Forward Air Corporation — FY 2010 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2010; it is an annual report, not a standalone Q4 filing. Forward Air provides time-definite surface transportation and logistics for deferred air freight across 84 U.S. and Canadian cities. Forward Air Solutions (FASI) provides regional pool distribution through a 19-city network.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $483.9 million | $417.4 million |
| Operating income | $53.7 million | $18.6 million |
| Operating margin | 11.1% | 4.4% |
| Net income | $32.0 million | $9.8 million |
| Diluted EPS | $1.10 | $0.34 |
| Cash from operations | $54.0 million | $50.2 million |
- Revenue increased 15.9%; operating income rose 188.7% and net income rose 226.5% year over year. Forward Air revenue grew 19.2% to $412.9 million; FASI revenue was nearly flat at $72.5 million.
- Q4 2010 revenue was $133.3 million, operating income $18.7 million, net income $11.8 million and diluted EPS $0.41. In Q4 2009, the corresponding figures were $118.0 million, $12.0 million, $6.3 million and $0.22.
- Operating cash flow was $54.0 million; investing cash outflow was $13.9 million, including $15.1 million of property and equipment purchases; financing cash outflow was $7.6 million. Year-end cash was $74.5 million, up from $42.0 million.
- At year-end, total assets were $348.8 million and shareholders’ equity was $256.1 million. The company had $50.0 million drawn on its $100 million variable-rate senior facility, $38.3 million of available borrowing capacity after letters of credit, and $1.5 million in capital lease obligations. The facility matures in October 2012.
- The company declared $0.28 per share in dividends for 2010 and expected to continue quarterly dividends subject to Board approval.
Material changes versus prior periods
- The recovery in freight activity drove a 13.9% increase in Forward Air network tonnage and a 2.1% increase in base revenue per pound, excluding fuel surcharges and pickup-and-delivery revenue. A May 2010 general rate increase contributed to higher yields.
- Net fuel surcharge revenue increased 59.8% year over year as fuel prices and shipping activity rose. Purchased transportation increased 15.5% in dollars, but declined slightly as a share of revenue, from 41.8% to 41.6%.
- Forward Air operating income increased to $53.9 million from $26.9 million, with segment operating margin rising to 13.1% from 7.8%, reflecting revenue growth and fixed-cost leverage. FASI’s operating loss narrowed to $0.2 million from $8.3 million; the prior-year result included a $7.0 million goodwill impairment.
- FASI lost a major customer during Q2 2010, reducing revenue by approximately $9.6 million versus 2009; new business largely offset the loss. Management said the discontinued business was low yielding and its earnings impact was minimal.
- The 2009 comparison was depressed by recession-related volume and pricing pressure and $7.2 million of goodwill and intangible-asset impairment charges. No impairment charge was recorded in 2010.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management stated that cash, expected operating cash generation and available credit should meet anticipated needs for at least 12 months.
- Management’s growth plans include winning more business from existing customers, expanding logistics and pool distribution services, improving network efficiency, investing in technology and selectively pursuing acquisitions. It planned to expand FASI into selected Forward Air terminals.
- Key risks include economic weakness, freight volumes and pricing, fuel-price volatility, competition, customer concentration and customer credit, availability and cost of owner-operators and freight handlers, insurance and claims, regulation, environmental matters, technology disruptions, and acquisition integration.
- FASI’s four largest customers generated 70.4% of FASI revenue, although no one customer exceeded 10% of consolidated revenue. FASI goodwill was $5.4 million; management warned that prolonged or worsening economic conditions could lead to another impairment.
- Unusual 2010 items included a $0.7 million gain on termination of a capital lease and $14.2 million of committed equipment purchases expected in 2011. Self-insurance reserves were $10.6 million; management could not estimate a reasonably possible range of additional losses.
- Routine litigation was not expected by management to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether the freight-volume and pricing recovery continued after year-end, and how higher fuel costs affected net surcharge economics and margins.
- FASI’s progress in replacing lost customer revenue, improving profitability and reducing reliance on a small number of customers.
- Compliance with senior-credit-facility covenants and the refinancing plan before the October 2012 maturity; distinguish the $50.0 million drawn balance from $38.3 million of reported availability.
- The adequacy and development of self-insurance reserves, and the potential for additional FASI goodwill impairment.
- Execution and funding of equipment commitments, planned network investments and the dividend policy.