Forward Air's Q2: Expedited LTL Steady As She Goes

Forward Air Corporation FWRD reported second-quarter earnings after markets closed July 25. The Greeneville, Tennessee-based trucking company has a business mix of truckload, expedited less-than-truckload services, intermodal and consolidation/warehousing logistics services. 

Forward Air reported diluted earnings per share of $0.78 compared to $0.82 in the year prior. Top-line revenue grew 4.7 percent year-over-year to $345.8 million, but net income dropped 8 percent year-over-year to $22.33 million.

The company offered guidance for the third quarter.

"We expect third-quarter year-on-year revenue growth to be 7 percent to 11 percent," said Michael J. Morris, Forward Air's chief financial officer. "We expect net income per diluted share to be between $0.74 and $0.78 in the third quarter of 2019 compared to $0.76 in the third quarter of 2018. This earnings-per-share outlook reflects a $0.03 per-share impact from executive transition expenses."

After the release, Deutsche Bank transportation analyst Seldon Clarke commented on the vague guidance, which he called a "head-scratcher" because Forward expects high single digit to low double digit revenue growth but no corresponding earnings growth.

"Guidance, however, was a bit of a head-scratcher, in our view, as mgmt. is forecasting a solid acceleration in revenue growth (+7-11% vs. +5% in 2Q) with no improvements in profitability as EPS is expected to be roughly flat yoy after adjusting for executive transition expenses (3c/share)," Clarke wrote. "It's unclear to us whether this incorporates any incremental charges related to insurance reserves or other one-time items related to its recently announced acquisition of intermodal drayage provider OST."

EBITDA for the second quarter contracted slightly to $41.2 million from $43.2 million the year before, while free cash flow dropped to $18.6 million compared to $19 million in the second quarter of 2018.

"Our growth strategies drove our record second-quarter revenue, which increased 4.7 percent," Tom Schmitt, Forward Air's chairman, president and chief executive officer, said in a statement. "Our operating income grew 5.5 percent before considering the net impact of the $5 million vehicle reserve recorded during the quarter."

The four business units broken out in Forward Air's financial reporting are: Expedited LTL (providing expedited regional, inter-regional and national LTL services, including local pickup and delivery, shipment consolidation/deconsolidation, warehousing, final-mile solutions and customs brokerage by utilizing a comprehensive national network of terminals); Intermodal (providing first- and last-mile high-value drayage services both to and from seaports and railheads, dedicated contract and Container Freight Station warehouse and handling services); Truckload Premium Services (providing expedited truckload brokerage, dedicated fleet services, as well as high-security and temperature-controlled logistics services); and Pool Distribution (providing high-frequency handling and distribution of time-sensitive products to numerous destinations within a specific geographic region).

Truckload Premium Services was the worst performer among the four units and the only business division that posted lower year-over-year operating revenues. Truckload Premium Services' operating revenue dropped 5.7 percent to $46.1 million.

Even more tellingly, Truckload Premium Services' income from operations was slashed by 59 percent to $689,000, down from $1.71 million in the second quarter of 2018.

Expedited LTL, by far the largest part of Forward Air's business, held up well in a tough freight cycle, growing income by about 1 percent to $26.9 million. Intermodal and Pool Distribution incomes were down just slightly on a year-over-year basis.

Forward Air doesn't calculate its operating ratios, but by dividing operating expenses by operating revenue, one arrives at a figure of 86.9 percent for the Expedited LTL segment, 70 basis points higher (worse) than the second quarter of 2018. A slightly less efficient operation was the result of lower tonnage and fewer shipments, although the volume drag was slightly offset by a 1.3 percent higher weight per shipment and 5.7 percent higher revenue per hundredweight.
Denser shipments and higher prices combined for a 6.9 percent improvement in revenue per shipment.

On the other side of the trucking business, Truckload Premium Services posted a 98.4 percent operating ratio on operating revenues of $46.1 million and operating expenses of $45.5 million.

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