Forward Air Corporation — Q3 2017 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 filing covers the three and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Dollar figures below are in millions unless noted.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $280.2 | $249.6 | $794.7 | $717.7 |
| Operating income | $26.9 | $24.7 | $79.9 | $31.8 |
| Operating margin | 9.6% | 9.9% | 10.1% | 4.4% |
| Net income | $18.2 | $11.9 | $51.9 | $15.0 |
| Diluted EPS | $0.60 | $0.39 | $1.71 | $0.49 |
- Q3 revenue rose 12.3%, operating income 8.9%, and net income 52.9% year over year. Revenue growth was broad-based; Intermodal was up 53.3%, largely from acquisitions, while Expedited LTL grew 7.9%.
- For the first nine months, revenue increased 10.7%. Operating income rose sharply against 2016, which included $42.4 million of goodwill, intangible and other asset impairment charges. Excluding those charges, 2016 operating income was approximately $74.2 million; 2017’s $79.9 million represents more modest underlying improvement.
- Q3 segment operating income: Expedited LTL $23.2 million (14.9% margin); TLS $0.1 million (0.2%); Pool $0.7 million (1.8%); Intermodal $3.5 million (8.3%). TLS profitability fell from $2.0 million as third-party carrier costs and vehicle-claim reserves rose. Intermodal revenue expanded, but its margin declined from 10.9%.
- Operating cash flow was $77.7 million for nine months, down from $94.6 million, mainly because receivables increased with higher business volumes and the Atlantic acquisition. Investing used $34.7 million, including $22.5 million for Atlantic; financing used $39.1 million. Cash increased $3.9 million to $12.4 million.
- At September 30, current assets were $157.8 million and current liabilities $58.2 million. Debt and capital lease obligations totaled about $41.2 million, including $40.5 million drawn on the revolver. The company reported $100.8 million of available revolver capacity after $8.7 million of letters of credit; the borrowing rate was 2.6%.
- Nine-month capital expenditures were $13.6 million; dividends paid were $13.6 million and share repurchases were $42.0 million. The quarterly dividend increased to $0.15 per share in 2017 from $0.12 in 2016.
Material changes and management commentary
- In May 2017, Forward Air acquired Atlantic for $22.5 million, plus a potential $1.0 million earnout, expanding Intermodal’s southeastern footprint. Atlantic contributed $14.7 million of Q3 revenue and $1.1 million of operating income. The purchase-price allocation remained preliminary.
- Q3 Expedited LTL benefited from higher tonnage, Complete service attachment and fuel surcharge revenue, but increased use of more costly third-party carriers pressured costs. LTL’s Q3 operating margin improved to 14.9%; its nine-month margin was 14.4%, down from 14.9%.
- Management cited new business wins and higher miles in TLS, but increased third-party carrier use, rising cost per mile and a large vehicle claim reserve materially weakened segment earnings. Pool improved on rate increases, volume and operating efficiencies.
- Management believes cash, expected operating cash flows and available credit will cover anticipated needs for at least the next 12 months. It plans to grow Intermodal through acquisitions and greenfield locations. No earnings or revenue guidance is provided.
Outlook, risks and unusual items
- A new five-year, $150 million unsecured revolving facility was entered into September 29, 2017, replacing the previous facility and maturing in September 2022. It includes financial and other covenants that may restrict transactions, dividends, repurchases and additional debt. The facility may be increased, subject to lender approval and conditions.
- Adoption of the new revenue standard is planned on a full-retrospective basis. Certain agency revenues and related costs are expected to be presented gross, increasing both revenue and expenses by approximately $46 million for the first nine months of 2017 and $33 million for the comparable 2016 period, with no operating-income effect. Revenue recognition for shipments in transit is also expected to accelerate; management expects no significant overall impact.
- Management identifies freight volumes and yield, competition and pricing, customer concentration and credit, fuel prices, availability and cost of owner-operators and freight handlers, claims and insurance, regulation, systems capacity, and acquisition integration as risks. Self-insurance estimates may change materially; management cannot estimate a reasonably possible additional loss range.
- Routine litigation is not expected by management to have a material adverse effect. No additional goodwill impairment was recorded in 2017; the TQI reporting unit’s estimated fair value exceeded carrying value by about 15% at June 30, 2017, but the estimate is sensitive to projected cash flows and valuation assumptions.
Important facts for investors to verify
- Whether TLS can restore margins as third-party carrier costs and vehicle-claim reserves evolve.
- Whether Intermodal acquisition growth translates into sustained operating income and margins, and whether Atlantic’s final purchase accounting or earnout changes.
- Receivables, operating cash conversion and the effects of further revenue growth on working capital.
- Compliance with the new credit facility’s covenants and the company’s debt, repurchase and dividend plans.
- The realized presentation and timing effects of the revenue-standard adoption, and the sensitivity of TQI goodwill valuations and self-insurance reserves.