Forward Air Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with the three months ended March 31, 2013. Forward Air provides expedited transportation and logistics services, with Forward Air, FASI and TQI as its reportable segments. Amounts below are in U.S. dollars; financial statement figures are generally in thousands unless stated otherwise.
Financial performance and position
- Revenue: $171.6 million, up 21.2% from $141.6 million. Growth included the CST acquisition, a full quarter of TQI versus about one month in Q1 2013, and organic growth at Forward Air and FASI.
- Profitability: Operating income was $16.3 million, up 3.2%; operating margin fell to 9.5% from 11.2%. Net income declined 6.4% to $10.2 million. Diluted EPS was $0.33 versus $0.36. The effective tax rate increased to 37.3% from 30.8%.
- Segment results: Forward Air revenue rose 15.6% to $134.2 million, while operating income fell 6.1% to $15.4 million. FASI revenue grew 22.4% to $27.3 million and results improved by $0.8 million from a prior-year operating loss. TQI revenue rose to $11.1 million from $3.9 million, chiefly reflecting the longer period included in 2014.
- Cash flow: Operating activities provided $20.0 million, compared with $20.6 million. Investing activities used $102.5 million, including $83.0 million for CST and $19.5 million of property and equipment purchases. Financing activities used $3.8 million. Cash declined by $86.3 million to $41.0 million.
- Liquidity and debt: Current assets were $145.1 million and current liabilities $44.0 million. The company had no borrowings under its $150 million senior credit facility, with $140.6 million of borrowing availability after letters of credit. Debt and capital lease obligations totaled approximately $1.8 million at quarter-end.
- Other metrics: Capital expenditures were $19.5 million, versus $12.2 million. The quarterly dividend increased to $0.12 per share from $0.10.
Material changes and notable items
- On February 2, 2014, Forward Air acquired CST for $83.0 million in net cash and assumed $11.2 million of debt, which it immediately repaid. The purchase was funded from cash on hand. CST contributed $10.8 million of revenue and $4,000 of operating income from acquisition through March 31; its purchase price allocation remained preliminary.
- Severe winter weather increased transportation costs and disrupted efficiency, particularly at Forward Air and TQI. Management cited higher miles, cost per mile and use of more expensive third-party providers; weather-related claims also contributed to higher insurance costs.
- Forward Air’s higher revenue reflected CST, increased airport-to-airport tonnage and a general rate increase initiated in March. FASI growth reflected new customer business and rate increases.
- The Board authorized repurchases of up to 2 million shares in February; none were repurchased in Q1.
Outlook, risks and contingencies
- No specific financial guidance or quantified forecast is provided. Management said cash, investments, expected operating cash flow and available credit should be sufficient for anticipated needs for at least the next 12 months. It expects regular quarterly dividends, subject to Board approval.
- Key risks identified include economic and freight-volume weakness, pricing pressure and competition, customer concentration or credit issues, fuel costs, availability and cost of owner-operators and freight handlers, claims and health-care costs, regulation, and ability to integrate acquisitions. Results are seasonal and Q1 is not necessarily indicative of full-year performance.
- Routine litigation was not considered likely to have a material adverse effect. The company self-insures portions of workers’ compensation, vehicle, property and medical claims; management cautioned that estimates could change materially, but could not estimate a reasonably possible additional-loss range.
- The filing reports $866,000 of CST transaction costs expensed in Q1. CST’s assets, representing approximately 18.8% of total assets, were excluded from management’s assessment of internal control over financial reporting for the period following acquisition.
Important facts for investors to verify
- Whether CST integration and intermodal growth deliver expected operating returns, given its limited reported post-acquisition contribution.
- Whether weather-related cost pressure and Forward Air’s margin decline reverse, and whether the March rate increase offsets operating-cost inflation.
- How much of reported revenue growth is organic versus acquisition-related, especially given the differing TQI comparison period.
- Cash conversion, capital spending needs and liquidity after the CST purchase; quarter-end cash was substantially below year-end.
- Potential changes in self-insurance claim reserves and the impact of the higher effective tax rate on future earnings.