Forward Air Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Acquisitions and Long-Lived Assets

Acquisitions and Long-Lived Assets

3 Months Ended

Mar. 31, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

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

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.

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.

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

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.