Forward Air(FWRD) - 2019 Q1 - Quarterly Report

Part I. Financial Information This part presents unaudited financial statements, management's discussion, and market risk disclosures Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of comprehensive income, and cash flows, along with detailed notes explaining the company's business, accounting policies, recent pronouncements, acquisitions, share-based payments, debt, income taxes, leases, financial instruments, shareholders' equity, commitments, contingencies, segment reporting, and subsequent events Condensed Consolidated Balance Sheets This section presents the company's financial position, highlighting changes in assets, liabilities, and equity, including the impact of new lease accounting standards Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | December 31, 2018 | | :----------------------------------- | :------------- | :---------------- | | Total assets | $885,577 | $760,215 | | Cash and cash equivalents | $42,165 | $25,657 | | Operating lease right-of-use assets | $133,361 | — | | Total current liabilities | $116,646 | $74,723 | | Operating lease obligations, current | $43,824 | — | | Total shareholders' equity | $553,437 | $553,244 | - Total assets increased to $885,577 thousand from $760,215 thousand, primarily due to the recognition of operating lease right-of-use assets[8] - Operating lease right-of-use assets and corresponding liabilities were recorded as of March 31, 2019, at $133,361 thousand and $133,739 thousand, respectively, following the adoption of ASU 2016-02[8][21] Condensed Consolidated Statements of Comprehensive Income This section details the company's financial performance, including operating revenue, expenses, and net income for the period Condensed Consolidated Statements of Comprehensive Income Highlights (in thousands, except per share data) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change (%) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Operating revenue | $321,471 | $302,608 | 6.2% | | Total operating expenses | $296,737 | $278,373 | 6.6% | | Income from operations | $24,734 | $24,235 | 2.1% | | Net income and comprehensive income | $18,407 | $17,741 | 3.8% | | Basic net income per share | $0.64 | $0.60 | 6.7% | | Diluted net income per share | $0.64 | $0.60 | 6.7% | | Dividends per share | $0.18 | $0.15 | 20.0% | - Operating revenue increased by 6.2% year-over-year, reaching $321,471 thousand for the three months ended March 31, 2019[10] - Net income and comprehensive income grew by 3.8% to $18,407 thousand, while diluted EPS increased by 6.7% to $0.64[10] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $41,526 | $40,813 | | Net cash used in investing activities | $(3,689) | $(5,668) | | Net cash used in financing activities | $(21,329) | $(26,303) | | Net increase in cash | $16,508 | $8,842 | | Cash at end of period | $42,165 | $12,735 | - Net cash provided by operating activities increased slightly to $41,526 thousand in Q1 2019 from $40,813 thousand in Q1 2018[13] - Net cash used in financing activities decreased by $4,974 thousand, primarily due to a reduction in common stock repurchases[13][161] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Description of Business and Basis of Presentation This section describes the company's business operations and the foundational principles used in preparing the financial statements - Forward Air Corporation operates as an asset-light freight and logistics company with four reportable segments: Expedited LTL, Intermodal, Truckload Premium Services (TLS), and Pool Distribution[15] - The Expedited LTL segment provides expedited regional, inter-regional, and national less-than-truckload (LTL) services, with terminals located at or near airports in the United States and Canada[16] 2. Recent Accounting Pronouncements This section discusses the adoption and impact of new accounting standards on the company's financial reporting - The Company adopted ASU 2016-02, Leases, on January 1, 2019, using a modified retrospective approach[21] - Adoption resulted in recording right-of-use lease assets of $133,361 thousand and corresponding lease liabilities of $133,739 thousand as of March 31, 2019, with no impact on the Statements of Comprehensive Income or Cash Flows[21] 3. Revenue This section explains how the company generates and recognizes revenue from its transportation and logistics services - Revenue is generated from providing transportation and related services, such as terminal handling, storage, equipment rentals, and customs brokerage[23] - Performance obligations are typically short-term (less than a week), and revenue is recognized over time as customers simultaneously receive and consume the benefits of these services[23] 4. Acquisitions and Goodwill This section details the company's acquisition activities and the associated accounting for goodwill - In 2018, the Intermodal segment expanded through the acquisition of Multi-Modal Transport Inc. (MMT) for $3,737 thousand and Southwest Freight Distributors for $16,250 thousand, enhancing geographic footprint and customer relationships[25] - No goodwill impairment charges were identified during the three months ended March 31, 2019[27] Goodwill by Segment as of March 31, 2019 (in thousands) | Segment | Goodwill | | :------------------ | :------- | | Expedited LTL | $97,593 | | Intermodal | $76,615 | | TLS | $45,164 | | Pool Distribution | $12,359 | | Total | $199,092 | 5. Share-Based Payments This section describes the company's share-based compensation plans and the related expense recognition - Share-based compensation includes stock options, non-vested shares, and performance shares, with expense recognized ratably over the vesting period[32] - Total share-based compensation expense for Q1 2019 was $3,047 thousand, an increase from $2,261 thousand in Q1 2018[13][34][36] - Performance shares granted in Q1 2019 are based 50% on EBITDA per share targets and 50% on the Company's total shareholder return (TSR) relative to a peer group[37] 6. Senior Credit Facility This section provides information on the company's revolving credit facility, including outstanding borrowings and compliance - The Company has a five-year senior unsecured revolving credit facility of $150,000 thousand, maturing in September 2022[45] - As of March 31, 2019, outstanding borrowings were $47,500 thousand, with $89,796 thousand of available borrowing capacity and an interest rate of 3.9%[46] - The Company was in compliance with all financial and other covenants of the facility as of March 31, 2019[48] 7. Net Income Per Share This section presents the calculation of basic and diluted net income per share for the reporting periods Net Income Per Share (Q1 2019 vs. Q1 2018) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Numerator for basic and diluted income per share - net income | $18,199 | $17,596 | | Denominator for basic income per share - weighted-average shares (thousands) | 28,530 | 29,375 | | Denominator for diluted income per share - adjusted weighted-average shares (thousands) | 28,648 | 29,480 | | Basic net income per share | $0.64 | $0.60 | | Diluted net income per share | $0.64 | $0.60 | - Basic and diluted net income per share increased to $0.64 in Q1 2019 from $0.60 in Q1 2018[49] 8. Income Taxes This section details the company's income tax expense and effective tax rates for the reporting periods - The combined federal and state effective tax rate for Q1 2019 was 23.8%, down from 25.7% in Q1 2018[51] - The lower effective tax rate in Q1 2019 was primarily due to increased stock-based compensation vesting and exercises[51] 9. Leases This section outlines the company's lease accounting policies and the impact of the new lease standard on its financial statements - The Company adopted ASU 2016-02, Leases, on January 1, 2019, recognizing right-of-use assets and corresponding lease liabilities for most operating leases[53] Lease Costs and Obligations (Q1 2019, in thousands) | Metric | Amount | | :------------------------------------------ | :------- | | Operating lease cost | $13,861 | | Short-term lease cost | $2,849 | | Variable lease cost | $77,547 | | Sublease income | $(535) | | Total lease cost | $93,722 | | Operating cash flows from operating leases | $13,451 | | Right-of-use assets obtained for new operating lease liabilities | $146,822 | | Weighted-average remaining lease term - operating leases | 4 years | | Weighted-average discount rate - operating leases | 4.4% | | Present value of future minimum lease payments | $133,739 | | Long-term lease obligations | $89,915 | - Variable lease costs, primarily for independent owner-operators, totaled $77,547 thousand for Q1 2019 and are included in purchased transportation[59][61][63] 10. Financial Instruments This section describes the company's financial instruments and their fair value considerations - The carrying amounts of accounts receivable and accounts payable approximate their fair value due to their short-term nature[68] - The carrying value of the revolving credit facility approximates its fair value due to its variable interest rate[69] 11. Shareholders' Equity This section details changes in shareholders' equity, including dividends and share repurchase programs - The Board of Directors declared a cash dividend of $0.18 per share for Q4 2018 and Q1 2019, an increase from $0.15 per share in prior quarters of 2018[70] - On February 5, 2019, the 2016 Repurchase Plan was canceled, and a new 2019 Repurchase Plan authorizing up to five million shares was approved[71][173] Share Repurchases (Q1 2019 vs. Q1 2018) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total shares repurchased | 229,872 | 364,286 | | Cost of shares repurchased | $14,181 | $19,993 | | Average cost per share | $61.69 | $54.88 | | Shares available under 2019 Plan (as of March 31, 2019) | 4,837,700 | N/A | 12. Commitments and Contingencies This section discloses the company's various commitments and potential liabilities from ongoing operations and legal matters - The Company is involved in routine litigation, primarily related to workers' compensation, property damage, vehicle liability, and medical benefits[74] - Management believes these pending actions will not have a material adverse effect on the business, financial condition, or results of operations[74] - Self-insurance loss exposure is estimated, but the ultimate resolution of outstanding and incurred but not reported claims could materially differ from estimates[76][78] 13. Segment Reporting This section provides financial performance data for each of the company's distinct operating segments - The Company operates in four reportable segments: Expedited LTL, Intermodal, TLS, and Pool Distribution, with performance evaluated based on income from operations[79][81] Segment Results from Operations (Q1 2019 vs. Q1 2018, in thousands) | Segment | External Revenues Q1 2019 | External Revenues Q1 2018 | Income (loss) from operations Q1 2019 | Income (loss) from operations Q1 2018 | | :-------------------------- | :------------------------ | :------------------------ | :------------------------------------ | :------------------------------------ | | Expedited LTL | $177,355 | $168,363 | $19,547 | $20,773 | | Intermodal | $54,097 | $42,607 | $6,181 | $3,469 | | Truckload Premium Services | $44,923 | $48,477 | $841 | $(43) | | Pool Distribution | $45,096 | $43,161 | $1,251 | $1,371 | | Eliminations & other | — | — | $(3,086) | $(1,335) | | Consolidated | $321,471 | $302,608 | $24,734 | $24,235 | 14. Subsequent Events This section reports significant events that occurred after the balance sheet date but before the financial statements were issued - On April 21, 2019, the Company acquired FSA Logistix for $27,000 thousand, funded by cash flows from operations[86] - FSA Logistix, specializing in last-mile logistics, is anticipated to contribute approximately $75,000 thousand in annual revenue and $3,000 thousand in operating income[86] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the three months ended March 31, 2019, compared to the same period in 2018. It covers an executive summary, key trends and developments, detailed results from operations by segment, critical accounting policies, the impact of recent accounting pronouncements, and an analysis of liquidity and capital resources Overview and Executive Summary This section provides a high-level overview of the company's business model and key factors influencing its financial performance - Forward Air Corporation is an asset-light freight and logistics company operating in four segments: Expedited LTL, Intermodal, Truckload Premium Services (TLS), and Pool Distribution[88] - The company's ability to increase earnings is significantly dependent on increasing freight volume, revenue per pound, and growth in other business lines[92] Trends and Developments This section highlights significant operational, leadership, and environmental initiatives impacting the company - Thomas Schmitt was appointed President and CEO effective September 1, 2018, and Bruce A. Campbell retired as Executive Chairman on February 5, 2019[93] - The Intermodal segment expanded its geographic footprint through the acquisitions of Multi-Modal Transport Inc. and Southwest Freight Distributors in 2018[94] - The Company is committed to environmental protection, participating in the EPA SmartWay program, utilizing fuel-efficient equipment, and implementing waste management solutions[95][96][97] Results from Operations This section provides a detailed analysis of the company's consolidated and segment-level financial performance for the period Revenues This section analyzes the drivers of the company's consolidated operating revenue growth and segment contributions - Consolidated operating revenue increased by $18.9 million, or 6.2%, to $321.5 million for the three months ended March 31, 2019[99][100] - The revenue increase was primarily driven by the Expedited LTL segment ($8.7 million increase), with growth also in Intermodal and Pool Distribution[99][100] - Truckload Premium Services (TLS) revenue decreased by $0.4 million due to the deliberate shedding of lower-margin business[99][100] Operating Expenses This section details the changes in the company's operating expenses, including salaries, purchased transportation, and other costs - Total operating expenses increased by $18.4 million, or 6.6%, to $296.8 million for Q1 2019[99][101] - Salaries, wages, and employee benefits increased by $6.8 million (9.8%) due to increased Company-employed drivers and personnel needs[99][101] - Purchased transportation increased by $4.3 million (3.1%) due to increased volumes, partly offset by higher utilization of owner-operators over more costly third-party providers[99][101] Operating Income and Segment Operations This section provides an overview of the company's consolidated operating income and its segment-level performance - Consolidated operating income increased by $0.5 million, or 2.1%, to $24.7 million for the three months ended March 31, 2019[99][102] Interest Expense This section explains the changes in interest expense, primarily due to borrowings on the credit facility - Interest expense increased by $0.2 million, or 50%, to $0.6 million in Q1 2019, primarily due to additional borrowings on the revolving credit facility[99][103] Income Taxes This section discusses the company's effective tax rate and the factors influencing its income tax expense - The combined federal and state effective tax rate for Q1 2019 was 23.8%, down from 25.7% in Q1 2018, mainly due to increased stock-based compensation vesting and exercises[104] Expedited LTL Segment Performance This section analyzes the revenue, tonnage, and operating income performance of the Expedited LTL segment - Operating revenue increased by 5.1% to $178.6 million, driven by increased network revenue and final mile revenue[107][110] - Tonnage decreased by 2.0%, while revenue per hundredweight increased by 6.0%[108][110] - Income from operations decreased by 5.8% to $19.6 million, with operating margin declining to 11.0% from 12.2%, primarily due to sluggish linehaul tonnage, higher vehicle claim reserves, cargo claims, legal/professional fees, and increased receivables allowance[107][118] Intermodal Segment Performance This section reviews the Intermodal segment's revenue growth, drayage shipments, and operating income improvements - Operating revenue increased by 11.3% to $54.1 million, primarily attributable to the MMT and Southwest acquisitions[121][122] - Drayage shipments increased by 2.6%, and drayage revenue per shipment increased by 9.5%[121] - Income from operations increased significantly by 77.1% to $6.2 million, with operating margin improving to 11.5% from 7.2%, driven by revenue rate increases and the acquisitions[121][130] Truckload Premium Services Segment Performance This section examines the Truckload Premium Services segment's revenue, miles, and operating income, highlighting strategic adjustments - Operating revenue decreased by 0.9% to $45.7 million due to a 6.6% decrease in overall miles, partly offset by a 6.4% increase in average revenue per mile, resulting from deliberate shedding of lower-margin business[133][134] - Income from operations improved to $0.9 million from breakeven in the prior year, with operating margin reaching 2.0%, attributed to rate increases, higher fuel surcharges, and the shedding of lower-margin business[133][142] Pool Distribution Segment Performance This section details the Pool Distribution segment's revenue, cartons handled, and operating income, noting cost pressures - Operating revenue increased by 5.9% to $45.2 million due to rate increases, increased volumes from existing customers, and new business wins[144][145] - Cartons handled increased by 10.3%, while revenue per carton decreased by 4.3%[144] - Income from operations decreased by 7.1% to $1.3 million, with operating margin declining to 2.9% from 3.3%, primarily due to increased utilization of and higher rates charged by third-party carriers and the use of more costly contract labor for increasing dedicated revenue volumes[144][153] Other Operations Performance This section explains the operating loss from other activities, including increases in self-insurance reserves and transition costs - Other operating activity resulted in a $3.3 million operating loss in Q1 2019, an increase from a $1.5 million loss in Q1 2018[154] - The increased loss was primarily due to a $1.8 million increase in self-insurance reserves for vehicular claims, a $0.6 million increase for workers' compensation claims, and $0.7 million in CEO transition costs[154] Critical Accounting Policies This section identifies the key accounting policies requiring significant management judgment and estimates - Management considers Self-Insurance Loss Reserves, Business Combinations, and Goodwill and Other Intangible Assets as critical accounting policies due to the significant subjective judgments and estimates required[156] Impact of Recent Accounting Pronouncements This section describes the financial impact of newly adopted accounting standards, particularly on lease accounting - The adoption of ASU 2016-02, Leases, on January 1, 2019, led to the recognition of $133.4 million in right-of-use lease assets and $133.7 million in corresponding lease liabilities on the balance sheet[157] - The new lease standard had no impact on the Company's Statements of Comprehensive Income or Statements of Cash Flows[157] Liquidity and Capital Resources This section analyzes the company's cash flows, credit facility, and share repurchase activities to assess its financial flexibility Cash Flows Comparison This section compares the company's cash flows from operating, investing, and financing activities between periods - Net cash provided by operating activities increased by $0.7 million to $41.5 million, driven by increased collection of receivables and higher net earnings[159] - Net cash used in investing activities decreased by $2.0 million to $3.7 million, primarily due to lower capital expenditures[160] - Net cash used in financing activities decreased by $5.0 million to $21.3 million, mainly due to a $5.8 million decrease in common stock repurchases[161] Credit Facility This section refers to the details of the company's senior credit facility as presented in the financial statements notes - Details regarding the senior credit facility are provided in Note 6 to the Consolidated Financial Statements[163] Share Repurchases This section provides information on the company's share repurchase program and dividend declarations - Information on share repurchases and dividends during the period is discussed in Note 11 to the Consolidated Financial Statements[164] Forward-Looking Statements This section cautions readers about forward-looking statements and outlines key risks that could cause actual results to differ - The report contains forward-looking statements that involve known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from projections[165] - Key risk factors include economic conditions, availability of qualified personnel, changes in fuel prices, competition, acquisitions, claims, governmental regulations, and environmental/tax matters[165] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risk related to its outstanding debt is not significant and has not materially changed from the information provided in its 2018 Form 10-K - The Company's exposure to market risk related to outstanding debt is not significant[166] - There has been no material change in market risk from the information provided in the 2018 Form 10-K[166] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2019, and notes the implementation of changes in internal control specifically related to the adoption of the new lease accounting standard (ASU 2016-02) - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2019[167][168] - Changes in internal control over financial reporting were implemented to meet the reporting and disclosure requirements of ASU 2016-02, Leases, and were effective as of March 31, 2019[169] Part II. Other Information This part covers legal proceedings, risk factors, equity security sales, and other miscellaneous disclosures Item 1. Legal Proceedings The company is routinely involved in litigation incidental to its business, primarily concerning personal injury, property damage, and workers' compensation claims, but does not anticipate any material adverse effect on its financial condition or operations - The Company is a party to ordinary, routine litigation, mainly involving claims for personal injury, property damage, and workers' compensation[170] - Management does not believe these pending actions will have a material adverse effect on the Company's business, financial condition, or results of operations[170] Item 1A. Risk Factors This section refers to the comprehensive list of risk factors detailed in the company's 2018 Annual Report on Form 10-K and confirms that there have been no changes in the nature of these factors since December 31, 2018 - A summary of factors that could affect results and cause them to differ materially from forward-looking statements is described in the 2018 Annual Report on Form 10-K[171] - There have been no changes in the nature of these risk factors since December 31, 2018[171] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides details on the company's common stock repurchase activities during the first quarter of 2019, including the cancellation of the previous repurchase plan and the authorization of a new one Issuer Purchases of Equity Securities (Q1 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------- | :----------------------------- | :--------------------------- | | January 1-31, 2019 | 58,716 | $56.73 | | February 1-28, 2019 | 39,756 | $64.84 | | March 1-31, 2019 | 131,400 | $62.96 | | Total | 229,872 | $61.69 | - On February 5, 2019, the 2016 Repurchase Plan was canceled, and a new 2019 Repurchase Plan authorizing up to five million shares was approved[173] - As of March 31, 2019, 4,837,700 shares remained available for purchase under the 2019 Plan[172][173] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - This item is not applicable[174] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is not applicable[175] Item 5. Other Information This item is not applicable to the company for the reporting period - This item is not applicable[176] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, executive agreements, share-based compensation forms, and certifications - Exhibits include the Restated Charter, Amended and Restated Bylaws, Executive Severance and Change in Control Plan, Consulting Agreement, Performance Share Agreements, and CEO/CFO certifications[179] - XBRL Instance Document and Taxonomy Extensions are also included as exhibits[179] Signatures This section provides the official signatures certifying the accuracy and completeness of the report - The report was signed on April 25, 2019, by Michael J. Morris, Chief Financial Officer, Senior Vice President and Treasurer[182]