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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, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-22490
facorplogo72519a02.jpg
FORWARD AIR CORPORATION
(Exact name of registrant as specified in its charter)

 
Tennessee
 
 
62-1120025
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
1915 Snapps Ferry Road
Building N
Greeneville
TN
 
37745
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (423) 636-7000
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
FWRD
 
The Nasdaq Stock Market LLC

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  No x
 
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 21, 2019 was 28,172,110.



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,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
34,824

 
$
25,657

Accounts receivable, less allowance of $2,494 in 2019 and $2,081 in 2018
157,494

 
156,359

Other current assets
23,393

 
19,066

Total current assets
215,711

 
201,082

 
 
 
 
Property and equipment
438,656

 
413,900

Less accumulated depreciation and amortization
217,813

 
204,005

Total property and equipment, net
220,843

 
209,895

Operating lease right-of-use assets
158,977

 

Goodwill and other acquired intangibles:
 

 
 

Goodwill
220,423

 
199,092

Other acquired intangibles, net of accumulated amortization of $88,839 in 2019 and $80,666 in 2018
130,038

 
113,661

Total goodwill and other acquired intangibles, net
350,461

 
312,753

Other assets
34,641

 
36,485

Total assets
$
980,633

 
$
760,215

 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
32,599

 
$
34,630

Accrued expenses
51,412

 
39,784

Other current liabilities
7,049

 

Current portion of debt and finance lease obligations
1,578

 
309

Current portion of operating lease obligations
47,137

 

Total current liabilities
139,775

 
74,723

 
 
 
 
Debt and finance lease obligations, less current portion
72,738

 
47,335

Operating lease obligations, less current portion
112,553

 

Other long-term liabilities
51,316

 
47,739

Deferred income taxes
43,106

 
37,174

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock

 

Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 27,915,057 in 2019 and 28,534,935 in 2018
279

 
285

Additional paid-in capital
221,629

 
210,296

Retained earnings
339,237

 
342,663

Total shareholders’ equity
561,145

 
553,244

Total liabilities and shareholders’ equity
$
980,633

 
$
760,215

 
 
 
 
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,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Operating revenue
$
361,663

 
$
331,375

 
$
1,028,891

 
$
964,325

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Purchased transportation
163,606

 
155,451

 
462,744

 
450,833

Salaries, wages and employee benefits
87,259

 
76,028

 
243,899

 
217,682

Operating leases
20,521

 
18,671

 
60,021

 
54,640

Depreciation and amortization
10,528

 
10,295

 
32,036

 
31,346

Insurance and claims
10,930

 
9,203

 
33,531

 
26,442

Fuel expense
6,105

 
5,634

 
17,642

 
16,786

Other operating expenses
32,025

 
26,214

 
93,045

 
79,612

Total operating expenses
330,974

 
301,496

 
942,918

 
877,341

Income from operations
30,689

 
29,879

 
85,973

 
86,984

 
 
 
 
 
 
 
 
Other expense:
 
 
 
 
 
 
 
Interest expense
(761
)
 
(472
)
 
(1,916
)
 
(1,327
)
Other, net
1

 
(1
)
 
(1
)
 
(2
)
Total other expense
(760
)
 
(473
)
 
(1,917
)
 
(1,329
)
Income before income taxes
29,929

 
29,406

 
84,056

 
85,655

Income tax expense
7,734

 
7,077

 
21,124

 
21,289

Net income and comprehensive income
$
22,195


$
22,329

 
$
62,932

 
$
64,366

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.78

 
$
0.76

 
$
2.20

 
$
2.18

Diluted
$
0.78

 
$
0.76

 
$
2.19

 
$
2.18

 
 
 
 
 
 
 
 
Dividends per share:
$
0.18

 
$
0.15

 
$
0.54

 
$
0.45


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, 2019
 
September 30,
2018
 
 
Operating activities:
 
 
 
Net income
$
62,932

 
$
64,366

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
32,036

 
31,346

Change in fair value of earn-out liability
890

 
(455
)
Share-based compensation
9,006

 
7,525

Loss (gain) on disposal of property and equipment, net
1,010

 
(14
)
Provision for loss (recovery) on receivables
828

 
(52
)
Provision for revenue adjustments
2,243

 
2,921

Deferred income tax expense
5,931

 
6,676

Changes in operating assets and liabilities
 
 
 
Accounts receivable
(4,206
)
 
(3,386
)
Prepaid expenses and other current assets
(4,473
)
 
(4,880
)
Income taxes
(2,556
)
 
(3,193
)
Accounts payable and accrued expenses
14,090

 
12,991

Net cash provided by operating activities
117,731

 
113,845

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposal of property and equipment
2,101

 
5,989

Purchases of property and equipment
(27,102
)
 
(34,344
)
Acquisition of business, net of cash acquired
(39,000
)
 
(3,737
)
Other

 
(356
)
Net cash used in investing activities
(64,001
)
 
(32,448
)
 
 
 
 
Financing activities:
 
 
 
Payments of finance lease obligations
(528
)
 
(228
)
Proceeds from senior credit facility
20,000

 

Proceeds from exercise of stock options
2,063

 
3,682

Payments of cash dividends
(15,421
)
 
(13,213
)
Repurchase of common stock (repurchase program)
(47,906
)
 
(44,985
)
Proceeds from common stock issued under employee stock purchase plan
261

 
237

Cash settlement of share-based awards for tax withholdings
(3,032
)
 
(1,872
)
Net cash used in financing activities
(44,563
)
 
(56,379
)
Net increase in cash
9,167

 
25,018

Cash at beginning of period
25,657

 
3,893

Cash at end of period
$
34,824

 
$
28,911

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


5


Forward Air Corporation
Consolidated Statements of Shareholders' Equity
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in
Capital
 
Retained Earnings
 
Total Shareholders' Equity
 
Shares
 
Amount
 
 
 
Balance at December 31, 2018
28,535

 
$
285

 
$
210,296

 
$
342,663

 
$
553,244

Net income and comprehensive income

 

 

 
18,407

 
18,407

Other

 
2

 

 

 
2

Exercise of stock options
18

 

 
830

 

 
830

Share-based compensation

 

 
3,047

 

 
3,047

Dividends ($0.18 per share)

 

 
1

 
(5,190
)
 
(5,189
)
Cash settlement of share-based awards for minimum tax withholdings
(44
)
 
(1
)
 

 
(2,720
)
 
(2,721
)
Share repurchases
(230
)
 
(2
)
 

 
(14,179
)
 
(14,181
)
Vesting of previously non-vested shares
136

 

 

 

 

Balance at March 31, 2019
28,415

 
284

 
214,174

 
338,981

 
553,439

Net income and comprehensive income

 

 

 
22,330

 
22,330

Other

 

 
(2
)
 
(2
)
 
(4
)
Exercise of stock options
10

 

 
448

 

 
448

Common stock issued under employee stock purchase plan
5

 

 
261

 

 
261

Share-based compensation

 

 
3,197

 

 
3,197

Dividends ($0.18 per share)

 

 
2

 
(5,146
)
 
(5,144
)
Cash settlement of share-based awards for minimum tax withholdings
(1
)
 

 

 
(49
)
 
(49
)
Share repurchases
(407
)
 
(4
)
 

 
(24,432
)
 
(24,436
)
Vesting of previously non-vested shares
18

 

 

 

 

Balance at June 30, 2019
28,040

 
$
280

 
$
218,080

 
$
331,682

 
$
550,042

Net income and comprehensive income

 

 

 
22,195

 
22,195

Exercise of stock options
17

 

 
785

 

 
785

Share-based compensation

 

 
2,762

 

 
2,762

Dividends ($0.18 per share)

 

 
2

 
(5,090
)
 
(5,088
)
Cash settlement of share-based awards for minimum tax withholdings
(4
)
 

 

 
(262
)
 
(262
)
Share repurchases
(152
)
 
(1
)
 

 
(9,288
)
 
(9,289
)
Vesting of previously non-vested shares
14

 

 

 

 

Balance at September 30, 2019
27,915

 
279

 
221,629

 
339,237

 
561,145

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




6


Forward Air Corporation
Consolidated Statements of Shareholders' Equity, continued
(In thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in
Capital
 
Retained Earnings
 
Total Shareholders' Equity
 
Shares
 
Amount
 
 
 
Balance at December 31, 2017
29,454

 
$
295

 
$
195,346

 
$
337,058

 
$
532,699

Net income and comprehensive income

 

 

 
17,741

 
17,741

Other

 
(2
)
 

 
(27
)
 
(29
)
Share-based compensation

 

 
2,261

 

 
2,261

Dividends ($0.15 per share)

 

 
1

 
(4,414
)
 
(4,413
)
Cash settlement of share-based awards for minimum tax withholdings
(33
)
 

 

 
(1,823
)
 
(1,823
)
Share repurchases
(364
)
 
(4
)
 

 
(19,989
)
 
(19,993
)
Vesting of previously non-vested shares
105

 
1

 
(1
)
 

 

Balance at March 31, 2018
29,162

 
290

 
197,607

 
328,546

 
526,443

Net income and comprehensive income

 

 

 
24,298

 
24,298

Other

 

 

 
(2
)
 
(2
)
Exercise of stock options
26

 
1

 
1,111

 

 
1,112

Common stock issued under employee stock purchase plan
5

 

 
237

 

 
237

Share-based compensation

 

 
2,418

 

 
2,418

Dividends ($0.15 per share)

 

 
1

 
(4,416
)
 
(4,415
)
Cash settlement of share-based awards for minimum tax withholdings
(1
)
 

 

 
(49
)
 
(49
)
Share repurchases
(133
)
 
(1
)
 

 
(8,171
)
 
(8,172
)
Vesting of previously non-vested shares
15

 
1

 
(1
)
 

 

Balance at June 30, 2018
29,074

 
291

 
201,373

 
340,206

 
541,870

Net income and comprehensive income

 

 

 
22,329

 
22,329

Other
 
 

 
(1
)
 

 
(1
)
Exercise of stock options
62

 

 
2,570

 

 
2,570

Share-based compensation

 

 
2,847

 

 
2,847

Dividends ($0.15 per share)

 

 
1

 
(4,386
)
 
(4,385
)
Share repurchases
(267
)
 
(3
)
 

 
(16,817
)
 
(16,820
)
Balance at September 30, 2018
28,869

 
288

 
206,790

 
341,332

 
548,410

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




7

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019


1.    Description of Business and Basis of Presentation

Forward Air Corporation ("the Company", "We", "Our") is a leading asset-light freight and logistics company. Forward Air Corporation's services can be classified into four reportable segments: Expedited LTL, Intermodal, Truckload Premium Services ("TLS") and Pool Distribution ("Pool") (See Note 13).
 
Through the Expedited LTL segment, we operate a comprehensive national network to provide expedited regional, inter-regional and national less-than-truckload ("LTL") services. Expedited LTL offers customers local pick-up and delivery and other services including shipment consolidation and deconsolidation, warehousing, final mile solutions, customs brokerage and other handling. Because of our roots in serving the deferred air freight market, our terminal network is located at or near airports in the United States and Canada.

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 container freight station ("CFS") warehouse and handling services. Today, Intermodal operates primarily in the Midwest and Southeast, with a smaller operational presence in the Southwest and Mid-Atlantic United States.

Through our TLS segment, we provide expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-controlled logistics services in the United States and Canada.

In our Pool segment, we provide high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. We offer this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company’s operating results are subject to seasonal trends (as described in our 2018 Form 10-K) when measured on a quarterly basis; therefore operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018.

The accompanying unaudited condensed consolidated financial statements of the Company include Forward Air Corporation and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period financial information to conform to the current year presentation.

2.    Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss methodology previously employed to measure credit losses for most financial assets and requires the use of a forward-looking expected loss model. Under current accounting guidance, credit losses are recognized when it is probable a loss has been incurred. The updated guidance will require financial assets to be measured at amortized costs less a reserve, equal to the net amount expected to be collected. This standard will be effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize a right-of-use asset with a corresponding lease liability on their balance sheet for most leases classified as operating leases under previous guidance. Lessors are required to recognize a net lease investment for most leases. Additional qualitative and quantitative disclosures are also required. The Company applied the transition requirements as of January 1, 2019. As of September 30, 2019 the Company recorded right-of-use lease assets and corresponding lease liabilities of $158,977 and $159,690, respectively. There was no impact to the Company's Statements of Comprehensive Income or Statements of Cash Flows. In addition, comparative financial statements have not been

8

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019

presented as allowed per the guidance. Changes to processes and internal controls to meet the standard’s reporting and disclosure requirements have also been implemented. See Note 9, Leases, for additional discussion over this new standard, including the impact on the Company's financial statements.

3.     Revenue

The Company's revenue is generated from providing transportation and related services to customers in accordance with contractual agreements, bill of lading ("BOL") contracts and general tariff provisions. Related services include accessorial charges such as terminal handling, storage, equipment rentals and customs brokerage. These services are distinct and are accounted for as separate performance obligations. Generally, the Company's performance obligations begin when a customer's BOL is received and are satisfied when the delivery of a shipment and related services are completed. The Company generally recognizes revenue for its services over time to coincide with when its customers simultaneously receive and consume the benefits of these services. Performance obligations are short-term with transit days typically less than a week. Upon delivery of a shipment or related service, customers are billed and remit payment according to payment terms.

Our revenue from contracts with customers is disclosed within our four reportable segments: Expedited LTL, Intermodal, TLS and Pool. This is consistent with our disclosures in earnings releases and annual reports and with the information regularly reviewed by the chief operating decision maker for evaluating financial performance. See additional discussion in Note 13, Segment Reporting.

4.    Acquisitions and Long-Lived Assets

Expedited LTL Acquisitions

As part of our strategy to expand our final mile pickup and delivery operations, in April 2019, we acquired certain assets and liabilities of FSA Network, Inc., doing business as FSA Logistix (“FSA”), for $27,000 and a potential earnout of up to $15,000. This acquisition provides an opportunity for our Expedited LTL segment to expand its final mile service offering into additional geographic markets, form relationships with new customers, add volumes to our existing locations and generate synergies with our LTL operations. This transaction was funded using cash flows from operations. The assets, liabilities, and operating results of this acquisition have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Expedited LTL reportable segment.

The acquisition agreement provides the sellers an earnout opportunity of up to $15,000 based on the achievement of certain revenue milestones over a two year period, beginning May 1, 2019. Upon acquisition the fair value of the earn-out liability was $10,321 and is included in other current and long-term liabilities in the opening condensed consolidated balance sheet. The earn-out liability was classified as 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”) and the value was determined based on estimated revenues and the probability of achieving them. The fair value was based on the two-year performance of FSA's acquired customer revenue and was estimated using a Monte Carlo simulation. The initial weighted average assumptions used in the Monte Carlo simulation are summarized in the following table:
 
FSA Earn-out
 
 
Risk-free rate
2.4%
Revenue discount rate
8.5%
Revenue volatility
9.0%


During the three months ended September 30, 2019, the earn-out fair value increased $890 to $11,211. The fair value increased due to new final mile business wins after the acquisition date that are included in the revenue used to calculate the earn-out and due to increased probability of paying the earn-out, partly due to the passage of time. The increase in the earn-out was recorded in the other operating expenses line item. As of September 30, 2019, the expected total earn-out to be paid is $12,600.


9

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019

Intermodal Acquisitions

As part of the Company's strategy to expand its Intermodal operations, in July 2019, the Company acquired certain assets and liabilities of O.S.T. Logistics, Inc. and O.S.T. Trucking Co., Inc. (together referred to as “OST”) for $12,000. OST is a drayage company and provides the Intermodal segment with an expanded footprint on the East Coast, with locations in the Pennsylvania, Maryland, Virginia, South Carolina and Georgia markets. Additionally, in October 2018, the Company acquired certain assets of Southwest Freight Distributors (“Southwest”) for $16,250. The Southwest acquisition provides an expanded footprint in Texas and access to several strategic customer relationships.

These transactions were funded using cash flows from operations.The assets, liabilities, and operating results of these collective acquisitions have been included in the Company's consolidated financial statements from their dates of acquisition and have been included in the Intermodal reportable segment.

Allocations of Purchase Price

The following table presents the allocations of the FSA and OST purchase price to the assets acquired and liabilities assumed based on their estimated fair values and resulting residual goodwill (in thousands):

FSA
OST

April 21, 2019
July 14, 2019
Tangible assets:
 
 
Cash
$
202

$

Other receivables
1,491


Property and equipment
40

10,604

Operating lease right-of-use assets
3,209

1,672

Total tangible assets
4,942

12,276

Intangible assets:
 
 
Non-compete agreements
900

850

Customer relationships
17,100

5,700

Goodwill
19,281

2,050

Total intangible assets
37,281

8,600

Total assets acquired
42,223

20,876


 
 
Liabilities assumed:
 
 
Current liabilities
7,664


Other liabilities
4,350


Debt and finance lease obligations

7,204

Operating lease obligations
3,209

1,672

Total liabilities assumed
15,223

8,876

Net assets acquired
$
27,000

$
12,000



The above purchase price allocations for FSA and OST is preliminary, as the Company is still in the process of finalizing the valuation of the acquired assets and liabilities assumed. The above estimated fair values of assets acquired and liabilities assumed for FSA and OST are based on the information that was available as of the acquisition date through the date of this filing. The acquired definite-lived intangible assets have the following useful lives:
 
Useful Lives
 
FSA
OST
Non-compete agreements
5 years
3 years
Customer relationships
15 years
10 years


The fair value of the non-compete agreements and customer relationships assets were estimated using an income approach. The Company's inputs into fair value estimates are classified within level 3 of the fair value hierarchy. 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

10

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019

intangible asset over its remaining useful life. To estimate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.

Goodwill

The Company conducted its annual impairment assessments and test of goodwill for each reporting unit as of June 30, 2019 and no impairment charges were required at that time. 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 reporting units, using a combination of discounted projected cash flows and market valuations for comparable companies as of the valuation date (level 3). 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. During the nine months ended September 30, 2019, no indicators of goodwill impairment were identified.

The following is a summary of the Company's goodwill as of September 30, 2019. Approximately $141,279 of goodwill is deductible for tax purposes.
 
Beginning balance, December 31, 2018
 
FSA Acquisition
OST Acquisition
 
Ending balance, September 30, 2019
Expedited LTL
 
 
 
 
 
 
Goodwill
$
97,593

 
$
19,281

$

 
$
116,874

Accumulated Impairment

 


 

 
 
 
 
 
 
 
Intermodal
 
 
 
 
 
 
Goodwill
76,615

 

2,050

 
78,665

Accumulated Impairment

 


 

 
 
 
 
 
 
 
TLS
 
 
 
 
 
 
Goodwill
45,164

 


 
45,164

Accumulated Impairment
(25,686
)
 


 
(25,686
)
 
 
 
 
 
 
 
Pool Distribution
 
 
 
 
 
 
Goodwill
12,359

 


 
12,359

Accumulated Impairment
(6,953
)
 


 
(6,953
)
 
 
 
 
 
 
 
Total
$
199,092

 
$
19,281

$
2,050

 
$
220,423


Other Long-Lived Assets
The Company evaluates the reasonableness of the useful lives and salvage values of its assets on an ongoing basis. During the current quarter, the Company identified indicators that the useful lives of its owned tractors and trailers extended beyond initial expectations. As a result, the Company performed a useful life study ("the study") to conclude if any changes to its tractor and trailer useful lives and salvage values were warranted. The study included reviewing statistical data for its population of owned tractors and trailers, including historical disposition activity, reviewing fair value information and conducting interviews with management to determine the expected future use of assets.

11

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019


As a result of this study, management deemed it appropriate to extend the average useful life of its trailers from 7 to 10 years and its tractors from 5 to 10 years. In addition, management reduced the average salvage value of its tractors from 25% to 10%. No changes were made to trailer salvage values. These changes in estimates were made to assets currently owned and originally purchased new since assets purchased used were assigned individual useful lives and salvage values based on their age and condition at purchase. This change in estimate was made on a prospective basis beginning on July 1, 2019. The impact of this study on the three and nine months ended September 30, 2019 was a $1,000 reduction in depreciation.

In addition, management recorded a $900 reserve for tractors during the current quarter. This is recorded in other operating expenses in our Consolidated Statements of Comprehensive Income.

5.    Share-Based Payments

The Company’s general practice has been to make a single annual grant of share-based compensation in the first quarter 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 shares”), and performance shares.  The Company also typically makes a single annual grant of non-vested shares to non-employee directors in conjunction with the annual election of non-employee directors to the Board of Directors. Share-based compensation is based on the grant date fair value of the instrument and is recognized ratably over the requisite service period, or vesting period.  All share-based compensation expense is recognized in salaries, wages and employee benefits.

Employee Activity - Stock Options
 
Stock option grants to employees generally expire seven years from the grant date and typically vest ratably over a three-year period.  The Company historically used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted.  The Company did not make any stock option grants in the nine months ended September 30, 2019.

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

Nine months ended September 30, 2019







Weighted-



Weighted-



Average



Average

Aggregate

Remaining



Exercise

Intrinsic

Contractual

Options

Price

Value

Term
Outstanding at December 31, 2018
538


$
51





Exercised
(45
)

47





Forfeited
(8
)

54





Outstanding at September 30, 2019
485


$
52


$
4,638


4.0
Exercisable at September 30, 2019
319


$
48


$
4,163


3.3

 
 
 
 

Nine months ended

September 30,
2019

September 30,
2018
Share-based compensation for options
$
1,209


$
1,085

Tax benefit for option compensation
$
312


$
271

Unrecognized compensation cost for options, net of estimated forfeitures
$
1,878


$
3,621

Weighted average period over which unrecognized compensation will be recognized (years)
1.6

 
 




12

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019

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:
 
 
 
 
 
 

Nine months ended September 30, 2019



Weighted-





Average

Aggregate

Non-vested

Grant Date

Grant Date

Shares

Fair Value

Fair Value
Outstanding and non-vested at December 31, 2018
315


$
55



Granted
114


59



Vested
(131
)

61



Forfeited
(15
)

56



Outstanding and non-vested at September 30, 2019
283


$
58


$
16,441


Nine months ended

September 30,
2019

September 30,
2018
Share-based compensation for non-vested shares
$
6,210


$
4,902

Tax benefit for non-vested share compensation
$
1,581


$
1,225

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
10,705


$
13,146

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

 
 


Employee Activity - Performance Shares

The Company annually grants performance shares to key employees.  Under the terms of the performance share agreements, following the end of a three-year performance period, the Company will issue to these employees a calculated number of common stock shares based on meeting certain performance targets. For shares granted during the nine months ended September 30, 2019, 50% of the performance share issuances will be based on meeting earnings before interest, taxes, depreciation and amortization ("EBITDA") per share targets and the remaining 50% of the performance share issuances will be based on the three-year performance of the Company’s total shareholder return ("TSR") as compared to the TSR of a selected peer group. All performance shares granted during the nine months ended September 30, 2018 were based on achieving total shareholder return targets.

Depending upon the EBITDA per share targets met, 0% to 200% of the granted shares may ultimately be issued. For shares granted based on total shareholder return, 0% of the shares will be issued if the Company's total shareholder return outperforms 25% or less of the peer group, but 200% of the shares will be issued if the Company's total shareholder return performs better than 90% of the peer group.  

The fair value of the performance shares granted based on meeting EBITDA per share targets were estimated using the closing market prices on the day of grant and the probability of meeting these targets as of the measurement date.

The fair value of the performance shares granted based on the three year performance of the Company’s total shareholder return 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,
2019

September 30,
2018
Expected stock price volatility
23.4
%

24.3
%
Weighted average risk-free interest rate
2.5
%

2.2
%

13

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019

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

Nine months ended September 30, 2019



Weighted-





Average

Aggregate

Performance

Grant Date

Grant Date

Shares

Fair Value

Fair Value
Outstanding and non-vested at December 31, 2018
65


$
58



Granted
30


61



Vested
(23
)

64



Forfeited
(10
)

63



Outstanding and non-vested at September 30, 2019
62


$
62


$
3,870



Nine months ended

September 30,
2019

September 30,
2018
Share-based compensation for performance shares
$
821


$
953

Tax benefit for performance share compensation
$
212


$
238

Unrecognized compensation cost for performance shares, net of estimated forfeitures
$
1,884


$
1,725

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

 
 


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 357 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. The following table summarizes the Company’s employee stock purchase activity and related information:

Nine months ended

September 30,
2019

September 30,
2018
Shares purchased by participants under plan
5


5

Average purchase price
$
49


$
52

Weighted-average fair value of each purchase right under the ESPP granted ¹
$
10


$
7

Share-based compensation for ESPP shares
$
52


$
32

 
 
 
 
¹ Equal to the discount from the market value of the common stock at the end of each six month purchase period



14

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019

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:

Nine months ended September 30, 2019



Weighted-





Average

Aggregate

Non-vested

Grant Date

Grant Date

Shares

Fair Value

Fair Value
Outstanding and non-vested at December 31, 2018
15


$
59



Granted
15


62



Vested
(15
)

59



Outstanding and non-vested at September 30, 2019
15


$
62


$
920



Nine months ended

September 30,
2019

September 30,
2018
Share-based compensation for non-vested shares
$
714


$
553

Tax benefit for non-vested share compensation
$
184


$
138

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
554


$
501

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

 
 


6.    Senior Credit Facility

On September 29, 2017, the Company entered into a five-year senior unsecured revolving credit facility (the “Facility”) with a maximum aggregate principal amount of $150,000, with a sublimit of $30,000 for letters of credit and a sublimit of $30,000 for swing line loans. The Facility may be increased by up to $100,000 to a maximum aggregate principal amount of $250,000 pursuant to the terms of the credit agreement, subject to the lenders’ agreement to increase their commitments or the addition of new lenders extending such commitments. Such increases to the Facility may be in the form of additional revolving credit loans, term loans or a combination thereof, and are contingent upon there being no events of default under the Facility and satisfaction of other conditions precedent and are subject to the other limitations set forth in the credit agreement. The Facility is scheduled to mature in September 2022 and may be used to refinance existing indebtedness of the Company and for working capital, capital expenditures and other general corporate purposes.

Unless the Company elects otherwise under the credit agreement, interest on borrowings under the Facility is based on the highest of (a) the federal funds rate (not less than 0%) plus 0.5%, (b) the administrative agent's prime rate and (c) the LIBOR Rate plus 1.0%, in each case plus a margin that can range from 0.3% to 0.8% with respect to the Facility depending on the Company’s ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization, as set forth in the credit agreement. Payments of interest for each loan that is based on the LIBOR Rate are due in arrears on the last day of the interest period applicable to such loan (with interest periods of one, two or three months being available, at the Company’s option). Payments of interest on loans that are not based on the LIBOR Rate are due on the last day of each quarter ended March 31, June 30, September 30 and December 31 of each year. All unpaid amounts of principal and interest are due at maturity. As of September 30, 2019, the Company had $67,500 in borrowings outstanding under the revolving credit facility, $14,020 utilized for outstanding letters of credit and $68,480 of available borrowing capacity under the revolving credit facility.  The interest rate on the outstanding borrowing under the revolving credit facility was 3.4% as of September 30, 2019.

The Facility contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, material judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default may result in, among other things, the termination of the Facilities, acceleration of repayment obligations and the exercise of remedies by the lenders with respect to the Company and its subsidiaries

15

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
September 30, 2019

that are party to the Facility. The Facility also contains financial covenants and other covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of the required lenders, to engage in certain mergers, consolidations, asset sales, dividends and stock repurchases, investments, and other transactions or to incur liens or indebtedness in excess of agreed thresholds, as set forth in the credit agreement. As of September 30, 2019, the Company was in compliance with the aforementioned covenants.

7.    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,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Numerator:
 
 
 
 
 
 
 
 
Net income and comprehensive income
 
$
22,195

 
$
22,329


$
62,932


$
64,366

Income allocated to participating securities
 
(236
)
 
(239
)

(696
)

(596
)
Numerator for basic and diluted income per share - net income
 
$
21,959

 
$
22,090

 
$
62,236

 
$
63,770

Denominator:
 
 

 
 

 
 
 
 
Denominator for basic income per share - weighted-average shares
 
27,981

 
28,964

 
28,286

 
29,189

Effect of dilutive stock options
 
74

 
95

 
76

 
81

Effect of dilutive performance shares
 
27

 
36

 
31

 
33

Denominator for diluted income per share - adjusted weighted-average shares
 
28,082

 
29,095

 
28,393

 
29,303

Basic net income per share
 
$
0.78

 
$
0.76

 
$
2.20

 
$
2.18

Diluted net income per share
 
$
0.78

 
$
0.76

 
$
2.19

 
$
2.18



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, 2019
 
September 30, 2018
Anti-dilutive stock options
188

 
100

Anti-dilutive performance shares

 
15

Anti-dilutive non-vested shares and deferred stock units

 
3

Total anti-dilutive shares
188

 
118



8.    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 2011.

For the three and nine months ended September 30, 2019 and 2018, the effective income tax rates varied from the statutory federal income tax rate of 21.0%, 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, 2019 was 25.1% compared to a rate of 24.9% for the same period in 2018. The higher effective tax rate for the nine months ended September 30, 2019 was primarily the result of a larger portion of executive compensation exceeding the IRS code section 162M limit, which makes it not deductible for income tax purposes in 2019 and a