Forward Air Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports quarterly results; Q4 2017 revenue was $306.1 million, operating income $28.8 million, net income $35.4 million and diluted EPS $1.18. Forward Air is an asset-light freight and logistics provider with Expedited LTL, Truckload Premium Services (TLS), Intermodal and Pool Distribution segments.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Operating revenue | $1,100.8 million | $982.5 million | +12.0% |
| Operating income | $108.7 million | $60.0 million | +81.0% |
| Operating margin | 9.9% | 6.1% | +3.8 percentage points |
| Net income | $87.3 million | $27.7 million | +215.2% |
| Diluted EPS | $2.89 | $0.90 | +221% |
| Cash from operations | $103.4 million | $130.4 million | Down $27.0 million |
Operating expenses increased 7.6% to $992.1 million, slower than revenue growth. Purchased transportation rose 15.7% to $478.2 million; insurance and claims rose 16.5% to $29.6 million. Interest expense was $1.2 million, down from $1.6 million.
Cash from operations declined mainly due to a $21.6 million increase in accounts receivable and $23.4 million more in income tax payments, partly offset by higher earnings. Investing used $59.2 million, including $23.1 million for acquisitions and $35.8 million in net capital expenditures. Financing used $48.8 million, including $49.0 million of share repurchases and $18.1 million of dividends.
At year-end, cash was $3.9 million, total assets $687.7 million and shareholders’ equity $533.5 million. Revolver borrowings were $40.5 million at 2.9%; letters of credit used $7.9 million and available borrowing capacity was $101.6 million under the $150 million facility, which matures in September 2022. Capital lease obligations totaled approximately $0.7 million. Management said cash, expected operating cash flows and available borrowing capacity should cover anticipated needs for at least 12 months.
Segments and changes versus FY2016
- Expedited LTL: Revenue rose 8.6% to $619.8 million; operating income increased 5.5% to $88.1 million. Higher tonnage, Complete service attachment and fuel surcharges supported growth, while greater use of more expensive third-party carriers reduced operating margin to 14.2% from 14.6%.
- TLS: Revenue rose 9.1% to $179.3 million, with miles up 7.9%. Operating income was $3.2 million versus a $35.4 million loss in 2016, which included a $42.4 million impairment charge. Excluding that charge, performance weakened as transportation cost per mile rose faster than revenue per mile.
- Pool Distribution: Revenue rose 10.5% to $164.2 million and operating income increased to $6.4 million from $3.6 million, helped by volume, rate increases, purchased-transportation efficiencies and lower facility costs.
- Intermodal: Revenue increased 43.6% to $148.9 million, largely from acquisitions and higher fuel surcharges. Operating income rose 15.5% to $12.7 million, but margin fell to 8.5% from 10.6%, reflecting acquired-business mix, amortization and acquisition-related costs.
Intermodal expansion included the May 2017 Atlantic asset acquisition for $22.5 million, plus the smaller KCL acquisition. The company also paid a $1.3 million earnout related to the 2016 Triumph acquisition.
Outlook, risks and unusual items
- Outlook: No specific revenue, earnings or margin guidance is provided. Management’s stated strategy is to expand premium services, enhance information systems and pursue acquisitions and geographic growth, particularly in Intermodal.
- Tax and earnings comparability: The 2017 effective tax rate was 18.7%, versus 52.6% in 2016. The Tax Cuts and Jobs Act revaluation of deferred tax balances reduced 2017 tax expense by approximately $15.9 million; management described the tax-law impact as provisional and subject to further analysis. The 2016 comparison also included the $42.4 million TQI impairment.
- Acquisitions and goodwill: No impairment was recorded in 2017. TQI’s year-end goodwill assessment followed weaker-than-projected performance; its June 2017 estimated fair value exceeded carrying value by approximately 15.1%. Goodwill was $191.7 million at year-end.
- Operating and market risks: Freight demand is cyclical and seasonal; the first half is typically weaker. Key exposures include competition and pricing pressure, fuel and surcharge volatility, availability and cost of owner-operators and third-party carriers, labor costs, customer concentration, and fixed network costs. Most customer arrangements can be cancelled on 30–60 days’ notice.
- Other risks and contingencies: Driver classification, regulation including the electronic logging device mandate, cybersecurity and IT disruptions, environmental compliance, and vehicle, workers’ compensation and cargo claims could increase costs. The company self-insures meaningful claim amounts; year-end self-insurance claims were $21.8 million. Management did not expect routine litigation to have a material adverse effect, but said additional claim losses could differ materially from estimates.
- Commitments and capital returns: Contractual cash obligations totaled $148.0 million, including $117.6 million of operating leases and $29.6 million of equipment purchase commitments, primarily due in 2018. The company repurchased 947,819 shares for $49.0 million in 2017 and declared $0.60 per share in dividends.
- Accounting changes: The company planned full-retrospective adoption of the new revenue standard. Certain revenues and related expenses are expected to be presented gross, increasing reported revenue and expense by approximately $66 million for 2017 and $47 million for 2016, with no operating-income impact. Revenue recognition for shipments in transit is expected to accelerate, with no significant overall impact anticipated.
Important facts for investors to verify
- How much of 2017’s net-income increase reflects recurring operations versus the $15.9 million tax benefit and the prior-year impairment comparison.
- Whether purchased-transportation cost increases—especially in Expedited LTL and TLS—can be offset through pricing, mix or operating efficiencies.
- Cash conversion and receivables collections, given operating cash flow fell despite higher earnings and accounts receivable increased.
- Acquired Intermodal revenue and margins, integration outcomes, and any future goodwill or intangible-asset impairment indicators.
- Capacity under the credit facility, covenant compliance, planned capital spending and the sustainability of dividends and share repurchases.
- Developments in insurance renewals, claim reserves, customer concentration, fuel-surcharge recovery and owner-operator availability.