Forward Air Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. Dollar amounts are in millions unless otherwise noted. Forward Air provides time-definite transportation and logistics services; Forward Air Solutions (FASI) provides regional pool distribution.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $132.2 | $122.1 | $252.4 | $229.1 |
| Operating income | $19.9 | $13.5 | $33.2 | $19.6 |
| Net income | $12.0 | $7.9 | $19.8 | $11.3 |
| Diluted EPS | $0.40 | $0.27 | $0.67 | $0.39 |
| Operating margin | 15.1% | 11.1% | 13.1% | 8.6% |
Q2 revenue increased 8.3%, operating income 47.4%, and net income 51.9% year over year. For the first half, revenue rose 10.2%, operating income 69.4%, and net income 75.2%. The effective tax rate was 39.4% in Q2 and 39.7% for the first half.
- Revenue mix and performance: Q2 Forward Air segment revenue grew 10.3% to $116.5 million, while FASI revenue fell 5.9% to $15.9 million. For the first half, Forward Air revenue grew 12.8% to $221.7 million and FASI declined 6.6% to $31.1 million.
- Cash flow: First-half operating cash flow was $32.6 million, versus $18.9 million. Capital expenditures were $15.4 million versus $8.7 million; operating cash flow less capital expenditures was $17.1 million versus $10.2 million. Cash increased to $96.1 million from $74.5 million at year-end.
- Liquidity and debt: Current assets were $176.0 million and current liabilities $33.9 million at June 30. Debt and capital lease obligations totaled approximately $51.2 million, including $50.0 million drawn on the senior credit facility. The facility had $38.2 million of available borrowing capacity after $11.8 million reserved for letters of credit; it matures in October 2012.
- Shareholder returns: The company paid $4.1 million in dividends during the first half and declared $0.07 per share quarterly. Future dividends remain subject to Board approval.
Material changes and management commentary
- Forward Air’s growth reflected higher tonnage, rate increases, fuel surcharge revenue, and greater use of its Complete pickup-and-delivery service. Q2 airport-to-airport tonnage rose 3.4%; base revenue per pound, excluding fuel surcharges and Complete, rose 3.0%.
- Net fuel surcharge revenue increased 55.7% in Q2 and 55.9% in the first half. Management attributed this to higher diesel prices and shipping activity; fuel-related revenue gains should be considered alongside higher fuel expenses and purchased transportation costs.
- FASI revenue included the loss of a customer that contributed approximately $2.6 million in Q2 2010 revenue and $5.4 million in first-half 2010 revenue. Management said the lost business was low yielding and had minimal operating-income impact; new wins and existing-customer volumes partly offset the decline. FASI remained loss-making, with operating losses of $0.5 million in Q2 and $1.5 million in the first half.
- Management cited positive operating leverage at Forward Air and lower employee-benefit costs. A favorable workers’ compensation reserve adjustment contributed to results: expenses declined by approximately $1.2 million in Q2 and $2.2 million for the first half versus prior-year periods.
Outlook, risks, and contingencies
- The filing provides no specific revenue or earnings guidance. Management said available cash, anticipated operating cash flow, and credit-facility availability should cover anticipated needs for at least the next 12 months.
- Management cautioned that quarterly results are seasonal and the first two quarters are historically FASI’s slowest retail periods. It is working to diversify FASI’s customer base.
- Goodwill testing at June 30 found no impairment. However, management warned that delayed FASI growth or weaker projected financial results could lead to impairment of its $5.4 million goodwill balance. Forward Air goodwill was $37.9 million.
- Self-insured claims, including workers’ compensation, vehicle liability, property damage, and medical claims, involve estimation uncertainty; management said additional losses could change materially in the near term, but could not estimate a reasonably possible range.
- Other cited risks include freight volumes and pricing, fuel costs, competition, loss of major customers, capacity and availability of owner-operators, regulation, and economic conditions. Routine litigation was not expected to have a material adverse effect. Market risk from debt was described as not significant and not materially changed.
Investor verification points
- Assess whether Forward Air’s volume, pricing, and fuel-surcharge growth can continue, and how higher transportation-provider costs affect margins.
- Track FASI’s customer diversification, operating losses, and goodwill impairment assumptions.
- Evaluate how much reported earnings benefited from workers’ compensation reserve adjustments and whether future claims estimates remain adequate.
- Review cash generation and capital spending, and the October 2012 credit-facility maturity, borrowing availability, and any refinancing plans.
- Confirm that seasonal trends and the absence of formal financial guidance are reflected in expectations.