Forward Air Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Forward Air is an asset-light freight and logistics company with Expedited Freight, Intermodal, and Pool Distribution segments. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $342.5 million | $321.5 million | +6.5% |
| Operating income | $11.7 million | $24.7 million | -52.6% |
| Operating margin | 3.4% | 7.7% | Down 4.3 percentage points |
| Net income | $8.4 million | $18.4 million | -54.3% |
| Diluted EPS | $0.30 | $0.64 | Down $0.34 |
| Operating cash flow | $29.2 million | $41.5 million | Down $12.3 million |
| Cash and cash equivalents, March 31 | $77.2 million | $64.7 million at Dec. 31, 2019 | Up $12.5 million |
Revenue growth reflected primarily acquired Final Mile operations; COVID-19 reduced volumes across all segments, particularly late in the quarter. Total operating expenses rose 11.5%, faster than revenue, including higher purchased transportation, wages, leases, and insurance. Net margin was approximately 2.4%, versus 5.7% in Q1 2019. The quarterly dividend remained $0.18 per share.
Segment performance: Expedited Freight revenue increased 12.6% to $251.2 million, while operating income fell 27.9% to $14.7 million (5.9% margin versus 9.1%). Network tonnage declined 4.5%; shipments declined 4.8%. Intermodal revenue declined 3.1% to $52.4 million and operating income fell 40.3% to $3.7 million (7.1% margin versus 11.5%). Pool revenue declined 12.8% to $39.4 million, and the segment moved from $1.3 million operating income to a $3.6 million operating loss.
Cash, debt, and liquidity: Operating activities provided $29.2 million; investing activities used $58.4 million, including $55.9 million net for Linn Star; financing activities provided $41.7 million, including $65.0 million of revolver borrowings. At March 31, debt and finance lease obligations were $138.3 million, including $132.5 million outstanding on the revolving facility. After $14.0 million of letters of credit, reported revolver availability was $3.5 million. The company reported compliance with debt covenants. Lease obligations are additional balance-sheet commitments.
Material changes, outlook, and risks
- COVID-19: Management cited falling freight volumes, reduced fuel-surcharge revenue, and weaker operating leverage. Intermodal faced lower imports, blank sailings, and port congestion; Pool was particularly exposed to retail closures. Approximately 90% of Pool’s workforce was furloughed in April.
- Outlook: Management expected a Q2 downturn followed by a slow sequential recovery through Q1 2021, while year-over-year growth was expected to remain negative for the rest of 2020. Management expected Pool’s discontinued-operations loss to be large enough to produce a consolidated Q2 operating loss, but expected continuing operations to remain profitable in Q2 and for the rest of 2020. These are forward-looking estimates, not guarantees.
- Pool divestiture: On April 23, the Board approved a strategy to divest Pool. No material definitive sale agreement had been signed by the filing date; management considered a sale within a year probable. Pool was to be reported as a discontinued operation beginning in Q2.
- Financing and cash measures: On April 16, the company amended its revolving facility, increasing commitments from $150 million to $225 million and changing pricing. The facility’s maturity was unchanged; $146 million was outstanding as of April 16. CARES Act payroll and income-tax payment deferrals were expected to benefit Q2 cash flow by about $11 million and 2020 cash flow by about $12 million; some deferred income taxes were due by July 15. Management said it did not expect liquidity problems or inability to meet financial obligations.
- Acquisitions and estimates: Linn Star was acquired in January for $57.2 million, adding 20 Final Mile locations; purchase-price allocations remained preliminary. FSA’s earn-out fair value was $11.2 million, with $12.6 million expected to be paid in total. No goodwill or long-lived-asset impairment was identified at quarter-end, but management noted future impairment risk amid COVID-19 uncertainty.
- Other risks and contingencies: Self-insurance reserves increased for vehicle and workers’ compensation claims. Management said ordinary-course litigation was not expected to have a material adverse effect, but the ultimate cost of claims could change materially and no reasonably possible additional-loss range was provided. Risks include prolonged economic disruption, customer credit and collections, labor and carrier availability, pricing pressure, and covenant compliance if earnings and cash flow deteriorate.
Most important facts for investors to verify
- Subsequent quarterly filings: actual freight volumes, margins, and the duration and severity of COVID-19 effects versus management’s recovery assumptions.
- Pool sale progress, proceeds, separation costs, and discontinued-operations losses.
- Revolver borrowings, availability, pricing, covenant headroom, and repayment of deferred taxes.
- Integration results and final purchase accounting for Linn Star and FSA, including the earn-out payment.
- Developments in self-insurance claims, receivable collectability, and any impairment charges.