Business context and reporting period
Forward Air Corporation’s Form 10-K covers the fiscal year ended December 31, 2014. The company provides expedited surface freight and logistics services through Forward Air, pool distribution through FASI, and temperature-controlled life-sciences logistics through TQI. The filing is annual; fourth-quarter results are separately identified below.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Operating revenue | $781.0 million | $652.5 million |
| Income from operations | $96.4 million | $84.4 million |
| Operating margin | 12.3% | 12.9% |
| Net income | $61.2 million | $54.5 million |
| Diluted EPS | $1.96 | $1.77 |
| Cash from operating activities | $91.7 million | $90.8 million |
| Cash used in investing activities | $127.7 million | $78.9 million |
| Cash used in financing activities | $49.9 million | Cash provided: $3.3 million |
FY 2014 revenue increased 19.7%, operating income 14.2%, and net income 12.3%. Operating expenses grew 20.5%, faster than revenue, and operating margin contracted 0.6 percentage points. The effective tax rate was 36.3%, versus 35.1%.
For Q4 2014, revenue was $214.1 million, operating income $25.6 million, net income $17.0 million, and diluted EPS $0.55. Q4 2013 comparatives were $181.1 million, $23.2 million, $15.6 million, and $0.50, respectively.
At year-end, cash and cash equivalents were $41.4 million, down from $127.4 million. Total assets were $541.8 million and shareholders’ equity was $463.6 million. The company had no borrowings under its $150 million revolving credit facility, with $140.3 million available after letters of credit; capital lease obligations were $1.6 million. Current assets were $150.0 million and current liabilities $43.4 million.
Material changes versus the prior comparable period
- Forward Air revenue rose 22.2%, primarily reflecting the CST acquisitions and higher airport-to-airport tonnage and pricing. Airport-to-airport tonnage increased 5.5%; base revenue per pound, excluding fuel surcharges and Complete, rose 3.2%.
- Intermodal/drayage revenue increased to $55.3 million from $5.1 million, largely due to CST. CST, RGL and MMT contributed $68.9 million of revenue and approximately $7.1 million of operating income according to MD&A.
- FASI revenue increased 10.4%, and operating income rose to $6.0 million from $2.1 million, supported by rate increases, new business and improved operating processes.
- TQI revenue increased 16.7% and operating income 19.4%; 2014 included a full year of results, compared with ten months in 2013.
- Cash from operations was nearly flat year over year. Investing outflows increased with $90.2 million of acquisition spending and $39.5 million of property-and-equipment purchases. Financing outflows included $40.0 million of share repurchases and $14.8 million of dividends.
Outlook, commentary, risks and unusual items
- Management said available cash, expected operating cash flows and borrowing capacity should meet anticipated cash needs for at least the next 12 months. It provided no specific earnings or revenue guidance.
- On February 4, 2015, the company agreed to acquire Towne for approximately $125 million in cash, subject to closing conditions; the deal was expected to close in Q1 2015 and was intended to be funded with credit-facility borrowings. The purchase price is subject to a working-capital adjustment.
- Also on February 4, 2015, the company entered a new five-year facility with up to $275 million of aggregate capacity, including a $150 million revolver and a $125 million term loan facility. This replaced the prior $150 million revolver.
- Key risks include economic and freight-volume weakness, competitive pricing pressure, dependence on owner-operators and third-party carriers, labor and fuel-cost volatility, customer concentration, fixed terminal-network costs, severe weather, insurance claims, regulatory and environmental requirements, cybersecurity and IT disruptions, and acquisition integration or impairment risks.
- FASI’s four largest customers represented 64.6% of that segment’s revenue. Forward Air’s ten largest customers represented 44.3% of segment revenue; no single customer exceeded 10% of Forward Air revenue.
- The company recorded $144.4 million of goodwill and $72.7 million of net definite-lived intangible assets at year-end. Its 2014 goodwill tests found no impairment; reporting-unit fair value exceeded carrying value by approximately 9% to 175%.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The company reported $11.5 million of self-insurance claim reserves and $1.3 million of reserves for unrecognized tax benefits in its contractual-obligations discussion; ultimate claim losses could differ from estimates.
- The 2014 CST acquisition was funded with cash; the acquired business accounted for approximately 20.4% of consolidated total assets and 9.3% of revenue. Management excluded CST from its year-end internal-control assessment; the auditor’s internal-control opinion likewise did not cover CST.
Important facts for investors to verify
- Whether acquired CST and related operations sustain their contribution to revenue and operating income after integration.
- Whether margin pressure from purchased transportation, wages, insurance and other operating costs eases or persists.
- The completion, financing and working-capital adjustment for the Towne acquisition, and the resulting leverage and interest expense.
- Whether customer concentration, owner-operator and carrier availability, and self-insurance exposures change materially.
- Whether cash generation remains sufficient to support acquisition spending, capital expenditures, dividends and share repurchases.