Forward Air Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; financial statements are unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Business context
Forward Air provides time-definite airport-to-airport transportation and related logistics services, including truckload brokerage. Forward Air Solutions (FASI) provides regional pool distribution. The company operates primarily in the United States and Canada.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $143.5 | $135.7 | $428.9 | $388.1 |
| Operating income | $19.6 | $20.3 | $59.5 | $53.5 |
| Operating margin | 13.7% | 15.0% | 13.9% | 13.8% |
| Net income | $12.3 | $12.9 | $36.7 | $32.8 |
| Diluted EPS | $0.41 | $0.44 | $1.24 | $1.11 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $45.7 | $54.8 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $20.5 | $20.3 |
Q3: Revenue rose 5.7%, but operating income fell 3.4% and net income fell 4.7%. Higher purchased transportation, insurance and claims, and other operating expenses outweighed revenue growth. The effective tax rate was 37.1%, versus 36.1%, partly because federal tax credits taken in Q3 2011 expired.
Nine-month period: Revenue grew 10.5%, operating income 11.2%, and net income 11.9%. Diluted EPS increased to $1.24 from $1.11. Purchased transportation grew faster than revenue (16.7% versus 10.5%) and rose to 43.7% of revenue from 41.4%; insurance and claims increased 32.8%.
Segments and operating trends
- Q3 Forward Air revenue increased 4.7%; segment operating income declined 6.3% to $19.3 million. Airport-to-airport tonnage was flat, while stronger Complete service use and higher pricing supported revenue. Management said flat tonnage continued into Q4.
- Q3 logistics revenue increased 12.4%, supported by 15.9% more TLX miles, partly offset by a 2.0% decline in average revenue per mile.
- Q3 FASI revenue rose 13.4% on new business wins; segment operating income improved to $0.3 million from a $0.3 million loss. For the nine months, FASI revenue rose 17.8%, but the segment still reported a $0.4 million operating loss, improved from a $1.8 million loss.
- Net fuel surcharge revenue decreased 9.9% in Q3 amid lower diesel prices and business-mix changes; it was flat for the nine-month period.
Cash, debt, liquidity, and capital allocation
- Cash was $93.0 million at September 30, 2012, versus $58.8 million at year-end 2011. Nine-month operating cash flow was $45.7 million; investing activities used $19.9 million, primarily for equipment, and financing activities provided $8.4 million.
- Cash from operations declined $9.2 million year over year, which management attributed mainly to higher estimated tax payments and timing of working-capital payments.
- Total debt and capital lease obligations were approximately $0.5 million. The company had no borrowings under its $150 million senior credit facility and reported $140.7 million of available borrowing capacity after letters of credit. The facility matures in February 2017.
- The company paid $0.10 per share in Q3 dividends, up from $0.07 in earlier quarters. Management expects regular quarterly dividends to continue, subject to Board approval. 815,059 shares remained available under the repurchase plan; no repurchases were made in the nine-month period.
- Management believes cash, expected operating cash generation, and available facility capacity will meet anticipated needs for at least the next 12 months.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management highlighted the importance of freight volumes, revenue per pound, and growth in logistics to earnings, and reported that airport-to-airport tonnage was flat in Q3 and remained so into Q4. Results are subject to seasonality and are not necessarily indicative of full-year performance.
- FASI goodwill was $5.4 million. No impairment was recorded in the June 2012 annual assessment, but management cautioned that delays in expanding and diversifying FASI revenue could reduce projected results and lead to a future impairment charge. Forward Air goodwill was $37.9 million.
- Three customers generated approximately 60.9% of FASI revenue for the nine months, creating segment-level customer concentration.
- Self-insurance and claims estimates may change materially; management said no estimate of the reasonably possible additional loss range could currently be made. Routine litigation was not expected to have a material adverse effect.
- Other disclosed risks include economic and freight-volume weakness, pricing pressure and competition, customer loss or credit risk, fuel costs, claims, owner-operator availability, regulation, and acquisition integration.
Most important facts for investors to verify
- Whether flat airport-to-airport tonnage persists and whether pricing and Complete-service growth can sustain revenue.
- Whether purchased transportation, insurance and claims, and other operating costs continue to pressure margins.
- Whether FASI can improve profitability, diversify its revenue base, and reduce customer concentration; also monitor goodwill impairment assumptions.
- Whether operating cash flow recovers from the year-over-year decline and supports capital spending and dividends.
- Whether claims reserves and self-insurance estimates remain adequate as claims and related costs increase.