Forward Air Corporation — Q3 2015 Form 10-Q
Business context and period. The unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Forward Air provides time-definite transportation and logistics services; its other reportable segments are Forward Air Solutions (FASI) and Total Quality (TQI). Results include Towne from its March 9, 2015 acquisition.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $247.1 million | $201.5 million | $702.7 million | $566.9 million |
| Operating income | $24.6 million | $26.9 million | $52.8 million | $70.8 million |
| Operating margin | 10.0% | 13.3% | 7.5% | 12.5% |
| Net income | $15.7 million | $16.7 million | $32.3 million | $44.1 million |
| Diluted EPS | $0.50 | $0.54 | $1.03 | $1.41 |
- Cash flow: Nine-month operating cash flow was $57.3 million, down from $65.1 million. Investing used $79.8 million, including $62.4 million for Towne and $18.5 million of property and equipment purchases. Financing provided $28.5 million; cash increased $6.0 million to $47.4 million.
- Liquidity and debt: Current assets were $185.7 million and current liabilities $113.0 million at September 30. Debt and capital lease obligations totaled $98.7 million, including $55.9 million classified current. The term loan balance was $97.2 million, bearing 1.4% interest, with $55.6 million current; it matures in March 2017. No revolving borrowings were outstanding; $136.3 million of revolving capacity remained available after letters of credit.
- Capital returns: The company paid $0.12 per share quarterly dividends and repurchased 204,590 shares for $10.0 million during the first nine months. The board’s stated intention to continue regular quarterly dividends remains subject to approval.
Material changes and management commentary
- Revenue rose 22.6% in Q3 and 24.0% for the nine-month period, mainly reflecting Towne and the inclusion of a full nine months of CST-related operations. Forward Air segment revenue increased 28.9% in Q3; FASI revenue rose 4.9%, while TQI revenue fell 15.0%.
- Despite revenue growth, operating income fell 8.6% in Q3 and 25.6% for the nine months. Towne transaction and integration costs were approximately $3.9 million in Q3 and $22.9 million year to date. Higher salaries, operating leases, insurance and claims, and other operating costs also pressured margins. Lower fuel expense partly offset these increases.
- FASI operating income declined 72.2% in Q3 and 71.4% year to date, amid higher claims and insurance costs, facility openings and relocations, and customer onboarding costs. TQI operating income declined 55.6% in Q3; management said its shift toward company drivers and fleet utilization was progressing more slowly than expected, while revenue weakened.
- Towne was acquired for $62.4 million net cash and $59.5 million of assumed debt and capital leases, funded with a $125 million term loan. Management cited expanded service points, pickup-and-delivery capabilities, network density and owner-operator capacity as expected strategic benefits. The purchase price allocation remained preliminary.
- Management said available cash, expected operating cash generation and borrowing capacity should meet anticipated needs for at least the next 12 months. No specific earnings or revenue guidance was provided. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Risks, contingencies and unusual items
- Transportation claims are partly self-insured. Management noted estimates for incurred and unreported claims could change materially in the near term; it could not estimate a reasonably possible range of additional losses. Vehicle claim reserves increased, including from adverse development of older claims.
- The company cited risks including freight volumes and revenue per pound, competition and pricing pressure, customer loss or creditworthiness, fuel prices, availability of qualified drivers and owner-operators, claims, regulation, and successful acquisition integration.
- The credit facility has financial and other covenants. The term loan’s quarterly amortization creates a substantial current debt classification. Goodwill impairment testing as of June 30 found no impairment; management reported estimated fair-value headroom of 20% for CST and 16% for TQI, versus higher headroom for the other reporting units.
- Routine litigation was not considered likely to have a material adverse effect. The company was evaluating newly issued revenue-recognition guidance, effective for periods beginning on or after December 15, 2017; adoption method and impact were not yet determined.
Important facts for investors to verify
- Whether Towne integration and duplicate-facility costs subside as planned, and whether acquired revenue translates into sustainable operating-margin improvement.
- Whether Forward Air’s volume growth and rate actions offset Towne’s lower base revenue per pound and higher network costs.
- Whether FASI’s claims and facility costs normalize and TQI’s fleet-utilization strategy improves revenue and profitability.
- The development of self-insured claims, especially adverse vehicle-claim development, and its potential cash and earnings impact.
- Term-loan repayment, covenant headroom and available revolving capacity; the filing does not state specific covenant headroom.
- Final Towne purchase accounting, acquisition-related goodwill and intangible valuations, and the eventual effect of revenue-recognition adoption.