Forward Air Corporation — 2013 Form 10-K Summary
Business and reporting period. The filing reports the fiscal year ended December 31, 2013; quarterly figures include the three months ended December 31, 2013. Forward Air provides time-definite ground transportation and logistics, FASI provides pool distribution, and TQI provides secure, temperature-controlled logistics, primarily for pharmaceutical and life-science customers. TQI was acquired on March 4, 2013, so its results are included from that date.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Operating revenue | $652.5 million | $584.4 million |
| Income from operations | $84.4 million | $83.5 million |
| Operating margin | 12.9% | 14.3% |
| Net income | $54.5 million | $52.7 million |
| Diluted EPS | $1.77 | $1.78 |
| Cash provided by operating activities | $90.8 million | $68.6 million |
- Revenue grew 11.7%, while operating income increased 1.1% and net income increased 3.4%. Diluted EPS declined slightly, reflecting higher weighted-average diluted shares.
- Quarter four revenue was $181.1 million, operating income $23.2 million, net income $15.6 million, and diluted EPS $0.50. Versus Q4 2012, revenue rose from $155.5 million, while operating income fell from $24.0 million and net income from $16.0 million; diluted EPS declined from $0.54.
- Segment revenue and operating income: Forward Air $501.1 million and $78.7 million; FASI $113.4 million and $2.1 million; TQI $41.8 million and $3.6 million. FASI revenue increased 33.4%; Forward Air revenue was essentially flat and operating income declined 3.4%.
- Cash and cash equivalents were $127.4 million at year-end, versus $112.2 million in 2012. Total assets were $506.3 million and shareholders’ equity was $435.9 million.
- Investing cash use was $78.9 million, including $45.3 million for TQI and $35.4 million of capital expenditures. Financing activities provided $3.3 million; dividends paid were $12.1 million.
- No borrowings were outstanding under the $150 million revolving credit facility. After $9.4 million of letters of credit, available borrowing capacity was $140.6 million. Capital lease obligations totaled approximately $72,000.
- Operating margin declined to 12.9% from 14.3%. Purchased transportation rose to 43.8% of revenue from 43.3%; fuel expense increased 52.0% to $15.2 million, partly reflecting TQI and higher fuel prices.
Changes, outlook, risks, and unusual items
- Revenue growth reflected TQI, new FASI business, and increased airport-to-airport tonnage. Forward Air’s airport-to-airport tonnage rose 1.4%, but average base revenue per pound declined 0.4%; logistics revenue fell 4.6%, largely due to lower TLX miles. Complete service attachment declined to 17.3% from 23.1%, mainly following a customer loss.
- FASI’s new business required three additional agent stations and two service centers. Its operating margin declined to 1.9% from 2.4%, with start-up and integration costs among the factors cited.
- The TQI acquisition included $45.3 million net cash consideration, $20.1 million of assumed debt that was immediately repaid, and a possible earn-out of up to $5.0 million. The estimated earn-out liability was reduced to zero in 2013, producing a $0.6 million gain; a payout could arise if 2014 performance targets are met. Acquisition transaction costs were approximately $0.9 million.
- On February 2, 2014, the company acquired CST for a stated purchase price of approximately $84.9 million, funded from cash reserves. CST provides intermodal drayage and related services. The purchase-price allocation was preliminary at filing date.
- Management said available cash, expected operating cash flows, investments, and credit-facility capacity were expected to meet anticipated cash needs for at least 12 months. No specific quantitative earnings or revenue guidance was provided. The board declared a $0.12-per-share dividend for payment in Q1 2014; future dividends remain subject to board approval.
- Key risks include economic weakness and freight-volume or pricing declines, competitive pressure, fuel-price volatility, loss of major customers, dependence on owner-operators and freight handlers, self-insured claims, regulatory and environmental exposure, information-system disruption, and acquisition integration or goodwill impairment. FASI’s four largest customers accounted for 69.6% of its segment revenue.
- Litigation was described as routine, and management did not expect pending matters to have a material adverse effect. The company had $10.0 million of self-insurance claim reserves and $1.9 million of unrecognized tax-benefit reserves, excluding which additional claim losses could not be reasonably estimated. Management and the auditor reported effective internal financial controls, but TQI was excluded from the internal-control assessment.
Investor verification priorities
- Review whether core Forward Air pricing, Complete attachment, and logistics/TLX volumes recover after the 2013 declines.
- Track FASI margins and customer retention as recently won business is integrated, and assess its customer concentration.
- Verify TQI’s 2014 performance against earn-out thresholds and evaluate the assumptions behind its valuation and goodwill.
- Assess the funding, integration, and returns from the CST acquisition, including final purchase accounting and the impact on liquidity.
- Monitor operating cash conversion, capital spending commitments of $32.9 million due in 2014, and the continued availability of the revolving facility.
- Review developments in self-insurance claims, tax contingencies, and the company’s internal-control assessment of TQI.