UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 Commission File No. 000-22490 FORWARD AIR CORPORATION (Exact name of registrant as specified in its charter) TENNESSEE 62-1120025 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 430 AIRPORT ROAD GREENEVILLE, TENNESSEE 37745 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (423) 636-7100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares outstanding of the registrant's common stock, $.01 par value, as of August 3, 2001 was 21,575,593. TABLE OF CONTENTS FORWARD AIR CORPORATION
Page Number PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Income - Three and six months ended June 30, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements - June 30, 2001 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 ITEM 3. Quantitative and Qualitative Disclosure of Market Risk 13 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 14 ITEM 2. Changes in Securities and Use of Proceeds 14 ITEM 3. Defaults Upon Senior Securities 14 ITEM 4. Submission of Matters to a Vote of Security Holders 14 ITEM 5. Other Information 15 ITEM 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Forward Air Corporation Condensed Consolidated Balance Sheets
June 30, 2001 December 31, 2000 ---------------------------------- (Unaudited) (Note 1) (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 27,727 $ 15,589 Accounts receivable, less allowance of $929 in 2001 and $1,184 in 2000 28,214 33,617 Other current assets 4,530 5,719 ---------------------------------- Total current assets 60,471 54,925 Property and equipment 66,546 64,120 Less accumulated depreciation and amortization (21,780) (19,059) ---------------------------------- 44,766 45,061 Other assets 18,300 15,982 ---------------------------------- Total assets $ 123,537 $ 115,968 ================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,377 $ 9,730 Accrued expenses 8,360 8,425 Current portion of long-term debt 474 532 Current portion of capital lease obligations 455 446 ---------------------------------- Total current liabilities 14,666 19,133 Long-term debt, less current portion 672 2,784 Capital lease obligations, less current portion 4,255 4,448 Deferred income taxes 7,190 6,150 Shareholders' equity: Preferred stock -- -- Common stock, $.01 par value: Authorized shares - 50,000,000 Issued and outstanding shares - 21,569,247 in 2001 and 21,311,799 in 2000 216 213 Additional paid-in capital 42,693 40,578 Retained earnings 53,845 42,662 ---------------------------------- Total shareholders' equity 96,754 83,453 ---------------------------------- Total liabilities and shareholders' equity $ 123,537 $ 115,968 ==================================
See notes to condensed consolidated financial statements. 3 Forward Air Corporation Condensed Consolidated Statements of Income (Unaudited)
Three months ended Six months ended --------------------------------------------------------------------- June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 --------------------------------------------------------------------- (In thousands, except per share data) Operating revenue $ 56,965 $ 54,058 $ 117,688 $ 103,465 Operating expenses: Purchased transportation 24,147 22,859 50,177 44,055 Salaries, wages and employee benefits 12,468 12,025 26,637 23,459 Operating leases 2,939 2,543 5,571 5,112 Depreciation and amortization 2,197 1,408 3,997 2,781 Insurance and claims 1,785 837 3,052 1,643 Other operating expenses 5,373 4,620 10,404 9,278 --------------------------------------------------------------------- 48,909 44,292 99,838 86,328 --------------------------------------------------------------------- Income from operations 8,056 9,766 17,850 17,137 Other income (expense): Interest expense (120) (24) (117) (107) Other, net 190 166 381 307 --------------------------------------------------------------------- 70 142 264 200 --------------------------------------------------------------------- Income before income taxes 8,126 9,908 18,114 17,337 Income taxes 3,108 3,790 6,934 6,630 --------------------------------------------------------------------- Net income $ 5,018 $ 6,118 $ 11,180 $ 10,707 ===================================================================== Income per share: Basic $ 0.23 $ 0.29 $ 0.52 $ 0.51 ===================================================================== Diluted $ 0.23 $ 0.28 $ 0.50 $ 0.48 =====================================================================
See notes to condensed consolidated financial statements. 4 Forward Air Corporation Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended ------------------------------- June 30, 2001 June 30, 2000 ------------------------------- (In thousands) Cash provided by operations $ 18,687 $ 11,153 Investing activities: Proceeds from disposal of property and equipment 328 40 Purchases of property and equipment (3,179) (6,967) Acquisition of business (2,833) -- Other (200) (117) ------------------------------- Net cash used in investing activities (5,884) (7,044) Financing activities: Payments of long-term debt (2,170) (1,314) Payments of capital lease obligations (184) (241) Proceeds from exercise of stock options 1,618 1,676 Common stock issued under employee stock purchase plan 71 96 ------------------------------- Net cash (used in) provided by financing activities (665) 217 ------------------------------- Increase in cash and cash equivalents $ 12,138 $ 4,326 ===============================
See notes to condensed consolidated financial statements. 5 Forward Air Corporation Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2000. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date, but does not include all of the financial information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. 2. COMPREHENSIVE INCOME The Company had no items of other comprehensive income in 2001 or 2000 and, accordingly, comprehensive income is equivalent to net income. 6 3. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three months ended Six months ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 --------------------------------------------------- Numerator: Numerator for basic and diluted income per share - net income $ 5,018 $ 6,118 $11,180 $10,707 Denominator: Denominator for basic income per share - weighted-average shares 21,558 21,047 21,494 20,916 Effect of dilutive stock options 716 1,163 786 1,230 --------------------------------------------------- Denominator for diluted income per share - adjusted weighted-average shares 22,274 22,210 22,280 22,146 =================================================== Basic income per share $ 0.23 $ 0.29 $ 0.52 $ 0.51 =================================================== Diluted income per share $ 0.23 $ 0.28 $ 0.50 $ 0.48 ===================================================
4. INCOME TAXES For the three and six months ended June 30, 2001 and 2000, the effective income tax rate varied from the statutory federal income tax rate of 35% primarily as a result of the effect of state income taxes, net of the federal benefit, and permanent differences. 5. COMMITMENTS AND CONTINGENCIES The primary claims in the Company's business are workers' compensation, property damage, auto liability and medical benefits. Most of the Company's insurance coverage provides for self-insurance levels with primary and excess coverage which management believes is sufficient to adequately protect the Company from catastrophic claims. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured limits, including provision for estimated claims incurred but not reported. The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims, and by performing hindsight analysis to determine an estimate of probable losses on claims incurred but not reported. Such losses could be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates. Because of the uncertainty of the ultimate resolution of outstanding claims, as well as uncertainty regarding claims incurred but not reported, it is possible that management's provision for these 7 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) losses could change materially in the near term. However, no estimate can currently be made of the range of additional loss that is at least reasonably possible. 6. ACQUISITION OF BUSINESS In January 2001, the Company acquired certain assets of Expedited Delivery Services, Inc. ("Expedited"), a deferred air freight contractor to the air cargo industry based in Dallas, Texas. The Company paid approximately $2.8 million in cash for certain assets of Expedited, including approximately $930,000 of capitalized direct and/or out-of-pocket expenses related to the acquisition. The acquisition was accounted for as a purchase and the excess cost over fair value of the net assets acquired is being amortized on a straight-line basis over a fifteen-year period. The allocation of the purchase price resulted in a tentative allocation of $3.0 million to goodwill. The results of operations for the acquired business are included in the consolidated statements of income from the acquisition date forward. 7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. The effect of the adoption of SFAS No. 133 was not material to the Company's earnings, financial position, or cash flows. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $640,000 ($0.03 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The Company provides scheduled ground transportation of cargo on a time-definite basis. As a result of the Company's established transportation schedule and network of terminals, its operating cost structure includes significant fixed costs. The Company's ability to improve its operating margins will depend on its ability to increase the volume of freight moving through its network. Results of Operations The following table shows the percentage relationship of expense items to operating revenue for the periods indicated.
Three months ended Six months ended --------------------------------------------------------------- June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 --------------------------------------------------------------- Operating revenue 100.0% 100.0% 100.0% 100.0% Operating expenses: Purchased transportation 42.4 42.3 42.6 42.6 Salaries, wages and employee benefits 21.9 22.2 22.6 22.7 Operating leases 5.2 4.7 4.7 4.9 Depreciation and amortization 3.9 2.6 3.4 2.7 Insurance and claims 3.1 1.5 2.6 1.6 Other operating expenses 9.4 8.6 8.9 8.9 --------------------------------------------------------------- 85.9 81.9 84.8 83.4 Income from operations 14.1 18.1 15.2 16.6 Other income (expense): Interest expense (0.2) -- (0.1) (0.1) Other, net 0.4 0.2 0.3 0.3 --------------------------------------------------------------- 0.2 0.2 0.2 0.2 --------------------------------------------------------------- Income before income taxes 14.3 18.3 15.4 16.8 Income taxes 5.5 7.0 5.9 6.5 --------------------------------------------------------------- Net income 8.8% 11.3% 9.5% 10.3% ===============================================================
Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000 Operating revenue increased by $2.9 million, or 5.4%, to $57.0 million in the second quarter of 2001 from $54.1 million in the same period of 2000. This increase resulted primarily from an increased volume from domestic and international air cargo customers due, in part, to the Dedicated Transportation Services, Inc. ("DTSI") acquisition completed in December 2000 and the Expedited Delivery Services, Inc. ("Expedited") acquisition in January 2001, an increase in the number of operating terminals and enhanced logistics services. 9 Purchased transportation represented 42.4% of operating revenue in the second quarter of 2001 compared to 42.3% in the same period of 2000. The increase in purchased transportation as a percentage of operating revenue was attributed to an increase in the number of miles driven to support the Forward Air network. Salaries, wages and employee benefits were 21.9% of operating revenue in the second quarter of 2001 compared to 22.2% for the same period of 2000. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was attributed to a decrease in incentive payments, strategic cutbacks and better group insurance experience. Operating leases, the largest component of which is facility rent, were 5.2% of operating revenue in the second quarter of 2001 compared to 4.7% in the same period of 2000. The increase in operating leases as a percentage of operating revenue between periods was attributable to an increase in the number and size of terminals. Depreciation and amortization expense as a percentage of operating revenue was 3.9% in the second quarter of 2001, compared to 2.6% in the same period of 2000. The increase in depreciation and amortization expense as a percentage of operating revenue was attributable to the depreciation of the capitalized costs associated with the development of internal-use software and amortization of the goodwill arising from the DTSI and Expedited acquisitions. Insurance and claims were 3.1% of operating revenue in the second quarter of 2001, compared to 1.5% in the same period of 2000. The increase in insurance and claims as a percentage of operating revenue resulted primarily from higher premium costs and an increase in the frequency and severity of accidents during the second quarter of 2001. Other operating expenses were 9.4% of operating revenue in the second quarter of 2001 compared to 8.6% in the same period of 2000. The increase in other operating expenses as a percentage of operating revenue was primarily attributable to increasing the provision for bad debt expense and increased maintenance costs during the second quarter of 2001. Income from operations decreased by $1.7 million, or 17.5%, to $8.1 million for the second quarter of 2001 compared to $9.8 million for the same period in 2000. The decrease in income from operations was primarily a result of a higher operating cost structure on a percentage of revenue basis. Interest expense was $120,000, or 0.2% of operating revenue, in the second quarter of 2001, compared with $24,000, or 0.0%, for the same period in 2000. The increase in interest expense was a result of the discontinuation of the capitalization of interest costs relating to the completion of the development of internal-use software during the second quarter of 2001. 10 Other income, net was $190,000, or 0.4% of operating revenue, in the second quarter of 2001, compared to $166,000, or 0.2%, for the same period in 2000. The increase in other income, net resulted from higher interest income attributed to higher average cash and cash equivalent balances during the second quarter of 2001. The combined federal and state effective tax rate for the second quarter of 2001 was 38.2% compared to a rate of 38.3% for the same period in 2000. As a result of the foregoing factors, net income decreased by $1.1 million, or 18.0%, to $5.0 million for the second quarter of 2001, compared to $6.1 million for the same period in 2000. Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000 Operating revenue increased by $14.2 million, or 13.7%, to $117.7 million in the first six months of 2001 from $103.5 million in the same period of 2000. This increase resulted primarily from an increased volume from domestic and international air cargo customers due, in part, to the DTSI acquisition in December 2000 and the Expedited acquisition in January 2001, an increase in the number of operating terminals and enhanced logistics services. Purchased transportation represented 42.6% of operating revenue in the first six months of 2001 compared to 42.6% in the same period of 2000. Salaries, wages and employee benefits were 22.6% of operating revenue in the first six months of 2001 compared to 22.7% in the same period of 2000. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was attributed to a decrease in incentive payments, strategic cutbacks and better group insurance experience which was offset by the wind-down of the LogTech Corporation operations. Operating leases, the largest component of which is facility rent, were 4.7% of operating revenue in the first six months of 2001 compared to 4.9% in the same period of 2000. The decrease in operating leases as a percentage of operating revenue between periods was attributable to improved leverage resulting from increased operating revenue, which was offset by the increase in the number and size of terminals. Depreciation and amortization expense as a percentage of operating revenue was 3.4% in the first six months of 2001, compared to 2.7% in the same period of 2000. The increase in depreciation and amortization expense as a percentage of operating revenue was attributable to the depreciation of the capitalized costs associated with the development of internal-use software and amortization of the goodwill arising from the DTSI and Expedited acquisitions. Insurance and claims were 2.6% of operating revenue in the first six months of 2001, compared with 1.6% in the same period of 2000. The increase in insurance and claims as a percentage of operating revenue resulted primarily from higher premium costs and an increase in the frequency and severity of accidents during the first six months of 2001. 11 Other operating expenses were 8.9% of operating revenue in the first six months of 2001 compared to 8.9% in the same period of 2000. Income from operations increased by approximately $700,000, or 4.2%, to $17.9 million for the first six months of 2001 compared to $17.1 million for the same period in 2000. The increase in income from operations was primarily a result of an increase in operating revenue, which allowed the Company to spread the fixed costs of the network over a larger revenue base. Interest expense was $117,000, or 0.1% of operating revenue, in the first six months of 2001, compared to $107,000, or 0.1%, for the same period in 2000. The increase in interest expense was a result of the discontinuation of the capitalization of interest costs relating to the completion of the development of internal-use software offset by a decrease in average net borrowings during the first six months of 2001. Other income, net was $381,000, or 0.3% of operating revenue, in the first six months of 2001, compared to $307,000, or 0.3%, for the same period in 2000. The increase in other income, net resulted from higher interest income attributed to higher average cash and cash equivalent balances during the first six months of 2001. The combined federal and state effective tax rate for the first six months of 2001 was 38.3% compared to a rate of 38.2% for the same period in 2000. As a result of the foregoing factors, net income increased by approximately $500,000, or 4.4%, to $11.2 million for the first six months of 2001, compared to $10.7 million for the same period in 2000. Liquidity and Capital Resources The Company has historically financed its working capital needs, including capital purchases, with cash flows from operations and borrowings under the Company's bank lines of credit. Net cash provided by operating activities totaled approximately $18.7 million for the six months ended June 30, 2001, compared with $11.2 million in the same period of 2000. Net cash used in investing activities was approximately $5.9 million for the six months ended June 30, 2001 compared with $7.0 million in the same period of 2000. Investing activities consisted primarily of the Expedited acquisition in January 2001, and the purchase of operating equipment and management information systems during the six months ended June 30, 2001. Net cash used in financing activities totaled approximately $665,000 for the six months ended June 30, 2001 compared with net cash provided by financing activities of approximately $217,000 for the same period of 2000. Financing activities included the repayment of long-term debt and capital leases and proceeds received from the exercise of stock options. 12 The Company's credit facility consists of a working capital line of credit. As long as the Company complies with the financial covenants and ratios, the credit facility permits it to borrow up to $20.0 million. Interest rates for advances under the facility vary based on how the Company's performance measures against covenants related to total indebtedness, cash flows, results of operations and other ratios. The facility bears interest at LIBOR plus 1.00% to 1.90%, expires in April 2002 and is secured by accounts receivable. The amount the Company can borrow under the line of credit is reduced by the amount of any outstanding letters of credit. At June 30, 2001, the Company had no borrowings outstanding under the line of credit facility. Management believes that its available cash, expected cash generated from future operations and borrowings under available credit facilities, will be sufficient to satisfy the Company's anticipated cash needs for at least the next twelve months. Forward-Looking Statements The Company, or its executive officers and directors on behalf of the Company, may from time to time make written or oral "forward-looking statements." Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases and in reports to shareholders. Oral forward-looking statements may be made by the Company's executive officers and directors on behalf of the Company to the press, potential investors, securities analysts and others. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. The Company relies on this safe harbor in making such disclosures. In connection with this safe harbor provision, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Without limitation, factors that might cause such a difference include economic factors such as recessions, inflation, higher interest rates and downturns in customer business cycles, the Company's inability to maintain its historical growth rate because of a decreased volume of freight moving through the Company's network, competition, surplus inventories, loss of a major customer, the inability of the Company's information systems to handle an increased volume of freight moving through its network, and the lack of availability and compensation of qualified independent owner-operators needed to serve the Company's transportation needs. The Company disclaims any intent or obligation to update these forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK The Company's exposure to market risk related to its remaining outstanding debt is not significant. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involve claims for personal injury and property damage incurred in connection with the transportation of freight. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held on May 21, 2001 for the purpose of electing seven directors and approving the appointment of independent auditors for 2001. Shareholders elected each director nominee for a one-year term expiring at the 2002 annual meeting. The vote for each director was as follows:
For Against ---------- --------- Bruce A. Campbell 16,803,036 2,294,513 Andrew C. Clarke 18,706,017 391,532 James A. Cronin, III 18,698,991 398,558 Hon. Robert K. Gray 18,724,866 372,683 Ray A. Mundy 18,726,041 371,508 Scott M. Niswonger 16,702,981 2,394,568 Richard H. Roberts 18,702,342 395,207
The appointment of Ernst & Young LLP as independent auditors for 2001 was ratified and approved as follows:
For Against Abstain --- ------- ------- 19,071,740 25,354 455
14 ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (1) Exhibits - Not applicable (2) Reports on Form 8-K - The Company did not file any reports on Form 8-K during the three months ended June 30, 2001. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Forward Air Corporation Date: August 9, 2001 By: /s/ Andrew C. Clarke -------------------------------- Andrew C. Clarke Chief Financial Officer and Senior Vice President 16