Forward Air Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Forward Air provides time-definite transportation and logistics, alongside pool distribution through FASI and temperature-controlled logistics through TQI.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $205.9 million | $171.6 million | +20.0% |
| Income from operations | $8.2 million | $16.3 million | -49.1% |
| Operating margin | 4.0% | 9.5% | -5.5 percentage points |
| Net income | $4.8 million | $10.2 million | -52.0% |
| Diluted EPS | $0.16 | $0.33 | Down $0.17 |
| Operating cash flow | $7.5 million | $20.0 million | Down $12.5 million |
Revenue growth reflected higher airport-to-airport volumes, rate increases, and the Towne acquisition, as well as a full quarter of CST-related operations. Fuel surcharge revenue declined 16.7% as fuel prices fell. Operating costs rose 27.2%; salaries and benefits, operating leases, and other operating expenses increased notably. The effective tax rate was 38.3%, versus 37.3%.
Liquidity, debt, and cash flow
- Cash was $54.5 million at March 31, 2015, compared with $41.4 million at year-end 2014. Current assets were $196.7 million and current liabilities were $114.0 million.
- Total debt and capital lease obligations were $127.0 million, including $56.1 million classified as current. The company drew a $125 million term loan to finance Towne.
- The new five-year unsecured credit facility provides a $150 million revolver; $137.4 million remained available at quarter-end after letters of credit, with no revolver borrowings outstanding. The term loan bears variable interest (1.3% at quarter-end), requires quarterly principal installments, and matures in March 2017.
- Investing cash outflow was $67.1 million, including $62.3 million net cash paid for Towne. Financing cash inflow was $72.7 million, principally reflecting the term loan. Management said available cash, expected operating cash flows, and facility capacity should meet anticipated needs for at least 12 months.
Material changes, outlook, and risks
- Forward Air acquired CLP Towne on March 9, 2015, paying $62.3 million net cash and assuming $59.5 million in debt and capital leases; assumed debt other than capital leases was promptly repaid. Towne’s 2014 revenue was approximately $230 million. Its results are included in the Forward Air segment from the acquisition date, but the company could not separately identify Towne’s post-acquisition revenue and operating results after integration.
- Towne-related severance, duplicate-facility costs, and other integration and transaction expenses totaled approximately $11.8 million. Management identified these costs as the principal reason Forward Air segment operating income fell 53.2%. Towne’s purchase-price allocation remained preliminary.
- Segment revenue and operating income: Forward Air revenue rose 25.7% to $168.7 million and operating income fell to $7.2 million; FASI revenue declined 0.4% to $27.2 million and operating income improved to $0.2 million; TQI revenue increased 1.8% to $11.3 million and operating income was approximately $0.9 million.
- No specific earnings or revenue guidance was provided. Management expects regular quarterly dividends to continue, subject to board approval; the Q1 dividend was $0.12 per share.
- Risks highlighted include freight-volume and pricing pressure, competition, fuel prices, customer credit and concentration, availability and cost of owner-operators and labor, claims and insurance, regulation, and the ability to integrate acquisitions. Management said ordinary-course litigation was not expected to have a material adverse effect, but noted that self-insurance estimates could change materially and could not estimate a reasonably possible additional loss range.
- The company was evaluating the impact of the new revenue-recognition standard, effective for periods beginning on or after December 15, 2016; it had not selected a transition method.
Investor verification priorities
- Track Towne integration progress, realized cost savings, and whether acquisition-related expenses recur; confirm the finalized purchase-price allocation.
- Assess whether revenue growth translates into improved operating margins, particularly given higher purchased-transportation costs and lease and labor expenses.
- Monitor operating cash conversion and working-capital movements, including payments of Towne-assumed trade payables.
- Review term-loan repayment, variable-rate exposure, credit-facility covenants, and remaining borrowing availability.
- Evaluate the development of self-insurance and claims liabilities and any material change in litigation exposure.