fwrd-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-22490

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

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

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 27, 2020 was 27,507,750.


Table of Contents

Forward Air Corporation

		Page
		Number
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets – September 30, 2020 and December 31, 2019	3

	Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2020 and 2019	4

	Consolidated Statements of Cash Flows – Nine months ended September 30, 2020 and 2019	5

	Consolidated Statements of Shareholders' Equity – Nine months ended September 30, 2020 and 2019	6

	Notes to Consolidated Financial Statements – September 30, 2020	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55

Item 4.	Controls and Procedures	55

Part II.	Other Information

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	58

Signatures		59

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)
	September 30, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	42,990	$	64,749
Accounts receivable, less allowance of $2,448 in 2020 and $2,053 in 2019	153,070		136,214
Other current assets	22,062		20,403
Current assets held for sale	16,925		14,952
Total current assets	235,047		236,318

Property and equipment	379,306		373,571
Less accumulated depreciation and amortization	189,042		180,815
Total property and equipment, net	190,264		192,756
Operating lease right-of-use assets	115,551		105,170
Goodwill and other acquired intangibles:
Goodwill	240,933		215,699
Other acquired intangibles, net of accumulated amortization of $89,540 in 2020 and $79,250 in 2019	145,086		124,857
Total goodwill and other acquired intangibles, net	386,019		340,556
Other assets	43,266		39,374
Noncurrent assets held for sale	78,063		76,704
Total assets	$	1,048,210	$	990,878


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	32,581	$	25,411
Accrued expenses	52,454		44,154
Other current liabilities	4,277		5,318
Current portion of debt and finance lease obligations	1,557		1,421
Current portion of operating lease obligations	40,258		35,886
Current liabilities held for sale	26,006		24,974
Total current liabilities	157,133		137,164

Debt and finance lease obligations, less current portion	116,583		72,249
Operating lease obligations, less current portion	76,003		69,678
Other long-term liabilities	61,536		56,448
Deferred income taxes	45,532		41,214
Noncurrent liabilities held for sale	39,227		36,943

Shareholders’ equity:
Preferred stock	—		—
Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 27,258,493 in 2020 and 27,850,233 in 2019	273		279
Additional paid-in capital	237,497		226,869
Retained earnings	314,426		350,034
Total shareholders’ equity	552,196		577,182
Total liabilities and shareholders’ equity	$	1,048,210	$	990,878

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

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Forward Air Corporation
Consolidated Statements of Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)

	Three months ended				Nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019






Operating revenue	$	331,997	$	313,683	$	919,232	$	895,531

Operating expenses:
Purchased transportation	173,054		150,296		465,721		426,283
Salaries, wages and employee benefits	66,927		68,532		200,258		192,330
Operating leases	17,327		15,860		52,598		46,861
Depreciation and amortization	9,172		9,016		27,919		27,531
Insurance and claims	8,671		9,532		26,437		29,276
Fuel expense	2,715		4,637		9,247		13,219
Other operating expenses	30,621		26,624		83,854		78,071

Total operating expenses	308,487		284,497		866,034		813,571
Income from continuing operations	23,510		29,186		53,198		81,960

Other expense:
Interest expense	(1,304)		(761)		(3,355)		(1,917)
Other, net	—		1		—		(1)
Total other expense	(1,304)		(760)		(3,355)		(1,918)
Income before income taxes	22,206		28,426		49,843		80,042
Income tax expense	5,214		7,372		12,209		20,055
Net income from continuing operations	16,992		21,054		37,634		59,987
(Loss) income from discontinued operations, net of tax	(345)		1,141		(9,458)		2,945
Net income and comprehensive income	$	16,647	$	22,195	$	28,176	$	62,932

Basic net income (loss) per share:
Continuing operations	$	0.61	$	0.74	$	1.35	$	2.10
Discontinued operations	(0.01)		0.04		(0.34)		0.10
Net income per share	$	0.60	$	0.78	$	1.01	$	2.20

Diluted net income (loss) per share:
Continuing operations	$	0.61	$	0.74	$	1.35	$	2.09
Discontinued operations	(0.01)		0.04		(0.34)		0.10
Net income per share	$	0.60	$	0.78	$	1.01	$	2.19






Dividends per share:	$	0.18	$	0.18	$	0.54	$	0.54

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

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Forward Air Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Nine months ended
	September 30, 2020		September 30, 2019

Operating activities:
Net income from continuing operations	$	37,634	$	59,987
Adjustments to reconcile net income of continuing operations to net cash provided by operating activities of continuing operations
Depreciation and amortization	27,919		27,531

Change in fair value of earn-out liability	(2,209)		890
Share-based compensation	7,852		8,536
Loss on disposal of property and equipment, net	108		781
Provision for loss on receivables	606		819
Provision for revenue adjustments	2,972		2,239
Deferred income tax expense	4,317		5,881

Changes in operating assets and liabilities
Accounts receivable	(20,436)		(3,778)
Prepaid expenses and other current assets	(173)		(4,380)
Income taxes	1,426		(2,557)
Accounts payable and accrued expenses	20,477		11,876
Net cash provided by operating activities of continuing operations	80,493		107,825

Investing activities:
Proceeds from disposal of property and equipment	1,415		1,693
Purchases of property and equipment	(16,439)		(23,240)
Acquisition of business, net of cash acquired	(55,931)		(39,000)

Net cash used in investing activities of continuing operations	(70,955)		(60,547)

Financing activities:

Payments of finance lease obligations	(529)		(528)
Proceeds from senior credit facility	65,000		20,000
Payments on senior credit facility	(20,000)		—
Payments on earn-out liability	(5,284)		—
Proceeds from exercise of stock options	1,901		2,063
Payments of cash dividends	(15,090)		(15,421)
Repurchase of common stock (repurchase program)	(45,248)		(47,906)

Proceeds from common stock issued under employee stock purchase plan	294		261

Cash settlement of share-based awards for tax withholdings	(3,444)		(3,032)
(Distributions to) contributions from subsidiary held for sale	(8,897)		6,452
Net cash used in financing activities from continuing operations	(31,297)		(38,111)
Net (decrease) increase in cash of continuing operations	(21,759)		9,167

Cash from discontinued operations:
Cash (used in) provided by operating activities of discontinued operations, net	(8,090)		9,906
Cash used in investing activities of discontinued operations, net	(807)		(3,454)
Cash provided by (used in) financing activities of discontinued operations, net	8,897		(6,452)
Net (decrease) increase in cash	(21,759)		9,167
Cash at beginning of period of continuing operations	64,749		25,657
Cash at beginning of period of discontinued operations/held for sale	—		—
Net (decrease) increase in cash	(21,759)		9,167
Less: cash at end of period of discontinued operations/held for sale	—		—
Cash at end of period of continuing operations	$	42,990	$	34,824

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

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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
Net income and comprehensive income	—	—		—		16,647		16,647

Exercise of stock options	42	1		1,901		—		1,902

Share-based compensation	—	—		2,507		—		2,507
Dividends ($0.18 per share)	—	—		3		(5,008)		(5,005)
Cash settlement of share-based awards for tax withholdings	(3)	—		—		(158)		(158)
Share repurchases	(519)	(5)		—		(29,984)		(29,989)
Vesting of previously non-vested shares	9	—		—		—		—

Balance at September 30, 2020	27,258	273		237,497		314,426		552,196

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Forward Air Corporation
Consolidated Statements of Shareholders' Equity, continued
(In thousands, except share data)

	Common Stock			Additional Paid-in Capital		Retained Earnings		Total Shareholders' Equity
	Shares	Amount
Balance at December 31, 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
Net income and comprehensive income	—	—		—		22,195		22,195

Exercise of stock options	17	—		785		—		785

Share-based compensation	—	—		2,762		—		2,762
Dividends ($0.18 per share)	—	—		2		(5,090)		(5,088)
Cash settlement of share-based awards for tax withholdings	(4)	—		—		(262)		(262)
Share repurchases	(152)	(1)		—		(9,288)		(9,289)
Vesting of previously non-vested shares	14	—		—		—		—

Balance at September 30, 2019	27,915	279		221,629		339,237		561,145












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

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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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. As a result of the decision to divest 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 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 a discontinued operation, 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 nine months ended September 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 and accordingly, has been classified as assets held for sale as of September 30, 2020 and for all prior periods presented. 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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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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. 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 ("CODM") for evaluating financial performance. See additional discussion in Note 14, Segment Reporting.

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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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 has been classified as assets held for sale as of September 30, 2020 and for all prior periods presented. 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 goodwill 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%. In addition, during the three months ended September 30, 2020, no indicators of goodwill impairment were identified, and the Company believes the fair value of Pool exceeds its carrying value.

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 CODM 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.

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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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:






	September 30, 2020		December 31, 2019
Assets
Current assets:

Accounts receivable, less allowance of $108 in 2020 and $49 in 2019	$	16,164	$	13,983
Other current assets	761		969

Total current assets held for sale	$	16,925	$	14,952

Property and equipment	$	51,199	$	53,166
Less accumulated depreciation and amortization	31,480		32,891
Total property and equipment, net	19,719		20,275
Operating lease right-of-use assets	47,568		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	2,749		1,595
Total noncurrent assets held for sale	$	78,063	$	76,704


Liabilities
Current liabilities:
Accounts payable	$	3,501	$	4,575
Accrued expenses	5,720		5,668
Other current liabilities	—		2

Current portion of operating lease obligations	16,785		14,729
Total current liabilities held for sale	$	26,006	$	24,974


Operating lease obligations, less current portion	$	30,851	$	31,847
Other long-term liabilities	4,192		2,368
Deferred income taxes	4,184		2,728
Total noncurrent liabilities held for sale	$	39,227	$	36,943

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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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 nine months ended September 30, 2020 and 2019:







	Three months ended				Nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019






Operating revenue	$	37,521	$	47,980	$	88,447	$	133,359

Operating expenses:
Purchased transportation	8,700		13,310		21,383		36,461
Salaries, wages and employee benefits	17,012		18,727		42,519		51,569
Operating leases	5,304		4,661		15,950		13,159
Depreciation and amortization	—		1,512		1,657		4,505
Insurance and claims	1,525		1,398		4,538		4,254
Fuel expense	1,045		1,468		2,785		4,423
Other operating expenses	4,467		5,401		12,309		14,975

Total operating expenses	38,053		46,477		101,141		129,346
(Loss) income from discontinued operations before income taxes	(532)		1,503		(12,694)		4,013






Income tax (benefit) expense	(187)		362		(3,236)		1,068

(Loss) income from discontinued operations, net of tax	$	(345)	$	1,141	$	(9,458)	$	2,945

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.

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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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	September 30, 2020
Risk-free rate	2.9%	2.2%	2.0%
Revenue discount rate	4.4%	4.4%	3.2%
Revenue volatility	3.0%	5.0%	7.0%

In June 2020, the Company paid the first period earn-out payment of $5,284; the second and final payment is expected to be paid in the second quarter of 2021. During the three months ended September 30, 2020, the earn-out fair value increased $493 to $4,277, 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.

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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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.

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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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.

In evaluating whether events or changes in circumstances indicate that an interim impairment assessment is required, management considers if there were any indicators that exist that may impair the carrying value of the Company’s goodwill. During the three months ended September 30, 2020, no indicators of goodwill impairment were identified and an interim impairment test was not required as 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 following is a summary of the Company's goodwill as of September 30, 2020. Approximately $161,789 of goodwill is deductible for tax purposes.


	Beginning balance, December 31, 2019		Linn Star Acquisition		Ending balance, September 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.

During the three months ended September 30, 2020, the Company determined no indicators of an impairment existed and all of its assets were recoverable. As such, no impairments to the Company's long-lived assets were identified.

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Forward Air Corporation

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 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.

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


			Nine months ended
			September 30, 2020
Expected dividend yield