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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 September 30, 2020
OR
☐ 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)
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| | 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:
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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.
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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 October 27, 2020 was 27,507,750.
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Table of Contents |
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Forward Air Corporation |
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Part I. | Financial Information | |
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Item 1. | Financial Statements (Unaudited) | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II. | Other Information | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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Part I. | Financial Information |
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Item 1. | Financial Statements (Unaudited). |
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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 | |
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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 | |
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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 | |
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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 |
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Operating revenue | $ | 331,997 | | | $ | 313,683 | | | $ | 919,232 | | | $ | 895,531 | |
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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 | |
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Total operating expenses | 308,487 | | | 284,497 | | | 866,034 | | | 813,571 | |
Income from continuing operations | 23,510 | | | 29,186 | | | 53,198 | | | 81,960 | |
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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 | |
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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 | |
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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 | |
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| | | | | | | | | |
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 | |
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The accompanying notes are an integral part of the financial statements. |
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.
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.
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.
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:
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|
| 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 | |
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| | | |
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 | |
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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:
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| Three months ended | | Nine months ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
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Operating revenue | $ | 37,521 | | | $ | 47,980 | | | $ | 88,447 | | | $ | 133,359 | |
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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 | |
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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 | |
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Income tax (benefit) expense | (187) | | | 362 | | | (3,236) | | | 1,068 | |
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(Loss) income from discontinued operations, net of tax | $ | (345) | | | $ | 1,141 | | | $ | (9,458) | | | $ | 2,945 | |
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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.
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.
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.
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.
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 | |