Forward Air Corp. 10-Q Summary: Q1 2010
Business Context and Reporting Period
This filing covers the quarterly period ended March 31, 2010. Forward Air Corporation operates in two primary segments: Forward Air, providing time-definite surface transportation and logistics for deferred air freight, and Forward Air Solutions (FASI), providing pool distribution services to retailers and distributors. The company operates a network of terminals across the U.S. and Canada.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Operating Revenue | $106,977 | $96,616 |
| Net Income (Loss) | $3,419 | $(3,104) |
| Income from Operations | $6,055 | $(5,026) |
| Operating Margin | 5.7% | -5.2% |
| Net Cash from Operating Activities | $10,192 | $16,459 |
| Cash and Equivalents (End of Period) | $44,612 | $31,241 |
| Total Debt (Current + Long-term) | $52,827 | $53,088 |
| Available Borrowing Capacity | $38,196 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 10.8% to $107.0 million, driven by an 11.8% increase in tonnage volumes and higher fuel surcharge revenue (up 57.9%).
- Profitability Turnaround: The company returned to profitability with $3.4 million in net income, compared to a $3.1 million net loss in Q1 2009. This improvement is largely due to the absence of a $7.2 million goodwill impairment charge recorded in Q1 2009.
- Segment Performance:
- Forward Air: Revenue rose 10.7% to $90.9 million; operating income increased 89.5% to $7.2 million.
- FASI: Revenue rose 10.8% to $16.4 million; operating loss narrowed significantly to $1.1 million from $8.8 million in the prior year.
- Cost Management: Operating expenses remained relatively flat year-over-year ($100.9 million vs. $101.6 million), despite revenue growth, due to reduced impairment charges and lower insurance/claims costs.
Outlook, Risks, and Management Commentary
- Rate Increases: Management announced a general rate increase effective May 1, 2010, to counter pricing competition experienced during the 2009 recession.
- Fuel Prices: Rising diesel prices in 2010 increased fuel expenses by 23.5% but were largely offset by increased net fuel surcharge revenue.
- Customer Concentration: The company notified one of FASI's largest customers (representing ~2.5% of consolidated revenue) that services would cease by July 2, 2010. Management projects the impact on 2010 results to be minimal as the revenue was low-yielding.
- Goodwill Risk: While no impairment was recorded in Q1 2010, management notes that if economic conditions worsen, additional impairment charges against the FASI segment's goodwill ($5.4 million carrying value) may be required.
- Liquidity: The company maintains a $100 million senior credit facility with $38.2 million available. Management believes cash flows and borrowing capacity are sufficient for the next 12 months.
Key Facts for Investor Verification
- Revenue Quality: Verify the sustainability of the 11.8% tonnage increase and the effectiveness of the May 1, 2010 rate hike in stabilizing base revenue per pound.
- FASI Segment Viability: Monitor FASI's ability to reduce fixed costs and achieve profitability without the benefit of non-recurring impairment charges from the prior year.
- Customer Churn: Assess the actual financial impact of the departure of the major FASI customer and the success of replacing that volume.
- Debt Covenants: Confirm continued compliance with the senior credit facility covenants, specifically the total indebtedness to earnings ratio, which influences interest rates.
- Goodwill Valuation: Watch for any future indicators of impairment in the FASI segment given the ongoing economic challenges in the retail sector.