Forward Air Corporation (NASDAQ: FWRD) — Q3 2019 Form 10-Q
Business context and reporting period. Asset-light freight and logistics company operating Expedited LTL, Intermodal, Truckload Premium Services (TLS), and Pool Distribution segments. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods unless noted. Dollars below are in millions except per-share amounts.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $361.7 | $331.4 | $1,028.9 | $964.3 |
| Operating income | $30.7 | $29.9 | $86.0 | $87.0 |
| Net income | $22.2 | $22.3 | $62.9 | $64.4 |
| Diluted EPS | $0.78 | $0.76 | $2.19 | $2.18 |
| Operating margin | 8.5% | 9.0% | 8.4% | 9.0% |
Q3 revenue increased 9.1%, while operating income rose 2.7% and net income edged down 0.4%. For nine months, revenue grew 6.7%, but operating income fell 1.1% and net income fell 2.3%. The filing reports operating expenses of $331.0 million in Q3 and $942.9 million year to date. Nine-month effective tax rate was 25.1%, versus 24.9%.
Cash flow and liquidity. Nine-month operating cash flow was $117.7 million, compared with $113.8 million; investing cash outflow was $64.0 million, including acquisitions and capital spending; financing cash outflow was $44.6 million. Cash increased to $34.8 million from $25.7 million at year-end 2018. At September 30, current assets were $215.7 million and current liabilities $139.8 million. The current-liability comparison is affected by adoption of lease accounting; operating lease liabilities of $159.7 million were recognized on the balance sheet in 2019, with no comparative balance presented.
Debt and capital returns. The company had $67.5 million drawn on its $150 million revolving facility, $14.0 million of letters of credit, and $68.5 million of available capacity; the borrowing rate was 3.4%. It reported compliance with facility covenants. The board approved a new authorization for up to 5.0 million share repurchases; 789,000 shares were repurchased for $47.9 million in the first nine months. Dividends were $0.18 per share quarterly, up from $0.15 in the comparable 2018 quarters.
Material changes and segment trends
- Expedited LTL: Q3 revenue rose 11.5% to $210.1 million, primarily from FSA final-mile activity. Operating income increased 9.3% to $25.9 million, but margin declined to 12.3% from 12.6%. Traditional linehaul tonnage fell 3.6% in Q3, partly offset by higher revenue per hundredweight.
- Intermodal: Q3 revenue grew 15.4% to $58.3 million, supported by OST and Southwest acquisitions and higher drayage activity. Operating income fell 5.5% to $6.9 million; margin declined to 11.8% from 14.5%, including pressure from costs and lower high-margin storage revenue.
- TLS: Q3 revenue declined 5.0% to $45.5 million and operating income fell 64.7% to $0.6 million. Management cited rate pressure in spot and contract markets; revenue per mile decreased 6.8%. Year-to-date revenue fell 4.1% and operating income fell 38.2%.
- Pool Distribution: Q3 revenue increased 7.8% to $51.0 million and operating income increased to $1.9 million from $0.7 million, supported by new business and locations.
Outlook, commentary, risks, and unusual items
The filing provides no quantified earnings or revenue guidance. Management described plans to expand Intermodal through acquisitions and greenfield locations, grow final-mile and other services, and pursue operating synergies, including sharing fleet resources. Management cautioned that quarterly results are seasonal and that nine-month results are not necessarily indicative of full-year results.
- Acquisitions: FSA was acquired in April for $27.0 million plus a contingent earn-out of up to $15.0 million; the earn-out liability was $11.2 million at quarter-end, with an expected total payment of $12.6 million. OST was acquired in July for $12.0 million. Purchase-price allocations remained preliminary.
- Asset estimates: Effective July 1, the company extended estimated useful lives of owned tractors and trailers and reduced tractor salvage value. The change reduced Q3 depreciation by $1.0 million. It also recorded a $0.9 million tractor reserve during the quarter.
- Claims and transition costs: Management reported a $2.5 million Q3 reserve for unfavorable development of vehicle claims and $1.6 million of CEO-transition costs in other operations. For the nine months, other operations included $6.5 million in vehicle reserves, additional claim-development factors, and $2.9 million of CEO-transition costs. Management said no estimate could currently be made of the range of additional reasonably possible losses from claims.
- Other disclosed risks include economic and freight-volume weakness, pricing pressure, customer credit and concentration, availability of drivers and carriers, acquisition integration, fuel prices, insurance and claims, regulation, and information-system capacity. The company said routine litigation was not expected to have a material adverse effect; no changes to the risk factors in its 2018 Form 10-K were reported.
Important facts for investors to verify
- Whether FSA and OST deliver expected growth, integration benefits, and returns, and how the FSA earn-out ultimately changes.
- Whether falling traditional LTL tonnage and TLS pricing pressure persist, and whether the company can protect segment margins.
- The adequacy and development of vehicle and workers’ compensation reserves, including the large vehicle-claim incident and potential additional losses.
- Cash generation and capital allocation after acquisition spending, share repurchases, dividends, and debt borrowing.
- The effect of lease accounting on reported liabilities and comparability, and the sustainability of depreciation benefits from revised asset-life estimates.