Forward Air Corporation — Q3 2013 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Forward Air provides time-definite transportation and logistics services; FASI operates pool distribution; and TQI provides temperature-controlled and secure logistics, primarily for pharmaceutical and life-science customers. TQI was acquired on March 4, 2013, so reported comparisons include it only from the acquisition date. Amounts below are in millions except per-share data.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $170.0 | $143.5 | $471.4 | $428.9 |
| Operating income | $22.9 | $19.6 | $61.2 | $59.5 |
| Operating margin | 13.5% | 13.7% | 13.0% | 13.9% |
| Net income | $14.2 | $12.3 | $38.9 | $36.7 |
| Diluted EPS | $0.46 | $0.41 | $1.27 | $1.24 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $60.5 | $45.7 |
- For the first nine months, investing cash outflow was $77.0 million, including $45.3 million for the TQI acquisition and $33.3 million of capital expenditures. Financing cash flow was positive $2.9 million. Cash declined $13.6 million to $98.6 million.
- At September 30, cash was $98.6 million; current assets were $200.6 million and current liabilities $36.6 million. Debt and capital lease obligations totaled approximately $0.1 million. The company had no revolver borrowings, $140.6 million of available borrowing capacity, and $9.4 million of letters of credit outstanding under its $150 million facility, which matures in February 2017.
- Quarterly and nine-month dividends were $0.10 and $0.30 per share, respectively. The nine-month dividend was $0.24 per share in 2012.
Material changes versus comparable periods
- Q3 revenue rose 18.5% and net income rose 15.4%. TQI contributed $12.4 million of quarterly revenue and $0.9 million of operating income; FASI revenue grew 52.8% on new business, while Forward Air revenue increased 3.5%.
- Nine-month revenue increased 9.9%, but operating income rose only 2.7%; operating margin declined to 13.0% from 13.9%. Forward Air revenue declined 1.2% and operating income declined 1.8%; FASI revenue grew 34.0% and returned to a small operating profit; TQI contributed $28.5 million of revenue and $1.9 million of operating income since acquisition.
- On a pro forma basis assuming TQI had been acquired January 1, 2012, nine-month 2013 revenue was $479.9 million versus $472.2 million in 2012, while net income was $39.1 million versus $39.1 million and diluted EPS was $1.27 versus $1.33.
- For the first nine months, purchased transportation was 43.8% of revenue, slightly above 43.7% in 2012; salaries, wages and benefits rose to 23.2% from 22.7%. Management cited higher health-insurance and workers’ compensation costs, FASI new-business costs, and TQI acquisition-related costs.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said cash, expected operating cash generation and available borrowing capacity should be sufficient for anticipated needs for at least the next 12 months. It expects regular quarterly dividends, subject to board approval.
- Management attributed Q3 growth to the TQI acquisition, FASI customer wins and higher Forward Air airport-to-airport volumes. It noted Forward Air pricing pressure and lower base revenue per pound in Q3; nine-month Forward Air results also reflected weaker logistics volumes and loss of customers.
- TQI was acquired for $45.3 million net cash, with $20.1 million of assumed debt paid off after closing and potential additional earn-out consideration of up to $5.0 million. The recorded estimated earn-out liability was $0.6 million; final value depends on TQI’s 2013 and 2014 EBITDA performance. Purchase-price allocation remained preliminary.
- Goodwill impairment testing as of June 30, 2013 found no impairment. Estimated fair value exceeded carrying value by 165% for Forward Air, 81% for FASI and only 3% for TQI, making TQI’s valuation particularly sensitive to assumptions and performance.
- Management identified risks including freight volumes and pricing, competition, customer loss, fuel prices, customer credit, labor and health costs, claims and workers’ compensation, regulation, and successful acquisition integration. Self-insurance estimates may change materially; management could not estimate a reasonably possible range of additional losses. Routine litigation was not expected to have a material adverse effect.
- Management’s September 30 control assessment excluded TQI’s internal control over financial reporting, which represented 17.2% of consolidated assets. The filing reports no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether TQI meets the EBITDA targets underlying the earn-out and whether acquisition integration supports the stated diversification rationale.
- Whether FASI’s rapid revenue growth translates into sustained profitability after agent-station, transportation and start-up costs.
- Whether Forward Air can restore growth and protect pricing and margins amid customer losses, softer logistics volumes and pricing pressure.
- How sensitive TQI goodwill valuation is to forecast cash flows, discount rates and future operating results, given the disclosed 3% fair-value cushion.
- Whether elevated insurance, health-benefit and self-insurance costs, as well as planned capital spending and dividends, affect future cash generation.