Forward Air Corporation — Q2 2019 Form 10-Q
Business context and reporting period. Forward Air is an asset-light freight and logistics company operating Expedited LTL, Intermodal, Truckload Premium Services (TLS), and Pool Distribution segments. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $345.8m | $330.3m | $667.2m | $633.0m |
| Operating income | $30.6m | $32.9m | $55.3m | $57.1m |
| Net income | $22.3m | $24.3m | $40.7m | $42.0m |
| Diluted EPS | $0.78 | $0.82 | $1.41 | $1.42 |
| Operating margin | 8.8% | 9.9% | 8.3% | 9.0% |
Q2 revenue grew 4.7%, while operating income fell 7.0% and net income fell 8.2%. For the first half, revenue increased 5.4%, but operating income declined 3.2% and net income declined 3.1%. Margins shown are calculated from reported figures.
- Cash flow and investment: First-half operating cash flow was $71.8m, versus $67.0m. Purchases of property and equipment were $16.6m; the company also spent $27.0m on the FSA acquisition. Investing cash outflow was $42.3m.
- Liquidity and debt: June 30 cash was $14.8m, down from $25.7m at year-end. Current assets were $193.1m and current liabilities $136.6m. Debt and finance lease obligations totaled about $57.5m. The revolving facility had $79.8m of available capacity after $57.5m borrowed and $12.7m in letters of credit; the company reported covenant compliance.
- Leases: Adoption of the new lease standard resulted in $149.5m of operating lease right-of-use assets and $150.1m of lease liabilities at June 30. The filing says adoption did not affect income or cash flows; comparative balance sheets were not restated.
- Capital returns: First-half dividends paid were $10.3m and share repurchases were $38.6m. The quarterly dividend increased to $0.18 per share from $0.15 in 2018.
Material changes and segment performance
- Expedited LTL: Q2 revenue rose 6.6% to $205.7m, primarily reflecting FSA final-mile acquisition revenue. Operating income edged up 1.5% to $26.9m, while margin declined to 13.1% from 13.7%. Traditional linehaul tonnage fell 6.2%; higher rates and final-mile activity partly offset lower volumes.
- Intermodal: Q2 revenue increased 2.6% to $50.5m, but operating income decreased 7.1% to $5.2m and margin fell to 10.3%. For the first half, revenue rose 7.1% and operating income rose 26.7%, supported by the MMT and Southwest acquisitions and rate increases.
- TLS: Q2 revenue fell 5.7% to $46.1m and operating income fell 58.8% to $0.7m. Management cited fewer miles and lower revenue per mile amid spot- and contract-rate pressure. First-half revenue declined 3.4% and operating income declined 11.8%.
- Pool Distribution: Q2 revenue grew 5.8% to $45.8m, while operating income was flat at $1.6m and margin eased to 3.5%. Growth reflected rate increases, volumes from existing customers, and new business; higher third-party carrier and contract labor costs weighed on results.
Outlook, commentary, risks, and unusual items
- The filing provides no specific financial guidance or quantified full-year outlook. Management describes acquisition and greenfield expansion as part of its growth strategy, particularly in Intermodal, and notes that operating results are seasonal and the first half is not necessarily indicative of the full year.
- In April, the company acquired FSA Logistix assets for $27.0m, with contingent consideration of up to $15.0m; the earn-out liability was valued at $10.3m at quarter-end. The purchase-price allocation remained preliminary.
- On July 14, 2019, after quarter-end, the company acquired substantially all assets of OST for $12.0m using operating cash flows. Management anticipates annualized revenue of about $32.0m and operating income of about $2.5m.
- A $5.0m reserve for pending vehicular claims was recorded in Q2. Claims remain under development and could further affect results; management could not estimate a reasonably possible range of additional losses. Self-insurance estimates are a critical accounting policy.
- First-half results also included $1.3m of CEO-transition costs. Management identifies risks including freight demand and pricing, customer credit, driver and carrier availability, fuel costs, customer concentration, acquisition integration, claims, regulation, and environmental and tax matters. No changes to the risk factors in the 2018 Form 10-K were reported.
- The company reported no goodwill impairment at June 30. Management also noted that changes in market conditions or strategy could affect goodwill valuation estimates.
Important facts for investors to verify
- Whether lower traditional LTL tonnage and TLS rate/mileage pressure persist, and whether pricing and final-mile growth can offset them.
- The development and ultimate cost of the pending vehicle claims underlying the $5.0m reserve, including potential additional reserve needs.
- FSA and OST integration, realized revenue and profitability versus management’s expectations, and the final FSA purchase-price allocation and earn-out.
- Cash levels and borrowing needs after acquisitions, repurchases, dividends, and capital spending; confirm facility availability and covenant headroom.
- How acquisition-related growth and the new operating lease liabilities affect future margins, cash commitments, and balance-sheet measures.