Forward Air Corporation (NASDAQ: FWRD) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Forward Air is an asset-light freight and logistics company operating Expedited LTL, Truckload Premium Services (TLS), Intermodal and Pool Distribution segments. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $247.0 | $229.5 | +7.6% |
| Income from operations | $23.2 | $21.4 | +8.4% |
| Operating margin | 9.4% | 9.3% | +0.1 percentage point |
| Income before taxes | $22.9 | $20.8 | +10.1% |
| Net income | $14.2 | $13.1 | +8.4% |
| Diluted EPS | $0.47 | $0.43 | +$0.04 |
| Net cash from operating activities | $37.1 | $37.4 | -$0.3 |
Net margin was approximately 5.8%, versus 5.7%. Operating expenses rose 7.5% to $223.8 million, slightly slower than revenue. Interest expense declined to $0.3 million from $0.6 million. The effective tax rate increased to 37.8% from 37.1%, including approximately $0.3 million of additional tax expense from newly adopted share-based payment accounting guidance.
Segment revenue and operating income: Expedited LTL revenue was $140.6 million (+4.6%) and operating income $18.4 million (+7.6%); TLS revenue was $41.8 million (+8.3%) and operating income $1.7 million (+6.3%); Pool Distribution revenue was $37.8 million (+13.9%) and operating income $1.4 million, versus $0.1 million; Intermodal revenue was $28.3 million (+15.0%) and operating income $2.6 million (+8.3%).
Cash, debt and liquidity
- Cash was $14.3 million at March 31, 2017, compared with $8.5 million at December 31, 2016.
- Current assets were $139.2 million and current liabilities $58.5 million; the resulting current ratio was approximately 2.4.
- Debt and capital lease obligations totaled approximately $13.9 million, including $13.0 million borrowed under the revolving credit facility. The term loan matured in March 2017; financing cash flows included $27.9 million of debt and lease payments and $13.0 million of revolver borrowings.
- Revolver availability was $129.5 million after $7.5 million of letters of credit; the outstanding borrowing rate was 2.2%. The facility expires in February 2020 and includes financial and other covenants.
- Investing activities used $1.7 million, including $2.7 million of property and equipment purchases. Financing activities used $29.5 million, including $10.0 million of share repurchases and $4.5 million of dividends.
- Management stated that cash, expected operating cash flows and available borrowing capacity should cover anticipated needs for at least the next 12 months.
Material changes and management commentary
- Growth was broad-based. Management attributed Expedited LTL improvement to higher volumes, Complete shipments, fuel surcharge revenue and operating efficiencies. Pool growth reflected new business, rate increases and increased volumes, with better fixed-cost leverage. Intermodal growth reflected the Ace and Triumph acquisitions, fuel surcharges and rental and storage revenue.
- TLS miles increased 8.8%, but revenue per mile declined 1.1%; use of more costly third-party transportation contributed to purchased transportation rising faster than TLS revenue.
- Expedited LTL revenue per pound increased overall, supported by fuel surcharge and Complete services, while linehaul yield declined as shipments became more regionalized. Net fuel surcharge revenue increased 53.7% company-wide, primarily due to higher fuel prices and volumes.
- Corporate and other operations shifted from $0.2 million of operating income to a $0.9 million operating loss. Q1 2017 included $0.5 million of executive severance and $0.4 million in reserves for vehicle and workers’ compensation claim development.
- The company repurchased 204,809 shares for $10.0 million, at an average $48.81 per share. The quarterly dividend increased to $0.15 per share from $0.12 in Q1 2016; future dividends remain subject to Board approval.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management cautioned that quarterly results are seasonal and Q1 performance is not necessarily indicative of full-year results.
- On April 10, 2017, the company announced a pending agreement to acquire substantially all assets of Atlantic Trucking and related entities for approximately $22.5 million, with a possible $1.0 million earn-out. The transaction was subject to customary closing conditions and was expected to be funded with cash and revolver borrowings. Atlantic reported approximately $62.3 million of 2016 revenue; the acquisition is intended to expand Intermodal’s Southeast footprint.
- In 2016, the company recorded a $25.7 million goodwill impairment and a $16.5 million impairment of TQI customer-relationship intangibles. No additional goodwill impairment indicators were identified in Q1 2017. Goodwill valuations depend on assumptions, including projected cash flows, and could be affected by changes in performance or market conditions.
- Self-insured claims estimates may change materially; management said it could not estimate a reasonably possible range of additional losses. Other stated risks include freight volumes and pricing, fuel costs, customer credit and concentration, labor and owner-operator availability, regulation, competition and successful acquisition integration.
- Revenue guidance effective in 2018 was expected to change recognition from shipment completion to recognition over time for shipments in transit. Management anticipated a minor overall impact because transit times are short; transition method had not been selected. The company was also evaluating the future lease-accounting standard.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. It stated that routine litigation was not expected to have a material adverse effect; the filing describes no estimate for a reasonably possible excess of self-insurance claims.
Investor verification priorities
- Confirm the term-loan repayment and reconcile reported debt, capital leases and revolver borrowing after the March 2017 maturity.
- Track Atlantic acquisition closing, final purchase price and earn-out terms, funding mix, integration and contribution to Intermodal results.
- Assess whether segment revenue growth converts to durable margins, particularly TLS’s lower revenue per mile and Intermodal’s margin decline.
- Monitor claims development and self-insurance reserves, including the corporate reserve increase, and any further TQI impairment indicators.
- Verify cash conversion, accounts-receivable collections, share repurchases, dividend policy and compliance with credit-facility covenants.