Forward Air Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with the three months ended March 31, 2010 unless noted. Forward Air provides time-definite transportation and logistics services; Forward Air Solutions (FASI) provides regional pool distribution. The filing is unaudited and cautions that quarterly results are seasonal and not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $120.2 million | $107.0 million | +12.3% |
| Income from operations | $13.3 million | $6.1 million | +118.0% |
| Operating margin | 11.1% | 5.7% | +5.4 percentage points |
| Net income | $7.9 million | $3.4 million | +132.4% |
| Diluted earnings per share | $0.27 | $0.12 | +$0.15 |
| Operating cash flow | $15.2 million | $10.2 million | +$5.0 million |
| Capital expenditures | $7.3 million | $5.4 million | +$1.9 million |
Net margin was approximately 6.5%, compared with 3.2% a year earlier. Revenue growth and fixed-cost leverage drove the earnings improvement. The effective tax rate declined to 40.0% from 42.1%.
Segments and operating drivers
- Forward Air: Revenue increased 15.7% to $105.2 million; operating income rose to $14.3 million from $7.2 million, with segment operating margin increasing to 13.6% from 7.9%. Airport-to-airport revenue grew 15.8%; tonnage increased 5.8% and base revenue per pound, excluding fuel surcharge and Complete, increased 4.8%. Logistics revenue rose 18.6%.
- FASI: Revenue declined 7.3% to $15.2 million. Its operating loss improved slightly to $1.0 million from $1.1 million. Management attributed the revenue decline primarily to a customer termination, partly offset by new business and volume from existing customers.
- Net fuel surcharge revenue increased 56.2% year over year. Higher freight activity and fuel prices supported revenue, while capacity tightness and higher third-party provider costs increased transportation costs.
Balance sheet, cash flow and liquidity
- Cash was $85.7 million at March 31, 2011, up from $74.5 million at December 31, 2010. Total assets were $368.1 million; shareholders’ equity was $268.3 million.
- Cash from operations of $15.2 million was partly offset by $6.7 million used in investing activities. Financing activities provided $2.7 million, including $4.8 million from stock-option exercises; cash dividends paid were $2.1 million. Cash increased $11.2 million during the quarter.
- Debt and capital lease obligations totaled approximately $51.4 million on the balance sheet, including $50.0 million outstanding under the senior credit facility. The facility matures October 10, 2012. The company reported $38.3 million of available borrowing capacity after $11.7 million of availability was used for letters of credit.
- Quarterly dividend declared was $0.07 per share. Management expects to continue regular quarterly dividends, subject to Board approval, and believes cash, future operating cash flow and available borrowing capacity will meet anticipated needs for at least 12 months.
Management commentary, outlook and risks
Management cited improving economic conditions, a May 2010 general rate increase, higher tonnage, new logistics business and increased fuel surcharge revenue as drivers of Forward Air’s growth. FASI remained challenged by lower retail volumes; the first quarter is historically its slowest, and adverse weather also affected volumes. The company is working to diversify FASI’s customer base. No specific earnings or revenue guidance was provided.
- Goodwill: FASI goodwill was $5.4 million. Management warned that delays in growing and diversifying FASI revenue could reduce projected cash flows and lead to impairment. No impairment was recorded in the quarter.
- Operating and market risks: The filing identifies freight volumes and pricing, competition, fuel prices, customer loss or credit deterioration, third-party transportation capacity and cost, availability of owner-operators and labor, and economic conditions as risks.
- Claims and litigation: Routine litigation was not expected to have a material adverse effect. Self-insurance estimates for workers’ compensation, vehicle liability, property damage and medical claims could change materially; management could not estimate a reasonably possible additional loss range.
- The company reported no material change in its risk factors since its 2010 Form 10-K, no material change in internal control over financial reporting, and effective disclosure controls and procedures.
Investor verification points
- Whether Forward Air’s volume and pricing gains persist as third-party transportation capacity tightens and provider costs rise.
- Whether FASI replaces lost customer revenue, diversifies its customer base and improves profitability; monitor the related goodwill impairment risk.
- Whether the $50.0 million credit facility can be refinanced or repaid before its October 2012 maturity, and whether reported borrowing availability remains accessible.
- How fuel prices, fuel surcharge recovery, seasonal retail demand and adverse weather affect margins and cash generation.
- Whether self-insurance claim estimates or other contingencies change materially, and whether the Board continues the quarterly dividend.