Acquisitions and Long-Lived Assets
|6 Months Ended|
Jun. 30, 2020
|Goodwill and Intangible Assets Disclosure [Abstract]|
|Acquisitions and Long-Lived Assets||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.
The initial weighted average assumptions used in the Monte Carlo simulation are summarized in the following table:
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.
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):
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:
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 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:
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.
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.
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.
The entire disclosure for goodwill and intangible assets.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef