Forward Air Corporation (NASDAQ: FWRD) — FY 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Forward Air is an asset-light freight and logistics provider operating four segments: Expedited LTL, Truckload Premium Services (TLS), Intermodal, and Pool Distribution. Prior-year segment results were restated to reflect a reporting-structure change.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Operating revenue | $982.5 million | $959.1 million | +2.4% |
| Income from operations | $60.0 million | $81.8 million | -26.7% |
| Operating margin | 6.1% | 8.5% | -2.4 percentage points |
| Net income | $27.7 million | $55.6 million | -50.2% |
| Diluted EPS | $0.90 | $1.78 | -49.4% |
| Cash from operations | $130.4 million | $85.7 million | +$44.7 million |
| Capital expenditures | $42.2 million | $40.5 million | +$1.7 million |
Fourth-quarter revenue was $264.8 million versus $256.4 million in Q4 2015; operating income was $28.2 million versus $29.0 million, and net income was $12.7 million versus $23.2 million. The filing does not provide a specific explanation for the year-over-year fourth-quarter net-income decline.
Margins and segments. Expedited LTL revenue fell 1.1% to $570.8 million, but operating income rose 5.4% to $83.5 million and its operating margin improved to 14.6% from 13.7%. TLS revenue grew 7.2% to $164.3 million, but it recorded a $35.4 million operating loss, including a $42.4 million impairment charge; excluding the impairment, results still deteriorated, principally because pharmaceutical revenue declined and revenue per mile fell faster than cost per mile. Pool Distribution revenue rose 14.3% to $148.6 million, while operating income slipped to $3.6 million. Intermodal revenue decreased 0.6% to $103.7 million and operating income fell 7.6% to $11.0 million.
Cash, debt, and liquidity. Year-end cash was $8.5 million, down from $33.3 million. The balance sheet reported $27.7 million of current debt and $1.1 million of capital lease obligations. The $27.8 million term-loan balance was due in March 2017. The company had no revolving-credit borrowings, $7.5 million of letters of credit, and $142.5 million of available revolver capacity. Management said cash, expected operating cash flow, and available borrowing capacity should meet anticipated needs for at least 12 months. Operating cash flow less property-and-equipment purchases was approximately $88.2 million; this is a simple calculation and excludes acquisitions and other investing activity.
Material changes versus the prior comparable period
- Revenue grew modestly, but operating income and net income declined substantially. The principal unusual charge was a $42.4 million impairment of goodwill, customer-related intangibles, and other assets associated with TQI in TLS; the filing identifies $25.7 million of goodwill impairment and $16.5 million of intangible-asset impairment, plus a separate $0.3 million facility impairment.
- The impairment was non-deductible for tax purposes and contributed to a 52.6% effective tax rate, compared with 30.2% in 2015.
- Net fuel surcharge revenue declined 24.0%, mainly due to lower fuel prices and lower volumes in Expedited LTL and Intermodal. Expedited LTL also benefited from improved pricing, a new dimensional-weight standard, and operating efficiencies.
- Operating cash flow increased, while investing cash outflow declined to $52.4 million from $100.9 million. 2016 investing included $11.8 million for the Ace and Triumph acquisitions and $42.2 million of property-and-equipment purchases.
- Financing used $102.8 million of cash, including $40.0 million for share repurchases and $15.5 million of dividends; the company also paid down debt. The quarterly dividend increased from $0.12 to $0.15 per share in Q4.
Outlook, commentary, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management described growth priorities as expanding premium-service offerings, improving information systems, and pursuing acquisitions, particularly to broaden Intermodal’s geographic reach. Management noted that the business has substantial fixed network costs and depends on freight volume and revenue per pound; historical seasonality generally makes the first half weaker than the third and fourth quarters.
- Key operating risks include economic and freight-volume weakness, pricing pressure, customer concentration (top 10 customers were approximately 34.1% of 2016 revenue), and reliance on owner-operators and third-party carriers. Customer contracts are often cancellable on 30–60 days’ notice.
- Other material risks include fuel-price and surcharge volatility, driver and freight-handler availability and classification, insurance costs and self-insured claims, weather disruption, regulatory changes including the ELD mandate, cybersecurity and systems outages, and acquisition integration or impairment risk.
- Insurance and claims expense rose 18.1% to $25.4 million. The company reported self-insured retentions of $0.8 million per vehicle/general-liability occurrence and generally $0.3 million per workers’ compensation or employee-health claim, with a higher Ohio workers’ compensation retention.
- Contractual cash obligations totaled $135.0 million, including $103.9 million of operating leases and $27.8 million of term-loan payments, largely due in 2017. The company also reported $18.8 million of self-insurance reserves and $0.8 million of unrecognized tax benefits excluded from that obligations table.
- Management did not expect pending routine litigation to have a material adverse effect, but said the possible range of additional losses on claims could not currently be estimated. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Assess the underlying performance and recovery prospects of TQI/TLS after the impairment, including pharmaceutical customer revenue and revenue-per-mile trends.
- Track whether Expedited LTL’s pricing, dimensional-weight changes, and network efficiencies can offset volume softness and lower fuel surcharges.
- Verify repayment of the $27.8 million term loan due in March 2017 and monitor revolver use, cash balances, and covenant headroom.
- Review insurance renewals, claims development, and the effect of self-insurance on earnings and collateral requirements.
- Monitor Pool Distribution’s ability to absorb new-business onboarding, facility, and dock-labor costs, and Intermodal’s market conditions and acquisition integration.
- Confirm the sustainability of dividends and repurchases alongside acquisition spending, capital expenditures, and lease commitments.