Business context and reporting period
Forward Air Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. The asset-light freight and logistics company reported continuing operations in Expedited Freight and Intermodal. Following the Board’s April 23, 2020 decision to pursue a sale of Pool Distribution within a year, Pool is presented as a discontinued operation and its assets and liabilities as held for sale. Prior-period results were recast accordingly.
Financial performance and position
Amounts are in millions except per-share data. Revenue and operating results below are from continuing operations unless stated otherwise.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $281.7 | $302.9 | $587.2 | $581.8 |
| Income from continuing operations | $13.9 | $29.1 | $29.7 | $52.8 |
| Continuing-operations net income | $9.2 | $21.2 | $20.6 | $38.9 |
| Discontinued-operations income (loss), net of tax | $(6.1) | $1.1 | $(9.1) | $1.8 |
| Total net income | $3.2 | $22.3 | $11.5 | $40.7 |
| Diluted net income per share | $0.11 | $0.78 | $0.40 | $1.41 |
- Continuing-operations operating margin was approximately 4.9% in Q2 2020 versus 9.6% in Q2 2019, and 5.1% for the first half versus 9.1% in 2019.
- Q2 Expedited Freight revenue fell 6.9% year over year and operating income fell 58.2%; its operating margin was 5.0%, down from 11.1%. Final Mile revenue more than doubled, largely reflecting the FSA and Linn Star acquisitions, but network revenue declined.
- Q2 Intermodal revenue decreased 8.1% and operating income decreased 15.4%; operating margin was 9.5% versus 10.3%.
- Six-month continuing operating cash flow was $59.9, compared with $64.3 in 2019. Investing cash use was $69.2, including the Linn Star acquisition; property and equipment purchases were $14.2. Financing provided $25.4.
- Cash was $80.9 at June 30, 2020, versus $64.7 at year-end 2019. The revolving facility had $132.5 drawn, $15.4 in letters of credit and $77.1 of available capacity. The facility’s maximum commitment was increased from $150 to $225 in April; it matures in September 2022. The company reported compliance with its debt covenants.
- Cash dividends were $0.18 per share in each quarter. The company made no share repurchases in Q2; first-half repurchases totaled $15.3.
Material changes versus prior comparable periods
- COVID-19-related volume weakness drove lower continuing-operations earnings despite first-half revenue growth of 0.9%. Q2 revenue declined 7.0% and continuing-operations income declined 52.2% year over year; first-half continuing net income fell 47.0%.
- Expedited Freight’s Q2 network tonnage declined 16.7%, shipments declined 5.0%, and revenue per hundredweight declined 3.9%. Lower fuel prices also reduced fuel surcharge revenue.
- First-half Expedited Freight revenue rose 2.2%, as Final Mile revenue growth of $66.5 million, including acquired operations, more than offset declines in network, truckload and other revenue. Its first-half operating margin fell to 5.5% from 10.3%.
- Pool shifted to discontinued operations. Its Q2 revenue was $14.0 versus $42.9 a year earlier, and it recorded a $6.1 after-tax loss versus $1.1 of income. Held-for-sale assets totaled $86.5 and liabilities $60.1 at June 30.
- Debt and finance lease obligations on the balance sheet totaled approximately $138.0, up from approximately $73.7 at December 31, 2019. The increase reflects additional revolving-credit borrowing, alongside acquisition and other funding activity.
Outlook, management commentary and risks
- Management said it expected Pool to recover slowly on a sequential basis through Q1 2021, while expecting negative year-over-year growth for the remainder of 2020. Management expected the company to remain profitable for the rest of 2020; this was not quantified guidance.
- The company was exploring options to divest Pool and said it had not entered into a material definitive sale agreement as of the filing. Pool’s fair value less costs to sell was estimated to exceed carrying value by approximately 5%.
- Management described COVID-19 effects as uncertain. Stay-at-home orders, weaker retail and freight demand, lower Asian imports, port congestion, fuel-price declines, possible customer payment delays and labor or supply-chain disruptions could continue to affect volumes, margins and liquidity. The company cautioned that prolonged weakness could threaten covenant compliance and future investment capacity.
- The company reported $5 million of Q2 cash-flow benefit from CARES Act tax-payment deferrals and expected approximately $12 million of benefit for 2020; these figures include discontinued operations. It also used $0.8 million of employee retention credits, primarily benefiting Pool.
- Management reported no goodwill or long-lived-asset impairment at June 30, but noted that COVID-19 could weaken assumptions used in impairment analyses and future charges could be required. Self-insurance claim estimates may also change materially; management could not estimate a reasonably possible additional-loss range. Routine litigation was not expected to have a material adverse effect.
- Unusual items included $1.0 million of Q2 severance and $0.6 million of increased vehicle-claim reserves in corporate/other operations. For the first half, vehicle and workers’ compensation reserve increases were $2.6 million and $0.5 million, respectively. Linn Star was acquired in January for $57.2 million; the first FSA earn-out installment of $5.3 million was paid in June, with a remaining $3.8 million fair-value liability.
Important facts for investors to verify
- Whether and on what terms Pool is sold, and how its results, assets and liabilities change before divestiture.
- Whether freight volumes and segment margins recover as management anticipated, especially in Expedited Freight’s network and Intermodal.
- Liquidity, revolving-credit usage and covenant headroom if COVID-19-related demand weakness persists; also the timing and effect of deferred tax and payroll payments.
- Integration performance and returns from Linn Star, FSA and OST, including remaining earn-out obligations and acquisition-related costs.
- Changes in receivable reserves, self-insurance estimates and goodwill or other asset impairment assumptions as economic conditions evolve.