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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 March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-22490
forwardlogoa04.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 April 27, 2020 was 27,974,687.



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

Table of Contents


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)
 
March 31,
2020
 
December 31,
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
77,245

 
$
64,749

Accounts receivable, less allowance of $1,923 in 2020 and $2,101 in 2019
143,234

 
150,197

Other current assets
20,710

 
21,372

Total current assets
241,189

 
236,318

 
 
 
 
Property and equipment
426,375

 
426,737

Less accumulated depreciation and amortization
216,621

 
213,706

Total property and equipment, net
209,754

 
213,031

Operating lease right-of-use assets
171,242

 
151,657

Goodwill and other acquired intangibles:
 

 
 

Goodwill
242,639

 
221,105

Other acquired intangibles, net of accumulated amortization of $95,492 in 2020 and $91,879 in 2019
158,135

 
127,798

Total goodwill and other acquired intangibles, net
400,774

 
348,903

Other assets
43,277

 
40,969

Total assets
$
1,066,236

 
$
990,878

 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
26,565

 
$
29,986

Accrued expenses
52,168

 
49,822

Other current liabilities
5,661

 
5,320

Current portion of debt and finance lease obligations
1,433

 
1,421

Current portion of operating lease obligations
57,501

 
50,615

Total current liabilities
143,328

 
137,164

 
 
 
 
Debt and finance lease obligations, less current portion
136,900

 
72,249

Operating lease obligations, less current portion
114,380

 
101,525

Other long-term liabilities
60,299

 
58,816

Deferred income taxes
45,488

 
43,942

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock

 

Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 27,678,521 in 2020 and 27,850,233 in 2019
277

 
279

Additional paid-in capital
230,135

 
226,869

Retained earnings
335,429

 
350,034

Total shareholders’ equity
565,841

 
577,182

Total liabilities and shareholders’ equity
$
1,066,236

 
$
990,878

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

3

Table of Contents


Forward Air Corporation
Condensed Consolidated Statements of Comprehensive Income
(In thousands, except per share data)
(Unaudited)
 
 
 
Three months ended
 
March 31,
2020
 
March 31,
2019
Operating revenue
$
342,509

 
$
321,471

 
 
 
 
Operating expenses:
 
 
 
Purchased transportation
160,134

 
144,014

Salaries, wages and employee benefits
86,672

 
76,362

Operating leases
23,564

 
19,173

Depreciation and amortization
10,629

 
10,827

Insurance and claims
11,770

 
9,371

Fuel expense
5,340

 
5,608

Other operating expenses
32,698

 
31,382

Total operating expenses
330,807

 
296,737

Income from operations
11,702

 
24,734

 
 
 
 
Other expense:
 
 
 
Interest expense
853

 
575

Other, net

 
1

Total other expense
853

 
576

Income before income taxes
10,849

 
24,158

Income tax expense
2,474

 
5,751

Net income and comprehensive income
$
8,375


$
18,407

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.30

 
$
0.64

Diluted
$
0.30

 
$
0.64

 
 
 
 
Dividends per share:
$
0.18

 
$
0.18


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


4

Table of Contents


Forward Air Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Three months ended
 
March 31,
2020
 
March 31,
2019
 
 
Operating activities:
 
 
 
Net income
$
8,375

 
$
18,407

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
10,629

 
10,827

Change in fair value of earn-out liability
(594
)
 

Share-based compensation
3,266

 
3,047

Gain on disposal of property and equipment, net
(38
)
 
(61
)
(Recovery of) provision for loss on receivables
(180
)
 
629

Provision for revenue adjustments
1,041

 
540

Deferred income tax expense
1,545

 
836

Changes in operating assets and liabilities
 
 
 
Accounts receivable
6,102

 
4,567

Prepaid expenses and other current assets
907

 
2,699

Income taxes
1,519

 
4,631

Accounts payable and accrued expenses
(3,406
)
 
(4,596
)
Net cash provided by operating activities
29,166

 
41,526

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposal of property and equipment
750

 
407

Purchases of property and equipment
(3,172
)
 
(4,090
)
Acquisition of business, net of cash acquired
(55,931
)
 

Other

 
(6
)
Net cash used in investing activities
(58,353
)
 
(3,689
)
 
 
 
 
Financing activities:
 
 
 
Payments of finance lease obligations
(336
)
 
(68
)
Proceeds from senior credit facility
65,000

 

Proceeds from exercise of stock options

 
830

Payments of cash dividends
(5,050
)
 
(5,189
)
Repurchase of common stock (repurchase program)
(15,259
)
 
(14,181
)
Cash settlement of share-based awards for tax withholdings
(2,672
)
 
(2,721
)
Net cash provided by (used in) financing activities
41,683

 
(21,329
)
Net increase in cash
12,496

 
16,508

Cash at beginning of period
64,749

 
25,657

Cash at end of period
$
77,245

 
$
42,165

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


5

Table of Contents


Forward Air Corporation
Consolidated Statements of Shareholders' Equity
(In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in
Capital
 
Retained Earnings
 
Total Shareholders' Equity
 
Shares
 
Amount
 
 
 
Balance at December 31, 2019
27,850

 
$
279

 
$
226,869

 
$
350,034

 
$
577,182

Net income and comprehensive income

 

 

 
8,375

 
8,375

Share-based compensation

 

 
3,266

 

 
3,266

Dividends ($0.18 per share)

 

 
2

 
(5,052
)
 
(5,050
)
Cash settlement of share-based awards for tax withholdings
(42
)
 

 

 
(2,672
)
 
(2,672
)
Share repurchases
(268
)
 
(3
)
 

 
(15,256
)
 
(15,259
)
Vesting of previously non-vested shares
139

 
1

 
(2
)
 

 
(1
)
Balance at March 31, 2020
27,679

 
$
277

 
$
230,135

 
$
335,429

 
$
565,841

 
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 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

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

6

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020


1.    Description of Business and Basis of Presentation

Basis of Presentation and Principles of Consolidation

Forward Air Corporation ("the Company", "We", "Our") is a leading asset-light freight and logistics company. Forward Air Corporation's services are classified into three principal reportable segments: Expedited Freight, Intermodal and Pool Distribution ("Pool") (See Note 13).
 
Through the Expedited Freight segment, the Company operates a comprehensive national network to provide expedited regional, inter-regional and national less-than-truckload ("LTL") services. Expedited Freight offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling.

The Company's 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 United States.

In the Pool segment, the Company provides high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. The Company offers 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 the Company's 2019 Form 10-K) when measured on a quarterly basis; therefore operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019.

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.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

In particular, management has made estimates and assumptions related to the impact of the novel coronavirus ("COVID-19") on its business. COVID-19 was characterized as a pandemic by the World Health Organization on March 11, 2020. To help lessen its spread, many countries have implemented travel restrictions and/or required companies to limit or suspend business operations. These actions have disrupted supply chains and company operations around the world. The current environment resulting from COVID-19 is unprecedented and comes with a great deal of uncertainty as discussed further throughout this document.

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

7

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

to be collected. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard as of January 1, 2020, which resulted in the Company revising its allowance for doubtful accounts policy on a prospective basis. The adoption of this standard did not have a material impact on the Company's financial statements.

The Company has a broad range of customers, including freight forwarders, third-party logistics (“3PL”) companies, passenger and cargo airlines, steamship lines, and retailers, located across a diverse geography. In addition, the Company does not have a significant concentration of credit risk; no single customer accounts for more than 10% of its consolidated revenue. In circumstances in which the Company is aware of a specific customer’s inability to meet its financial obligations to the Company (for example, bankruptcy filings, accounts turned over for collection, or litigation), the Company records a specific reserve for these bad debts against amounts due, in order to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes a general reserve based on a percentage of revenue to ensure accounts receivables are properly recorded at the net amount expected to be collected. Management evaluates the collectability of its accounts receivables at least quarterly and sets the reserve based on historical and current collection history and reasonable and supportable forecasts about any expected changes to our collection experience in the future due to changing economic conditions. If circumstances change (i.e., the Company experiences higher than expected defaults or an unexpected material adverse change in a customer’s ability to meet its financial obligations to the Company), the estimates of the recoverability of amounts due to the Company could be changed by a material amount. Accounts are written off after all means of collection, including legal action, have been exhausted.

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.

The Company's revenue from contracts with customers is disclosed within three reportable segments: Expedited Freight, Intermodal and Pool. This is consistent with 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 Freight Acquisitions

As part of the Company's strategy to expand final mile pickup and delivery operations, in January 2020, the Company acquired certain assets and liabilities of Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC (collectively, “Linn Star”) for $57,239. This acquisition increased the Company's Final Mile capabilities with an additional 20 locations. In addition, in April 2019, the Company 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. Both transactions were funded using cash flows from operations. The assets, liabilities, and operating results of these acquisitions have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Expedited Freight reportable segment.

The FSA acquisition agreement provides the sellers an earnout opportunity of up to $15,000 based on the achievement of certain revenue milestones over two one-year periods, beginning May 1, 2019. Upon acquisition, the fair value of the earn-out liability was $11,803 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

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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

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

April 21, 2019

December 31, 2019

March 31, 2020
Risk-free rate
2.9%

2.2%

4.5%
Revenue discount rate
4.4%

4.4%

3.1%
Revenue volatility
3.0%

5.0%

6.0%


During the three months ended March 31, 2020, the earn-out fair value decreased $594 to $11,176, $5,661 of which is classified as a current liability. The change in fair value is included in other operating expenses and is based on changes in expected cash flows. As of March 31, 2020, the expected total earn-out to be paid was $12,583. The current portion of the earn-out is expected to be paid in the second quarter of 2020.

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 expanded the Company's intermodal footprint on the East Coast, primarily in Baltimore, Maryland, with additional locations in Pennsylvania, Virginia, South Carolina and Georgia. This transaction was funded using cash flows from operations. The assets, liabilities, and operating results of the acquisition have been included in the Company's consolidated financial statements from the date of acquisition and have been included in the Intermodal reportable segment.


9

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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

Allocations of Purchase Price

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

FSA
OST
Linn Star

April 21, 2019
July 14, 2019
January 12, 2020
Tangible assets:
 
 
 
Cash
$
202

$

$
1,308

Other receivables
1,491



Prepaid expenses and other current assets


1,182

Property and equipment
40

10,371

605

Operating lease right-of-use assets
3,209

1,672

10,011

Total tangible assets
4,942

12,043

13,106

Intangible assets:
 
 
 
Non-compete agreements
900

850

650

Customer relationships
17,900

5,700

33,300

Goodwill
19,963

2,050

21,534

Total intangible assets
38,763

8,600

55,484

Total assets acquired
43,705

20,643

68,590


 
 
 
Liabilities assumed:
 
 
 
Current liabilities
8,466


1,340

Other liabilities
5,030



Debt and finance lease obligations

6,971


Operating lease obligations
3,209

1,672

10,011

Total liabilities assumed
16,705

8,643

11,351

Net assets acquired
$
27,000

$
12,000

$
57,239



The above purchase price allocations are 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 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
Linn Star
Non-compete agreements
5 years
3 years
1 year
Customer relationships
15 years
10 years
15 years


The fair value of the non-compete agreements and customer relationships 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 believed the level and timing of cash flows appropriately reflected market participant assumptions. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.


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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

Goodwill

Goodwill is allocated to reporting units that are expected to benefit from the business combinations generating the goodwill. The Company has five reporting units - Expedited LTL, Truckload, Final Mile, Intermodal and Pool. The Company conducted its annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 2019 and no impairment charges were required.

During the three months ended March 31, 2020, the Company performed a qualitative assessment and evaluated if indicators of an impairment exist, especially considering the impact from COVID-19. While the Company's business has been negatively impacted by COVID-19, specifically its Pool business, the Company does not believe it is more likely than not that the carrying value of any of its reporting units exceeds its fair value. The Company expects the second quarter of 2020 to also be negatively impacted by COVID-19, with a slow sequential recovery in the second half of the year, but does not believe these short-term disruptions to the business have significantly reduced the Company's long-term cash flows such that any of its reporting units' fair values are below its carrying values. As a result, as of March 31, 2020, no goodwill impairments were identified.

The following is a summary of the Company's goodwill as of March 31, 2020. Approximately $163,496 of goodwill is deductible for tax purposes.
 
Beginning balance, December 31, 2019
 
Linn Star Acquisition
 
Ending balance, March 31, 2020
Expedited LTL
 
 
 
 
 
Goodwill
$
97,593

 
$

 
$
97,593

Accumulated Impairment

 

 

 
 
 
 
 
 
Truckload
 
 
 
 
 
Goodwill
45,164

 

 
45,164

Accumulated Impairment
(25,686
)
 

 
(25,686
)
 
 
 
 
 
 
Final Mile
 
 
 
 
 
Goodwill
19,963

 
21,534

 
41,497

Accumulated Impairment

 

 

 
 
 
 
 
 
Intermodal
 
 
 
 
 
Goodwill
78,665

 

 
78,665

Accumulated Impairment

 

 

 
 
 
 
 
 
Pool Distribution
 
 
 
 
 
Goodwill
12,359

 

 
12,359

Accumulated Impairment
(6,953
)
 

 
(6,953
)
 
 
 
 
 
 
Total
 
 
 
 
 
Goodwill
253,744

 
21,534

 
275,278

Accumulated Impairment
(32,639
)
 

 
(32,639
)
 
$
221,105

 
$
21,534

 
$
242,639


Other Long-Lived Assets
The Company tests its long-lived assets (asset groups) for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Management evaluates long-lived assets for impairment at the lowest level for which cashflows are identifiable. In general, these assets are reviewed at the reporting unit level, discussed above, by significant

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Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

asset category. Examples of significant asset categories include land, buildings, tractors, trailers, other equipment, leasehold improvements, right-of-use lease assets, customer relationships, non-compete agreements, software and inventory.

During the three months ended March 31, 2020, the Company evaluated if indicators of an impairment exist, especially considering the impact from COVID-19. As discussed above, although the Company's business has been negatively impacted by COVID-19, the Company does not believe these short-term disruptions to the business have significantly reduced the Company's long-term cash flows. As such, of March 31, 2020, the Company believes all of its assets were recoverable and no impairments to the Company's long-lived assets were identified.

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.  All forfeitures were recognized as they occurred. The Company used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted.  There were no options granted during the three months ended March 31, 2019. The weighted-average fair value of options granted and assumptions used to estimate their fair value during the three months ended March 31, 2020 were as follows:

Three months ended

March 31, 2020
Expected dividend yield
1.1
%
Expected stock price volatility
24.1
%
Weighted average risk-free interest rate
1.5
%
Expected life of options (years)
5.9

Weighted average grant date fair value
$
14.79



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

Three months ended March 31, 2020







Weighted-



Weighted-



Average



Average

Aggregate

Remaining



Exercise

Intrinsic

Contractual

Options

Price

Value

Term
Outstanding at December 31, 2019
431


$
53





Granted
36


66





Exercised







Forfeited
(2
)

60





Outstanding at March 31, 2020
465


$
54


$
3,017


4.1
Exercisable at March 31, 2020
330


$
51


$
3,364


3.5



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Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020


Three months ended

March 31,
2020

March 31,
2019
Share-based compensation for options
$
327


$
439

Tax benefit for option compensation
$
75


$
105

Unrecognized compensation cost for options
$
1,671


$
2,768

Weighted average period over which unrecognized compensation will be recognized (years)
1.7

 
 


Employee Activity - Non-vested Shares

The fair value of non-vested shares issued was estimated using the closing market prices for the business day of the grant. The share-based compensation for the nonvested shares is recognized ratably over the requisite service period or vesting period, which is a three-year period.  All forfeitures were recognized as they occurred.

The following tables summarize the Company’s employee non-vested share activity and related information:

Three months ended March 31, 2020



Weighted-





Average

Aggregate

Non-vested

Grant Date

Grant Date

Shares

Fair Value

Fair Value
Outstanding and non-vested at December 31, 2019
277


$
58



Granted
117


66



Vested
(104
)

67



Forfeited
(6
)

62



Outstanding and non-vested at March 31, 2020
284


$
63


$
17,758


Three months ended

March 31,
2020

March 31,
2019
Share-based compensation for non-vested shares
$
1,938


$
2,042

Tax benefit for non-vested share compensation
$
442


$
486

Unrecognized compensation cost for non-vested shares
$
13,963


$
15,251

Weighted average period over which unrecognized compensation will be recognized (years)
2.2

 
 


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 may issue to these employees a calculated number of common stock shares if certain performance targets are met. For shares granted during the three months ended March 31, 2020 and 2019, 50% of the performance share issuances will be based on meeting three-year 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 forfeitures were recognized as they occurred.

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

13

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

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 following table contains the weighted-average assumptions used to estimate the fair value of performance shares granted using the Monte Carlo simulation. These assumptions are subjective and changes in these assumptions can materially affect the fair value estimate.

Three months ended

March 31,
2020

March 31,
2019
Expected stock price volatility
23.5
%

23.4
%
Weighted average risk-free interest rate
1.4
%

2.5
%

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

Three months ended March 31, 2020



Weighted-





Average

Aggregate

Performance

Grant Date

Grant Date

Shares

Fair Value

Fair Value
Outstanding and non-vested at December 31, 2019
62


$
62



Granted
40


69



Additional shares awarded based on performance
13


51



Vested
(35
)

51



Forfeited
(4
)

66



Outstanding and non-vested at March 31, 2020
76


$
67


$
5,135



Three months ended

March 31,
2020

March 31,
2019
Share-based compensation for performance shares
$
740


$
348

Tax benefit for performance share compensation
$
169


$
83

Unrecognized compensation cost for performance shares
$
3,695


$
2,806

Weighted average period over which unrecognized compensation will be recognized (years)
2.5

 
 


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 350 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. There were no shares issued during the three months ended March 31, 2020.
 
 
 
 


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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

Non-employee Director Activity - Non-vested Shares

In May 2006, the Company’s shareholders approved the Company’s 2006 Non-Employee Director Stock Plan (the “2006 Plan”). The Company’s shareholders then approved the Company’s Amended and Restated Non-Employee Director Stock Plan (the “Amended Plan”) on May 22, 2007. The Amended Plan was then further amended and restated on December 17, 2008. Under the Amended Plan, on the first business day after each Annual Meeting of Shareholders, each non-employee director will automatically be granted an award (the “Annual Grant”), in such form and size as the Board determines from year to year. Unless otherwise determined by the Board, Annual Grants will become vested and nonforfeitable on the earlier of (a) the day immediately prior to the first Annual Meeting that occurs after the Grant Date or (b) the first anniversary of the Grant Date so long as the non-employee director’s service with the Company does not earlier terminate. Each director may elect to defer receipt of the shares under a non-vested share award until the director terminates service on the Board of Directors. If a director elects to defer receipt, the Company will issue deferred stock units to the director, which do not represent actual ownership in shares and the director will not have voting rights or other incidents of ownership until the shares are issued. However, the Company will credit the director with dividend equivalent payments in the form of additional deferred stock units for each cash dividend payment made by the Company. All forfeitures were recognized as they occurred.

In May 2016, with the approval of shareholders, the Company further amended the Amended Plan to reserve for issuance an additional 160 common shares, increasing the total number of reserved common shares under the Amended Plan to 360. As of March 31, 2020, there were approximately 116 shares remaining available for grant.

The following tables summarize the Company’s non-employee non-vested share activity and related information:

Three months ended March 31, 2020



Weighted-





Average

Aggregate

Non-vested

Grant Date

Grant Date

Shares

Fair Value

Fair Value
Outstanding and non-vested at December 31, 2019
16


$
62



Granted





Vested





Forfeited





Outstanding and non-vested at March 31, 2020
16


$
62


$
990



Three months ended

March 31,
2020

March 31,
2019
Share-based compensation for non-vested shares
$
261


$
218

Tax benefit for non-vested share compensation
$
60


$
52

Unrecognized compensation cost for non-vested shares
$
106


$
142

Weighted average period over which unrecognized compensation will be recognized (years)
0.1

 
 


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.

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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020


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. The Facility refinanced the Company’s obligations for its unsecured credit facility under the credit agreement dated as of February 4, 2015, as amended, which was terminated as of the date of the new Facility.

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 March 31, 2020, the Company had $132,500 in borrowings outstanding under the revolving credit facility, $13,970 utilized for outstanding letters of credit and $3,530 of available borrowing capacity under the revolving credit facility.  The interest rate on the outstanding borrowing under the revolving credit facility was 2.3% as of March 31, 2020.

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 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 March 31, 2020, 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
 
March 31,
2020
 
March 31,
2019
Numerator:
 
 
 
Net income and comprehensive income
$
8,375

 
$
18,407

Income allocated to participating securities
(67
)
 
(208
)
Numerator for basic and diluted income per share - net income
$
8,308

 
$
18,199

Denominator:
 

 
 

Denominator for basic income per share - weighted-average shares
27,846

 
28,530

Effect of dilutive stock options
55

 
76

Effect of dilutive performance shares
47

 
42

Denominator for diluted income per share - adjusted weighted-average shares
27,948

 
28,648

Basic net income per share
$
0.30

 
$
0.64

Diluted net income per share
$
0.30

 
$
0.64



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:

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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020


Three months ended

March 31,
2020

March 31,
2019
Anti-dilutive stock options
203

 
195

Anti-dilutive performance shares
24

 
8

Anti-dilutive non-vested shares and deferred stock units
75

 

Total anti-dilutive shares
302

 
203



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 2012.

For the three months ended March 31, 2020 and 2019, 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 three months ended March 31, 2020 was 22.8% compared to a rate of 23.8% for the same period in 2019.  The lower effective tax rate for the three months ended March 31, 2020 was primarily the result of a refund for Tennessee tax credits and increased stock based compensation vesting as a percentage of income before income taxes. This was partially offset by increased executive compensation as a percentage of income before income taxes, which was not deductible for income tax purposes.

9.     Leases

A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. An entity controls the use of the identified asset if both of the following are true: (1) the entity obtains the right to substantially all of the economic benefits from use of the identified asset and (2) the entity has the right to direct the use of the identified asset. For the three months ended March 31, 2020, the Company leased facilities and equipment under operating and finance leases, which were accounted for in accordance with ASU 2016-02, Leases.

The Company elected the practical expedients as allowed per this guidance to combine lease and non-lease components and to keep leases with an initial term of 12 months or less, after the consideration of options, off the balance sheet. Additionally, variable lease and variable nonlease components were not contemplated in the calculation of the right-of-use asset and corresponding liability.

For leases and subleases with terms greater than 12 months, the Company recorded the related right-of-use asset as the balance of the related lease liability, adjusted for any prepaid or accrued lease payments. Unamortized initial direct costs and lease incentives were not significant as of March 31, 2020. The lease liability was recorded at the present value of the lease payments over the term. Many of the Company's leases include rental escalation clauses, renewal options and/or termination options that were contemplated in the determination of lease payments when appropriate. As of March 31, 2020, the Company was not reasonably certain of exercising any renewal options. Further, as of March 31, 2020, it was reasonably certain that all termination options would not be exercised. As such, there were no adjustments made to its right-of-use lease assets or corresponding liabilities as a result. In addition, the Company does not have any leases with residual value guarantees or material restrictions or covenants as of March 31, 2020.

For these leases with an initial term of 12 months or less, after the consideration of options, the Company recognized the corresponding lease expense on a straight-line basis over the lease term.

Operating Leases

The Company leases some of its facilities under noncancelable operating leases that expire in various years through 2026. Certain leases may be renewed for periods varying from 1 to 10 years.  In conjunction with the acquisition of Linn Star in January 2020,

17

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

discussed further in Note 4, Acquisitions and Long-Lived Assets, the Company assumed operating facility leases that expire in various years through 2025 and had a right-of-use asset and corresponding lease liability of approximately $10,011 at acquisition.

The Company has also historically entered into or assumed through acquisition several equipment operating leases for assets including tractors, straight trucks and trailers with original lease terms between 2 and 6 years.  These leases expire in various years through 2028 and certain leases may be renewed for periods varying from 1 to 3 years.  The Company did not enter into any material equipment leases outside the normal course of business during the three months ended March 31, 2020.

As of March 31, 2020, the Company has certain obligations to lease tractors, which will be delivered throughout 2020. These leases are expected to have terms of approximately 3 to 4 years and are not expected to materially impact the Company's right-of-use lease assets or liabilities as of March 31, 2020.

Finance Leases

Primarily through acquisitions, the Company assumed equipment leases that met the criteria for classification as a finance lease with remaining lease terms between 2 and 7 years. These leases expire in various years through 2025 with no options to renew.  The finance leased equipment is being amortized over the shorter of the lease term or useful life. The Company did not enter into any new finance leases during the three months ended March 31, 2020.

10.    Financial Instruments

Off Balance Sheet Risk

As of March 31, 2020, the Company had letters of credit outstanding totaling $13,970.

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.
 
Revolving credit facility: The Company’s revolving credit facility bears variable interest rates plus additional basis points based upon covenants related to total indebtedness to earnings.  As the revolving credit facility bears a variable interest rate, the carrying value approximates fair value.

The fair value estimates of earn-outs are discussed in Note 4, Acquisitions and Long-Lived Assets.

Using interest rate quotes and discounted cash flows, the Company estimated the fair value of its outstanding finance lease obligations as follows:

 

March 31, 2020


Carrying Value

Fair Value
Finance leases

$
5,979


$
6,149



The carrying value of the finance lease obligations are included within the Equipment section of Property and equipment on the Company’s Consolidated Balance Sheet. The Company's fair value estimates for the above financial instruments are classified within level 3 of the fair value hierarchy as defined in the FASB Codification.



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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

11.    Shareholders' Equity

During each quarter of 2019 and the first quarter of 2020, the Company's Board of Directors declared a cash dividend of $0.18 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 July 21, 2016, the Company's Board of Directors approved a stock repurchase authorization for up to 3,000 shares of the Company’s common stock (the "2016 Repurchase Plan"). On February 5, 2019, the Company's Board of Directors canceled the Company’s 2016 Repurchase Plan and approved a new stock repurchase plan authorizing up to 5,000 shares of the Company’s common stock (the “2019 Repurchase Plan”) that shall remain in effect until such time as the shares authorized for repurchase are exhausted or the plan is canceled.  The Company is not obligated to repurchase any specific number of shares and may suspend or cancel the plan at any time. The Company does not expect to repurchase any shares under this plan during the second quarter of 2020.

The following tables summarize the Company's share repurchases for the three months ended March 31, 2020 and 2019.

Three months ended

March 31, 2020

March 31, 2019

Shares repurchased
Cost of shares repurchased
Average cost per share

Shares repurchased
Cost of shares repurchased
Average cost per share
2016 Repurchase Plan

$

$


68

$
3,850

$
56.97

2019 Repurchase Plan
268

15,259

56.93


162

10,331

63.66

Total
268

$
15,259

$
56.93


230

$
14,181

$
61.69

 
 
 
 
 
 
 
 
As of March 31, 2020, 3,887 shares were available to be purchased under the 2019 Plan.
12.    Commitments and Contingencies

Self-Insurance Reserves

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, results of operations or cash flows. The primary claims in the Company’s business relate to workers’ compensation, property damage, vehicle liability and employee 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. Such insurance coverage above the applicable self-insurance levels continues to be an important part of the Company's risk management process.

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. The Company is responsible for the first $7,500 per incident until it meets the $6,000 aggregate deductible for incidents resulting in claims between $3,000 and $5,000 and the $2,500 aggregate deductible for incidents resulting in claims between $5,000 and $10,000. Due to 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.

Purchase Commitments

As of March 31, 2020, the Company had commitments to purchase forklifts and trailer rollerbeds for approximately $2,508 during 2020.


13.    Segment Reporting

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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020


The Company operates in three reportable segments based on information available to and used by the chief operating decision maker ("CODM").  This classification is consistent with how the CODM makes decisions about resource allocation and assesses the Company's performance. 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.

Expedited Freight operates a comprehensive national network to provide expedited regional, inter-regional and national LTL services and offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling. Included within the $251,158 of Expedited Freight revenue for the three months ended March 31, 2020 were defined services including Network revenue of $152,010, Truckload revenue of $45,058, Final Mile revenue of $47,802 and other revenue of $6,288. Intermodal primarily provides first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Pool Distribution provides high-frequency handling and distribution of time sensitive product to numerous destinations.

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 of the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2019. For workers compensation and vehicle claims, each segment is charged an insurance premium and is also charged a deductible that corresponds with each segment's individual self-retention limit. However, any losses beyond these deductibles and any loss development factors applied to outstanding claims as a result of actuary analysis are not passed to the segments, but recorded at the corporate level ("Eliminations & other").

Segment data includes intersegment revenues and shared costs.  Costs of the corporate headquarters, shared services and shared assets, such as trailers, are allocated to the segments based on usage. The cost basis of shared assets are not allocated. Instead, the cost basis for the majority of shared assets, such as trailers, are included in Expedited Freight.  


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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

The following tables summarize segment information for the three months ended March 31, 2020 and 2019.
 
 
Three months ended March 31, 2020
 
 
Expedited Freight
 
Intermodal
 
Pool Distribution
 
Eliminations & other
 
Consolidated
External revenues
 
$
250,673

 
$
52,455

 
$
39,382

 
$
(1
)
 
$
342,509

Intersegment revenues
 
485

 
5

 
42

 
(532
)
 

Depreciation
 
4,858

 
1,053

 
1,097

 
8

 
7,016

Amortization
 
1,788

 
1,568

 
257

 

 
3,613

Share-based compensation expense
 
2,667

 
389

 
188

 
22

 
3,266

Interest expense
 
3

 
54

 

 
796

 
853

Income (loss) from operations
 
14,698

 
3,713

 
(3,562
)
 
(3,147
)
 
11,702

Total assets
 
773,917

 
213,060

 
98,254

 
(18,995
)
 
1,066,236

Capital expenditures
 
2,405

 
246

 
521

 

 
3,172

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019 (As Adjusted)
 
 
Expedited Freight
 
Intermodal
 
Pool Distribution
 
Eliminations & other
 
Consolidated
External revenues
 
$
222,278

 
$
54,097

 
$
45,096

 
$

 
$
321,471

Intersegment revenues
 
705

 
18

 
89

 
(812
)
 

Depreciation
 
6,532

 
469

 
1,315

 

 
8,316

Amortization
 
847

 
1,407

 
257

 

 
2,511

Share-based compensation expense
 
2,169

 
531

 
182

 
165

 
3,047

Interest expense
 
1

 
13

 

 
561

 
575

Income (loss) from operations
 
20,388

 
6,181

 
1,251

 
(3,086
)
 
24,734

Total assets
 
641,525

 
182,489

 
102,678

 
(41,115
)
 
885,577

Capital expenditures
 
2,237

 
73

 
1,780

 

 
4,090

 
 
 
 
 
 
 
 
 
 
 

14.    Subsequent Events

Senior Credit Facility
On April 16, 2020, the Company entered into an amendment ("the First Amendment") to its five-year senior unsecured credit facility established pursuant to its Credit Agreement, dated as of September 29, 2017, by and among the Company and Forward Air, Inc., as borrowers, certain subsidiaries of the Company, as guarantors, Bank of America, N.A., as administrative agent and lender, U.S. Bank, National Association, as lender, and the other lenders party thereto (as amended by the First Amendment, the “Credit Agreement”).
The First Amendment:
increased the size of the revolving credit facility from $150,000 to $225,000;
amended the base interest rate (which cannot be less than 3.00%) to be based on the highest of (a) the federal funds rate plus 0.50%, (b) the Bank of America prime rate; and (c) the LIBOR Rate (which cannot be less than 1.00%) published by Bloomberg (or if such published rate is not available, such other rate as determined by the administrative agent) plus 1.00%, in each case plus a margin that can range from 0.250% to 0.750% depending on the Company’s ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization, calculated as set forth in the Credit Agreement; and
increased the applicable margin for LIBOR rate loans and letter of credit fees to a range of 2.250% to 2.750% and the commitment fee to a range of 0.375% to 0.425%, in each case depending on the Company’s ratio of consolidated funded

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Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
March 31, 2020

indebtedness to earnings before interest, taxes, depreciation and amortization, calculated as set forth in the Credit Agreement.
The facility maturity date was not amended. The proceeds from the Credit Agreement may be used for working capital and general corporate purposes. As of April 16, 2020, a total of $146,000 out of an available $225,000 was outstanding under the Credit Agreement.

Board Approved Divestiture of Pool Segment

On April 23, 2020, the Company's Board of Directors ("the Board") approved a strategy to divest the Company's Pool Distribution business. This represents a strategic shift for the Company that will have a major effect on its operations and financial results. The Company is currently exploring all options to divest of these assets, but has not entered into a material definitive agreement to sell these assets as of the date of this report. However, the Company does believe it is probable that these assets will be divested of within a year of receiving this authority from the Board. As a result, the Company will begin reporting Pool as a Discontinued Operation starting with the second quarter of 2020.


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

Overview and Executive Summary
 
Forward Air Corporation is a leading asset-light freight and logistics company. Our services are classified into three reportable segments: Expedited Freight, Intermodal and Pool Distribution.
 
Through the Expedited Freight segment, we operate a comprehensive national network to provide expedited regional, inter-regional and national LTL services. Expedited Freight offers customers local pick-up and delivery and other services including final mile, truckload, shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling. We plan to grow our LTL and final mile geographic footprints through greenfield start-ups as well as acquisitions.

Our Intermodal segment provides first- and last-mile high value intermodal container drayage services both to and from seaports and railheads. Intermodal also offers dedicated contract and container freight station ("CFS") warehouse and handling services. Today, Intermodal operates primarily in the Midwest and Southeast, with smaller operational presence in Southwest and Mid-Atlantic United States. We plan to grow Intermodal’s geographic footprint through acquisitions as well as greenfield start-ups where we do not have an acceptable acquisition target.

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

Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our ability to increase our earnings depends in significant part on our ability to increase the amount of freight and the revenue per pound for the freight shipped through our networks and to grow other services, such as LTL pickup and delivery, final mile solutions and intermodal services, which will allow us to maintain revenue growth in challenging shipping environments. In addition, we are continuing to execute synergies across our services, particularly with service offerings in the Expedited Freight segment. Synergistic opportunities include the ability to share resources, particularly our fleet resources.

Trends and Developments

Impact of COVID-19

COVID-19 was characterized as a pandemic by the World Health Organization on March 11, 2020. To help lessen its spread, many countries have implemented travel restrictions and/or required companies to limit or suspend business operations. These actions have disrupted supply chains and company operations around the world. The current environment resulting from COVID-19 is unprecedented and comes with a great deal of uncertainty.
The Forward Air team is actively managing through the COVID-19 pandemic, with a paramount focus on team member and customer safety. Given our modal exposures to air freight, ocean freight and physical retail, the impact of COVID-19 presents a meaningful challenge that we are addressing through our asset-light business model.
In Expedited Freight, our networks remain fully operational. Our LTL terminals are open and we are actively lowering purchased transportation and labor costs in response to reduced volumes from our forwarder and airline customers. Much of the freight that typically moves through our LTL network is not classified as “essential goods” - such as staples, consumables or consumer packaged goods. As such, we are adversely impacted by the numerous stay-at-home orders being issued throughout the country to combat COVID-19. In addition, declining fuel prices have resulted in decreased fuel surcharge revenue as compared to prior periods.
Despite these headwinds, we are making key investments that we believe will enable us to emerge from this episode as a stronger LTL competitor (amid a potentially reduced field of service providers). Our owner-operator fleet is the best it has ever been, which helped reduce our use of brokered power to approximately 5.0% of miles in the first quarter of 2020. Our Truckload team is becoming more integrated in our LTL operations, and our Truckload brokerage group is growing by generating opportunities amid supply chain disruptions. We are also integrating Final Mile into our LTL operations while organically growing in an environment where more heavy-bulky items are being ordered online.
COVID-19 has impacted our Intermodal business, which is facing reduced volumes from lower Asian imports amid reduced US demand, blank sailings and port congestion driven by container imbalances. Our Intermodal network is fully functional with all

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terminals open and we are actively lowering purchase transportation and labor costs to address the volume declines. At the same time, we continue to pursue acquisition opportunities along our M&A pipeline as well as greenfield opportunities, including a recent location we opened in Front Royal, VA.
Beyond lowering our costs through our flexible business model, we are actively pursuing new revenue opportunities in line with our medium-term growth objectives. We believe that we have the most reliable networks for moving freight that is bigger-than-a-box, and we are stretching these capabilities to “essential goods,” small and midsize businesses, business-to-consumer shipments, new verticals and warehousing opportunities.
COVID-19’s impact on our Pool Distribution business has been significant. Reduced US demand, coupled with temporary retail mall closures in response to stay-at-home orders, have materially reduced Pool’s revenue. We have furloughed roughly 90% of Pool’s workforce in response in April 2020. While we remain committed to serving our current and additional Pool customers when volumes improve, we are reviewing our strategic options for this business unit. On April 23, 2020, the Company's Board approved a strategy to divest the Company's Pool Distribution business. This represents a strategic shift for the Company that will have a major effect on its operations and financial results. The Company is currently exploring all options to divest of these assets, but has not entered into a material definitive agreement to sell these assets as of the date of this report. However, the Company does believe it is probable that these assets will be divested of within a year of receiving this authority from the Board. As a result, the Company will begin reporting Pool as a Discontinued Operation starting with the second quarter of 2020.
We currently do not expect the effects of COVID-19 to be prolonged. Specially, we are currently projecting a downturn in Q2 2020 that slowly recovers sequentially through Q1 2021, although year-on-year growth is expected to be negative for the remainder of 2020. Pool’s results will likely drive a discontinued operations loss for the second quarter of 2020, which we expect will be big enough to drive a consolidated second quarter operating loss for the Company. However, on a continuing operations basis, we expect to be profitable for the second quarter of 2020 and for the remainder of the year ended December 31, 2020.
We have also taken steps to improve our financial flexibility including fully drawing down on our $150 million revolving credit facility and executing a $75 million amendment to increase this line, which closed on April 16, 2020. In addition, we have deferred payroll and federal and state income tax payments as allowed by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which is expected to result in an approximately $11 million cash flow benefit for the second quarter of 2020 and an approximately $12 million cash flow benefit for 2020. Note that payroll taxes may be deferred for all of 2020, while federal and state income tax payments may only be deferred for the second quarter of 2020 and are due and payable on or before July 15, 2020. At this time, the Company does not expect any liquidity issues or inability in meeting its financial obligations. See additional discussion over the impact to our results from operations below.

Expedited LTL Acquisitions

As part of our strategy to expand our final mile pickup and delivery operations, in January 2020, we acquired certain assets and liabilities of Linn Star for $57.2 million. This acquisition increased our Final Mile capabilities with an additional 20 locations. In addition, in April 2019, we acquired certain assets and liabilities of FSA for $27.0 million and a potential earnout of up to $15.0 million based upon future revenue generation. The earnout had a fair value of $11.2 million as of March 31, 2020. These acquisitions provided an opportunity for our Expedited Freight segment to expand its final mile service offering into additional geographic markets, form relationships with new customers, and add volumes to our existing locations.

These acquisitions were funded using cash flows from operations. The assets, liabilities, and operating results of these acquisitions have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Expedited Freight reportable segment. See additional discussion in Note 4, Acquisitions and Long-Lived Assets, to our Consolidated Financial Statements.

Intermodal Acquisitions

As part of our strategy to expand our Intermodal operations, in July 2019, we acquired certain assets and liabilities of OST for $12.0 million. OST is a drayage company and expanded our intermodal footprint on the East Coast, primarily in Baltimore, Maryland, with additional locations in Pennsylvania, Virginia, South Carolina and Georgia. This acquisition was funded using cash flows from operations and provide an opportunity for our Intermodal segment to expand into additional geographic markets and add volumes to our existing locations. 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 Intermodal reportable segment. See additional discussion in Note 4, Acquisitions and Long-Lived Assets, to our Consolidated Financial Statements.


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Environmental Protection and Community Support

At Forward Air, our mission is to create long-term value for our shareholders, customers and employees while having a positive impact on the communities in which we live and work. We strive to integrate social responsibility and environmental sustainability into every aspect of our strategy - from how we engage with employees and local communities to offering more sustainable products and services to customers. Our commitment to this mission requires us to adhere to a strong corporate governance program that includes policies and principles that integrate environmental, social and governance (“ESG”) matters into our broader risk management and strategic planning initiatives.
During fiscal 2019, the Board amended the Corporate Governance and Nominating Committee charter to reflect that the committee would review and discuss with management, at least quarterly, the Company’s (i) environmental, social and governance matters and (ii) management of sustainability-related risks. The Corporate Governance and Nominating Committee provides leadership and oversight of our ESG practices, including oversight of our policies and programs related to environmental sustainability, health and safety, diversity and inclusion, and charitable giving.
To facilitate our ESG initiatives, we appointed a head of Corporate ESG in the first quarter of 2020. We also have engaged a third-party to conduct an ESG materiality assessment during the first half of 2020. Our intent is to build upon this work to develop a more robust ESG strategy, institutionalize processes and begin to provide more public disclosure around activities and performance going forward.
We have already taken a variety of steps to improve the sustainability of our operations. For example, as a partner of the U.S. Environmental Protection Agency ("EPA") SmartWay program since 2008, Forward Air has continued to adopt new environmentally safe policies and innovations to improve fuel efficiency and reduce emissions. We actively seek to utilize equipment with reduced environmental impact. We utilize trailers with light weight composites and employ trailer skirts to decrease aerodynamic drag, both of which improve fuel efficiency. We are also increasing our use of electric forklifts and transitioning to automatic transmission tractors, which will decrease our fuel consumption.

Through vendor partnerships, we are implementing new solutions to manage waste and improve recycling across our facilities. Annually, we recycle tons of dunnage and thousands of aluminum load bars. Forward Air also participates in ReCaps, providing and purchasing recycled trailer tires. We also focus on increasing our landfill diversion rate through our partnership with Waste Harmonics.
In addition, we are a corporate partner of Truckers Against Trafficking, a nonprofit organization that educates, equips, empowers and mobilizes members of the trucking and busing industries to combat human trafficking. On Veteran’s Day 2019, Forward Air also launched Operation: Forward Freedom - providing support to our Veterans primarily through partnering with Hope for the Warriors. Hope for the Warriors is a non