FORWARD AIR CORP 10-Q

Item 1. Financial Statements (Unaudited). Forward Air Corporation Condensed Consolidated Balance Sheets (unaudited and in thousands, except share and per share amounts) March 31, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 32,028 $ 45,822 Accounts receivable, less allowance of $ 3,314 in 2023 and $ 3,158 in 2022 201,385 221,028 Other current assets 24,381 37,465 Total current assets 257,794 304,315 Property and equipment, net of accumulated depreciation and amortization of $ 226,026 in 2023 and $ 220,669 in 2022 252,932 249,080 Operating lease right-of-use assets 150,282 141,865 Goodwill 356,627 306,184 Other acquired intangibles, net of accumulated amortization of $ 127,786 in 2023 and $ 123,325 in 2022 155,726 154,801 Other assets 53,205 51,831 Total assets $ 1,226,566 $ 1,208,076 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 42,994 $ 54,601 Accrued expenses 52,807 54,291 Other current liabilities 6,207 3,956 Current portion of debt and finance lease obligations 11,619 9,444 Current portion of operating lease liabilities 52,143 47,106 Total current liabilities 165,770 169,398 Finance lease obligations, less current portion 18,328 15,844 Long-term debt, less current portion and debt issuance costs 150,681 106,588 Operating lease liabilities, less current portion 102,697 98,865 Other long-term liabilities 50,507 59,044 Deferred income taxes 52,950 51,093 Shareholders’ equity: Preferred stock, $ 0.01 par value: Authorized shares - 5,000,000 ; no shares issued or outstanding in 2023 and 2022 — — Common stock, $ 0.01 par value: Authorized shares - 50,000,000 ; issued and outstanding shares - 26,052,877 in 2023 and 26,461,293 in 2022 261 265 Additional paid-in capital 274,007 270,855 Retained earnings 411,365 436,124 Total shareholders’ equity 685,633 707,244 Total liabilities and shareholders’ equity $ 1,226,566 $ 1,208,076 The accompanying notes are an integral part of the condensed consolidated financial statements. 3 Table of Contents Forward Air Corporation Condensed Consolidated Statements of Comprehensive Income (unaudited and in thousands, except per share amounts) Three Months Ended March 31, 2023 March 31, 2022 Operating revenues $ 427,066 $ 466,961 Operating expenses: Purchased transportation 185,217 224,832 Salaries, wages and employee benefits 79,520 86,081 Operating leases 27,248 22,673 Depreciation and amortization 13,635 11,130 Insurance and claims 13,782 11,968 Fuel expense 5,784 5,865 Other operating expenses 51,371 47,061 Total operating expenses 376,557 409,610 Income from operations 50,509 57,351 Other expense: Interest expense, net ( 2,355 ) ( 784 ) Total other expense ( 2,355 ) ( 784 ) Income before income taxes 48,154 56,567 Income tax expense 11,786 13,881 Net income and comprehensive income $ 36,368 $ 42,686 Net income per share Basic $ 1.37 $ 1.57 Diluted $ 1.37 $ 1.57 Dividends per share $ 0.24 $ 0.24 The accompanying notes are an integral part of the condensed consolidated financial statements. 4 Table of Contents Forward Air Corporation Condensed Consolidated Statements of Cash Flows (unaudited and in thousands) Three Months Ended March 31, 2023 March 31, 2022 Operating activities: Net income from operations $ 36,368 $ 42,686 Adjustments to reconcile net income from operations to net cash provided by operating activities Depreciation and amortization 13,635 11,130 Change in fair value of earn-out liability — ( 294 ) Share-based compensation expense 3,149 2,761 Provision for revenue adjustments 2,157 1,304 Deferred income tax expense 1,857 1,643 Other ( 300 ) 132 Changes in operating assets and liabilities, net of effects from the purchase of acquired businesses: Accounts receivable 16,669 ( 30,278 ) Other receivables — 3,609 Other current and noncurrent assets 11,422 13,818 Accounts payable and accrued expenses ( 18,964 ) 15,975 Net cash provided by operating activities 65,993 62,486 Investing activities: Proceeds from sale of property and equipment 1,815 511 Purchases of property and equipment ( 6,789 ) ( 9,908 ) Purchases of a business, net of cash acquired ( 56,567 ) — Net cash used in investing activities ( 61,541 ) ( 9,397 ) Financing activities: Repayments of finance lease obligations ( 2,118 ) ( 1,070 ) Proceeds from credit facility 45,000 — Payments on credit facility — ( 375 ) Proceeds from issuance of common stock upon stock option exercises — 206 Payments of dividends to shareholders ( 6,345 ) ( 6,502 ) Repurchases and retirement of common stock ( 50,491 ) ( 17,780 ) Payment of minimum tax withholdings on share-based awards ( 4,292 ) ( 3,254 ) Net cash used in financing activities ( 18,246 ) ( 28,775 ) Net (decrease) increase in cash and cash equivalents ( 13,794 ) 24,314 Cash and cash equivalents at beginning of period 45,822 37,316 Cash and cash equivalents at end of period $ 32,028 $ 61,630 The accompanying notes are an integral part of the condensed consolidated financial statements. 5 Table of Contents Forward Air Corporation Condensed Consolidated Statements of Shareholders’ Equity (unaudited and in thousands) Common Stock Additional Paid-in Capital Retained Earnings Total Shareholders’ Equity Shares Amount Balance at December 31, 2022 26,462 $ 265 $ 270,855 $ 436,124 $ 707,244 Net income — — — 36,368 36,368 Share-based compensation expense — — 3,149 — 3,149 Payment of dividends to shareholders — — 4 ( 6,349 ) ( 6,345 ) Payment of minimum tax withholdings on share-based awards ( 40 ) — — ( 4,292 ) ( 4,292 ) Repurchases and retirement of common stock ( 474 ) ( 5 ) — ( 50,486 ) ( 50,491 ) Issuance of share-based awards 105 1 ( 1 ) — — Balance at March 31, 2023 26,053 $ 261 $ 274,007 $ 411,365 $ 685,633 Common Stock Additional Paid-in Capital Retained Earnings Total Shareholders’ Equity Shares Amount Balance at December 31, 2021 26,969 $ 270 $ 258,474 $ 334,910 $ 593,654 Net income — — — 42,686 42,686 Stock options exercised 3 — 206 — 206 Share-based compensation expense — — 2,761 — 2,761 Payment of dividends to shareholders — — 4 ( 6,506 ) ( 6,502 ) Payment of minimum tax withholdings on share-based awards ( 30 ) — — ( 3,254 ) ( 3,254 ) Repurchases and retirement of common stock ( 176 ) ( 2 ) — ( 17,778 ) ( 17,780 ) Issuance of share-based awards 96 1 ( 1 ) — — Balance at March 31, 2022 26,862 $ 269 $ 261,444 $ 350,058 $ 611,771 The accompanying notes are an integral part of the condensed consolidated financial statements. 6 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 1. Description of Business and Basis of Presentation Basis of Presentation and Principles of Consolidation Forward Air Corporation and its subsidiaries (“Forward Air ” or the “Company ” ) is a leading asset-light freight and logistics company. The Company has two reportable segments: Expedited Freight and Intermodal. The Company conducts business in the United States, Canada, and Mexico. The Expedited Freight segment provides expedited regional, inter-regional and national less-than-truckload (“LTL ” ), truckload and final mile services. Expedited Freight also offers customers local pick-up and delivery and other services including shipment consolidation and deconsolidation, warehousing, customs brokerage and other handling services. The 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. The Company’s condensed consolidated financial statements include Forward Air Corporation and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position, results of operations, and cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Results for interim periods are not necessarily indicative of the results for the year. 2. Revenue Recognition Revenue is recognized when the Company satisfies the performance obligation by the delivery of a shipment in accordance with contractual agreements, bills of lading (“BOLs”) and general tariff provisions. The amount of revenue recognized is measured as the consideration the Company expects to receive in exchange for those services pursuant to a contract with a customer. A contract exists once the Company enters into a contractual agreement with a customer. The Company does not recognize revenue in cases where collectibility is not probable, and defers recognition until collection is probable or payment is received. The Company generates revenue from the delivery of a shipment and the completion of related services. Revenue for the delivery of a shipment is recorded over time to coincide with when customers simultaneously receive and consume the benefits of the delivery services. Accordingly, revenue billed to a customer for the transportation of freight are recognized over the transit period as the performance obligation to the customer is satisfied. The Company determines the transit period for a shipment based on the pick-up date and the delivery date, which may be estimated if delivery has not occurred as of a reporting period. The determination of the transit period and how much of it has been completed as of a given reporting date may require the Company to make judgments that impact the timing of revenue recognized. For delivery of shipments with a pick-up date in one reporting period and a delivery date in another reporting period, the Company recognizes revenue based on relative transit time in each reporting period. A portion of the total revenue to be billed to the customer after completion of a delivery is recognized in each reporting period based on the percentage of total transit time that has been completed at the end of the applicable reporting period. Upon delivery of a shipment or related service, customers are billed according to the applicable payment terms. Related services are a separate performance obligation and include accessorial charges such as terminal handling, storage, equipment rentals and customs brokerage. Revenue is classified based on the line of business as the Company believes that best depicts the nature, timing and amount of revenue and cash flows. For all lines of business, the Company records revenue on a gross basis as it is the principal 7 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 in the transaction as the Company has discretion to determine the amount of consideration. Additionally, the Company has the discretion to select drivers and other vendors for the services provided to customers. These factors, discretion in the amount of consideration and the selection of drivers and other vendors, support revenue recognized on a gross basis. 3. Acquisitions Expedited Freight Acquisitions In January 2023, the Company acquired certain assets of Land Air Express, Inc. (“Land Air”) for $ 56,567 . Land Air, headquartered in Bowling Green, Kentucky, offers a variety of less-than-truckload services including guaranteed, standard, exclusive, same day, hot shot and pickup and delivery, and operates in over 25 terminals across the United States. The acquisition of Land Air will accelerate the expansion of the Company's national terminal footprint, particularly in the middle part of the United States, and is expected to strategically position the Company to better meet the current and future needs of customers. The acquisition was funded using cash flow from operations and proceeds from the Company's credit facility. The results of Land Air have been included in the Company ’ s Condensed Consolidated Financial Statements as of and from the date of acquisition. The associated goodwill has been included in the Company's Expedited Freight reportable segment. Intermodal Acquisitions In May 2022, the Company acquired certain assets and liabilities of Edgmon Trucking, LLC (“Edgmon”) for $ 40,993 and a potential earn-out of up to $ 5,000 , based on the achievement of certain profit contribution milestones over a nineteen month period, beginning May 31, 2022. The estimated fair value of the earn-out liability on the date of acquisition was immaterial. The fair value was based on the estimated certain profit contribution during the nineteen month period and was calculated using the option pricing method. Edgmon, headquartered in Kent, Washington, operates a terminal in Kent and a yard in Seattle, servicing both the Port of Seattle and the Port of Tacoma. The acquisition of Edgmon marks the Company’s first Intermodal location on the West Coast, a key area of expansion in the Intermodal strategic growth plan. The acquisition was funded using cash flows from operations. The results of Edgmon have been included in the Company’s Condensed Consolidated Financial Statements as of and from the date of acquisition. The associated goodwill has been included in the Company’s Intermodal reportable segment. 8 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 Fair Value of Assets Acquired and Liabilities Assumed Assets acquired and liabilities assumed as of the acquisition date are presented in the following table: Edgmon Land Air May 31, 2022 January 31, 2023 Tangible assets: Accounts receivable $ 4,963 $ — Property and equipment 613 738 Total tangible assets 5,576 738 Intangible assets: Customer relationships 13,051 4,513 Non-compete agreements 172 873 Goodwill 22,195 50,443 Total intangible assets 35,418 55,829 Total assets acquired 40,994 56,567 Liabilities assumed: Current liabilities 1 — Total liabilities assumed 1 — Net assets acquired $ 40,993 $ 56,567 The preliminary purchase price for Edgmon and Land Air have been allocated to assets acquired and liabilities assumed based on the the Company’s best estimates and assumptions using the information available as of the acquisition date through the date of this filing. The provisional measurements of identifiable assets and liabilities, and the resulting goodwill related to these acquisitions are subject to adjustments in subsequent periods as the Company finalizes its purchase price allocation, including the third-party valuations. The Company expects to finalize the valuations as soon as practicable, but no later than one year from the acquisition date. The estimated useful life of acquired intangible assets as of the acquisition date are summarized in the following table: Estimated Useful Lives Edgmon Land Air Customer relationships 9 years 12 years Non-compete agreements 5 years 5 years 9 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 4. Goodwill and Intangible Assets Goodwill Changes in the carrying amount of goodwill during the three months ended March 31, 2023 are summarized as follows: Expedited Freight Intermodal Consolidated Balance as of December 31, 2022 $ 169,288 $ 136,896 $ 306,184 Acquisition 50,443 — 50,443 Balance as of March 31, 2023 $ 219,731 $ 136,896 $ 356,627 The Company ’ s accumulated goodwill impairment is $ 25,686 related to impairment charges the Company recorded during 2016 pertaining to its Truckload Services reporting unit. The Truckload Services reporting unit operates within the Expedited Freight reportable segment. As of March 31, 2023, approximately $ 277,484 of goodwill is deductible for tax purposes. Goodwill is tested for impairment on an annual basis and more often if indications of impairment exist. The Company conducts its annual impairment analyses as of June 30 each year. There have been no indicators of impairment during the three months ended March 31, 2023. Other Intangible Assets Changes in the carrying amount of acquired intangible assets during the three months ended March 31, 2023 are summarized as follows: Gross Carrying Amount Customer Relationships 1 Non-Compete Agreements Trade Names Total Balance as of December 31, 2022 $ 267,870 $ 8,756 $ 1,500 $ 278,126 Acquisition 4,513 873 — 5,386 Balance as of March 31, 2023 $ 272,383 $ 9,629 $ 1,500 $ 283,512 Accumulated Amortization Customer Relationships 1 Non-Compete Agreements Trade Names Total Balance as of December 31, 2022 $ 114,380 $ 7,445 $ 1,500 $ 123,325 Amortization expense 4,306 155 — 4,461 Balance as of March 31, 2023 $ 118,686 $ 7,600 $ 1,500 $ 127,786 1 Carrying value as of March 31, 2023 and December 31, 2022 is inclusive of $ 16,501 of accumulated impairment. 10 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 5. Stock Incentive Plans Stock Incentive Plan The Company recorded share-based compensation expense as follows for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 March 31, 2022 Total share-based compensation expense $ 2,810 $ 2,422 In May 2016, the Company adopted the 2016 Omnibus Incentive Compensation Plan (the “Omnibus Plan”) for the issuance of up to 2,000 common shares to employees. As of March 31, 2023, appro ximately 564 shares remain available for grant under the Omnibus Plan. Stock Options Certain executives are eligible to receive grants of stock options. Stock options vest over a three-year period from the date of grant. Share-based compensation expense associated with these awards is amortized ratably over the vesting period. The Company estimates the fair value of the grants using the Black-Scholes option-pricing model. Stock option transactions during the three months ended March 31, 2023 were as follows: Stock Options Weighted-Average Exercise Price Outstanding as of January 1 376 $ 66.13 Granted 55 115.42 Exercised — — Forfeited ( 61 ) 44.97 Outstanding as of March 31 370 $ 76.91 As of March 31, 2023, the total share-based compensation expense related to unvested stock options not yet recognized was $ 3,316 , and the weighted-average period over which it is expected to be recognized is approximately two years . Restricted Shares The Company’s primary long-term incentive plan is a restricted share award plan that entitles employees to receive shares of the Company’s common stock subject to vesting requirements based on continued employment. Shares granted under the restricted share award plan are restricted from sale or transfer until vesting, and the restrictions lapse in three equal installments beginning one year after the date of grant. Dividends are paid in cash on a current basis throughout the vesting period. Share-based compensation expense associated with these awards is amortized ratably over the requisite service period. 11 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 Restricted share transactions during the three months ended March 31, 2023 were as follows: Restricted Shares Weighted-Average Grant Date Fair Value Outstanding as of January 1 151 $ 87.82 Granted 76 115.14 Vested ( 74 ) 81.01 Forfeited ( 2 ) 103.36 Outstanding as of March 31 151 $ 104.74 As of March 31, 2023, the total share-based compensation expense related to restricted shares not yet recognized was $ 14,613 , and the weighted-average period over which it is expected to be recognized is approximately two years . Performance Awards Performance awards are based on achieving certain financial targets, such as targets for earnings before interest, taxes, depreciation and amortization, and the Company’s total shareholder return as compared to the total shareholder return of a selected peer group, as determined by the Board. Performance targets are set at the beginning of each three-year measurement period. Share-based compensation expense associated with these awards is amortized ratably over the vesting period. Depending on the financial target, the compensation expense is determined based on the projected assessment of the level of performance that will be achieved. The Company estimates the fair value of the grants with a financial target based on the Company’s total shareholder return using a Monte Carlo simulation model. Performance award transactions during the three months ended March 31, 2023 were as follows assuming target levels of performance: Performance Awards Weighted-Average Grant Date Fair Value Outstanding as of January 1 70 $ 87.74 Granted 18 120.27 Additional shares awarded based on performance 4 68.75 Earned ( 31 ) 69.10 Forfeited or unearned — — Outstanding as of March 31 61 $ 105.95 As of March 31, 2023, the total share-based compensation expense related to unearned performance awards not yet recognized, assuming the Company’s current projected assessment of the level of performance that will be achieved, was $ 4,345 , and the weighted-average period over which it is expected to be recognized is approximately two years . Employee Stock Purchase Plan Under the 2005 Employee Stock Purchase Plan (the “ESPP”), the Company is authorized to issue up to a remaining 314 shares of common stock to employees. These shares may be issued at a price equal to 90 % of the lesser of the market value on th e 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. No shares were issued during the three months ended March 31, 2023. 12 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 Director Restricted Shares Under the Amended and Restated Non-Employee Director Stock Plan (the “Amended Plan”), approved in May 2007 and further amended in February 2013 and January 2016, up to 360 of common shares may be issued. As of March 31, 2023, approxim ately 60 shares re main available for grant under the Amended Plan. Under the Amended Plan, each non-employee director receives an annual grant of restricted shares of the Company’s common stock. The restricted shares vest on the earlier of (a) the day immediately prior to the first annual shareholder meeting that occurs after the grant date or (b) one year after the grant date. Director restricted share transactions during the three months ended March 31, 2023 were as follows: Director Restricted Shares Weighted-Average Grant Date Fair Value Outstanding as of January 1 15 $ 93.70 Granted — — Vested — — Forfeited — — Outstanding as of March 31 15 $ 93.70 For both the three months ended March 31, 2023 and 2022, the Company recorded $ 339 of share-based compensation expense associated with these grants. As of March 31, 2023, the total share-based compensation expense related to the restricted shares not yet recognized was $ 154 , and the weighted-average period over which it is expected to be recognized is approximately less than one year . 6. Indebtedness Long-term debt consisted of the following as of March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 Credit facility, expires 2026 $ 153,500 $ 108,500 Debt issuance costs ( 389 ) ( 418 ) 153,111 108,082 Less: Current portion of long-term debt ( 2,430 ) ( 1,494 ) Total long-term debt, less current portion $ 150,681 $ 106,588 13 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 In September 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 maturity date of the Facility was September 29, 2022. In April 2020, the Company entered into the first amendment to the Facility, which increased the maximum aggregate principal amount to $ 225,000 . The Facility could have been increased by up to $ 25,000 to a maximum aggregate principal amount of $ 250,000 pursuant to the terms of the amended credit agreement, subject to the lenders’ agreement to increase their commitments or the addition of new lenders extending such commitments. In July 2021, the Company entered into the second amendment to the Facility, which extended the maturity date to July 20, 2026 and changed the interest rate options available under the Facility. In December 2021, the Company entered into the third amendment to the Facility, which increased the amount available for borrowing under the Facility to $ 450,000 , consisting of a $ 300,000 revolving line of credit and a term loan of $ 150,000 . In connection with the third amendment, the Company borrowed $ 150,000 under the term loan and simultaneously repaid $ 150,000 on the revolving line of credit from the borrowings received. Under the third amendment, the Facility may be increased by up to $ 75,000 to a maximum aggregate principal amount of $ 525,000 pursuant to the terms of the amended 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. As of March 31, 2023 and December 31, 2022, the Company had $ 234,966 and $ 279,966 , respectively, of available borrowing capacity under the Facility. The Facility contains covenants that, among other things, restrict the ability of the Company, 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. The Company also has to fulfill financial covenants with respect to a leverage ratio and an interest coverage ratio. As of March 31, 2023, the Company was in compliance with the aforementioned covenants. Under the amended Facility, interest accrues on the amounts outstanding under the Facility at the Company ’s option, at either (1) Bloomberg Short-Term Bank Yield Index rate (the “BSBY Rate ”), which cannot be less than zero , plus a margin ranging from 1.25 % to 1.75 % based on the Company ’s leverage ratio, or (2) the base rate, which cannot be less than 2.00 %. The base rate is the highest of (i) the federal funds rate, which cannot be less than zero , plus 0.50 %, (ii) the administrative agent ’s prime rate and (iii) the BSBY Rate, which cannot be less than zero , plus 1.00 %, plus a margin ranging from 0.00 % to 0.50 % based on the Company ’s leverage ratio. Interest is payable in arrears for each loan that is based on the BSBY rate on the last day o f the interest period applicable to each loan, and interest is payable in arrears on loans not based on the BSBY rate on the last day of each quarter. The weighted average interest rate on the outstanding borrowings under the revolving credit facility was 5.96 % and 1.44 % for the three months ended March 31, 2023, and 2022, respectively. Letters of Credit The Company has an arrangement under the Facility to issue letters of credit, which guarantee the Company’s obligations for potential claims exposure for insurance coverage. As of both March 31, 2023 and December 31, 2022, outstanding letters of credit totaled $ 20,034 . 14 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 7. Net Income Per Share Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during each period. Restricted shares have non-forfeitable rights to dividends and as a result, are considered participating securities for purposes of computing net income per common share pursuant to the two-class method. Diluted net income per common share assumes the exercise of outstanding stock options and the vesting of performance share awards using the treasury stock method when the effects of such assumptions are dilutive. A reconciliation of net income attributable to Forward Air and weighted-average common shares outstanding for purposes of calculating basic and diluted net income per share during the three months ended March 31, 2023 and 2022 is as follows: Three Months Ended March 31, 2023 March 31, 2022 Numerator: Net income attributable to Forward Air $ 36,368 $ 42,686 Income allocated to participating securities ( 185 ) ( 248 ) Numerator for basic and diluted net income per share $ 36,183 $ 42,438 Denominator: Denominator for basic net income per share - weighted-average number of common shares outstanding 26,350 26,947 Dilutive stock options and performance share awards 129 153 Denominator for diluted net income per share - weighted-average number of common shares and common share equivalents outstanding 26,479 27,100 Net income per share: Basic $ 1.37 $ 1.57 Diluted $ 1.37 $ 1.57 The number of shares that were not included in the calculation of net income per diluted share because to do so would have been anti-dilutive for the three months ended March 31, 2023 and 2022 are as follows: Three Months Ended March 31, 2023 March 31, 2022 Anti-dilutive stock options 112 64 Anti-dilutive performance shares 18 14 Anti-dilutive restricted shares and deferred stock units 74 — Total anti-dilutive shares 204 78 15 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 8. Income Taxes For the three months ended March 31, 2023 and 2022, the Company recorded income tax expense of $ 11,786 and $ 13,881 , respectively. The effective tax rate of 24.5 % for the three months ended March 31, 2023 varied from the statutory United States federal income tax rate of 21.0% primarily due to the effect of state income taxes, net of the federal benefit, and non-deductible executive compensation, partially offset by excess tax benefits realized on share-based awards. The effective tax rate of 24.5 % for the three months ended March 31, 2022 varied from the statutory United States federal income tax rate of 21.0% primarily due to the effect of state income taxes, net of the federal benefit, and non-deductible executive compensation, partially offset by excess tax benefits realized on share-based awards. The Company recognizes income tax benefits from uncertain tax positions where the realization of the ultimate benefit is uncertain. As of both March 31, 2023 and December 31, 2022, the Company had $ 198 of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. As of both March 31, 2023 and December 31, 2022, the Company had accrued interest and penalties related to unrecognized tax benefits of $ 85 . 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 2015. The sale of the Pool Distribution business in February 2021 resulted in a capital loss in the amount of $ 4,253 , which expires in 2026. The Company concluded that it was more likely than not that the capital loss carryforward will not be realized and therefore, established a valuation allowance of $ 4,253 to reserve against its capital loss carryforward. The Company also maintains a valuation allowance to reserve against its state net operating loss carryforwards of $ 395 . A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assessed the likelihood that its deferred tax assets would be recovered from estimated future taxable income and available tax planning strategies. In making this assessment, all available evidence was considered including economic climate, as well as reasonable tax planning strategies. The Company believes it is more likely than not that it will realize its remaining net deferred tax assets, net of the valuation allowance, in future years. 16 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 9. Fair Value of Financial Instruments Cash and cash equivalents, accounts receivable, and accounts payable are valued at their carrying amounts in the Company’s Condensed Consolidated Balance Sheets, due to the immediate or short-term maturity of these financial instruments. The carrying amount of long-term debt under the Company’s credit facility approximates fair value based on the borrowing rates currently available to the Company for a loan with similar terms and average maturity. As of March 31, 2023, the estimated fair value of the Company’s finance lease obligation, based on current borrowing rates, was $ 27,215 , compared to its carrying value of $ 27,517 . As of December 31, 2022, the estimated fair value of the Company’s finance lease obligation, based on current borrowing rates, was $ 23,210 , compared to its carrying value of $ 23,794 . 10. Shareholders’ Equity Cash Dividends During the first quarter of 2023, the Board declared and the Company has paid a quarterly cash dividend of $ 0.24 per common share. During each quarter of 2022, the Company’s Board of Directors declared and the Company has paid a quarterly cash dividend of $ 0.24 per common share On April 28, 2023, the Board declared a quarterly cash dividend of $ 0.24 per common share that will be paid in the second quarter of 2023. Share Repurchase Program On February 5, 2019, the Board of Directors approved a stock repurchase plan authorizing the repurchase of up to 5,000 shares of the Company’s common stock (the “2019 Repurchase Plan”). The 2019 Repurchase Plan expires when the shares authorized for repurchase are exhausted or the 2019 Repurchase Plan is canceled. During the three months ended March 31, 2023, the Company repurchased through open market transactions 474 shares of common stock for $ 50,491 , or an average of $ 105.38 per share, and during the three months ended March 31, 2022, the Company repurchased through open market transactions 176 shares of common stock for $ 17,780 , or an average of $ 100.86 per share. All shares received were retired upon receipt, and the excess of the purchase price over the par value per share was recorded to “Retained Earnings ” in the Condensed Consolidated Balance Sheets. As of March 31, 2023, the remaining shares permitted to be repurchased under the 2019 Repurchase Plan were approximately 1,759 shares. 11. Commitments and Contingencies Contingencies The Company is party to various legal claims and actions incidental to its business, including claims related to vehicle liability, workers’ compensation, property damage and employee medical benefits. The Company accrues for the uninsured portion of contingent losses from these and other pending claims when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Based on the knowledge of the facts, the Company believes the resolution of claims and pending litigation, taking into account existing reserves, will not have a material adverse effect on our condensed consolidated financial statements. Moreover, the results of complex legal proceedings are difficult to predict, and the Company’s view of these matters may change in the future as the litigation and related events unfold. Insurance coverage provides the Company with primary and excess coverage for claims related to vehicle liability, workers’ compensation, property damage and employee medical benefits. 17 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 For vehicle liability, the Company retains a portion of the risk. Below is a summary of the Company’s risk retention on vehicle liability insurance coverage maintained by the Company up to $ 10,000 (in thousands): Company Risk Retention Frequency Layer Policy Term Expedited Freight¹ LTL business $ 5,000 Occurrence/Accident² $ 0 to $ 5,000 10/1/2022 to 10/1/2023 Truckload business $ 2,000 Occurrence/Accident² $ 0 to $ 2,000 10/1/2022 to 10/1/2023 LTL, Truckload and Intermodal businesses $ 5,000 Policy Term Aggregate³ $ 5,000 to $ 10,000 10/1/2022 to 10/1/2023 Intermodal $ 1,000 Occurrence/Accident² $ 0 to $ 1,000 10/1/2022 to 10/1/2023 ¹ Excluding the Final Mile business, which is primarily a brokered service. ² For each and every accident/incident, the Company is responsible for damages and defense up to these amounts, regardless of the number of claims associated with any accident/incident. ³ During the Policy Term, the Company is responsible for damages and defense within the stated Layer up to the stated, aggregate amount of Risk Retention before insurance will continue. Also, from time to time, when brokering freight, the Company may face claims for the “negligent selection” of outside, contracted carriers that are involved in accidents, and the Company maintains third-party liability insurance coverage with a $ 100 deductible per occurrence for most of its brokered services. Additionally, the Company maintains workers’ compensation insurance with a self-insured retention of $ 500 per occurrence. Insurance coverage in excess of the self-insured retention limit is an important part of the Company’s risk management process. The Company accrues for the costs of the uninsured portion of pending claims within the self-insured retention based on the nature and severity of individual claims and historical claims development trends. The Company believes the recorded reserves are sufficient for all incurred claims up to the self-insured retention limits, including an estimate for claims incurred but not reported. However, estimating the number and severity of claims, as well as related judgment or settlement amounts is inherently difficult, and the Company may fail to establish sufficient insurance reserves and adequately estimate for future insurance claims. Since the ultimate resolution of outstanding claims as well as claims incurred but not reported is uncertain, it is possible that the reserves recorded for these losses could change materially in the near term. Although, an estimate cannot be made of the range of additional loss that is at least reasonably possible. 12. Segment Reporting The Company has two reportable segments: Expedited Freight and Intermodal. The Company evaluates segment performance based on income from operations. Segment results include intersegment revenues and shared costs. Costs related to the corporate headquarters, shared services and shared assets, such as trailers, are allocated to each segment based on usage. Shared assets are not allocated to each segment, but rather the shared assets, such as trailers, are allocated to the Expedited Freight segment. Corporate includes revenues and expenses as well as assets that are not attributable to any of the Company’s reportable segments. The accounting policies applied to each segment are the same as those described in the Summary of Significant Accounting Policies as disclosed in Note 1 to the Annual Report on Form 10-K for the year ended December 31, 2022, except for certain self-insurance loss reserves related to vehicle liability and workers’ compensation. Each segment is allocated an insurance premium and deductible that corresponds to the self-insured retention limit for that particular segment. Any self-insurance loss exposure beyond the deductible allocated to each segment is recorded in Corporate. 18 Table of Contents Forward Air Corporation Notes to Condensed Consolidated Financial Statements (unaudited and in thousands, except per share data) March 31, 2023 Segment results from operations for the three months ended March 31, 2023 and 2022 are as follows: Three Months Ended March 31, 2023 Expedited Freight Intermodal Corporate Eliminations Consolidated External revenues $ 338,904 $ 88,162 $ — $ — $ 427,066 Intersegment revenues 30 7 — ( 37 ) — Depreciation 6,988 2,186 — — 9,174 Amortization 1,901 2,560 — — 4,461 Income from operations 32,998 11,203 6,308 — 50,509 Purchases of property and equipment 6,613 176 — — 6,789 Three Months Ended March 31, 2022 Expedited Freight Intermodal Corporate Eliminations Consolidated External revenues $ 376,526 $ 90,435 $ — $ — $ 466,961 Intersegment revenues 65 5 — ( 70 ) — Depreciation 5,673 1,340 39 — 7,052 Amortization 1,808 2,270 — — 4,078 Income (loss) from operations 47,680 11,146 ( 1,475 ) — 57,351 Purchases of property and equipment 8,956 952 — — 9,908 Total Assets As of March 31, 2023 $ 750,838 $ 296,624 $ 179,178 $ ( 74 ) $ 1,226,566 As of December 31, 2022 683,386 322,001 202,756 ( 67 ) 1,208,076 Revenue from the individual services within the Expedited Freight segment for the three months ended March 31, 2023 and 2022 are as follows: Three Months Ended March 31, 2023 March 31, 2022 Expedited Freight revenues: Network $ 205,931 $ 233,700 Truckload 41,744 55,908 Final Mile 69,357 65,758 Other 21,902 21,225 Total $ 338,934 $ 376,591 19