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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 June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-22490
logo.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 July 27, 2020 was 27,980,727.
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.
 
 
 



Table of Contents


Part I.
Financial Information
 
 
Item 1.
Financial Statements (Unaudited).
Forward Air Corporation
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
June 30,
2020
 
December 31,
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
80,916

 
$
64,749

Accounts receivable, less allowance of $2,637 in 2020 and $2,053 in 2019
130,759

 
136,214

Other current assets
23,745

 
20,403

Current assets held for sale
11,871

 
14,952

Total current assets
247,291

 
236,318

 
 
 
 
Property and equipment
381,834

 
373,571

Less accumulated depreciation and amortization
187,239

 
180,815

Total property and equipment, net
194,595

 
192,756

Operating lease right-of-use assets
123,925

 
105,170

Goodwill and other acquired intangibles:
 

 
 

Goodwill
240,933

 
215,699

Other acquired intangibles, net of accumulated amortization of $86,174 in 2020 and $79,250 in 2019
148,452

 
124,857

Total goodwill and other acquired intangibles, net
389,385

 
340,556

Other assets
42,710

 
39,374

Noncurrent assets held for sale
74,593

 
76,704

Total assets
$
1,072,499

 
$
990,878

 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity

 
 
Current liabilities:
 
 
 
Accounts payable
$
27,682

 
$
25,411

Accrued expenses
48,041

 
44,154

Other current liabilities
3,784

 
5,318

Current portion of debt and finance lease obligations
1,445

 
1,421

Current portion of operating lease obligations
42,108

 
35,886

Current liabilities held for sale
23,792

 
24,974

Total current liabilities
146,852

 
137,164

 
 
 
 
Debt and finance lease obligations, less current portion
136,549

 
72,249

Operating lease obligations, less current portion
82,404

 
69,678

Other long-term liabilities
58,194

 
56,448

Deferred income taxes
45,883

 
41,214

Noncurrent liabilities held for sale
36,325

 
36,943

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock

 

Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 27,729,013 in 2020 and 27,850,233 in 2019
277

 
279

Additional paid-in capital
233,086

 
226,869

Retained earnings
332,929

 
350,034

Total shareholders’ equity
566,292

 
577,182

Total liabilities and shareholders’ equity
$
1,072,499

 
$
990,878

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

3

Table of Contents


    
Forward Air Corporation
Consolidated Statements of Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
June 30,
2020
 
June 30,
2019
 
June 30,
2020
 
June 30,
2019
Operating revenue
$
281,678

 
$
302,887

 
$
587,235

 
$
581,848

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Purchased transportation
142,069

 
143,436

 
292,667

 
275,987

Salaries, wages and employee benefits
63,772

 
63,841

 
133,331

 
123,798

Operating leases
17,387

 
16,124

 
35,271

 
31,001

Depreciation and amortization
9,413

 
9,227

 
18,747

 
18,515

Insurance and claims
7,722

 
11,757

 
17,766

 
19,745

Fuel expense
2,519

 
4,467

 
6,532

 
8,582

Other operating expenses
24,882

 
24,965

 
53,234

 
51,448

Total operating expenses
267,764

 
273,817

 
557,548

 
529,076

Income from continuing operations
13,914

 
29,070

 
29,687

 
52,772

 
 
 
 
 
 
 
 
Other expense:
 
 
 
 
 
 
 
Interest expense
(1,198
)
 
(581
)
 
(2,051
)
 
(1,156
)
Other, net

 
(1
)
 

 
(2
)
Total other expense
(1,198
)
 
(582
)
 
(2,051
)
 
(1,158
)
Income before income taxes
12,716

 
28,488

 
27,636

 
51,614

Income tax expense
3,491

 
7,244

 
6,995

 
12,683

Net income from continuing operations
9,225

 
21,244

 
20,641

 
38,931

(Loss) income from discontinued operations, net of tax
(6,071
)
 
1,086

 
(9,112
)
 
1,806

Net income and comprehensive income
$
3,154


$
22,330

 
$
11,529

 
$
40,737

 
 
 
 
 
 
 
 
Basic net income (loss) per share:









Continuing operations
$
0.33


$
0.74


$
0.72


$
1.35

Discontinued operations
(0.22
)

0.04


(0.31
)

0.07

Net income per share
$
0.11


$
0.78


$
0.41


$
1.42













Diluted net income (loss) per share:











Continuing operations
$
0.33


$
0.74


$
0.72


$
1.35

Discontinued operations
(0.22
)

0.04


(0.32
)

0.06

Net income per share
$
0.11


$
0.78


$
0.40


$
1.41

 
 
 
 
 
 
 
 
Dividends per share:
$
0.18

 
$
0.18

 
$
0.36

 
$
0.36


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


4

Table of Contents


Forward Air Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Six months ended
 
June 30,
2020
 
June 30,
2019
 
 
Operating activities:
 
 
 
Net income from continuing operations
$
20,641

 
$
38,931

Adjustments to reconcile net income of continuing operations to net cash provided by operating activities of continuing operations
 
 
 
Depreciation and amortization
18,747

 
18,515

Change in fair value of earn-out liability
(2,702
)
 

Share-based compensation
5,507

 
5,910

Loss (gain) on disposal of property and equipment, net
9

 
(218
)
Provision for loss on receivables
688

 
635

Provision for revenue adjustments
1,787

 
1,277

Deferred income tax expense
4,668

 
3,290

Changes in operating assets and liabilities
 
 
 
Accounts receivable
2,979

 
(3,922
)
Prepaid expenses and other current assets
312

 
(4,842
)
Income taxes
(341
)
 
(2,182
)
Accounts payable and accrued expenses
7,634

 
6,876

Net cash provided by operating activities of continuing operations
59,929

 
64,270

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposal of property and equipment
988

 
1,008

Purchases of property and equipment
(14,214
)
 
(14,214
)
Acquisition of business, net of cash acquired
(55,931
)
 
(27,000
)
Net cash used in investing activities of continuing operations
(69,157
)
 
(40,206
)
 
 
 
 
Financing activities:
 
 
 
Payments of finance lease obligations
(676
)
 
(137
)
Proceeds from senior credit facility
65,000

 
10,000

Payments on earn-out liability
(5,284
)
 

Proceeds from exercise of stock options

 
1,278

Payments of cash dividends
(10,087
)
 
(10,333
)
Repurchase of common stock (repurchase program)
(15,259
)
 
(38,617
)
Proceeds from common stock issued under employee stock purchase plan
294

 
261

Cash settlement of share-based awards for tax withholdings
(3,286
)
 
(2,770
)
(Distributions to) contributions from subsidiary
(5,307
)
 
5,374

Net cash provided by (used in) financing activities from continuing operations
25,395

 
(34,944
)
Net increase (decrease) in cash of continuing operations
16,167

 
(10,880
)
 
 
 
 
Cash from discontinued operations:
 
 
 
Cash (used in) provided by operating activities of discontinued operations, net
(4,672
)
 
7,494

Cash used in investing activities of discontinued operations, net
(635
)
 
(2,120
)
Cash provided by (used in) financing activities of discontinued operations, net
5,307

 
(5,374
)
Net increase (decrease) in cash
16,167

 
(10,880
)
Cash at beginning of period of continuing operations
64,749

 
25,657

Cash at beginning of period of discontinued operations/held for sale

 

Net increase (decrease) in cash
16,167

 
(10,880
)
Less: cash at end of period of discontinued operations/held for sale

 

Cash at end of period of continuing operations
$
80,916

 
$
14,777

 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

Net income and comprehensive income

 

 

 
3,155

 
3,155

Common stock issued under employee stock purchase plan
7

 

 
295

 

 
295

Share-based compensation

 

 
2,654

 

 
2,654

Dividends ($0.18 per share)

 

 
3

 
(5,042
)
 
(5,039
)
Cash settlement of share-based awards for tax withholdings
(13
)
 

 

 
(613
)
 
(613
)
Vesting of previously non-vested shares
56

 

 
(1
)
 

 
(1
)
Balance at June 30, 2020
27,729

 
$
277

 
$
233,086

 
$
332,929

 
$
566,292

 
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

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 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

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

6

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 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. Prior to the Company’s Board of Directors’ (the "Board") approval of a strategy to divest the Company's Pool Distribution business (“Pool”), its services were classified into three principal reportable segments: Expedited Freight, Intermodal and Pool Distribution. As a result of the decision to divest of Pool, which has been classified as a discontinued operation, the Company now has two principal reportable segments: Expedited Freight and Intermodal (see Note 14, Segment Reporting). See Note 4, Discontinued Operations and Held for Sale, for additional information regarding the decision to divest of Pool.

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.

Pool, which has been classified as discontinued operations, provides high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. Pool offers this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States.

The accompanying unaudited 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 six months ended June 30, 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 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.

Discontinued Operations

On April 23, 2020, the Board approved a strategy to divest Pool within the next year. Accordingly, Pool met the criteria for assets held for sale as of June 30, 2020. Pool assets and liabilities are reflected as “Assets and liabilities held for sale” on the Consolidated Balance Sheets in this report. In addition, the results of operations for Pool have been presented in this report as discontinued operations. Amounts for all periods discussed below reflect the results of operations, financial condition and cash flows from Forward Air’s continuing operations, unless otherwise noted. See Note 4, Discontinued Operations and Held for Sale.

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Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020


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 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.

Excluding Pool, the Company's revenue from contracts with customers is disclosed within two reportable segments: Expedited Freight and Intermodal. 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 14, Segment Reporting.



8

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020

4.    Discontinued Operations and Held for Sale

On April 23, 2020, the Board approved a strategy to divest Pool within the next year. Accordingly, Pool met the criteria for assets held for sale as of June 30, 2020. Pool assets and liabilities are reflected as “Assets and liabilities held for sale” on the Consolidated Balance Sheets in this report. In addition, the results of operations for Pool have been presented in this report as discontinued operations.
Upon meeting the assets held for sale criteria and during its annual impairment analysis, the Company evaluated whether Pool's estimated fair value, less costs to sell, exceeded the carrying value of its assets and liabilities. As a result of that assessment, we determined that the fair value of Pool exceeded its carrying value by approximately 5%.
The results of Pool were previously included in its own segment. The Company will continue to have two reporting segments: Expedited Freight and Intermodal, which is consistent with the way the Chief Operating Decision Maker reviews operating results and makes resource decisions (See Note 14, Segment Reporting). Certain corporate overhead and other costs previously allocated to Pool for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations. These costs have been reclassified to the eliminations and other column in the segment reconciliation that appears in Note 14, Segment Reporting.

9

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020

Summarized Held for Sale and Discontinued Operations Financial Information
 
The following table provides a reconciliation of the carrying amounts of major classes of assets and liabilities which are included in assets and liabilities held for sale in the accompanying Consolidated Balance Sheets as of each of the periods presented below:
 
June 30,
2020
 
December 31,
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$

 
$

Accounts receivable, less allowance of $124 in 2020 and $49 in 2019
11,224

 
13,983

Other current assets
647

 
969

Total current assets held for sale
$
11,871

 
$
14,952

 
 
 
 
Property and equipment
$
52,046

 
$
53,166

Less accumulated depreciation and amortization
32,443

 
32,891

Total property and equipment, net
19,603

 
20,275

Operating lease right-of-use assets
44,110

 
46,487

Goodwill and other acquired intangibles:
 

 


Goodwill
5,406

 
5,406

Other acquired intangibles, net of accumulated amortization of $12,679 in 2020 and $12,359 in 2019
2,621

 
2,941

Total goodwill and other acquired intangibles, net
8,027

 
8,347

Other assets
2,853

 
1,595

Total noncurrent assets held for sale
$
74,593

 
$
76,704

 
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,732

 
$
4,575

Accrued expenses
5,163

 
5,668

Other current liabilities

 
2

Current portion of operating lease obligations
15,897

 
14,729

Total current liabilities held for sale
$
23,792

 
$
24,974

 
 
 
 
  Operating lease obligations, less current portion
$
28,385

 
$
31,847

  Other long-term liabilities
3,989

 
2,368

  Deferred income taxes
3,951

 
2,728

Total noncurrent liabilities held for sale
$
36,325

 
$
36,943


10

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020


The following table summarizes the results of operations classified as discontinued operations, net of tax, in the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019:
 
Three months ended
 
Six months ended
 
June 30,
2020
 
June 30,
2019
 
June 30,
2020
 
June 30,
2019
Operating revenue
$
13,974

 
$
42,869

 
$
50,926

 
$
85,379

 
 
 
 
 
 
 

Operating expenses:
 
 
 
 
 
 

Purchased transportation
3,147

 
11,688

 
12,683

 
23,151

Salaries, wages and employee benefits
8,394

 
16,437

 
25,507

 
32,842

Operating leases
4,966

 
4,202

 
10,646

 
8,498

Depreciation and amortization
362

 
1,454

 
1,657

 
2,993

Insurance and claims
1,287

 
1,472

 
3,013

 
2,856

Fuel expense
413

 
1,462

 
1,740

 
2,955

Other operating expenses
3,495

 
4,674

 
7,841

 
9,572

Total operating expenses
22,064

 
41,389

 
63,087

 
82,867

(Loss) income from discontinued operations before income taxes
(8,090
)
 
1,480

 
(12,161
)
 
2,512

Income tax (benefit) expense
(2,019
)
 
394

 
(3,049
)
 
706

(Loss) income from discontinued operations, net of tax
$
(6,071
)
 
$
1,086

 
$
(9,112
)
 
$
1,806



5.    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 was included in other current and long-term liabilities in the opening 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.


11

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020

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
 
June 30, 2020
Risk-free rate
2.9%
 
2.2%
 
2.2%
Revenue discount rate
4.4%
 
4.4%
 
3.2%
Revenue volatility
3.0%
 
5.0%
 
6.0%


In June 2020, the Company paid the first period's earn-out payment of $5,284; the second and final payment is expected to be paid in the second quarter of 2021. Excluding the impact from this payment, during the three months ended June 30, 2020, the earn-out fair value decreased $2,108 to $3,784, 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 and expected new business wins.

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.


12

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

450

Customer relationships
17,900

5,700

29,800

Goodwill
19,963

2,050

25,234

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 allocation for Linn Star 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 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.


13

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020

Goodwill

Goodwill is allocated to reporting units that are expected to benefit from the business combinations generating the goodwill. Excluding Pool, the Company has four reporting units - Expedited LTL, Truckload, Final Mile and Intermodal. As discussed in Note 4, Discontinued Operations and Held for Sale, the carrying amounts of Pool's assets and liabilities, including goodwill, are classified as held for sale in the accompanying Consolidated Balance Sheets and its operating results are not part of the continuing operations of the Company.

The Company conducted its annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 2020 and no impairment charges were required. The Company estimated 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). Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. Our calculations for Expedited LTL, Truckload, Final Mile and Intermodal indicated the fair value of each reporting unit exceeded their carrying value by 421.6%, 65.7%, 118.5% and 49.4%, respectively, as of June 30, 2020.

This discounted projected cash flow analysis required the Company to calculate the present value of its projected future cash flows using each reporting unit's applicable discount rate. The Company used a ten-year projection period to derive operating cash flow projections. Certain assumptions were made regarding future revenue and operating income growth based on industry market data and historical and expected performance. The Company's projected operating income was combined with expected working capital and capital expenditure requirements to determine operating cash flows. The significant assumptions used in this analysis were as follows:
 
Expedited LTL
 
Truckload
 
Final Mile
 
Intermodal
Discount rate
10.5
%
 
13.5
%
 
13.5
%
 
13.5
%
Terminal growth rate
4.0
%
 
4.0
%
 
4.0
%
 
4.0
%


Market valuations for comparable companies employ valuation multiples derived from market stock prices of companies that are engaged in the same or similar lines of business as the reporting units and that are actively traded on a free and open market. The estimates used to calculate the fair value of each reporting unit change over time based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of the reporting unit's fair value and goodwill impairment for the reporting unit.


14

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020

The following is a summary of the Company's goodwill as of June 30, 2020. Approximately $161,789 of goodwill is deductible for tax purposes.
 
Beginning balance, December 31, 2019
 
Linn Star Acquisition
 
Ending balance, June 30, 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

 
25,234

 
45,197

Accumulated Impairment

 

 

 
 
 
 
 
 
Intermodal
 
 
 
 
 
Goodwill
78,665

 

 
78,665

Accumulated Impairment

 

 

 
 
 
 
 
 
Total
 
 
 
 
 
Goodwill
241,385

 
25,234

 
266,619

Accumulated Impairment
(25,686
)
 

 
(25,686
)
 
$
215,699

 
$
25,234

 
$
240,933


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 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.

As part of the Company's annual goodwill impairment analysis, management compared the undiscounted cash flows of each reporting unit to the carrying value of its long-lived assets, noting no impairment charges were required during the three and six months ended June 30, 2020.

6.    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. Share-based compensation amounts below are disclosed on both a continuing and discontinuing basis.


15

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020

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 six months ended June 30, 2019. Further, there were no options granted to employees of the Company's discontinued operations during the six months ended June 30, 2020 or 2019. The weighted-average fair value of options granted and assumptions used to estimate their fair value during the six months ended June 30, 2020 were as follows (on a continuing basis):
 
Six months ended
 
June 30, 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 on a continuing basis:
 
Six months ended June 30, 2020
 
 
 
 
 
 
 
Weighted-
 

 
Weighted-
 

 
Average
 

 
Average
 
Aggregate
 
Remaining
 

 
Exercise
 
Intrinsic
 
Contractual
 
Options
 
Price
 
Value
 
Term
Outstanding at December 31, 2019
417

 
$
53

 

 

Granted
36

 
66

 

 

Exercised

 

 

 

Forfeited
(4
)
 
60

 

 

Outstanding at June 30, 2020
449

 
$
54

 
$
247

 
3.9
Exercisable at June 30, 2020
317

 
$
51

 
$
1,379

 
3.3


 
Six months ended
 
June 30,
2020
 
June 30,
2019
Share-based compensation for options
$
600

 
$
829

Tax benefit for option compensation
$
153

 
$
212

Unrecognized compensation cost for options
$
1,348

 
$
2,316

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

 
 



16

Table of Contents
Forward Air Corporation
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 30, 2020


The following tables summarize the Company’s employee stock option activity and related information on a discontinued basis:
 
Six months ended June 30, 2020
 
 
 
 
 
 
 
Weighted-
 

 
Weighted-
 

 
Average
 

 
Average
 
Aggregate
 
Remaining
 

 
Exercise
 
Intrinsic
 
Contractual
 
Options
 
Price
 
Value
 
Term
Outstanding at December 31, 2019
14

 
$
52

 
 
 
 
Granted

 

 
 
 
 
Exercised

 

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding at June 30, 2020
14

 
$
52

 
$
37

 
3.3
Exercisable at June 30, 2020