10-K 1 fwrd201710-k.htm FORWARD AIR CORPORATION 10-K 2017 Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2017
Commission file number: 001-16853

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                       to                     
Commission File No. 000-22490

FORWARD AIR CORPORATION
(Exact name of Registrant as specified in its charter)
 
 
Tennessee
62-1120025

(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
1915 Snapps Ferry Road, Building N
 
Greeneville, Tennessee
37745
(Address of principal executive offices)
(Zip Code)

(423) 636-7000
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
The Nasdaq Stock Market LLC
 
 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting Company o
Emerging Growth Company o

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $1,581,907,549 as of June 30, 2017.

The number of shares outstanding of the Registrant’s common stock (as of February 20, 2018): 29,584,537

Documents Incorporated By Reference
Portions of the proxy statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.




Table of Contents
 
 
 
 
Forward Air Corporation
Page
Number
 
 
Part I.
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
Part III.
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
Part IV.
 
 
 
 
 
Item 15.
 
 
 
 
 
 
 
 
 
 
 
 
 


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Introductory Note

This Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (this “Form 10-K”) contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements other than historical information or statements of current condition and relate to future events or our future financial performance. In this Form 10-K, forward-looking statements include, but are not limited to, any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements regarding future insurance and claims; any statements concerning proposed or intended new services or developments; any statements regarding intended expansion through acquisition or greenfield startups; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. Some forward-looking statements may be identified by use of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,” “projects” or “expects.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The following is a list of factors, among others, that could cause actual results to differ materially from those contemplated by the forward-looking statements: economic factors such as recessions, inflation, higher interest rates and downturns in customer business cycles, the creditworthiness of our customers and their ability to pay for services rendered, the availability and compensation of qualified independent owner-operators and freight handlers as well as contracted, third-party carriers needed to serve our customers’ transportation needs, the inability of our information systems to handle an increased volume of freight moving through our network, changes in fuel prices, our inability to maintain our historical growth rate because of a decreased volume of freight or decreased average revenue per pound of freight moving through our network, loss of a major customer, increasing competition and pricing pressure, our ability to secure terminal facilities in desirable locations at reasonable rates, our inability to successfully integrate acquisitions, claims for property damage, personal injuries or workers’ compensation, enforcement of and changes in governmental regulations, environmental and tax matters, and the handling of hazardous materials. As a result of the foregoing, no assurance can be given as to future financial condition, cash flows or results of operations. Except as required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Part I

Item 1. Business

Overview

Forward Air is a leading asset-light freight and logistics company. We provide less-than-truckload (“LTL”), truckload, intermodal and pool distribution services across the United States and in Canada. We utilize an asset-light strategy to minimize our investments in equipment and facilities and to reduce our capital expenditures. Forward Air was formed as a corporation under the laws of the State of Tennessee on October 23, 1981. Our common stock is listed on the Nasdaq Global Select Market under the symbol “FWRD”.

Services Provided

Our services are classified into four principal reportable segments: Expedited LTL, Truckload Premium Services (“TLS”), Intermodal and Pool Distribution. For financial information relating to each of our business segments, see Note 10, “Segment Reporting,” in the Notes to consolidated Financial Statements included in this Form 10-K.

Expedited LTL. 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. During the year ended December 31, 2017, Expedited LTL accounted for 56.3% of our consolidated revenue.

TLS. We provide expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-controlled logistics services in the United States and Canada. During the year ended December 31, 2017, TLS accounted for 16.3% of our consolidated revenue.

Intermodal. We provide first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers dedicated contract and Container Freight Station (“CFS”) warehouse and handling services.

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Today, 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. During the year ended December 31, 2017, Intermodal accounted for 13.5% of our consolidated revenue.

Pool Distribution. We provide high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. We offer this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States. During the year ended December 31, 2017, Pool Distribution accounted for 14.9% of our consolidated revenue.

Strategy

Our strategy is to take advantage of our core competencies to provide asset-light freight and logistics services in order to grow in the premium or high service level segments of the markets we serve. Principal components of our efforts include:
Expand Service Offerings. We believe we can increase freight volumes and revenues by offering new and enhanced services that address more of our customers’ premium transportation needs. In the past few years, we have added or enhanced LTL pickup and delivery, customer label integration, expedited truckload, temperature-controlled shipments, warehousing, drayage, customs brokerage and shipment consolidation and handling services. These services benefit our existing customers and increase our ability to attract new customers.

Enhance Information Systems. We are committed to the development and enhancement of our information systems in order to provide us competitive service advantages and increased productivity. We believe our information systems have and will assist us in capitalizing on new business opportunities with existing and new customers.

Pursue Strategic Acquisitions. We continue to evaluate and pursue acquisitions that can increase our penetration of a geographic area; add new customers, business verticals and services; and increase freight volume. For example, we acquired Central States Trucking Co. (“CST”) in 2014. CST provides industry-leading container and intermodal drayage services within the Midwest, Southeast and Southwest regions of the United States. CST also provides linehaul service within the LTL space as well as dedicated contract and CFS warehouse services. Since our acquisition of CST in 2014, CST has completed six acquisitions. In 2017, CST acquired certain assets of Atlantic Trucking Company, Inc., Heavy Duty Equipment Leasing, LLC, Atlantic Logistics, LLC and Transportation Holdings, Inc. (together referred to as “Atlantic”) and certain assets of Kansas City Logistics, LLC ("KCL").

Operations

The following describes in more detail the operations of each of our reportable segments: Expedited LTL, Truckload Premium Services, Intermodal and Pool Distribution.

Expedited LTL

Overview

Our Expedited LTL segment provides expedited regional, inter-regional and national LTL services. We market our Expedited LTL services primarily to freight and logistics intermediaries (such as freight forwarders and third party logistics companies) and airlines (such as integrated air cargo carriers, and passenger and cargo airlines). We offer our customers a high level of service with a focus on on-time, damage-free deliveries. Our terminals are located on or near airports in the United States and Canada and maintain regularly scheduled transportation service between major cities.



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Operations

Our Expedited LTL network consists of terminals located in the following 94 cities:
City
 
Airport Served
 
City
 
Airport Served
Albany, NY
 
ALB
 
Lubbock, TX*
 
LBB
Albuquerque, NM*
 
ABQ
 
Memphis, TN
 
MEM
Allentown, PA*
 
ABE
 
McAllen, TX
 
MFE
Amarillo, TX*
 
AMA
 
Miami, FL
 
MIA
Atlanta, GA
 
ATL
 
Midland, TX*
 
MAF
Austin, TX
 
AUS
 
Milwaukee, WI
 
MKE
Baltimore, MD**
 
BWI
 
Minneapolis, MN
 
MSP
Baton Rouge, LA*
 
BTR
 
Mobile, AL*
 
MOB
Birmingham, AL*
 
BHM
 
Moline, IA
 
MLI
Blountville, TN*
 
TRI
 
Montgomery, AL*
 
MGM
Boston, MA
 
BOS
 
Nashville, TN
 
BNA
Buffalo, NY
 
BUF
 
Newark, NJ
 
EWR
Burlington, IA
 
BRL
 
Newburgh, NY
 
SWF
Cedar Rapids, IA
 
CID
 
New Orleans, LA
 
MSY
Charleston, SC****
 
CHS
 
New York, NY
 
JFK
Charlotte, NC
 
CLT
 
Norfolk, VA
 
ORF
Chicago, IL
 
ORD
 
Oklahoma City, OK
 
OKC
Cincinnati, OH
 
CVG
 
Omaha, NE
 
OMA
Cleveland, OH
 
CLE
 
Orlando, FL
 
MCO
Columbia, SC*
 
CAE
 
Pensacola, FL*
 
PNS
Columbus, OH***
 
CMH
 
Philadelphia, PA
 
PHL
Corpus Christi, TX*
 
CRP
 
Phoenix, AZ
 
PHX
Dallas/Ft. Worth, TX
 
DFW
 
Pittsburgh, PA
 
PIT
Dayton, OH*
 
DAY
 
Portland, OR
 
PDX
Denver, CO
 
DEN
 
Raleigh, NC
 
RDU
Des Moines, IA**
 
DSM
 
Richmond, VA
 
RIC
Detroit, MI
 
DTW
 
Roanoke, VA
 
ROA
El Paso, TX
 
ELP
 
Rochester, NY
 
ROC
Evansville, IN
 
EVV
 
Sacramento, CA
 
SMF
Fort Wayne, IN
 
FWA
 
Saginaw, MI
 
MBS
Grand Rapids, MI
 
GRR
 
Salt Lake City, UT
 
SLC
Greensboro, NC
 
GSO
 
San Antonio, TX
 
SAT
Greenville, SC
 
GSP
 
San Diego, CA
 
SAN
Hartford, CT
 
BDL
 
San Francisco, CA
 
SFO
Harrisburg, PA
 
MDT
 
Seattle, WA
 
SEA
Houston, TX
 
IAH
 
Shreveport, LA*
 
SHV
Huntsville, AL*
 
HSV
 
South Bend, IN
 
SBN
Indianapolis, IN
 
IND
 
St. Louis, MO
 
STL
Jacksonville, FL
 
JAX
 
Syracuse, NY
 
SYR
Kansas City, MO
 
MCI
 
Tampa, FL
 
TPA
Knoxville, TN*
 
TYS
 
Toledo, OH*
 
TOL
Lafayette, LA*
 
LFT
 
Traverse City, MI*
 
TVC
Laredo, TX
 
LRD
 
Tucson, AZ*
 
TUS
Las Vegas, NV
 
LAS
 
Tulsa, OK**
 
TUL
Little Rock, AR*
 
LIT
 
Washington, DC
 
IAD
Los Angeles, CA
 
LAX
 
Montreal, Canada*
 
YUL
Louisville, KY
 
SDF
 
Toronto, Canada
 
YYZ

*      Denotes an independent agent location.
**    Denotes a location with combined Expedited LTL and Pool Distribution operations.
*** Denotes a location in which Expedited LTL is an agent for Pool Distribution.
****Denotes a location with combined Expedited LTL and Intermodal operations.


5


Independent agents operate 23 of our Expedited LTL locations. These locations typically handle lower volumes of freight relative to our Company-operated facilities.

Shipments

During 2017, approximately 30.1% of the freight handled by Expedited LTL was for overnight delivery, approximately 55.6% was for delivery within two to three days and the balance was for delivery in four or more days.

The average weekly volume of freight moving through our Expedited LTL network was approximately 49.5 million pounds per week in 2017. During 2017, our average shipment weighed approximately 623 pounds. Although we impose no significant size or weight restrictions, we focus our marketing and price structure on shipments of 200 pounds or more.

Expedited LTL generally does not market its services directly to shippers (where such services might compete with our freight and logistics intermediary customers). Also, because Expedited LTL does not place significant size or weight restrictions on shipments, we generally do not compete directly with integrated air cargo carriers such as United Parcel Service and FedEx Corporation in the overnight delivery of small parcels.

The table below summarizes the average weekly volume of freight moving through our network for each year since 2003.

Average Weekly

Volume in Pounds
Year
(In millions)
2003
25.3
2004
28.7
2005
31.2
2006
32.2
2007
32.8
2008
34.2
2009
28.5
2010
32.6
2011
34.0
2012
34.9
2013
35.4
2014
37.4
2015
47.2
2016
46.5
2017
49.5

Purchased Transportation

Our licensed property broker places our customers’ cargo with qualified motor carriers, including our own, and other third-party transportation companies. Expedited LTL’s licensed motor carrier contracts with owner-operators for most of its transportation services. The owner-operators own, operate and maintain their own tractors and employ their own drivers. Our freight handlers load and unload our trailers and vehicles for hauling by owner-operators between our terminals.

We seek to establish long-term relationships with owner-operators to assure dependable service and availability. Historically, Expedited LTL has experienced significantly higher-than-industry average retention of owner-operators. Expedited LTL has established specific guidelines relating to safety records, driving experience and personal evaluations that we use to select our owner-operators. To enhance our relationship with the owner-operators, Expedited LTL seeks to pay rates that are generally above prevailing market rates and our owner-operators often are able to negotiate a consistent work schedule for their drivers. Usually, owner-operators negotiate schedules for their drivers that are between the same two cities or along a consistent route, improving quality of work life for the drivers of our owner-operators and, in turn, increasing our driver retention.

As a result of efforts to expand our logistics and other services, seasonal demands and volume surges in particular markets, we also purchase transportation from other surface transportation providers to handle overflow volume. Of the $254.9 million incurred for Expedited LTL's purchased transportation during 2017, we purchased 53.8% from the owner-operators of our licensed motor carrier and 46.2% from other surface transportation providers.

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Other Services

Expedited LTL customers increasingly demand more than the movement of freight from their transportation providers. To meet these demands, we continually seek ways to customize and add new services.

Other Expedited LTL services allow customers to access the following services from a single source:

customs brokerage;
warehousing, dock and office space;
hotshot or ad-hoc ultra expedited services; and
shipment consolidation and handling, such as shipment build-up and break-down and reconsolidation of air or ocean pallets or containers.

Customers

Our wholesale customer base is primarily comprised of freight forwarders, third party logistics (“3PL”) companies, integrated air cargo carriers and passenger, cargo airlines and steamship lines. Expedited LTL’s freight forwarder customers vary in size from small, independent, single facility companies to large, international logistics companies. Our dependable service and wide-ranging service offerings also make Expedited LTL an attractive option for 3PL providers , which is one of the fastest growing segments in the transportation industry. Because we deliver dependable service, integrated air cargo carriers use our network to provide overflow capacity and other services, including shipment of bigger packages and pallet-loaded cargo. In 2017, LTL's ten largest customers accounted for approximately 31% of its operating revenue, but no single customer accounted for more than 10% of our consolidated revenue.

Truckload Premium Services

Overview

Our TLS segment is an asset-light provider of transportation management services, including, but not limited to, expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-controlled logistics services. We market our TLS services to integrated air cargo carriers, airlines, freight forwarders and LTL carriers, as well as life-science companies, and their distributors and other shippers of high value cargo. TLS offers long haul, regional and local services through a dedicated fleet and third party transportation providers. TLS also utilizes a wide assortment of equipment to meet our customers’ critical on-time expectations in the United States and Canada.

Operations

TLS’ primary operations are located in Columbus, Ohio. TLS also has satellite operations in South Bend, Indiana; Greeneville, Tennessee; Grand Rapids, Michigan; and Sacramento, California.

Operating Statistics

The table below summarizes the average weekly miles driven for each year since 2003.

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Average Weekly Miles
Year
(In thousands)
2003
211
2004
260
2005
248
2006
331
2007
529
2008
676
2009
672
2010
788
2011
876
2012
1,005
2013
1,201
2014
1,185
2015
1,459
2016
1,756
2017
1,902

Transportation

TLS utilizes a dedicated fleet of owner-operators, company drivers and third party transportation providers in its operations. The owner-operators own, operate and maintain their own tractors and employ their own drivers. We also maintain a fleet of company drivers, which primarily services our life science and high value cargo customers. In many instances, our customers request team (driver) service. Through team service, we are able to provide quicker, more secure, transit service to our TLS customers.

We seek to establish long-term relationships with owner-operators and company drivers to assure dependable service and availability. To enhance our relationship with the owner-operators and our company drivers, TLS strives to set its owner-operator and company driver pay rates above prevailing market rates.

TLS has established specific guidelines relating to safety records, driving experience and personal evaluations that we use to qualify and select our drivers (leased and employed).

In addition to our owner-operators and company fleet, we also purchase transportation from other surface transportation providers (including Expedited LTL) to serve our customers’ needs. TLS’ brokerage operation has relationships with over 4,400 qualified carriers. Of the $143.0 million incurred for TLS transportation during 2017, we purchased 34.5% from the owner-operators of our licensed motor carrier, 8.2% from our company fleet and 57.3% from other surface transportation providers.

We have access to a pool of trailers and we utilize a variety of equipment in our TLS operations including dry van, refrigerated, and roller-bed trailers, as well as straight trucks and cargo vans. We service our life science and high-security cargo customers with industry-leading TAPA (Transported Asset Protection Association) Level 1 certified equipment that has layered security measures to prevent theft, qualified and calibrated refrigerated trailers, and temperature systems that minimize the chance of damage to cargo caused by temperature excursions. All of the TLS trailers have global positioning trailer-tracking technology that allows us to more effectively manage our trailer pool.

All of our TLS company and independent contractor tractors are equipped with in-cab communication devices, which enable us to communicate with our drivers, plan and monitor shipment progress and monitor and record our drivers’ hours of service. We use the real-time global positioning data obtained from these devices to improve customer and driver service.

Customers

Our customer base is primarily comprised of freight forwarders, third party logistics companies, integrated air cargo carriers, passenger and cargo airlines, and LTL carriers, as well as retail, life-science companies, and their distributors. TLS’ customers include Fortune 500 pharmaceutical manufacturers and distributors, as well as transportation companies. In 2017, TLS’ ten largest customers accounted for approximately 77% of its operating revenue but no single customer accounted for more than 10% of our consolidated revenue.





8


Intermodal

Overview

Our Intermodal segment provides high value intermodal container drayage services. We market our Intermodal services to import and export customers. Intermodal offers first- and last-mile transportation of freight both to and from seaports and railheads through a dedicated fleet and third party transportation providers. Today, Intermodal operates primarily in the Midwest and Southeast, with a smaller presence in the Southwest. We plan to expand beyond our current geographic footprint through acquisitions as well as greenfield start-ups where no suitable acquisition is available. Intermodal also provides linehaul and local less-than-truckload service in the Midwest, as well as CFS warehousing services (e.g. devanning, unit load device build-up/tear-down, and security screening) for air and ocean import/export freight at five (5) of its Midwest terminals (Chicago, Cleveland, Milwaukee, Indianapolis and Detroit). Our Intermodal service differentiators include:
Immediate proof of delivery ("POD") and Signature Capture capability via tablets;
All drivers receive dispatch orders on hand-held units and are trackable via GPS; and
Daily contrainer visibility and per diem management reports.

Operations

Intermodal’s primary office is located in Oak Brook, Illinois. Intermodal’s network consists of terminals in the following locations:
                
City
Atlanta, GA
Joliet, IL
Charleston, SC
Kansas City, MO
Charlotte, NC
Memphis, TN
Chicago/Joliet, IL
Milwaukee, WI
Cincinnati, OH
Minneapolis, MN
Cleveland, OH
Nashville, TN
Dallas, TX
Norfolk, VA
Houston, TX
Rochelle, IL
Indianapolis, IN
Romulus, MI
Jacksonville, FL
Savannah, GA

Transportation

Intermodal utilizes a mix of Company-employed drivers, owner-operators and third party carriers. During 2017, approximately 19.7% of Intermodal’s direct transportation expenses were provided by Company-employed drivers, 78.8% by owner-operators and 1.5% was provided by third party carriers.

All of our Intermodal company and independent contractor tractors are equipped with computer tablets, which enable us to communicate with our drivers, plan and monitor shipment progress and monitor our drivers’ hours of service. We use the real-time global positioning data obtained from these devices to improve customer and driver service and provide a high level of shipment visibility to our customers (including immediate POD signature capture). We believe that our technology is a key differentiator and enables us to provide a higher level of service than our competitors.

Customers

Intermodal’s customer base is primarily comprised of international freight forwarders, passenger and cargo airlines and steamship lines. In 2017, Intermodal’s ten largest customers accounted for approximately 31% of its operating revenue but no single customer accounted for more than 10% of our consolidated revenue.




9


Pool Distribution

Overview

Our Pool Distribution (or “Pool”) segment provides pool distribution services through a network of terminals and service locations in 27 cities throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. We market these services to national and regional retailers and distributors.

Operations

Our Pool Distribution network consists of terminals and service locations in the following 27 cities:
City
Albuquerque, NM*
Kansas City, MO
Atlanta, GA
Lakeland, FL
Baltimore, MD***
Las Vegas, NV
Baton Rouge, LA*
Little Rock, AR*
Charlotte, NC
Miami, FL
Chicago, IL*
Montgomery, AL
Columbus, OH**
Nashville, TN
Dallas/Ft. Worth, TX
Raleigh, NC
Des Moines, IA***
Richmond, VA
Detroit, MI*
Rochester, NY
Houston, TX
San Antonio, TX
Jacksonville, FL
St. Louis, MO*
Jacksonville, TX
Tulsa, OK***
Jeffersonville, OH
 

* Denotes an independent agent station.
** Denotes a location in which Expedited LTL is an agent for Pool Distribution.
*** Denotes a location with combined Expedited LTL and Pool Distribution operations.

Transportation
Pool Distribution provides transportation services through a mix of Company-employed drivers, owner-operators and third party carriers. The mix of sources utilized to provide Pool transportation services is dependent on the individual markets and related customer routes. During 2017, approximately 37.0% of Pool's direct transportation expenses were provided by Company-employed drivers, 34.4% by owner-operators and 28.6% was provided by third party carriers.
Customers

Pool Distribution’s customer base is primarily composed of national and regional retailers and distributors. Pool’s three largest customers accounted for approximately 41% of Pool Distribution’s 2017 operating revenue, but revenues from these three customers do not exceed 10% of our consolidated revenue. No other customers accounted for more than 10% of Pool’s operating revenue.

Competition

We compete in the North American transportation and logistics services industry, and the markets in which we operate are highly competitive, very fragmented and historically have few barriers to entry. We compete with a large number of other asset-light logistics companies, asset-based carriers, integrated logistics companies, and third-party freight brokers. To a lesser extent, we also compete with integrated air cargo carriers and passenger airlines. Our competition ranges from small operators that compete within a limited geographic area to companies with substantially greater financial and other resources, including greater freight capacity.  

Our Expedited LTL, TLS and Pool Distribution segments primarily compete with other national and regional truckload carriers. Expedited LTL also competes with less-than-truckload carriers, and to a lesser extent, integrated air cargo carriers and

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passenger and cargo airlines, while our TLS segment also competes with property brokers and 3PLs. Our Intermodal segment primarily competes with national and regional drayage providers.

We believe competition in our segments is based primarily on quality service, available capacity, on-time delivery, flexibility, reliability and security, transportation rates, location of facilities and business relationships, and we believe we compete favorably with other transportation service companies. To that end, we believe our Expedited LTL segment has an advantage over other truckload and less-than-truckload carriers because Expedited LTL delivers faster, more reliable services between cities at rates that are generally significantly below the charge to transport the same shipments to the same destinations by air. We believe our TLS and Intermodal segments have a competitive advantage over other truckload carriers and drayage providers because we deliver faster, more reliable service while offering greater shipment visibility and security. Additionally, we believe our Intermodal segment is one of the leading providers of drayage and related services in North America today. We believe that our presence in several regions across the continental United States enables our Pool Distribution segment to provide consistent, high-quality service to our customers regardless of location, which is a competitive advantage over other pool distribution providers.

Marketing

We market all of our services through a sales and marketing staff located in major markets of the United States. Senior management also is actively involved in sales and marketing at the national and local account levels. We participate in trade shows and advertise our services through direct mail programs and through the Internet via www.forwardaircorp.com, www.forwardair.com, www.forwardairsolutions.com, www.shiptqi.com, and www.cstruck.com. We market our services through all of our websites. The information contained on our websites is not part of this filing and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

Seasonality

Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third and fourth quarters have traditionally been the strongest. Typically, this pattern has been the result of factors such as economic conditions, customer demand, weather and national holidays. Additionally, a significant portion of our revenue is derived from customers whose business levels are impacted by the economy. The impact of seasonal trends and the economy is more pronounced on our pool distribution business, whose operating revenues and results tend to improve in the third and fourth quarters compared to the first and second quarters.

Employees and Equipment

As of December 31, 2017, we had 3,857 full-time employees, 1,339 of whom were freight handlers. Also, as of that date, we had an additional 1,041 part-time employees, of whom the majority were freight handlers. None of our employees are covered by a collective bargaining agreement. We recognize that our workforce, including our freight handlers, is one of our most valuable assets. The recruitment, training and retention of qualified employees are essential to support our continued growth and to meet the service requirements of our customers.

We manage a trailer pool that is utilized by all of our reportable segments to move freight through our networks. Our trailer pool includes dry van, refrigerated and roller-bed trailers, and substantially all of our trailers are 53 feet long. We own the majority of the trailers we use, but we supplement at times with leased trailers. At December 31, 2017, we had 5,680 owned trailers in our fleet with an average age of approximately 5.4 years. In addition, at December 31, 2017, we also had 784 leased trailers in our fleet. At December 31, 2017, we had 581 owned tractors and straight trucks in our fleet, with an average age of approximately 6.4 years. In addition, at December 31, 2017, we also had 383 leased tractors and straight trucks in our fleet.

Risk Management and Litigation

Under U.S. Department of Transportation (“DOT”) regulations, we are liable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on our behalf. Additionally, from time to time, the drivers employed and engaged by the third-party transportation carriers we contract with are involved in accidents, which may result in serious personal injuries. The resulting types and/or amounts of damages may be excluded by or exceed the amount of insurance coverage maintained by the contracted carrier. Although these drivers are not our employees and all of these drivers are employees, owner-operators, or independent contractors working for carriers, from time to time, claims may be asserted against us for their actions, or for our actions in retaining them. We currently maintain liability insurance coverage that we believe is adequate to cover third-party claims. We have a self-insured retention of $1.0 million per occurrence for vehicle and general liability claims. We may also be subject to claims for workers’ compensation. We maintain workers’ compensation insurance coverage that we believe is adequate to cover such claims. We have a self-insured retention of approximately $0.4 million for

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each such claim, except in Ohio, where we are a qualified self-insured entity with an approximately $0.5 million self-insured retention. We could incur claims in excess of our policy limits or incur claims not covered by our insurance.

From time to time, we are a party to litigation arising in the normal course of our business, most of which involve claims for personal injury, property damage related to the transportation and handling of freight, or workers’ compensation. We do not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations.

Regulation

We are regulated by various United States and state agencies, including but not limited to the DOT. These regulatory authorities have broad powers, generally governing matters such as authority to engage in motor carrier operations, as well as motor carrier registration, driver hours of service, safety and fitness of transportation equipment and drivers, transportation of hazardous materials, certain mergers and acquisitions and periodic financial reporting. The trucking industry is also subject to regulatory and legislative changes from a variety of other governmental authorities, which address matters such as: increasingly stringent environmental, occupational safety and health regulations, limits on vehicle weight and size, ergonomics, port security, and hours of service. In addition, we are subject to compliance with cargo-security and transportation regulations issued by the Transportation Security Administration and Customs and Border Protection (“CBP”) within the U.S. Department of Homeland Security, and our domestic customs brokerage operations are licensed by CBP. Additionally, our Canada business activities are subject to similar requirements imposed by the laws and regulations of Canada, as well as its provincial laws and regulations. Regulatory requirements, and changes in regulatory requirements, may affect our business or the economics of the industry by requiring changes in operating practices or by influencing the demand for and increasing the costs of providing transportation services.

Service Marks

Through one of our subsidiaries, we hold federal trademark registrations or applications for federal trademark registration, associated with the following service marks: Forward Air, Inc.®, North America’s Most Complete Roadfeeder Network®, Keeping Your Business Moving Forward®, Forward Air®, Forward Air Solutions ®, Forward Air Complete®, PROUD®, Total Quality, Inc.®, TQI, Inc.®, TQI®, Central States Trucking Co.® and CSTSM. These marks are of significant value to our business.

Available Information

We file reports with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports from time to time. We are an electronic filer and the SEC maintains an Internet site at www.sec.gov that contains these reports and other information filed electronically. We make available free of charge through our website our reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is www.forwardaircorp.com. Our goal is to maintain our website as a portal through which investors can easily find or navigate to pertinent information about us. The information provided on the website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

Item 1A.
Risk Factors

We routinely encounter and address risks in conducting our business. Some of these risks may cause our future results to be different - sometimes materially different - than we presently anticipate. Below are material risks we have identified that could adversely affect our business. How we react to material future developments, as well as how our competitors and customers react to those developments, could also affect our future results.

Overall economic conditions that reduce freight volumes could have a material adverse impact on our operating results and ability to achieve growth.

We are sensitive to changes in overall economic conditions that impact customer shipping volumes, industry freight demand and industry truck capacity. The transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of our customers, interest rate fluctuations, inflation and other economic factors beyond our control. Deterioration in the economic environment subjects our business to various risks, including the following, that may have a material and adverse impact on our operating results and cause us not to maintain profitability or achieve growth:


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A reduction in overall freight volumes reduces our revenues and opportunities for growth. In addition, a decline in the volume of freight shipped due to a downturn in customers’ business cycles or other factors (including our ability to assess dimensional-based weight increases) generally results in decreases in freight pricing and decreases in average revenue per pound of freight, as carriers compete for loads to maintain truck productivity.

Our base transportation rates are determined based on numerous factors such as length of haul, weight per shipment and freight class. During economic downturns, we may also have to lower our base transportation rates based on competitive pricing pressures and market factors.

Some of our customers may face economic difficulties and may not be able to pay us, and some may go out of business. In addition, some customers may not pay us as quickly as they have in the past, causing our working capital needs to increase.

A significant number of our transportation providers may go out of business and we may be unable to secure sufficient equipment or other transportation services to meet our commitments to our customers.

We may not be able to appropriately adjust our expenses to changing market demands. In order to maintain high variability in our business model, it is necessary to adjust staffing levels to changing market demands. In periods of rapid change, it is more difficult to match our staffing levels to our business needs.

If we have difficulty attracting and retaining owner-operators or freight handlers, or are unable to contract with a sufficient number of third-party carriers to supplement our owner-operator fleet, our profitability and results of operations could be adversely affected.

We depend on owner-operators for most of our transportation needs. In 2017, owner-operators provided 57.3% of our purchased transportation. Competition for owner-operators is intense, and sometimes there are shortages of available owner-operators. In addition, a decline in the availability of trucks, tractors and trailers for owner-operator purchase or use may negatively affect our ability to hire, attract or retain available owner-operators. We also need a large number of freight handlers to operate our business efficiently. During periods of low unemployment in the areas where our terminals are located, we may have difficulty hiring and retaining a sufficient number of freight handlers. If we have difficulty attracting and retaining enough qualified freight handlers and owner-operators, we may be forced to increase wages and benefits or to increase the cost at which we contract with our owner-operators, either of which would increase our operating costs. This difficulty may also impede our ability to maintain our delivery schedules, which could make our service less competitive and force us to curtail our planned growth. A capacity deficit may lead to a loss of customers and a decline in the volume of freight we receive from customers.

To augment our fleet of owner-operators, from time to time we purchase transportation from third-party carriers at a higher cost. As with owner-operators, competition for third-party carriers is intense, and sometimes there are shortages of available third-party carriers. If we cannot secure a sufficient number of owner-operators and have to purchase transportation from third-party carriers, our operating costs will increase. If our labor and operating costs increase, we may be unable to offset the increased costs by increasing rates without adversely affecting our business. As a result, our profitability and results of operations could be adversely affected.

A determination by regulators that our independent owner-operators are employees rather than independent contractors could expose us to various liabilities and additional ongoing expenses, and related litigation can subject us to substantial costs, which could have a material adverse effect on our results of operations and our financial condition.

At times, the Internal Revenue Service, the Department of Labor and state authorities have asserted that owner-operators are “employees,” rather than “independent contractors.” In addition, the topic of the classification of individuals as employees or independent contractors has gained increased attention among the plaintiffs’ bar. One or more governmental authorities may challenge our position that the owner-operators we use are not our employees. A determination by regulators that our independent owner-operators are employees rather than independent contractors could expose us to various liabilities and additional ongoing expenses, including but not limited to, employment-related expenses such as workers’ compensation insurance coverage and reimbursement of work-related expenses. Our exposure could include prior period compensation, as well as potential liability for employee benefits and tax withholdings. In addition, certain states have recently seen numerous class action lawsuits filed against transportation companies that engage independent contractors, some of which have resulted in significant damage awards and/or monetary settlements for workers who have been allegedly misclassified as independent contractors. The legal and other costs associated with any of these matters can be substantial and could have a material adverse effect on our results of operations and our financial condition.


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If we fail to maintain our information technology systems, or if we fail to successfully implement new technology or enhancements, we may be at a competitive disadvantage and experience a decrease in revenues.

We rely heavily on our information technology systems to efficiently run our business, and they are a key component of our growth strategy and competitive advantage. We expect our customers to continue to demand more sophisticated, fully integrated information systems from their transportation providers. To keep pace with changing technologies and customer demands, we must correctly interpret and address market trends and enhance the features and functionality of our information technology systems in response to these trends, which may lead to significant ongoing software development costs. We may be unable to accurately determine the needs of our customers and the trends in the transportation services industry or to design and implement the appropriate features and functionality of our information technology systems in a timely and cost-effective manner, which could put us at a competitive disadvantage and result in a decline in our efficiency, decreased demand for our services and a corresponding decrease in our revenues. Furthermore, as technology improves, our customers may be able to find alternatives to our services for matching shipments with available freight hauling capacity.

Our information technology systems can also play an integral role in managing our internal freight and transportation information and creating additional revenue opportunities including assessing available backhaul capacity. A failure to capture and utilize our internal freight and transportation information may impair our ability to service our existing customers or grow revenue.

Our information technology systems are subject to risks, many of which are outside of our control.

Our information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant system failures and electrical outages in the past. While we take measures to ensure our major systems have redundant capabilities, our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, data leakage, human error, break-ins, cyber-attacks and similar events. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. The occurrence of any of these events could disrupt or damage our information technology systems and hamper our internal operations, impede our customers’ access to our information technology systems and adversely impact our customer service, volumes, and revenues and result in increased cost. Furthermore, a material network breach in the security of our information technology systems could result in the theft of our intellectual property or trade secrets, personal information of our employees and confidential information of our customers. To the extent that any disruptions or security breach results in a loss or damage to our data, or in inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, reduce the demand for our services, lead to claims against us and ultimately harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

We may have difficulty effectively managing our growth, which could adversely affect our business, results of operations and financial condition.

Our growth strategy includes increasing freight volume from existing customers, expanding our service offerings and pursing strategic transactions. Our growth plans will place significant demands on our management and operating personnel. Our ability to manage our future growth effectively will require us to, among other things, regularly enhance our operating and management information systems, evaluate and change our service offerings and continue to attract, retain, train, motivate and manage key employees, including through training and development programs. If we are unable to manage our growth effectively, our business, results of operations and financial condition may be adversely affected.

Volatility in fuel prices, shortages of fuel or the ineffectiveness of our fuel surcharge program can have a material adverse effect on our results of operations and profitability.

We are subject to risks associated with the availability and price of fuel, which are subject to political, economic and market factors that are outside of our control. Fuel prices have fluctuated dramatically over recent years. Over time we have been able to mitigate the impact of the fluctuations through our fuel surcharge programs. Our fuel surcharge rates are set weekly based on the national average for fuel prices as published by the U.S. Department of Energy and our fuel surcharge table. Our net fuel surcharge revenue is the result of our fuel surcharge rates and the tonnage transiting our networks. The fuel surcharge revenue is then netted with the fuel surcharge we pay to our owner-operators and third party transportation providers. There can be no assurance that our fuel surcharge revenue programs will be effective in the future as the fuel surcharge may not capture the entire amount of the increase in fuel prices. Additionally, decreases in fuel prices reduce the cost of transportation services and accordingly, could reduce our revenues and may reduce margins for certain lines of business. In addition to changing fuel prices, fluctuations in volumes and related load factors may subject us to volatility in our net fuel surcharge revenue. Fuel shortages, changes in fuel

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prices and the potential volatility in net fuel surcharge revenue may adversely impact our results of operations and overall profitability.

Because a portion of our network costs are fixed, any factors that result in a decrease in the volume or revenue per pound of freight shipped through our networks will adversely affect our results of operations.

Our operations, particularly our networks of hubs and terminals, represent substantial fixed costs. As a result, any decline in the volume or revenue per pound of freight we handle will have an adverse effect on our operating margin and our results of operations. Several factors can result in such declines, including adverse business and economic conditions affecting shippers of freight as discussed above. In addition, volumes shipped through our network may be negatively impacted by lack of customer contractual obligations or cancellations of existing customer contracts. Typically, we do not enter into long-term contracts with our customers. Rather, our customer contracts typically allow for cancellation within 30 to 60 days.  As a result, we cannot guarantee that our current customers will continue to utilize our services or that they will continue at the same levels.   Any one of the foregoing factors that results in a decrease in the volume or revenue per pound of freight shipped will adversely affect our results of operations.

We derive a significant portion of our revenue from a few major customers, the loss of one or more of which could have a material adverse effect on our business.

For the calendar year ended December 31, 2017, our top 10 customers, based on revenue, accounted for approximately 26% of our revenue. Our Expedited LTL, TLS and Intermodal segments typically do not have long-term contracts with their customers. While our Pool segment business may involve a long-term written contract, those contracts may contain cancellation clauses, and there is no assurance that our current customers will continue to utilize our services or continue at the same levels. A reduction in or termination of our services by one or more of our major customers could have a material adverse effect on our business and operating results.

We operate in highly competitive and fragmented segments of our industry, and our business will suffer if we are unable to adequately address downward pricing pressures and other factors that may adversely affect our results of operations, growth prospects and profitability.

The segments of the freight transportation industry in which we participate are highly competitive, very fragmented and historically have few barriers to entry. We compete with a large number of other asset-light logistics companies, asset-based carriers, integrated logistics companies, and third-party freight brokers. To a lesser extent, we also compete with integrated air cargo carriers and passenger airlines. Our competition ranges from small operators that compete within a limited geographic area to companies with substantially greater financial and other resources, including greater freight capacity.  We also face competition from freight forwarders who decide to establish their own networks to transport expedited ground freight, as well as from logistics companies, internet matching services and internet and third party freight brokers and new entrants to the market. In addition, customers can bring in-house some of the services we provide to them. We believe competition is based primarily on quality service, available capacity, on-time delivery, flexibility, reliability and security, transportation rates as well as the ability to acquire and maintain terminal facilities in desirable locations at reasonable rates. Many of our competitors periodically reduce their rates to gain business, especially during times of economic decline. In the past several years, several of our competitors have reduced their rates to unusually low levels that we believe are unsustainable in the long-term, but that may materially adversely affect our business in the short-term.

In addition, competitors may pursue other strategies to gain a competitive advantage such as developing superior information technology systems or establishing cooperative relationships to increase their ability to address customer needs. Furthermore, the transportation industry continues to consolidate. As a result of consolidation, our competitors may increase their market share and improve their financial capacity, and may strengthen their competitive positions. Business combinations could also result in competitors providing a wider variety of services at competitive prices, which could adversely affect our financial performance. These competitive pressures may cause a decrease in our volume of freight, require us to lower the prices we charge for our services and adversely affect our results of operations, growth prospects and profitability.

Our results of operations will be materially and adversely affected if our new service offerings do not gain market acceptance or result in the loss of our current customer base.

One element of our growth strategy is to expand our service offerings to customers. As a result, we have added additional services in the past few years. We may not succeed in making our customers sufficiently aware of existing and future services or in creating customer acceptance of these services at the prices we would want to charge. In addition, we may be required to devote substantial resources to educate our customers, with no assurance that a sufficient number of customers will use our services for

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commercial success to be achieved. We may not identify trends correctly, or may not be able to bring new services to market as quickly, effectively or price-competitively as our competitors. In addition, new services may alienate existing customers or cause us to lose business to our competitors. If any of the foregoing occurs, it could have a material adverse effect on our results of operations.

We have grown and may grow, in part, through acquisitions, which involve various risks, and we may not be able to identify or acquire companies consistent with our growth strategy or successfully integrate acquired businesses into our operations.

We have grown through acquisitions, and we intend to pursue opportunities to expand our business by acquiring other companies in the future. Acquisitions involve risks, including those relating to:

identification of appropriate acquisition candidates;
negotiation of acquisitions on favorable terms and valuations;
integration of acquired businesses and personnel;
implementation of proper business and accounting controls;
ability to obtain financing, at favorable terms or at all;
diversion of management attention;
retention of employees and customers;
unexpected liabilities;
potential erosion of operating profits as new acquisitions may be unable to achieve profitability comparable with our Expedited LTL business; and
detrimental issues not discovered during due diligence.

Acquisitions also may affect our short-term cash flow and net income as we expend funds, potentially increase indebtedness and incur additional expenses. If we are not able to identify or acquire companies consistent with our growth strategy, or if we fail to successfully integrate any acquired companies into our operations, we may not achieve anticipated increases in revenue, cost savings and economies of scale, our operating results may actually decline and acquired goodwill may become impaired.

We could be required to record a material non-cash charge to income if our recorded intangible assets or goodwill are determined to be impaired.

We have $111.2 million of recorded net definite-lived intangible assets on our consolidated balance sheet at December 31, 2017.  Our definite-lived intangible assets primarily represent the value of customer relationships and non-compete agreements that were recorded in conjunction with our various acquisitions.  We review our long-lived assets, such as our definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  Impairment is recognized on these assets when the estimated fair value is less than the carrying value.  If such measurement indicates an impairment, we would be required to record a non-cash impairment charge to our consolidated statement of comprehensive income in the amount that the carrying value of these assets exceed the estimated fair value of the assets.

We also have recorded goodwill of $191.7 million on our consolidated balance sheet at December 31, 2017. Goodwill is assessed for impairment annually (or more frequently if circumstances indicate possible impairment) for each of our reporting units. This assessment includes comparing the fair value of each reporting unit to the carrying value of the assets assigned to each reporting unit. If the carrying value of the reporting unit was to exceed our estimated fair value of the reporting unit, we would then be required to estimate the fair value of the individual assets and liabilities within the reporting unit to ascertain the amount of fair value of goodwill and any potential impairment. If we determine that our fair value of goodwill is less than the related book value, we could be required to record a non-cash impairment charge to our consolidated statement of comprehensive income, which could have a material adverse effect on our earnings.

We are dependent on our senior management team and other key employees, and the loss of any such personnel could materially and adversely affect our business, operating results and financial condition.

Our future performance depends, in significant part, upon the continued service of our senior management team and other key employees. We cannot be certain that we can retain these employees. The loss of the services of one or more of these or other key personnel could have a material adverse effect on our business, operating results and financial condition if we are unable to secure replacement personnel internally or through our recruitment programs and initiatives that have sufficient experience in our industry or in the management of our business. If we fail to develop and retain a core group of senior management and other key employees and address issues of succession planning, it could hinder our ability to execute on our business strategies and maintain our level of service.

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Claims for property damage, personal injuries or workers’ compensation and related expenses could significantly reduce our earnings.

Under DOT regulations, we are liable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on our behalf. Additionally, from time to time, the drivers employed and engaged by the third-party transportation carriers we contract with are involved in accidents, which may result in serious personal injuries. The resulting types and/or amounts of damages may be excluded by or exceed the amount of insurance coverage maintained by the contracted carrier. Although these drivers are not our employees and all of these drivers are employees, owner-operators, or independent contractors working for carriers, from time to time, claims may be asserted against us for their actions, or for our actions in retaining them. We currently maintain liability insurance coverage that we believe is adequate to cover third-party claims. We have a self-insured retention of $1.0 million per occurrence for vehicle and general liability claims. We may also be subject to claims for workers’ compensation. We maintain workers’ compensation insurance coverage that we believe is adequate to cover such claims. We have a self-insured retention of approximately $0.4 million for each such claim, except in Ohio, where we are a qualified self-insured entity with an approximately $0.5 million self-insured retention. We could incur claims in excess of our policy limits or incur claims not covered by our insurance. Any claims beyond the limits or scope of our insurance coverage may have a material adverse effect on us. Because we do not carry “stop loss” insurance, a significant increase in the number of claims that we must cover under our self-insurance retainage could adversely affect our profitability. In addition, we may be unable to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses.

We face risks related to self-insurance and third-party insurance that can be volatile to our earnings.

We self-insure a significant portion of our claims exposure and related expenses for cargo loss, employee medical expense, bodily injury, workers’ compensation and property damage, and maintain insurance with insurance companies above our limits of self-insurance. Self-insurance retention and other limitations are detailed in Part II, Item 7, under “Self-Insurance Loss Reserves.” Our large self-insured retention limits can make our insurance and claims expense higher or more volatile. Additionally, if our third-party insurance carriers or underwriters leave the trucking sector, as was the case during 2017, or if they decline to renew us as an insured, it could materially increase our insurance costs or collateral requirements, or create difficulties in finding insurance in excess of our self-insured retention limits.  Additionally, we could find it necessary to raise our self-insured retention, pay higher premiums or decrease our aggregate coverage limits when our policies are renewed or replaced, any of which will negatively impact our earnings.

We accrue for the costs of the uninsured portion of pending claims, based on the nature and severity of individual claims and historical claims development trends. Estimating the number and severity of claims, as well as related judgment or settlement amounts is inherently difficult. This, along with legal expenses, incurred but not reported claims, and other uncertainties can cause unfavorable differences between actual self-insurance costs and our reserve estimates.

Our business is subject to seasonal trends.

Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. Our first and second quarters have traditionally been the weakest compared with our third and fourth quarters. This trend is dependent on numerous factors including economic conditions, customer demand and weather. Because revenue is directly related to the available working days of shippers, national holidays and the number of business days during a given period may also create seasonal impact on our results of operations. After the winter holiday season and during the remaining winter months, our freight volumes are typically lower because some customers reduce shipment levels. In addition, a substantial portion of our revenue is derived from customers in industries whose shipping patterns are tied closely to consumer demand which can sometimes be difficult to predict or are based on just-in-time production schedules. Therefore, our revenue is, to a large degree, affected by factors that are outside of our control. There can be no assurance that our historic operating patterns will continue in future periods as we cannot influence or forecast many of these factors.

Our results of operations may be affected by harsh weather conditions and disasters.

Certain weather-related conditions such as ice and snow can disrupt our operations. Our operating expenses have historically been higher in the winter months because of cold temperatures and other adverse winter weather conditions (such as explosive cyclogenesis events) which result in decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs. Harsh weather could also reduce our ability to transport freight, which could result in decreased revenues. Disasters, whether natural or man-made can also adversely affect our performance by reducing demand and reducing our ability to transport freight, which could result in decreased revenue and increased operating expenses.

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We operate in a regulated industry, and increased costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.

The DOT and various state and federal agencies have been granted broad regulatory powers over our business in the United States, and we are licensed by the DOT and U.S. Customs. Additionally, our Canada business activities are subject to the similar laws and regulations of Canada and its provinces. If we fail to comply with any applicable regulations, our licenses may be revoked or we could be subject to substantial fines or penalties and to civil and criminal liability.

The transportation industry is subject to legislative and regulatory changes that can affect the economics of our business by requiring changes in operating practices or influencing the demand for, and the cost of providing, transportation services.

The Federal Motor Carrier Safety Administration (“FMCSA”) has implemented a requirement that electronic driver logs be monitored by Electronic Log Devices (“ELDs”) for most interstate commercial motor vehicle drivers by no later than December 18, 2017. The cost associated with the ELD mandate, together with other regulations, could result in a reduction in the pool of owner-operators and other third-party carriers available to us to service our customers’ demands, which could increase driver turnover, decrease asset utilization, limit growth and adversely impact our results of operations. Further, heightened security concerns may continue to result in increased regulations, including the implementation of various security measures, checkpoints or travel restrictions on trucks.
In addition, there may be changes in applicable federal or state tax or other laws or interpretations of those laws. If this happens, we may incur additional taxes, as well as higher workers’ compensation and employee benefit costs, and possibly penalties and interest for prior periods. This could have an adverse effect on our results of operations.

We are subject to various environmental laws and regulations, and costs of compliance with, or liabilities for violations of, existing or future laws and regulations could significantly increase our costs of doing business.

Our operations are subject to environmental laws and regulations dealing with, among other things, the handling of hazardous materials and discharge and retention of stormwater. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage, environmental damage, and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable environmental laws or regulations, it could significantly increase our cost of doing business. Under specific environmental laws and regulations, we could be held responsible for all of the costs relating to any contamination at our past or present terminals and at third-party waste disposal sites. If we fail to comply with applicable environmental laws and regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

In addition, as global warming issues become more prevalent, federal and local governments and our customers are beginning to respond to these issues. This increased focus on sustainability may result in new regulations and customer requirements that could negatively affect us. This could cause us to incur additional direct costs or to make changes to our operations in order to comply with any new regulations and customer requirements, as well as increased indirect costs or loss of revenue resulting from, among other things, our customers incurring additional compliance costs that affect our costs and revenues. We could also lose revenue if our customers divert business from us because we have not complied with their sustainability requirements. These costs, changes and loss of revenue could have a material adverse effect on our business, financial condition and results of operations.

The FMCSA’s CSA initiative could adversely impact our ability to hire qualified drivers or contract with qualified owner-operators or third-party carriers, meet our growth projections and maintain our customer relationships, each of which could adversely impact our results of operations.

The FMCSA’s Compliance, Safety, Accountability initiative (“CSA”) is an enforcement and compliance program designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver. These measurements are scored and used by the FMCSA to identify potential safety risks and to direct enforcement action. CSA scores are dependent upon safety and compliance experience, which could change at any time. In addition, the safety standards prescribed in CSA could change and our ability as well as our independent contractors’ ability to maintain an acceptable score could be adversely impacted. Public disclosure of certain CSA scores was restricted through the enactment of the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”) on December 4, 2015; however, the FAST Act does not restrict public disclosure of all data collected by the FMCSA. If we receive unacceptable CSA scores, and this data is made available to the public, our relationships with our customers could be damaged, which could result in a loss of business.


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The requirements of CSA could also shrink the industry’s pool of drivers as those with unfavorable scores could leave the industry. As a result, the costs to attract, train and retain qualified drivers, owner-operators or third-party carriers could increase. In addition, a shortage of qualified drivers could increase driver turnover, decrease asset utilization, limit growth and adversely impact our results of operations.

If our employees were to unionize, our operating costs would likely increase.

None of our employees is currently represented by a collective bargaining agreement. However, we have no assurance that our employees will not unionize in the future, which could increase our operating costs and force us to alter our operating methods. This could have a material adverse effect on our operating results.

Our charter and bylaws and provisions of Tennessee law could discourage or prevent a takeover that may be considered favorable.

Our charter and bylaws and provisions of Tennessee law may discourage, delay or prevent a merger, acquisition or change in control that may be considered favorable. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors and take other corporate actions. Among other things, these provisions:

authorize us to issue preferred stock, the terms of which may be determined at the sole discretion of our Board of Directors and may adversely affect the voting or economic rights of our shareholders; and

establish advance notice requirements for nominations for election to the Board of Directors and for proposing matters that can be acted on by shareholders at a meeting.

Our charter and bylaws and provisions of Tennessee law may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices for our Common Stock and also could limit the price that investors are willing to pay in the future for shares of our Common Stock.



Item 1B.    Unresolved Staff Comments

None.

Item 2.        Properties

Properties
 
We believe that we have adequate facilities for conducting our business, including properties owned and leased. Management further believes that in the event replacement property is needed, it will be available on terms and at costs substantially similar to the terms and costs experienced by competitors within the transportation industry.
 
We own our Columbus, Ohio central sorting facility which is used by our Expedited LTL and TLS segments. The Columbus, Ohio facility is 125,000 square feet with 168 trailer doors. This premier facility can unload, sort and load upwards of 3.7 million pounds in five hours.

We also own facilities near Dallas/Fort Worth, Texas, Chicago, Illinois and Atlanta, Georgia, all of which are used by the Expedited LTL segment.  The Dallas/Fort Worth, Texas facility has over 216,000 square feet with 134 trailer doors and approximately 28,000 square feet of office space.  The Chicago, Illinois facility is over 125,000 square feet with 110 trailer doors and over 10,000 square feet of office space. The Atlanta, Georgia facility is over 142,000 square feet with 118 trailer doors and approximately 12,000 square feet of office space. We lease our shared services headquarters in Greeneville, Tennessee. During 2016, we renewed the lease through 2023. Our executives are headquartered within our Atlanta, Georgia and Dallas, Texas facilities.

We lease and maintain 130 additional terminals, office spaces and other properties located in major cities throughout the United States and Canada. Lease terms for these terminals are typically for three to seven years. As a result of the Towne acquisition, we currently have 2 idle facilities that we are still leasing. Our plan is to buyout or sublease these remaining facilities. In addition, we have operations in 30 cities operated by independent agents who handle freight for us on a commission basis.
    


19


Item 3.        Legal Proceedings
 
From time to time, we are a party to ordinary, routine litigation incidental to and arising in the normal course of our business, most of which involve claims for personal injury, property damage related to the transportation and handling of freight, or workers’ compensation. We do not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or cash flow.

Item 4.        Mine Safety Disclosures
    
Not applicable.

Part II

Item 5.        Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities    

Our Common Stock trades on The Nasdaq Global Select Stock Market™ under the symbol “FWRD.” The following table sets forth the high and low sales prices for Common Stock as reported by The Nasdaq Global Select Stock Market™ for each full quarterly period within the two most recent fiscal years.
2017
 
High
 
Low
 
Dividends
First Quarter
 
$
51.51

 
$
45.86

 
$
0.15

Second Quarter
 
56.52

 
46.35

 
0.15

Third Quarter
 
57.68

 
49.98

 
0.15

Fourth Quarter
 
59.98

 
49.88

 
0.15

 
 
 
 
 
 
 
2016
 
High
 
Low
 
Dividends
First Quarter
 
$
49.01

 
$
36.00

 
$
0.12

Second Quarter
 
48.69

 
41.48

 
0.12

Third Quarter
 
47.78

 
41.70

 
0.12

Fourth Quarter
 
50.72

 
40.07

 
0.15


There were approximately 606 shareholders of record of our Common Stock as of January 18, 2018.
 
Subsequent to December 31, 2017, our Board of Directors declared a cash dividend of $0.15 per share that will be paid in the first quarter of 2018. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.

There are no material restrictions on our ability to declare dividends. 

None of our securities were sold during fiscal year 2017 without registration under the Securities Act.

Stock Performance Graph

The following graph compares the percentage change in the cumulative shareholder return on our Common Stock with The Nasdaq Trucking and Transportation Stocks Index and The Nasdaq Global Select Stock Market™ Index commencing on the last trading day of December 2012 and ending on the last trading day of December 2017. The graph assumes a base investment of $100 made on December 31, 2012 and the respective returns assume reinvestment of all dividends. The comparisons in this graph are required by the SEC and, therefore, are not intended to forecast or necessarily be indicative of any future return on our Common Stock.

The performance graph and related information shall not be deemed “soliciting material” or be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.


20


chart-8ada83284cd25c7ab6e.jpg

2012

2013

2014

2015

2016

2017
Forward Air Corporation
$
100


$
125


$
144


$
123


$
135


$
164

Nasdaq Trucking and Transportation Stocks Index
100


125


173


146


178


222

Nasdaq Global Select Stock Market Index
100


138


157


166


179


230


Issuer Purchases of Equity Securities    
Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Program

Maximum Number of Shares that May Yet Be Purchased Under the Program (1)
October 1-31, 2017



$





November 1-30, 2017








December 1-31, 2017

121,186


58


121,186


1,818,665

Total

121,186


$
58


121,186


1,818,665


(1) On July 21, 2016, the Board of Directors approved a stock repurchase program for up to 3.0 million shares of the Company's common stock.


21


Item 6.        Selected Financial Data

The following table sets forth our selected financial data. The selected financial data should be read in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes thereto, included elsewhere in this report.
 
Year ended
 
December 31,
 
December 31,
 
December 31,
 
December 31,
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per share data)
Income Statement Data:
 
 
 
 
 
 
 
 
 
Operating revenue
$
1,100,816

 
$
982,530

 
$
959,125

 
$
780,959

 
$
652,481

Income from operations
108,672

 
59,979

 
81,772

 
96,406

 
84,355

Operating margin (1)
9.9
%
 
6.1
%
 
8.5
%
 
12.3
%
 
12.9
%
 
 
 
 
 
 
 
 
 
 
Net income
87,321

 
27,670

 
55,575

 
61,169

 
54,467

Net income per share:
 
 
 
 
 
 
 
 
 
   Basic
$
2.90

 
$
0.91

 
$
1.80

 
$
1.99

 
$
1.81

   Diluted
$
2.89

 
$
0.90

 
$
1.78

 
$
1.96

 
$
1.77

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.60

 
$
0.51

 
$
0.48

 
$
0.48

 
$
0.40

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at end of period):
 
 
 
 
 
 
 
 
 
Total assets
$
687,716

 
$
641,291

 
$
699,932

 
$
539,309

 
$
506,269

Long-term obligations, net of current portion
40,588

 
725

 
28,856

 
1,275

 
3

Shareholders' equity
533,489

 
499,069

 
510,055

 
463,563

 
435,865

 
 
 
 
 
 
 
 
 
 
(1) Income from operations as a percentage of operating revenue


22


Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview and Executive Summary
 
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 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

Acquisition of Towne

On March 9, 2015, we completed the acquisition of CLP Towne Inc. (“Towne”). Towne is a full-service trucking provider offering time-sensitive less-than-truckload shipping, full truckload service, an extensive cartage network, container freight stations and dedicated trucking. For the acquisition of Towne, we paid $61.9 million in net cash and assumed $59.5 million in debt and capital leases. The transaction was funded with proceeds from a $125.0 million two year term loan. The assets, liabilities, and operating results of Towne have been included in the Expedited LTL reportable segment since its acquisition in 2015.
Acquisitions of CST and Related Companies

As part of our strategy to expand our Intermodal operations, in January 2016, we acquired certain assets of Ace for $1.7 million and in August 2016, we acquired certain assets of Triumph for $10.1 million and an earnout of $1.3 million paid in September 2017. 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.

Goodwill

In 2013, we acquired TQI Holdings, Inc. for total consideration of $65.4 million and established the Total Quality, Inc. reporting unit ("TQI"). In conjunction with our policy to annually test goodwill for impairment as of June 30, 2016, we determined there were indicators of potential impairment of the goodwill and other long lived assets assigned to the acquisition of TQI Holdings, Inc. This determination was based on TQI's financial performance falling notably short of previous projections. As a result, we reduced TQI's projected cash flows and consequently the estimate of TQI's fair value no longer exceeded its respective carrying value.  Based on the results of the impairment test, during the second quarter of 2016, we recorded impairment charges for goodwill, intangibles and other assets of $42.4 million related to the TQI reporting unit, which is part of the TLS reportable segment. 

23



Results from Operations
The following table sets forth our consolidated historical financial data for the year ended December 31, 2017 and 2016 (in millions):

Year ended December 31,

2017

2016

Change

Percent Change
Operating revenue:











Expedited LTL
$
619.8


$
570.8


$
49.0


8.6
 %
Truckload Premium Services
179.3


164.3


15.0


9.1

Pool Distribution
164.2


148.6


15.6


10.5

Intermodal
148.9


103.7


45.2


43.6

Eliminations and other operations
(11.4
)

(4.9
)

(6.5
)

132.7

Operating revenue
1,100.8


982.5


118.3


12.0

Operating expenses:







   Purchased transportation
478.2


413.4


64.8


15.7

   Salaries, wages, and employee benefits
264.7


242.0


22.7


9.4

   Operating leases
63.8


60.5


3.3


5.5

   Depreciation and amortization
41.1


38.2


2.9


7.6

   Insurance and claims
29.6


25.4


4.2


16.5

   Fuel expense
16.5


13.2


3.3


25.0

   Other operating expenses
98.3


87.4


10.9


12.5

   Impairment of goodwill, intangibles and other assets


42.4


(42.4
)

(100.0
)
      Total operating expenses
992.2


922.5


69.7


7.6

Income (loss) from operations:









Expedited LTL
88.1


83.5


4.6


5.5

Truckload Premium Services
3.2


(35.4
)

38.6


NM

Pool Distribution
6.4


3.6


2.8


77.8

Intermodal
12.7


11.0


1.7


15.5

Other operations
(1.8
)

(2.7
)

0.9


(33.3
)
Income from operations
108.6


60.0


48.6


81.0

Other expense:







   Interest expense
(1.2
)

(1.6
)

0.4


(25.0
)
   Other, net







      Total other expense
(1.2
)

(1.6
)

0.4


(25.0
)
Income before income taxes
107.4


58.4


49.0


83.9

Income taxes
20.1


30.7


(10.6
)

(34.5
)
Net income
$
87.3


$
27.7


$
59.6


215.2
 %

During the year ended December 31, 2017, we experienced a 12.0% increase in our consolidated revenues compared to the year ended December 31, 2016. Operating income increased $48.6 million, or 81.0%, from 2016 to $108.6 million for the year ended December 31, 2017.

Segment Operations

Expedited LTL's revenue increased $49.0 million, or 8.6%, while operating income increased $4.6 million, or 5.5% for the year ended December 31, 2017, compared to the same period in 2016. The increase in revenue was due to increased tonnage, increased local pickup and delivery ("Complete") attachment and higher fuel surcharges. The deterioration in income from

24


operations as a percentage of revenue was due to an increased utilization of third party transportation providers partly offset by increased Complete, fuel surcharge and linehaul revenues. The fuel surcharge increase was also due to increased fuel prices.

TLS revenue increased $15.0 million, or 9.1%, and operating income increased $38.6 million for the year ended December 31, 2017, compared to the same period in 2016. The increase in revenue was due to an increase in overall miles from new business wins. The increase of TLS operating income was largely the result of 2016 including $42.4 million in impairment charges related to the TQI reporting unit. Excluding the impairment charges, the deterioration in results from operations was due to increased utilization of third party transportation providers, which led to the increase in cost per mile outpacing the increase in revenue per mile.

Pool Distribution revenue increased $15.6 million, or 10.5%, while operating income increased $2.8 million, or 77.8%, for the year ended December 31, 2017, compared to the same period in 2016.  The revenue increase was due to increased volumes from previously existing customers, new business and rate increases. The improvement in income from operations was primarily the result of higher revenue volumes, current year rate increases, purchased transportation efficiencies and lower facility costs.

Intermodal revenue increased $45.2 million, or 43.6%, and operating income increased $1.7 million, or 15.5%, for the year ended December 31, 2017, compared to the same period in 2016. The increase in revenue and operating income in total dollars was primarily attributable to the Atlantic, Ace and Triumph acquisitions. The decrease in income from operations as a percentage of revenue was attributable to increased amortization associated with Intermodal's acquisitions, lower margins on acquired business and acquisition-related legal and professional fees.

Fuel Surcharge

Our net fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and volume transiting our network.  During the year ended December 31, 2017, total net fuel surcharge revenue increased 44.3% as compared to the same period in 2016, mostly due to increased fuel prices and increased volumes in the Expedited LTL, Intermodal and Pool segments.

Interest Expense

Interest expense was $1.2 million for the year ended December 31, 2017 compared to $1.6 million for the same period of 2016. The decrease in interest expense was attributable to principal payments made on the term loan used to finance the Towne acquisition in March 2015 partly offset by borrowings on our revolving credit facility.

Income Taxes

The combined federal and state effective tax rate for the year ended December 31, 2017 was 18.7% compared to a rate of 52.6% for the same period in 2016. The lower effective tax rate for 2017 is the result of the enactment of the Tax Cuts and Jobs Act, which lowered the value of our net deferred tax liabilities. Also, the 2016 effective tax rate reflected the impairment of goodwill in the second quarter of 2016 that is non-deductible for tax purposes.

Net Income

As a result of the foregoing factors, net income increased by $59.6 million, or 215.2%, to $87.3 million for the year ended December 31, 2017 compared to $27.7 million for the same period in 2016.


25


Expedited LTL - Year Ended December 31, 2017 compared to Year Ended December 31, 2016

The following table sets forth our historical financial data of the Expedited LTL segment for the year ended December 31, 2017 and 2016 (in millions):

Expedited LTL Segment Information
(In millions)
(Unaudited)













Year ended

December 31,

Percent of

December 31,

Percent of



Percent
 
2017

Revenue

2016

Revenue

Change

Change
Operating revenue
$
619.8


100.0
%

$
570.8


100.0
%

$
49.0


8.6
%












Operating expenses:











Purchased transportation
254.9


41.1


225.1


39.5


29.8


13.2

Salaries, wages and employee benefits
145.9


23.5


139.0


24.4


6.9


5.0

Operating leases
36.7


5.9


34.4


6.0


2.3


6.7

Depreciation and amortization
22.1


3.6


21.9


3.8


0.2


0.9

Insurance and claims
15.4


2.5


13.2


2.3


2.2


16.7

Fuel expense
3.8


0.6


3.3


0.6


0.5


15.2

Other operating expenses
52.9


8.6


50.4


8.8


2.5


5.0

Total operating expenses
531.7


85.8


487.3


85.4


44.4


9.1

Income from operations
$
88.1


14.2
%

$
83.5


14.6
%

$
4.6


5.5
%
Expedited LTL Operating Statistics







Year ended

December 31,
 
December 31,
 
Percent

2017
 
2016
 
Change


 

 

Operating ratio
85.8
%
 
85.4
%
 
0.5
 %


 

 

Business days
254.0

 
255.0

 
(0.4
)
Business weeks
50.8

 
51.0

 
(0.4
)


 

 

Expedited LTL:

 

 

Tonnage

 

 

    Total pounds ¹
2,513,055

 
2,370,788

 
6.0

    Average weekly pounds ¹
49,470

 
46,486

 
6.4



 

 

Linehaul shipments

 

 

    Total linehaul
4,036,385

 
3,757,275

 
7.4

    Average weekly
79,456

 
73,672

 
7.9



 

 

Forward Air Complete shipments
943,396

 
782,425

 
20.6

As a percentage of linehaul shipments
23.4
%
 
20.8
%
 
12.5



 

 

Average linehaul shipment size
623

 
631

 
(1.3
)


 

 

Revenue per pound 2

 

 

    Linehaul yield
$
17.12

 
$
17.64

 
(2.3
)
    Fuel surcharge impact
1.20

 
0.95

 
1.1

    Forward Air Complete impact
3.82

 
3.33

 
2.2

Total Expedited LTL yield
$
22.14

 
$
21.92

 
1.0
 %


 

 



 

 

¹ - In thousands

 

 

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

26


Revenues
Expedited LTL operating revenue increased $49.0 million, or 8.6%, to $619.8 million for the year ended December 31, 2017 from $570.8 million for the same period of 2016. The increase in revenue is mostly the result of increases to Complete activity and fuel surcharge revenues. Linehaul revenue, which is the largest portion of Expedited LTL, increased $12.1 million, or 2.9%, due to the increase in tonnage partly offset by the decrease in linehaul yield noted in the preceding table. The increase in tonnage is due to a growing percentage of total volume from shipments with higher density attributes and a slightly lower length of haul than our traditional shipments, driving the decrease in average base revenue per pound.

The $49.0 million revenue increase is primarily the result of a $16.9 million, or 21.4%, increase in Complete revenue.  The increase in Complete revenue was attributable to an increase in shipping volumes in our Expedited LTL network and a 12.5% increase in the attachment rate of Complete to linehaul shipments. Additionally, compared to the same period in 2016, net fuel surcharge revenue increased $7.6 million largely due to the increase in fuel prices and volume increases. Other terminal based revenues, which includes dedicated local pickup and delivery services, warehousing and terminal handling, increased $12.4 million, or 24.4%, to $63.4 million in 2017 from $51.0 million in the same period of 2016. The increase in other terminal revenue was mainly attributable to increases in dedicated local pickup and delivery.

Purchased Transportation
Expedited LTL’s purchased transportation increased by $29.8 million, or 13.2%, to $254.9 million for the year ended December 31, 2017 from $225.1 million for the year ended December 31, 2016. As a percentage of segment operating revenue, Expedited LTL purchased transportation was 41.1% during the year ended December 31, 2017 compared to 39.5% for the same period of 2016. The increase is mostly due to a 6.3% increase in Expedited LTL cost per mile. The higher cost per mile is due to increased utilization of third party transportation providers, which are more costly than owner-operators. 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 by $6.9 million, or 5.0%, to $145.9 million for the year ended December 31, 2017 from $139.0 million in the same period of 2016. Salaries, wages and employee benefits were 23.5% of Expedited LTL’s operating revenue for the year ended December 31, 2017 compared to 24.4% for the same period of 2016. The decrease in salaries, wages and employee benefits as a percentage of revenue was primarily attributable to a a 0.7% decrease in direct Expedited LTL terminal and management salaries as a percentage of revenue and a 0.2% decrease in health insurance costs as a percentage of revenue. The decrease in direct pay as a percentage of revenue is the impact of additional revenue on fixed salaries and improved operating efficiencies.
 
Operating Leases
Operating leases increased $2.3 million, or 6.7%, to $36.7 million for the year ended December 31, 2017 from $34.4 million for the year ended December 31, 2016.  Operating leases were 5.9% of Expedited LTL’s operating revenue for the year ended December 31, 2017 compared with 6.0% for the year ended December 31, 2016.  The increase in cost is due to $1.2 million of additional facility lease expenses and a $1.1 million increase in truck, trailer and equipment rentals and leases. Facility leases increased due to the expansion of certain facilities. Vehicle leases increased due to the replacement of older owned power equipment with leased power equipment.
Depreciation and Amortization
Expedited LTL depreciation and amortization increased $0.2 million, or 0.9%, to $22.1 million for the year ended December 31, 2017 from $21.9 million for the year ended December 31, 2016.  Depreciation and amortization expense as a percentage of Expedited LTL operating revenue was 3.6% in the year ended December 31, 2017 compared to 3.8% for the year ended December 31, 2016.   The decrease as a percentage of revenue was due to the increase in equipment leasing mentioned above instead of purchased equipment.
Insurance and Claims
Expedited LTL insurance and claims expense increased $2.2 million, or 16.7%, to $15.4 million for the year ended December 31, 2017 from $13.2 million for the year ended December 31, 2016.  Insurance and claims as a percentage of Expedited LTL’s operating revenue was 2.5% for the year ended December 31, 2017 compared to 2.3% for the year ended December 31, 2016. The increase in dollars was partly attributable to a $0.7 million increase in insurance premiums associated with our insurance

27


plan renewals and a $2.0 million increase in vehicle accident claim reserves. These increases were partly offset by decreases in vehicle damage and cargo claims.
Fuel Expense
Expedited LTL fuel expense increased $0.5 million, or 15.2%, to $3.8 million for the year ended December 31, 2017 from $3.3 million in the year ended December 31, 2016.  Fuel expense was 0.6% of Expedited LTL’s operating revenue for the years ended December 31, 2017 and 2016. LTL fuel expenses increased due to higher year-over-year fuel prices.
Other Operating Expenses
Expedited LTL other operating expenses increased $2.5 million, or 5.0%, to $52.9 million for the year ended December 31, 2017 from $50.4 million for the year ended December 31, 2016.  Expedited LTL other operating expenses were 8.6% of operating revenue for the year ended December 31, 2017 compared to 8.8% for the year ended December 31, 2016.  Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other costs of transiting our network. The decrease as percentage of revenue was primarily the result of a decrease in legal fees mostly related to indemnification funds received related to the Towne acquisition and lower costs of transiting our network due to the use of third party transportation previously mentioned. The prior period also included a corporate event that did not occur in 2017. These improvements were partly offset by an increase in receivables allowance.
Income from Operations
Expedited LTL income from operations increased by $4.6 million, or 5.5%, to $88.1 million for the year ended December 31, 2017 compared with $83.5 million for the year ended December 31, 2016.   Expedited LTL’s income from operations was 14.2% of operating revenue for the year ended December 31, 2017 compared with 14.6% for the year ended December 31, 2016.  Deterioration in income from operations as a percentage of revenue was due to an increased utilization of third party transportation providers partly offset by higher tonnage driving increased Complete, fuel surcharge and linehaul revenues. The fuel surcharge increase was also due to increased fuel prices.

28


Truckload Premium Services - Year Ended December 31, 2017 compared to Year Ended December 31, 2016

The following table sets forth our historical financial data for the Truckload Premium Services segment for the year ended December 31, 2017 and 2016 (in millions):

Truckload Premium Services Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended
 
December 31,
 
Percent of
 
December 31,
 
Percent of
 
 
 
Percent
 
2017
 
Revenue
 
2016
 
Revenue
 
Change
 
Change
Operating revenue
$
179.3

 
100.0
%
 
$
164.3

 
100.0
 %
 
$
15.0

 
9.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
131.3

 
73.2

 
115.4

 
70.2

 
15.9

 
13.8

Salaries, wages and employee benefits
20.4

 
11.4

 
19.3

 
11.7

 
1.1

 
5.7

Operating leases
0.9

 
0.5

 
0.3

 
0.2

 
0.6

 
200.0

Depreciation and amortization
6.3

 
3.5

 
6.5

 
4.0

 
(0.2
)
 
(3.1
)
Insurance and claims
5.4

 
3.0

 
4.8

 
2.9

 
0.6

 
12.5

Fuel expense
3.3

 
1.8

 
2.6

 
1.6

 
0.7

 
26.9

Other operating expenses
8.5

 
4.8

 
8.4

 
5.1

 
0.1

 
1.2

Impairment of goodwill, intangibles and other assets

 

 
42.4

 
25.8

 
(42.4
)
 
(100.0
)
Total operating expenses
176.1

 
98.2

 
199.7

 
121.5

 
(23.6
)
 
(11.8
)
Income (loss) from operations
$
3.2

 
1.8
%
 
$
(35.4
)
 
(21.5
)%
 
$
38.6

 
(109.0
)%

Truckload Premium Services Operating Statistics
 
 
 
Year ended
 
December 31,
 
December 31,
 
Percent
 
2017
 
2016
 
Change
 
 
 
 
 
 
    Company driver 1
7,822

 
6,740

 
16.1
 %
    Owner operator 1
45,123

 
50,442

 
(10.5
)
    Third party 1
43,653

 
32,358

 
34.9

Total Miles
96,598

 
89,540

 
7.9

 
 
 
 
 
 
Revenue per mile
$
1.80

 
$
1.79

 
0.6

 
 
 
 
 
 
Cost per mile
$
1.43

 
$
1.38

 
3.6
 %
 
 
 
 
 
 
¹ - In thousands
 
 
 
 
 

Revenues
TLS revenue increased $15.0 million, or 9.1%, to $179.3 million for the year ended December 31, 2017 from $164.3 million in the same period of 2016. The increase in TLS revenue was attributable to new business wins which resulted in a 7.9% increase in miles driven to support revenue.


29


Purchased Transportation

Purchased transportation costs for our TLS revenue increased $15.9 million, or 13.8%, to $131.3 million for the year ended December 31, 2017 from $115.4 million for the year ended December 31, 2016. For the year ended December 31, 2017, TLS purchased transportation costs represented 73.2% of TLS revenue compared to 70.2% for the same period in 2016. The increase in TLS purchased transportation was attributable to a 7.2% increase in non-Company miles driven and a 4.9% increase in non-Company cost per mile during the year ended December 31, 2017 compared to the same period in 2016. The increase in TLS miles driven was attributable to new business wins previously mentioned. The increase in cost per mile was due to TLS utilizing more costly third party transportation providers to cover miles. The increase in TLS purchased transportation as a percentage of revenue was attributable to TLS revenue per mile not increasing in proportion with the increase in TLS cost per mile.

Salaries, Wages, and Benefits

Salaries, wages and employee benefits of TLS increased by $1.1 million, or 5.7%, to $20.4 million in the year ended December 31, 2017 from $19.3 million in the same period of 2016. Salaries, wages and employee benefits were 11.4% of TLS’s operating revenue in the year ended December 31, 2017 compared to 11.7% for the same period of 2016. The decrease in salaries, wages and employee benefits as a percentage of revenue was mostly attributable to the increase in revenue outpacing the increase in pay to Company drivers and office staff.

Operating Leases

Operating leases increased $0.6 million, or 200.0%, to $0.9 million for the year ended December 31, 2017 from $0.3 million for the same period in 2016. Operating leases were 0.5% of TLS operating revenue for the year ended December 31, 2017 compared to 0.2% for the same period of 2016. The $0.6 million increase in cost is due to additional trailer rentals for the new business wins mentioned above.

Depreciation and Amortization

Depreciation and amortization decreased $0.2 million, or 3.1%, to $6.3 million for the year ended December 31, 2017 from $6.5 million for the year ended December 31, 2016.  Depreciation and amortization expense as a percentage of TLS operating revenue was 3.5% for the year ended December 31, 2017 compared to 4.0% for the same period in 2016. The decrease was due to the impairment of TQI intangible assets in the second quarter of 2016 leading to lower on-going amortization expense. This decrease was partially offset by increased trailer depreciation on trailers purchased during 2017.

Insurance and Claims

TLS insurance and claims increased $0.6 million, or 12.5%, to $5.4 million for the year ended December 31, 2017 from $4.8 million for the year ended December 31, 2016. As a percentage of operating revenue, insurance and claims was 3.0% for the year ended December 31, 2017 compared to 2.9% for the year ended December 31, 2016. The increase was due to higher vehicle accident claim reserves. The increase was also attributable to higher insurance premiums associated with our insurance plan renewals and higher cargo claims partly offset by a benefit from a prior period insurance premium audit.

Fuel Expense

TLS fuel expense increased $0.7 million, or 26.9%, to $3.3 million for the year ended December 31, 2017 from $2.6 million for the year ended December 31, 2016.  Fuel expenses were 1.8% of TLS operating revenue during the year ended December 31, 2017 compared to 1.6% for the year ended December 31, 2016.  The increase as a percentage of revenue was mostly attributable to higher year-over-year fuel prices and the increase in Company driver miles.

Other Operating Expenses

TLS other operating expenses increased $0.1 million, or 1.2%, to $8.5 million for the year ended December 31, 2017 compared to $8.4 million for the year ended December 31, 2016.  TLS other operating expenses were 4.8% of operating revenue for the year ended December 31, 2017 compared to 5.1% for the year ended December 31, 2016. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other costs of transiting shipments. The increase was attributable to a $0.2 million increase in equipment maintenance and a $0.1 million increase in transit costs. These increases were mostly offset by a $0.2 million decrease in losses on destroyed equipment.


30


Impairment of goodwill, intangibles and other assets
In the second quarter of 2016, we determined there were indicators of potential impairment of goodwill and other long lived assets acquired in the TQI acquisition. Based on our analysis we recorded $42.4 million in total impairment charges related to TQI’s goodwill and other long lived assets. During the year ended December 31, 2017, there were no impairment charges recognized.
Income from Operations
TLS results from operations increased by $38.6 million to $3.2 million in income from operations for the year ended December 31, 2017 compared with a $35.4 million loss from operations for the same period in 2016. Excluding the impairment charges, the deterioration in results from operations was due to increased utilization of third party transportation providers which led to the increase in cost per mile outpacing the increase in revenue per mile.


31


Pool Distribution - Year Ended December 31, 2017 compared to Year Ended December 31, 2016

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

Pool Distribution Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended
 
December 31,
 
Percent of
 
December 31,
 
Percent of
 
 
 
Percent
 
2017
 
Revenue
 
2016
 
Revenue
 
Change
 
Change
Operating revenue
$
164.2

 
100.0
%
 
$
148.6

 
100.0
%
 
$
15.6

 
10.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
43.2

 
26.3

 
40.0

 
26.9

 
3.2

 
8.0

Salaries, wages and employee benefits
62.7

 
38.2

 
56.8

 
38.2

 
5.9

 
10.4

Operating leases
13.3

 
8.1

 
12.7

 
8.6

 
0.6

 
4.7

Depreciation and amortization
6.8

 
4.1

 
6.0

 
4.0

 
0.8

 
13.3

Insurance and claims
4.7

 
2.9

 
4.4

 
3.0

 
0.3

 
6.8

Fuel expense
5.5

 
3.3

 
4.8

 
3.2

 
0.7

 
14.6

Other operating expenses
21.6

 
13.2

 
20.3

 
13.7

 
1.3

 
6.4

Total operating expenses
157.8

 
96.1

 
145.0

 
97.6

 
12.8

 
8.8

Income from operations
$
6.4

 
3.9
%
 
$
3.6

 
2.4
%
 
$
2.8

 
77.8
%

Revenues
Pool operating revenue increased $15.6 million, or 10.5%, to $164.2 million for the year ended December 31, 2017 from $148.6 million for the year ended December 31, 2016.  The revenue increase was due to increased volumes from previously existing customers, new business and rate increases.

Purchased Transportation

Pool purchased transportation increased $3.2 million, or 8.0%, to $43.2 million for the year ended December 31, 2017 from $40.0 million for the year ended December 31, 2016.  Pool purchased transportation as a percentage of revenue was 26.3% for the year ended December 31, 2017 compared to 26.9% for the same period in 2016.  The improvement in Pool purchased transportation as a percentage of revenue was attributable to an increased utilization of owner-operators over more costly third party carriers and revenue increases associated with rate increases.

Salaries, Wages, and Benefits
Salaries, wages and employee benefits of Pool increased by $5.9 million, or 10.4%, to $62.7 million for the year ended December 31, 2017 from $56.8 million for the year ended December 31, 2016.  As a percentage of Pool operating revenue, salaries, wages and benefits were 38.2% for the years ended December 31, 2017 and 2016.  As a percentage of revenue, increases in dock pay and employee incentive were offset by decreases in Company driver pay. Dock pay increased as a percentage of revenue as increasing revenue volumes required the use of more costly contract labor.

Operating Leases

Operating leases increased $0.6 million, or 4.7%, to $13.3 million for the year ended December 31, 2017 from $12.7 million for the year ended December 31, 2016.  Operating leases were 8.1% of Pool operating revenue for the year ended December 31, 2017 compared with 8.6% for the year ended December 31, 2016.  Operating leases increased in total dollars due to additional truck and trailer leases and rentals used to provide capacity for additional business wins throughout the network,

32


partially offset by reduced facility rent driven by higher rent in 2016 attributable to the transition and relocation of certain terminals. The decrease as a percentage of revenue is attributable to increased revenue.

Depreciation and Amortization

Depreciation and amortization increased $0.8 million, or 13.3%, to $6.8 million for the year ended December 31, 2017 compared to $6.0 million for the same period in 2016.  Depreciation and amortization expense as a percentage of Pool operating revenue was 4.1% for the year ended December 31, 2017 compared to 4.0% for the year ended December 31, 2016.  The increase in Pool depreciation and amortization in total dollars was due to the allocation of trailer depreciation, which reflects Pool's increased utilization of our trailer fleet. This increase was partly offset by a decrease in tractor depreciation due to the increased use of rentals and leases mentioned above.

Insurance and Claims

Pool insurance and claims increased $0.3 million, or 6.8%, to $4.7 million for the year ended December 31, 2017 from $4.4 million for the year ended December 31, 2016. As a percentage of operating revenue, insurance and claims was 2.9% for the year ended December 31, 2017 compared to 3.0% for the year ended December 31, 2016. The decrease as a percentage of revenue was due to a decrease in cargo claims, partly offset by increases in vehicle accident claim reserves.

Fuel Expense

Pool fuel expense increased $0.7 million, or 14.6%, to $5.5 million for the year ended December 31, 2017 from $4.8 million for the year ended December 31, 2016.  Fuel expenses were 3.3% of Pool operating revenue during the year ended December 31, 2017 compared to 3.2% for the year ended December 31, 2016.  Pool fuel expenses increased in total dollars due to higher year-over-year fuel prices and higher revenue volumes.

Other Operating Expenses

Pool other operating expenses increased $1.3 million, or 6.4%, to $21.6 million for the year ended December 31, 2017 compared to $20.3 million for the year ended December 31, 2016.  Pool other operating expenses were 13.2% of operating revenue for the year ended December 31, 2017 compared to 13.7% for the year ended December 31, 2016. Other operating expenses includes equipment maintenance, terminal and office expenses, professional fees and other over-the-road costs.  As a percentage of revenue the decrease was attributable to a 0.3% decrease in dock and facility related costs, a 0.2% decrease in legal and professional fees and 0.2% decrease due to improved agent station margins. These improvements were partly offset by losses incurred on the sale of old equipment. The dock and facility related cost improvements were mainly attributable to 2016 including the start up of new business, while similar costs were not incurred in 2017. The decrease in legal fees is primarily related to costs associated with a 2016 Department of Transportation safety audit that were not incurred in 2017.

Income from Operations

Pool income from operations increased by $2.8 million, or 77.8% to $6.4 million for the year ended December 31, 2017 from $3.6 million for the year ended December 31, 2016.  Pool income from operations was 3.9% of operating revenue for the year ended December 31, 2017 compared with 2.4% of operating revenue for the year ended December 31, 2016.  The improvement in Pool income from operations was primarily the result of higher revenue volumes, current year rate increases, purchased transportation efficiencies and lower facility costs.


33


Intermodal - Year Ended December 31, 2017 compared to Year Ended December 31, 2016

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

Intermodal Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended
 
December 31,
 
Percent of
 
December 31,
 
Percent of
 
 
 
Percent
 
2017
 
Revenue
 
2016
 
Revenue
 
Change
 
Change
Operating revenue
$
148.9

 
100.0
%
 
$
103.7

 
100.0
%
 
$
45.2

 
43.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
58.6

 
39.4

 
36.2

 
34.9

 
22.4

 
61.9

Salaries, wages and employee benefits
33.5

 
22.5

 
25.2

 
24.3

 
8.3

 
32.9

Operating leases
13.5

 
9.1

 
12.0

 
11.6

 
1.5

 
12.5

Depreciation and amortization
5.8

 
3.9

 
3.9

 
3.8

 
1.9

 
48.7

Insurance and claims
4.2

 
2.8

 
3.0

 
2.9

 
1.2

 
40.0

Fuel expense
3.9

 
2.6

 
2.5

 
2.4

 
1.4

 
56.0

Other operating expenses
16.7

 
11.2

 
9.9

 
9.5

 
6.8

 
68.7

Total operating expenses
136.2

 
91.5

 
92.7

 
89.4

 
43.5

 
46.9

Income from operations
$
12.7

 
8.5
%
 
$
11.0

 
10.6
%
 
$
1.7

 
15.5
%

Revenues

Intermodal operating revenue increased $45.2 million, or 43.6%, to $148.9 million for the year ended December 31, 2017 from $103.7 million for the same period in 2016. The increases in operating revenue were primarily attributable to the acquisition of Atlantic, Triumph and Ace and the impact of increased fuel surcharges.

Purchased Transportation

Intermodal purchased transportation increased $22.4 million, or 61.9%, to $58.6 million for the year ended December 31, 2017 from $36.2 million for the same period in 2016.  Intermodal purchased transportation as a percentage of revenue was 39.4% for the year ended December 31, 2017 compared to 34.9% for the year ended December 31, 2016.  The increase in Intermodal purchased transportation as a percentage of revenue was attributable to the Atlantic acquisition, which had a higher utilization of owner-operators as opposed to Company-employed drivers. The increase is also attributable to rate increases to our owner-operators.

Salaries, Wages, and Benefits

Intermodal salaries, wages and employee benefits increased $8.3 million, or 32.9%, to $33.5 million for the year ended December 31, 2017 compared to $25.2 million for the year ended December 31, 2016.  As a percentage of Intermodal operating revenue, salaries, wages and benefits decreased to 22.5% for the year ended December 31, 2017 compared to 24.3% for the same period in 2016. The improvement in salaries, wages and employee benefits as a percentage of revenue was primarily due to leveraging the increase in revenue on office and administrative salaries leading to a 0.8% decrease as a percentage of revenue. The improvement is also due to a 0.5% decrease as a percentage of revenue for lower workers' compensation and health insurance costs and an additional 0.5% decrease as a percentage of revenue due to dock efficiencies.

Operating Leases

Operating leases increased $1.5 million, or 12.5% to $13.5 million for the year ended December 31, 2017 from $12.0 million for the same period in 2016.  Operating leases were 9.1% of Intermodal operating revenue for the year ended December 31, 2017 compared with 11.6% in the same period of 2016.  Operating leases decreased as a percentage of revenue due to slightly

34


increasing trailer rental charges while other revenue that does not require trailer rentals increased at a more rapid rate. The decrease as a percentage of revenue is also attributable to utilization of owned equipment acquired as part of Atlantic and the increase in revenue out-pacing the increase in facility rents.

Depreciation and Amortization

Depreciation and amortization increased $1.9 million, or 48.7%, to $5.8 million for the year ended December 31, 2017 from $3.9 million for the same period in 2016. Depreciation and amortization expense as a percentage of Intermodal operating revenue was 3.9% for the year ended December 31, 2017 compared to 3.8% for the same period of 2016. The higher depreciation and amortization was due to equipment and intangible assets acquired with Atlantic, Triumph and Ace.

Insurance and Claims

Intermodal insurance and claims expense increased $1.2 million, or 40.0%, to $4.2 million for the year ended December 31, 2017 from $3.0 million for the year ended December 31, 2016.   Intermodal insurance and claims were 2.8% of operating revenue for the year ended December 31, 2017 compared with 2.9% for the same period in 2016. The increase in Intermodal insurance and claims was primarily attributable to higher insurance premiums and increased vehicle accident claim reserves due to an increased vehicle fleet as a result of the acquisitions.

Fuel Expense

Intermodal fuel expense increased $1.4 million, or 56.0%, to $3.9 million for the year ended December 31, 2017 from $2.5 million in the same period of 2016.  Fuel expenses were 2.6% of Intermodal operating revenue for the year ended December 31, 2017 compared to 2.4% in the same period of 2016.  Intermodal fuel expenses increased due to higher year-over-year fuel prices and revenue volumes. These increases were partially offset by increased utilization of owner-operators.

Other Operating Expenses

Intermodal other operating expenses increased $6.8 million, or 68.7%, to $16.7 million for the year ended December 31, 2017 compared to $9.9 million for the same period of 2016.  Intermodal other operating expenses as a percentage of revenue for the year ended December 31, 2017 were 11.2% compared to 9.5% for the same period of 2016.  The increase in Intermodal other operating expenses was due mostly due to a $3.8 million increase in container related rental and storage charges associated with revenue increases discussed previously. The remaining increase was due to increased terminal expenses and other variable costs, such as maintenance and tolls, corresponding with the increases in revenue, and legal and professional fees related to the acquisition of Atlantic.

Income from Operations

Intermodal’s income from operations increased by $1.7 million, or 15.5%, to $12.7 million for the year ended December 31, 2017 compared with $11.0 million for the same period in 2016.  Income from operations as a percentage of Intermodal operating revenue was 8.5% for the year ended December 31, 2017 compared to 10.6% in the same period of 2016.  The increase in operating income in total dollars was primarily attributable to the Atlantic, Triumph and Ace acquisitions. The decrease in income from operations as a percentage of revenue was attributable to increased amortization associated with Intermodal's acquisitions, lower margins on acquired business and acquisition related legal and professional fees.

35


Other Operations

Other operating activity improved from a $2.7 million operating loss during the year ended December 31, 2016 to a $1.8 million operating loss during the year ended December 31, 2017. The year ended December 31, 2017, includes $1.2 million in loss development reserves for vehicle and workers' compensation claims, $0.9 million of executive severance costs and $0.4 of turn in costs from old Towne equipment. These costs were partly offset by $0.7 million of indemnification funds received related to the Towne acquisition. These costs and benefits were kept at the corporate level and not passed through to our operating segments.

The $2.7 million in operating loss included in other operations and corporate activities for the year ended December 31, 2016, was primarily for $1.7 million in loss development reserves resulting from our semi-annual actuarial analyses of our workers' compensation claims. Other operations for the year ended December 31, 2016 also included a $1.0 million increase to our reserve for remaining net payments on duplicate facilities vacated following the Towne acquisition, as several facilities had yet to be sub-leased.



36



Results of Operations

The following table sets forth our historical financial data for the years ended December 31, 2016 and 2015 (in millions):
 
Year ended December 31,
 
2016
 
2015
 
Change
 
Percent Change
Operating revenue:
 
 
 
 
 
 
 
Expedited LTL
$
570.8

 
$
577.0

 
$
(6.2
)
 
(1.1
)%
Truckload Premium Services
164.3

 
153.3

 
11.0

 
7.2

Pool Distribution
148.6

 
130.0

 
18.6

 
14.3

Intermodal
103.7

 
104.3

 
(0.6
)
 
(0.6
)
Eliminations and other operations
(4.9
)
 
(5.5
)
 
0.6

 
(10.9
)
Operating revenue
982.5

 
959.1

 
23.4

 
2.4

Operating expenses:
 
 
 
 
 
 
 
   Purchased transportation
413.4

 
408.8

 
4.6

 
1.1

   Salaries, wages, and employee benefits
242.0

 
240.6

 
1.4

 
0.6

   Operating leases
60.5

 
66.3

 
(5.8
)
 
(8.7
)
   Depreciation and amortization
38.2

 
37.1

 
1.1

 
3.0

   Insurance and claims
25.4

 
21.5

 
3.9

 
18.1

   Fuel expense
13.2

 
15.9

 
(2.7
)
 
(17.0
)
   Other operating expenses
87.4

 
87.1

 
0.3

 
0.3

   Impairment of goodwill, intangibles and other assets
42.4

 

 
42.4

 
100.0

      Total operating expenses
922.5

 
877.3

 
45.2

 
5.2

Income (loss) from operations:
 
 
 
 
 
 
 
Expedited LTL
83.5

 
79.2

 
4.3

 
5.4

Truckload Premium Services
(35.4
)
 
13.3

 
(48.7
)
 
(366.2
)
Pool Distribution
3.6

 
3.9

 
(0.3
)
 
(7.7
)
Intermodal
11.0

 
11.9

 
(0.9
)
 
(7.6
)
Other operations
(2.7
)
 
(26.5
)
 
23.8

 
(89.8
)
Income from operations
60.0

 
81.8

 
(21.8
)
 
(26.7
)
Other expense:
 
 
 
 
 
 
 
   Interest expense
(1.6
)
 
(2.0
)
 
0.4

 
(20.0
)
   Other, net

 
(0.1
)
 
0.1

 
(100.0
)
      Total other expense
(1.6
)
 
(2.1
)
 
0.5

 
(23.8