Forward Air Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results. Forward Air provides time-definite transportation and logistics services; its three reportable segments are Forward Air, FASI pool distribution, and TQI specialized pharmaceutical and life-sciences logistics.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $201.5 million | $170.0 million | $566.9 million | $471.4 million |
| Operating income | $26.9 million | $22.9 million | $70.8 million | $61.2 million |
| Operating margin | 13.3% | 13.5% | 12.5% | 13.0% |
| Net income | $16.7 million | $14.2 million | $44.1 million | $38.9 million |
| Diluted EPS | $0.54 | $0.46 | $1.41 | $1.27 |
| Dividends per share | $0.12 | $0.10 | $0.36 | $0.30 |
- Q3 revenue rose 18.5% and net income 18.3% year over year. Nine-month revenue increased 20.3% and net income 13.4%.
- Operating expenses grew 18.7% in Q3 and 20.9% year to date, faster than operating income. The operating margin narrowed 0.2 percentage points in Q3 and 0.5 points for the nine-month period.
- Cash from operations was $65.1 million for the first nine months, versus $60.5 million a year earlier. Investing used $119.8 million, including $84.3 million for acquisitions and $37.1 million of property and equipment purchases; financing used $48.1 million.
- Cash was $24.6 million at September 30, down from $127.4 million at year-end 2013. Current assets were $138.6 million and current liabilities $45.0 million. Total assets were $529.9 million and shareholders’ equity $446.6 million.
- Debt and capital lease obligations totaled approximately $1.6 million. The company had no borrowings on its $150 million senior credit facility and reported $140.3 million of available capacity after letters of credit.
Material changes and business drivers
- The February 2014 CST acquisition expanded the Forward Air segment into intermodal drayage. CST contributed $21.1 million of Q3 revenue and $2.5 million of Q3 operating income; reported results include CST from its acquisition date. CST and the September acquisition of RGL assets involved $84.3 million of net cash outlays in the cash-flow statement.
- Forward Air segment revenue increased 24.3% in Q3 and 21.5% year to date, driven by CST, higher airport-to-airport tonnage, rate increases, and fuel surcharge revenue. Airport-to-airport tonnage rose 4.9% in Q3 and 6.0% year to date; base revenue per pound increased 4.3% and 2.8%, respectively.
- FASI Q3 revenue increased 2.7% and operating income improved to $1.8 million from $1.4 million. Nine-month revenue rose 11.1%, and operating income was $2.8 million versus $0.4 million.
- TQI Q3 revenue declined 3.2%, while operating income remained $0.9 million. Nine-month revenue increased 29.1%, partly reflecting a full nine months of ownership in 2014 versus seven months in 2013; severe first-quarter weather adversely affected operations.
- Reported growth includes acquisitions. Pro forma results assuming acquisitions occurred January 1, 2013 show nine-month revenue of $572.0 million in 2014 versus $529.0 million in 2013, and diluted EPS of $1.42 versus $1.41.
Outlook, risks and unusual items
- Management provided no specific earnings or revenue guidance. It said cash, investments, expected operating cash flow, and available credit should cover anticipated cash needs for at least the next 12 months. Management expects regular quarterly dividends to continue, subject to board approval.
- The company repurchased 881,979 shares for $40.0 million during the first nine months under a two-million-share authorization; 1,118,021 shares remained authorized for repurchase at quarter-end.
- Management cited exposure to freight volumes and pricing, competition, customer concentration and creditworthiness, fuel prices, owner-operator availability, labor and health-care costs, claims, regulation, weather, and successful acquisition integration. Ordinary-course litigation is not expected by management to have a material adverse effect, but self-insurance estimates could change materially; management could not estimate a reasonably possible additional loss range.
- CST and RGL purchase-price allocations were preliminary. No goodwill impairment was recorded in the June 2014 annual test, although CST’s estimated fair value exceeded carrying value by approximately 9%, less headroom than the other reporting units. The TQI agreement allows up to $5 million of earn-out consideration; the recorded liability had been reduced to zero, but could increase significantly if 2014 performance goals are met.
- A new revenue-recognition standard was issued, effective for periods beginning on or after December 15, 2016; the company was evaluating its impact and had not selected a transition method.
Important facts for investors to verify
- How much of future growth and earnings reflects CST acquisition contributions versus organic volume, pricing, and operating improvements.
- Whether operating-margin pressure persists as labor, fuel, depreciation, maintenance, and other costs rise.
- CST integration, preliminary purchase accounting, acquired-intangible amortization, and the returns generated by the acquisition.
- Cash conversion and working-capital trends: receivables used $15.9 million of operating cash in the first nine months.
- Potential self-insurance claim exposure and whether TQI earns additional contingent consideration.
- Share repurchases, dividends, and capital spending relative to operating cash generation and liquidity.