Forward Air Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 15, 2013. The filing also reports unaudited quarterly results, including the fourth quarter. Forward Air provides time-definite ground transportation and logistics services; its FASI segment provides regional pool distribution.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Operating revenue | $584.4 million | $536.4 million | +8.9% |
| Income from operations | $83.5 million | $77.1 million | +8.3% |
| Operating margin | 14.3% | 14.4% | Down 0.1 percentage point |
| Net income | $52.7 million | $47.2 million | +11.7% |
| Diluted EPS | $1.78 | $1.60 | +11.3% |
| Cash from operating activities | $68.6 million | $77.0 million | Down $8.4 million |
FY 2012 revenue growth reflected higher airport-to-airport pricing and tonnage, increased use of Forward Air Complete pickup and delivery, and higher TLX logistics activity. Airport-to-airport tonnage increased 2.5%, while base revenue per pound increased 1.9%. Complete revenue rose 34.1%, and its attachment rate increased to 23.1% from 15.5%. The company said tonnage gains were concentrated in the first half, with volumes slightly lower year over year in the second half.
Forward Air segment revenue increased 8.0% to $501.7 million, with operating income up 6.5% to $81.5 million; its operating margin declined to 16.2% from 16.5%. FASI revenue increased 16.1% to $85.0 million, and operating income rose to $2.0 million from $0.6 million. FASI’s three largest customers represented 61.9% of its segment revenue.
Purchased transportation expense grew 13.3%, faster than revenue, and rose to 43.3% of revenue from 41.6%. Insurance and claims expense increased 28.4% to $11.3 million. These pressures were partly offset by salaries and benefits declining to 23.1% of revenue from 24.4%. The effective tax rate was 36.7%, down from 38.4%, reflecting federal refunds accrued for prior years following a change in an income-tax reporting position.
Fourth quarter
Fourth-quarter revenue was $155.5 million versus $148.3 million a year earlier; operating income was $24.0 million versus $23.6 million, and net income was $16.0 million versus $14.4 million. Diluted EPS was $0.54 versus $0.50.
Liquidity, debt, and capital resources
At year-end, cash and cash equivalents were $112.2 million, total assets were $399.2 million, and shareholders’ equity was $351.7 million. Operating cash flow was $68.6 million; investing activities used $20.7 million, including $21.4 million of property and equipment purchases. Management attributed lower operating cash flow mainly to higher estimated tax payments and timing of payable and prepaid-asset payments.
The company had no borrowings outstanding under its five-year, $150 million revolving credit facility, which matures in February 2017. After $10.6 million of letters of credit, $139.4 million remained available. Capital lease obligations were $0.3 million. The company declared $0.34 per share in dividends for 2012 and said it expected to continue quarterly dividends, subject to board approval. It reported $25.0 million of equipment purchase commitments due in 2013 and $71.9 million of future operating lease payments.
Outlook, risks, and unusual items
The filing provides no quantified revenue, earnings, or margin guidance. Management stated that cash, expected operating cash flows, investments, and available credit should meet anticipated cash needs for at least the next 12 months. Its stated priorities include increasing customer volumes and Complete attachment, improving network efficiency, expanding logistics and pool distribution, and evaluating acquisitions.
- Results are exposed to economic conditions, freight volumes and pricing, competition, fuel-price changes, and the ability to recover higher transportation and labor costs. Fixed terminal and network costs make lower volumes a margin risk; the first quarter is historically weakest and the third and fourth quarters strongest.
- Owner-operator and freight-handler availability, labor costs, and possible reclassification of owner-operators as employees could affect costs and service. Customer concentration is notable at FASI, and its contracts generally allow cancellation on 30–60 days’ notice.
- FASI goodwill was $5.4 million after a prior impairment. Its June 2012 estimated fair value exceeded carrying value by approximately 28%; management cautioned that delayed growth or diversification could lead to an impairment charge. Forward Air goodwill was $37.9 million.
- Self-insurance reserves and claims are estimates subject to uncertainty. Management reduced workers’ compensation reserves by approximately $1.1 million in the second quarter, while full-year insurance and claims expense increased. The filing says it cannot estimate the range of reasonably possible additional losses on outstanding and incurred-but-not-reported claims.
- Routine litigation was not expected by management to have a material adverse effect. The filing also identifies information-system, regulatory, environmental, acquisition-integration, and customer-credit risks.
Investor verification priorities
- Check whether second-half freight softness persisted and whether pricing and Complete attachment continued to support airport-to-airport revenue.
- Track purchased-transportation and insurance-and-claims costs against revenue growth, and assess the durability of the operating margin.
- Review FASI customer concentration, profitability, growth and goodwill impairment assumptions.
- Reconcile cash conversion and planned equipment spending with the $25.0 million 2013 purchase commitments and dividend policy.
- Verify developments in self-insurance claims, tax matters, and any material changes to credit-facility availability or covenants.