Forward Air Corporation — Q2 2018 Form 10-Q
Business context and reporting period
Forward Air is an asset-light freight and logistics company operating Expedited LTL, Truckload Premium Services (TLS), Intermodal, and Pool Distribution segments. This unaudited report covers the quarter and six months ended June 30, 2018. Comparisons are to 2017 amounts adjusted retrospectively for the adoption of the revenue-recognition standard.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $330.3 million | $283.9 million | $633.0 million | $545.9 million |
| Operating income | $32.9 million | $30.0 million | $57.1 million | $53.7 million |
| Net income | $24.3 million | $19.7 million | $42.0 million | $34.2 million |
| Diluted EPS | $0.82 | $0.65 | $1.42 | $1.13 |
| Operating margin | 10.0% | 10.6% | 9.0% | 9.8% |
Q2 revenue rose 16.3%, operating income 9.7%, and net income 23.4% year over year. For the first half, revenue increased 16.0%, operating income 6.3%, and net income 22.8%. The lower operating margin reflects expense growth outpacing revenue; lower income taxes supported net income growth. The six-month effective tax rate was 25.3%, versus 35.6% in 2017, primarily reflecting the U.S. corporate tax-rate reduction.
- Segment trends: Q2 Expedited LTL revenue grew 20.2% and operating income 14.7%; higher volume and fuel surcharges helped, while greater use of costlier third-party carriers reduced margin. Intermodal revenue rose 32.3% and operating income 75.0%, supported by the Atlantic acquisition, organic growth, and fuel surcharges. Pool revenue grew 14.6%, but operating income was flat. TLS revenue declined 3.0% and operating income declined 5.6%, amid fewer miles, driver-capacity constraints, and deliberate removal of lower-margin business.
- Cash flow and investment: Six-month operating cash flow was $67.0 million, compared with $52.0 million. Investing cash outflow was $13.1 million, including $17.6 million in capital expenditures and $4.8 million of disposal proceeds; no acquisition cash payment was reported for the period. Financing cash outflow was $37.7 million, including $28.2 million of share repurchases and $8.8 million of dividends. Cash increased to $20.1 million from $3.9 million at year-end.
- Liquidity and debt: Current assets were $193.5 million and current liabilities $69.7 million at June 30. Revolver borrowings were $40.5 million, with $98.5 million available after $11.0 million of letters of credit; the borrowing rate was 3.6%. Total current and long-term debt and capital lease obligations were approximately $40.8 million. The company reported compliance with facility covenants.
- Shareholder returns: The quarterly dividend was $0.15 per share. The company repurchased 497,166 shares for $28.2 million during the first half; 1,321,499 shares remained authorized for repurchase at June 30.
Outlook, commentary, risks, and unusual items
- Management gave no specific earnings or revenue guidance. It expects available cash, future operating cash flow, and borrowing capacity to meet anticipated needs for at least the next 12 months. Management describes Intermodal expansion through acquisitions and greenfield starts as part of its strategy.
- Management cautions that results are seasonal and the first-half results are not necessarily indicative of full-year performance. Key risks include freight volumes and pricing, fuel costs, availability of drivers and third-party carriers, customer credit and concentration, competition, acquisition integration, regulatory changes, and insurance claims.
- Vehicle-claim actuarial reserves increased $2.7 million in Q2 and $3.7 million for the first half, weighing on corporate/other operating results. Effective April 1, 2018, the company increased vehicle-liability self-insurance retention and deductibles. Management said additional near-term claim losses cannot currently be estimated, and actual provisions may change materially.
- ASC 606 was adopted using full retrospective presentation. Fuel surcharge revenue and related costs are now reported gross rather than net, increasing 2017 comparative revenue and expenses by $15.4 million for Q2 and $29.6 million for the first half, with no operating-income effect from that gross-versus-net change. The company recognizes shipping revenue over time based on days of transit.
- No goodwill impairment was recorded at June 30. The company is evaluating the impact of the new lease-accounting standard, which is scheduled to take effect for it in 2019.
Important facts for investors to verify
- Whether growth in Expedited LTL and Intermodal volumes and rates can offset higher purchased-transportation, fuel, and insurance costs—and whether operating margins stabilize.
- Whether TLS can rebuild miles and profitability given driver and carrier capacity constraints.
- How vehicle-liability claims develop after the increased self-insured retention and deductibles, and whether reserve estimates require further changes.
- How much of reported revenue growth reflects underlying activity versus fuel surcharges, acquisitions, and retrospective accounting presentation.
- Future cash generation, capital spending, buybacks, and dividends relative to revolver usage and covenant headroom.