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, 2019

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)

		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:

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 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 21, 2019 was 28,172,110.

Table of Contents
Forward Air Corporation
		Page
		Number
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – September 30, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2019 and 2018	5
	Consolidated Statements of Shareholders' Equity – Nine months ended September 30, 2019 and 2018	6
	Notes to Condensed Consolidated Financial Statements – September 30, 2019	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
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	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	57
Signatures		58

2

Part I.	Financial Information
Item 1.	Financial Statements (Unaudited).

Forward Air Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
	September 30, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	34,824	$	25,657
Accounts receivable, less allowance of $2,494 in 2019 and $2,081 in 2018	157,494		156,359
Other current assets	23,393		19,066
Total current assets	215,711		201,082
Property and equipment	438,656		413,900
Less accumulated depreciation and amortization	217,813		204,005
Total property and equipment, net	220,843		209,895
Operating lease right-of-use assets	158,977		—
Goodwill and other acquired intangibles:
Goodwill	220,423		199,092
Other acquired intangibles, net of accumulated amortization of $88,839 in 2019 and $80,666 in 2018	130,038		113,661
Total goodwill and other acquired intangibles, net	350,461		312,753
Other assets	34,641		36,485
Total assets	$	980,633	$	760,215
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	32,599	$	34,630
Accrued expenses	51,412		39,784
Other current liabilities	7,049		—
Current portion of debt and finance lease obligations	1,578		309
Current portion of operating lease obligations	47,137		—
Total current liabilities	139,775		74,723
Debt and finance lease obligations, less current portion	72,738		47,335
Operating lease obligations, less current portion	112,553		—
Other long-term liabilities	51,316		47,739
Deferred income taxes	43,106		37,174
Shareholders’ equity:
Preferred stock	—		—
Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 27,915,057 in 2019 and 28,534,935 in 2018	279		285
Additional paid-in capital	221,629		210,296
Retained earnings	339,237		342,663
Total shareholders’ equity	561,145		553,244
Total liabilities and shareholders’ equity	$	980,633	$	760,215
The accompanying notes are an integral part of the financial statements.

3

Forward Air Corporation
Condensed Consolidated Statements of Comprehensive Income
(In thousands, except per share data)
(Unaudited)
	Three months ended						Nine months ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Operating revenue	$	361,663		$	331,375		$	1,028,891		$	964,325
Operating expenses:
Purchased transportation	163,606			155,451			462,744			450,833
Salaries, wages and employee benefits	87,259			76,028			243,899			217,682
Operating leases	20,521			18,671			60,021			54,640
Depreciation and amortization	10,528			10,295			32,036			31,346
Insurance and claims	10,930			9,203			33,531			26,442
Fuel expense	6,105			5,634			17,642			16,786
Other operating expenses	32,025			26,214			93,045			79,612
Total operating expenses	330,974			301,496			942,918			877,341
Income from operations	30,689			29,879			85,973			86,984
Other expense:
Interest expense	(761		)	(472		)	(1,916		)	(1,327		)
Other, net	1			(1		)	(1		)	(2		)
Total other expense	(760		)	(473		)	(1,917		)	(1,329		)
Income before income taxes	29,929			29,406			84,056			85,655
Income tax expense	7,734			7,077			21,124			21,289
Net income and comprehensive income	$	22,195		$	22,329		$	62,932		$	64,366
Net income per share:
Basic	$	0.78		$	0.76		$	2.20		$	2.18
Diluted	$	0.78		$	0.76		$	2.19		$	2.18
Dividends per share:	$	0.18		$	0.15		$	0.54		$	0.45

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

4

Forward Air Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
	Nine months ended
	September 30, 2019			September 30, 2018
Operating activities:
Net income	$	62,932		$	64,366
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	32,036			31,346
Change in fair value of earn-out liability	890			(455		)
Share-based compensation	9,006			7,525
Loss (gain) on disposal of property and equipment, net	1,010			(14		)
Provision for loss (recovery) on receivables	828			(52		)
Provision for revenue adjustments	2,243			2,921
Deferred income tax expense	5,931			6,676
Changes in operating assets and liabilities
Accounts receivable	(4,206		)	(3,386		)
Prepaid expenses and other current assets	(4,473		)	(4,880		)
Income taxes	(2,556		)	(3,193		)
Accounts payable and accrued expenses	14,090			12,991
Net cash provided by operating activities	117,731			113,845
Investing activities:
Proceeds from disposal of property and equipment	2,101			5,989
Purchases of property and equipment	(27,102		)	(34,344		)
Acquisition of business, net of cash acquired	(39,000		)	(3,737		)
Other	—			(356		)
Net cash used in investing activities	(64,001		)	(32,448		)
Financing activities:
Payments of finance lease obligations	(528		)	(228		)
Proceeds from senior credit facility	20,000			—
Proceeds from exercise of stock options	2,063			3,682
Payments of cash dividends	(15,421		)	(13,213		)
Repurchase of common stock (repurchase program)	(47,906		)	(44,985		)
Proceeds from common stock issued under employee stock purchase plan	261			237
Cash settlement of share-based awards for tax withholdings	(3,032		)	(1,872		)
Net cash used in financing activities	(44,563		)	(56,379		)
Net increase in cash	9,167			25,018
Cash at beginning of period	25,657			3,893
Cash at end of period	$	34,824		$	28,911

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

5

Forward Air Corporation
Consolidated Statements of Shareholders' Equity
(In thousands)
	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 minimum 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 minimum 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 minimum 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.

6

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, 2017	29,454		$	295		$	195,346		$	337,058		$	532,699
Net income and comprehensive income	—		—			—			17,741			17,741
Other	—		(2		)	—			(27		)	(29		)
Share-based compensation	—		—			2,261			—			2,261
Dividends ($0.15 per share)	—		—			1			(4,414		)	(4,413		)
Cash settlement of share-based awards for minimum tax withholdings	(33	)	—			—			(1,823		)	(1,823		)
Share repurchases	(364	)	(4		)	—			(19,989		)	(19,993		)
Vesting of previously non-vested shares	105		1			(1		)	—			—
Balance at March 31, 2018	29,162		290			197,607			328,546			526,443
Net income and comprehensive income	—		—			—			24,298			24,298
Other	—		—			—			(2		)	(2		)
Exercise of stock options	26		1			1,111			—			1,112
Common stock issued under employee stock purchase plan	5		—			237			—			237
Share-based compensation	—		—			2,418			—			2,418
Dividends ($0.15 per share)	—		—			1			(4,416		)	(4,415		)
Cash settlement of share-based awards for minimum tax withholdings	(1	)	—			—			(49		)	(49		)
Share repurchases	(133	)	(1		)	—			(8,171		)	(8,172		)
Vesting of previously non-vested shares	15		1			(1		)	—			—
Balance at June 30, 2018	29,074		291			201,373			340,206			541,870
Net income and comprehensive income	—		—			—			22,329			22,329
Other			—			(1		)	—			(1		)
Exercise of stock options	62		—			2,570			—			2,570
Share-based compensation	—		—			2,847			—			2,847
Dividends ($0.15 per share)	—		—			1			(4,386		)	(4,385		)
Share repurchases	(267	)	(3		)	—			(16,817		)	(16,820		)
Balance at September 30, 2018	28,869		288			206,790			341,332			548,410
The accompanying notes are an integral part of the financial statements.

7

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

1.    Description of Business and Basis of Presentation

Forward Air Corporation ("the Company", "We", "Our") is a leading asset-light freight and logistics company. Forward Air Corporation's services can be classified into four reportable segments: Expedited LTL, Intermodal, Truckload Premium Services ("TLS") and Pool Distribution ("Pool") (See Note 13).

Through the Expedited LTL segment, we operate a comprehensive national network to provide expedited regional, inter-regional and national less-than-truckload ("LTL") services. Expedited LTL offers customers local pick-up and delivery and other services including shipment consolidation and deconsolidation, warehousing, final mile solutions, customs brokerage and other handling. Because of our roots in serving the deferred air freight market, our terminal network is located at or near airports in the United States and Canada.

Our 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 and Mid-Atlantic United States.

Through our TLS segment, we provide expedited truckload brokerage, dedicated fleet services, as well as high security and temperature-controlled logistics services in the United States and Canada.

In our Pool segment, we provide high-frequency handling and distribution of time sensitive product to numerous destinations within a specific geographic region. We offer this service throughout the Mid-Atlantic, Southeast, Midwest and Southwest United States.

The accompanying unaudited condensed 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 our 2018 Form 10-K) when measured on a quarterly basis; therefore operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018.

The accompanying unaudited condensed 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.

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 will be effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize a right-of-use asset with a corresponding lease liability on their balance sheet for most leases classified as operating leases under previous guidance. Lessors are required to recognize a net lease investment for most leases. Additional qualitative and quantitative disclosures are also required. The Company applied the transition requirements as of January 1, 2019. As of September 30, 2019 the Company recorded right-of-use lease assets and corresponding lease liabilities of $158,977 and $159,690, respectively. There was no impact to the Company's Statements of Comprehensive Income or Statements of Cash Flows. In addition, comparative financial statements have not been

8

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

presented as allowed per the guidance. Changes to processes and internal controls to meet the standard’s reporting and disclosure requirements have also been implemented. See Note 9, Leases, for additional discussion over this new standard, including the impact on the Company's financial statements.

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.

Our revenue from contracts with customers is disclosed within our four reportable segments: Expedited LTL, Intermodal, TLS and Pool. This is consistent with our disclosures in earnings releases and annual reports and with the information regularly reviewed by the chief operating decision maker for evaluating financial performance. See additional discussion in Note 13, Segment Reporting.

4.    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.

9

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

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

10

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

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.

11

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

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.

5.    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.

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.  The Company historically used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted.  The Company did not make any stock option grants in the nine months ended September 30, 2019.

The following tables summarize the Company’s employee stock option activity and related information:

	Nine months ended September 30, 2019
							Weighted-
			Weighted-				Average
			Average		Aggregate		Remaining
			Exercise		Intrinsic		Contractual
	Options		Price		Value		Term
Outstanding at December 31, 2018	538		$	51
Exercised	(45	)	47
Forfeited	(8	)	54
Outstanding at September 30, 2019	485		$	52	$	4,638	4.0
Exercisable at September 30, 2019	319		$	48	$	4,163	3.3

	Nine months ended
	September 30, 2019		September 30, 2018
Share-based compensation for options	$	1,209	$	1,085
Tax benefit for option compensation	$	312	$	271
Unrecognized compensation cost for options, net of estimated forfeitures	$	1,878	$	3,621
Weighted average period over which unrecognized compensation will be recognized (years)	1.6

12

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

Employee Activity - Non-vested Shares

Non-vested share grants to employees vest ratably over a three-year period.  The non-vested shares’ fair values were estimated using closing market prices on the day of grant. The following tables summarize the Company’s employee non-vested share activity and related information:

	Nine months ended September 30, 2019
			Weighted-
			Average		Aggregate
	Non-vested		Grant Date		Grant Date
	Shares		Fair Value		Fair Value
Outstanding and non-vested at December 31, 2018	315		$	55
Granted	114		59
Vested	(131	)	61
Forfeited	(15	)	56
Outstanding and non-vested at September 30, 2019	283		$	58	$	16,441

	Nine months ended
	September 30, 2019		September 30, 2018
Share-based compensation for non-vested shares	$	6,210	$	4,902
Tax benefit for non-vested share compensation	$	1,581	$	1,225
Unrecognized compensation cost for non-vested shares, net of estimated forfeitures	$	10,705	$	13,146
Weighted average period over which unrecognized compensation will be recognized (years)	1.8

Employee Activity - Performance Shares

The Company annually grants performance shares to key employees.  Under the terms of the performance share agreements, following the end of a three-year performance period, the Company will issue to these employees a calculated number of common stock shares based on meeting certain performance targets. For shares granted during the nine months ended September 30, 2019, 50% of the performance share issuances will be based on meeting earnings before interest, taxes, depreciation and amortization ("EBITDA") per share targets and the remaining 50% of the performance share issuances will be based on the three-year performance of the Company’s total shareholder return ("TSR") as compared to the TSR of a selected peer group. All performance shares granted during the nine months ended September 30, 2018 were based on achieving total shareholder return targets.

Depending upon the EBITDA per share targets met, 0% to 200% of the granted shares may ultimately be issued. For shares granted based on total shareholder return, 0% of the shares will be issued if the Company's total shareholder return outperforms 25% or less of the peer group, but 200% of the shares will be issued if the Company's total shareholder return performs better than 90% of the peer group.  

The fair value of the performance shares granted based on meeting EBITDA per share targets were estimated using the closing market prices on the day of grant and the probability of meeting these targets as of the measurement date.

The fair value of the performance shares granted based on the three year performance of the Company’s total shareholder return was estimated using a Monte Carlo simulation. The weighted average assumptions used in the Monte Carlo estimate were as follows:

	Nine months ended
	September 30, 2019		September 30, 2018
Expected stock price volatility	23.4	%	24.3	%
Weighted average risk-free interest rate	2.5	%	2.2	%

13

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

The following tables summarize the Company’s employee performance share activity, assuming median share awards, and related information:

	Nine months ended September 30, 2019
			Weighted-
			Average		Aggregate
	Performance		Grant Date		Grant Date
	Shares		Fair Value		Fair Value
Outstanding and non-vested at December 31, 2018	65		$	58
Granted	30		61
Vested	(23	)	64
Forfeited	(10	)	63
Outstanding and non-vested at September 30, 2019	62		$	62	$	3,870

	Nine months ended
	September 30, 2019		September 30, 2018
Share-based compensation for performance shares	$	821	$	953
Tax benefit for performance share compensation	$	212	$	238
Unrecognized compensation cost for performance shares, net of estimated forfeitures	$	1,884	$	1,725
Weighted average period over which unrecognized compensation will be recognized (years)	1.9

Employee Activity – Employee Stock Purchase Plan

Under the 2005 Employee Stock Purchase Plan (the “ESPP”), which has been approved by shareholders, the Company is authorized to issue up to a remaining 357 shares of common stock to employees of the Company. These shares may be issued at a price equal to 90% of the lesser of the market value on the first day or the last day of each six-month purchase period. Common stock purchases are paid for through periodic payroll deductions and/or up to two large lump sum contributions. The following table summarizes the Company’s employee stock purchase activity and related information:

	Nine months ended
	September 30, 2019		September 30, 2018
Shares purchased by participants under plan	5		5
Average purchase price	$	49	$	52
Weighted-average fair value of each purchase right under the ESPP granted ¹	$	10	$	7
Share-based compensation for ESPP shares	$	52	$	32
¹ Equal to the discount from the market value of the common stock at the end of each six month purchase period

14

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

Non-employee Director Activity - Non-vested Shares

Grants of non-vested shares to non-employee directors vest ratably over the elected term to the Board of Directors, or approximately one year.  The following tables summarize the Company’s non-employee non-vested share activity and related information:

	Nine months ended September 30, 2019
			Weighted-
			Average		Aggregate
	Non-vested		Grant Date		Grant Date
	Shares		Fair Value		Fair Value
Outstanding and non-vested at December 31, 2018	15		$	59
Granted	15		62
Vested	(15	)	59
Outstanding and non-vested at September 30, 2019	15		$	62	$	920

	Nine months ended
	September 30, 2019		September 30, 2018
Share-based compensation for non-vested shares	$	714	$	553
Tax benefit for non-vested share compensation	$	184	$	138
Unrecognized compensation cost for non-vested shares, net of estimated forfeitures	$	554	$	501
Weighted average period over which unrecognized compensation will be recognized (years)	0.6

6.    Senior Credit Facility

On September 29, 2017, the Company entered into a five-year senior unsecured revolving credit facility (the “Facility”) with a maximum aggregate principal amount of $150,000, with a sublimit of $30,000 for letters of credit and a sublimit of $30,000 for swing line loans. The Facility may be increased by up to $100,000 to a maximum aggregate principal amount of $250,000 pursuant to the terms of the credit agreement, subject to the lenders’ agreement to increase their commitments or the addition of new lenders extending such commitments. Such increases to the Facility may be in the form of additional revolving credit loans, term loans or a combination thereof, and are contingent upon there being no events of default under the Facility and satisfaction of other conditions precedent and are subject to the other limitations set forth in the credit agreement. The Facility is scheduled to mature in September 2022 and may be used to refinance existing indebtedness of the Company and for working capital, capital expenditures and other general corporate purposes.

Unless the Company elects otherwise under the credit agreement, interest on borrowings under the Facility is based on the highest of (a) the federal funds rate (not less than 0%) plus 0.5%, (b) the administrative agent's prime rate and (c) the LIBOR Rate plus 1.0%, in each case plus a margin that can range from 0.3% to 0.8% with respect to the Facility depending on the Company’s ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization, as set forth in the credit agreement. Payments of interest for each loan that is based on the LIBOR Rate are due in arrears on the last day of the interest period applicable to such loan (with interest periods of one, two or three months being available, at the Company’s option). Payments of interest on loans that are not based on the LIBOR Rate are due on the last day of each quarter ended March 31, June 30, September 30 and December 31 of each year. All unpaid amounts of principal and interest are due at maturity. As of September 30, 2019, the Company had $67,500 in borrowings outstanding under the revolving credit facility, $14,020 utilized for outstanding letters of credit and $68,480 of available borrowing capacity under the revolving credit facility.  The interest rate on the outstanding borrowing under the revolving credit facility was 3.4% as of September 30, 2019.

The Facility contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, material judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default may result in, among other things, the termination of the Facilities, acceleration of repayment obligations and the exercise of remedies by the lenders with respect to the Company and its subsidiaries

15

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

September 30, 2019

that are party to the Facility. The Facility also contains financial covenants and other covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of the required lenders, to engage in certain mergers, consolidations, asset sales, dividends and stock repurchases, investments, and other transactions or to incur liens or indebtedness in excess of agreed thresholds, as set forth in the credit agreement. As of September 30, 2019, the Company was in compliance with the aforementioned covenants.

7.    Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:

	Three months ended						Nine months ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Numerator:
Net income and comprehensive income	$	22,195		$	22,329		$	62,932		$	64,366
Income allocated to participating securities	(236		)	(239		)	(696		)	(596		)
Numerator for basic and diluted income per share - net income	$	21,959		$	22,090		$	62,236		$	63,770
Denominator:
Denominator for basic income per share - weighted-average shares	27,981			28,964			28,286			29,189
Effect of dilutive stock options	74			95			76			81
Effect of dilutive performance shares	27			36			31			33
Denominator for diluted income per share - adjusted weighted-average shares	28,082			29,095			28,393			29,303
Basic net income per share	$	0.78		$	0.76		$	2.20		$	2.18
Diluted net income per share	$	0.78		$	0.76		$	2.19		$	2.18

The number of instruments that could potentially dilute net income per basic share in the future, but that were not included in the computation of net income per diluted share because to do so would have been anti-dilutive for the periods presented, are as follows:

	September 30, 2019	September 30, 2018
Anti-dilutive stock options	188	100
Anti-dilutive performance shares	—	15
Anti-dilutive non-vested shares and deferred stock units	—	3
Total anti-dilutive shares	188	118

8.    Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various states and Canada. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or Canadian examinations by tax authorities for years before 2011.

For the three and nine months ended September 30, 2019 and 2018, the effective income tax rates varied from the statutory federal income tax rate of 21.0%, primarily as a result of the effect of state income taxes, net of the federal benefit, and permanent differences between book and tax net income. The combined federal and state effective tax rate for the nine months ended September 30, 2019 was 25.1% compared to a rate of