FORWARD AIR CORP quarterly report, Q3 FY2018

Forward Air Corporation — Q3 2018 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2018. Forward Air is an asset-light freight and logistics company operating Expedited LTL, Truckload Premium Services (TLS), Intermodal, and Pool Distribution segments. Financial statements are unaudited. 2017 comparisons are presented as adjusted for the retrospective adoption of the revenue standard.

Financial performance and liquidity

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Revenue	$331.4 million	$298.3 million	$964.3 million	$844.2 million
Operating income	$29.9 million	$27.2 million	$87.0 million	$80.9 million
Net income	$22.3 million	$18.3 million	$64.4 million	$52.6 million
Diluted EPS	$0.76	$0.61	$2.18	$1.73
Operating margin	9.0%	9.1%	9.0%	9.6%

Q3 revenue grew 11.1%, operating income 9.9%, and net income 21.9%. For the first nine months, revenue grew 14.2% and net income 22.4%. Lower effective taxes helped net income growth: the nine-month effective tax rate was 24.9%, versus 34.4% in 2017, following the U.S. corporate tax rate reduction.
Nine-month operating cash flow was $113.8 million, compared with $77.7 million. Investing cash outflow was $32.4 million, including $34.3 million of property and equipment purchases and $3.7 million for the MMT acquisition. Financing cash outflow was $56.4 million, including $45.0 million of repurchases and $13.2 million of dividends. Cash increased to $28.9 million from $3.9 million at year-end 2017.
At September 30, cash was $28.9 million and debt and capital lease obligations totaled $40.7 million on the balance sheet. The revolver had $40.5 million drawn, $11.1 million committed to letters of credit, and $98.4 million available; its drawn interest rate was 3.6%. The company reported compliance with credit covenants.
Current assets were $201.1 million and current liabilities $75.5 million. The company stated available cash, expected operating cash flow, and revolver capacity should meet anticipated needs for at least 12 months. Quarterly dividend was $0.15 per share.

Material changes and segment trends

Expedited LTL: Q3 revenue rose 14.0% to $188.5 million, but operating income increased only 2.2% to $23.7 million; margin fell to 12.6% from 14.0%. Higher tonnage, rates, fuel surcharges, and pickup/delivery revenue were partly offset by greater use of more costly third-party providers.
TLS: Q3 revenue declined 7.0% to $47.9 million as the company deliberately shed lower-margin freight and operated fewer miles. Higher revenue per mile and improved cost control lifted operating income to $1.7 million from $0.1 million. Nine-month revenue was down 4.0% and operating income down 8.1%.
Pool: Q3 revenue rose 17.7% to $47.3 million, while operating income remained $0.7 million and margin eased to 1.5%. Growth came from rate increases, customer volumes, and new business; higher carrier costs and contract labor pressured margins.
Intermodal: Q3 revenue grew 14.3% to $50.5 million and operating income rose 92.1% to $7.3 million. Nine-month revenue increased 34.5% and operating income 71.6%, benefiting in part from the Atlantic acquisition, storage revenue, and fuel surcharges.

Outlook, management commentary, risks, and unusual items

No formal financial guidance is provided. Management describes growth plans for Intermodal through acquisitions and greenfield start-ups, while noting that seasonal trends make nine-month results not necessarily indicative of full-year results.
Thomas Schmitt became President and CEO effective September 1, 2018, succeeding Bruce Campbell, who was expected to serve as Executive Chairman through the 2019 annual meeting. Q3 included $1.1 million of CEO-transition costs.
Other operations recorded Q3 charges of $1.4 million for existing vehicle claims and $0.6 million for workers’ compensation claims; nine-month increases were $5.2 million and $0.8 million, respectively. The company says estimates may change materially and cannot currently quantify a reasonably possible additional loss range. It increased vehicle-liability self-insurance exposure when renewing policies in April 2018.
On October 24, 2018, the company announced a proposed $16.25 million acquisition of substantially all assets of Southwest Freight Distributors, subject to customary closing conditions. Management expected closing within a month and estimated annualized contribution of $20 million revenue and $3 million EBITDA.
The company adopted the revenue standard retrospectively, including gross recognition of fuel surcharge revenue and recognition of shipment revenue over transit time. This increased reported revenue and costs in prior periods; the filing’s comparisons are adjusted. The company expects lease accounting adoption to add right-of-use assets and lease liabilities, but does not anticipate a material effect on operating results or liquidity.
Key stated risks include freight demand and pricing, fuel prices, carrier and driver availability and costs, customer credit and concentration, acquisition integration, competition, and insurance claims. Routine litigation was not expected to have a material adverse effect. No goodwill impairment was identified in the 2018 annual test or during Q3.

Investor verification points

Assess whether LTL and Pool can protect margins as purchased transportation and labor costs rise, and whether TLS volume reduction improves sustainable profitability.
Reconcile revenue growth with the retrospective fuel-surcharge gross-up and distinguish underlying shipment, rate, and volume trends from accounting presentation.
Monitor vehicle and workers’ compensation claims development, self-insurance retention exposure, and the effect of related reserves on future earnings.
Verify closing, funding, integration, and realized contribution of the Southwest acquisition; evaluate the Intermodal growth strategy and acquisition returns.
Track cash generation against repurchases, dividends, capital spending, debt, and the forthcoming lease-standard balance-sheet recognition.