UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2016
Commission File No. 000-22490

corplogo.jpg

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


Tennessee
 
62-1120025
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
430 Airport Road
Greeneville, Tennessee
 
37745
(Address of principal executive offices)
 
(Zip Code)
 

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x
 
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 20, 2016 was 30,523,021.



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

2



Part I.
Financial Information
 
 
Item 1.
Financial Statements (Unaudited).
Forward Air Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash
$
11,312

 
$
33,312

Accounts receivable, less allowance of $1,924 in 2016 and $2,405 in 2015
115,327

 
109,165

Other current assets
17,321

 
30,980

Total current assets
143,960

 
173,457

 
 
 
 
Property and equipment
369,582

 
343,147

Less accumulated depreciation and amortization
172,348

 
155,859

Total property and equipment, net
197,234

 
187,288

Goodwill and other acquired intangibles:
 

 
 

Goodwill
184,675

 
205,609

Other acquired intangibles, net of accumulated amortization of $58,943 in 2016 and $51,212 in 2015
109,041

 
127,800

Total net goodwill and other acquired intangibles
293,716

 
333,409

Other assets
6,603

 
5,778

Total assets
$
641,513

 
$
699,932

 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
18,415

 
$
23,334

Accrued expenses
30,843

 
29,823

Current portion of debt and capital lease obligations
41,866

 
55,887

Total current liabilities
91,124

 
109,044

 
 
 
 
Long-term debt and capital lease obligations, less current portion
814

 
28,617

Other long-term liabilities
14,726

 
12,340

Deferred income taxes
39,007

 
39,876

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock

 

Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 30,283,518 in 2016 and 30,543,864 in 2015
303

 
305

Additional paid-in capital
174,450

 
160,855

Retained earnings
321,089

 
348,895

Total shareholders’ equity
495,842

 
510,055

Total liabilities and shareholders’ equity
$
641,513

 
$
699,932

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


3



Forward Air Corporation
Condensed Consolidated Statements of Comprehensive Income
(In thousands, except per share data)
(Unaudited)
 
 
 
 
 
Three months ended
 
Nine months ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Operating revenue
$
249,552

 
$
247,093

 
$
717,737

 
$
702,705

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 

 
 
Purchased transportation
105,039

 
104,434

 
300,783

 
301,253

Salaries, wages and employee benefits
60,161

 
59,025

 
175,857

 
174,815

Operating leases
16,215

 
17,072

 
44,684

 
51,105

Depreciation and amortization
9,399

 
9,399

 
28,409

 
27,601

Insurance and claims
7,170

 
5,161

 
19,213

 
16,531

Fuel expense
3,416

 
3,826

 
9,375

 
12,034

Other operating expenses
23,452

 
23,575

 
65,218

 
66,608

Impairment of goodwill, intangibles and other assets

 

 
42,442

 

Total operating expenses
224,852

 
222,492

 
685,981

 
649,947

Income from operations
24,700

 
24,601

 
31,756

 
52,758

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 

 
 
Interest expense
(216
)
 
(554
)
 
(1,230
)
 
(1,489
)
Other, net
(4
)
 
10

 
(149
)
 
(127
)
Total other income (expense)
(220
)
 
(544
)
 
(1,379
)
 
(1,616
)
Income before income taxes
24,480

 
24,057

 
30,377

 
51,142

Income tax expense
12,549

 
8,370

 
15,413

 
18,795

Net income and comprehensive income
$
11,931


$
15,687

 
$
14,964

 
$
32,347

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 

 
 
Basic
$
0.39

 
$
0.51

 
$
0.49

 
$
1.04

Diluted
$
0.39

 
$
0.50

 
$
0.49

 
$
1.03

 
 
 
 
 
 
 
 
Dividends per share:
$
0.12

 
$
0.12

 
$
0.36

 
$
0.36


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

4



Forward Air Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Nine months ended
 
September 30,
2016
 
September 30,
2015
 
 
Operating activities:
 
 
 
Net income
$
14,964

 
$
32,347

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
28,409

 
27,601

Impairment of goodwill, intangible and other assets
42,442

 

Share-based compensation
6,204

 
5,562

Loss (gain) on disposal of property and equipment
201

 
(3
)
Provision for loss on receivables
268

 
463

Provision for revenue adjustments
1,570

 
3,391

Deferred income tax
661

 
5,546

Excess tax benefit for stock options exercised
(137
)
 
(2,365
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable
(8,000
)
 
866

Other current assets
13,083

 
(1,531
)
Accounts payable and accrued expenses
(5,057
)
 
(14,562
)
Net cash provided by operating activities
94,608

 
57,315

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposal of property and equipment
1,795

 
1,200

Purchases of property and equipment
(28,725
)
 
(18,541
)
Acquisition of business, net of cash acquired
(11,800
)
 
(61,878
)
Other
(673
)
 
(598
)
Net cash used in investing activities
(39,403
)
 
(79,817
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from term loan

 
125,000

Payments of debt and capital lease obligations
(41,825
)
 
(87,367
)
Proceeds from exercise of stock options
7,041

 
11,351

Payments of cash dividends
(10,987
)
 
(11,133
)
Repurchase of common stock (repurchase program)
(29,986
)
 
(9,996
)
Common stock issued under employee stock purchase plan
215

 
228

Excess tax benefit for stock options exercised
137

 
2,365

Cash settlement of share-based awards for minimum tax withholdings
(1,800
)
 
(1,931
)
Net cash (used in) provided by financing activities
(77,205
)
 
28,517

Net (decrease) increase in cash
(22,000
)
 
6,015

Cash at beginning of period
33,312

 
41,429

Cash at end of period
$
11,312

 
$
47,444

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



5

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016



1.    Basis of Presentation

Forward Air Corporation's (“the Company”, “We”, “Our”) services can be classified into four principal reportable segments: Expedited LTL, Expedited Truckload Services (“TLX”), Intermodal and Pool Distribution (See note 11).
 
In our Expedited LTL segment, we provide time-definite transportation services to the North American deferred air freight market. Our Expedited LTL service operates a comprehensive national network for the time-definite surface transportation of expedited ground freight. The Expedited LTL service offers customers local pick-up and delivery and scheduled surface transportation of cargo as a cost effective, reliable alternative to air transportation. Expedited LTL’s other services include shipment consolidation and deconsolidation, warehousing, customs brokerage, and other handling. The Expedited LTL segment primarily provides its transportation services through a network of terminals located at or near airports in the United States and Canada.

In our TLX segment, we provide expedited truckload brokerage, dedicated fleet services and maximum security and temperature-controlled logistics services. We are able to expedite this service by utilizing a dedicated fleet of team owner operators, some team company drivers as well as third party transportation providers. The TLX segment provides full truckload service in the United States and Canada.

In our Intermodal segment, we provide container and intermodal drayage services primarily within the Midwest region of the United States. Drayage is essentially the first and last mile of the movement of an intermodal container. We are providing this service both to and from ports and rail heads. Our Intermodal segment also provides dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. Today Intermodal operates primarily in the Midwest but through acquisition as well as green-field start-ups we anticipate moving into other geographies within the United States.

In our Pool Distribution segment, we provide pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. Our primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company’s operating results are subject to seasonal trends when measured on a quarterly basis; therefore operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. For further information, refer to the consolidated financial statements and notes thereto included in the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2015.

The accompanying unaudited condensed consolidated financial statements of the Company include Forward Air Corporation and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

2.    Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital (APIC) pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective in 2017 with early adoption permitted. We plan to adopt this guidance in January 2017 and while the elimination of APIC pools will result in increased volatility of our effective tax rate, the overall impact is expected to be minimal.


6

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


In February 2016, the FASB, issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact of the future adoption of this standard on our consolidated financial statements.

In November 2015, the FASB issued Accounting Standard Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes", an update to ASC 740, Income Taxes (“Update”). Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The FASB also decided to permit earlier application by all entities as of the beginning of any interim or annual reporting period. The FASB further provides that this Update may be applied to all deferred tax liabilities and assets retrospectively to all periods presented. We adopted the Update retrospectively for the year ended December 31, 2015.
    
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.

3.    Acquisitions and Goodwill

Acquisition of Towne

On March 9, 2015, the Company acquired CLP Towne Inc. (“Towne”) pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) resulting in Towne becoming an indirect, wholly-owned subsidiary of the Company. For the acquisition of Towne, the Company paid $61,878 in net cash and assumed $59,544 in debt and capital leases. With the exception of assumed capital leases, the assumed debt was immediately paid in full after funding of the acquisition. Of the total aggregate cash consideration paid, $16,500 was placed into an escrow account, with $2,000 of such amount being available to settle any shortfall in Towne’s net working capital and with $14,500 of such amount being available for a period of time to settle certain possible claims against Towne’s common stockholders for indemnification. To the extent the escrow fund is insufficient, certain equity holders have agreed to indemnify Forward Air, subject to certain limitations set forth in the Merger Agreement, as a result of inaccuracies in or breaches of certain of Towne’s representations, warranties, covenants and agreements and other matters. Forward Air financed the Merger Agreement with a $125,000 2 year term loan available under the senior credit facility discussed in note 5.

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. Towne’s airport-to-airport network provides scheduled deliveries to 61 service points. A fleet of approximately 525 independent contractor tractors provides the line-haul between those service points. The acquisition of Towne provides the Expedited LTL and TLX segments with opportunities to expand their service points and service offerings, such as pick up and delivery services. Additional benefits of the acquisition include increased linehaul network shipping density and a significant increase to our owner operator fleet, both of which are key to the profitability of the Company.
 
The assets, liabilities, and operating results of Towne have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Expedited LTL and TLX reportable segments. As the operations of Towne

7

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


were fully integrated into the Company's existing networks and operations, the Company is not able to provide the revenue and operating results from Towne included in our consolidated revenue and results since the date of acquisition.
Effective with the acquisition of Towne, the Company immediately entered into a restructuring plan to remove duplicate costs, primarily in the form of, but not limited to salaries, wages and benefits and facility leases. As a result of these plans, during the nine months ended September 30, 2015 the Company recognized expense and recorded liabilities of $2,588 and $11,290 for severance obligations and remaining net payments on vacated, duplicate facilities, respectively. The expenses associated with the severance obligations and vacated, duplicate facilities were recognized in the salaries, wages and benefits and operating lease line items, respectively. During the nine months ended September 30, 2015, the Company also incurred expense of $9,059 for various other integration and transaction related costs which are largely included in other operating expenses.
In conjunction with the Towne acquisition, the Company vacated certain duplicate facilities under long-term non-cancelable leases and recorded contract termination costs. As of September 30, 2016, the Company's reserve for remaining payments on vacated facilities was $4,775. During the three and nine months ended September 30, 2016, we paid $700 and $3,862 respectively in recurring payments on these non-cancelable leases.
Acquisition of Triumph and Ace

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

8

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016



Triumph & Ace
 
Towne

2016
 
March 9, 2015
Tangible assets:


 
 
Accounts receivable
$

 
$
24,068

Prepaid expenses and other current assets

 
2,916

Property and equipment
1,294

 
2,095

Other assets

 
614

Total tangible assets
1,294

 
29,693

Intangible assets:


 
 
Non-compete agreements
139

 

Customer relationships
5,335

 
66,000

Goodwill
6,282

 
59,666

Total intangible assets
11,756

 
125,666

Total assets acquired
13,050

 
155,359



 
 
Liabilities assumed:

 
 
Current liabilities

 
28,920

Other liabilities
1,250

 
3,886

Debt and capital lease obligations

 
59,544

Deferred income taxes

 
1,131

Total liabilities assumed
1,250

 
93,481

Net assets acquired
$
11,800

 
$
61,878


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

Useful Lives

Triumph & Ace
 
Towne
Customer relationships
15 years
 
20 years
Non-compete agreements
5 years
 
-
The fair value of the non-compete agreements and customer relationships assets were estimated using an income approach (level 3). Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To estimate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.
Pro forma
The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if the Towne acquisition occurred as of January 1, 2015 (in thousands, except per share data).

9

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


 
Nine months ended
 
September 30, 2016
September 30, 2015
Operating revenue
$
717,737

$
736,932

Income from operations
31,756

50,451

Net income
14,964

29,868

Net income per share
 
 
Basic
$
0.49

$
0.97

Diluted
$
0.49

$
0.96

The unaudited pro forma consolidated results for the nine month periods are based on the historical financial information of Towne. The unaudited pro forma consolidated results incorporate historical financial information since January 1, 2015. The historical financial information has been adjusted to give effect to pro forma adjustments that are: (i) directly attributable to the acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been had it completed these acquisitions on January 1, 2015.
Goodwill
The Company conducted its annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 2016.  The first step of the goodwill impairment test is the Company's assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, including goodwill. When performing the qualitative assessment, the Company considers the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performance of each reporting unit, litigation and new legislation. If based on the qualitative assessments, the Company believes it more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, or periodically as deemed appropriate by management, the Company will prepare an estimation of the respective reporting unit's fair value utilizing a quantitative approach.  If a quantitative fair value estimation is required, the Company estimates the fair value of the applicable reportable units, using a combination of discounted projected cash flows and market valuations for comparable companies as of the valuation date.  The Company's inputs into the fair value estimates for goodwill are classified within level 3 of the fair value hierarchy as defined in the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“the FASB Codification”). If this estimation of fair value indicates that impairment potentially exists, the Company will then measure the amount of the impairment, if any.  Goodwill impairment exists when the estimated implied fair value of goodwill is less than its carrying value.  Changes in strategy or market conditions could significantly impact these fair value estimates and require adjustments to recorded asset balances.

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

The following is a summary of the changes in goodwill for the nine months ended September 30, 2016. Approximately $100,156 of goodwill, not including the goodwill acquired with the Towne acquisition, is deductible for tax purposes.

10

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


 
Expedited LTL
 
Expedited Truckload
 
Pool Distribution
 
Intermodal
 
Total
 
 
Accumulated
 
 
Accumulated
 
 
Accumulated
 
 
Accumulated
 
 
 
Goodwill
Impairment
 
Goodwill
Impairment
 
Goodwill
Impairment
 
Goodwill
Impairment
 
Net
Beginning balance, December 31, 2015
$
99,123

$

 
$
45,164

$

 
$
12,359

$
(6,953
)
 
$
55,916

$

 
$
205,609

Triumph and Ace Acquisition


 


 


 
6,282


 
6,282

TQI impairment


 

(25,686
)
 


 


 
(25,686
)
Adjustment to Towne acquisition
(1,530
)

 


 


 


 
(1,530
)
Ending balance, September 30, 2016
$
97,593

$

 
$
45,164

$
(25,686
)
 
$
12,359

$
(6,953
)
 
$
62,198

$

 
$
184,675

Additionally, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is recognized on assets classified as held and used when the sum of undiscounted estimated cash flows expected to result from the use of the asset is less than the carrying value. If such measurement indicates a possible impairment, the estimated fair value of the asset is compared to its net book value to measure the impairment charge, if any. In conjunction with the TQI goodwill impairment assessment the Company determined there were indicators that TQI's customer relationship and non-compete intangible assets were impaired as the undiscounted cash flows associated with the applicable assets no longer exceeded the related assets' net book values. The Company then estimated the current market values of the customer relationship and non-compete assets using an income approach (level 3). Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To estimate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. As a result of these estimates the Company recorded an impairment charge of $16,501 related to TQI customer relationships.

The Company is still in the process of finalizing certain valuations related to the goodwill and customer relationship impairment analyses. Adjustments, if any, to its estimates as a result of completing its valuation analysis will be recorded during the three months ended December 31, 2016.
      
In addition, during the three months ended June 30, 2016, the Company also discontinued use of an owned maintenance facility and began efforts to sell the property. In conjunction with these actions, the Company incurred a $255 impairment charge that was estimated using current offers received to sell the property less estimated cost to sell the facility.

4.    Share-Based Payments

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

Employee Activity - Stock Options
 
Stock option grants to employees generally expire seven years from the grant date and typically vest ratably over a three-year period.  The Company used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted.  The weighted-average fair value of options granted and assumptions used to estimate their fair value during the three and nine months ended September 30, 2016 and 2015 were as follows:


11

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


 
 
 
 

Three months ended

September 30,
2016

September 30,
2015
Expected dividend yield
%

1.2
%
Expected stock price volatility
%

29.8
%
Weighted average risk-free interest rate
%

1.4
%
Expected life of options (years)


4.5

Weighted average grant date fair value
$


$
12

 
 
 
 

Nine months ended

September 30,
2016

September 30,
2015
Expected dividend yield
1.0
%

1.0
%
Expected stock price volatility
29.0
%

33.7
%
Weighted average risk-free interest rate
1.3
%

1.6
%
Expected life of options (years)
6.0


6.0

Weighted average grant date fair value
$
12


$
16



12

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


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


Three months ended September 30, 2016







Weighted-



Weighted-

Aggregate

Average



Average

Intrinsic

Remaining

Options

Exercise

Value

Contractual

(000)

Price

(000)

Term
Outstanding at June 30, 2016
855


$
34





Granted







Exercised
(263
)

23





Forfeited







Outstanding at September 30, 2016
592


$
40


$
3,355


4.0
Exercisable at September 30, 2016
364


$
36


$
3,351


2.8
 

Three months ended

September 30,
2016

September 30,
2015
Share-based compensation for options
$
377


$
352

Tax benefit for option compensation
$
140


$
137

Unrecognized compensation cost for options, net of estimated forfeitures
$
2,036


$
1,977

Weighted average period over which unrecognized compensation will be recognized (years)
1.9



 
 
 
 
 
 
 
 

Nine months ended September 30, 2016







Weighted-



Weighted-

Aggregate

Average



Average

Intrinsic

Remaining

Options

Exercise

Value

Contractual

(000)

Price

(000)

Term
Outstanding at December 31, 2015
786


$
32





Granted
122


44





Exercised
(311
)

23





Forfeited
(5
)

38





Outstanding at September 30, 2016
592


$
40


$
3,355


4.0
Exercisable at September 30, 2016
364


$
36


$
3,351


2.8
 
 
 
 

Nine months ended

September 30,
2016

September 30,
2015
Share-based compensation for options
$
1,101


$
1,029

Tax benefit for option compensation
$
407


$
403

Unrecognized compensation cost for options, net of estimated forfeitures
$
2,036


$
1,977

Weighted average period over which unrecognized compensation will be recognized (years)
1.9

 
 

13

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


Employee Activity - Non-vested Shares

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


Three months ended September 30, 2016



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at June 30, 2016
228


$
45



Granted





Vested
(1
)

47



Forfeited
(3
)

45



Outstanding and non-vested at September 30, 2016
224


$
45


$
10,173



Three months ended

September 30,
2016

September 30,
2015
Share-based compensation for non-vested shares
$
1,176


$
1,031

Tax benefit for non-vested share compensation
$
434


$
403

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
7,147


$
6,148

Weighted average period over which unrecognized compensation will be recognized (years)
2.0



 
 
 
 
 
 

Nine months ended September 30, 2016



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2015
191


$
46



Granted
134


44



Vested
(94
)

44



Forfeited
(7
)

46



Outstanding and non-vested at September 30, 2016
224


$
45


$
10,173

 
 
 
 

Nine months ended

September 30,
2016

September 30,
2015
Share-based compensation for non-vested shares
$
3,434


$
3,042

Tax benefit for non-vested share compensation
$
1,270


$
1,190

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
7,147


$
6,148

Weighted average period over which unrecognized compensation will be recognized (years)
2.0

 
 

14

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


Employee Activity - Performance Shares

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


Nine months ended

September 30,
2016

September 30,
2015
Expected stock price volatility
22.3
%

23.5
%
Weighted average risk-free interest rate
0.8
%

1.0
%

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

Three months ended September 30, 2016



Weighted-

Aggregate

Performance

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at June 30, 2016
80


$
55



Granted





Additional shares awarded based on performance





Vested





Outstanding and non-vested at September 30, 2016
80


$
55


$
4,373



Three months ended

September 30,
2016

September 30,
2015
Share-based compensation for performance shares
$
367


$
337

Tax benefit for performance share compensation
$
136


$
132

Unrecognized compensation cost for performance shares, net of estimated forfeitures
$
2,076


$
2,062

Weighted average period over which unrecognized compensation will be recognized (years)
1.8




15

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


 
 
 
 
 
 

Nine months ended September 30, 2016



Weighted-

Aggregate

Performance

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2015
77


$
52



Granted
29


49



Additional shares awarded based on performance
7


40



Vested
(33
)

40



Outstanding and non-vested at September 30, 2016
80


$
55


$
4,373

 
 
 
 

Nine months ended

September 30,
2016

September 30,
2015
Share-based compensation for performance shares
$
1,080


$
972

Tax benefit for performance share compensation
$
400


$
380

Unrecognized compensation cost for performance shares, net of estimated forfeitures
$
2,076


$
2,062

Weighted average period over which unrecognized compensation will be recognized (years)
1.8

 
 

Employee Activity - Employee Stock Purchase Plan
Under the 2005 Employee Stock Purchase Plan (the “ESPP”), which has been approved by shareholders, the Company is authorized to issue up to a remaining 387,395 shares of common stock to employees of the Company. These shares may be issued at a price equal to 90% of the lesser of the market value on the first day or the last day of each six-month purchase period. Common stock purchases are paid for through periodic payroll deductions and/or up to two large lump sum contributions. For the nine months ended September 30, 2016, participants under the plan purchased 5,592 shares at an average price of $38.50 per share. For the nine months ended September 30, 2015, participants under the plan purchased 5,087 shares at an average price of $44.74 per share. The weighted-average fair value of each purchase right under the ESPP granted for the nine months ended September 30, 2016, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $6.03 per share. The weighted-average fair value of each purchase right under the ESPP granted for the nine months ended September 30, 2015, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $7.52 per share. Share-based compensation expense of $34 and $37 was recognized during the nine months ended September 30, 2016 and 2015, respectively.

Non-employee Director Activity - Non-vested Shares

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

16

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016



Three months ended September 30, 2016



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at June 30, 2016
16


$
44



Granted





Vested





Outstanding and non-vested at September 30, 2016
16


$
44


$
688



Three months ended

September 30,
2016

September 30,
2015
Share-based compensation for non-vested shares
$
173


$
166

Tax benefit for non-vested share compensation
$
64


$
65

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
419


$
424

Weighted average period over which unrecognized compensation will be recognized (years)
0.6



 
 
 
 
 
 

Nine months ended September 30, 2016



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2015
15


$
51



Granted
16


44



Vested
(15
)

51



Outstanding and non-vested at September 30, 2016
16


$
44


$
688

 
 
 
 

Nine months ended

September 30,
2016

September 30,
2015
Share-based compensation for non-vested shares
$
555


$
482

Tax benefit for non-vested share compensation
$
198


$
189

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
419


$
424

Weighted average period over which unrecognized compensation will be recognized (years)
0.6

 
 

5.    Senior Credit Facility

On February 4, 2015, the Company entered into a five-year senior, unsecured credit facility (the “Facility”) with a maximum aggregate principal amount of $275,000, including a revolving credit facility of $150,000 and a term loan facility of $125,000. The revolving credit facility has a sublimit of $25,000 for letters of credit and a sublimit of $15,000 for swing line loans. The revolving credit facility is scheduled to expire in February 2020 and may be used to refinance existing indebtedness of the Company and for working capital, capital expenditures and other general corporate purposes. Unless the Company elects otherwise under the credit agreement, interest on borrowings under the Facility are based on the highest of (a) the federal funds rate plus 0.5%, (b)

17

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


the administrative agent's prime rate and (c) the LIBOR Rate plus 1.0%, in each case plus a margin that can range from 0.1% to 0.6% with respect to the term loan facility and from 0.3% to 0.8% with respect to the revolving credit facility depending on the Company’s ratio of consolidated funded indebtedness to earnings as set forth in the credit agreement. The Facility contains financial covenants and other covenants that, among other things, restrict the ability of the Company, without the approval of the lenders, to engage in certain mergers, consolidations, asset sales, investments, transactions or to incur liens or indebtedness, as set forth in the credit agreement. As of September 30, 2016, the Company had no borrowings outstanding under the revolving credit facility. At September 30, 2016, the Company had utilized $9,414 of availability for outstanding letters of credit and had $140,586 of available borrowing capacity outstanding under the revolving credit facility.  

In conjunction with the acquisition of Towne (see note 3), the Company borrowed $125,000 on the available term loan. The term loan is payable in quarterly installments of 11.1% of the original principal amount of the term loan plus accrued and unpaid interest, and matures in March 2017. The interest rate on the term loan was 1.8% at September 30, 2016. The remaining balance on the term loan was $41,675 as of September 30, 2016 and is a current liability. The balance on the term loan was $83,338 and the interest rate was 1.5% as of December 31, 2015.

6.    Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:
 
 
Three months ended
 
Nine months ended
 
 
September 30,
2016
 
September 30,
2015
 
September 30, 2016
 
September 30, 2015
Numerator:
 
 
 
 
 
 
 
 
Net income and comprehensive income
 
$
11,931

 
$
15,687


$
14,964


$
32,347

Income allocated to participating securities
 
(93
)
 
(104
)

(114
)

(215
)
Numerator for basic and diluted income per share - net income
 
$
11,838

 
$
15,583

 
$
14,850

 
$
32,132

Denominator (in thousands):
 
 

 
 

 
 
 
 
Denominator for basic income per share - weighted-average shares
 
30,191

 
30,715

 
30,316

 
30,750

Effect of dilutive stock options (in thousands)
 
117

 
250

 
151

 
300

Effect of dilutive performance shares (in thousands)
 
30

 
33

 
29

 
34

Denominator for diluted income per share - adjusted weighted-average shares
 
30,338

 
30,998

 
30,496

 
31,084

Basic net income per share
 
$
0.39

 
$
0.51

 
$
0.49

 
$
1.04

Diluted net income per share
 
$
0.39

 
$
0.50

 
$
0.49

 
$
1.03


The number of instruments that could potentially dilute net income per basic share in the future, but that were not included in the computation of net income per diluted share because to do so would have been anti-dilutive for the periods presented, are as follows:
 
September 30,
2016
 
September 30,
2015
Anti-dilutive stock options (in thousands)
309

 
176

Anti-dilutive performance shares (in thousands)

 
23

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

 

Total anti-dilutive shares (in thousands)
309

 
199


7.    Income Taxes

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

18

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016



For the three and nine months ended September 30, 2016 and 2015, the effective income tax rates varied from the statutory federal income tax rate of 35.0%, primarily as a result of the effect of state income taxes, net of the federal benefit, and permanent differences between book and tax net income. The combined federal and state effective tax rate for the nine months ended September 30, 2016 was 50.7% compared to a rate of 36.8% for the same period in 2015.  The increase in the 2016 effective tax rate was attributable to the TQI goodwill write off (Note 3) that is not deductible for tax purposes.

8.    Financial Instruments

Fair Value of Financial Instruments

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

Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value based on their short-term nature.
 
The Company’s revolving credit facility and term loan bear variable interest rates plus additional basis points based upon covenants related to total indebtedness to earnings.  As the term loan bears a variable interest rate, the carrying value approximates fair value. Using interest rate quotes and discounted cash flows, the Company estimated the fair value of its outstanding capital lease obligations as follows:
 
 
 
September 30, 2016
 
 
Carrying Value
 
Fair Value
Capital leases
 
$
1,103

 
$
1,220


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

9.    Shareholders' Equity

During each quarter of 2015 and the first, second and third quarters of 2016, the Company's Board of Directors declared a cash dividend of $0.12 per share of common stock. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.

On February 7, 2014, our Board of Directors approved a stock repurchase authorization for up to two million shares of our common stock. During the three months ended September 30, 2016, we repurchased 222,388 shares for $9,996, or an average of $44.95 per share. During the nine months ended September 30, 2016, we repurchased 676,773 shares for $29,986, or an average of $44.31 per share. During the three and nine months ended September 30, 2015, we repurchased 204,590 for $9,996, or $48.86 per share.

On July 21, 2016, our Board of Directors canceled the Company’s remaining 2014 share repurchase authorization and approved a stock repurchase authorization for up to three million shares of the Company’s common stock. All shares remain for repurchase, as shares repurchased in the three months ended September 30, 2016 were made under the 2014 plan.

10.    Commitments and Contingencies

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

The primary claims in the Company’s business relate to workers’ compensation, property damage, vehicle liability and medical benefits. Most of the Company’s insurance coverage provides for self-insurance levels with primary and excess coverage which management believes is sufficient to adequately protect the Company from catastrophic claims. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured limits, including provision for estimated claims incurred but not reported.

19

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


 
The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing hindsight and actuarial analysis to determine an estimate of probable losses on claims incurred but not reported.  Such losses should be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates. 

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

11.    Segment Reporting

The Company operates in four reportable segments based on information available to and used by the chief operating decision maker.  Expedited LTL provides time-definite transportation and logistics services to the deferred air freight market.  The TLX segment provides expedited truckload brokerage, dedicated fleet services and maximum security and temperature-controlled logistics services. Our Intermodal segment provides container and intermodal drayage services. Pool Distribution provides pool distribution services primarily to regional and national distributors and retailers.

During the first quarter of 2016, the Company changed its reportable segments to separate its truckload and intermodal businesses from our Expedited LTL service and to aggregate reporting for truckload services into a single segment. The Company previously reported three segments: Forward Air, Forward Air Solutions and Total Quality, Inc. Consequently, the Company now reports four segments: Expedited LTL, Expedited Truckload Services (“TLX”), Intermodal and Pool Distribution. All prior year segment amounts have been restated to reflect this new reporting structure.
Except for certain insurance activity, the accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in Note 1 to the Consolidated Financial Statements included in the Company’s 2015 Annual Report on Form 10-K. For workers compensation and vehicle claims each segment is charged an insurance premium and is also charged a deductible that corresponds with the our corporate deductibles disclosed in Note 1 to the Consolidated Financial Statements included in the Company’s 2015 Annual Report on Form 10-K. However, any losses beyond our deductibles and any loss development factors applied to our outstanding claims as a result of actuary analysis are not passed to the segments, but kept at the corporate level.

Segment data includes intersegment revenues.  Assets and costs of the corporate headquarters are allocated to the segments based on usage.  The Company evaluates the performance of its segments based on income from operations.  The Company’s business is conducted in the U.S. and Canada.
 
The following tables summarize segment information about results from operations and assets used by the chief operating decision maker of the Company in making decisions regarding allocation of assets and resources as of and for the three and nine months ended September 30, 2016 and 2015.

20

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


 
 
Three months ended September 30, 2016
 
 
Expedited LTL
 
Expedited Truckload
 
Pool Distribution
 
Intermodal
 
Eliminations & other
 
Consolidated
External revenues
 
$
143,753

 
$
41,927

 
$
36,305

 
$
27,567

 
$

 
$
249,552

Intersegment revenues
 
584

 
283

 
132

 
12

 
(1,011
)
 

Depreciation and amortization
 
5,470

 
1,470

 
1,472

 
987

 

 
9,399

Share-based compensation expense
 
1,792

 
98

 
84

 
119

 

 
2,093

Interest expense
 
385

 

 

 
12

 
(181
)
 
216

Income (loss) from operations
 
21,014

 
2,038

 
66

 
3,041

 
(1,459
)
 
24,700

Total assets
 
634,028

 
52,465

 
46,327

 
128,048

 
(219,355
)
 
641,513

Capital expenditures
 
11,915

 
36

 
722

 
11

 

 
12,684

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2015
 
 
Expedited LTL
 
Expedited Truckload
 
Pool Distribution
 
Intermodal
 
Eliminations & other
 
Consolidated
External revenues
 
$
148,647

 
$
38,088

 
$
31,949

 
$
28,568

 
$
(159
)
 
$
247,093

Intersegment revenues
 
565

 
440

 
184

 
322

 
(1,511
)
 

Depreciation and amortization
 
5,403

 
1,590

 
1,451

 
939

 
16

 
9,399

Share-based compensation expense
 
1,514

 
219

 
69

 
84

 

 
1,886

Interest expense
 
535

 

 

 
19

 

 
554

Income (loss) from operations
 
21,594

 
3,170

 
555

 
3,536

 
(4,254
)
 
24,601

Total assets
 
652,946

 
89,659

 
45,017

 
118,035

 
(206,992
)
 
698,665

Capital expenditures
 
3,484

 
1,879

 
1,108

 
108

 

 
6,579



21

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2016


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
 
Expedited LTL
 
Expedited Truckload
 
Pool Distribution
 
Intermodal
 
Eliminations & other
 
Consolidated
External revenues
 
$
421,194

 
$
119,574

 
$
100,726

 
$
76,243

 
$

 
$
717,737

Intersegment revenues
 
2,216

 
696

 
427

 
148

 
(3,487
)
 

Depreciation and amortization
 
16,278

 
4,944

 
4,434

 
2,753

 

 
28,409

Share-based compensation expense
 
5,353

 
260

 
251

 
340

 

 
6,204

Interest expense
 
1,345

 

 

 
66

 
(181
)
 
1,230

Income (loss) from operations
 
63,026

 
(36,679
)
 
(191
)
 
8,170

 
(2,570
)
 
31,756

Total assets
 
634,028

 
52,465

 
46,327

 
128,048

 
(219,355
)
 
641,513

Capital expenditures
 
24,487

 
1,821

 
2,275

 
142

 

 
28,725

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
Expedited LTL
 
Expedited Truckload
 
Pool Distribution
 
Intermodal
 
Eliminations & other
 
Consolidated
External revenues
 
$
425,992

 
$
110,935

 
$
86,460

 
$
78,705

 
$
613

 
$
702,705

Intersegment revenues
 
1,285

 
1,460

 
580

 
707

 
(4,032
)
 

Depreciation and amortization
 
15,707

 
4,514

 
4,492

 
2,854

 
34

 
27,601

Share-based compensation expense
 
4,511

 
637

 
220

 
194

 

 
5,562

Interest expense
 
1,058

 

 

 
65

 
366

 
1,489

Income (loss) from operations
 
57,275

 
10,521

 
758

 
8,843

 
(24,639
)
 
52,758

Total assets
 
652,946

 
89,659

 
45,017

 
118,035

 
(206,992
)
 
698,665

Capital expenditures
 
8,834

 
5,968

 
3,344

 
395

 

 
18,541



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

Overview and Executive Summary
 
Our services are classified into four principal reportable segments: Expedited LTL, Expedited Truckload Services (“TLX”), Intermodal and Pool Distribution.
 
Through the Expedited LTL segment, we provide time-definite transportation services to the North American deferred air freight market. Our Expedited LTL service operates a comprehensive national network for the time-definite surface transportation of expedited ground freight. The Expedited LTL service offers customers local pick-up and delivery and scheduled surface transportation of cargo as a cost effective, reliable alternative to air transportation. Expedited LTL’s other services include shipment consolidation and deconsolidation, warehousing, customs brokerage, and other handling. The Expedited LTL segment primarily provides its transportation services through a network of terminals located at or near airports in the United States and Canada.

Through our TLX segment we provide expedited truckload brokerage, dedicated fleet services and maximum security and temperature-controlled logistics services. We are able to expedite this service by utilizing a dedicated fleet of team owner operators, some team company drivers as well as third party transportation providers. The TLX segment provides full truckload service in the United States and Canada.

Our Intermodal segment provides container and intermodal drayage services primarily within the Midwest region of the United States. Drayage is essentially the first and last mile of the movement of an intermodal container. We are providing this service both to and from ports and rail heads. Our Intermodal segment also provides dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. Today Intermodal operates primarily in the Midwest but through acquisition as well as green-field start-ups we anticipate moving into other geographies within the United States.

We provide pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. Our primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains.

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 Truckload, 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 million two year term loan. The assets, liabilities, and operating results of Towne have been included in the Expedited LTL reportable segment.
Acquisition of Triumph and Ace

As part of the Company's strategy to expand its Intermodal operations, in August , we acquired certain assets of Triumph Transport, Inc. and Triumph Repair Service, Inc. (together referred to as “Triumph”) for $10.1 million and a potential earnout of $1.3 million. The assets, liabilities, and operating results of Triumph have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment.
In January 2016, we acquired certain assets of Ace Cargo, LLC ("Ace") for $1.7 million. The assets, liabilities, and operating results of Ace have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Intermodal reportable segment.


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Change in Reportable Segments
During the first quarter of 2016, we changed our reportable segments to separate our truckload and intermodal businesses from our Expedited LTL service and to aggregate our reporting for truckload services into a single segment. We previously reported three segments: Forward Air, Forward Air Solutions and Total Quality, Inc. Consequently, we now report four segments: Expedited LTL, Expedited Truckload Services (“TLX”), Intermodal and Pool Distribution. All prior year segment amounts have been restated to reflect this new reporting structure.
Goodwill


In conjunction with our policy to annually test goodwill for impairment as of June 30 we determined there were indicators of potential impairment of the goodwill and other long lived assets assigned to the TQI acquisition. This determination was based on TQI's financial performance falling notably short of previous projections, declining revenue from significant customers and strategic initiatives not having the required impact on financial results. As a result of these factors we reduced TQI's projected cash flows and consequently the estimate of TQI's fair value no longer exceeded the respective carrying value.  Based on the results of the impairment test, we concluded that an impairment loss was probable and could be reasonably estimated.  Therefore, 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. 

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Results from Operations
The following table sets forth our consolidated historical financial data for the three months ended September 30, 2016 and 2015 (in millions):
 
Three months ended September 30
 
2016
 
2015
 
Change
 
Percent Change
Operating revenue:
 
 
 
 
 
 
 
Expedited LTL
$
144.3

 
$
149.2

 
$
(4.9
)
 
(3.3
)%
Expedited Truckload
42.2

 
38.5

 
3.7

 
9.6

Pool Distribution
36.4

 
32.1

 
4.3

 
13.4

Intermodal
27.6

 
28.9

 
(1.3
)
 
(4.5
)
Eliminations and other operations
(1.0
)
 
(1.6
)
 
0.6

 
(37.5
)
Operating revenue
249.5

 
247.1

 
2.4

 
1.0

Operating expenses:
 
 
 
 
 
 
 
   Purchased transportation
105.0

 
104.4

 
0.6

 
0.6

   Salaries, wages, and employee benefits
60.2

 
59.1

 
1.1

 
1.9

   Operating leases
16.2

 
17.0

 
(0.8
)
 
(4.7
)
   Depreciation and amortization
9.4

 
9.4

 

 

   Insurance and claims
7.2

 
5.2

 
2.0

 
38.5

   Fuel expense
3.4

 
3.8

 
(0.4
)
 
(10.5
)
   Other operating expenses
23.4

 
23.6

 
(0.2
)
 
(0.8
)
      Total operating expenses
224.8

 
222.5

 
2.3

 
1.0

Income from operations:
 
 
 
 
 
 
 
Expedited LTL
21.0

 
21.6

 
(0.6
)
 
(2.8
)
Expedited Truckload
2.0

 
3.2

 
(1.2
)
 
(37.5
)
Pool Distribution
0.1

 
0.5

 
(0.4
)
 
(80.0
)
Intermodal
3.0

 
3.5

 
(0.5
)
 
(14.3
)
Other operations
(1.4
)
 
(4.2
)
 
2.8

 
(66.7
)
Income from operations
24.7

 
24.6

 
0.1

 
0.4

Other expense:
 
 
 
 
 
 
 
   Interest expense
(0.2
)
 
(0.5
)
 
0.3

 
(60.0
)
      Total other expense
(0.2
)
 
(0.5
)
 
0.3

 
(60.0
)
Income before income taxes
24.5

 
24.1

 
0.4

 
1.7

Income taxes
12.6

 
8.4

 
4.2

 
50.0

Net income
$
11.9

 
$
15.7

 
$
(3.8
)
 
(24.2
)%
During the three months ended September 30, 2016, we experienced a 1.0% increase in our consolidated revenues compared to the three months ended September 30, 2015. Operating income increased $0.1 million, or 0.4%, from 2015 to $24.7 million for the three months ended September 30, 2016.

Segment Operations

Expedited LTL's revenue decreased $4.9 million, or 3.3%, while operating income decreased $0.6 million, or 2.8% for the three months ended September 30, 2016, compared to the same period in 2015. The decrease of Expedited LTL's revenue was the result of lower airport-to-airport volumes due to a sluggish economic environment and reduced net fuel surcharge revenue as a result of the decline in fuel prices since the third quarter of 2015. The revenue decrease was partially offset by improved pricing, the implementation of the February 2016 change to our dim-factor standard and further operating efficiencies leading to a slight increase in operating income as a percentage of revenue.

TLX's revenue increased $3.7 million, or 9.6%, but operating income decreased $1.2 million, or 37.5%, for the three months ended September 30, 2016, compared to the same period in 2015. The increase in revenue was due to an increase in overall miles and

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new business wins. The decrease of TLX's operating income was the result of the decline of higher-margin pharmaceutical business and TLX revenue per mile declining at a faster pace than cost per mile.

Pool Distribution revenue increased $4.3 million, or 13.4%, while operating results decreased $0.4 million for the three months ended September 30, 2016, compared to the same period in 2015.  The revenue increase was due to new business, rate increases and increased volumes. The decline in Pool Distribution operating income was primarily the result of higher lease costs as Pool Distribution opened new facilities and relocated others to support business wins since the third quarter of 2015.

Intermodal revenue decreased $1.3 million, or 4.5%, and operating income decreased $0.5 million, or 14.3%, for the three months ended September 30, 2016, compared to the same period in 2015. The decreases in operating revenue and income were primarily attributable to suppressed market conditions, the negative impact of decreased fuel surcharges and decreased chassis rental and rail storage revenues, partially offset by the Ace and Triumph acquisitions.

Fuel Surcharge

Our net fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and volume transiting our network.  During the three months ended September 30, 2016, total net fuel surcharge revenue decreased 19.9% as compared to the same period in 2015, mostly due to decreased fuel prices and decreased volumes in the Expedited LTL and Intermodal segments.

Interest Expense

Interest expense was $0.2 million for the three months ended September 30, 2016 compared to $0.5 million for the same period of 2015. The decrease in interest expense was attributable to principal payments made on the term loan used to finance the Towne acquisition in March 2015.

Income Taxes

The combined federal and state effective tax rate for the third quarter of 2016 was 51.3% compared to a rate of 34.8% for the same period in 2015. The higher effective tax rate for the third quarter of 2016 is the result of the impairment of goodwill in the second quarter of 2016 that is non-deductible for tax purposes. Also, 2015 benefited from the amending of prior year federal and state income tax returns to take advantage of qualified production property deductions.

Net Income

As a result of the foregoing factors, net income decreased by $3.8 million, or 24.2%, to $11.9 million for the third quarter of 2016 compared to $15.7 million for the same period in 2015.

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Table of Contents


Expedited LTL - Three Months Ended September 30, 2016 compared to Three Months Ended September 30, 2015

The following table sets forth our historical financial data of the Expedited LTL segment for the three months ended September 30, 2016 and 2015 (in millions):
Expedited LTL Segment Information
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
September 30,
 
Percent of
 
September 30,
 
Percent of
 
 
 
Percent
 
2016
 
Revenue
 
2015
 
Revenue
 
Change
 
Change
Operating revenue
$
144.3

 
100.0
%
 
$
149.2

 
100.0
%
 
$
(4.9
)
 
(3.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
56.3

 
39.0

 
61.7

 
41.4

 
(5.4
)
 
(8.8
)
Salaries, wages and employee benefits
33.8

 
23.4

 
35.7

 
23.9

 
(1.9
)
 
(5.3
)
Operating leases
9.0

 
6.2

 
8.4

 
5.6

 
0.6

 
7.1

Depreciation and amortization
5.5

 
3.8

 
5.4

 
3.6

 
0.1

 
1.9

Insurance and claims
3.9

 
2.7

 
2.6

 
1.7

 
1.3

 
50.0

Fuel expense
0.8

 
0.6

 
1.0

 
0.7

 
(0.2
)
 
(20.0
)
Other operating expenses
14.0

 
9.7

 
12.8

 
8.6

 
1.2

 
9.4

Total operating expenses
123.3

 
85.4

 
127.6

 
85.5

 
(4.3
)
 
(3.4
)
Income from operations
$
21.0

 
14.6
%
 
$
21.6

 
14.5
%
 
$
(0.6
)
 
(2.8
)%