Quarterly report pursuant to Section 13 or 15(d)

Acquisitions and Long-Lived Assets

v3.19.3
Acquisitions and Long-Lived Assets
9 Months Ended
Sep. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Acquisitions and Long-Lived Assets Acquisitions and Long-Lived Assets

Expedited LTL Acquisitions

As part of our strategy to expand our final mile pickup and delivery operations, in April 2019, we 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. This acquisition provides an opportunity for our Expedited LTL segment to expand its final mile service offering into additional geographic markets, form relationships with new customers, add volumes to our existing locations and generate synergies with our LTL operations. This transaction was funded using cash flows from operations. The assets, liabilities, and operating results of this acquisition have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Expedited LTL reportable segment.

The acquisition agreement provides the sellers an earnout opportunity of up to $15,000 based on the achievement of certain revenue milestones over a two year period, beginning May 1, 2019. Upon acquisition the fair value of the earn-out liability was $10,321 and is included in other current and long-term liabilities in the opening condensed consolidated balance sheet. The earn-out liability was classified as level 3 of the fair value hierarchy as defined in the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“the FASB Codification”) and the value was determined based on estimated revenues and the probability of achieving them. The fair value was based on the two-year performance of FSA's acquired customer revenue and was estimated using a Monte Carlo simulation. The initial weighted average assumptions used in the Monte Carlo simulation are summarized in the following table:
 
FSA Earn-out
 
 
Risk-free rate
2.4%
Revenue discount rate
8.5%
Revenue volatility
9.0%


During the three months ended September 30, 2019, the earn-out fair value increased $890 to $11,211. The fair value increased due to new final mile business wins after the acquisition date that are included in the revenue used to calculate the earn-out and due to increased probability of paying the earn-out, partly due to the passage of time. The increase in the earn-out was recorded in the other operating expenses line item. As of September 30, 2019, the expected total earn-out to be paid is $12,600.

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 provides the Intermodal segment with an expanded footprint on the East Coast, with locations in the Pennsylvania, Maryland, Virginia, South Carolina and Georgia markets. Additionally, in October 2018, the Company acquired certain assets of Southwest Freight Distributors (“Southwest”) for $16,250. The Southwest acquisition provides an expanded footprint in Texas and access to several strategic customer relationships.

These transactions were funded using cash flows from operations.The assets, liabilities, and operating results of these collective acquisitions have been included in the Company's consolidated financial statements from their dates of acquisition and have been included in the Intermodal reportable segment.

Allocations of Purchase Price

The following table presents the allocations of the FSA and OST purchase price to the assets acquired and liabilities assumed based on their estimated fair values and resulting residual goodwill (in thousands):

FSA
OST

April 21, 2019
July 14, 2019
Tangible assets:
 
 
Cash
$
202

$

Other receivables
1,491


Property and equipment
40

10,604

Operating lease right-of-use assets
3,209

1,672

Total tangible assets
4,942

12,276

Intangible assets:
 
 
Non-compete agreements
900

850

Customer relationships
17,100

5,700

Goodwill
19,281

2,050

Total intangible assets
37,281

8,600

Total assets acquired
42,223

20,876


 
 
Liabilities assumed:
 
 
Current liabilities
7,664


Other liabilities
4,350


Debt and finance lease obligations

7,204

Operating lease obligations
3,209

1,672

Total liabilities assumed
15,223

8,876

Net assets acquired
$
27,000

$
12,000



The above purchase price allocations for FSA and OST 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 for FSA and OST 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
Non-compete agreements
5 years
3 years
Customer relationships
15 years
10 years


The fair value of the non-compete agreements and customer relationships assets were estimated using an income approach. The Company's inputs into fair value estimates are classified within level 3 of the fair value hierarchy. 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 believes that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.

Goodwill

The Company conducted its annual impairment assessments and test of goodwill for each reporting unit as of June 30, 2019 and no impairment charges were required at that time. The first step of the goodwill impairment test is the Company's assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, including goodwill. When performing the qualitative assessment, the Company considers the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performance of each reporting unit, litigation and new legislation. If based on the qualitative assessments, the Company believes it more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, or periodically as deemed appropriate by management, the Company will prepare an estimation of the respective reporting unit's fair value utilizing a quantitative approach.

If a quantitative fair value estimation is required, the Company estimates 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). If this estimation of fair value indicates that impairment potentially exists, the Company will then measure the amount of the impairment, if any. Goodwill impairment exists when the estimated implied fair value of goodwill is less than its carrying value. Changes in strategy or market conditions could significantly impact these fair value estimates and require adjustments to recorded asset balances. During the nine months ended September 30, 2019, no indicators of goodwill impairment were identified.

The following is a summary of the Company's goodwill as of September 30, 2019. Approximately $141,279 of goodwill is deductible for tax purposes.
 
Beginning balance, December 31, 2018
 
FSA Acquisition
OST Acquisition
 
Ending balance, September 30, 2019
Expedited LTL
 
 
 
 
 
 
Goodwill
$
97,593

 
$
19,281

$

 
$
116,874

Accumulated Impairment

 


 

 
 
 
 
 
 
 
Intermodal
 
 
 
 
 
 
Goodwill
76,615

 

2,050

 
78,665

Accumulated Impairment

 


 

 
 
 
 
 
 
 
TLS
 
 
 
 
 
 
Goodwill
45,164

 


 
45,164

Accumulated Impairment
(25,686
)
 


 
(25,686
)
 
 
 
 
 
 
 
Pool Distribution
 
 
 
 
 
 
Goodwill
12,359

 


 
12,359

Accumulated Impairment
(6,953
)
 


 
(6,953
)
 
 
 
 
 
 
 
Total
$
199,092

 
$
19,281

$
2,050

 
$
220,423


Other Long-Lived Assets
The Company evaluates the reasonableness of the useful lives and salvage values of its assets on an ongoing basis. During the current quarter, the Company identified indicators that the useful lives of its owned tractors and trailers extended beyond initial expectations. As a result, the Company performed a useful life study ("the study") to conclude if any changes to its tractor and trailer useful lives and salvage values were warranted. The study included reviewing statistical data for its population of owned tractors and trailers, including historical disposition activity, reviewing fair value information and conducting interviews with management to determine the expected future use of assets.

As a result of this study, management deemed it appropriate to extend the average useful life of its trailers from 7 to 10 years and its tractors from 5 to 10 years. In addition, management reduced the average salvage value of its tractors from 25% to 10%. No changes were made to trailer salvage values. These changes in estimates were made to assets currently owned and originally purchased new since assets purchased used were assigned individual useful lives and salvage values based on their age and condition at purchase. This change in estimate was made on a prospective basis beginning on July 1, 2019. The impact of this study on the three and nine months ended September 30, 2019 was a $1,000 reduction in depreciation.

In addition, management recorded a $900 reserve for tractors during the current quarter. This is recorded in other operating expenses in our Consolidated Statements of Comprehensive Income.