Business context and reporting period
Forward Air Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Its three reporting segments are Forward Air (expedited transportation and logistics), Forward Air Solutions (pool distribution) and Total Quality, Inc. (temperature-controlled and life-sciences logistics). Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
On March 9, 2015, Forward Air acquired CLP Towne Inc. for $62.4 million net cash and assumed $59.5 million of debt and capital leases. Towne’s results are included in Forward Air from the acquisition date. The acquisition materially affects year-over-year comparisons.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $249.7 | $193.9 | $455.6 | $365.4 |
| Operating income | $19.9 | $27.6 | $28.2 | $43.9 |
| Operating margin | 8.0% | 14.2% | 6.2% | 12.0% |
| Net income | $11.8 | $17.2 | $16.7 | $27.4 |
| Diluted EPS | $0.38 | $0.55 | $0.53 | $0.87 |
- Second-quarter revenue rose 28.8%, while operating income declined 27.9% and net income declined 31.4%. For the first half, revenue increased 24.7%, but operating income fell 35.8% and net income fell 39.1%.
- For the first half, purchased transportation was 43.2% of revenue (42.8% in 2014); salaries, wages and benefits were 25.4% (23.5%); and operating leases were 7.5% (4.5%). Fuel expense declined 17.0%, largely reflecting lower fuel prices.
- Six-month operating cash flow was $18.6 million, down from $39.2 million. Investing used $73.8 million, including $62.4 million for Towne; financing provided $56.3 million. Cash increased $1.1 million to $42.5 million.
- At June 30, cash was $42.5 million and total current assets were $193.3 million against current liabilities of $116.7 million. Debt and capital lease obligations totaled approximately $112.8 million, including $55.9 million current and $56.9 million long-term.
- The $150 million revolving facility had no borrowings outstanding; $13.7 million was used for letters of credit and $136.3 million remained available. The $125 million term loan carried a 1.3% rate and matures in March 2017. The revolving facility expires in February 2020.
- Capital expenditures were $12.0 million for the first half, compared with $33.4 million in 2014. Dividends were $0.12 per share quarterly; $7.4 million in cash dividends was paid in the first half.
Material changes and management commentary
- Forward Air segment revenue grew 37.0% in the second quarter, mainly due to Towne, higher airport-to-airport tonnage and growth in logistics services. Airport-to-airport tonnage increased 37.4%, while base revenue per pound, excluding fuel surcharge and Complete revenue, declined 1.7%, partly because Towne’s base revenue per pound was lower.
- Management attributed much of the margin and earnings decline to Towne transaction and integration costs and acquisition-related network costs. It reported $18.7 million of Towne transaction and integration costs for the first half, including severance, reserves for vacated duplicate facilities and other integration costs.
- FASI revenue increased 3.0% in the quarter, but operating income fell to $0.1 million from $1.0 million. Management cited higher health-insurance costs, cargo claims and expenses related to a new facility.
- TQI quarterly revenue declined 13.9% and operating income declined 28.6%, reflecting lower customer shipping activity and higher health-insurance costs. The prior-year period included a distribution that did not recur.
- Vehicle-claim reserves increased following adverse development of older claims and an actuarial review. Management said self-insurance provisions could change materially in the near term; it could not estimate the reasonably possible additional loss range.
Outlook, risks and unusual items
No specific revenue, earnings or margin guidance is provided. Management said available cash, expected operating cash generation and borrowing capacity should be sufficient for anticipated needs for at least the next 12 months. It expects regular quarterly dividends to continue, subject to Board approval. Management cautioned that quarterly results are seasonal and are not necessarily indicative of full-year results.
Key stated risks include successful integration of acquisitions; freight volumes and revenue per pound; competition and pricing pressure; customer concentration and creditworthiness; fuel prices; availability and cost of owner-operators and freight handlers; claims and insurance costs; employment and health-care costs; regulation; and access to suitable terminal facilities. The credit facility also contains financial and other restrictive covenants. Routine litigation was not expected by management to have a material adverse effect. The annual goodwill impairment assessment found no impairment; estimated fair-value cushions were lowest for TQI at 16% and CST at 20%. Towne’s purchase-price allocation remained preliminary.
Important facts for investors to verify
- Whether Towne integration and duplicate-facility costs decline as planned, and whether the acquisition supports sustainable margins after these costs.
- Whether the increase in vehicle claims, cargo claims and insurance costs persists, and how self-insurance estimates develop.
- How much of reported revenue growth reflects acquired businesses versus underlying volume, pricing and revenue-per-pound trends.
- Term-loan amortization, covenant compliance and remaining revolver availability as the acquisition is integrated.
- Whether TQI and FASI recover profitability, and whether the goodwill valuation cushions remain adequate if operating performance weakens.