Forward Air Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results. Forward Air provides expedited surface transportation and logistics; its segments are Forward Air, FASI pool distribution, and TQI pharmaceutical and life-science logistics.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $193.9M | $159.8M | $365.4M | $301.4M |
| Operating income | $27.6M | $22.5M | $43.9M | $38.3M |
| Net income | $17.2M | $13.8M | $27.4M | $24.7M |
| Diluted EPS | $0.55 | $0.45 | $0.87 | $0.81 |
| Operating margin | 14.2% | 14.1% | 12.0% | 12.7% |
- Q2 revenue rose 21.3%, operating income 22.7%, and net income 24.6% year over year. Six-month revenue rose 21.2%, while operating income rose 14.6% and net income 10.9%.
- Six-month operating cash flow was $39.2M, versus $37.3M. Investing used $116.1M, including $83.0M for CST and $33.4M in property and equipment purchases. Financing used $25.5M, including $20.0M of share repurchases and $7.5M of dividends. Cash fell to $24.9M from $127.4M at year-end.
- At June 30, total assets were $532.5M and shareholders’ equity was $450.7M. Current assets were $137.2M and current liabilities $43.7M. Debt and capital lease obligations totaled approximately $1.7M; the company had no revolver borrowings and $140.3M of available borrowing capacity under its $150M facility.
- Quarterly dividends increased to $0.12 per share from $0.10. The company repurchased 446,986 shares in Q2 at an average $44.71 per share; 1,553,014 shares remained authorized for repurchase.
Material changes and operating drivers
- The February 2014 CST acquisition expanded intermodal drayage and related services. CST contributed $18.1M of Q2 revenue and $2.3M of Q2 operating income; its purchase price was $83.0M net cash plus $11.2M of assumed debt, which was immediately repaid. The purchase-price allocation remained preliminary.
- Forward Air segment Q2 revenue increased 24.3%, with roughly 59.9% of the increase attributed to CST. Legacy airport-to-airport growth reflected higher tonnage and a March rate increase. FASI returned to Q2 operating profit of $1.0M from a $0.2M loss; TQI Q2 operating income rose 75% to $1.4M.
- For the first half, Forward Air operating margin declined to 14.1% from 15.9%; management said legacy segment operating income was flat, with first-quarter severe weather weighing on results. Consolidated margin fell to 12.0% from 12.7% as costs rose faster than revenue.
- Net fuel surcharge revenue increased 20.3% in Q2 and 20.0% for the first half, primarily from CST and higher Forward Air volumes. Consolidated purchased transportation declined as a share of revenue, while salaries, fuel, depreciation and amortization, and other operating costs increased.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said available cash, expected operating cash flows, investments and the credit facility should meet anticipated cash needs for at least the next 12 months. Regular quarterly dividends are expected to continue, subject to board approval.
- Management cited seasonality and warned interim results may not indicate full-year performance. Severe first-quarter weather affected transportation operations, including TQI, and increased miles and transportation costs.
- Risks include freight volumes and pricing, competition, fuel costs, customer concentration and creditworthiness, access to facilities and qualified drivers, claims and health-care costs, regulation, information systems, and successful acquisition integration. Most insurance coverage is subject to self-insured limits; management noted estimates for incurred and unreported claims could change materially, and it could not estimate a reasonably possible additional-loss range.
- The annual goodwill assessment found no impairment. CST’s reporting-unit fair value exceeded carrying value by approximately 9%, the narrowest disclosed cushion; changes in assumptions or business conditions could affect future impairment assessments.
- A potential TQI earn-out of up to $5.0M remained contingent on 2014 EBITDA targets, although the recorded earn-out liability was $0 based on the then-most-probable outcomes. A new customer revenue-recognition standard was issued; the company was evaluating its impact and had not selected a transition method.
Important facts for investors to verify
- How much of reported growth and future earnings reflects CST versus organic volume, pricing and productivity, and how CST integration and its preliminary valuation develop.
- Whether Forward Air’s first-half margin pressure and the effects of weather, purchased transportation costs and wage inflation persist.
- Whether operating cash flow can support capital spending, dividends and repurchases after the substantial cash outlay for CST.
- Whether TQI reaches earn-out targets and whether self-insurance claims or goodwill assumptions require material adjustments.