Forward Air Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results; financial amounts below are in millions of dollars unless stated otherwise. Forward Air provides time-definite transportation and logistics, FASI provides pool distribution, and newly acquired TQI provides temperature-controlled and secure logistics services.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $159.8 | $148.3 | $301.4 | $285.4 |
| Operating income | $22.5 | $23.1 | $38.3 | $39.9 |
| Operating margin | 14.1% | 15.6% | 12.7% | 14.0% |
| Net income | $13.8 | $14.2 | $24.7 | $24.4 |
| Diluted EPS | $0.45 | $0.48 | $0.81 | $0.83 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $37.3 | $23.9 |
- Q2 revenue rose 7.8%, principally from TQI and FASI growth, while operating income fell 2.6% and net income fell 2.8%. Six-month revenue rose 5.6%; operating income declined 4.0%, while net income increased 0.8%.
- For the first six months, operating cash flow increased $13.3 million year over year. Investing used $72.3 million, including $45.3 million for TQI and $28.0 million of capital expenditures. Financing provided $4.0 million. Cash declined to $81.1 million from $112.2 million at year-end 2012.
- At June 30, total assets were $468.2 million and shareholders’ equity was $403.8 million. Current assets were $177.3 million versus current liabilities of $29.5 million. Debt and capital lease obligations totaled approximately $0.1 million on the balance sheet. The company had no borrowings under its $150 million revolving credit facility, with $138.7 million available after letters of credit.
Business changes and drivers
- Forward Air acquired all of TQI on March 4, 2013. Consideration included $45.3 million net cash, $20.1 million of assumed debt that was repaid immediately, and a possible earn-out of up to $5.0 million. A $0.6 million estimated earn-out liability was recorded. TQI contributed $12.2 million revenue and $0.8 million operating income in Q2; from acquisition through June 30, it contributed $16.1 million revenue and $1.0 million operating income.
- Q2 Forward Air segment revenue fell 4.9%, reflecting weaker airport-to-airport and truckload brokerage volumes, lower Complete service revenue, and a lost customer. FASI revenue rose 32.1% on new business wins, but its operating loss widened to $0.2 million amid start-up and integration inefficiencies. TQI generated a 6.6% Q2 operating margin.
- Six-month Forward Air revenue declined 3.5%; FASI revenue rose 23.9% but recorded a $1.0 million operating loss. TQI reported $1.0 million of operating income since acquisition.
- Consolidated operating margin contracted year over year. Higher insurance and claims, fuel, other operating expenses, and acquisition-related amortization weighed on results. FASI’s purchased transportation costs also rose as a share of revenue.
Liquidity, outlook, risks and unusual items
- Management said cash, expected operating cash generation, and available credit were sufficient for anticipated needs for at least the next 12 months. The company expected regular quarterly dividends to continue, subject to Board approval; the 2013 quarterly dividend was $0.10 per share, versus $0.07 in the first half of 2012.
- No specific earnings or revenue guidance was provided. Management noted that results are seasonal and interim results are not necessarily indicative of full-year performance.
- Goodwill was $87.8 million, including $44.4 million from TQI. No impairment charge was recorded. Management’s valuation estimated TQI’s fair value exceeded carrying value by only about 3%, making its goodwill particularly sensitive to operating results and valuation assumptions; FASI’s estimated headroom was 81%.
- The TQI purchase-price allocation remained preliminary. The potential earn-out depends on TQI’s 2013 and 2014 EBITDA performance and could differ significantly from the recorded estimate. Approximately $0.9 million of acquisition transaction costs were expensed in the first half.
- Routine litigation was not expected by management to have a material adverse effect. Self-insured claims estimates may change materially, but the filing said no reasonably possible additional-loss range could be estimated. The company also identified freight volumes and pricing, customer loss, fuel prices, competition, claims, labor costs, and acquisition integration among forward-looking risks.
- Management reported effective disclosure controls, but excluded TQI’s internal control over financial reporting from its June 30 assessment because the acquisition was recent; TQI represented about 17.7% of total assets.
Key facts for investors to verify
- Whether Forward Air’s core volumes and pricing stabilize, especially airport-to-airport tonnage, TLX activity, and Complete service after the customer loss.
- Whether FASI integrates new customer business, improves purchased-transportation economics, and returns to operating profitability.
- Whether TQI meets earn-out targets and delivers results that support its preliminary valuation and limited goodwill headroom.
- Whether cash generation remains adequate after elevated capital spending, dividends, and acquisition-related costs.
- Whether self-insurance reserves, claims experience, and TQI’s financial reporting controls require material changes or additional disclosure.