Forward Air Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Forward Air provides expedited LTL, truckload, intermodal and pool distribution transportation services. Unless noted otherwise, financial amounts below are in millions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $249.6 | $247.1 | $717.7 | $702.7 |
| Operating income | $24.7 | $24.6 | $31.8 | $52.8 |
| Net income | $11.9 | $15.7 | $15.0 | $32.3 |
| Diluted EPS | $0.39 | $0.50 | $0.49 | $1.03 |
| Operating margin | 9.9% | 10.0% | 4.4% | 7.5% |
- Q3 revenue increased 1.0%, while net income fell 24.2%; higher income tax expense was a key contributor. The Q3 effective tax rate was 51.3%, versus 34.8% a year earlier.
- Nine-month revenue rose 2.1%, but operating income declined 39.7% and net income declined 53.6%. Results included a $42.4 impairment charge recorded in Q2, largely related to TQI goodwill and customer relationship assets. The impairment was nondeductible and contributed to a 50.7% nine-month effective tax rate.
- Cash flow: Nine-month operating cash flow was $94.6, versus $57.3 in 2015. Investing used $39.4, including $28.7 of property and equipment purchases and $11.8 for the Ace and Triumph acquisitions. Financing used $77.2, including $41.8 of debt and lease payments, $30.0 of share repurchases and $11.0 of dividends. Cash declined $22.0 to $11.3.
- Liquidity and debt: Current assets were $144.0 and current liabilities $91.1 at September 30. Debt and capital lease obligations totaled approximately $42.7, including a $41.7 term-loan balance due March 2017. The company had no revolver borrowings and reported $140.6 of available revolving capacity after letters of credit.
- Quarterly dividends were $0.12 per share. The company repurchased 676,773 shares for approximately $30.0 during the first nine months.
Material changes and segment trends
- Q3 Expedited LTL revenue declined 3.3% to $144.3; operating income was $21.0, down 2.8%. Lower volumes and fuel surcharges weighed on revenue, while pricing, the dim-factor change and efficiency gains helped support margin.
- Q3 Truckload revenue rose 9.6% to $42.2, but operating income fell 37.5% to $2.0. Higher miles and new business were offset by lower revenue per mile and reduced higher-margin pharmaceutical activity.
- Q3 Pool Distribution revenue rose 13.4% to $36.4, but operating income decreased to $0.1 from $0.5 as facility and start-up costs increased.
- Q3 Intermodal revenue fell 4.5% to $27.6 and operating income fell 14.3% to $3.0, reflecting weak market conditions and lower fuel surcharge, rental and storage revenue. Ace and Triumph acquisitions partly offset the decline.
- For the first nine months, Truckload reported an operating loss of $36.7, including the $42.4 impairment; Pool Distribution reported a $0.2 operating loss. Expedited LTL operating income increased 9.9% to $63.0, while Intermodal operating income declined 6.8% to $8.2.
- Management reorganized segment reporting in Q1 2016 into four segments; prior-year segment figures were restated. It also acquired Ace in January and Triumph in August to expand Intermodal.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management said available cash, expected operating cash flow and borrowing capacity should meet anticipated cash needs for at least the next 12 months.
- Management cited a sluggish economic and shipping environment, lower fuel prices and fuel surcharges, pricing pressure, declining pharmaceutical business, and cost pressure from insurance, claims, facilities and labor. The company’s fixed-cost network makes earnings sensitive to freight volumes and revenue per pound.
- The TQI impairment valuation remained subject to finalization; any valuation adjustments could be recorded in Q4 2016. Goodwill valuations depend on projected cash flows and other assumptions, and changes in conditions could affect recorded asset values.
- Routine litigation is not expected by management to have a material adverse effect. However, self-insured workers’ compensation, vehicle and other claims are uncertain, and management said estimates could change materially in the near term; it could not estimate a reasonably possible additional loss range.
- Other disclosed risks include customer losses or credit deterioration, availability of owner-operators and freight handlers, fuel-price changes, regulation, competition and acquisition integration. Management reported no material change in risk factors since year-end 2015.
Important facts for investors to verify
- Whether TQI’s operating performance and the final impairment valuation lead to further asset write-downs.
- Whether Truckload can stabilize revenue per mile and recover profitability, particularly as pharmaceutical revenue declines.
- Whether LTL and Intermodal volumes, fuel surcharge revenue and customer activity improve or remain weak.
- The company’s ability to repay or refinance the $41.7 million term-loan balance due March 2017 while maintaining capital spending, dividends and repurchases.
- Future developments in self-insurance reserves, claims costs and the Pool Distribution safety audit-related legal expenses.