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, 2018
Commission File No. 000-22490

corplogoa10.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 23, 2018 was 29,414,997.



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,
2018
 
December 31,
2017
 
 
 
(As Adjusted)
Assets
 
 
 
Current assets:
 
 
 
Cash
$
12,735

 
$
3,893

Accounts receivable, less allowance of $3,158 in 2018 and $3,006 in 2017
146,191

 
147,948

Other current assets
11,147

 
15,807

Total current assets
170,073

 
167,648

 
 
 
 
Property and equipment
402,688

 
399,235

Less accumulated depreciation and amortization
199,088

 
193,123

Total property and equipment, net
203,600

 
206,112

Goodwill and other acquired intangibles:
 

 
 

Goodwill
191,671

 
191,671

Other acquired intangibles, net of accumulated amortization of $73,837 in 2018 and $71,527 in 2017
108,938

 
111,247

Total goodwill and other acquired intangibles, net
300,609

 
302,918

Other assets
15,925

 
15,944

Total assets
$
690,207

 
$
692,622

 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
30,004

 
$
30,723

Accrued expenses
35,976

 
35,069

Current portion of debt and capital lease obligations
351

 
359

Total current liabilities
66,331

 
66,151

 
 
 
 
Long-term debt and capital lease obligations, less current portion
40,522

 
40,588

Other long-term liabilities
24,118

 
24,104

Deferred income taxes
32,793

 
29,080

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock

 

Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 29,161,999 in 2018 and 29,454,062 in 2017
290

 
295

Additional paid-in capital
197,607

 
195,346

Retained earnings
328,546

 
337,058

Total shareholders’ equity
526,443

 
532,699

Total liabilities and shareholders’ equity
$
690,207

 
$
692,622

 
 
 
 
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,
2018
 
March 31,
2017
 
 
 
(As Adjusted)
Operating revenue
$
302,608

 
$
262,046

 
 
 
 
Operating expenses:
 
 
 
Purchased transportation
139,666

 
117,695

Salaries, wages and employee benefits
69,581

 
61,928

Operating leases
17,964

 
15,601

Depreciation and amortization
10,690

 
10,033

Insurance and claims
7,153

 
5,806

Fuel expense
5,554

 
3,680

Other operating expenses
27,765

 
23,560

Total operating expenses
278,373

 
238,303

Income from operations
24,235

 
23,743

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(371
)
 
(282
)
Other, net

 
(26
)
Total other income (expense)
(371
)
 
(308
)
Income before income taxes
23,864

 
23,435

Income tax expense
6,123

 
8,854

Net income and comprehensive income
$
17,741


$
14,581

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.60

 
$
0.48

Diluted
$
0.60

 
$
0.48

 
 
 
 
Dividends per share:
$
0.15

 
$
0.15


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,
2018
 
March 31,
2017
 
 
 
 
 
(As Adjusted)
Operating activities:
 
 
 
Net income
$
17,741

 
$
14,581

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
10,690

 
10,033

Share-based compensation
2,261

 
1,962

Loss on disposal of property and equipment
82

 
488

Provision for loss on receivables
134

 
22

Provision for revenue adjustments
817

 
718

Deferred income tax
3,713

 
131

Changes in operating assets and liabilities
 
 
 
Accounts receivable
805

 
(1,470
)
Other current assets
2,715

 
2,153

Income taxes
1,768

 
8,434

Accounts payable and accrued expenses
87

 
9

Net cash provided by operating activities
40,813

 
37,061

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposal of property and equipment
644

 
790

Purchases of property and equipment
(6,221
)
 
(2,652
)
Other
(91
)
 
128

Net cash used in investing activities
(5,668
)
 
(1,734
)
 
 
 
 
Financing activities:
 
 
 
Payments of debt and capital lease obligations
(74
)
 
(27,857
)
Proceeds from senior credit facility

 
13,000

Proceeds from exercise of stock options

 
1,524

Payments of cash dividends
(4,413
)
 
(4,539
)
Repurchase of common stock (repurchase program)
(19,993
)
 
(9,996
)
Cash settlement of share-based awards for tax withholdings
(1,823
)
 
(1,635
)
Net cash used in financing activities
(26,303
)
 
(29,503
)
Net increase in cash
8,842

 
5,824

Cash at beginning of period
3,893

 
8,511

Cash at end of period
$
12,735

 
$
14,335

 
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, 2018


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 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 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 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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.

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 January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): "Simplifying the Accounting for Goodwill Impairment." Under the current guidance for assessing goodwill for impairment, an entity can first assess qualitative factors to determine whether a two-step goodwill impairment test is necessary. Under the new standard, a goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill, thus no longer requiring the two-step method. The guidance requires prospective adoption and will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption of this guidance is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have adopted this guidance and do not expect any impact to the consolidated financial statements.

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, 2018

goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a full retrospective or modified retrospective adoption approach with a cumulative effect adjustment recorded in either scenario as necessary upon transition.

As permitted by the guidance, we implemented the use of full retrospective presentation, which required the Company to restate each prior reporting period presented. 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, increasing revenue and expenses by approximately $14,203 for the three months ended March 31, 2017 with no impact on operating income.

In addition, based on a review 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 receive and consume the benefits of these services as the entity performs 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 language to our 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 time.

Management notes that the FASB’s basis for conclusions to the new revenue standard includes an example of a transportation contract to move goods from one city to another. In paragraph BC126 of ASU 2014-09 (ASC 606), the FASB explained the application of over time revenue recognition guidance to transportation services. Forward Air’s conclusion is consistent with the FASB’s conclusion in BC126.

Once management concluded that revenue would be recognized over time under ASC 606, management determined an appropriate measure of progress of recognizing revenue over time toward complete satisfaction of a performance obligation. Most of the company’s services are completed in a short amount of time; therefore, a relatively small number of contracts in a quarter are open as of the end of the quarter. Consequently, any reasonable measure of progress will result in materially the same amount of revenue in a quarter. Management concluded that the measure of progress would be days of shipping. For example, if a transportation service performance obligation takes three days to complete and a quarter ends on day two of the services, management would recognize two-thirds of the revenue for the transportation performance obligation.

Our revenue from contracts with customers is separated by 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.

We recast certain prior period amounts to conform with the adoption of the revenue recognition standard, as shown in the following tables:


7

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018

 
 
Three months ended March 31, 2017
(In thousands, except per share data)
 
As Previously Reported
 
Adjustments
 
As Adjusted
Income Statement:
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
LTL revenue
 
$
140,598

 
$
8,167

 
$
148,765

Truckload Premium Services
 
41,785

 
5,303

 
47,088

Pool Distribution
 
37,823

 
978

 
38,801

Intermodal
 
28,291

 
616

 
28,907

Eliminations and other operations
 
(1,515
)
 

 
(1,515
)
Consolidated revenue
 
246,982

 
15,064

 
262,046

 
 
 
 
 
 
 
Operating Expenses
 
223,793

 
14,510

 
238,303

Income from operations
 
23,189

 
554

 
23,743

Income tax expenses
 
8,638

 
216

 
8,854

Net Income
 
14,243

 
338

 
14,581

Diluted earnings per share
 
$
0.47

 
$
0.01

 
$
0.48


 
 
December 31, 2017
 
 
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


3.    Acquisitions and Goodwill

CST Acquisitions

As part of the Company's strategy to expand its Intermodal operations, in May 2017, we 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 a potential earnout of $1,000. The acquisition was funded by a combination of cash on hand and funds from our revolving credit facility. Atlantic was a privately held provider of intermodal, drayage and related services headquartered in Charleston, South Carolina. It also has terminal operations in Atlanta, Charlotte, Houston, Jacksonville, Memphis, Nashville, Norfolk and Savannah. These locations allowed Intermodal to significantly expand its footprint in the southeastern region. In October 2017, we also acquired certain assets of Kansas City Logistics, LLC ("KCL") for $640 and a potential earnout of $100. KCL provided CST with an expanded footprint in the Kansas and Missouri markets. The assets, liabilities, and operating results of these collective acquisitions have been included in the Company's consolidated financial statements from their dates of acquisition and have been included in the Intermodal reportable segment.
Allocations of Purchase Prices
The following table presents the allocation of the Atlantic purchase price to the assets acquired and liabilities assumed based on their estimated fair values and resulting residual goodwill (in thousands):

8

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018


Atlantic
KCL

May 7, 2017
October 22, 2017
Tangible assets:
 
 
Property and equipment
$
1,821

$
223

Total tangible assets
1,821

223

Intangible assets:
 
 
Non-compete agreements
1,150

6

Customer relationships
13,400

234

Goodwill
6,719

277

Total intangible assets
21,269

517

Total assets acquired
23,090

740


 
 
Liabilities assumed:
 
 
Current liabilities
590

100

Total liabilities assumed
590

100

Net assets acquired
$
22,500

$
640

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

Useful Lives

Atlantic
KCL
Customer relationships
15 years
15 years
Non-compete agreements
5 years
2 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

There were no changes to goodwill for the three months ended March 31, 2018. Approximately $112,527 of goodwill is deductible for tax purposes. The following is a summary of the goodwill balances as of March 31, 2018.
 
 
Ending balance, March 31, 2018
Expedited LTL
 
 
Goodwill
 
$
97,593

Accumulated Impairment
 

 
 
 
TLS
 
 
Goodwill
 
45,164

Accumulated Impairment
 
(25,686
)
 
 
 
Pool Distribution
 
 
Goodwill
 
12,359

Accumulated Impairment
 
(6,953
)
 
 
 
Intermodal
 
 
Goodwill
 
69,194

Accumulated Impairment
 

 
 
 
Total
 
$
191,671


9

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018

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, 2018 and 2017 were as follows:

 
 
 
 

Three months ended

March 31,
2018

March 31,
2017
Expected dividend yield
1.1
%

1.3
%
Expected stock price volatility
24.9
%

28.7
%
Weighted average risk-free interest rate
2.6
%

2.0
%
Expected life of options (years)
6.0


6.0

Weighted average grant date fair value
$
15


$
13

 
 
 
 

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


Three months ended March 31, 2018







Weighted-



Weighted-

Aggregate

Average



Average

Intrinsic

Remaining

Options

Exercise

Value

Contractual

(000)

Price

(000)

Term
Outstanding at December 31, 2017
440


$
45





Granted
86


59





Exercised







Forfeited







Outstanding at March 31, 2018
526


$
47


$
3,075


4.5
Exercisable at March 31, 2018
313


$
44


$
2,877


3.5
 

10

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018


Three months ended

March 31,
2018

March 31,
2017
Share-based compensation for options
$
342


$
363

Tax benefit for option compensation
$
88


$
134

Unrecognized compensation cost for options, net of estimated forfeitures
$
2,589


$
2,683

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



 
 
 
 
 
 
 
 
 
 
 
 
Employee Activity - Non-vested Shares

Non-vested share grants to employees vest ratably over a three-year period.  The 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, 2018



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2017
227


$
47



Granted
122


58



Vested
(105
)

56



Forfeited
(2
)

52



Outstanding and non-vested at March 31, 2018
242


$
52


$
12,690



Three months ended

March 31,
2018

March 31,
2017
Share-based compensation for non-vested shares
$
1,399


$
1,246

Tax benefit for non-vested share compensation
$
360


$
459

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
11,747


$
10,470

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 25% 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:


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Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018


Three months ended

March 31,
2018

March 31,
2017
Expected stock price volatility
24.3
%

24.7
%
Weighted average risk-free interest rate
2.2
%

1.4
%

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

Three months ended March 31, 2018



Weighted-

Aggregate

Performance

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2017
69


$
58



Granted
18


72



Forfeited
(22
)

$
67



Outstanding and non-vested at March 31, 2018
65


$
58


$
3,795



Three months ended

March 31,
2018

March 31,
2017
Share-based compensation for performance shares
$
335


$
184

Tax benefit for performance share compensation
$
86


$
68

Unrecognized compensation cost for performance shares, net of estimated forfeitures
$
2,343


$
2,612

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



 
 
 
 
 
 
 
 
 
 

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, 2018



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2017
11


$
52



Granted
1


61



Vested





Forfeited


$



Outstanding and non-vested at March 31, 2018
12


$
52


$
615



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Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018


Three months ended

March 31,
2018

March 31,
2017
Share-based compensation for non-vested shares
$
185


$
169

Tax benefit for non-vested share compensation
$
47


$
63

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
65


$
77

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



 
 
 
 
 
 
 
 
 
 


5.    Senior Credit Facility

On September 29, 2017, the Company, entered into a five-year senior unsecured revolving credit facility (the “Facility”) with a maximum aggregate principal amount of $150,000, with a sublimit of $30,000 for letters of credit and a sublimit of $30,000 for swing line loans. The Facility may be increased by up to $100,000 to a maximum aggregate principal amount of $250,000 pursuant to the terms of the credit agreement, subject to the lenders’ agreement to increase their commitments or the addition of new lenders extending such commitments. Such increases to the Facility may be in the form of additional revolving credit loans, term loans or a combination thereof, and are contingent upon there being no events of default under the Facility and satisfaction of other conditions precedent and are subject to the other limitations set forth in the credit agreement.

The Facility is scheduled to mature in September 2022 and may be used to refinance existing indebtedness of the Company and for working capital, capital expenditures and other general corporate purposes. The Facility refinanced the Company’s existing obligations for its unsecured credit facility under the credit agreement dated as of February 4, 2015, as amended, which was terminated as of the date of the new Facility.

Unless the Company elects otherwise under the credit agreement, interest on borrowings under the Facility is based on the highest of (a) the federal funds rate (not less than 0%) plus 0.5%, (b) the administrative agent's prime rate and (c) the LIBOR Rate plus 1.0%, in each case plus a margin that can range from 0.3% to 0.8% with respect to the Facility depending on the Company’s ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization, as set forth in the credit agreement. Payments of interest for each loan that is based on the LIBOR Rate are due in arrears on the last day of the interest period applicable to such loan (with interest periods of one, two or three months being available, at the Company’s option). Payments of interest on loans that are not based on the LIBOR Rate are due on the last day of each quarter ended March 31, June 30, September 30 and December 31 of each year. All unpaid amounts of principal and interest are due at maturity. As of March 31, 2018, we had $40,500 in borrowings outstanding under the revolving credit facility, $7,932 utilized for outstanding letters of credit and $101,568 of available borrowing capacity under the revolving credit facility.  The interest rate on the outstanding borrowing under the revolving credit facility was 3.6% at March 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.

Our new facility replaced our previously existing unsecured credit facility, which had 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 previous revolving credit facility was scheduled to expire in February 2020.


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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018

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,
2018
 
March 31,
2017
 
 
 
 
(As Adjusted)
Numerator:
 
 
 
 
Net income and comprehensive income
 
$
17,741

 
$
14,581

Income allocated to participating securities
 
(145
)
 
(122
)
Numerator for basic and diluted income per share - net income
 
$
17,596

 
$
14,459

Denominator (in thousands):
 
 

 
 

Denominator for basic income per share - weighted-average shares
 
29,375

 
29,998

Effect of dilutive stock options (in thousands)
 
70

 
75

Effect of dilutive performance shares (in thousands)
 
35

 
33

Denominator for diluted income per share - adjusted weighted-average shares
 
29,480

 
30,106

Basic net income per share
 
$
0.60

 
$
0.48

Diluted net income per share
 
$
0.60

 
$
0.48


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,
2018
 
March 31,
2017
Anti-dilutive stock options (in thousands)
67

 
282

Anti-dilutive performance shares (in thousands)
11

 
15

Anti-dilutive non-vested shares and deferred stock units (in thousands)
9

 

Total anti-dilutive shares (in thousands)
87

 
297


7.    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 was formerly called the “Tax Cuts and Jobs Act” and is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act provides for significant changes in the U.S. Internal Revenue Code of 1986, as amended. The U.S. Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017. Beginning on January 1, 2018, the U.S. Tax Act lowers the U.S. corporate income tax rate from 35% to 21% on our U.S. earnings from that date and beyond.

The ultimate impact of the U.S. Tax Act on our reported results in 2018 may differ from the estimates provided herein, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the U.S. Tax Act different from that presently contemplated. On December 22, 2017, the SEC staff issued SAB 118 that allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We currently are analyzing the 2017 Tax Act, and in certain areas, have made reasonable estimates of the effects on our consolidated financial statements and tax disclosures, including the changes to our existing deferred tax balances.



14

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018

Tax Rate

For the three months ended March 31, 2018 and 2017, the effective income tax rates varied from the statutory federal income tax rate of 21.0% and 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, 2018 was 25.7% compared to a rate of 37.8% for the same period in 2017.  The lower effective tax rate for the first quarter of 2018 is the result of the enactment of the U.S. Tax Act, which lowered the statutory federal income tax rate to 21.0% from 35.0%. The lower rate was partly offset by fuel tax benefits taken in the first quarter of 2018 that were not deductible for tax purposes and 2017 benefiting from qualified production property deductions that were not renewed in the U.S. Tax Act.

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:

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 bears variable interest rates plus additional basis points based upon covenants related to total indebtedness to earnings.  As the revolving credit facility 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, 2018
 
 
Carrying Value
 
Fair Value
Capital leases
 
$
635

 
$
649


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 each quarter of 2017 and the first quarter of 2018, our Board of Directors declared a cash dividend of $0.15 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. The following table summarizes our share repurchases for the three months ended March 31, 2018 and 2017.
 
Three months ended
 
March 31, 2018

 
March 31, 2017

Shares repurchased
364,286

 
204,809

Cost of shares repurchased
$
19,993

 
$
9,996

Average cost per share
$
54.88

 
$
48.81

As of March 31, 2018, 1,454,379 shares are available to be purchased under the 2016 Plan.

10.    Commitments and Contingencies


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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018

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. We renewed our liability insurance policies on April 1, 2018 and took on additional risk exposure for vehicle liability claims by increasing our self-insurance retention and deductible levels for our LTL and Pool businesses. See “Item 1A - Risk Factors” for additional details related to the risks of our insurance coverage. 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 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, 2017. 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 actuarial analysis are not passed to the segments, but reported 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 cost basis of shared assets 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. 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, 2018 and 2017.

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Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
March 31, 2018

 
 
Three months ended March 31, 2018
 
 
Expedited LTL
 
Truckload Premium
 
Pool Distribution
 
Intermodal
 
Eliminations & other
 
Consolidated
External revenues
 
$
168,363

 
$
43,161

 
$
42,607

 
$
48,477

 
$

 
$
302,608

Intersegment revenues
 
1,581

 
2,933

 
64

 
91

 
(4,669
)
 

Depreciation and amortization
 
5,528

 
1,757

 
1,804

 
1,601

 

 
10,690

Share-based compensation expense
 
1,675

 
180

 
116

 
290

 

 
2,261

Interest expense
 

 
1

 

 
13

 
357

 
371

Income from operations
 
20,773

 
(43
)
 
1,371

 
3,469

 
(1,335
)
 
24,235

Total assets
 
634,599

 
65,263

 
57,324

 
150,321

 
(217,300
)
 
690,207

Capital expenditures
 
6,058

 
4

 
78

 
81

 

 
6,221

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2017
 
 
(As Adjusted)
 
 
Expedited LTL
 
Truckload Premium
 
Pool Distribution
 
Intermodal
 
Eliminations & other
 
Consolidated
External revenues
 
$
148,179

 
$
46,240

 
$
38,731

 
$
28,896

 
$

 
$
262,046

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
 
18,928

 
1,755

 
1,367

 
2,555

 
(862
)
 
23,743

Total assets
 
634,039

 
55,523

 
50,120

 
132,337

 
(232,535
)
 
639,484

Capital expenditures
 
2,511

 
6

 
83

 
52

 

 
2,652

 
 
 
 
 
 
 
 
 
 
 
 
 

17

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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, Truckload Premium Services ("TLS"), Intermodal and Pool Distribution ("Pool").
 
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 and Southeast, with a smaller operational presence in the Southwest. We plan to grow Intermodal’s geographic footprint through acquisitions as well as greenfield start-ups where we do not have an acceptable acquisition target.

In our Pool Distribution segment, we provide high-frequency handling and distribution 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

CST Acquisitions

As part of our strategy to expand our Intermodal operations, in May 2017, we acquired certain assets of Atlantic for $22.5 million and a potential earnout of $1.0 million and in October 2017, we acquired certain assets of KCL for $0.7 million and a potential earnout of $0.1 million. These acquisitions provide an opportunity for our Intermodal segment to expand into additional geographic markets or add volumes to our existing locations. The assets, liabilities, and operating results of these acquisitions have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment.




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Table of Contents


Results from Operations
The following table sets forth our consolidated historical financial data for the three months ended March 31, 2018 and 2017 (in millions):
 
Three months ended March 31
 
2018
 
2017
 
Change
 
Percent Change
 
 
 
(As Adjusted)
 
 
 
 
Operating revenue:
 
 
 
 
 
 
 
Expedited LTL
$
169.9

 
$
148.8

 
$
21.1

 
14.2
 %
Truckload Premium Services
46.1

 
47.1

 
(1.0
)
 
(2.1
)
Pool Distribution
42.7

 
38.8

 
3.9

 
10.1

Intermodal
48.6

 
28.9

 
19.7

 
68.2

Eliminations and other operations
(4.7
)
 
(1.6
)
 
(3.1
)
 
193.8

Operating revenue
302.6

 
262.0

 
40.6

 
15.5

Operating expenses:
 
 
 
 
 
 
 
   Purchased transportation
139.7

 
117.7

 
22.0

 
18.7

   Salaries, wages, and employee benefits
69.6

 
61.9

 
7.7

 
12.4

   Operating leases
18.0

 
15.6

 
2.4

 
15.4

   Depreciation and amortization
10.7

 
10.0

 
0.7

 
7.0

   Insurance and claims
7.1

 
5.8

 
1.3

 
22.4

   Fuel expense
5.5

 
3.7

 
1.8

 
48.6

   Other operating expenses
27.8

 
23.6

 
4.2

 
17.8

      Total operating expenses
278.4

 
238.3

 
40.1

 
16.8

Income from operations:
 
 
 
 
 
 
 
Expedited LTL
20.8

 
18.9

 
1.9

 
10.1

Truckload Premium Services

 
1.7

 
(1.7
)
 
(100.0
)
Pool Distribution
1.4

 
1.4

 

 

Intermodal
3.5

 
2.6

 
0.9

 
34.6

Other operations
(1.5
)
 
(0.9
)
 
(0.6
)
 
66.7

Income from operations
24.2

 
23.7

 
0.5

 
2.1

Other expense:
 
 
 
 
 
 
 
   Interest expense
(0.4
)
 
(0.3
)
 
(0.1
)
 
33.3

      Total other expense
(0.4
)
 
(0.3
)
 
(0.1
)
 
33.3

Income before income taxes
23.8

 
23.4

 
0.4

 
1.7

Income taxes
6.1

 
8.8

 
(2.7
)
 
(30.7
)
Net income
$
17.7

 
$
14.6

 
$
3.1

 
21.2
 %
During the three months ended March 31, 2018, we experienced a 15.5% increase in our consolidated revenues compared to the three months ended March 31, 2017. Operating income increased $0.5 million, or 2.1%, to $24.2 million for the three months ended March 31, 2018 from $23.7 million for the same period of 2017.

Segment Operations

Expedited LTL's revenue increased $21.1 million, or 14.2%, and operating income increased $1.9 million, or 10.1% for the three months ended March 31, 2018, compared to the same period in 2017. 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 2017. The increase in income from operations was due to increases in revenue due to higher tonnage, higher fuel surcharge and higher pickup and delivery 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.


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TLS revenue decreased $1.0 million, or 2.1% and operating income decreased $1.7 million for the three months ended March 31, 2018, compared to the same period in 2017. The revenue decrease was due to a decrease in overall miles due to culling of poorly priced business as well as TLS's reduced fleet capacity versus the first quarter of last year. The increased revenue per mile was primarily driven by rate increases to existing customers and, to a lesser extent, the aforementioned culling of poorly priced business. The deterioration in income from operations was due to a decrease in revenue and increased utilization of third party carriers which led to the increase in cost per mile outpacing the increase in revenue per mile.

Pool Distribution revenue increased $3.9 million, or 10.1%, and operating income was unchanged at $1.4 million for the three months ended March 31, 2018 and 2017.  The revenue increase was due to new business wins, rate increases and increased volumes from existing customers and lanes. The deterioration in Pool operating income as a percentage of revenue was primarily the result of increased use of third-party carriers, equipment rentals to cover additional volumes and higher fuel prices mostly offset by current year rate increases.

Intermodal revenue increased $19.7 million, or 68.2%, and operating income increased $0.9 million, or 34.6%, for the three months ended March 31, 2018, compared to the same period in 2017. The increases in operating revenue and income were primarily attributable to the Atlantic and KLC acquisitions and the positive impact of increased fuel surcharges.

Fuel Surcharge

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 three months ended March 31, 2018, total fuel surcharge revenue increased 45.6% as compared to the same period in 2017, mostly due to increased fuel prices and rates and increased volumes in the Expedited LTL and Intermodal segment.

Interest Expense

Interest expense was $0.4 million for the three months ended March 31, 2018 compared to $0.3 million for the same period of 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 first quarter of 2018 was 25.7% compared to a rate of 37.8% for the same period in 2017. The lower effective tax rate for the first quarter of 2018 is 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%.

Net Income

As a result of the foregoing factors, net income increased by $3.1 million, or 21.2%, to $17.7 million for the first quarter of 2018 from $14.6 million for the same period in 2017.

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Table of Contents


Expedited LTL - Three Months Ended March 31, 2018 compared to Three Months Ended March 31, 2017

The following table sets forth our historical financial data of the Expedited LTL segment for the three months ended March 31, 2018 and 2017 (in millions):
Expedited LTL Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
Percent of
 
March 31,
 
Percent of
 
 
 
Percent
 
2018
 
Revenue
 
2017
 
Revenue
 
Change
 
Change
 
 
 
 
 
(As Adjusted)
 
 
 
 
 
 
Operating revenue
$
169.9

 
100.0
%
 
$
148.8

 
100.0
%
 
$
21.1

 
14.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
78.4

 
46.2

 
63.1

 
42.4

 
15.3

 
24.2

Salaries, wages and employee benefits
37.7

 
22.2

 
34.9

 
23.5

 
2.8

 
8.0

Operating leases
9.9

 
5.8

 
9.2

 
6.2

 
0.7

 
7.6

Depreciation and amortization
5.5

 
3.2

 
5.6

 
3.8

 
(0.1
)
 
(1.8
)
Insurance and claims
3.2

 
1.9

 
2.9

 
1.9

 
0.3

 
10.3

Fuel expense
1.3

 
0.8

 
0.9

 
0.6

 
0.4

 
44.4

Other operating expenses
13.1

 
7.7

 
13.3

 
8.9

 
(0.2
)
 
(1.5
)
Total operating expenses
149.1

 
87.8

 
129.9

 
87.3

 
19.2

 
14.8

Income from operations
$
20.8

 
12.2
%
 
$
18.9

 
12.7
%
 
$
1.9

 
10.1
 %

Expedited LTL Operating Statistics
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
March 31,
 
Percent
 
2018
 
2017
 
Change
 
 
 
(As Adjusted)
 
 
 
 
 
 
 
 
Business days
64

 
64

 
%
 
 
 
 
 
 
Tonnage
 
 
 
 
 
    Total pounds ¹
608,822

 
565,682

 
7.6

    Pounds per day ¹
9,513

 
8,839

 
7.6

 
 
 
 
 
 
Shipments
 
 
 
 
 
    Total shipments
970,820

 
901,636

 
7.7

    Shipments per day
15,169

 
14,088

 
7.7

    Total shipments with pickup and/or delivery
231,410

 
210,002

 
10.2

 
 
 
 
 
 
Revenue per hundredweight
$
25.18

 
$
24.01

 
4.9

Revenue per hundredweight, ex fuel
21.66

 
21.46

 
0.9

 
 
 
 
 
 
Revenue per shipment
158

 
151

 
4.6

Revenue per shipment, ex fuel
136

 
135

 
0.7

 
 
 
 
 
 
Weight per shipment
627

 
627

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

21

Table of Contents


Revenues
Expedited LTL had operating revenue increase $21.1 million, or 14.2%, to $169.9 million from $148.8 million, accounting for 56.2% of consolidated operating revenue for the three months ended March 31, 2018 compared to 56.8% for the same period in 2017. The increase in Expedited LTL's revenue was the result of higher LTL volumes, increased pick up and delivery ("Complete") shipments and increased fuel surcharge revenue as a result of the increase in fuel prices since the first quarter of 2017. Linehaul revenue, which is the largest portion of Expedited LTL revenue, increased $6.9 million, or 7.0%, on higher tonnage partly offset by the decrease in average revenue per hundredweight, ex fuel noted in the preceding table. The increase in tonnage is due to a growing percentage of total volume from class-rated shipments, which have higher density attributes and a slightly lower length of haul than our traditional shipments. While increasing tonnage, class rated tonnage has caused a decrease in average base revenue per pound.
The $21.1 million revenue increase is also the result of a $7.0 million increase in fuel surcharge revenue largely due to the increase in fuel prices and tonnage volumes.  Additionally, compared to the same period in 2017, Complete revenue increased $3.5 million, or 16.2% which was attributable to an increase in shipping volumes in our Expedited LTL network and a 10.2% increase in the attachment rate of Complete to linehaul shipments. Other terminal based revenues, which includes dedicated local pickup and delivery services, warehousing and terminal handling, increased $3.7 million, or 28.2%, to $16.6 million in the first quarter of 2018 from $13.0 million in the same period of 2017. The increase in other terminal revenue was mainly attributable to increases in certain dedicated local pickup and delivery revenues.
Purchased Transportation
Expedited LTL’s purchased transportation increased by $15.3 million, or 24.2%, to $78.4 million for the three months ended March 31, 2018 from $63.1 million for the three months ended March 31, 2017. As a percentage of segment operating revenue, Expedited LTL purchased transportation was 46.2% during the three months ended March 31, 2018 compared to 42.4% for the same period in 2017. The increase is mostly due to an increase in Expedited LTL cost per mile as a result of increased utilization of third party transportation providers, which are more costly than owner-operators. The increase as a percentage of revenue is also due to increased Complete attachment on higher linehaul volumes. Complete purchased transportation has a higher percentage of revenue than linehaul.
Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Expedited LTL increased $2.8 million, or 8.0%, to $37.7 million in the first quarter of 2018 from $34.9 million for the same period in 2017.  Salaries, wages and employee benefits were 22.2% of Expedited LTL’s operating revenue in the first quarter of 2018 compared to 23.5% for the same period of 2017.  The decrease in salaries, wages and employee benefits as a percentage of revenue was primarily attributable to a 0.4% decrease in health insurance costs as a percentage of revenue and a 0.4% decrease in 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. The remaining decrease as a percentage of revenue is due to lower workers' compensation costs, employee incentives and share based compensation.
Operating Leases
Operating leases increased $0.7 million, or 7.6%, to $9.9 million for the three months ended March 31, 2018 from $9.2 million for the same period in 2017.  Operating leases were 5.8% of Expedited LTL operating revenue for the three months ended March 31, 2018 compared to 6.2% for the same period of 2017. The increase in cost is due to $0.4 million of additional facility lease expenses and a $0.2 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 decreased $0.1 million, or 1.8%, to $5.5 million in the first quarter of 2018 from $5.6 million in the same period of 2017.  Depreciation and amortization expense as a percentage of Expedited LTL operating revenue was 3.2% in the first quarter of 2018 compared to 3.8% in the same period of 2017.  The decrease as a percentage of revenue was due to lower amortization expenses and the switch to leased equipment versus owned equipment mentioned above, partly offset by the purchase of new trailers since the first quarter of 2017. The lower amortization expense is due to the completion of the useful life for an acquired customer relationship.



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Insurance and Claims
Expedited LTL insurance and claims expense increased $0.3 million, or 10.3%, to $3.2 million for the three months ended March 31, 2018 from $2.9 million for the same period of 2017.  Insurance and claims was 1.9% of operating revenue for the three months ended March 31, 2018 and 2017. The increase was attributable to a $0.2 million increase in vehicle liability reserves and a $0.1 million increase in claims-related fees.
Fuel Expense
Expedited LTL fuel expense increased $0.4 million, or 44.4%, to $1.3 million for the first quarter of 2018 from $0.9 million in the same period of 2017.  Fuel expenses were 0.8% of Expedited LTL operating revenue in the first quarter of 2018 compared to 0.6% in the same period of 2017.  Expedited LTL fuel expenses increased due to higher year-over-year fuel prices.
Other Operating Expenses
Other operating expenses decreased $0.2 million, or 1.5%, to $13.1 million during the three months ended March 31, 2018 from $13.3 million in the same period of 2017.  Other operating expenses were 7.7% of Expedited LTL operating revenue in the first quarter of 2018 compared to 8.9% in the same period of 2017. The decrease as percentage of revenue was primarily the result of lower owner operator costs to transit the network due to the increased utilization of brokered transportation mentioned above. The first quarter of 2017 also included a $0.4 million loss on the disposal of assets that did not occur in the first quarter of 2018.
Income from Operations
Income from operations increased by $1.9 million, or 10.1%, to $20.8 million for the first quarter of 2018 compared with $18.9 million for the same period in 2017.  Income from operations as a percentage of Expedited LTL operating revenue was 12.2% for the three months ended March 31, 2018 compared with 12.7% in the same period of 2017. The increase in income from operations was due to increases in revenue due to higher tonnage, higher fuel surcharge and higher pickup and delivery 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.



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Truckload Premium Services - Three Months Ended March 31, 2018 compared to Three Months Ended March 31, 2017

The following table sets forth our historical financial data of the Truckload Premium Services segment for the three months ended March 31, 2018 and 2017 (in millions):
Truckload Premium Services Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
Percent of
 
March 31,
 
Percent of
 
 
 
Percent
 
2018
 
Revenue
 
2017
 
Revenue
 
Change
 
Change
 
 
 
 
 
(As Adjusted)
 
 
 
 
 
 
Operating revenue
$
46.1

 
100.0
%
 
$
47.1

 
100.0
%
 
$
(1.0
)
 
(2.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:

 
 
 
 
 
 
 
 
 
 
Purchased transportation
34.8

 
75.5

 
34.6

 
73.4

 
0.2

 
0.6

Salaries, wages and employee benefits
5.1

 
11.1

 
5.2

 
11.0

 
(0.1
)
 
(1.9
)
Operating leases
0.2

 
0.4

 
0.1

 
0.2

 
0.1

 
100.0

Depreciation and amortization
1.8

 
3.9

 
1.5

 
3.2

 
0.3

 
20.0

Insurance and claims
1.0

 
2.2

 
1.1

 
2.3

 
(0.1
)
 
(9.1
)
Fuel expense
1.1

 
2.4

 
0.8

 
1.7

 
0.3

 
37.5

Other operating expenses
2.1

 
4.5

 
2.1

 
4.5

 

 

Total operating expenses
46.1

 
100.0

 
45.4

 
96.4

 
0.7

 
1.5

Income from operations
$

 
%
 
$
1.7

 
3.6
%
 
$
(1.7
)
 
(100.0
)%

Truckload Premium Services Operating Statistics
 
 
 
Three months ended
 
March 31,
 
March 31,
 
Percent
 
2018
 
2017
 
Change
 
 
 
(As Adjusted)
 
 
 
 
 
 
 
 
Total Miles ¹
20,072

 
22,846

 
(12.1
)%
Empty Miles Percentage
9.5
%
 
10.2
%
 
(6.9
)
Tractors (avg)
329

 
408

 
(19.4
)
Miles per tractor per week
4,766

 
4,375

 
8.9

 
 
 
 
 
 
Revenue per mile
$
2.19

 
$
2.01

 
9.0

Cost per mile
$
1.81

 
$
1.60

 
13.1
 %
 
 
 
 
 
 
¹ - In thousands
 
 
 
 
 


Revenues
    
TLS revenue decreased $1.0 million, or 2.1%, to $46.1 million in the first quarter of 2018 from $47.1 million in the first quarter of 2017.  TLS revenue decreased due to a 12.1% decrease in overall miles partly offset by a 9.0% increase in average revenue per mile. The decrease in overall miles was due to deliberate shedding of poorly priced business as well as reduced fleet capacity

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versus the first quarter of last year. The increased revenue per mile was primarily driven by rate increases to existing customers and, to a lesser extent, the aforementioned shedding of poorly priced business.

Purchased Transportation

Purchased transportation costs for TLS revenue increased $0.2 million, or 0.6%, to $34.8 million for the three months ended March 31, 2018 from $34.6 million for the same period in 2017. For the three months ended March 31, 2018, purchased transportation costs represented 75.5% of revenue compared to 73.4% for the same period in 2017.  The increase in purchased transportation was attributable to an 13.9% increase in cost per mile mostly offset by a 13.9% decrease in non-Company miles driven and during the three months ended March 31, 2018 compared to the same period in 2017. The decrease in TLS non-Company miles driven was attributable to the revenue activity discussed above. The increase in cost per mile was due to TLS utilizing third party carriers, which are more costly than owner operators. This increased utilization of third party carriers also led to the increase in purchased transportation as a percentage of revenue.

Salaries, Wages, and Benefits

Salaries, wages and employee benefits of TLS decreased by $0.1 million, or 1.9%, to $5.1 million in the first quarter of 2018 from $5.2 million in the same period of 2017.  Salaries, wages and employee benefits were 11.1% of TLS’s operating revenue in the first quarter of 2018 compared to 11.0% for the same period of 2017.  The increase in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to the increase in share based compensation on lower revenue. The decrease in salaries, wages and employee benefits in total dollars was mostly attributable to operating efficiencies with our fleet of Company drivers.
Operating Leases
Operating leases increased $0.1 million to $0.2 million for the first quarter of 2018 from $0.1 million for the same period in 2017.  Operating leases were 0.4% of TLS operating revenue for the first quarter of 2018 compared to 0.2% for the same period in 2017. The $0.1 million increase in cost is due to additional trailer rentals.
Depreciation and Amortization

Depreciation and amortization increased $0.3 million, or 20.0%, to $1.8 million in the first quarter of 2018 from $1.5 million for the same period of 2017.  Depreciation and amortization expense as a percentage of TLS operating revenue was 3.9% in the first quarter of 2018 compared to 3.2% in the same period of 2017.  The increase was due to new trailers purchased since the first quarter of 2017.
Insurance and Claims

TLS insurance and claims expense decreased $0.1 million, or 9.1%, to $1.0 million for the three months ended March 31, 2018 from $1.1 million for the same period of 2017.  Insurance and claims were 2.2% of operating revenue for the three months ended March 31, 2018 compared to 2.3% in the same period of 2017. The decrease was due to lower vehicle insurance premiums associated with lower owner operator utilization.
Fuel Expense

TLS fuel expense increased $0.3 million, or 37.5%, to $1.1 million for the first quarter of 2018 from $0.8 million for the same period of 2017.  Fuel expense as a percentage of TLS operating revenue was 2.4% in the first quarter of 2018 compared to 1.7% for the same period of 2017. The increase was attributable to an increase in year-over-year fuel prices and the increase in Company driver miles.
Other Operating Expenses

Other operating expenses were $2.1 million for the three months ended March 31, 2018 and 2017.  Other operating expenses were 4.5% of TLS operating revenue in the first quarter of 2018 and 2017.  Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other costs of transiting shipments. Recruiting costs increased compared to the same period in 2017, but were offset by a decrease in tolls and other costs of transiting shipments.



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Results from Operations
Results from operations decreased by $1.7 million to breakeven during the first quarter of 2018 compared with income from operations of $1.7 million for the same period in 2017. The deterioration in income from operations was due to a decrease in revenue and increased utilization of third party carriers which led to the increase in cost per mile outpacing the increase in revenue per mile.

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Pool Distribution - Three Months Ended March 31, 2018 compared to Three Months Ended March 31, 2017

The following table sets forth our historical financial data of the Pool Distribution segment for the three months ended March 31, 2018 and 2017 (in millions):

Pool Distribution Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
Percent of
 
March 31,
 
Percent of
 
 
 
Percent
 
2018
 
Revenue
 
2017
 
Revenue
 
Change
 
Change
 
 
 
 
 
(As Adjusted)
 
 
 
 
 
 
Operating revenue
$
42.7

 
100.0
%
 
$
38.8

 
100.0
%
 
$
3.9

 
10.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
12.1

 
28.3

 
10.9

 
28.1

 
1.2

 
11.0

Salaries, wages and employee benefits
15.9

 
37.2

 
14.4

 
37.1

 
1.5

 
10.4

Operating leases
3.7

 
8.7

 
3.2

 
8.2

 
0.5

 
15.6

Depreciation and amortization
1.8

 
4.2

 
1.8

 
4.6

 

 

Insurance and claims
0.9

 
2.1

 
1.0

 
2.6

 
(0.1
)
 
(10.0
)
Fuel expense
1.6

 
3.8

 
1.2

 
3.1

 
0.4

 
33.3

Other operating expenses
5.3

 
12.4

 
4.9

 
12.6

 
0.4

 
8.2

Total operating expenses
41.3

 
96.7

 
37.4

 
96.4

 
3.9

 
10.4

Income from operations
$
1.4

 
3.3
%
 
$
1.4

 
3.6
%
 
$

 
 %

Pool Operating Statistics
 
 
 
Three months ended
 
March 31,
 
March 31,
 
Percent
 
2018
 
2017
 
Change
 
 
 
(As Adjusted)
 
 
 
 
 
 
 
 
Cartons¹
20,223

 
18,691

 
8.2
%
Revenue per Carton
$
2.11

 
$
2.08

 
1.4
%
Terminals
28

 
28

 
%
 
 
 
 
 
 
¹ In thousands
 
 
 
 
 

Revenues

Pool Distribution (Pool) operating revenue increased $3.9 million, or 10.1%, to $42.7 million for the three months ended March 31, 2018 from $38.8 million for the same period in 2017.  The increase was attributable to new business wins, rate increases and increased volumes from existing customers and lanes.
Purchased Transportation

Pool purchased transportation increased $1.2 million, or 11.0%, to $12.1 million for the three months ended March 31, 2018 compared to $10.9 million for the same period of 2017.  Pool purchased transportation as a percentage of revenue was 28.3% for the three months ended March 31, 2018 compared to 28.1% for the same period of 2017.  The increase in Pool purchased

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transportation as a percentage of revenue was attributable to an increased utilization of third party carriers for increased linehaul distribution shipments.
Salaries, Wages, and Benefits

Pool salaries, wages and employee benefits increased $1.5 million, or 10.4%, to $15.9 million for the three months ended March 31, 2018 compared to $14.4 million for the same period of 2017.  As a percentage of Pool operating revenue, salaries, wages and benefits increased to 37.2% for the three months ended March 31, 2018 compared to 37.1% for the same period in 2017.   The increase in salaries, wages and benefits as a percentage of revenue was the result of increased dock pay and administrative salaries, wages and benefits mostly offset by decreases in employee incentives and workers' compensation costs.
Operating Leases

Operating leases were $3.7 million for the three months ended March 31, 2018 compared to $3.2 million for the same period of 2017.  Operating leases were 8.7% of Pool operating revenue for the three months ended March 31, 2018 compared with