Forward Air Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Dollar amounts are in millions unless otherwise noted. Forward Air provides expedited less-than-truckload, truckload, intermodal and pool distribution services. The company reorganized its reportable segments in 2016; prior-period segment results were restated.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $238.6 | $249.7 | $468.2 | $455.6 |
| Operating income (loss) | $(14.3) | $19.9 | $7.1 | $28.2 |
| Net income (loss) | $(10.1) | $11.8 | $3.0 | $16.7 |
| Diluted EPS | $(0.33) | $0.38 | $0.10 | $0.53 |
| Operating margin | (6.0)% | 8.0% | 1.5% | 6.2% |
Q2 revenue declined 4.4% year over year; the MD&A contains a contradictory sentence calling this an increase, but the financial statements and segment discussion show a decline. The $42.4 million impairment charge drove the reported Q2 operating loss. Excluding that charge, operating income was approximately $28.1 million, calculated from reported figures. For the first half, revenue rose 2.8%, while operating income fell 74.8% and net income fell 82.0%.
- Impairment: The company recorded $25.7 million of goodwill impairment for its TQI reporting unit, $16.5 million against customer relationships and $0.3 million for a maintenance facility. It said certain valuation work remained incomplete and any resulting adjustments would be recorded in Q3.
- Segments: Q2 Expedited LTL revenue fell 7.1% to $144.7 million, but operating income increased 19.7% to $24.9 million. TLX revenue was flat at $39.4 million; its $40.3 million operating loss included the TQI impairment. Pool Distribution revenue grew 13.7% to $31.5 million but recorded a $0.4 million operating loss. Intermodal revenue fell 12.0% to $24.2 million and operating income fell 15.2% to $2.8 million.
- Margins and drivers: Expedited LTL benefited from pricing, a February 2016 dimensional-factor change and operating efficiencies, despite lower volume and fuel surcharge revenue. TLX faced declining pharmaceutical business and revenue per mile falling faster than cost per mile. Pool’s expansion and facility costs pressured results; Intermodal faced subdued market conditions and lower fuel surcharges, rental and storage revenue.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $61.2 million, versus $18.6 million in 2015. Investing used $17.2 million, including $16.0 million of property and equipment purchases and the $1.7 million Ace acquisition. Financing used $55.6 million, including $27.9 million of debt and lease payments, $20.0 million of share repurchases and $7.3 million of dividends.
- Cash was $21.7 million at June 30, down from $33.3 million at year-end 2015. Current assets were $163.6 million and current liabilities $100.7 million.
- Debt and capital lease obligations totaled approximately $56.6 million: $55.7 million current and $0.9 million long term. The $55.6 million term-loan balance carried a 1.8% variable rate and matures in March 2017. No revolver borrowings were outstanding; $139.9 million of capacity remained after letters of credit.
- Shareholders’ equity was $489.5 million. The company paid quarterly dividends of $0.12 per share and repurchased 454,385 shares for $20.0 million during the first half.
Management said cash, expected operating cash generation and available borrowing capacity should meet anticipated needs for at least the next 12 months. It expects to continue regular quarterly dividends, subject to board approval. On July 21, 2016, the board replaced the remaining 2014 buyback authorization with authorization to repurchase up to 3 million shares.
Outlook, risks and notable items
- The filing provides no quantitative earnings or revenue guidance. Management noted that quarterly results are seasonal and first-half performance is not necessarily indicative of full-year results.
- Key operating risks cited include freight volume and pricing pressure, customer loss and credit risk, economic and fuel-price changes, competition, facility availability, claims and insurance costs, labor and owner-operator availability, regulation, and acquisition integration.
- Goodwill impairment estimates rely on projected cash flows and other Level 3 valuation inputs; management cautioned that changes in assumptions or market conditions could materially affect valuations.
- Routine litigation was not expected by management to have a material adverse effect. The company self-insures portions of workers’ compensation, vehicle, property and medical claims; it said ultimate claim costs could change materially, with no reasonably possible loss range estimable.
- The $55.6 million term loan is due in March 2017. The credit facility also includes financial and other covenants.
Important facts for investors to verify
- Completion of the TQI impairment valuation and whether further impairment adjustments were recorded in Q3.
- Whether TQI customer and pharmaceutical revenue trends, and TLX unit economics, stabilized after quarter-end.
- Progress toward repayment or refinancing of the term loan maturing in March 2017, and compliance with credit-facility covenants.
- Whether growth in Pool Distribution and other businesses translates into improved operating margins after added facility and start-up costs.
- Cash generation, capital spending, dividends and execution of the new share-repurchase authorization.