Forward Air Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; financial statements are unaudited and compared with the corresponding 2009 periods. Amounts are in millions of dollars unless stated otherwise.
Business context
Forward Air provides time-definite transportation and logistics services to the deferred air freight market, including airport-to-airport, logistics and related services. Forward Air Solutions (FASI) provides regional pool distribution, primarily for retailers and distributors. The business has substantial fixed network costs, making freight volumes and revenue per pound important drivers of earnings.
Financial performance
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $121.5 | $103.1 | $350.6 | $299.4 |
| Operating income | $15.5 | $6.7 | $35.1 | $6.5 |
| Operating margin | 12.8% | 6.5% | 10.0% | 2.2% |
| Net income | $8.9 | $3.8 | $20.2 | $3.5 |
| Diluted EPS | $0.31 | $0.13 | $0.69 | $0.12 |
| Net margin | 7.3% | 3.7% | 5.8% | 1.2% |
Q3 revenue rose 17.8%; nine-month revenue rose 17.1%. Growth was led by Forward Air: segment revenue increased 22.9% in Q3 and 20.1% for nine months. Airport-to-airport tonnage rose 15.9% in Q3 and 15.5% year to date; base revenue per pound increased 4.6% in Q3 after a May 1 general rate increase. Logistics revenue also grew, supported by higher truckload brokerage activity. Net fuel surcharge revenue increased 44.9% in Q3 and 66.7% for nine months.
FASI revenue fell 7.3% in Q3, reflecting customer losses and weak volumes, but rose 1.2% for nine months. FASI reported a $0.2 million operating loss in Q3 and a $2.0 million operating loss for nine months. The company attributed improvement from 2009 partly to operating efficiencies and the absence of the prior-year impairment charge.
For the nine months, operating cash flow was $37.9 million, versus $30.7 million in 2009. Investing activities used $10.5 million, primarily for replacement tractors, trailers and vehicles; financing activities used $6.2 million, mainly for dividends and scheduled debt and lease payments. Cash increased by $21.2 million to $63.2 million.
At September 30, cash was $63.2 million, total assets were $341.8 million and shareholders’ equity was $244.1 million. Debt and capital lease obligations totaled $51.7 million, including $50.0 million outstanding under the senior credit facility. The facility matures in October 2012; $38.3 million of borrowing capacity remained after $11.7 million was used for letters of credit. The facility bears interest at LIBOR plus 0.6%–0.9%. Quarterly dividends were $0.07 per share.
Changes versus prior period and notable items
- Q3 operating income more than doubled as revenue growth leveraged Forward Air’s fixed-cost network; nine-month operating income increased substantially from the weak 2009 comparison.
- The 2009 nine-month comparison included a $7.2 million non-cash impairment charge, mostly for FASI goodwill; no impairment was recorded in 2010. The company’s June 2010 annual test required no charge.
- Q3 expenses included a $0.7 million gain on termination of a capital lease. The company also received approximately $1.3 million from the lessor in final settlement.
- Customer losses affected FASI, including a major customer relationship ended by July 2010. That customer represented 10.7% of FASI revenue and 1.5% of consolidated revenue for the nine months; management said the lost business was low-yielding and expected its earnings impact to be minimal.
- Cash and equity increased from year-end 2009; debt and capital lease obligations declined modestly. Accounts receivable rose to $62.4 million from $55.7 million, which management linked to higher business volumes and revenue not yet collected.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management said cash, expected operating cash generation and available credit should meet anticipated cash needs for at least the next 12 months. It expects to continue quarterly dividends, subject to Board approval. Management cautioned that quarterly results are seasonal and the interim results are not necessarily indicative of full-year performance.
Key risks include economic and freight-volume weakness, pricing pressure, fuel-price changes, customer credit and loss of major customers, availability of owner-operators and freight handlers, and claims and employment costs. FASI goodwill remains sensitive to projected results; prolonged or worsening economic conditions could lead to another impairment. The company self-insures portions of workers’ compensation, vehicle, property and medical claims; management said the estimate for incurred and unreported claims could change materially, but could not estimate a reasonably possible additional loss range. Routine litigation was not expected to have a material adverse effect. The company increased reserves for unrecognized tax benefits and related interest by approximately $0.2 million in the first nine months, citing state audit findings.
Investor verification points
- Whether Forward Air’s freight-volume and pricing gains persist, and whether higher purchased transportation costs or fuel affect margins.
- FASI’s ability to restore revenue and reach profitability, and the assumptions supporting its $5.4 million goodwill balance.
- Collection of the increased receivables and ongoing operating cash conversion.
- Credit-facility covenants, October 2012 maturity and actual availability after letters of credit.
- Developments in self-insured claims, state tax audits and other contingencies.
- Whether the one-time lease termination gain and other unusual items affect comparability of operating results.