Forward Air Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual 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.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Operating revenue | $1,320.9 million | $1,169.3 million | +13.0% |
| Income from operations | $122.0 million | $108.8 million | +12.2% |
| Operating margin | 9.2% | 9.3% | -0.1 percentage point |
| Net income | $92.1 million | $87.3 million | +5.5% |
| Diluted EPS | $3.12 | $2.89 | +8.0% |
| Operating cash flow | $152.6 million | $103.4 million | +$49.2 million |
Fourth quarter: Revenue was $356.6 million versus $325.1 million, up 9.7%; operating income was $35.0 million versus $27.8 million, up 25.9%; and operating margin was approximately 9.8% versus 8.6%. Net income was $27.7 million versus $34.7 million, while diluted EPS was $0.95 versus $1.16. The quarterly table does not provide a clear explanation for the year-over-year Q4 net-income decline.
FY 2018 revenue growth was led by Expedited LTL, up 14.0% to $747.6 million, and Intermodal, up 29.9% to $201.0 million. Pool Distribution revenue rose 15.2% to $194.1 million, while TLS revenue declined 4.5% to $192.6 million as the company deliberately shed lower-margin business. Segment operating margins were 12.9% for Expedited LTL, 2.6% for TLS, 11.6% for Intermodal and 3.0% for Pool Distribution.
Operating expenses rose 13.0%, broadly in line with revenue. Purchased transportation increased $68.5 million and salaries, wages and benefits increased $34.4 million. Management cited greater use of higher-cost third-party carriers, higher owner-operator rates and staffing needs. Consolidated operating margin was slightly lower despite operating-income growth.
Cash, debt and liquidity
- Cash and cash equivalents at year-end were $25.7 million, compared with $3.9 million a year earlier. Total assets were $760.2 million and shareholders’ equity was $553.2 million.
- Net cash from operations was $152.6 million; investing activities used $55.5 million, including $42.3 million of property and equipment purchases and $20.0 million for acquisitions, partly offset by asset-sale proceeds. Financing activities used $75.3 million, including $66.1 million of share repurchases and $18.4 million of dividends.
- Revolver borrowings were $47.5 million at 4.1% interest; $10.7 million of letters of credit were outstanding and $91.9 million of borrowing capacity remained under the $150 million facility. The facility matures in September 2022. Capital lease obligations were approximately $0.4 million. The company reported compliance with its credit covenants.
- Management said cash, expected operating cash generation and available borrowing capacity should cover anticipated cash needs for at least the next 12 months. Contractual obligations included $159.3 million of operating lease payments and $14.3 million of equipment purchase commitments.
Material changes and unusual items
- Intermodal expanded through the 2018 acquisitions of MMT and Southwest for approximately $20.0 million combined. Their results were included from the acquisition dates.
- Corporate-level “other operations” loss widened to $8.5 million from $1.8 million, including a $6.0 million increase in vehicle-claim reserves, $0.8 million of workers’ compensation reserves and $1.2 million of CEO-transition costs. Pool results included a $1.0 million facility-vacating charge.
- FY 2018 effective tax rate was 23.4%, versus 18.9% in 2017. The prior-year rate benefited from remeasurement of deferred tax liabilities following U.S. tax reform; the federal statutory rate fell to 21% from 35% beginning in 2018.
- The company repurchased 1.11 million shares for $66.1 million in 2018 and declared $0.63 per share in dividends. In February 2019, the board authorized repurchases of up to 5.0 million shares, replacing the remaining 2016 authorization, and declared a $0.18-per-share dividend.
- New CEO Thomas Schmitt took office in September 2018. Bruce Campbell announced plans to retire as Executive Chairman before the 2019 annual meeting and serve as a consultant for 24 months thereafter.
- The company adopted the new lease accounting standard on January 1, 2019 and estimated recognition of $130–$150 million of right-of-use assets and corresponding lease liabilities. It did not expect a material effect on operating results or liquidity.
Outlook, risks and contingencies
The filing gives no specific numeric revenue or earnings guidance. Management’s stated priorities include expanding premium service offerings, enhancing information systems, and pursuing acquisitions and geographic growth, particularly in Intermodal. Management expects regular quarterly dividends to continue, subject to board approval, and continues to evaluate acquisitions.
Principal risks include economic and freight-volume cyclicality; pricing pressure and competition; dependence on owner-operators, freight handlers and third-party carrier capacity; customer concentration and cancellable customer arrangements; fuel-price volatility and limits of fuel surcharges; acquisition integration; cybersecurity and IT disruption; regulatory changes, including driver safety and electronic logging requirements; and potentially volatile self-insurance and claims costs. Self-insurance estimates are judgmental, and the company stated that a range of reasonably possible additional losses could not currently be estimated. Ordinary-course litigation was not considered material by management. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Reconcile the Q4 net-income and EPS decline with the quarterly tax provision and any other quarter-specific items.
- Assess whether revenue and operating-income growth can be sustained without further margin pressure from third-party transportation costs, wages and fuel.
- Review the development of vehicle and workers’ compensation claims, reserves, insurance coverage and self-insured exposure.
- Evaluate Intermodal acquisition contribution, integration progress and returns, and whether TLS margin improvement persists after shedding lower-margin business.
- Confirm the effects of the 2019 lease-standard adoption, capital allocation through repurchases and dividends, and remaining revolver capacity under potential acquisition plans.