Forward Air Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Forward Air is an asset-light freight and logistics company operating Expedited LTL, Intermodal, Truckload Premium Services (TLS), and Pool Distribution. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date | Change |
|---|---|---|---|
| Operating revenue | $321.5 million | $302.6 million | +6.2% |
| Operating income | $24.7 million | $24.2 million | +2.1% |
| Operating margin | 7.7% | 8.0% | Down about 0.3 percentage points |
| Net income | $18.4 million | $17.7 million | +3.8% |
| Diluted EPS | $0.64 | $0.60 | +$0.04 |
| Operating cash flow | $41.5 million | $40.8 million | +$0.7 million |
| Capital expenditures | $4.1 million | $6.2 million | Down $2.1 million |
| Cash and cash equivalents | $42.2 million | $25.7 million at Dec. 31, 2018 | +$16.5 million |
Net cash used in financing was $21.3 million, including $14.2 million of share repurchases and $5.2 million of dividends. The quarterly dividend was $0.18 per share, up from $0.15 a year earlier.
At March 31, 2019, the company reported $47.5 million drawn on its $150 million revolving facility, $12.7 million of letters of credit, and $89.8 million of remaining borrowing capacity. The drawn balance carried a 3.9% interest rate; the company reported compliance with facility covenants. Debt and finance lease obligations totaled approximately $47.6 million, excluding operating lease liabilities.
Adoption of the new lease standard added $133.4 million of operating lease right-of-use assets and $133.7 million of lease liabilities to the balance sheet. Management stated adoption did not affect income or cash flows; prior-period balance sheets were not restated.
Material changes and segment results
- Expedited LTL: Revenue rose 5.1% to $178.6 million, while operating income fell 5.8% to $19.6 million; margin declined to 11.0% from 12.2%. Rate and final-mile growth, including higher revenue per hundredweight, outweighed lower tonnage, but higher claims, receivables allowance, legal costs, and employee costs pressured results.
- Intermodal: Revenue increased 11.3% to $54.1 million and operating income rose 77.1% to $6.2 million; margin improved to 11.5% from 7.2%. Growth reflected pricing and the 2018 MMT and Southwest acquisitions.
- TLS: Revenue declined 0.9% to $45.7 million, while operating income improved to $0.9 million from breakeven. Management attributed lower miles to deliberately shedding lower-margin business and reduced fleet capacity; higher revenue per mile supported profitability.
- Pool Distribution: Revenue increased 5.9% to $45.2 million, but operating income fell 7.1% to $1.3 million; margin declined to 2.9% from 3.3%, primarily due to increased use and cost of third-party carriers and contract labor.
Consolidated operating expenses grew 6.6%, slightly faster than revenue. Salaries, wages, and benefits increased 9.8%; insurance and claims rose 32.4%. Other operations recorded a $3.3 million operating loss, including $1.8 million of added vehicle-claim reserves, $0.6 million of workers’ compensation reserves, and $0.7 million in CEO-transition costs. Interest expense increased to $0.6 million from $0.4 million, primarily due to additional revolver borrowings. The effective tax rate declined to 23.8% from 25.7%, mainly reflecting stock-based compensation activity.
Outlook, commentary, and risks
- The filing provides no consolidated earnings or revenue guidance. Management notes that quarterly results are seasonal and Q1 results are not necessarily indicative of full-year results.
- Management’s strategy emphasizes growing freight volumes and revenue per pound through its network and expanding Intermodal, TLS, and Pool. It cited acquisition and greenfield opportunities for Intermodal.
- On April 21, 2019, the company acquired substantially all assets of FSA Logistix for $27 million plus contingent consideration, funded with operating cash flows. Management expected annualized revenue of approximately $75 million and operating income of approximately $3 million; these are expectations, not reported results.
- Key disclosed risks include economic and freight-volume downturns, customer credit and concentration, availability and cost of drivers and carriers, fuel-price changes, competition and pricing pressure, acquisition integration, claims and insurance exposure, regulatory matters, and information-system capacity. Management said ordinary-course litigation was not expected to have a material adverse effect, but could not estimate a range of reasonably possible additional self-insurance losses.
- CEO Thomas Schmitt took office in September 2018. Executive Chairman Bruce Campbell planned to retire after the May 2019 annual meeting and serve as a consultant for 24 months afterward.
Most important facts for investors to verify
- Whether LTL tonnage and shipment declines persist, and whether pricing and final-mile growth can sustain segment margins.
- Development of vehicle, cargo, and workers’ compensation claims and the adequacy of self-insurance reserves.
- FSA’s completed integration, contingent consideration, and performance relative to management’s annualized estimates.
- Cash generation, revolver usage, and capital allocation among acquisitions, dividends, and the new authorization to repurchase up to 5 million shares.
- The effect of the newly recognized operating lease obligations on future fixed costs and liquidity; lease payments due in 2019 were disclosed as $37.5 million.