Forward Air Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Forward Air is an asset-light freight and logistics provider operating Expedited Freight and Intermodal segments in the U.S., Canada and Mexico. Amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $413.4 | $510.0 | $1,242.7 | $1,492.2 |
| Operating income | $15.5 | $71.7 | $96.2 | $204.6 |
| Net income | $9.3 | $52.1 | $65.6 | $150.2 |
| Diluted EPS | $0.36 | $1.93 | $2.50 | $5.53 |
| Operating margin | 3.7% | 14.0% | 7.7% | 13.7% |
Q3 revenue fell 18.9% year over year; operating income fell 78.4% and net income fell 82.2%. For the first nine months, revenue declined 16.7% and net income declined 56.3%. Lower freight demand, pricing and fuel surcharge revenue weighed on results. Net interest expense increased to $2.7 million in Q3 and $7.6 million year to date, reflecting higher rates and borrowings.
Segment trends: Q3 Expedited Freight revenue decreased 11.2% to $351.3 million and operating income decreased 35.4% to $36.4 million; its operating margin was 10.3%, versus 14.2%. Network tonnage declined 1.8%, and revenue per hundredweight excluding fuel fell 7.1%. Intermodal revenue decreased 45.7% to $62.2 million and operating income decreased 71.4% to $4.7 million; its margin was 7.6%, versus 14.5%. Drayage shipments declined 23.2% and revenue per shipment declined 31.6%.
Cash flow and liquidity: Nine-month operating cash flow was $159.4 million, down from $196.8 million. Investing cash outflow was $76.8 million, including $56.7 million for Land Air and $23.4 million of capital expenditures. Financing cash outflow was $109.6 million, including $93.8 million of share repurchases and $18.8 million of dividends. Cash was $18.8 million at September 30, down from $45.8 million at year-end. Working capital was approximately $47.3 million. The company reported $265.2 million of available capacity under its credit facility and compliance with its covenants.
Credit-facility borrowings were $122.4 million gross at quarter-end; finance lease obligations were $38.4 million. The credit-facility borrowing rate was 6.70% at September 30, compared with 3.33% a year earlier.
Material changes and notable items
- Q3 corporate/other operations recorded a $25.6 million operating loss, versus a $1.2 million loss a year earlier. It included $22.4 million of Omni-related diligence and transaction costs. Year-to-date costs were $27.9 million.
- Land Air Express was acquired in January 2023 for approximately $56.6 million, funded with operating cash and credit-facility borrowings.
- During the first nine months, the company repurchased 883,000 shares for $93.8 million, compared with 466,000 shares for $47.8 million in the prior-year period. The quarterly dividend remained $0.24 per share.
Outlook, transaction and risks
Management described freight volumes and rates as weak, citing excess transportation capacity, reduced shipper demand and lower imports. It expected these trends to continue into Q4 2023. The filing provides no specific financial guidance. Fuel surcharges may not fully offset fuel-price changes, and results remain exposed to economic cycles, pricing pressure, capacity costs and insurance claims.
The proposed Omni acquisition was a major uncertainty. Its announced consideration included $150 million cash, common-equity consideration representing 16.5% of fully diluted common equity before conversion approval, and convertible preferred equity that could bring the combined equity consideration to 37.7% if approval is obtained. The preferred units carry a cumulative annual coupon, with the rate set at closing, based on a 3.50% spread over the most junior transaction debt; the tax receivable agreement generally provides certain Omni holders 83.5% of specified realized tax benefits.
Transaction financing included a $725 million, 9.5% senior secured notes offering, closed October 2, 2023 and placed in escrow, and a priced $1.125 billion term-loan facility; the filing also describes commitments for up to $1.85 billion of bridge/term debt and a $400 million revolver. If the merger is not completed by June 30, 2024, or specified termination events occur earlier, the notes are subject to special mandatory redemption. These financing amounts relate to the proposed transaction, not quarter-end funded debt.
Litigation materially clouds the transaction outlook. A shareholder suit temporarily restrained the merger, but the court dissolved the restraint on October 25 and denied a temporary injunction; the plaintiffs later withdrew their request to reinstate it, while an interlocutory-appeal request remained under advisement. On October 31, Omni sued in Delaware seeking to compel closing. Forward Air said it believed Omni had not met certain obligations and that a closing condition therefore might not be satisfied; it intended to defend its position. The filing cautions that the court could nevertheless compel closing. Transaction costs, financing obligations, possible dilution, integration risks and the outcome of litigation are significant uncertainties.
Important facts for investors to verify
- Current status and outcome of the Omni dispute, merger closing conditions, and any associated litigation or termination.
- Whether escrowed notes and committed facilities become funded, the resulting debt burden and interest costs, and any redemption obligations if the merger fails.
- Whether weak freight demand, shipment volumes and yields—especially Intermodal drayage—stabilize or continue to pressure margins.
- Changes in liquidity, credit-facility availability, covenant compliance, and cash needs for operations, capital spending and claims.
- Potential transaction-related dilution, preferred dividends and tax-receivable-agreement payments if the Omni transaction proceeds.