Forward Air Corporation — FY 2019 Form 10-K
Business context and period. This annual filing covers the fiscal year ended December 31, 2019; it also reports fourth-quarter results. Forward Air provides asset-light expedited freight, intermodal drayage and pool distribution services in the United States and Canada. In Q4, the company reorganized its reporting segments, combining its former Expedited LTL and Truckload Premium Services businesses into Expedited Freight; prior-period segment data was recast.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $1,410.4 million | $1,320.9 million | +6.8% |
| Operating income | $118.8 million | $122.0 million | -2.7% |
| Operating margin | 8.4% | 9.2% | -0.8 percentage points |
| Net income | $87.1 million | $92.1 million | -5.4% |
| Diluted EPS | $3.04 | $3.12 | Lower |
| Cash from operations | $159.0 million | $152.6 million | +$6.4 million |
Q4 2019: Revenue was $381.5 million versus $356.6 million in Q4 2018; operating income was $32.9 million versus $35.0 million; net income was $24.2 million versus $27.7 million; diluted EPS was $0.85 versus $0.95.
Segments: Expedited Freight revenue was $988.8 million (+6.2%) and operating income $101.0 million, with a 10.2% margin versus 10.9%. Intermodal revenue was $217.7 million (+8.3%) and operating income $23.7 million, with a 10.9% margin versus 11.6%. Pool Distribution revenue was $207.4 million (+6.9%) and operating income $7.3 million, with a 3.5% margin versus 3.0%. Corporate and other operations recorded a $13.2 million operating loss, compared with an $8.5 million loss in 2018.
Liquidity, debt and capital allocation
- Year-end cash was $64.7 million. The company reported $159.0 million of operating cash flow, $63.9 million of net cash used in investing and $56.0 million of net cash used in financing.
- Revolver borrowings were $67.5 million; $68.5 million of borrowing capacity remained after $14.0 million of letters of credit. The revolving facility matures in September 2022, bears variable interest, and the company reported covenant compliance. Interest expense rose to $2.7 million from $1.8 million.
- Finance lease obligations were $6.3 million. Adoption of the lease standard resulted in $152.1 million of operating lease liabilities and $151.7 million of operating lease right-of-use assets at year-end.
- The company repurchased $56.2 million of shares and paid $20.5 million in dividends during 2019. Dividends declared were $0.72 per share for the year; a $0.18-per-share dividend was declared for Q1 2020.
Material changes, outlook and risks
- Revenue growth reflected acquisitions and expansion: FSA final-mile operations contributed to Expedited Freight, O.S.T. and prior acquisitions supported Intermodal, and Pool benefited from volume growth and new business. Expedited Freight LTL tonnage fell 3.2%, while revenue per hundredweight rose 4.1%.
- Operating expenses grew faster than revenue. Insurance and claims expense increased to $45.4 million from $35.2 million. Management cited a $6.5 million vehicle-claims reserve, higher claims-development factors, and $3.6 million of CEO-transition costs in corporate and other operations. Total self-insurance reserves were $66.2 million, versus $54.2 million.
- Management extended estimated useful lives for owned tractors and trailers, reducing 2019 depreciation by approximately $2.7 million; it also recorded a $1.2 million reserve for certain tractors. These estimates affect reported earnings.
- FSA was acquired in April 2019 for $27.0 million, with contingent consideration valued at $11.8 million at year-end. The O.S.T. acquisition closed in July 2019 for $12.0 million. Linn Star was acquired in January 2020 for $57.2 million; management anticipated annualized revenue of approximately $90 million and operating income of $6.3 million.
- No formal 2020 financial guidance is provided in the filing. Management’s strategy emphasizes profitable growth in premium freight, service expansion, acquisitions, final-mile growth and operating synergies.
- Key risks include economic and freight-volume cyclicality, pricing pressure and fixed network costs; dependence on owner-operators and potential worker-classification changes, including California AB 5; customer concentration and short cancellation periods; vehicle claims, self-insurance estimates and insurance availability; fuel volatility; acquisition integration; and cybersecurity and information-system disruption. The filing describes routine litigation and says it does not expect pending actions to have a material adverse effect, while noting that claim estimates may change materially.
The auditor issued an unqualified opinion on the financial statements, and management and the auditor reported effective internal control over financial reporting as of December 31, 2019.
Important facts for investors to verify
- Whether lower freight tonnage and weaker operating margins persist, particularly in Expedited Freight and Intermodal.
- Developments in vehicle and workers’ compensation claims, reserve adequacy, and insurance recoveries.
- Integration and returns from FSA, O.S.T. and Linn Star, including whether Linn Star meets management’s stated annualized expectations and whether FSA earnout payments are triggered.
- Liquidity and financing exposure, including variable-rate revolver borrowings, lease obligations, and the company’s capacity for continued repurchases and dividends.
- The earnings effects of depreciation estimates, claims assumptions, and acquisition valuations.