FORWARD AIR CORP quarterly report, Q1 FY2024

Forward Air Corporation — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024. Unaudited consolidated results. On January 25, 2024, Forward Air completed its acquisition of Omni Logistics; therefore, Q1 results include Omni only from the acquisition date. Comparisons with Q1 2023 are not fully like-for-like. Amounts below are in millions of dollars unless noted.

Financial performance

Metric	Q1 2024	Q1 2023
Revenue	$541.8	$357.7
Operating income (loss)	$(65.7)	$47.2
Net income (loss), consolidated	$(88.8)	$36.4
Net income (loss) attributable to Forward Air	$(61.7)	$36.4
Basic and diluted EPS	$(2.81)	$1.37
Cash from operating activities	$(51.7)	$60.8
Capital expenditures	$5.0	$6.5

Revenue rose 51.5%, primarily reflecting $224.8 million of Omni revenue. Expedited Freight revenue increased 1.4%; Intermodal revenue declined 36.2%.
Consolidated operating margin was approximately negative 12.1%, versus positive 13.2% a year earlier. Net loss attributable to Forward Air includes a $27.1 million net loss attributable to noncontrolling interests.
Expedited Freight operating income fell to $19.5 million from $29.7 million; its operating margin declined to 7.1% from 11.0%. Intermodal operating income fell to $3.6 million from $11.2 million; its margin declined to 6.4% from 12.7%.
Omni contributed $224.8 million of revenue and reported a $28.6 million operating loss for its included post-acquisition period. Corporate and other operations recorded a $60.2 million operating loss, including $58.2 million of Omni transaction and integration costs.
Operating cash flow was negative $51.7 million. Investing cash outflow was $1,569.5 million, including the acquisition; financing cash outflow was $158.7 million. Cash flow after capital expenditures was approximately negative $56.7 million, calculated from reported operating cash flow less capital expenditures.

Balance sheet, debt and liquidity

At March 31, cash and cash equivalents were $152.0 million and restricted cash was $20.2 million. Current assets were $569.4 million and current liabilities were $444.8 million.
Long-term debt, net of discounts and issuance costs, was $1,675.4 million, including $1,045.0 million of term loans and $725.0 million principal of 9.5% senior secured notes. Current debt was $11.3 million. Finance lease obligations totaled $62.4 million.
The term loans bear variable interest, mature in 2030, and had $1,045.0 million outstanding at quarter-end. The notes mature in 2031. No revolving facility borrowings were outstanding; commitments were reduced to $340 million from $400 million in February.
Q1 net interest expense was $40.8 million, versus $2.4 million a year earlier; the reported weighted-average borrowing rate was 9.58%, versus 5.96%.
Management stated that cash, internally generated funds and available borrowing capacity should be sufficient for working capital, capital expenditures and debt service over the next 12 months. The filing reports covenant compliance as of its filing date; the revolving facility’s leverage covenant begins measuring June 30, 2024.

Material changes, outlook and risks

Omni acquisition: Preliminary purchase price was $2,313.7 million, including $1,543.0 million to extinguish Omni debt. Acquisition accounting remains preliminary; final valuations and identification of acquired assets and liabilities could change. Goodwill recognized was $1,100.5 million.
Omni consideration includes common and preferred equity. The common equity consideration represented approximately 16.5% of Forward Air’s common stock on a fully diluted, as-exchanged basis at closing; if shareholders approve conversion of the convertible preferred consideration, total consideration could represent 35.0%. Series C preferred units accrue a 14% annual coupon. The company agreed to use reasonable best efforts to seek conversion approval.
The company entered a tax receivable agreement generally requiring payment to certain Omni holders of 83.5% of specified tax benefits; a $13.3 million liability was recorded. Early termination can require a payment based on the present value of anticipated future payments.
Management described uncertain global economic and trade conditions, soft freight demand, excess transportation capacity, and potential further rate declines in 2024. Carrier pricing volatility, fuel costs and surcharge timing may affect margins. No specific earnings or revenue guidance is provided in the supplied filing text.
Debt carries significant interest cost and variable-rate exposure. The company estimated that a 150-basis-point increase in term-loan rates would raise quarterly interest expense and reduce quarterly operating cash flow by approximately $4.0 million. Failure to meet the leverage covenant could eliminate access to the revolving facility.
A shareholder lawsuit challenging the absence of a shareholder vote on the Omni acquisition remains pending; plaintiffs sought leave in May 2024 to file an amended class-action complaint seeking damages, among other relief. The company disputes the allegations. Management says ordinary-course claims are reserved, but insurance reserve estimates could change materially.
Management assessed disclosure controls as effective. Omni’s controls were being integrated and assessed; the company planned to exclude the acquired operations from its fiscal 2024 Section 404 compliance efforts under SEC guidance.

Key facts for investors to verify

Omni’s post-acquisition operating performance, integration costs, expected synergies and final purchase-price allocation.
Current and forecast leverage against amended covenant limits, covenant headroom and access to the $340 million revolving facility.
Cash generation and working-capital needs, particularly given negative Q1 operating cash flow and substantial debt service.
Potential dilution and the outcome and timing of the shareholder vote on conversion of Omni-related preferred equity.
Progress and potential financial exposure from the acquisition-related shareholder litigation and the tax receivable agreement.