RADIANT LOGISTICS, INC quarterly report, Q3 FY2012

Business context and reporting period

Radiant Logistics, Inc. is a non-asset-based freight forwarding and logistics provider. This unaudited Form 10-Q covers the quarter and nine months ended March 31, 2012, compared with the corresponding 2011 periods. Although the request metadata labels the filing “2011 Q3,” the filing itself reports fiscal 2012 third-quarter results.

Growth came partly from acquisitions: DBA, acquired in April 2011; Isla, acquired in December 2011; and ALBS, acquired in February 2012. These added company-owned operations in New Jersey, Los Angeles, Laredo and New York-JFK.

Financial performance and liquidity

Management attributed the revenue growth mainly to acquired businesses. The margin decline reflected shipment mix and acquired operations that generally produced lower margins. For the nine-month period, reported revenue growth includes acquisitions; pro forma revenue, assuming the acquisitions were in place from July 1, 2010, rose 1.8%, while pro forma net revenue fell 5.6% and adjusted EBITDA increased 2.0%.

Operating cash flow was $1.3 million for the nine months, down from $3.6 million. Investing used $11.4 million, primarily for Isla and ALBS acquisitions; financing provided $10.3 million, primarily from Caltius debt and credit-facility borrowings. Cash at March 31 was $0.6 million. Current assets were $50.1 million and current liabilities $40.2 million, leaving working capital of about $9.9 million.

Debt and other obligations: notes and other long-term debt had a reported carrying value of $22.1 million, including $10.0 million principal of Caltius subordinated notes (carrying value net of discount and issuance costs), DBA shareholder notes and credit-facility borrowings. The company also recorded $7.12 million of contingent acquisition consideration. The Bank of America facility had a $20 million commitment; the filing reported $11.9 million available for borrowing at March 31, after collateral and letters of credit. The company reported compliance with its debt covenants. Caltius notes bear 13.5% accrued interest, with 11.75% payable currently in cash; principal is due December 1, 2016.

Material changes versus prior period

• Quarterly GAAP results turned to a loss attributable to Radiant of $74,617 from income of $770,719; nine-month attributable income declined 56.0% to $997,907.
• Quarterly operating income fell 76.0%, despite higher revenue. Personnel, SG&A and depreciation and amortization rose substantially, reflecting acquired operations, integration and acquisition-related costs.
• Interest expense increased to $0.47 million for the quarter from $0.03 million, and to $0.78 million for nine months from $0.12 million, following new borrowing.
• Goodwill rose to $14.1 million from $6.7 million and acquired intangibles, net, to $12.7 million from $2.9 million, largely reflecting acquisitions. Amortization expense for nine months increased to $1.64 million from $0.66 million.
• Common shares outstanding increased to 32.9 million from 31.7 million at June 30, 2011, including shares issued in connection with Isla financing and acquisition consideration.

Outlook, commentary, risks and unusual items

The filing gives no quantified revenue or earnings guidance. Management expects near-term GAAP earnings to remain pressured by acquired-intangible amortization and non-recurring expenses, including DBA transition costs, lost revenue at the DBA Los Angeles office, and legal expenses. Management views adjusted EBITDA as a useful performance measure but it is non-GAAP and excludes specified costs.

Radiant’s strategy combines organic expansion with acquisitions. Further acquisitions and growth depend on integration, retaining customers and agents, realizing expected synergies, financing access and compliance with lender restrictions. The May 11, 2012 effective shelf registration permits offerings of up to $75 million of securities; the company reported no agreement to issue securities as of the report date.

Radiant asserted indemnification and set-off claims, including a $1.8 million claim, against former DBA shareholders and brought related legal proceedings over alleged breaches and customer solicitations. The dispute may affect near-term earnings; recovery and outcome are uncertain. The filing also reports collection proceedings against two customers owing approximately $1.5 million; the company had expensed its portion and did not believe its exposure would be material, while acknowledging recovery was uncertain. The company noted that some agency stations had deficit bad-debt reserve balances, creating potential loss exposure if stations cannot replenish them.

Other items include $0.9 million of DBA transition costs for nine months, $0.4 million of expenses specifically attributable to acquisitions in the adjusted EBITDA reconciliation, and a $0.02 million increase in contingent consideration fair value. At March 31, management reported no indicators of goodwill or long-lived-asset impairment. The filing lists $8.8 million of minimum future operating lease payments.

Important facts for investors to verify

• Whether acquired businesses retain customers and agents, integrate successfully and deliver expected margins and synergies; review reported versus pro forma growth.
• The trend in net revenue margins and operating expenses, and the extent to which acquisition-related and other non-recurring charges continue.
• Debt service capacity, covenant headroom, credit-facility availability and the cost and terms of Caltius financing.
• Progress and potential financial effects of DBA-related claims, customer losses and legal proceedings, including whether claimed offsets or recoveries are realized.
• Collection of the approximately $1.5 million owed by two customers and replenishment of agency-station bad-debt reserves.
• Future acquisition earn-outs, dilution, contingent consideration estimates and any use of the $75 million shelf registration.