Forward Air Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone Q4 filing; quarterly figures below identify the fourth quarter. Forward Air provides expedited surface transportation and logistics, pool distribution, and temperature-controlled life-sciences transportation.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $959.1 million | $781.0 million | +22.8% |
| Operating income | $81.8 million | $96.4 million | -15.1% |
| Operating margin | 8.5% | 12.3% | -3.8 percentage points |
| Net income | $55.6 million | $61.2 million | -9.2% |
| Diluted EPS | $1.78 | $1.96 | -9.2% |
| Cash from operations | $85.7 million | $91.7 million | Down $6.0 million |
Fourth quarter: Revenue was $256.4 million versus $214.1 million in Q4 2014; operating income was $29.0 million versus $25.6 million; net income was $23.2 million versus $17.0 million. Diluted EPS was $0.75 versus $0.55.
Segments: Forward Air revenue rose 29.5% to $792.8 million, while operating income fell 12.5% to $75.3 million and segment margin declined to 9.5% from 14.1%. FASI revenue increased 3.8% to $130.0 million, but operating income fell 31.7% to $4.1 million. TQI revenue declined 13.1% to $42.4 million and operating income fell 44.2% to $2.4 million.
Cash, debt and liquidity: Year-end cash was $33.3 million, down from $41.4 million. Total assets were $700.2 million and shareholders’ equity was $510.1 million. The Towne acquisition term loan had $83.3 million outstanding at year-end, including $55.6 million current; capital lease obligations were $1.4 million. No revolving-credit borrowings were outstanding; $139.0 million of revolver capacity remained available after letters of credit. Operating cash flow was $85.7 million; investing cash use was $100.9 million, including the $61.9 million Towne acquisition and $40.5 million of property and equipment purchases.
Quarterly dividends were $0.12 per share, or $0.48 for the year. The company repurchased 422,404 shares for approximately $20.0 million in 2015. Management said cash, investments, expected operating cash generation and available borrowing capacity should meet anticipated needs for at least 12 months.
Material changes and management commentary
- The March 2015 Towne acquisition expanded Forward Air’s network and services. It was funded with a $125 million term loan; the company reported $23.5 million in Towne transaction and integration-related costs, which weighed on operating results.
- Forward Air airport-to-airport tonnage increased 26.6%, largely due to Towne, while base revenue per pound declined 1.1%, partly reflecting Towne’s lower rate profile. Net fuel surcharge revenue fell 24.3% company-wide amid lower fuel prices.
- Higher salaries, leases, insurance and other operating costs pressured margins. Consolidated operating expenses rose 28.1%, faster than revenue growth of 22.8%. Operating cash flow also declined, partly due to acquisition-related working-capital and tax cash uses.
- TQI results were below management’s June 2015 projections. The company performed an additional year-end goodwill test and reported no impairment. Year-end goodwill was $205.6 million and net acquired intangible assets were $127.8 million.
Outlook, risks and contingencies
No specific revenue, earnings or margin guidance is provided. Management expects to pursue further acquisitions, which could require cash, add debt and expenses, and create integration risks. Key disclosed risks include freight-volume and rate pressure, competition, fuel-price volatility, dependence on owner-operators and third-party carriers, labor and insurance costs, customer credit and concentration, severe weather, regulatory and environmental requirements, and information-system or cybersecurity disruptions.
The company has substantial self-insured exposure: vehicle and general liability retention is generally $0.5 million per occurrence, and workers’ compensation and employee-health retention is generally approximately $0.3 million, with a higher Ohio workers’ compensation retention. Management said ordinary-course litigation was not expected to have a material adverse effect, but noted that self-insurance estimates could change materially and that no range of additional reasonably possible loss could be estimated. Contractual cash obligations totaled $205.0 million, including $101.2 million of operating leases, $84.6 million of term-loan payments and $17.7 million of equipment commitments.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal financial reporting controls were effective as of year-end.
Important facts for investors to verify
- Whether Towne integration costs and duplicate-facility lease reserves decline as planned, and whether acquired operations deliver expected efficiencies.
- Whether Forward Air can restore operating margins despite lower fuel surcharges, higher labor and insurance costs, and Towne’s lower base revenue per pound.
- Whether TQI’s weaker performance improves and whether its goodwill remains recoverable if projections or market conditions deteriorate.
- The timing and funding of $55.6 million in 2016 term-loan repayments, alongside lease and equipment commitments, and compliance with credit-facility covenants.
- Developments in self-insurance claims, customer concentration, carrier capacity and the company’s ability to sustain dividends and repurchases while pursuing acquisitions.