Forward Air Corp. 10-Q Summary: Period Ended June 30, 2010
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2010, for Forward Air Corporation, a leading provider of time-definite surface transportation and logistics services. The company operates through two primary segments: Forward Air (airport-to-airport, logistics, and other services) and Forward Air Solutions (FASI) (pool distribution services). The company is classified as a large accelerated filer.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2010 |
|---|---|---|
| Operating Revenue | $122,132 | $229,108 |
| Net Income | $7,912 | $11,331 |
| Income from Operations | $13,502 | $19,557 |
| Operating Margin | 11.1% | 8.6% |
| Cash and Equivalents | $47,916 | $47,916 |
| Net Cash Provided by Operating Activities | N/A | $18,911 |
| Total Debt (Current + Long-term) | $52,598 | $52,598 |
| Available Borrowing Capacity | $38,196 | $38,196 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated operating revenue increased 22.5% for the quarter and 16.7% for the six months compared to the same periods in 2009. This was driven primarily by the Forward Air segment, which saw revenue increases of 26.8% (quarter) and 18.7% (six months) due to improved economic conditions, increased tonnage, and a general rate increase implemented on May 1, 2010.
- Profitability: Net income surged to $7.9 million for the quarter (up from $2.8 million in 2009) and $11.3 million for the six months (up from a net loss of $0.3 million in 2009). The prior year's loss was significantly impacted by a $7.2 million goodwill impairment charge in the FASI segment, which did not recur in 2010.
- Segment Performance: The Forward Air segment generated $14.2 million in operating income for the quarter. The FASI segment reported a reduced operating loss of $0.7 million for the quarter (improved from $0.9 million in 2009) due to cost efficiencies, though it continues to face challenges from depressed retail volumes.
- Cost Structure: Purchased transportation costs rose 20.7% for the quarter, largely due to increased miles driven and higher third-party carrier utilization. Fuel expense increased 25.0% due to rising diesel prices, though net fuel surcharge revenue also increased significantly.
Outlook, Risks, and Management Commentary
- Outlook: Management expects to continue paying regular quarterly cash dividends ($0.07 per share declared for Q2). The company anticipates that available cash and credit facilities will satisfy needs for the next 12 months.
- Goodwill Risk: While no impairment was recorded in Q2 2010, management notes that the FASI segment faces challenges in difficult economic times. If conditions worsen, additional impairment charges against FASI goodwill (carrying value $5.4 million) may be required.
- Customer Concentration: The company notified one of FASI's largest customers (representing 15.4% of FASI revenue) of a business relationship termination effective July 2, 2010. Management projects the impact on 2010 operating results to be minimal as the revenue was low-yielding.
- Liquidity: The company maintains a $100 million senior credit facility with $38.2 million available. Interest rates are tied to LIBOR plus a margin based on debt-to-earnings covenants.
Investor Verification Checklist
- FASI Segment Viability: Verify the impact of the terminated major customer on FASI's future revenue and the potential for further goodwill impairment if economic conditions deteriorate.
- Fuel Price Sensitivity: Monitor the correlation between rising fuel costs and the effectiveness of fuel surcharge pass-throughs to maintain margins.
- Debt Covenants: Confirm continued compliance with the senior credit facility covenants, specifically the total indebtedness to earnings ratio, to maintain access to the $38.2 million borrowing capacity.
- Accounts Receivable: Review the $8.9 million increase in accounts receivable during the six-month period, which contributed to a decrease in operating cash flow despite higher net income.