Form 10-Q Q3 2014

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, 2014
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.)
430 Airport Road
Greeneville, Tennessee
 
37745
(Address of principal executive offices)
 
(Zip Code)
 

Registrant’s telephone number, including area code: (423) 636-7000
 

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 and posted on its corporate Web site, if any, 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 and post such files).

Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x
 
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 20, 2014 was 30,450,053.




Table of Contents
 
 
 
Forward Air Corporation
 
 
 
 
 
Page
 
 
Number
Part I.
Financial Information
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

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,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash
$
24,573

 
$
127,367

Accounts receivable, less allowance of $2,294 in 2014 and $1,919 in 2013
100,016

 
76,500

Other current assets
14,057

 
16,493

Total current assets
138,646

 
220,360

 
 
 
 
Property and equipment
303,755

 
271,050

Less accumulated depreciation and amortization
127,259

 
116,287

Total property and equipment, net
176,496

 
154,763

Goodwill and other acquired intangibles:
 

 
 

Goodwill
140,678

 
88,496

Other acquired intangibles, net of accumulated amortization of $38,100 in 2014 and $31,790 in 2013
71,778

 
40,110

Total net goodwill and other acquired intangibles
212,456

 
128,606

Other assets
2,347

 
2,540

Total assets
$
529,945

 
$
506,269

 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
21,395

 
$
16,267

Accrued expenses
23,356

 
18,275

Current portion of debt and capital lease obligations
280

 
69

Total current liabilities
45,031

 
34,611

 
 
 
 
Long-term debt and capital lease obligations, less current portion
1,346

 
3

Other long-term liabilities
8,148

 
8,940

Deferred income taxes
28,838

 
26,850

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock

 

Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 30,245,216 in 2014 and 30,522,079 in 2013
302

 
305

Additional paid-in capital
126,516

 
107,726

Retained earnings
319,764

 
327,834

Total shareholders’ equity
446,582

 
435,865

Total liabilities and shareholders’ equity
$
529,945

 
$
506,269

 
 
 
 
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,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Operating revenue
$
201,477

 
$
170,033

 
$
566,897

 
$
471,396

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 

 
 
Purchased transportation
85,874

 
75,211

 
242,259

 
206,462

Salaries, wages and employee benefits
45,651

 
39,165

 
131,464

 
109,149

Operating leases
8,503

 
6,991

 
25,019

 
20,923

Depreciation and amortization
8,115

 
6,220

 
22,879

 
17,377

Insurance and claims
3,747

 
3,290

 
10,978

 
9,164

Fuel expense
5,012

 
3,871

 
14,990

 
10,535

Other operating expenses
17,669

 
12,428

 
48,537

 
36,634

Total operating expenses
174,571

 
147,176

 
496,126

 
410,244

Income from operations
26,906

 
22,857

 
70,771

 
61,152

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 

 
 
Interest expense
(172
)
 
(145
)
 
(355
)
 
(401
)
Other, net
(55
)
 
27

 
144

 
72

Total other income (expense)
(227
)
 
(118
)
 
(211
)
 
(329
)
Income before income taxes
26,679

 
22,739

 
70,560

 
60,823

Income taxes
9,935

 
8,542

 
26,437

 
21,941

Net income and comprehensive income
$
16,744


$
14,197

 
$
44,123

 
$
38,882

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 

 
 
Basic
$
0.55

 
$
0.47

 
$
1.44

 
$
1.30

Diluted
$
0.54

 
$
0.46

 
$
1.41

 
$
1.27

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
30,415

 
30,374

 
30,710

 
30,017

Diluted
30,932

 
30,986

 
31,234

 
30,677

 
 
 
 
 
 
 
 
Dividends per share:
$
0.12

 
$
0.10

 
$
0.36

 
$
0.30


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,
2014
 
September 30,
2013
 
 
Operating activities:
 
 
 
Net income
$
44,123

 
$
38,882

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
22,879

 
17,377

Share-based compensation
5,005

 
4,619

Gain on disposal of property and equipment
(441
)
 
(468
)
Provision for (recovery) loss on receivables
(39
)
 
234

Provision for revenue adjustments
1,896

 
1,705

Deferred income tax
1,729

 
4,658

Excess tax benefit for stock options exercised
(554
)
 
(3,207
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable
(15,875
)
 
(4,262
)
Prepaid expenses and other current assets
(1,397
)
 
(1,575
)
Accounts payable and accrued expenses
7,767

 
2,524

Net cash provided by operating activities
65,093

 
60,487

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposal of property and equipment
1,582

 
1,665

Purchases of property and equipment
(37,101
)
 
(33,266
)
Acquisition of business, net of cash acquired
(84,348
)
 
(45,328
)
Other
53

 
(111
)
Net cash used in investing activities
(119,814
)
 
(77,040
)
 
 
 
 
Financing activities:
 
 
 
Payments of debt and capital lease obligations
(9,662
)
 
(20,351
)
Proceeds from exercise of stock options
13,083

 
29,866

Payments of cash dividends
(11,141
)
 
(9,071
)
Repurchase of common stock (repurchase program)
(39,972
)
 

Common stock issued under employee stock purchase plan
148

 
137

Cash settlement of share-based awards for minimum tax withholdings
(1,083
)
 
(866
)
Excess tax benefit for stock options exercised
554

 
3,207

Net cash (used in) provided by financing activities
(48,073
)
 
2,922

Net decrease in cash
(102,794
)
 
(13,631
)
Cash at beginning of period
127,367

 
112,182

Cash at end of period
$
24,573

 
$
98,551

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



5

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014


1.    Basis of Presentation

Forward Air Corporation's (“the Company”) services can be classified into three principal reporting segments:  Forward Air, Inc. (“Forward Air”), Forward Air Solutions, Inc. (“FASI”) and Total Quality, Inc. ("TQI").  

Through the Forward Air segment, the Company is a leading provider of time-definite transportation and related logistics services to the North American deferred air freight market and its activities can be classified into three categories of service: airport-to-airport, logistics, and other.  Forward Air’s airport-to-airport service operates a comprehensive national network for the time-definite surface transportation of expedited ground freight.  The airport-to-airport service offers customers local pick-up and delivery and scheduled surface transportation of cargo as a cost effective, reliable alternative to air transportation.  Forward Air’s logistics services provide expedited full truckload ("TLX"), intermodal drayage and dedicated fleet services.  Forward Air’s other services include shipment consolidation and deconsolidation, warehousing, customs brokerage, and other handling.  The Forward Air segment primarily provides its transportation services through a network of terminals located at or near airports in the United States and Canada.  

FASI provides pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States.  Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions.  FASI’s primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains.  

TQI is a provider of high security and temperature-controlled logistics services, primarily truckload services, to the pharmaceutical and life science industries. In addition to core pharmaceutical services, TQI provides truckload and less-than-truckload brokerage transportation services.

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 when measured on a quarterly basis; therefore operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.

The accompanying unaudited condensed consolidated financial statements of the Company include Forward Air Corporation and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

2.    Recent Accounting Pronouncements

In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.




6

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

3.    Acquisitions and Goodwill

Acquisition of CST

On February 2, 2014, the Company acquired all of the outstanding capital stock of Central States Trucking Co. and Central States Logistics, Inc. (collectively referred to as “CST”). Pursuant to the terms of the Agreement and concurrently with the execution of the Agreement, the Company acquired all of the outstanding capital stock of CST in exchange for $82,998 in net cash and $11,215 in assumed debt. With the exception of capital leases, the assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using the Company's cash on hand. Under the purchase agreement, $10,000 of the purchase price was paid into an escrow account to protect the Company against potential unknown liabilities. The amount held in escrow will be remitted to the sellers on February 2, 2015.
CST provides industry leading container and intermodal drayage services primarily within the Midwest region of the United States. CST also provides dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. The acquisition of CST provides the Company with a scalable platform for which to enter the intermodal drayage space and thereby continuing to expand and diversify the Company's service offerings.
As part of the Company's strategy to scale CST's operations, on September 5, 2014, CST acquired certain assets of Recob Great Lakes Express, Inc. ("RGL") for $1,350. The acquisition of RGL's assets provided an opportunity for CST to expand into an additional midwest market.
The Company incurred total transaction costs related to the acquisitions of approximately $900, which were expensed during the nine months ended September 30, 2014, in accordance with U.S. GAAP. These transaction costs were primarily included in "Other operating expenses" in the consolidated statements of comprehensive income.
The assets, liabilities, and operating results of CST and RGL have been included in the Company's consolidated financial statements from the dates of acquisition and have been assigned to the Forward Air reportable segment. The results of CST and RGL operations are reflected in the Company's consolidated statements of comprehensive income for the three and nine months ended September 30, 2014 from the dates of acquisition are as follows (in thousands, except per share data):

Three months ended September 30, 2014
 
Dates of acquisition to September 30, 2014
Operating revenue
$
21,100

 
$
49,975

Income from operations
2,517

 
4,804

Net income
1,553

 
2,934

Net income per share

 

Basic
$
0.05

 
$
0.10

Diluted
$
0.05

 
$
0.09

Acquisition of TQI

On March 4, 2013, the Company entered into a Stock Purchase Agreement ("Agreement") with all of the shareholders of TQI to acquire all of the outstanding stock. Pursuant to the terms of the Agreement and concurrently with the execution of the Agreement, the Company acquired all of the outstanding capital stock of TQI in exchange for $45,328 in net cash, $20,113 in assumed debt and an available earn-out of up to $5,000. The assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using the Company's cash on hand. Under the purchase agreement, $4,500 of the purchase price was paid into an escrow account to protect the Company against potential unknown liabilities. The amount held in escrow was remitted to the sellers in September 2014.
Pursuant to the terms of the Agreement, the Company could pay the former shareholders of TQI additional cash consideration from $0 to $5,000 if certain earnings before interest, taxes, depreciation and amortization ("EBITDA") goals are exceeded. The ultimate payout is based on the level by which TQI operating results exceed specified thresholds as defined by the Agreement in

7

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

both 2013 and 2014. At the time of acquisition the Company recognized an estimated earn-out liability of $615. The fair value of the earn-out liability (level 3) was estimated using an income approach based on the present value of probability-weighted amounts payable under a range of performance scenarios for 2013 and a discount rate of 10.9%. However, based on the most probable outcomes the estimated earn-out liability was reduced to $0 and recognized as a gain in our results from operations during the fourth quarter of 2013. If TQI's 2014 EBITDA performance does exceed the goals established by the Agreement, the final value of the liability could be significantly higher than the liability the Company has currently recorded.
The Company incurred total transaction costs related to the acquisition of approximately $943, which was expensed during the nine months ended September 30, 2013, in accordance with U.S. GAAP. These transaction costs were primarily included in "Other operating expenses" in the consolidated statements of comprehensive income.
The acquisition of TQI allows the Company to expand and diversify its complimentary truckload operations while maintaining its goal of offering high-value added services.
Included in the assumed liabilities of TQI is a liability for unrecognized tax benefits for $1,120. The liability is attributable to TQI not filing income tax returns in all jurisdictions in which it operated. The $1,120 consists of unrecognized tax benefits of $853 and related penalties and interest of $174 and $93, respectively. In accordance with the Agreement, the former shareholders of TQI have indemnified the Company against this tax exposure. As a result, the Company also recognized an offsetting receivable net of the estimated federal tax benefit for $728.
The assets, liabilities, and operating results of TQI have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the TQI reportable segment. The results of TQI reflected in the Company's consolidated statements of comprehensive income for the three and nine months ended September 30, 2013 from the date of acquisition (March 4, 2013) are as follows (in thousands, except per share data):

Three months ended September 30, 2013
 
March 4, 2013 to September 30, 2013
Operating revenue
$
12,431

 
$
28,545

Income from operations
934

 
1,936

Net income
547

 
1,180

Net income per share

 

Basic
$
0.02

 
$
0.04

Diluted
$
0.02

 
$
0.04

Allocations of Purchase Prices
The following table presents the allocations of the CST and TQI purchase prices to the assets acquired and liabilities assumed based on their estimated fair values and resulting residual goodwill (in thousands):

8

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014


CST

RGL
 
TQI

February 2, 2014

September 5, 2014
 
March 4, 2013
Tangible assets:





 


Accounts receivable
$
9,498


$

 
$
5,639

Prepaid expenses and other current assets
101



 
1,093

Property and equipment
2,132


209

 
5,103

Other assets
35



 
728

Deferred income taxes



 
947

Total tangible assets
11,766


209

 
13,510

Intangible assets:





 


Non-compete agreements
930


14

 
470

Trade name
500



 
1,000

Customer relationships
36,000


535

 
22,300

Goodwill
51,590


592

 
45,164

Total intangible assets
89,020


1,141

 
68,934

Total assets acquired
100,786


1,350

 
82,444





 

Liabilities assumed:



 

Current liabilities
6,573



 
4,725

Other liabilities



 
1,735

Debt and capital lease obligations
11,215



 
20,113

Deferred income taxes



 
10,543

Total liabilities assumed
17,788



 
37,116

Net assets acquired
$
82,998


$1,350
 
$
45,328

The above purchase price allocations for CST and RGL are 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 CST and RGL are based on the information that was available as of the acquisition dates through the date of this filing. The acquired definite-live intangible assets have the following useful lives:

Useful Lives

CST

RGL
 
TQI
Customer relationships
15 years

15 years
 
15 years
Non-competes
5 years

5 years
 
5 years
Trade names
2 years

-
 
5 years
The fair value of the non-compete agreements, trade name and customer relationship assets 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 calculate 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. The fair value of the acquired trade names were estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be paid if the Company did not own the applicable names and had to license the trade names. The Company derived the hypothetical royalty income from the projected revenues of CST and TQI. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.


9

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

Pro forma
The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if the acquisitions occurred as of January 1, 2013 (in thousands, except per share data).
 
Three months ended
 
Nine months ended
 
September 30, 2014
September 30, 2013
 
September 30, 2014
September 30, 2013
Operating revenue
$
201,477

$
187,924

 
$
571,986

$
529,022

Income from operations
26,906

25,470

 
70,983

68,012

Net income
16,744

15,814

 
44,254

43,128

Net income per share
 
 
 


Basic
$
0.55

$
0.52

 
$
1.44

$
1.44

Diluted
$
0.54

$
0.51

 
$
1.42

$
1.41

Goodwill
The following is a summary of the changes in goodwill for the nine months ended September 30, 2014. All goodwill, except the goodwill assigned to TQI, is deductible for tax purposes.
 
Forward Air
 
FASI
 
TQI
 
Total
 
 
Accumulated
 
 
Accumulated
 
 
Accumulated
 
 
 
Goodwill
Impairment
 
Goodwill
Impairment
 
Goodwill
Impairment
 
Net
Beginning balance, December 31, 2013
$
37,926

$

 
$
12,359

$
(6,953
)
 
$
45,164

$

 
$
88,496

CST and RGL acquisitions
52,182


 


 


 
52,182

Ending balance, September 30, 2014
$
90,108

$

 
$
12,359

$
(6,953
)
 
$
45,164

$

 
$
140,678

The Company conducted its annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 2014 and no impairment charges were required.  The first step of the goodwill impairment test is the Company assesses 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 calculates the fair value of the applicable reportable units, using a combination of discounted projected cash flows and market valuations for comparable companies as of the valuation date.  The Company's inputs into the fair value calculations for goodwill are classified within 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”). 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 calculated 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.

4.    Share-Based Payments

The Company’s general practice has been to make a single annual grant of share-based compensation 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 share”), and performance

10

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

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, net of estimated forfeitures, ratably over the requisite service period, or vesting period. The Company estimates forfeitures based upon historical experience.  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 used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted.  The weighted-average fair value of options granted and assumptions used to calculate their fair value during the three and nine months ended September 30, 2014 and 2013 were as follows:


Three months ended

September 30,
2014

September 30,
2013
Expected dividend yield
%

1.2
%
Expected stock price volatility
%

43.4
%
Weighted average risk-free interest rate
%

1.5
%
Expected life of options (years)
0.0


4.5

Weighted average grant date fair value
$


$
13



Nine months ended

September 30,
2014

September 30,
2013
Expected dividend yield
1.2
%

1.2
%
Expected stock price volatility
38.8
%

43.7
%
Weighted average risk-free interest rate
1.6
%

0.9
%
Expected life of options (years)
5.3


5.3

Weighted average grant date fair value
$
14


$
13


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


Three months ended September 30, 2014







Weighted-



Weighted-

Aggregate

Average



Average

Intrinsic

Remaining

Options

Exercise

Value

Contractual

(000)

Price

(000)

Term
Outstanding at June 30, 2014
1,431


$
28





Granted







Exercised
(51
)

29





Forfeited







Outstanding at September 30, 2014
1,380


$
28


$
25,745


2.4
Exercisable at September 30, 2014
1,174


$
26


$
24,377


1.8
 

11

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014


Three months ended

September 30,
2014

September 30,
2013
Shared-based compensation for options
$
343


$
329

Tax benefit for option compensation
$
131


$
124

Unrecognized compensation cost for options, net of estimated forfeitures
$
1,971


$
1,899



Nine months ended September 30, 2014







Weighted-



Weighted-

Aggregate

Average



Average

Intrinsic

Remaining

Options

Exercise

Value

Contractual

(000)

Price

(000)

Term
Outstanding at December 31, 2013
1,732


$
27





Granted
101


43





Exercised
(445
)

28





Forfeited
(8
)

38





Outstanding at September 30, 2014
1,380


$
28


$
25,745


2.4
Exercisable at September 30, 2014
1,174


$
26


$
24,377


1.8


Nine months ended

September 30,
2014

September 30,
2013
Shared-based compensation for options
$
989


$
1,076

Tax benefit for option compensation
$
377


$
381

Unrecognized compensation cost for options, net of estimated forfeitures
$
1,971


$
1,899


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:


Three months ended September 30, 2014



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at June 30, 2014
189


$
40



Granted
2


47



Vested





Forfeited





Outstanding and non-vested at September 30, 2014
191


$
40


$
7,606



12

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014


Three months ended

September 30,
2014

September 30,
2013
Shared-based compensation for non-vested shares
$
906


$
781

Tax benefit for non-vested share compensation
$
345


$
297

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
5,241


$
4,508



Nine months ended September 30, 2014



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2013
186


$
35



Granted
99


43



Vested
(94
)

43



Forfeited





Outstanding and non-vested at September 30, 2014
191


$
40


$
7,606



Nine months ended

September 30,
2014

September 30,
2013
Shared-based compensation for non-vested shares
$
2,726


$
2,289

Tax benefit for non-vested share compensation
$
1,039


$
872

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
5,241


$
4,508


Employee Activity - Performance Shares

The Company annually grants performance shares to key employees.  Under the terms of the performance share agreements, on the third anniversary of the grant date, the Company will issue to the employees a calculated number of common stock shares based on the three year performance of the Company’s common stock share price as compared to the share price performance of a selected peer group.  No shares may be issued if the Company share price performance outperforms 30% or less of the peer group, but the number of shares issued may be doubled if the Company share price performs better than 90% of the peer group.  The fair value of the performance shares was estimated using a Monte Carlo simulation. The weighted average assumptions used in the Monte Carlo calculation were as follows:


Nine months ended

September 30,
2014

September 30,
2013
Expected stock price volatility
32.5
%

34.5
%
Weighted average risk-free interest rate
0.7
%

0.4
%






13

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

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

Three months ended September 30, 2014



Weighted-

Aggregate

Performance

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at June 30, 2014
74


$
44



Granted





Additional shares awarded based on performance





Vested





Outstanding and non-vested at September 30, 2014
74


$
44


$
3,279



Three months ended

September 30,
2014

September 30,
2013
Shared-based compensation for performance shares
$
275


$
275

Tax benefit for performance share compensation
$
105


$
105

Unrecognized compensation cost for performance shares, net of estimated forfeitures
$
1,500


$
1,465



Nine months ended September 30, 2014



Weighted-

Aggregate

Performance

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2013
88


$
37



Granted
23


48



Additional shares awarded based on performance
19


30



Vested
(56
)

30



Outstanding and non-vested at September 30, 2014
74


$
44


$
3,279



Nine months ended

September 30,
2014

September 30,
2013
Shared-based compensation for performance shares
$
822


$
780

Tax benefit for performance share compensation
$
313


$
297

Unrecognized compensation cost for performance shares, net of estimated forfeitures
$
1,500


$
1,465


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 408,508 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. For the nine months

14

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

ended September 30, 2014, participants under the plan purchased 3,814 shares at an average price of $38.88 per share. For the nine months ended September 30, 2013, participants under the plan purchased 4,241 shares at an average price of $32.34 per share. The weighted-average fair value of each purchase right under the ESPP granted for the nine months ended September 30, 2014, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $8.97 per share. The weighted-average fair value of each purchase right under the ESPP granted for the nine months ended September 30, 2013, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $5.94 per share. Share-based compensation expense of $35 and $26 was recognized during the nine months ended September 30, 2014 and 2013, respectively.

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:

Three months ended September 30, 2014



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at June 30, 2014
14


$
43



Granted





Vested





Outstanding and non-vested at September 30, 2014
14


$
43


$
602



Three months ended

September 30,
2014

September 30,
2013
Shared-based compensation for non-vested shares
$
152


$
141

Tax benefit for non-vested share compensation
$
58


$
54

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
363


$
335



Nine months ended September 30, 2014



Weighted-

Aggregate

Non-vested

Average

Grant Date

Shares

Grant Date

Fair Value

(000)

Fair Value

(000)
Outstanding and non-vested at December 31, 2013
15


$
38



Granted
14


43



Vested
(15
)

38



Outstanding and non-vested at September 30, 2014
14


$
43


$
602



15

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014


Nine months ended

September 30,
2014

September 30,
2013
Shared-based compensation for non-vested shares
$
433


$
448

Tax benefit for non-vested share compensation
$
165


$
171

Unrecognized compensation cost for non-vested shares, net of estimated forfeitures
$
363


$
335


Non-employee Director Activity - Stock Options

In addition to the above activity, each May from 1995 to 2005 options were granted to the non-employee directors of the Company.  The options have terms of ten years and are fully exercisable.  At September 30, 2014, 7,500 options were outstanding and will expire May 2015.  At September 30, 2014, the weighted average exercise price per share and remaining contractual term for the outstanding options of non-employee directors were $26 and 0.6 years, respectively.

5.    Senior Credit Facility

In February 2012, the Company entered into a $150,000 credit facility. This facility has a term of five years and matures in February 2017. The Company entered into this larger credit facility in order to fund potential acquisitions, the repurchase of its common stock and the financing of other general business purposes. Interest rates for advances under the facility are LIBOR plus 1.1% based upon covenants related to total indebtedness to earnings (1.3% at September 30, 2014). The agreement contains certain covenants and restrictions, none of which are expected to significantly affect the Company's operations or ability to pay dividends. No assets are pledged as collateral against the credit facility. As of September 30, 2014, the Company had no borrowings outstanding under the senior credit facility. At September 30, 2014, the Company had utilized $9,749 of availability for outstanding letters of credit and had $140,251 of available borrowing capacity outstanding under the senior credit facility.  

6.    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,
2014
 
September 30,
2013
 
September 30, 2014
 
September 30, 2013
Numerator:
 
 
 
 
 
 
 
 
Numerator for basic and diluted income per share - net income
 
$
16,744

 
$
14,197

 
$
44,123

 
$
38,882

Denominator (in thousands):
 
 

 
 

 
 
 
 
Denominator for basic income per share - weighted-average shares
 
30,415

 
30,374

 
30,710

 
30,017

Effect of dilutive stock options (in thousands)
 
418

 
447

 
431

 
512

Effect of dilutive performance shares (in thousands)
 
37

 
13

 
41

 
9

Effect of dilutive non-vested shares and deferred stock units (in thousands)
 
62

 
152

 
52

 
139

Denominator for diluted income per share - adjusted weighted-average shares
 
30,932

 
30,986

 
31,234

 
30,677

Basic net income per share
 
$
0.55

 
$
0.47

 
$
1.44

 
$
1.30

Diluted net income per share
 
$
0.54

 
$
0.46

 
$
1.41

 
$
1.27


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:

16

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

 
September 30,
2014
 
September 30,
2013
Anti-dilutive stock options (in thousands)
108

 
186

Anti-dilutive performance shares (in thousands)

 

Total anti-dilutive shares (in thousands)
108

 
186


7.    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 2009.

For the three and nine months ended September 30, 2014 and 2013, the effective income tax rates varied from the statutory federal income tax rate of 35.0%, 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, 2014 was 37.5% compared to a rate of 36.1% for the same period in 2013.  The increase in the effective tax rate was primarily due to 2013 benefiting from a retroactive reinstatement of alternative fuel tax credits for 2012 and higher benefits obtained from disqualified dispositions by employees of previously non-deductible incentive stock options.

8.    Financial Instruments

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value based on their short-term nature.
 
The Company’s senior credit facility bears interest at LIBOR plus 1.1% based upon covenants related to total indebtedness to earnings.  Using interest rate quotes and discounted cash flows, the Company estimated the fair value of its outstanding capital lease obligations as follows:
 
 
 
September 30, 2014
 
 
Carrying Value
 
Fair Value
Capital leases
 
$
1,626

 
$
1,662


The Company's fair value calculations for the above financial instruments are classified within level 3 of the fair value hierarchy.

9.    Shareholders' Equity

During each quarter of 2013, the Company's Board of Directors declared a cash dividend of $0.10 per share of common stock. During each quarter of 2014 , the Company's Board of Directors declared a cash dividend of $0.12 per share of common stock. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.

On February 7, 2014, our Board of Directors approved a new stock repurchase authorization for up to two million shares of our common stock. During the three months ended September 30, 2014, the Company repurchased 434,993 for $19,987, or $45.95 per share. During the nine months ended September 30, 2014, the Company repurchased 881,979 for $39,972, or $45.32 per share. As of September 30, 2014, 1,118,021 shares remain that may be repurchased.


17

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014


10.    Commitments and Contingencies

From time to time, the Company is party to ordinary, routine litigation incidental to and arising in the normal course of business.  The Company does not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on its business, financial condition or results of operations.

The primary claims in the Company’s business relate to workers’ compensation, property damage, vehicle liability and medical benefits. Most of the Company’s insurance coverage provides for self-insurance levels with primary and excess coverage which management believes is sufficient to adequately protect the Company from catastrophic claims. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured limits, including provision for estimated claims incurred but not reported.
 
The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing hindsight and actuarial analysis to determine an estimate of probable losses on claims incurred but not reported.  Such losses could be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates. 

Because of the uncertainty of the ultimate resolution of outstanding claims, as well as uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially in the near term. However, no estimate can currently be made of the range of additional loss that is at least reasonably possible.

11.    Segment Reporting

The Company operates in three reportable segments based on information available to and used by the chief operating decision maker.  Forward Air provides time-definite transportation and logistics services to the deferred air freight market.  FASI provides pool distribution services primarily to regional and national distributors and retailers. TQI is a provider of high security and temperature-controlled logistics services, primarily truckload services, to the pharmaceutical and life science industries. The assets, liabilities, and operating results of our most recent acquisition, CST, have been assigned to the Forward Air reportable segment.
 
The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in Note 1 to the Consolidated Financial Statements included in the Company’s 2013 Annual Report on Form 10-K. Segment data includes intersegment revenues.  Assets and costs of the corporate headquarters are allocated to the segments based on usage.  The Company evaluates the performance of its segments based on net income.  The Company’s business is conducted in the U.S. and Canada.
 
The following tables summarize segment information about net income and assets used by the chief operating decision maker of the Company in making decisions regarding allocation of assets and resources as of and for the three and nine months ended September 30, 2014 and 2013.

18

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

 
 
Three months ended September 30, 2014
 
 
Forward Air
 
FASI
 
TQI
 
Eliminations
 
Consolidated
External revenues
 
$
159,025

 
$
30,462

 
$
11,990

 
$

 
$
201,477

Intersegment revenues
 
1,060

 
153

 
39

 
(1,252
)
 

Depreciation and amortization
 
5,669

 
1,502

 
944

 

 
8,115

Share-based compensation expense
 
1,608

 
47

 
21

 

 
1,676

Interest expense
 
167

 

 
5

 

 
172

Interest income
 
1

 

 

 

 
1

Income tax expense
 
8,970

 
686

 
279

 

 
9,935

Net income
 
15,010

 
1,097

 
637

 

 
16,744

Total assets
 
595,447

 
43,771

 
88,462

 
(197,735
)
 
529,945

Capital expenditures
 
2,064

 
1,610

 
7

 

 
3,681

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
 
Forward Air
 
FASI
 
TQI
 
Eliminations
 
Consolidated
External revenues
 
$
127,953

 
$
29,649

 
$
12,431

 
$

 
$
170,033

Intersegment revenues
 
838

 
179

 

 
(1,017
)
 

Depreciation and amortization
 
4,238

 
1,254

 
728

 

 
6,220

Share-based compensation expense
 
1,471

 
28

 
26

 

 
1,525

Interest expense
 
144

 
1

 

 

 
145

Interest income
 
6

 

 

 

 
6

Income tax expense
 
7,604

 
551

 
387

 

 
8,542

Net income
 
12,768

 
882

 
547

 

 
14,197

Total assets
 
464,538

 
42,043

 
84,343

 
(100,122
)
 
490,802

Capital expenditures
 
1,679

 
1,797

 
1,796

 

 
5,272



19

Table of Contents
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
September 30, 2014

 
 
Nine months ended September 30, 2014
 
 
Forward Air
 
FASI
 
TQI
 
Eliminations
 
Consolidated
External revenues
 
$
445,874

 
$
84,482

 
$
36,541

 
$

 
$
566,897

Intersegment revenues
 
2,664

 
390

 
230

 
(3,284
)
 

Depreciation and amortization
 
15,976

 
4,229

 
2,674

 

 
22,879

Share-based compensation expense
 
4,829

 
128

 
48

 

 
5,005

Interest expense
 
377

 
2

 
(24
)
 

 
355

Interest income
 
8

 

 

 

 
8

Income tax expense
 
24,367

 
1,034

 
1,036

 

 
26,437

Net income
 
40,196

 
1,693

 
2,234

 

 
44,123

Total assets
 
595,447

 
43,771

 
88,462

 
(197,735
)
 
529,945

Capital expenditures
 
24,766

 
6,165

 
6,170

 

 
37,101

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
Forward Air
 
FASI
 
TQI
 
Eliminations
 
Consolidated
External revenues
 
$
367,011

 
$
75,841

 
$
28,544

 
$

 
$
471,396

Intersegment revenues
 
1,969

 
540

 

 
(2,509
)
 

Depreciation and amortization
 
12,110

 
3,621

 
1,646

 

 
17,377

Share-based compensation expense
 
4,453

 
113

 
53

 

 
4,619

Interest expense
 
395

 
6

 

 

 
401

Interest income
 
29

 

 
1

 

 
30

Income tax expense
 
20,989

 
196

 
756

 

 
21,941

Net income
 
37,481

 
221

 
1,180

 

 
38,882

Total assets
 
464,538

 
42,043

 
84,343

 
(100,122
)
 
490,802

Capital expenditures
 
23,993

 
6,302

 
2,971

 

 
33,266



20

Table of Contents


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

Overview and Executive Summary
 
Our operations can be broadly classified into three principal segments:  Forward Air, Inc. (“Forward Air”), Forward Air Solutions, Inc. (“FASI”) and Total Quality, Inc. ("TQI").  
 
Through our Forward Air segment, we are a leading provider of time-definite surface transportation and related logistics services to the North American expedited ground freight market. We offer our customers local pick-up and delivery (Forward Air Complete™) and scheduled surface transportation of cargo as a cost-effective, reliable alternative to air transportation. We transport cargo that must be delivered at a specific time, but is less time-sensitive than traditional air freight. This type of cargo is frequently referred to in the transportation industry as deferred air freight. We operate our Forward Air segment through a network of terminals located on or near airports in 87 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and 12 regional hubs serving key markets.  We also offer our customers an array of logistics and other services including: expedited truckload brokerage (“TLX”); intermodal drayage; dedicated fleets; warehousing; customs brokerage; and shipment consolidation, deconsolidation and handling.

FASI provides pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States.  Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions.  Our primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains. We service these customers through a network of terminals and service centers located in 24 cities.
 
TQI is a provider of high security and temperature-controlled logistics services, primarily truckload services, to the pharmaceutical and life science industries. In addition to core pharmaceutical services, TQI provides truckload and less-than-truckload brokerage transportation services.

Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our ability to increase our earnings depends in significant part on our ability to increase the amount of freight and the revenue per pound for the freight shipped through our networks and to grow other lines of businesses, such as TLX, FASI and TQI, which will allow us to maintain revenue growth in challenging shipping environments.

Trends and Developments

Acquisitions of CST and RGL

On February 2, 2014, we acquired all of the outstanding capital stock of Central States Trucking Co. and Central States Logistics, Inc. (collectively referred to as “CST”). CST provides industry leading container and intermodal drayage services primarily within the Midwest region of the United States. CST also provides dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. We acquired all of the outstanding capital stock of CST in exchange for $83.0 million in net cash and $11.2 million in assumed debt. With the exception of the assumed capital leases, the assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using our cash on hand. The assets, liabilities, and operating results of CST have been included in the Forward Air reportable segment.
The acquisition of CST provides us with a scalable platform for which to enter the intermodal drayage space and thereby continuing to expand and diversify our service offerings. As part of our strategy to scale CST's operations, on September 5, 2014, CST acquired certain assets of Recob Great Lakes Express, Inc. ("RGL") for $1.4 million. The acquisition of RGL's assets provided an opportunity for CST to expand into an additional midwest market.
Acquisition of TQI
On March 4, 2013, we entered into a Stock Purchase Agreement ("Agreement") with all of the shareholders of TQI to acquire 100% of the outstanding stock. Pursuant to the terms of the Agreement and concurrently with the execution of the Agreement, we acquired all of the outstanding capital stock of TQI in exchange for $45.3 million in net cash, $20.1 million in assumed debt and an available earn-out of up to $5.0 million. The assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using our cash on hand.


21

Table of Contents


Results from Operations
During the three months ended September 30, 2014, we experienced a 18.5% increase in our consolidated revenues compared to the three months ended September 30, 2013 and a 17.5% increase in our operating income.

Forward Air's revenue increased 24.3% and operating income increased 17.5% for the three months ended September 30, 2014, compared to the same period in 2013. Approximately 67.4% of the Forward Air revenue increase and 69.4% of the Forward Air operating income increase for the three months ended September 30, 2014, compared to the same period in 2013 was attributable to the acquisition of CST. The remaining increase was the result of higher airport-to-airport volumes combined with a general rate increase initiated at the beginning of March 2014.

FASI revenue increased 2.7% and operating results improved $0.4 million for the three months ended September 30, 2014, compared to the same period in 2013.  The FASI revenue and operating income increases were primarily the result of rate increases implemented during the first quarter of 2014 and improvement in operating processes.

TQI's revenue decreased 3.2% and operating income was consistent for the three months ended September 30, 2014, compared to the same period in 2013. However, operating income as a percentage of revenue increased to 7.5% for the three months ended September 30, 2014 from 7.3% for the three months ended September 30, 2013. These increases were largely driven by operating efficiencies gained since the acquisition of TQI.

Fuel Surcharge

Our net fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and the tonnage transiting our network.  During the three and nine months ended September 30, 2014, total net fuel surcharge revenue increased 11.8% and 16.8%, respectively, as compared to the same periods in 2013. The increase in net fuel surcharge revenue for the three and nine months ended September 30, 2014 compared to the same periods in 2013 was mostly due to the acquisition of CST and increased FAI business volumes.

Goodwill

As of September 30, 2014, the carrying value of goodwill related to the Forward Air, FASI and TQI segments was $90.1 million, $5.4 million and $45.2 million, respectively. In accordance with our accounting policy, we conducted our annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 2014 and no impairment charges were required.

22

Table of Contents


Results of Operations

The following table sets forth our consolidated historical financial data for the three months ended September 30, 2014 and 2013 (in millions):
 
 
Three months ended
 
September 30,
2014
 
September 30,
2013
 
Change
 
Percent Change
Operating revenue
$
201.5

 
$
170.0

 
$
31.5

 
18.5
%
Operating expenses:
 
 
 
 
 
 
 
   Purchased transportation
85.9

 
75.2

 
10.7

 
14.2

   Salaries, wages, and employee benefits
45.7

 
39.1

 
6.6

 
16.9

   Operating leases
8.5

 
7.0

 
1.5

 
21.4

   Depreciation and amortization
8.1

 
6.2

 
1.9

 
30.6

   Insurance and claims
3.7

 
3.3

 
0.4

 
12.1

   Fuel expense
5.0

 
3.9

 
1.1

 
28.2

   Other operating expenses
17.7

 
12.4

 
5.3

 
42.7

      Total operating expenses
174.6

 
147.1

 
27.5

 
18.7

Income from operations
26.9

 
22.9

 
4.0

 
17.5

Other expense:
 
 
 
 
 
 
 
   Interest expense
(0.2
)
 
(0.1
)
 
(0.1
)
 
100.0

      Total other expense
(0.2
)
 
(0.1
)
 
(0.1
)
 
100.0

Income before income taxes
26.7

 
22.8

 
3.9

 
17.1

Income taxes
9.9

 
8.6

 
1.3

 
15.1

Net income
$
16.8

 
$
14.2

 
$
2.6

 
18.3
%

23

Table of Contents


The following table sets forth our historical financial data by segment for the three months ended September 30, 2014 and 2013 (in millions):
 
Three months ended
 
September 30,
 
Percent of
 
September 30,
 
Percent of
 
 
 
Percent
 
2014
 
Revenue
 
2013
 
Revenue
 
Change
 
Change
Operating revenue
 
 
 
 
 
 
 
 
 
 
 
Forward Air
$
160.1

 
79.4
 %
 
$
128.8

 
75.8
 %
 
$
31.3

 
24.3
 %
FASI
30.6

 
15.2

 
29.8

 
17.5

 
0.8

 
2.7

TQI
12.0

 
6.0

 
12.4

 
7.3

 
(0.4
)
 
(3.2
)
Intercompany eliminations
(1.2
)
 
(0.6
)
 
(1.0
)
 
(0.6
)
 
(0.2
)
 
20.0

            Total
201.5

 
100.0

 
170.0

 
100.0

 
31.5

 
18.5

 
 
 
 
 
 
 
 
 
 
 
 
Purchased transportation
 
 
 
 
 
 
 
 
 
 
 
Forward Air
71.9

 
44.9

 
59.9

 
46.5

 
12.0

 
20.0

FASI
8.8

 
28.8

 
9.1

 
30.5

 
(0.3
)
 
(3.3
)
TQI
6.0

 
50.0

 
6.9

 
55.6

 
(0.9
)
 
(13.0
)
Intercompany eliminations
(0.8
)
 
66.7

 
(0.7
)
 
70.0

 
(0.1
)
 
14.3

            Total
85.9

 
42.6

 
75.2

 
44.2

 
10.7

 
14.2

 
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages and employee benefits
 
 
 
 
 
 
 
 
 
 
 
Forward Air
33.1

 
20.7

 
27.3

 
21.2

 
5.8

 
21.2

FASI
10.4

 
34.0

 
10.0

 
33.6

 
0.4

 
4.0

TQI
2.2

 
18.3

 
1.8

 
14.5

 
0.4

 
22.2

            Total
45.7

 
22.7

 
39.1

 
23.0

 
6.6

 
16.9

 
 
 
 
 
 
 
 
 
 
 
 
Operating leases
 
 
 
 
 
 
 
 
 
 
 
Forward Air
6.5

 
4.1

 
4.9

 
3.8

 
1.6

 
32.7

FASI
2.0

 
6.5

 
2.1

 
7.0

 
(0.1
)
 
(4.8
)
TQI

 

 

 

 

 

            Total
8.5

 
4.2

 
7.0

 
4.1

 
1.5