Forward Air Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Dollar amounts below are in millions unless noted.
Business context
Forward Air provides time-definite transportation and logistics services, principally for deferred air freight, through its Forward Air segment. Forward Air Solutions (FASI) provides regional pool distribution. The company notes that quarterly results are seasonal and may not indicate full-year performance.
Financial results and material changes
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $135.7 | $121.5 | $388.1 | $350.6 |
| Operating income | $20.3 | $15.5 | $53.5 | $35.1 |
| Operating margin | 15.0% | 12.8% | 13.8% | 10.0% |
| Net income | $12.9 | $8.9 | $32.8 | $20.2 |
| Diluted EPS | $0.44 | $0.31 | $1.11 | $0.69 |
- Q3 revenue rose 11.7% and net income rose 44.9%; nine-month revenue rose 10.7% and net income rose 62.4%.
- Forward Air revenue increased 12.9% in both comparison periods, supported by higher shipment volumes, rate increases, fuel surcharge revenue, and growth in Complete and logistics services. Q3 network tonnage increased 5.6%; nine-month tonnage increased 4.9%.
- FASI revenue rose 4.2% in Q3 but declined 2.8% for the first nine months, partly reflecting the prior-year loss of a customer. FASI reported operating losses of $0.3 million for Q3 and $1.8 million year to date; the nine-month loss improved from $2.0 million.
- Consolidated operating margin improved as revenue growth outpaced expenses and increased utilization of the fixed-cost Forward Air network supported earnings. Purchased transportation fell to 41.3% of revenue in Q3 from 42.1%, and to 41.4% year to date from 41.8%.
- Net fuel surcharge revenue increased 57.4% in Q3 and 56.5% year to date. Higher fuel prices also raised fuel expense, particularly in FASI.
Cash flow, balance sheet, and capital allocation
- Operating cash flow was $54.8 million for the first nine months, up from $37.9 million. Capital expenditures were $20.3 million, versus $11.9 million; investing cash outflow was $19.0 million.
- Cash at September 30 was $87.5 million, up from $74.5 million at December 31, 2010. Total debt and capital lease obligations were approximately $51.0 million, including $50.0 million outstanding under the senior credit facility.
- The company had $39.2 million of available facility borrowing capacity after $10.8 million was used for letters of credit. The $100 million facility matures October 10, 2012; management was negotiating a replacement facility and expected it by December 31, 2011.
- During the first nine months, the company repurchased 904,729 shares for $24.3 million and paid $6.2 million in dividends. It repurchased a further 69,039 shares for $1.8 million in October. The quarterly dividend was $0.07 per share.
- Management said cash, anticipated operating cash flow, and available borrowing capacity should be sufficient for anticipated needs for at least the next 12 months.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management emphasizes that earnings depend on freight volumes, revenue per pound, and growth in other services; substantial fixed network costs make volume and utilization important.
- FASI’s results were below projections, prompting a September 30 goodwill impairment test; no charge was recorded. FASI goodwill was $5.4 million. Management cautions that delayed customer-base diversification or weaker projections could result in a future impairment.
- FASI customer concentration is notable: four customers represented approximately 71.5% of its nine-month revenue. Management is seeking to diversify beyond specialty retail.
- Q3’s effective tax rate declined to 36.1% from 42.1%, and the nine-month rate to 38.3% from 41.5%. Drivers included renewed tax credits, a $0.4 million federal refund for a 2010 credit, and a $0.1 million reduction in state tax contingency reserves.
- Management cites risks including economic downturns, freight volume and pricing pressure, fuel-price changes, customer loss or credit risk, availability of owner-operators and freight handlers, vehicle and workers’ compensation claims, regulation, and execution of FASI’s growth and diversification efforts.
- Ordinary-course litigation is not expected by management to have a material adverse effect. However, estimates for self-insured claims may change materially, and the filing does not provide a clear estimate of the reasonably possible additional loss range.
Important facts for investors to verify
- Progress and terms of the replacement credit facility ahead of the October 2012 maturity.
- Whether Forward Air’s volume, base pricing, and fuel surcharge growth persist, and how fuel-cost changes affect margins.
- FASI’s operating performance, customer concentration, diversification progress, and goodwill impairment assumptions.
- Trends in self-insurance claims and reserves, which can affect expenses and cash flow.
- Cash deployment through share repurchases, dividends, and fleet investment relative to liquidity and operating needs.