Forward Air Corporation — Q2 2012 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2012; financial statements are unaudited. Forward Air provides time-definite transportation and logistics services, primarily for deferred air freight, while Forward Air Solutions (FASI) provides regional pool distribution. The company notes that quarterly results are seasonal and Q2 results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $148.3m | $132.2m | $285.4m | $252.4m |
| Operating income | $23.1m | $19.9m | $39.9m | $33.2m |
| Operating margin | 15.6% | 15.1% | 14.0% | 13.1% |
| Net income | $14.2m | $12.0m | $24.4m | $19.8m |
| Diluted EPS | $0.48 | $0.40 | $0.83 | $0.67 |
- Q2 revenue grew 12.2% and net income grew 18.3% year over year. For the first half, revenue rose 13.1% and net income rose 23.7%.
- Q2 revenue growth reflected higher airport-to-airport volumes and pricing, greater use of Forward Air Complete pickup and delivery, logistics growth, and FASI new business. Airport-to-airport tonnage rose 5.4% and base revenue per pound rose 2.0% in Q2.
- Purchased transportation costs grew faster than revenue: 20.5% in Q2 and 19.0% for the first half. As a share of revenue, the cost increased to 44.0% from 41.0% in Q2 and to 43.6% from 41.4% for the first half. Management attributed pressure partly to higher miles, provider rates, and service/customer mix.
- FASI revenue increased 15.7% in Q2 and 20.9% for the first half. Its operating loss narrowed to about $0.1m in Q2 from $0.5m, and to $0.6m for the first half from $1.5m.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $23.9m, down from $32.6m. Management cited higher estimated tax payments, timing of payables and prepaid assets, and increased claim payments; improved earnings and collections partly offset these uses.
- Capital expenditures were $18.3m, primarily for replacement trailers, vehicles and forklifts; investing cash use was $17.9m. Operating cash flow less capital expenditures was approximately $5.6m, versus approximately $17.1m in the prior-year period.
- Cash was $68.8m at June 30, 2012, versus $58.8m at December 31, 2011. Total current assets were $162.1m and current liabilities $32.5m.
- Debt and capital lease obligations totaled $0.6m. The company had no borrowings under its new $150m five-year credit facility; $9.3m was used for letters of credit, leaving $140.7m available. The facility matures in February 2017 and carries a stated rate of LIBOR plus 1.1%, subject to leverage covenants.
- Shareholders’ equity was $318.8m. The company paid $0.07 per share per quarter during the first half; after quarter-end, the board declared a $0.10 per-share dividend payable September 7, 2012, subject to the stated record date.
Outlook, commentary and risks
- No quantitative earnings or revenue guidance is provided. Management stated it expects cash, operating cash generation and available credit to cover anticipated needs for at least the next 12 months.
- Management highlighted the operating leverage of its fixed-cost terminal and hub network, while noting that earnings depend on freight volumes, revenue per pound and growth in other services.
- The annual goodwill assessment found no impairment. However, FASI goodwill was subject to a fair-value estimate sensitive to projected financial information; management warned that delays in building and diversifying FASI’s revenue base could lead to a future impairment charge.
- Three customers represented approximately 60.7% of FASI Q2 revenue and 61.2% of first-half revenue, creating segment-level customer concentration exposure.
- Routine litigation and self-insured workers’ compensation, vehicle liability, property damage and medical claims are described. Management believes reserves are adequate, but states that estimates could change materially and the reasonably possible additional loss range cannot currently be estimated.
- Other risks cited include economic and freight-volume weakness, pricing competition, customer loss or credit deterioration, fuel prices, availability and cost of owner-operators and freight handlers, claims, regulation, and acquisition integration. The filing reports no material change in risk factors since year-end 2011.
Most important facts for investors to verify
- Whether freight volumes, base pricing and Forward Air Complete growth persist, and whether purchased transportation cost growth moderates.
- FASI’s progress toward sustained profitability, the outlook for its goodwill, and its reliance on a small number of customers.
- Cash conversion and capital spending, including the timing of tax, payable, prepaid-asset and claim payments.
- The adequacy of self-insurance reserves and any developments in vehicle, workers’ compensation or other litigation claims.
- Future dividend and repurchase decisions, and compliance with the new credit facility’s covenants.