Company borrowed $125,000 on the available term loan. The term loan was payable in quarterly installments of 11.1% of the original principal amount of the term loan plus accrued and unpaid interest, and matured in March 2017.



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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017

6.    Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
Numerator:
 
 
 
 
Net income and comprehensive income
 
$
14,243

 
$
13,099

Income allocated to participating securities
 
(119
)
 
(64
)
Numerator for basic and diluted income per share - net income
 
$
14,124

 
$
13,035

Denominator (in thousands):
 
 

 
 

Denominator for basic income per share - weighted-average shares
 
29,998

 
30,420

Effect of dilutive stock options (in thousands)
 
75

 
165

Effect of dilutive performance shares (in thousands)
 
33

 
40

Denominator for diluted income per share - adjusted weighted-average shares
 
30,106

 
30,625

Basic net income per share
 
$
0.47

 
$
0.43

Diluted net income per share
 
$
0.47

 
$
0.43


The number of instruments that could potentially dilute net income per basic share in the future, but that were not included in the computation of net income per diluted share because to do so would have been anti-dilutive for the periods presented, are as follows:
 
March 31,
2017
 
March 31,
2016
Anti-dilutive stock options (in thousands)
282

 
275

Anti-dilutive performance shares (in thousands)
15

 
44

Anti-dilutive non-vested shares and deferred stock units (in thousands)

 
73

Total anti-dilutive shares (in thousands)
297

 
392


7.    Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various states and Canada. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or Canadian examinations by tax authorities for years before 2010.

For the three months ended March 31, 2017 and 2016, the effective income tax rates varied from the statutory federal income tax rate of 35.0%, primarily as a result of the effect of state income taxes, net of the federal benefit, and permanent differences between book and tax net income. The combined federal and state effective tax rate for the three months ended March 31, 2017 was 37.8% compared to a rate of 37.1% for the same period in 2016.  The higher effective tax rate for the first quarter of 2017 is primarily the result of our implementation of new Financial Accounting Standards Board ("FASB") guidance that requires we recognize the income tax effects of awards when the awards vest or are settled. Previously any income tax effect was recognized in additional paid in capital. See further discussion in the "Impact of Recent Accounting Pronouncements" section of this document.

8.    Financial Instruments

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:


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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017

Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value based on their short-term nature.
 
The Company’s revolving credit facility and term loan bear variable interest rates plus additional basis points based upon covenants related to total indebtedness to earnings.  As the term loan bears a variable interest rate, the carrying value approximates fair value. Using interest rate quotes and discounted cash flows, the Company estimated the fair value of its outstanding capital lease obligations as follows:
 
 
 
March 31, 2017
 
 
Carrying Value
 
Fair Value
Capital leases
 
$
987

 
$
1,058


The Company's fair value estimates for the above financial instruments are classified within level 3 of the fair value hierarchy.

9.    Shareholders' Equity

During the fourth quarter of 2016 and the first quarter of 2017, our 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. 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.

On July 21, 2016, our Board of Directors approved a stock repurchase authorization for up to three million shares of the Company’s common stock. During the three months ended March 31, 2017, we repurchased 204,809 for $9,996, or $48.81 per share. During the three months ended March 31, 2016, we repurchased 232,944 for $9,995, or $42.91 per share. The repurchases made for the three months ended March 31, 2016 were made under a previous share repurchase plan approved by our Board of Directors on February 7, 2014. This plan was cancelled and replaced on July 21, 2016. As of March 31, 2017, 2,561,675 shares remain to be purchased under the 2016 Plan.

10.    Commitments and Contingencies

From time to time, the Company is party to ordinary, routine litigation incidental to and arising in the normal course of business.  The Company does not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on its business, financial condition or results of operations.

The primary claims in the Company’s business relate to workers’ compensation, property damage, vehicle liability and medical benefits. Most of the Company’s insurance coverage provides for self-insurance levels with primary and excess coverage which management believes is sufficient to adequately protect the Company from catastrophic claims. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured limits, including provision for estimated claims incurred but not reported.
 
The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing hindsight and actuarial analysis to determine an estimate of probable losses on claims incurred but not reported.  Such losses should be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates. 

Because of the uncertainty of the ultimate resolution of outstanding claims, as well as uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially in the near term. However, no estimate can currently be made of the range of additional loss that is at least reasonably possible.

11.    Segment Reporting

The Company operates in four reportable segments based 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

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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017

LTL 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 high value intermodal container drayage services both to and from seaports and railheads. Pool Distribution provides high-frequency handling and distribution of time sensitive product to numerous destinations.

Except for certain insurance activity, the accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in Note 1 of the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2016. For workers compensation and vehicle claims each segment is charged an insurance premium and is also charged a deductible that corresponds with our corporate deductibles. However, any losses beyond our deductibles and any loss development factors applied to our outstanding claims as a result of actuary analysis are not passed to the segments, but kept at the corporate level.

Segment data includes intersegment revenues and shared costs.  Costs of the corporate headquarters, shared services and shared assets, such as trailers, are allocated to the segments based on usage. The basis of shared assets are not allocated.  Beginning in the first quarter of 2017, a trailer allocation was included in Pool's 2017 results from operations. The Company evaluates the performance of its segments based on income from operations.   The Company’s business is conducted in the U.S. and Canada.

The following tables summarize segment information about results from operations and assets used by the chief operating decision maker of the Company in making decisions regarding allocation of assets and resources as of and for the three months ended March 31, 2017 and 2016.
 
 
Three months ended March 31, 2017
 
 
Expedited LTL
 
Truckload Premium
 
Pool Distribution
 
Intermodal
 
Eliminations & other
 
Consolidated
External revenues
 
$
140,012

 
$
40,937

 
$
37,753

 
$
28,280

 
$

 
$
246,982

Intersegment revenues
 
586

 
848

 
70

 
11

 
(1,515
)
 

Depreciation and amortization
 
5,563

 
1,558

 
1,802

 
1,110

 

 
10,033

Share-based compensation expense
 
1,645

 
95

 
88

 
134

 

 
1,962

Interest expense
 
1

 

 

 
11

 
270

 
282

Income (loss) from operations
 
18,400

 
1,704

 
1,367

 
2,580

 
(862
)
 
23,189

Total assets
 
630,959

 
55,523

 
50,120

 
131,801

 
(232,535
)
 
635,868

Capital expenditures
 
2,511

 
6

 
83

 
52

 

 
2,652

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
 
 
Expedited LTL
 
Truckload Premium
 
Pool Distribution
 
Intermodal
 
Eliminations & other
 
Consolidated
External revenues
 
$
133,524

 
$
38,415

 
$
33,057

 
$
24,553

 
$

 
$
229,549

Intersegment revenues
 
855

 
205

 
135

 
71

 
(1,266
)
 

Depreciation and amortization
 
5,531

 
1,749

 
1,497

 
891

 

 
9,668

Share-based compensation expense
 
1,724

 
51

 
81

 
96

 

 
1,952

Interest expense
 

 

 

 
36

 
517

 
553

Income (loss) from operations
 
17,084

 
1,565

 
114

 
2,372

 
270

 
21,405

Total assets
 
635,283

 
90,678

 
47,877

 
120,251

 
(205,036
)
 
689,053

Capital expenditures
 
2,078

 
13

 
545

 
52

 

 
2,688


 
 
 
 
 
 
 
 
 
 
 
 
 


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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2017

12.    Subsequent Events

On April 10, 2017, we announced that our wholly-owned subsidiary, Central States Trucking Co. (“CST”), entered into an agreement to acquire substantially all of the 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). The closing of the transaction is subject to various customary conditions, including but not limited to, compliance with the covenants and agreements in the definitive agreement in all material respects. The Company will pay approximately $22,500 and provide an option for a $1,000 earn-out. The acquisition will be funded by a combination of cash on hand and funds from our revolving credit facility.

Atlantic is a privately held provider of intermodal, drayage and related services headquartered in Charleston, South Carolina. It also has terminal operations in Atlanta, Charlotte, Houston, Jacksonville, Memphis, Nashville, Norfolk and Savannah. These locations allow Intermodal to significantly expand its footprint in the southeastern region. During calendar year 2016, Atlantic generated approximately $62,300 in revenue.

CST is included in our Intermodal reportable segment.

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

Overview and Executive Summary
 
Forward Air Corporation is a leading asset-light freight and logistics company. Our services are classified into four reportable segments: Expedited LTL, TLS, Intermodal and Pool Distribution.
 
Through the Expedited LTL segment, we operate a comprehensive national network to provide expedited regional, inter-regional and national LTL services. Expedited LTL offers customers local pick-up and delivery and other services including shipment consolidation and deconsolidation, warehousing, 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.

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 CFS warehouse and handling services. Intermodal operates primarily in the Midwest, with a smaller operational presence in the Southwest and Southeast. We plan to grow Intermodal’s geographic footprint through acquisitions as well as greenfield start-ups where we do not have an acceptable acquisition target.

In our Pool Distribution segment, we provide high-frequency handling and distribution 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, such as TLS, Intermodal and Pool Distribution, which will allow us to maintain revenue growth in challenging shipping environments.

Trends and Developments

Acquisitions

In January 2016, our Intermodal segment acquired certain assets of Ace for $1.7 million. The assets, liabilities, and operating results of Ace have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment. In August 2016, our Intermodal segment acquired certain assets of Triumph for $10.1 million and a potential earnout of $1.3 million. These acquisitions provide an opportunity for our Intermodal segment to expand into additional geographic markets or add volumes to our existing locations.


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Results from Operations
The following table sets forth our consolidated historical financial data for the three months ended March 31, 2017 and 2016 (in millions):
 
Three months ended March 31
 
2017
 
2016
 
Change
 
Percent Change
Operating revenue:
 
 
 
 
 
 
 
Expedited LTL
$
140.6

 
$
134.4

 
$
6.2

 
4.6
 %
Truckload Premium Services
41.8

 
38.6

 
3.2

 
8.3

Pool Distribution
37.8

 
33.2

 
4.6

 
13.9

Intermodal
28.3

 
24.6

 
3.7

 
15.0

Eliminations and other operations
(1.5
)
 
(1.3
)
 
(0.2
)
 
15.4

Operating revenue
247.0

 
229.5

 
17.5

 
7.6

Operating expenses:
 
 
 
 
 
 
 
   Purchased transportation
103.1

 
96.5

 
6.6

 
6.8

   Salaries, wages, and employee benefits
62.0

 
58.7

 
3.3

 
5.6

   Operating leases
15.6

 
13.8

 
1.8

 
13.0

   Depreciation and amortization
10.0

 
9.7

 
0.3

 
3.1

   Insurance and claims
5.8

 
5.4

 
0.4

 
7.4

   Fuel expense
3.7

 
2.9

 
0.8

 
27.6

   Other operating expenses
23.6

 
21.1

 
2.5

 
11.8

      Total operating expenses
223.8

 
208.1

 
15.7

 
7.5

Income from operations:
 
 
 
 
 
 
 
Expedited LTL
18.4

 
17.1

 
1.3

 
7.6

Truckload Premium Services
1.7

 
1.6

 
0.1

 
6.3

Pool Distribution
1.4

 
0.1

 
1.3

 
1,300.0

Intermodal
2.6

 
2.4

 
0.2

 
8.3

Other operations
(0.9
)
 
0.2

 
(1.1
)
 
(550.0
)
Income from operations
23.2

 
21.4

 
1.8

 
8.4

Other expense:
 
 
 
 
 
 
 
   Interest expense
(0.3
)
 
(0.6
)
 
0.3

 
(50.0
)
      Total other expense
(0.3
)
 
(0.6
)
 
0.3

 
(50.0
)
Income before income taxes
22.9

 
20.8

 
2.1

 
10.1

Income taxes
8.7

 
7.7

 
1.0

 
13.0

Net income
$
14.2

 
$
13.1

 
$
1.1

 
8.4
 %
During the three months ended March 31, 2017, we experienced a 7.6% increase in our consolidated revenues compared to the three months ended March 31, 2016. Operating income increased $1.8 million, or 8.4%, from 2016 to $23.2 million for the three months ended March 31, 2017.

Segment Operations

Expedited LTL's revenue increased $6.2 million, or 4.6%, while operating income increased $1.3 million, or 7.6% for the three months ended March 31, 2017, compared to the same period in 2016. The increase of Expedited LTL's revenue was the result of higher LTL volumes, increased pick up and delivery shipments and increased net fuel surcharge revenue as a result of the increase in fuel prices since the first quarter of 2016. The revenue increase was furthered by operating efficiencies, primarily in our purchased transportation and terminal operations, leading to an increase in operating income.

TLS revenue increased $3.2 million, or 8.3% and operating income increased $0.1 million, or 6.3%, for the three months ended March 31, 2017, compared to the same period in 2016. The increase in revenue and operating income was due to an increase in overall miles and new business wins. The increase of TLS operating income was partially offset by revenue per mile declining while cost per mile remained consistent.

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Pool Distribution revenue increased $4.6 million, or 13.9%, while operating results increased $1.3 million for the three months ended March 31, 2017, compared to the same period in 2016.  The revenue increase was due to new business, rate increases and increased volumes. The increase in operating income was the result of improved leverage on fixed costs following the additional revenue.

Intermodal revenue increased $3.7 million, or 15.0%, and operating income increased $0.2 million, or 8.3%, for the three months ended March 31, 2017, compared to the same period in 2016. The increases in operating revenue and income were primarily attributable to the Ace and Triumph acquisitions and the positive impact of increased fuel surcharges.

Fuel Surcharge

Our net fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and volume transiting our network.  During the three months ended March 31, 2017, total net fuel surcharge revenue increased 53.7% as compared to the same period in 2016, mostly due to increased fuel prices and increased volumes in the Expedited LTL and Pool Distribution segment.

Interest Expense

Interest expense was $0.3 million for the three months ended March 31, 2017 compared to $0.6 million for the same period of 2016. The decrease in interest expense was attributable to principal payments made since March 2016 on our previously outstanding term loan.

Income Taxes

The combined federal and state effective tax rate for the first quarter of 2017 was 37.8% compared to a rate of 37.1% for the same period in 2016. The higher effective tax rate for the first quarter of 2017 is the result of our implementation of new Financial Accounting Standards Board ("FASB") guidance that requires we recognize the income tax effects of share-based awards when the awards vest or are settled. Previously any income tax effect was recognized in additional paid in capital. See further discussion in the "Impact of Recent Accounting Pronouncements" section of this document.

Net Income

As a result of the foregoing factors, net income increased by $1.1 million, or 8.4%, to $14.2 million for the first quarter of 2017 compared to $13.1 million for the same period in 2016.

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Table of Contents


Expedited LTL - Three Months Ended March 31, 2017 compared to Three Months Ended March 31, 2016

The following table sets forth our historical financial data of the Expedited LTL segment for the three months ended March 31, 2017 and 2016 (in millions):
Expedited LTL Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
Percent of
 
March 31,
 
Percent of
 
 
 
Percent
 
2017
 
Revenue
 
2016
 
Revenue
 
Change
 
Change
Operating revenue
$
140.6

 
100.0
%
 
$
134.4

 
100.0
%
 
$
6.2

 
4.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
55.4

 
39.4

 
53.5

 
39.8

 
1.9

 
3.6

Salaries, wages and employee benefits
34.9

 
24.8

 
34.9

 
26.0

 

 

Operating leases
9.2

 
6.5

 
8.0

 
5.9

 
1.2

 
15.0

Depreciation and amortization
5.6

 
4.0

 
5.5

 
4.1

 
0.1

 
1.8

Insurance and claims
2.9

 
2.1

 
2.8

 
2.1

 
0.1

 
3.6

Fuel expense
0.9

 
0.6

 
0.7

 
0.5

 
0.2

 
28.6

Other operating expenses
13.3

 
9.5

 
11.9

 
8.9

 
1.4

 
11.8

Total operating expenses
122.2

 
86.9

 
117.3

 
87.3

 
4.9

 
4.2

Income from operations
$
18.4

 
13.1
%
 
$
17.1

 
12.7
%
 
$
1.3

 
7.6
%

Expedited LTL Operating Statistics
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
March 31,
 
Percent
 
2017
 
2016
 
Change
 
 
 
 
 
 
Operating ratio
86.9
%
 
87.3
%
 
(0.5
)%
 
 
 
 
 
 
Business days
64.0

 
64.0

 

Business weeks
12.8

 
12.8

 

 
 
 
 
 
 
Expedited LTL:
 
 
 
 
 
Tonnage
 
 
 
 
 
    Total pounds ¹
566,454

 
563,727

 
0.5

    Average weekly pounds ¹
44,254

 
44,041

 
0.5

 
 
 
 
 
 
Linehaul shipments
 
 
 
 
 
    Total linehaul
896,311

 
876,476

 
2.3

    Average weekly
70,024

 
68,475

 
2.3

 
 
 
 
 
 
Forward Air Complete shipments
210,002

 
177,973

 
18.0

As a percentage of linehaul shipments
23.4
%
 
20.3
%
 
15.3

 
 
 
 
 
 
Average linehaul shipment size
632

 
643

 
(1.7
)
 
 
 
 
 
 
Revenue per pound 2
 
 
 
 
 
    Linehaul yield
$
17.50

 
$
17.86

 
(1.7
)
    Fuel surcharge impact
1.22

 
0.80

 
1.9

    Forward Air Complete impact
3.81

 
3.07

 
3.4

Total Expedited LTL yield
$
22.53

 
$
21.73

 
3.7
 %
 
 
 
 
 
 
¹ - In thousands
 
 
 
 
 
2 - In dollars per hundred pound; percentage change is expressed as a percent of total yield.

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Revenues
Expedited LTL had operating revenue increase $6.2 million, or 4.6%, to $140.6 million from $134.4 million, accounting for 56.9% of consolidated operating revenue for the three months ended March 31, 2017 compared to 58.6% for the same period in 2016. The increase in revenue is mostly the result of increases to Forward Air Complete ("Complete") and fuel surcharge revenues. Linehaul revenue, which is the largest portion of Expedited LTL, decreased $1.6 million, or 1.6%, due to the decrease in linehaul yield noted in the preceding table, partially offset by an increase in system tonnage. The decrease in average base revenue per pound was attributable to decreased length of haul as shipments have become more regionalized. The increase in tonnage is primarily due to a full quarter impact of our February 2016 change to our dim-factor standard. This change in dim-factor standard allows us to capture more billable tonnage on certain shipments.
The $6.2 million revenue increase is primarily the result of a $4.3 million, or 25.1%, increase in Complete revenue.  The increase in Complete revenue was attributable to an increase in shipping volumes in our Expedited LTL network and a 15.3% increase in the attachment rate of Complete to linehaul shipments. Additionally, compared to the same period in 2016, net fuel surcharge revenue increased $2.4 million largely due to the increase in fuel prices and volume increases. Other terminal based revenues, which includes dedicated local pickup and delivery services, warehousing and terminal handling, increased $1.1 million, or 9.2%, to $13.0 million in the first quarter of 2017 from $11.9 million in the same period of 2016. The increase in other terminal revenue was mainly attributable to increases in local pickup and delivery.
Purchased Transportation
Expedited LTL’s purchased transportation increased by $1.9 million, or 3.6%, to $55.4 million for the three months ended March 31, 2017 from $53.5 million for the three months ended March 31, 2016. As a percentage of segment operating revenue, Expedited LTL purchased transportation was 39.4% during the three months ended March 31, 2017 compared to 39.8% for the same period in 2016. The increase in total dollars is due to a 0.7% increase in Expedited LTL cost per mile and increased complete attachment on higher linehaul volumes. Improved network efficiencies and the overall improvement in Expedited LTL yield resulted in a decrease in purchased transportation as a percentage of revenue.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Expedited LTL was $34.9 million in the first quarter of 2017 and 2016.  Salaries, wages and employee benefits were 24.8% of Expedited LTL’s operating revenue in the first quarter of 2017 compared to 26.0% for the same period of 2016.  The decrease in salaries, wages and employee benefits as a percentage of revenue was primarily attributable to a 0.5% decrease in health insurance costs as a percentage of revenue and a 0.7% decrease in direct Expedited LTL terminal and management salaries as a percentage of revenue. The decrease in direct pay as a percentage of revenue is the impact of additional revenue on fixed salaries and improved operating efficiencies.
Operating Leases
Operating leases increased $1.2 million, or 15.0%, to $9.2 million for the three months ended March 31, 2017 from $8.0 million for the same period in 2016.  Operating leases were 6.5% of Expedited LTL operating revenue for the three months ended March 31, 2017 compared to 5.9% for the same period in 2016. The increase in cost is due to $0.8 million of additional facility lease expenses and a $0.4 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
Depreciation and amortization increased $0.1 million or 1.8%, to $5.6 million in the first quarter of 2017 from $5.5 million in the same period of 2016.  Depreciation and amortization expense as a percentage of Expedited LTL operating revenue was 4.0% in the first quarter of 2017 compared to 4.1% in the same period of 2016.  The decrease as a percentage of revenue was due to the increase in leased equipment mentioned above instead of purchased equipment.
Insurance and Claims
Expedited LTL insurance and claims expense increased $0.1 million, or 3.6%, to $2.9 million for the three months ended March 31, 2017 from $2.8 million for the same period of 2016.  Insurance and claims was 2.1% of operating revenue for the three months ended March 31, 2017 and 2016. The increase in dollars was partly attributable to a $0.6 million increase in insurance premiums associated with our insurance plan renewals mostly offset by decreases in claims and claim related legal and professional fees.


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Fuel Expense
Expedited LTL fuel expense increased $0.2 million, or 28.6%, to $0.9 million for the first quarter of 2017 from $0.7 million in the same period of 2016.  Fuel expenses were 0.6% of Expedited LTL operating revenue in the first quarter of 2017 compared to 0.5% in the first quarter of 2016.  Expedited LTL fuel expenses increased due to an increase in year-over-year fuel prices.
Other Operating Expenses
Other operating expenses increased $1.4 million, or 11.8%, to $13.3 million during the three months ended March 31, 2017 from $11.9 million in the same period of 2016.  Other operating expenses were 9.5% of Expedited LTL operating revenue in the first quarter of 2017 compared to 8.9% in the same period of 2016. The increase in total dollars and as percentage of revenue was primarily the result of a $0.3 million increase in losses on disposed assets, a $0.3 million increase in professional fees and a $0.2 million increase in bad debt reserves. The remaining increase is due to increases in terminal and network costs resulting from increased revenue volumes discussed previously.
Income from Operations
Income from operations increased by $1.3 million, or 7.6%, to $18.4 million for the first quarter of 2017 compared with $17.1 million for the same period in 2016.  Income from operations as a percentage of Expedited LTL operating revenue was 13.1% for the three months ended March 31, 2017 compared with 12.7% in the same period of 2016. Improvement in income from operations was generated by purchased transportation and dock efficiencies, increased net fuel surcharge revenue, increased Complete activity and a full quarter of the first quarter 2016 change to our dim-factor standard.



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Expedited Truckload Services - Three Months Ended March 31, 2017 compared to Three Months Ended March 31, 2016

The following table sets forth our historical financial data of the Expedited Truckload Services segment for the three months ended March 31, 2017 and 2016 (in millions):
Truckload Premium Services Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
Percent of
 
March 31,
 
Percent of
 
 
 
Percent
 
2017
 
Revenue
 
2016
 
Revenue
 
Change
 
Change
Operating revenue
$
41.8

 
100.0
%
 
$
38.6

 
100.0
%
 
$
3.2

 
8.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:

 
 
 
 
 
 
 
 
 
 
Purchased transportation
29.3

 
70.1

 
26.5

 
68.6

 
2.8

 
10.6

Salaries, wages and employee benefits
5.2

 
12.4

 
5.0

 
13.0

 
0.2

 
4.0

Operating leases
0.1

 
0.3

 
0.1

 
0.3

 

 

Depreciation and amortization
1.5

 
3.6

 
1.7

 
4.4

 
(0.2
)
 
(11.8
)
Insurance and claims
1.1

 
2.6

 
0.9

 
2.3

 
0.2

 
22.2

Fuel expense
0.8

 
1.9

 
0.6

 
1.6

 
0.2

 
33.3

Other operating expenses
2.1

 
5.0

 
2.2

 
5.7

 
(0.1
)
 
(4.5
)
Total operating expenses
40.1

 
95.9

 
37.0

 
95.9

 
3.1

 
8.4

Income from operations
$
1.7

 
4.1
%
 
$
1.6

 
4.1
%
 
$
0.1

 
6.3
 %

Truckload Premium Services Operating Statistics
 
 
 
Three months ended
 
March 31,
 
March 31,
 
Percent
 
2017
 
2016
 
Change
 
 
 
 
 
 
    Company driver 1
1,907

 
1,769

 
7.8
 %
    Owner operator 1
11,743

 
12,052

 
(2.6
)
    Third party 1
9,082

 
7,074

 
28.4

Total Miles
22,732

 
20,895

 
8.8

 
 
 
 
 
 
Revenue per mile
$
1.79

 
$
1.81

 
(1.1
)
 
 
 
 
 
 
Cost per mile
$
1.38

 
$
1.38

 
 %
 
 
 
 
 
 
¹ - In thousands
 
 
 
 
 


Revenues
    
TLS revenue increased $3.2 million, or 8.3%, to $41.8 million in the first quarter of 2017 from $38.6 million in the first quarter of 2016.  TLS revenue increased due to an 8.8% increase in overall miles on new business wins. TLS had a 1.1% decrease in average revenue per mile on a decrease in pharmaceutical revenue which historically has a higher revenue per mile than traditional truckload business.

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Purchased Transportation

Purchased transportation costs for our TLS revenue increased $2.8 million, or 10.6%, to $29.3 million for the three months ended March 31, 2017 from $26.5 million for the same period in 2016. For the three months ended March 31, 2017, TLS purchased transportation costs represented 70.1% of TLS revenue compared to 68.6% for the same period in 2016.  The increase in TLS purchased transportation was attributable to a 8.9% increase in non-Company miles driven and a 1.0% increase in cost per mile during the three months ended March 31, 2017 compared to the same period in 2016. The increase in TLS non-Company miles driven was attributable to the business wins discussed above. The increase in cost per mile was due to TLS utilizing third party transportation to cover the additional miles, which are more costly than owner operators. The increase in TLS purchased transportation as a percentage of revenue was attributable to TLS cost per mile not decreasing despite the previously discussed decline in TLS revenue per mile.
Salaries, Wages, and Benefits

Salaries, wages and employee benefits of TLS increased by $0.2 million, or 4.0%, to $5.2 million in the first quarter of 2017 from $5.0 million in the same period of 2016.  Salaries, wages and employee benefits were 12.4% of TLS’s operating revenue in the first quarter of 2017 compared to 13.0% for the same period of 2016.  The decrease in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to the increase in revenue outpacing the increase in pay to Company drivers and office staff.
Depreciation and Amortization

Depreciation and amortization decreased $0.2 million, or 11.8%, to $1.5 million in the first quarter of 2017 from $1.7 million in the same period of 2016.  Depreciation and amortization expense as a percentage of TLS operating revenue was 3.6% in the first quarter of 2017 compared to 4.4% in the same period of 2016.  The decrease was due to the impairment of TQI intangible assets in the second quarter of 2016 leading to lower amortization expense. This decrease was partially offset by increased trailer depreciation on trailers purchased since the first quarter of 2016.
Insurance and Claims

TLS insurance and claims expense increased $0.2 million, or 22.2%, to $1.1 million for the three months ended March 31, 2017 from $0.9 million for the same period of 2016.  Insurance and claims were 2.6% of operating revenue for the three months ended March 31, 2017 compared to 2.3% in the same period of 2016. The increase was due to higher vehicle insurance premiums associated with our insurance plan renewals.
Fuel Expense

TLS fuel expense increased $0.2 million, or 33.3%, to $0.8 million for the first quarter of 2017 from $0.6 million for the same period of 2016.  Fuel expense as a percentage of TLS operating revenue was 1.9% in the first quarter of 2017 compared to 1.6% in the same period of 2016. The increase as a percentage of revenue was mostly attributable to an increase in year-over-year fuel prices and the increase in Company driver miles.
Other Operating Expenses

Other operating expenses decreased $0.1 million, or 4.5%, to $2.1 million during the three months ended March 31, 2017 from $2.2 million in the same period of 2016.  Other operating expenses were 5.0% of TLS operating revenue in the first quarter of 2016 compared to 5.7% in the same period of 2016.  The decline in other operating expenses was due to a decline in recruiting fees and maintenance costs, partly offset by higher tolls on the increase in miles driven.
Income from Operations
Income from operations increased by $0.1 million, or 6.3%, to $1.7 million during the first quarter of 2017 compared with $1.6 million of income from operations for the same period in 2016.  The improvement in income from operations was primarily due to lower amortization expense partly offset by a decline in revenue per mile.

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Pool Distribution - Three Months Ended March 31, 2017 compared to Three Months Ended March 31, 2016

The following table sets forth our historical financial data of the Pool Distribution segment for the three months ended March 31, 2017 and 2016 (in millions):

Pool Distribution Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
Percent of
 
March 31,
 
Percent of
 
 
 
Percent
 
2017
 
Revenue
 
2016
 
Revenue
 
Change
 
Change
Operating revenue
$
37.8

 
100.0
%
 
$
33.2

 
100.0
%
 
$
4.6

 
13.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
9.9

 
26.2

 
8.9

 
26.8

 
1.0

 
11.2

Salaries, wages and employee benefits
14.4

 
38.1

 
12.7

 
38.3

 
1.7

 
13.4

Operating leases
3.2

 
8.5

 
2.9

 
8.7

 
0.3

 
10.3

Depreciation and amortization
1.8

 
4.7

 
1.5

 
4.5

 
0.3

 
20.0

Insurance and claims
1.0

 
2.6

 
1.2

 
3.6

 
(0.2
)
 
(16.7
)
Fuel expense
1.2

 
3.2

 
1.0

 
3.0

 
0.2

 
20.0

Other operating expenses
4.9

 
13.0

 
4.9

 
14.8

 

 

Total operating expenses
36.4

 
96.3

 
33.1

 
99.7

 
3.3

 
10.0

Income from operations
$
1.4

 
3.7
%
 
$
0.1

 
0.3
%
 
$
1.3

 
1,300.0
 %

Revenues

Pool Distribution (Pool) operating revenue increased $4.6 million, or 13.9%, to $37.8 million for the three months ended March 31, 2017 from $33.2 million for the same period in 2016.  The increase was attributable to new customer business wins, current year rate increases and increased volume from previously existing customers.
Purchased Transportation

Pool purchased transportation increased $1.0 million, or 11.2%, to $9.9 million for the three months ended March 31, 2017 compared to $8.9 million for the same period of 2016.  Pool purchased transportation as a percentage of revenue was 26.2% for the three months ended March 31, 2017 compared to 26.8% for the same period of 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

Pool salaries, wages and employee benefits increased $1.7 million, or 13.4%, to $14.4 million for the three months ended March 31, 2017 compared to $12.7 million for the same period of 2016.  As a percentage of Pool operating revenue, salaries, wages and benefits decreased to 38.1% for the three months ended March 31, 2017 compared to 38.3% for the same period in 2016.   The decrease in salaries, wages and benefits as a percentage of revenue was the result of decreases in Company driver pay, administrative salaries, wages and benefits and workers' compensation costs as a percentage of revenue. These costs benefited from the revenue volumes discussed above. These decreases were mostly offset by an increase in dock pay as a percentage of revenue. 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 $0.3 million, or 10.3%, to $3.2 million for the three months ended March 31, 2017 from $2.9 million for the same period in 2016.  Operating leases were 8.5% of Pool operating revenue for the three months ended March 31, 2017

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compared with 8.7% in the same period of 2016.  Operating leases increased due to additional truck leases and rentals used to provide capacity for additional business wins throughout the network.
Depreciation and Amortization

Pool depreciation and amortization increased $0.3 million, or 20.0%, to $1.8 million for the three months ended March 31, 2017 from $1.5 million for the same period in 2016. Depreciation and amortization expense as a percentage of Pool operating revenue was 4.7% in the first quarter of 2017 compared to 4.5% in the same period of 2016. The increase in Pool depreciation and amortization is to due to the allocation of trailer depreciation, which reflect Pool's increased utilization of our trailer fleet.
Insurance and Claims

Pool insurance and claims expense decreased $0.2 million, or 16.7%, to $1.0 million for the the three months ended March 31, 2017 from $1.2 million for the same period of 2016.  Insurance and claims were 2.6% of operating revenue for the three months ended March 31, 2017 compared to 3.6% in the same period of 2016. The decrease was due to a $0.2 million decrease in cargo claims and claims related fees.
Fuel Expense

Pool fuel expense increased $0.2 million, or 20.0%, to $1.2 million for the first quarter of 2017 from $1.0 million in the same period of 2016.  Fuel expenses were 3.2% of Pool operating revenue in the first quarter of 2017 compared to 3.0% in the first quarter of 2016.  Pool fuel expenses increased due to an increase in year-over-year fuel prices and higher revenue volumes. These increases were partially offset by increased utilization of owner operators.
Other Operating Expenses

Pool other operating expenses were $4.9 million for the three months ended March 31, 2017 and 2016.  Pool other operating expenses for the first quarter of 2017 were 13.0% compared to 14.8% for the same period of 2016.  The decrease in percentage of revenue is due to improved margins of agent stations. This decrease was partly offset by increases in equipment maintenance and terminal expenses associated with the volume increases discussed previously.
Income from Operations

Income from operations increased to $1.4 million for the first quarter of 2017 compared with $0.1 million for the same period in 2016.  Income from operations as a percentage of Pool operating revenue was 3.7% for the three months ended March 31, 2017 compared to 0.3% for the same period of 2016.  The improvement in Pool operating results was primarily the result of increased revenue volumes, current year rate increases, the reduction of cargo claims, agent station margin improvements and purchased transportation efficiencies.


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Intermodal - Three Months Ended March 31, 2017 compared to Three Months Ended March 31, 2016

The following table sets forth our historical financial data of the Intermodal segment for the three months ended March 31, 2017 and 2016 (in millions):

Intermodal Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
Percent of
 
March 31,
 
Percent of
 
 
 
Percent
 
2017
 
Revenue
 
2016
 
Revenue
 
Change
 
Change
Operating revenue
$
28.3

 
100.0
%
 
$
24.6

 
100.0
%
 
$
3.7

 
15.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:

 
 
 
 
 
 
 
 
 
 
Purchased transportation
9.7

 
34.3

 
8.4

 
34.1

 
1.3

 
15.5

Salaries, wages and employee benefits
6.7

 
23.7

 
6.0

 
24.4

 
0.7

 
11.7

Operating leases
3.1

 
10.9

 
3.0

 
12.2

 
0.1

 
3.3

Depreciation and amortization
1.1

 
3.9

 
0.9

 
3.7

 
0.2

 
22.2

Insurance and claims
0.8

 
2.8

 
0.8

 
3.2

 

 

Fuel expense
0.7

 
2.5

 
0.6

 
2.4

 
0.1

 
16.7

Other operating expenses
3.6

 
12.7

 
2.5

 
10.2

 
1.1

 
44.0

Total operating expenses
25.7

 
90.8

 
22.2

 
90.2

 
3.5

 
15.8

Income from operations
$
2.6

 
9.2
%
 
$
2.4

 
9.8
%
 
$
0.2

 
8.3
%

Revenues

Intermodal operating revenue increased $3.7 million, or 15.0%, to $28.3 million for the three months ended March 31, 2017 from $24.6 million for the same period in 2016.  The increases in operating revenue were primarily attributable to the acquisition of Ace and Triumph, the impact of increased fuel surcharges and increased rental and storage revenues.

Purchased Transportation

Intermodal purchased transportation increased $1.3 million, or 15.5%, to $9.7 million for the three months ended March 31, 2017 from $8.4 million for the same period in 2016.  Intermodal purchased transportation as a percentage of revenue was 34.3% for the three months ended March 31, 2017 compared to 34.1% for the three months ended March 31, 2016.  The increase in Intermodal purchased transportation as a percentage of revenue was attributable to higher utilization of owner-operators as opposed to Company-employed drivers in select markets. The increase as a percentage of revenue was partly offset by a change in business mix as revenues, such as rental and storage revenues, that do not utilize purchased transportation increased in the first quarter of 2017 compared to the same period of 2016.

Salaries, Wages, and Benefits

Intermodal salaries, wages and employee benefits increased $0.7 million, or 11.7%, to $6.7 million for the three months ended March 31, 2017 compared to $6.0 million for the three months ended March 31, 2016.  As a percentage of Intermodal operating revenue, salaries, wages and benefits decreased to 23.7% for the three months ended March 31, 2017 compared to 24.4% for the same period in 2016. The improvement in salaries, wages and employee benefits as a percentage of revenue is attributable to less reliance on Company-employed drivers.

Operating Leases

Operating leases increased $0.1 million, or 3.3%, to $3.1 million for the three months ended March 31, 2017 compared to $3.0 million for the same period of 2016.  Operating leases were 10.9% of Intermodal operating revenue for the three months ended March 31, 2017 compared with 12.2% in the same period of 2016.  Operating leases decreased as a percentage of revenue due to

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reduced usage of truck rentals as Intermodal increased utilization of owner-operators. This reduction was partly offset by increases to facility rent from additional facilities assumed with the acquisitions.

Depreciation and Amortization

Depreciation and amortization increased $0.2 million, or 22.2%, to $1.1 million for the three months ended March 31, 2017 compared to $0.9 million for the same period in 2016. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.9% in the first quarter of 2017 compared to 3.7% in the same period of 2016. The higher depreciation and amortization was due to increased tractors and intangible assets acquired from Triumph.

Insurance and Claims

Intermodal insurance and claims was $0.8 million for the three months ended March 31, 2017 and 2016. Intermodal insurance and claims were 2.8% of oper