Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a leading asset-light freight provider of transportation services, including LTL, truckload and intermodal drayage services and freight brokerage and supply chain services across North America, Europe, and Asia. We offer premium services that typically require precision execution, such as expedited transit, delivery during tight time windows and special handling. We utilize an asset-light strategy to minimize our investments in equipment and facilities and to reduce our capital expenditures.
Our services are classified into three reportable segments: Expedited Freight, Intermodal and Omni Logistics.
Our Expedited Freight segment provides expedited regional, inter-regional and national LTL services. Expedited Freight also offers customers local pick-up and delivery and other services including truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling. We plan to grow our LTL geographic footprint through greenfield start-ups as well as through acquisitions.
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, and in select locations, linehaul and LTL services. We plan to grow our Intermodal geographic footprint through acquisitions as well as through greenfield start-ups where no suitable acquisition is available.
Our Omni Logistics segment provides a full suite of global logistics services. Services include air and ocean freight consolidation and forwarding, customs brokerage, warehousing and distribution, time-definite transportation services and other supply chain solutions.
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 or shipment for the freight shipped or moved through our network. Additionally, our earnings depend on the growth of other services, such as LTL pickup and delivery, which will allow us to maintain revenue growth in a challenging freight environment. We continue to focus on creating synergies across our services, particularly with services offered in our Expedited Freight reportable segment. Synergistic opportunities include the ability to share resources, in particular our fleet resources.
We monitor and analyze a number of key operating statistics in order to manage our business and evaluate our financial and operating performance. These key operating statistics are defined below and are referred to throughout the discussion of the financial results of our Expedited Freight and Intermodal reportable segments. Our key operating statistics should not be interpreted as better measurements of our results than income from operations as determined under GAAP.
Within our Expedited Freight reportable segment, our primary revenue focus is to increase density, which is shipment and tonnage growth within our existing LTL network. Increases in density allow us to maximize our asset utilization and labor productivity, which we measure over many different functional areas of our operations including linehaul load factor and door pounds handled per hour. In addition to our focus on density and operating efficiencies, it is critical for us to obtain an appropriate yield, which is measured as revenue per hundredweight, on the shipments we handle to offset our cost inflation and support our ongoing investments in capacity and technology. Revenue per hundredweight is also a commonly-used indicator for general pricing trends in the LTL industry and can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment and length of haul. Therefore, changes in revenue per hundredweight may not necessarily indicate actual changes in underlying base rates. We regularly monitor the components of our pricing, including base freight rates, accessorial charges and fuel surcharges. The fuel surcharge is generally designed to offset fluctuations in the cost of the petroleum-based products used in our operations and is indexed to diesel fuel prices published by the U.S. Department of Energy. The impact of fuel on our results of operations depends on the relationship between the applicable surcharge, the fuel efficiency of our Company drivers, and the load factor achieved by our operation. Fluctuations in fuel prices in either direction could have a positive or negative impact on our margins, particularly in our LTL business where the weight of a shipment subject to the fuel surcharge on a given trailer can vary materially. We believe our yield management process focused on account level profitability, and ongoing improvements in operating efficiencies, are both key components of our ability to grow profitably.
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The key operating statistics necessary to understand the operating results of our Expedited Freight reportable segment are described below in more detail:
Tonnage - Total weight of shipments in pounds. The level of freight tonnage is affected by economic cycles and conditions, customers’ business cycles, changes in customers’ business practices and capacity in the truckload market.
Weight Per Shipment - Total pounds divided by the number of shipments. Fluctuations in weight per shipment can indicate changes in the mix of freight we receive from our customers, as well as changes in the number of units included in a shipment. Generally, increases in weight per shipment indicate higher demand and overall increased economic activity. Changes in weight per shipment can also be influenced by shifts between LTL and other modes of transportation, such as truckload, in response to capacity, service and pricing issues. Fluctuations in weight per shipment generally have an inverse effect on our revenue per hundredweight, as a decrease in weight per shipment will typically cause an increase in revenue per hundredweight.
Revenue Per Hundredweight - Network revenue per every 100 pounds of shipment weight. Our LTL transportation services are generally priced based on weight, commodity, and distance. Our pricing policies are reflective of the services we provide, and can be influenced by competitive market conditions. Changes in the freight profile factors such as average shipment size, average length of haul, freight density, and customer and geographic mix can impact the revenue per hundredweight. Fuel surcharges and intercompany revenue between Network and Truckload are included in this measurement.
Revenue Per Shipment - Network revenue divided by the number of shipments. Fuel surcharges and intercompany revenue between Network and Truckload are included in this measurement.
Average Length of Haul - Total miles between origin and destination service centers for all shipments, with miles based on the size of shipments. Length of haul is used to analyze our tonnage and pricing trends for shipments with similar characteristics. Changes in length of haul generally have a direct effect on our revenue per hundredweight, as an increase in length of haul will typically cause an increase in revenue per hundredweight.
Within our Intermodal reportable segment, our primary revenue focus is to increase the number of shipments. The key operating statistic necessary to understand the operating results of our Intermodal reportable segment is described below in more detail:
Drayage Revenue Per Shipment - Intermodal revenue divided by the number of drayage shipments. Revenue derived from container freight station warehouse and handling, and linehaul and LTL services is excluded from this measurement. Fuel surcharges and accessorial charges are included in this measurement.
Trends and Developments
Economy
Our business is highly susceptible to changes in economic conditions. Our products and services are directly tied to the production and sale of goods and, more generally, to the global economy. Participants in the transportation industry have historically experienced cyclical fluctuations in financial results due to economic recessions, downturns in the business cycles of customers, volatility in the prices charged by third-party carriers, interest rate fluctuations and other U.S. and global macroeconomic developments. During economic downturns, reductions in overall demand for transportation services will likely reduce demand for our services and exert downward pressure on our rates and margins. In periods of strong economic growth, overall demand may exceed the available supply of transportation resources. While this may present an opportunity to increase economies of scale in our network and enhanced pricing and margins, these benefits may be lessened by increased network congestion and operating inefficiencies.
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Like other providers of freight transportation services, our business has been impacted by the macroeconomic conditions of the past year. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions and foreign investment. Periodically, governments consider a variety of changes to tariffs and impose trade restrictions. We cannot predict the outcome of changes in tariffs, or interpretations, and trade restrictions and the effects they will have on our business. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies, our business may also be negatively affected by political developments and changes in government personnel or policies in the United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations and on the trade shipping lanes in which we conduct business and the future impact that these events may have on international trade.
Our ability to provide services to our customers is highly dependent on good working relationships with a variety of entities, including airlines, ocean carrier lines and ground transportation providers. We consider our current working relationships with these entities to be satisfactory. However, changes in the financial stability and operating capabilities and capacity of asset-based carriers, capacity allotments available from carriers could affect our business in unpredictable ways. When the market experiences seasonal peaks or any sort of disruption, the carriers often increase their pricing suddenly. This carrier behavior creates pricing volatility that could impact our ability to maintain historical profitability.
The global economic and trade environments remain uncertain, including inflation remaining higher than historical levels, greater volatility in oil prices and high interest rates. Starting in the second quarter of 2022 and continuing through most of 2023, we saw a slowdown in the global economy and a softening of customer demand resulting in declines in rates. As demand remains soft, available transportation capacity continues to exceed demand. These conditions could result in further declines in rates in 2024. We also expect that pricing volatility will continue as carriers adapt to lower demand, changing fuel prices, security risks and react to governmental trade policies and other regulations.
Fuel
We depend heavily upon the availability of adequate diesel fuel supplies, and recently, fuel availability and prices have fluctuated significantly. Fuel availability and prices can be impacted by factors beyond our control, such as natural or manmade disasters, adverse weather conditions, political events, economic sanctions imposed against oil-producing countries or specific industry participants, disruptions or failure of technology or information systems, price and supply decisions by oil producing countries and cartels, terrorist activities, armed conflict, tariffs, sanctions, other changes to trade agreements and world supply and demand imbalance. Through our fuel surcharge programs, we have been able to mitigate the impact of fluctuations in fuel prices. 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. In periods of changing fuel prices, our fuel surcharges vary by different degrees and may not fully offset fuel price fluctuations or may result in higher than expected increases in revenue. Fuel shortages, changes in fuel prices, and the potential volatility in fuel surcharge revenue may impact our results of operations and overall profitability. Fuel surcharge revenue as a percentage of operating revenues decreased to 11.7% for the quarter ended March 31, 2024 compared to 18.0% for the quarter ended March 31, 2023 as a result of the inclusion of Omni in the results for the quarter ended March 31, 2024 .
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Recent Events and Factors Affecting Comparability
Omni Acquisition
On January 25, 2024, we acquired Omni Newco, LLC (“Omni Logistics”) for a combination of (a) $100 million in cash and (b) (i) common equity consideration representing 5,135 shares of our common stock on an as-converted and as-exchanged basis and (ii) non-voting, convertible perpetual preferred equity consideration representing, if our shareholders approve, an additional 8,880 shares of our common stock on an as-exchanged basis (“Omni Acquisition”).
See Note 4, Acquisitions, to our Condensed Consolidated Financial Statements for more information about our acquisitions
Omni Logistics revenues and segment income from January 25, 2024 through March 31, 2024 are included in our condensed consolidated statements of comprehensive (loss) income for the three months ended March 31, 2024. The changes in our results of operations for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 are partially driven by the inclusion of the results of operations of Omni Logistics. The following table sets forth the financial data of our Omni Logistics segment for the three months ended March 31, 2024 (unaudited and in thousands):
Three Months Ended
March 31, 2024 Percent of Revenue
Operating revenue $ 224,838 100.0 %
Operating expenses:
Purchased transportation 144,424 64.2
Salaries, wages and employee benefits 48,775 21.7
Operating leases 19,127 8.5
Depreciation and amortization 16,869 7.5
Insurance and claims 2,053 0.9
Fuel expense 304 0.1
Other operating expenses 21,871 9.8
Total operating expenses 253,423 112.7
Loss from operations $ (28,585) (12.7) %
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Results from Operations
The following table sets forth our consolidated financial data for the three months ended March 31, 2024 and 2023 (unaudited and in thousands):
Three Months Ended
March 31, 2024 March 31, 2023 Change Percent Change
Operating revenues:
Expedited Freight $ 273,295 $ 269,577 $ 3,718 1.4 %
Intermodal 56,292 88,169 (31,877) (36.2)
Omni Logistics 224,838 — 224,838 —
Eliminations and other operations (12,612) (37) (12,575) 33,986.5
Operating revenues 541,813 357,709 184,104 51.5
Operating expenses:
Purchased transportation 277,015 145,171 131,844 90.8
Salaries, wages and employee benefits 128,867 66,647 62,220 93.4
Operating leases 38,803 24,073 14,730 61.2
Depreciation and amortization 31,786 12,372 19,414 156.9
Insurance and claims 12,881 13,258 (377) (2.8)
Fuel expense 5,246 5,686 (440) (7.7)
Other operating expenses 112,947 43,306 69,641 160.8
Total operating expenses 607,545 310,513 297,032 95.7
Income (loss) from continuing operations:
Expedited Freight 19,498 29,685 (10,187) (34.3)
Intermodal 3,586 11,203 (7,617) (68.0)
Omni Logistics (28,585) — (28,585) —
Other Operations (60,231) 6,308 (66,539) (1,054.8)
(Loss) income from continuing operations (65,732) 47,196 (112,928) (239.3)
Other income and expenses:
Interest expense, net (40,753) (2,355) (38,398) 1,630.5
Foreign exchange loss (668) — (668) —
Other income, net 9 — 9 —
Total other expense (41,412) (2,355) (39,057) 1,658.5
(Loss) income before income taxes (107,144) 44,841 (151,985) (338.9)
Income tax (benefit) expense (18,350) 10,937 (29,287) (267.8)
Net (loss) income from continuing operations (88,794) 33,904 (122,698) (361.9)
Income from discontinued operation, net of tax — 2,464 (2,464) (100.0)
Net (loss) income (88,794) 36,368 (125,162) (344.2)
Net loss attributable to noncontrolling interest (27,082) — (27,082) —
Net (loss) income attributable to Forward Air $ (61,712) $ 36,368 $ (98,080) (269.7) %
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Operating Revenues
Operating revenues increased $184,104, or 51.5%, to $541,813 for the three months ended March 31, 2024 compared to $357,709 for the three months ended March 31, 2023. The increase was primarily due to the inclusion of $224,838 from the Omni Logistics segment and an increase in our Expedited Freight segment of $3,718 due to increased Network revenue, offset by a decrease from our Intermodal segment of $31,877. The results for our reportable segments are discussed in detail in the following sections.
Operating Expenses
Operating expenses increased $297,032, or 95.7%, to $607,545 for the three months ended March 31, 2024 compared to $310,513 for the three months ended March 31, 2023. The increase was primarily due to the inclusion of the $253,423 of operating expenses from the Omni Logistics segment and a $13,905 increase in operating expenses from the Expedited Freight segment, partially offset by a $24,260 decrease in operating expenses from the Intermodal segment. Purchased transportation expense is our largest expense which includes our independent contractor fleet owners and owner-operators, who lease their equipment to our motor carriers (“Leased Capacity Providers ”), third-party motor carriers and capacity secured by transportation intermediaries, while Company-employed drivers are included in salaries, wages and employee benefits.
Income from Continuing Operations and Segment Operations
Income from operations decreased $112,928, or 239.3%, to a $65,732 loss for the three months ended March 31, 2024 compared to a $47,196 of income for the three months ended March 31, 2023. The decrease was primarily due to a decrease in Other Operations of $66,539, Omni Logistics segment of $28,585, Expedited Freight segment of $10,187, and Intermodal segment of $7,617.
Interest Expense, net
Interest expense, net was $40,753 for the three months ended March 31, 2024 compared to $2,355 for the three months ended March 31, 2023. The increase in interest expense was primarily due to an increase in the average interest rate during the first quarter of 2024 on higher borrowings outstanding as compared to the same period in 2023. In connection with the acquisition of Omni Logistics, the outstanding borrowings increased in the first quarter of 2024. The weighted-average interest rate on the outstanding borrowings were 9.58% and 5.96% during the three months ended March 31, 2024 and 2023, respectively.
Income Taxes on a Continuing Basis
The effective tax rate for the three months ended March 31, 2024 was 17.1% compared to 24.3% for the three months ended March 31, 2023. The effective tax rate varied from the statutory United States federal rate of 21% in the first quarter of 2024 primarily due to the effect of the noncontrolling interest, non-deductible executive compensation, excess tax benefits realized on share-based awards, partially offset by state income taxes, net of the federal benefit, and foreign taxes. The effective tax rate varied from the statutory United States federal rate of 21% in the first quarter of 2023 primarily due to the effect of state income taxes, net of the federal benefit, and non-deductible executive compensation, partially offset by excess tax benefits realized on share-based awards.
Income from Discontinued Operations, net of Tax
Income from discontinued operations, net of tax decreased $2,464 or 100% for the three months ended March 31, 2024. The decrease was due to the sale of our Final Mile business in December 2023.
Net (Loss) Income
As a result of the foregoing factors, net income decreased $125,162, or 344.2%, to a $88,794 loss for the three months ended March 31, 2024 compared to $36,368 income for the three months ended March 31, 2023.
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Expedited Freight - Three Months Ended March 31, 2024 compared to Three Months Ended March 31, 2023
The following table sets forth the financial data of our Expedited Freight segment for the three months ended March 31, 2024 and 2023 (unaudited and in thousands):
Three Months Ended
March 31, 2024 Percent of Revenue March 31, 2023 Percent of Revenue Change Percent Change
Operating revenues:
Network 1
$ 214,493 78.5 % $ 205,931 76.4 % $ 8,562 4.2 %
Truckload 37,055 13.6 41,744 15.5 (4,689) (11.2)
Other 21,747 7.9 21,902 8.1 (155) (0.7)
Total operating revenues 273,295 100.0 269,577 100.0 3,718 1.4
Operating expenses:
Purchased transportation 127,760 46.7 125,194 46.4 2,566 2.0
Salaries, wages and employee benefits 62,553 22.9 55,918 20.7 6,635 11.9
Operating leases 14,982 5.5 15,738 5.8 (756) (4.8)
Depreciation and amortization 10,290 3.8 7,626 2.8 2,664 34.9
Insurance and claims 10,652 3.9 9,219 3.4 1,433 15.5
Fuel expense 2,581 0.9 2,513 0.9 68 2.7
Other operating expenses 24,979 9.2 23,684 9.0 1,295 5.5
Total operating expenses 253,797 92.9 239,892 89.0 13,905 5.8
Income from operations $ 19,498 7.1 % $ 29,685 11.0 % $ (10,187) (34.3) %
1 Network revenue is comprised of all revenue, including linehaul, pickup and/or delivery, and fuel surcharge revenue, excluding accessorial and Truckload revenue.
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Expedited Freight Operating Statistics
Three Months Ended
March 31, 2024 March 31, 2023 Percent Change
Business days 64 64 — %
Tonnage 1,2
Total pounds 684,995 629,080 8.9
Pounds per day 10,703 9,829 8.9
Shipments 1,2
Total shipments 828 817 1.4
Shipments per day 12.9 12.8 1.4
Weight per shipment 827 770 7.4
Revenue per hundredweight 3
$ 31.32 $ 33.36 (6.1)
Revenue per hundredweight, ex fuel 3
$ 24.15 $ 25.75 (6.2)
Revenue per shipment 3
$ 259.14 $ 256.89 0.9
Revenue per shipment, ex fuel 3
$ 199.78 $ 198.30 0.7
1 In thousands
2 Excludes accessorial and Truckload products
3 Includes intercompany revenue between the Network and Truckload revenue streams
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Operating Revenues
Expedited Freight operating revenues increased $3,718, or 1.4%, to $273,295 for the three months ended March 31, 2024 from $269,577 for the three months ended March 31, 2023. The increase was primarily due to increased Network revenue, partially offset by decreased Truckload revenue. Network revenue increased due to a 8.9% increase in pounds per day, offset by a 6.2% decrease in revenue per hundredweight excluding fuel as compared to the same period in 2023. The increase in tonnage reflects an increase in weight per shipment of 7.4% on 1.4% more shipments per day. The increase in shipments is due to higher demand for our services while the increase in weight per shipment was the result of more dense freight in our network driven by a change in the mix of services provided to customers. Fuel surcharge revenue increased $1,286, or 2.7% as a result of the increased tonnage in our Network, partially offset by a decline in the average price of fuel as compared to the same period in 2023. Truckload revenue decreased $4,689, primarily due to challenged market conditions that led to decreased customer demand for our services. Other revenue, which includes accessorial revenue, warehousing and terminal handling, decreased $155.
Purchased Transportation
Expedited Freight purchased transportation increased $2,566, or 2.0%, to $127,760 for the three months ended March 31, 2024 from $125,194 for the three months ended March 31, 2023. Purchased transportation was 46.7% of Expedited Freight operating revenues for the three months ended March 31, 2024 compared to 46.4% for the same period in 2023. Expedited Freight purchased transportation includes Leased Capacity Providers and third-party motor carriers and transportation intermediaries, while Company-employed drivers are included in salaries, wages and employee benefits. The increase in purchased transportation was primarily due to higher volumes in Network, and the change in the mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers and transportation intermediaries and Company-employed drivers for Network and Truckload services. For the three months ended March 31, 2024, 65.5%, 30.0% and 4.5% of our freight capacity was purchased from Leased Capacity Providers, third-party motor carriers and transportation intermediaries and Company-employed drivers, respectively, for Network and Truckload. This compares to 71.1%, 24.8% and 4.1%, respectively, in the same period in 2023.
Salaries, Wages and Employee Benefits
Expedited Freight salaries, wages and employee benefits increased $6,635, or 11.9%, to $62,553 for the three months ended March 31, 2024 from $55,918 for the three months ended March 31, 2023. Salaries, wages and employee benefits were 22.9% of Expedited Freight operating revenues for the three months ended March 31, 2024 compared to 20.7% for the same period in 2023. The increase in salaries, wages and employee benefits expense was primarily due to an increase in Company-employed drivers in response to the higher volumes, an increase in the reserve for incentive compensation and an increase in salaries and wages as compared to the same period in 2023.
Operating Leases
Expedited Freight operating leases decreased $756, or 4.8%, to $14,982 for the three months ended March 31, 2024 from $15,738 for the three months ended March 31, 2023. Operating leases were 5.5% of Expedited Freight operating revenues for the three months ended March 31, 2024 compared to 5.8% for the same period in 2023. The decrease in operating lease expense was primarily due to fewer equipment leases in the first quarter of 2024 as compared to the same period in 2023.
Depreciation and Amortization
Expedited Freight depreciation and amortization increased $2,664, or 34.9%, to $10,290 for the three months ended March 31, 2024 from $7,626 for the three months ended March 31, 2023. Depreciation and amortization was 3.8% of Expedited Freight operating revenues for the three months ended March 31, 2024 compared to 2.8% for the same period in 2023. The increase in depreciation and amortization expense was primarily due to an increase in equipment depreciation in the first quarter of 2024 as compared to the same period in 2023 as the result of purchasing and placing in service new equipment in the second half of 2023 and 2024.
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Insurance and Claims
Expedited Freight insurance and claims increased $1,433, or 15.5%, to $10,652 for the three months ended March 31, 2024 from $9,219 for the three months ended March 31, 2023. Insurance and claims was 3.9% of Expedited Freight operating revenues for the three months ended March 31, 2024 compared to 3.4% for the same period in 2023. The increase in insurance and claims expense was primarily due to an increase in equipment repairs and vehicle liability claims in the first quarter of 2024 as compared to the same period in 2023. See additional discussion over the consolidated change in self-insurance reserves in the “Other Operations ” section below.
Fuel Expense
Expedited Freight fuel expense increased $68, or 2.7%, to $2,581 for the three months ended March 31, 2024 from $2,513 for the three months ended March 31, 2023. Fuel expense was 0.9% of Expedited Freight operating revenues for the three months ended March 31, 2024 compared to 0.9% and for the same period in 2023. Expedited Freight fuel expense increased primarily due to additional miles driven by Company-employed drivers, partially offset by a decrease in the average price of fuel in the first quarter of 2024 as compared to the same period in 2023.
Other Operating Expenses
Expedited Freight other operating expenses increased $1,295, or 5.5%, to $24,979 for the three months ended March 31, 2024 from $23,684 for the three months ended March 31, 2023. Other operating expenses were 9.2% of Expedited Freight operating revenues for the three months ended March 31, 2024 compared to 9.0% for the same period in 2023. Other operating expenses include contract labor, equipment maintenance, facility expenses, legal and professional fees, and other over-the-road costs. The increase in other operating expenses was primarily due to an increase in software license and subscription fees, partially offset by a decrease in maintenance and repair expense, professional fees, and contract labor in the first quarter of 2024 as compared to the same period in 2023.
Income from Operations
Expedited Freight income from operations decreased $10,187, or 34.3%, to $19,498 for the three months ended March 31, 2024 compared to $29,685 for the three months ended March 31, 2023. Income from operations was 7.1% of Expedited Freight operating revenues for the three months ended March 31, 2024 compared to 11.0% for the same period in 2023. The decrease in income from operations as a percentage of operating revenues was driven by decreased revenue per hundredweight excluding fuel on increased tonnage, the change in the mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers and transportation intermediaries and Company-employed drivers for Network and Truckload, and increased operating expenses for the three months ended March 31, 2024 compared to the same period in 2023.
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Intermodal - Three Months Ended March 31, 2024 compared to Three Months Ended March 31, 2023
The following table sets forth the financial data of our Intermodal segment for the three months ended March 31, 2024 and 2023 (unaudited and in thousands):
Three Months Ended
March 31, 2024 Percent of Revenue March 31, 2023 Percent of Revenue Change Percent Change
Operating revenues $ 56,292 100.0 % $ 88,169 100.0 % $ (31,877) (36.2) %
Operating expenses:
Purchased transportation 17,443 31.0 20,014 22.7 (2,571) (12.8)
Salaries, wages and employee benefits 15,082 26.8 18,914 21.5 (3,832) (20.3)
Operating leases 4,692 8.3 8,335 9.5 (3,643) (43.7)
Depreciation and amortization 4,627 8.2 4,746 5.4 (119) (2.5)
Insurance and claims 2,606 4.6 2,349 2.7 257 10.9
Fuel expense 2,361 4.2 3,173 3.6 (812) (25.6)
Other operating expenses 5,895 10.5 19,435 21.9 (13,540) (69.7)
Total operating expenses 52,706 93.6 76,966 87.3 (24,260) (31.5)
Income from operations $ 3,586 6.4 % $ 11,203 12.7 % $ (7,617) (68.0) %
Intermodal Operating Statistics
Three Months Ended
March 31, 2024 March 31, 2023 Percent Change
Drayage shipments 62,659 72,465 (13.5) %
Drayage revenue per shipment $ 822 $ 1,136 (27.6) %
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Operating Revenues
Intermodal operating revenues decreased $31,877, or 36.2%, to $56,292 for the three months ended March 31, 2024 from $88,169 for the three months ended March 31, 2023. The decrease in operating revenues was primarily due to a 13.5% decrease in drayage shipments and a decrease in drayage revenue per shipment of 27.6% as compared to the same period in 2023. The decrease in drayage shipments and lower accessorial revenues to support customers was primarily due to the challenged market conditions that led to decreased customer demand for our services in the first quarter of 2024 as compared to the same period in 2023. In addition, fuel surcharge revenue decreased $2,135, or 21.4%, as a result of the decline in the average price of fuel and fewer drayage shipments.
Purchased Transportation
Intermodal purchased transportation decreased $2,571, or 12.8%, to $17,443 for the three months ended March 31, 2024 from $20,014 for the three months ended March 31, 2023. Purchased transportation was 31.0% of Intermodal operating revenues for the three months ended March 31, 2024 compared to 22.7% for the same period in 2023. Intermodal purchased transportation includes Leased Capacity Providers and third-party motor carriers, while Company-employed drivers are included in salaries, wages and employee benefits. The decrease in purchased transportation was primarily due to fewer drayage shipments and the change in the mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers and Company-employed drivers compared to the same period in 2023.
Salaries, Wages and Employee Benefits
Intermodal salaries, wages and employee benefits decreased $3,832, or 20.3%, to $15,082 for the three months ended March 31, 2024 compared to $18,914 for the three months ended March 31, 2023. Salaries, wages and employee benefits were 26.8% of Intermodal operating revenues for the three months ended March 31, 2024 compared to 21.5% for the same period in 2023. The decrease in salaries, wages and employee benefits expense was primarily due to a decrease in the reserve for incentive compensation and fewer Company-employed drivers and office employees in response to the lower volumes, as compared to the same period in 2023.
Operating Leases
Intermodal operating leases decreased $3,643, or 43.7%, to $4,692 for the three months ended March 31, 2024 compared to $8,335 for the three months ended March 31, 2023. Operating leases were 8.3% of Intermodal operating revenues for the three months ended March 31, 2024 compared to 9.5% for the same period in 2023. The decrease in operating leases expense was primarily due to lower equipment expense incurred to support decreased accessorial revenues in the first quarter of 2024 as compared to the same period in 2023.
Depreciation and Amortization
Intermodal depreciation and amortization decreased $119, or 2.5%, to $4,627 for the three months ended March 31, 2024 from $4,746 for the three months ended March 31, 2023. Depreciation and amortization was 8.2% of Intermodal operating revenues for the three months ended March 31, 2024 compared to 5.4% for the same period in 2023 . The decrease in depreciation and amortization expense was primarily due to the lower amount of depreciable equipment in the first quarter of 2024 as compared to the same period in 2023.
Insurance and Claims
Intermodal insurance and claims increased $257, or 10.9%, to $2,606 for the three months ended March 31, 2024 from $2,349 for the three months ended March 31, 2023. Insurance and claims were 4.6% of Intermodal operating revenues for the three months ended March 31, 2024 compared to 2.7% for the same period in 2023. The increase in insurance and claims expense was primarily due to an increase in vehicle liability claims, partially offset by decreased equipment repairs in the first quarter of 2024 as compared to the same period in 2023. See additional discussion over the consolidated change in self-insurance reserves in the “Other Operations ” section below.
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Fuel Expense
Intermodal fuel expense decreased $812, or 25.6%, to $2,361 for the three months ended March 31, 2024 from $3,173 for the three months ended March 31, 2023. Fuel expense was 4.2% of Intermodal operating revenues for the three months ended March 31, 2024 compared to 3.6% for the same period in 2023. Intermodal fuel expense decreased due to fewer miles driven by Company-employed drivers and a decrease in the average price of fuel in the first quarter of 2024 as compared to the same period in 2023.
Other Operating Expenses
Intermodal other operating expenses decreased $13,540, or 69.7%, to $5,895 for the three months ended March 31, 2024 from $19,435 for the three months ended March 31, 2023. Other operating expenses were 10.5% of Intermodal operating revenues for the three months ended March 31, 2024 compared to 21.9% for the same period in 2023. Other operating expenses include contract labor, equipment maintenance, facility expenses, legal and professional fees, and accessorial storage costs. The decrease in other operating expenses was partially due to lower accessorial storage costs incurred as a result of decreased accessorial revenues, contract labor, maintenance and repairs expense and warehouse supplies in the first quarter of 2024 as compared to the same period in 2023.
Income from Operations
Intermodal income from operations decreased $7,617, or 68.0%, to $3,586 for the three months ended March 31, 2024 compared to $11,203 for the three months ended March 31, 2023. Income from operations was 6.4% of Intermodal operating revenues for the three months ended March 31, 2024 compared to 12.7% for the same period in 2023. The decrease in income from operations as a percentage of operating revenues was primarily due to lower drayage revenue per shipment on fewer drayage shipments, partially offset by the a change in mix of freight capacity purchased from Leased Capacity Providers, third-party motor carriers, and Company-employed drivers.
Other Operations - Three Months Ended March 31, 2024 compared to Three Months Ended March 31, 2023
Other operations included a $60,231 operating loss during the three months ended March 31, 2024 compared to $6,308 of operating income during the three months ended March 31, 2023. The change in the operating loss was primarily due to $58,226 of professional fees incurred for transaction and integration costs in connection with the acquisition of Omni, partially offset by a decrease in the reserves for vehicle liability claims. The decrease in the self-insurance reserves for vehicle liability claims was due to the favorable loss development factor of historical claims.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in conformity with United States generally accepted accounting principles (“GAAP”). The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and expenses during the reporting period. On an ongoing basis, management evaluates estimates, including those related to allowance for doubtful accounts and revenue adjustments, deferred income taxes and uncertain tax positions, goodwill, other intangible and long-lived assets, and self-insurance loss reserves. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions. A description of critical accounting policies and related judgments and estimates that affect the preparation of the Condensed Consolidated Financial Statements is set forth in the Annual Report on Form 10-K for the year-ended December 31, 2023.
Liquidity and Capital Resources
We have historically financed our working capital needs, including capital expenditures, with available cash, cash flows from operations and borrowings under our credit facility. In the first quarter of 2024, our credit facility was repaid and extinguished in tandem with the acquisition of Omni. We believe that borrowings under our Revolving Credit Facility (defined below) and our New Term Loans (defined below), together with available cash and internally generated funds, will be sufficient to support our working capital, capital expenditures and debt service requirements over the next twelve months. In addition, we frequently utilize operating leases to acquire revenue equipment.
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Senior Secured Notes
In order to finance a portion of the cash consideration payable for the Omni Acquisition and the costs and expenses incurred in connection therewith, GN Bondco, LLC, a Delaware limited liability company and wholly owned subsidiary of Omni Newco, LLC (the “Escrow Issuer” and consolidated VIE at December 31, 2023) launched a private offering of $725,000 aggregate principal amount of its 9.5% senior secured notes due 2031 (the “Notes”), in a transaction exempt from registration under the Securities Act. Upon the closing of the Omni Acquisition, Clue Opco, LLC, a newly formed subsidiary, (“Opco”) assumed the Escrow Issuer’s obligations under the Notes. The Notes bear interest at a rate of 9.5% per annum, payable semiannually in cash in arrears on April 15 and October 15 of each year, commencing April 15, 2024. The Notes were issued at 98.0% of the face amount and will mature on October 15, 2031. The Notes were issued pursuant to an indenture, dated as of October 2, 2023, between the Escrow Issuer and U.S. Bank Trust Company, National Association, as trustee and notes collateral agent.
The Notes are guaranteed on a senior secured basis in an aggregate principal amount in excess of $100,000. Prior to October 15, 2026, Opco may redeem some or all of the Notes at any time and from time to time at a redemption price equal to 100.000% of the principal amount thereof plus the applicable “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. On or after October 15, 2026, Opco may redeem some or all of the Notes at the following prices (expressed as a percentage of principal), plus in each case accrued and unpaid interest, if any, to, but excluding, the redemption date: (a) in the case of a redemption occurring during the 12-month period commencing October 15, 2026, at a redemption price of 104.750%; (b) in the case of a redemption occurring during the 12-month period commencing on October 15, 2027, at a redemption price of 102.375%; and (c) in the case of a redemption occurring on or after October 15, 2028, at a redemption price of 100.000%. In addition, at any time prior to October 15, 2026, Opco may redeem up to 40.000% of the original aggregate principal amount of the Notes in an amount not to exceed the amount of net cash proceeds from one or more equity offerings at a redemption price equal to 109.5 % of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Upon the occurrence of a “change of control”, Opco will be required to offer to repurchase all of the outstanding principal amount of the Notes at a purchase price of 101.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
Senior Secured Term Loan Facility
In order to finance a portion of the cash consideration payable for the Omni Acquisition and the costs and expenses incurred in connection therewith, GN Loanco, LLC, a Delaware limited liability company and wholly owned subsidiary of Omni Newco, LLC (the “Escrow Loan Borrower” and consolidated VIE at December 31, 2023), entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent and collateral agent and as initial term loan lender. Pursuant to the Credit Agreement, the Escrow Loan Borrower obtained senior secured term B loans in an aggregate principal amount of $1,125,000 (the “New Term Loans”) and the ability to draw down up to $400,000 under a line of credit (the “Revolving Credit Facility”). The New Term Loans bear interest based, at Opco’s election, on (a) SOFR plus an applicable margin or (b) the base rate plus an applicable margin. The base rate is equal the highest of the following: (i) the prime rate; (ii) 0.50% above the overnight federal funds rate; and (iii) the one-month SOFR plus 1.00%. The applicable margin for SOFR loans is 4.50% and the applicable margin for base rate loans is 3.50%. The New Term Loans are subject to customary amortization of 1.00% per year. The New Term Loans were issued at 96.0% of the face amount and will mature on December 19, 2030.
No borrowings under the Revolving Credit Facility were made in connection with the Omni Acquisition. The Revolving Credit Facility will mature on January 25, 2029. Loans made under the Revolving Credit Facility bear interest based, at Opco’s election, on (a) SOFR plus an applicable margin or (b) the base rate plus an applicable margin. Until delivery of a compliance certificate in respect of the fiscal quarter ending June 30, 2024, the applicable margin for SOFR loans is 4.25% and the applicable margin for base rate loans is 3.25%. Thereafter, the applicable margin can range from 3.75% to 4.25% for SOFR loans and from 2.75% to 3.25% for base rate loans, in each case depending on Opco’s first lien net leverage ratio, as set forth in the Credit Agreement. Upon the closing of the Omni Acquisition, Opco assumed the Escrow Loan Borrower’s obligations under the Credit Agreement, which were further secured by certain guarantors. Opco’s obligations under the Credit Agreement are guaranteed on a senior secured basis by us and each of Opco’s existing and future domestic subsidiaries (subject to customary exceptions).
On January 25, 2024, the date of the Omni Acquisition, both GN Bondco, LLC and GN Loanco, LLC ceased operations and their debt and related funds were transferred to Opco, a consolidated subsidiary of us.
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On February 12, 2024, Opco and the parties to the Credit Agreement entered into Amendment No. 2 (“Amendment No. 2”) to the Credit Agreement, which (a) modifies the financial performance covenant in the Credit Agreement by temporarily increasing the 4.50:1.00 maximum consolidated first lien net leverage ratio permitted by the covenant to (i) 6.00:1.00 (for the second and third quarters of 2024), (ii) 5.50:1.00 (for the fourth quarter of 2024), (iii) 5.25:1.00 (for the first quarter of 2025), (iv) 5.00:1.00 (for the second quarter of 2025) and (v) 4.75:1.00 (for the third quarter of 2025) and (b) reduces the revolving credit commitments available under the Credit Agreement from an aggregate principal amount of $400,000 to an aggregate principal amount of $340,000. Amendment No. 2 also amends certain other terms of the Credit Agreement in connection with the foregoing. Prior to the effectiveness of Amendment No. 2 on February 12, 2024, Opco repaid $80,000 aggregate principal amount of the New Term Loans outstanding under the Credit Agreement, together with all accrued and unpaid interest thereon.
Both the Notes and Revolving Credit Facility contain covenants that, among other things, restrict the ability of us, without the approval of the required lenders, to engage in certain mergers, consolidations, asset sales, dividends and stock repurchases, investments, and other transactions or to incur liens or indebtedness in excess of agreed thresholds, as set forth in the credit agreement. The Revolving Credit Facility’s terms also include a financial covenant which requires us to maintain a specific leverage ratio. As of the date of this report, we were in compliance with all aforementioned covenants.
Tax Receivable Agreement
In connection with the Omni Acquisition, we, Opco, Omni Holders and certain other parties entered into a tax receivable agreement (the “Tax Receivable Agreement”), which sets forth the agreement among the parties regarding the sharing of certain tax benefits realized by us as a result of the Omni Acquisition. Pursuant to the Tax Receivable Agreement, we are generally obligated to pay certain Omni Holders 83.5% of (a) the total tax benefit that we realize as a result of increases in tax basis in Opco’s assets resulting from certain actual or deemed distributions and the future exchange of units of Opco for shares of securities of us (or cash) pursuant to Opco’s operating agreement that became effective as of the Closing, (b) certain pre-existing tax attributes of certain Omni Holders that are corporate entities for tax purposes, (c) the tax benefits that we realize from certain tax allocations that correspond to items of income or gain required to be recognized by certain Omni Holders, and (d) other tax benefits attributable to payments under the Tax Receivable Agreement. Payment obligations under the Tax Receivable Agreement rank pari passu with all unsecured obligations but senior to any future tax receivable or similar agreement entered into by us.
The term of the Tax Receivable Agreement will continue until all such tax benefits have been utilized or expired unless we elect to terminate the Tax Receivable Agreement early (or it is terminated early due to a change of control or insolvency event with respect to us or a material breach by us of a material obligation under the Tax Receivable Agreement).
Upon such an early termination, we will be required to make a payment equal to the present value of the anticipated future payments to be made by it under the Tax Receivable Agreement (based upon certain assumptions and deemed events set forth in the Tax Receivable Agreement). In the event of a change of control, under certain circumstances, we may elect to pay the early termination payment over a period of 15 years, with the payments increased to reflect the time value of money.
Cash Flows
Continuing Operations
Net cash used in operating activities of continuing operations was $51,719 for the three months ended March 31, 2024 compared to net cash provided by operating activities of $60,839 for the three months ended March 31, 2023. The increase in net cash used in operating activities was primarily due to the change in net income from operations after consideration of non-cash items and the increase in accounts receivable and other current and noncurrent assets, partially offset by the change in accounts payable and accrued expenses.
Net cash used in investing activities was $1,569,452 for the three months ended March 31, 2024 compared to $61,271 for the three months ended March 31, 2023. Capital expenditures for the first three months of 2024 were $4,970, which primarily related to the purchase of technology and operating equipment. Capital expenditures for the first three months of 2023 were $6,519, which primarily related to the purchase of technology and operating equipment. Investing activities of continuing operations for the first three months of 2024 included the Omni Acquisition for a preliminary purchase price of $2,313,653, while investing activities for the first three months of 2023 included the acquisition of Land Air Express, Inc for a preliminary purchase price of $56,567.
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Net cash used in financing activities of continuing operations was $158,726 for the three months ended March 31, 2024 compared to $13,362 for the three months ended March 31, 2023. The change in the net cash used in financing activities of continuing operations was primarily due to the payment of debt issuance costs, payments on the New Term Loans, and payment of an earn-out liability.
Discontinued Operation
Net cash provided by operating activities of discontinued operation was $— for the three months ended March 31, 2024 compared to $5,154 for the three months ended March 31, 2023. The change in net cash provided by operating activities of discontinued operation was primarily related to a decrease in net income of discontinued operation after consideration of non-cash items. The sale of Final Mile was completed on December 20, 2023.
Net cash used in investing activities of discontinued operation was $— for the three months ended March 31, 2024 compared to $270 for the three months ended March 31, 2023. The change in the net cash used in investing activities of discontinued operation was due to the sale of Final Mile on December 20, 2023.
Net cash used in financing activities of discontinued operation was $— for the three months ended March 31, 2024 compared to $4,884 for the three months ended March 31, 2023. The change in the net cash used in financing activities of discontinued operation was due to decreased contributions to the parent. The sale of Final Mile was completed on December 20, 2023.
Stock Repurchase Program
During the three months ended March 31, 2024, we did not repurchase any shares of our common stock. During the three months ended March 31, 2023, we repurchased 474 shares of our common stock for approximately $50,491 through open market transactions. All shares received were retired upon receipt, and the excess of the purchase price over the par value per share was recorded to “Retained Earnings” in our Condensed Consolidated Balance Sheets.
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Forward-Looking Statements
This report 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. Some forward-looking statements may be identified by use of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,” “projects” or “expects.” In this Form 10-Q, forward-looking statements include, but are not limited to, any statements regarding In this Form 10-Q, forward-looking statements include, but are not limited to, any statements regarding: (i) any projections of earnings, revenues, other financial items or related accounting treatment, or cost reduction measures, including any impact of the Omni Acquisition on our financial statements; (ii) future performance, including any expectations about our ability to increase shipments; (iii) our ability to maintain compliance with the covenants of our indebtedness instruments; (iv) our expectations regarding our ability to recognize synergies as a result of the Omni Acquisition; (v) our yield management process, any improvements in operating efficiencies and our ability to create synergies across our services; (vi) fuel shortages, changes in fuel prices and volatility in fuel surcharge revenue, and the impact on our business; (vii) consumer demand and inventory levels, and the impact on freight volumes; (viii) future insurance, claims and litigation and any associated estimates or projections; (ix) our ability to accelerate the expansion of the Company’s terminal footprint; (x) certain tax and accounting matters, including the impact on our financial statements and our ability realize remaining net deferred tax assets; (xi) intended expansion through acquisitions or greenfield startups, and the impact of any such acquisition on our business; (xii) our ability to use key performance metrics to gauge growth strategies; (xiii) future business, economic conditions or performance, as well as industry projections; (xiv) competition, including our specific advantages, the capabilities of our segments, including the integration of services and our geographic location; (xv) expectations regarding new vessel deliveries; (xvi) expectations regarding plans, strategies, and objectives of management for future operations, including the Grow Forward strategy; (xvii) the Company’s ability to finalize the valuation in connection with assets acquired and liabilities assumed in connection with the Omni Acquisition; and (xviii) any belief and any statements of assumptions underlying any of the foregoing.
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 outcome and related impact of the Omni Acquisition, continued weakening of the freight environment, future debt and financing levels, the outcome of any legal proceedings related to the Omni Acquisition, our substantial indebtedness, our ability to manage our growth and ability to grow, in part, through acquisitions while being able to successfully integrate such acquisitions, our ability to secure terminal facilities in desirable locations at reasonable rates, more limited liquidity than expected which limits our ability to make key investments, the creditworthiness of our customers and their ability to pay for services rendered, 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, the availability and compensation of qualified Leased Capacity Providers and freight handlers as well as contracted, third-party motor carriers needed to serve our customers’ transportation needs, our inability to manage our information systems and inability of our information systems to handle an increased volume of freight moving through our network, the occurrence of cybersecurity risks and events, market acceptance of our service offerings, claims for property damage, personal injuries or workers’ compensation, enforcement of and changes in governmental regulations, environmental, tax, insurance and accounting matters, the handling of hazardous materials, changes in fuel prices, loss of a major customer, increasing competition and pricing pressure, our dependence on our senior management team and the potential effects of changes in employee status, seasonal trends, the occurrence of certain weather events, restrictions in our charter and bylaws, the cost of new equipment, the impact and efficacy of our disclosure controls and procedures, and the risks described in our Annual Report on Form 10-K for the year ended December 31, 2023. As a result of the foregoing, no assurance can be given as to future financial condition, cash flows or results of operations. We undertake no obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise.
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