Forward Air Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statement amounts below are in U.S. dollars; figures are generally shown in millions unless noted.
Business context
Forward Air provides time-definite transportation and logistics services; its FASI segment provides pool distribution. The company added TQI, a temperature-controlled and secure logistics provider serving pharmaceutical and life-science customers, on March 4, 2013. TQI results are included from the acquisition date.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Operating revenue | $141.6 million | $137.1 million; up 3.3% |
| Operating income / margin | $15.8 million / 11.2% | $16.8 million / 12.3% |
| Net income | $10.9 million | $10.3 million; up 5.8% |
| Diluted EPS | $0.36 | $0.35 |
| Operating cash flow | $20.6 million | $18.0 million |
| Capital expenditures | $12.2 million | $13.1 million |
| Cash | $71.6 million at March 31 | $112.2 million at December 31, 2012 |
| Debt and capital leases | $0.2 million total carrying value | No borrowings under the $150 million revolver |
Revenue growth was led by FASI, up 16.1% to $22.3 million, and the acquired TQI, which contributed $3.9 million of revenue and $0.2 million of operating income after acquisition. Forward Air revenue declined 1.9% to $116.1 million. The company reported $139.4 million of available revolver capacity after letters of credit. Cash declined by $40.6 million during the quarter, primarily reflecting the TQI acquisition and capital spending.
Changes versus prior year and notable items
- Operating expenses rose 4.6%, faster than revenue, and operating income fell 6.0%; operating margin declined 1.1 percentage points.
- Forward Air operating income fell 5.7%, reflecting lower airport-to-airport and truckload brokerage volumes and approximately $0.9 million of TQI transaction costs. Logistics revenue declined 10.3%, including the effect of a customer loss in 2012.
- FASI revenue growth from new business was offset by start-up costs and operating inefficiencies; its operating loss widened to $0.8 million from $0.6 million.
- The effective tax rate fell to 30.8% from 38.7%, mainly due to retroactively reinstated alternative-fuel credits and tax benefits from disqualified employee stock-option dispositions. This helped lift net income despite lower operating income.
- TQI was acquired for $45.2 million net cash, with $20.1 million of assumed debt paid off immediately and a potential earn-out of up to $5.0 million. The filing recorded an estimated $0.9 million earn-out liability; the purchase-price allocation remains preliminary and includes $44.5 million of goodwill.
- The quarterly dividend was $0.10 per share, up from $0.07 in Q1 2012.
Outlook, risks and contingencies
Management gave no specific earnings or revenue guidance. It expects available cash, operating cash flow and revolver capacity to cover anticipated needs for at least the next 12 months, and expects to continue quarterly dividends subject to Board approval. Management noted seasonal trends make quarterly results not necessarily indicative of full-year results.
Risks highlighted include freight volumes and pricing, fuel costs, customer losses and credit quality, competition, owner-operator availability, acquisition integration, regulation, and injury, property-damage and workers’ compensation claims. Management said claims reserves could change materially, but could not estimate a reasonably possible additional loss range. Four customers generated approximately 65.6% of FASI revenue. The filing also cautions that delays in growing FASI could lead to a goodwill impairment. TQI’s purchase accounting is preliminary, and management excluded TQI internal-control effectiveness from its quarter-end controls assessment under the acquisition-related transition guidance.
Most important facts for investors to verify
- Whether TQI meets the 2013–2014 EBITDA conditions for its potential earn-out, and whether integration and preliminary valuation assumptions hold.
- Whether FASI’s new business scales profitably, given its operating loss and customer concentration, and whether its goodwill remains recoverable.
- Whether Forward Air’s freight volumes and logistics revenue stabilize after declines, and whether operating margins recover.
- Whether workers’ compensation and other self-insurance estimates remain adequate as claims experience develops.
- Whether cash generation, capital spending and the $0.10 quarterly dividend remain sustainable; the dividend is subject to Board review.