Forward Air Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Forward Air is an asset-light freight and logistics company operating in the United States, Canada and Mexico, with Expedited Freight and Intermodal segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $427.1 | $467.0 | -8.5% |
| Operating income | $50.5 | $57.4 | -11.9% |
| Operating margin | 11.8% | 12.3% | -0.5 percentage points |
| Net income | $36.4 | $42.7 | -14.8% |
| Diluted EPS | $1.37 | $1.57 | -12.7% |
| Operating cash flow | $66.0 | $62.5 | +$3.5 |
| Capital expenditures | $6.8 | $9.9 | -$3.1 |
Net margin was approximately 8.5%, versus 9.1% a year earlier. Interest expense rose to $2.4 million from $0.8 million, primarily due to higher variable rates; the average rate on credit-facility borrowings was 5.96%, compared with 1.44%.
- Expedited Freight: Revenue fell 10.0% to $338.9 million and operating income fell 30.8% to $33.0 million; segment operating margin declined to 9.7% from 12.7%. Network tonnage fell 12.3%, and Truckload revenue fell 25.3%; Final Mile revenue increased 5.5%.
- Intermodal: Revenue declined 2.5% to $88.2 million, while operating income was essentially flat at $11.2 million. Drayage shipments fell 17.9%, partly offset by 23.6% higher revenue per shipment.
Liquidity, debt and capital allocation
- Cash was $32.0 million at March 31, down from $45.8 million at year-end. Current assets were $257.8 million and current liabilities $165.8 million.
- Credit-facility borrowings were $153.5 million principal ($153.1 million net of issuance costs), versus $108.5 million principal at year-end. Available borrowing capacity was approximately $235.0 million. The facility matures in 2026; the company reported compliance with its covenants.
- Cash used in investing was $61.5 million, including $56.6 million for the January acquisition of Land Air Express. Cash used in financing was $18.2 million, including $50.5 million of share repurchases and $6.3 million of dividends, partly offset by $45.0 million of credit-facility proceeds.
- The quarterly dividend was $0.24 per share; a further $0.24 dividend was declared for payment in Q2. Approximately 1.76 million shares remained authorized for repurchase at quarter-end.
Material changes and management outlook
Revenue and earnings weakened as freight demand softened. Management said industry capacity had shifted toward excess carrier capacity, with declining transportation rates amid elevated inventories and slower economic growth. Lower customer freight volumes affected both segments, and management expected these trends to continue into Q2 2023. No numerical earnings or revenue guidance was provided.
Land Air Express, acquired for a preliminary $56.6 million, operates more than 25 terminals and is intended to expand the Expedited Freight network, particularly in the central United States. Purchase-price allocations were preliminary at filing, including $50.4 million of goodwill.
Management attributed the improvement in operating cash flow mainly to lower accounts receivable, partly offset by lower accounts payable and accrued expenses and lower net income. Expedited Freight profitability was pressured by reduced Network tonnage and lower revenue per hundredweight excluding fuel. Intermodal pricing and shipment revenue helped offset fewer shipments. A reversal of a previously accrued employee incentive program contributed to the improvement in “Other Operations” results; increased health and vehicle-liability claim reserves partially offset it.
Risks, contingencies and unusual items
- Freight volumes, rates and margins are exposed to economic cycles, customer inventory levels, competition, carrier capacity and customer concentration. Management noted that fuel surcharges may not fully offset fuel-price movements.
- Variable-rate borrowings expose the company to higher interest costs. The company also identified liquidity, acquisition integration, labor and carrier availability, cybersecurity, regulatory, weather and fuel risks among factors that could affect results.
- The company is involved in ordinary-course legal and insurance claims, including vehicle liability and workers’ compensation. Management said existing reserves were believed adequate and pending matters were not expected to have a material adverse effect, but noted that reserve estimates could change materially and a reasonably possible additional-loss range could not be estimated.
- Vehicle-liability claims had unfavorable historical loss development during the quarter. The company retains specified portions of vehicle-liability and workers’ compensation risks.
Investor facts to verify
- Whether the expected Q2 freight-volume weakness materialized and how it affected Network tonnage, pricing and segment margins.
- Land Air’s integration, operating contribution and final purchase-price allocation, including the substantial goodwill recorded.
- Whether operating cash flow continues to cover acquisition spending, capital needs, dividends and repurchases as cash declined and borrowings increased.
- Credit-facility borrowing costs, available capacity and continued covenant compliance in a higher-rate environment.
- Developments in vehicle-liability and other self-insurance reserves, and any change in the status or estimated exposure of legal claims.