Forward Air Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Forward Air provides expedited less-than-truckload, truckload, intermodal and pool distribution services. Prior-year segment figures were restated to reflect a new four-segment reporting structure.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $229.5 million | $205.9 million | +11.5% |
| Operating income | $21.4 million | $8.2 million | +$13.2 million |
| Operating margin | 9.3% | 4.0% | +5.3 percentage points |
| Net income | $13.1 million | $4.8 million | +$8.3 million |
| Diluted EPS | $0.43 | $0.16 | +$0.27 |
| Operating cash flow | $37.4 million | $7.5 million | +$29.9 million |
| Capital expenditures | $2.7 million | $5.2 million | -$2.5 million |
Operating income benefited substantially from the absence of $11.8 million in Towne acquisition and integration costs recorded in Q1 2015. The effective tax rate was 37.1%, versus 38.3%. Interest expense was $0.6 million, up from $0.4 million. Quarterly dividends remained $0.12 per share.
Segments and material changes
- Expedited LTL: Revenue rose 9.9% to $134.4 million; operating income increased 14.8% to $17.1 million. Growth reflected Towne volumes, pricing and a February dimensional-factor change. Segment operating margin improved to 12.7% from 12.2%.
- Truckload Expedited (TLX): Revenue rose 11.9% to $38.6 million, but operating income fell 50% to $1.6 million. Revenue per mile declined 13.4%; management cited business mix and difficulty reducing cost per mile commensurately. Margin decreased to 4.1% from 9.3%.
- Pool Distribution: Revenue increased 22.1% to $33.2 million; operating income slipped to $0.1 million from $0.2 million. Higher facility, lease, maintenance and staffing costs weighed on results.
- Intermodal: Revenue increased 7.0% to $24.6 million and operating income rose 20% to $2.4 million, supported by pricing, surcharges and the January acquisition of Ace Cargo for $1.7 million.
Reported year-over-year growth was affected by Towne, acquired in March 2015 and included in the 2016 quarter for a full quarter. Management’s unaudited pro forma comparison, assuming Towne was acquired at the start of 2015, showed Q1 2015 revenue of $240.1 million, operating income of $5.9 million and net income of $2.4 million; the filing cautions that pro forma results are not necessarily indicative of actual results.
Cash, debt and liquidity
- Cash was $38.0 million at March 31, 2016, up from $33.3 million at year-end. Current assets were $167.9 million and current liabilities $118.7 million.
- Operating cash flow of $37.4 million was supported by earnings and working-capital movements, including collections of receivables and reductions in other current assets; assess the extent to which this level is repeatable.
- Investing cash outflow was $4.2 million, including the Ace acquisition. Financing cash outflow was $28.5 million, including $14.0 million of debt and lease payments, $10.0 million of share repurchases and $3.7 million of dividends.
- Debt and capital lease obligations totaled approximately $70.6 million, of which $69.8 million was current. The $69.5 million term-loan balance matures in March 2017; its rate was 1.8% at quarter-end. No revolving borrowings were outstanding, and approximately $139.0 million of revolver capacity remained available after letters of credit.
Outlook, risks and unusual items
No specific earnings or revenue guidance was provided. Management expects cash, future operating cash flows and available credit to cover anticipated needs for at least the next 12 months, and expects to continue regular quarterly dividends subject to Board approval. It anticipates expanding Intermodal into additional U.S. geographies through acquisitions and new operations.
Key risks cited include freight volume and pricing pressure, economic and customer-cycle weakness, competition, fuel-price changes, customer credit risk, availability of owner-operators and freight handlers, acquisition integration, regulation, and vehicle, property-damage and workers’ compensation claims. Management says routine litigation is not expected to have a material adverse effect, but notes that self-insurance estimates could change materially and that it cannot estimate a reasonably possible range of additional losses. TQI performance had previously prompted additional goodwill impairment analysis; no impairment was identified as of December 31, 2015. The filing reports no change in risk-factor descriptions since year-end.
The company acquired Ace Cargo assets for $1.7 million and repurchased 232,944 shares for approximately $10.0 million at an average $42.91 per share. It adopted deferred-tax balance-sheet presentation guidance retrospectively; the impact of new lease, share-based payment and revenue-recognition standards was still being evaluated. Management assessed disclosure controls as effective.
Investor verification points
- Separate underlying growth from Towne acquisition effects and compare reported results with the disclosed pro forma figures.
- Track TLX revenue per mile, cost per mile and margins, and whether profitability recovers as volumes and fleet costs evolve.
- Assess cash-flow quality and working-capital contributions against future quarters.
- Confirm the company’s plan to repay or refinance the term loan due March 2017 and monitor covenant compliance and available revolver capacity.
- Monitor Pool Distribution cost absorption, self-insurance and claims estimates, and goodwill performance—particularly TQI.