Business context and reporting period
Forward Air Corporation is an asset-light freight and logistics company with four reportable segments: Expedited LTL, Truckload Premium Services (TLS), Intermodal and Pool Distribution. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $267.5 | $238.6 | $514.5 | $468.2 |
| Income from operations | $29.8 | $(14.3) | $53.0 | $7.1 |
| Net income (loss) | $19.6 | $(10.1) | $33.8 | $3.0 |
| Diluted EPS | $0.64 | $(0.33) | $1.11 | $0.10 |
Revenue grew 12.1% in Q2 and 9.9% for the first half. Calculated operating margins were approximately 11.1% and 10.3%, respectively. The 2016 comparisons include a $42.4 million impairment charge, so the sharp year-over-year profit improvement substantially reflects the absence of that charge. Excluding it, TLS operating results weakened, while Expedited LTL operating income declined in both reported periods.
- Cash flow: First-half operating cash flow was $52.0 million, down from $61.2 million. The company attributed the decline mainly to higher receivables, including Atlantic-related revenue not yet collected. Investing used $25.3 million, including the $22.5 million Atlantic acquisition; financing used $25.1 million. Cash increased to $10.1 million from $8.5 million at year-end 2016.
- Debt and liquidity: At June 30, debt and capital lease obligations totaled approximately $21.4 million, including $20.5 million drawn on the revolver. The company reported $7.5 million of letters of credit and $122.0 million of remaining revolver capacity; the drawn rate was 2.5%. The term loan matured in March 2017. The company said available cash, expected operating cash flow and facility capacity should meet anticipated needs for at least 12 months.
- Balance sheet: Total assets were $659.7 million and shareholders’ equity was $519.2 million at June 30, compared with $641.3 million and $499.1 million, respectively, at December 31, 2016.
- Shareholder returns: The quarterly dividend was $0.15 per share, up from $0.12 in 2016. First-half dividends paid were $9.1 million; share repurchases were $12.0 million.
Material changes and segment performance
- Expedited LTL: Q2 revenue rose 5.3% to $152.3 million, while operating income fell 7.6% to $23.0 million; margin declined to 15.1% from 17.2%. Higher volumes, Complete services and fuel surcharge revenue were offset by greater use of higher-cost third-party carriers, employee incentives and vehicle claim reserves.
- TLS: Q2 revenue increased 14.7% to $45.2 million; operating income was $1.8 million versus a $40.3 million loss, largely because 2016 included the impairment. Excluding that charge, operating income declined $0.3 million as third-party carrier costs rose faster than revenue per mile.
- Pool Distribution: Q2 revenue increased 16.8% to $36.8 million and operating income improved to $1.6 million from a $0.4 million loss, supported by rate increases, volume and operating efficiencies.
- Intermodal: Q2 revenue increased 45.9% to $35.3 million, mainly due to acquisitions and fuel surcharges. Operating income rose 10.7% to $3.1 million, but margin decreased to 8.8% from 11.6% as acquisition-related amortization, insurance and other costs increased.
Outlook, commentary and risks
- In May 2017, the company acquired Atlantic’s intermodal assets for $22.5 million, with a potential $1.0 million earnout. Atlantic added southeastern locations and contributed $8.4 million of Q2 revenue and $0.3 million of operating income. Its purchase-price allocation remained preliminary.
- Management described growth in Intermodal and other businesses as a strategy to expand geographic reach and diversify revenue. It provided no specific earnings or revenue guidance.
- Management reported that its June 30 goodwill assessment required no impairment. For TQI, which had been impaired in 2016 and continued to incur operating losses, estimated fair value exceeded carrying value by approximately 15%; the estimate depends on projected cash flows and other valuation assumptions.
- The company identified freight volumes and pricing, competition, fuel prices, customer credit and concentration, availability and cost of owner operators and freight handlers, acquisition integration, and vehicle, workers’ compensation and other claims as risks. It noted that claim estimates could change materially, though it could not estimate a reasonably possible additional loss range. Routine litigation was not expected to have a material adverse effect.
- The company expected adoption of the new revenue standard to shift recognition from shipment completion to progress over time for shipments in transit, with a minor anticipated financial impact; its transition method was not yet determined. It was evaluating the future lease standard.
Important facts for investors to verify
- How much reported revenue growth reflects acquisitions versus underlying volume, pricing and fuel surcharges, particularly in Intermodal.
- Whether purchased-transportation costs, insurance and claims, and Expedited LTL margins improve or continue to pressure profitability.
- Atlantic’s final purchase-price allocation, earnout exposure, integration costs and contribution to results.
- Cash conversion and receivables collection, alongside revolver use, covenant compliance and liquidity needs.
- The sensitivity of TQI’s goodwill valuation to projected cash flows and the assumptions supporting its estimated 15% fair-value cushion.