Forward Air Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. Amounts below are in millions, except per-share data. Forward Air is an asset-light freight and logistics company; results reflect continuing operations unless stated otherwise. Its continuing segments are Expedited Freight and Intermodal. Pool is classified as a discontinued operation and held for sale.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $332.0 | $313.7 | $919.2 | $895.5 |
| Operating income, continuing operations | $23.5 | $29.2 | $53.2 | $82.0 |
| Operating margin, continuing operations | 7.1% | 9.3% | 5.8% | 9.2% |
| Net income, continuing operations | $17.0 | $21.1 | $37.6 | $60.0 |
| Net income (loss), including discontinued operations | $16.6 | $22.2 | $28.2 | $62.9 |
| Diluted EPS, including discontinued operations | $0.60 | $0.78 | $1.01 | $2.19 |
- Q3 revenue increased 5.8%, led by Expedited Freight, up 10.7% to $283.5 million. Final Mile revenue rose 80.4% to $57.0 million, primarily reflecting the Linn Star acquisition. Intermodal revenue fell 16.1% to $48.9 million.
- Despite revenue growth, continuing operating income declined 19.5% in Q3. Purchased transportation expense increased 15.2%, and operating expenses overall grew faster than revenue. Expedited Freight operating margin fell to 8.3% from 10.6%; Intermodal margin fell to 9.8% from 11.8%.
- For the first nine months, revenue increased 2.6%, while continuing operating income declined 35.1%. Final Mile acquisition growth partly offset weaker network, Truckload and Intermodal activity. Expedited Freight operating income fell 33.8% and Intermodal operating income fell 29.5%.
- Pool generated a $0.3 million after-tax loss in Q3 and a $9.5 million loss for the nine months, versus income of $1.1 million and $2.9 million, respectively, in the prior-year periods. COVID-related demand weakness and retail mall closures were cited.
Cash flow, debt and liquidity
- Continuing operating cash flow was $80.5 million for the first nine months, down from $107.8 million. Continuing investing cash outflow was $71.0 million, including $55.9 million for Linn Star; continuing financing cash outflow was $31.3 million.
- Cash declined to $43.0 million at September 30, 2020, from $64.7 million at year-end 2019. Capital expenditures were $16.4 million, with $9.8 million related to expansion of the Columbus hub.
- Revolver borrowings were $112.5 million; $97.1 million remained available after $15.4 million of letters of credit. The facility’s stated maximum was $225 million, and it matures in September 2022. The reported interest rate was 3.27%. Total debt and finance lease obligations on the balance sheet were $118.1 million.
- Management reported compliance with credit covenants and said it did not expect liquidity issues or difficulty meeting financial obligations. It also reported approximately $5 million of CARES Act-related cash-flow benefit in Q2 and expected approximately $8 million for 2020, including discontinued operations.
- The company paid $15.1 million in dividends and repurchased $45.2 million of shares during the nine months. The quarterly dividend was $0.18 per share through Q3; a $0.21 dividend was declared in Q4.
Outlook, risks and notable items
- Management stated that the company was profitable on a continuing and consolidated basis and expected to remain profitable for the rest of 2020. Pool year-over-year growth was expected to remain negative for the remainder of 2020. No quantitative earnings or revenue guidance was provided.
- The Board approved a plan in April 2020 to divest Pool within a year. The company was exploring options but had not entered into a material definitive sale agreement as of the filing. Pool’s estimated fair value less selling costs exceeded carrying value by approximately 5% at the assessment date.
- COVID-19 reduced volumes across segments and created substantial uncertainty. Management cited exposure to air and ocean freight and physical retail, lower fuel surcharge revenue, and the risk that prolonged economic weakness could hurt demand, collections, liquidity and covenant compliance. Networks remained operational.
- The company described growth efforts including LTL network expansion, Final Mile integration and Intermodal development. It acquired Linn Star for $57.2 million in January 2020; a $4.3 million FSA earn-out remained at quarter-end, with final payment expected in Q2 2021.
- After quarter-end, Forward Air acquired CLW Delivery for $5.5 million. Management anticipated annualized contribution of approximately $20 million of revenue and $1 million of operating income.
- Unusual Q3 items included a $2.3 million litigation reserve and $1.6 million of increased vehicle self-insurance reserves. For the nine months, increased vehicle and workers’ compensation reserves were $4.2 million and $1.1 million, respectively. Management cautioned that ultimate claim outcomes and estimates could differ materially.
Important facts for investors to verify
- Whether the planned Pool divestiture is completed on the stated timetable and at proceeds consistent with its carrying value.
- Whether COVID-related demand and volume pressures persist, particularly in Intermodal and the legacy LTL network, and how they affect operating margins.
- Whether Final Mile acquisitions deliver expected growth and integration benefits without further pressure from purchased transportation and installation costs.
- Cash generation, debt and covenant headroom, and the effect of capital returns and acquisitions on liquidity.
- Developments in self-insurance reserves, litigation matters and potential asset impairment assessments as economic conditions evolve.