Forward Air Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Forward Air is an asset-light freight and logistics company with Expedited LTL, Truckload Premium Services (TLS), Intermodal and Pool Distribution segments. Amounts below are in U.S. dollars; financial comparisons are to Q1 2017, as adjusted for the company’s adoption of ASC 606.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $302.6 million | $262.0 million | +15.5% |
| Income from operations | $24.2 million | $23.7 million | +2.1% |
| Operating margin | 8.0% | 9.1% | Down 1.1 percentage points |
| Net income | $17.7 million | $14.6 million | +21.2% |
| Diluted EPS | $0.60 | $0.48 | +$0.12 |
| Operating cash flow | $40.8 million | $37.1 million | +$3.8 million |
- Taxes: Effective tax rate was 25.7%, down from 37.8%, primarily reflecting the U.S. Tax Act’s reduction in the federal corporate rate from 35% to 21%. This contributed to net income growing faster than operating income.
- Cash and liquidity: Cash was $12.7 million at quarter-end. Current assets were $170.1 million and current liabilities were $66.3 million.
- Debt and facility: Balance-sheet debt and capital lease obligations totaled $40.9 million, including $40.5 million drawn on the revolving credit facility. The $150 million facility had $101.6 million available after outstanding letters of credit; the drawn balance carried a 3.6% rate. The facility matures in September 2022.
- Investing and shareholder returns: Capital expenditures were $6.2 million; net cash used in investing was $5.7 million. The company repurchased 364,286 shares for $20.0 million and paid $4.4 million in dividends. The quarterly dividend was $0.15 per share.
Material changes versus Q1 2017
- Revenue growth was led by Intermodal, up 68.2% to $48.6 million, primarily reflecting the Atlantic and KCL acquisitions and higher fuel surcharges. Intermodal operating income rose 34.6% to $3.5 million, while its margin declined to 7.2% from 9.0%.
- Expedited LTL revenue increased 14.2% to $169.9 million and operating income increased 10.1% to $20.8 million. Higher tonnage, pickup-and-delivery activity and fuel surcharges supported growth, but greater use of third-party transportation providers reduced the segment margin to 12.2% from 12.7%.
- Pool Distribution revenue grew 10.1% to $42.7 million, while operating income was flat at $1.4 million; margin fell to 3.3% from 3.6%. Higher carrier use, equipment rentals and fuel costs offset revenue gains.
- TLS revenue decreased 2.1% to $46.1 million and the segment moved from $1.7 million of operating income to breakeven. Miles declined 12.1% as the company shed poorly priced business and operated a smaller fleet; higher rates per mile did not offset increased costs per mile.
- Consolidated operating expenses rose 16.8%, faster than revenue growth, including increases in purchased transportation, employee costs, insurance and fuel. Interest expense increased to $0.4 million from $0.3 million.
- Operating cash flow increased to $40.8 million. Financing cash use included higher share repurchases, while Q1 2017 had included substantial term-loan repayments.
Outlook, commentary, risks and unusual items
- Management provided no quantitative earnings or revenue guidance in the supplied filing text. It said cash, expected operating cash generation and available borrowings should meet anticipated cash needs for at least the next 12 months. It expects regular quarterly dividends, subject to board approval.
- Management describes the business as having substantial fixed network costs; earnings depend partly on freight volumes, revenue per pound and growth in TLS, Intermodal and Pool. It plans to expand Intermodal through acquisitions and greenfield locations.
- ASC 606 was adopted using full retrospective presentation. The company now recognizes transportation revenue over time and presents fuel surcharge revenue and related costs gross rather than net. The gross presentation increased Q1 2017 revenue and expenses by approximately $14.2 million with no operating-income impact for that fuel surcharge change; comparisons reflect the adjusted presentation.
- Other operations recorded a $1.5 million operating loss, including a $1.3 million increase in claims-related loss development factors and $0.2 million of equipment turn-in costs. Q1 2017 other operations included $0.5 million of executive severance and $0.4 million of claims reserves.
- Insurance exposure increased for vehicle liability when policies renewed April 1, 2018. The company disclosed a $3.0 million per-occurrence self-insured retention for vehicle and general liability claims in Expedited LTL and Pool, plus aggregate deductibles. Management said the ultimate cost of incurred and unreported claims could change materially, but could not estimate the reasonably possible additional loss.
- Other disclosed risks include fuel-price changes, availability and cost of owner-operators and third-party carriers, customer demand and pricing pressure, major-customer loss, acquisition integration, regulation, and claims exceeding insurance coverage. Management said routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth translates into improved operating margins, particularly given increased third-party carrier costs across several segments.
- How much Intermodal growth and profitability is attributable to the 2017 acquisitions, and whether acquired operations can sustain or improve margins.
- The development of TLS after deliberate capacity reductions and its return to positive operating income.
- Future vehicle liability and workers’ compensation claims, the effect of higher self-insured exposure, and changes in claims-development estimates.
- Cash generation, capital spending, revolving-credit usage and covenant headroom while share repurchases and dividends continue.
- The effects of ASC 606 presentation changes when comparing revenue with earlier periods; the filing restates prior-period comparisons, and gross fuel surcharge presentation raises reported revenue and expenses without a corresponding operating-income effect for that change.