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 September 30, 2000 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 October 27, 2000 was 21,250,399. TABLE OF CONTENTS FORWARD AIR CORPORATION
Page Number PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Income - Three and nine months ended September 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements - September 30, 2000 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 14 ITEM 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 EXHIBIT INDEX 16
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Forward Air Corporation Condensed Consolidated Balance Sheets
September 30, December 31, 2000 1999 -------------------------------- (Unaudited) (Note 1) (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 15,355 $ 5,989 Accounts receivable, less allowance of $990 in 2000 and $918 in 1999 29,610 27,342 Other current assets 5,572 3,083 -------------------------------- Total current assets 50,537 36,414 Property and equipment 60,903 47,197 Less accumulated depreciation and amortization (17,872) (14,307) -------------------------------- 43,031 32,890 Other assets 9,685 10,313 -------------------------------- Total assets $ 103,253 $ 79,617 ================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,300 $ 7,436 Accrued expenses 9,762 8,145 Current portion of long-term debt 169 758 Current portion of capital lease obligations 535 513 -------------------------------- Total current liabilities 18,766 16,852 Long-term debt, less current portion -- 835 Capital lease obligations, less current portion 3,544 3,919 Deferred income taxes 5,379 3,059 Shareholders' equity: Preferred stock -- -- Common stock, $.01 par value: Authorized shares - 50,000,000 Issued and outstanding shares - 21,200,787 in 2000 and 20,732,963 in 1999 212 207 Additional paid-in capital 39,283 35,528 Retained earnings 36,069 19,217 -------------------------------- Total shareholders' equity 75,564 54,952 -------------------------------- Total liabilities and shareholders' equity $ 103,253 $ 79,617 ================================
See notes to condensed consolidated financial statements. 3 Forward Air Corporation Condensed Consolidated Statements of Income (Unaudited)
Three months ended Nine months ended ------------------------------------ ------------------------------------- September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------------------------------ ------------------------------------- (In thousands, except per share data) Operating revenue $ 53,703 $ 42,599 $ 157,168 $ 121,108 Operating expenses: Purchased transportation: Provided by Landair Corporation 461 992 1,818 2,494 Provided by others 22,375 17,642 65,073 50,145 Salaries, wages and employee benefits 11,893 9,690 35,352 27,564 Operating leases 2,365 2,117 7,477 6,340 Depreciation and amortization 1,457 1,266 4,238 3,720 Insurance and claims 878 710 2,521 1,580 Other operating expenses 4,516 3,622 13,794 11,291 -------------------------------- --------------------------------- 43,945 36,039 130,273 103,134 -------------------------------- --------------------------------- Income from operations 9,758 6,560 26,895 17,974 Other income (expense): Interest expense -- (141) (107) (766) Other, net 191 94 498 172 -------------------------------- --------------------------------- 191 (47) 391 (594) -------------------------------- --------------------------------- Income before income taxes 9,949 6,513 27,286 17,380 Income taxes 3,804 2,508 10,434 6,725 -------------------------------- --------------------------------- Net income $ 6,145 $ 4,005 $ 16,852 $ 10,655 ================================ ================================= Income per share: Basic $ .29 $ .19 $ .80 $ .54 ================================ ================================= Diluted $ .28 $ .18 $ .76 $ .51 ================================ =================================
See notes to condensed consolidated financial statements. 4 Forward Air Corporation Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended ---------------------------------- September 30, September 30, 2000 1999 --------------- --------------- (In thousands) Cash provided by operations $ 22,712 $ 14,127 Investing activities: Proceeds from disposal of property and equipment 78 666 Purchases of property and equipment (13,836) (5,901) Other 12 (123) ------------------------------- (13,746) (5,358) Financing activities: Payments of long-term debt (1,424) (19,682) Payments of capital lease obligations (353) (856) Proceeds from exercise of stock options 2,081 1,003 Common stock issued under employee stock purchase plan 96 57 Net proceeds from public offering -- 18,033 ------------------------------- 400 (1,445) ------------------------------- Increase in cash and cash equivalents $ 9,366 $ 7,324 ===============================
See notes to condensed consolidated financial statements. 5 Forward Air Corporation Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 three- and nine-month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 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, 1999. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. 2. COMPREHENSIVE INCOME The Company had no items of other comprehensive income in 2000 or 1999 and, accordingly, comprehensive income is equivalent to net income. 3. NET INCOME PER SHARE On January 10, 2000, the Board of Directors approved a three-for-two split of the common stock which was distributed on January 28, 2000 to shareholders of record as of January 21, 2000. On February 24, 1999, the Board of Directors approved a two-for-one split of the common stock of the Company which was distributed on March 19, 1999 to shareholders of record as of March 12, 1999. Common stock issued and additional paid-in capital have been restated to reflect these splits for all periods presented. All common share and per share data included in the condensed consolidated financial statements and notes thereto have been restated to give effect to the stock splits. 6 Forward Air Corporation Notes to Condensed Consolidated Financial Statements (continued) The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three months ended Nine months ended ------------------------------------ ------------------------------------ September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ----------------- ----------------- ----------------- ----------------- Numerator: Numerator for basic and diluted income per share - net income $ 6,145 $ 4,005 $16,852 $10,655 Denominator: Denominator for basic income per share - weighted-average shares 21,180 20,636 21,004 19,665 Effect of dilutive stock options 1,143 1,179 1,206 1,038 ----------------------------- ----------------------------- Denominator for diluted income per share - adjusted weighted- average shares 22,323 21,815 22,210 20,703 ============================= ============================= Basic income per share $ .29 $ .19 $ .80 $ .54 ============================= ============================= Diluted income per share $ .28 $ .18 $ .76 $ .51 ============================= =============================
4. INCOME TAXES For the three and nine months ended September 30, 2000 and 1999, 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. 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. 7 Forward Air Corporation Notes to Condensed Consolidated Financial Statements (continued) 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 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. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The Forward Air operations provide scheduled ground transportation of cargo on a time-definite basis. As a result of Forward Air's established transportation schedule and network of terminals, its operating cost structure includes significant fixed costs. Forward Air'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 Nine months ended ---------------------------------------- ---------------------------------------- September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ----------------- ----------------- ----------------- ----------------- Operating revenue 100.0% 100.0% 100.0% 100.0% Operating expenses: Purchased transportation 42.5 43.7 42.6 43.5 Salaries, wages and employee benefits 22.1 22.7 22.5 22.8 Operating leases 4.4 5.0 4.8 5.2 Depreciation and amortization 2.7 3.0 2.7 3.1 Insurance and claims 1.6 1.7 1.6 1.3 Other operating expenses 8.5 8.5 8.7 9.3 --------------------------------- --------------------------------- 81.8 84.6 82.9 85.2 Income from operations 18.2 15.4 17.1 14.8 Other income (expense): Interest expense 0.0 (0.3) 0.0 (0.6) Other, net 0.3 0.2 0.3 0.1 --------------------------------- --------------------------------- 0.3 (0.1) 0.3 (0.5) --------------------------------- --------------------------------- Income before income taxes 18.5 15.3 17.4 14.3 Income taxes 7.1 5.9 6.7 5.5 --------------------------------- --------------------------------- Net income 11.4% 9.4% 10.7% 8.8% ================================= =================================
Three Months Ended September 30, 2000 compared to Three Months Ended September 30, 1999 Operating revenue increased by $11.1 million, or 26.1%, to $53.7 million in the third quarter of 2000 from $42.6 million in the same period of 1999. This increase resulted primarily from an increased volume from domestic and international air cargo customers, an increase in the number of operating terminals and direct shuttles and enhanced logistics services. Purchased transportation represented 42.5% of operating revenue in the third quarter of 2000 compared to 43.7% in the same period of 1999. The decrease in purchased transportation as a 9 percentage of operating revenue was attributed to operating efficiencies resulting from an increased volume of freight transported through the Forward Air network. Salaries, wages and employee benefits were 22.1% of operating revenue in the third quarter of 2000 compared to 22.7% for the same period of 1999. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was attributed to operating efficiencies resulting from an increased volume of freight transported through the Forward Air network. Operating leases, the largest component of which is terminal rent, were 4.4% of operating revenue in the third quarter of 2000 compared to 5.0% in the same period of 1999. The decrease in operating leases as a percentage of operating revenue between periods was attributable to increased leverage resulting from increased operating revenue. Depreciation and amortization expense as a percentage of operating revenue was 2.7% in the third quarter of 2000, compared to 3.0% in the same period of 1999. The decrease in depreciation and amortization expense as a percentage of revenue was attributable to increased utilization of operating equipment during 2000 as a result of increased operating revenue. Insurance and claims as a percentage of revenue were 1.6% of operating revenue in the third quarter of 2000, compared to 1.7% in the same period of 1999. The decrease in insurance and claims as a percentage of revenue resulted primarily from a decrease in the frequency and severity of accidents partially offset by higher premium costs during the third quarter of 2000. Other operating expenses were 8.5% of operating revenue in the third quarter of 2000 and 1999. Income from operations increased by $3.2 million, or 48.5%, to $9.8 million for the third quarter of 2000 compared to $6.6 million for the same period in 1999. The increase in income from operations was primarily a result of a lower operating cost structure on a percentage of revenue basis resulting from an increase in operating revenue, which allowed the Company to spread the fixed costs of the network over a larger revenue base. The increase in income from operations during the third quarter of 2000 was partially offset by operating losses of approximately $516,000 relating to the Company's new information technology subsidiary, LogTech Corporation. No interest expense was recorded in the third quarter of 2000, compared to $141,000, or 0.3%, for the same period in 1999. The decrease in interest expense was a result of the capitalization of interest costs totaling $82,000 during the third quarter of 2000 related to the development of Internet-based software at LogTech Corporation coupled with lower average net borrowings during the third quarter of 2000. Other income, net, was $191,000, or 0.3% of operating revenue, in the third quarter of 2000, compared to $94,000, or 0.2%, for the same period in 1999. The increase in other income resulted from higher interest income attributed to higher average cash and cash equivalent balances during the third quarter of 2000. 10 The combined federal and state effective tax rate for the third quarter of 2000 was 38.2% compared to a rate of 38.5% for the same period in 1999. As a result of the foregoing factors, net income increased by $2.1 million, or 52.5%, to $6.1 million for the third quarter of 2000, compared to $4.0 million for the same period in 1999. Nine Months Ended September 30, 2000 compared to Nine Months Ended September 30, 1999 Operating revenue increased by $36.1 million, or 29.8%, to $157.2 million in the first nine months of 2000 from $121.1 million in the same period of 1999. This increase resulted primarily from an increased volume from domestic and international air cargo customers, an increase in the number of operating terminals and direct shuttles and enhanced logistics services. Purchased transportation represented 42.6% of operating revenue in the first nine months of 2000 compared to 43.5% in the same period of 1999. The decrease in purchased transportation as a percentage of operating revenue was attributed to operating efficiencies resulting from an increased volume of freight transported through the Forward Air network. Salaries, wages and employee benefits were 22.5% of operating revenue in the first nine months of 2000 compared to 22.8% in the same period of 1999. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was attributed to operating efficiencies resulting from an increased volume of freight transported through the Forward Air network. Operating leases, the largest component of which is terminal rent, were 4.8% of operating revenue in the first nine months of 2000 compared to 5.2% in the same period of 1999. The decrease in operating leases as a percentage of operating revenue between periods was attributable to increased leverage resulting from increased operating revenue. Depreciation and amortization expense as a percentage of operating revenue was 2.7% in the first nine months of 2000, compared to 3.1% in the same period of 1999. The decrease in depreciation and amortization expense as a percentage of revenue was attributable to increased utilization of operating equipment during 2000 as a result of increased operating revenue. Insurance and claims as a percentage of revenue were 1.6% of operating revenue in the first nine months of 2000, compared with 1.3% in the same period of 1999. The increase in insurance and claims as a percentage of revenue resulted primarily from an increase in the frequency and severity of accidents and higher premium costs during the first nine months of 2000. Other operating expenses were 8.7% of operating revenue in the first nine months of 2000 compared to 9.3% in the same period of 1999. The decrease in other operating expenses as a percentage of operating revenue was primarily attributable to a lower operating cost structure on a percentage of revenue basis resulting from increased operating revenue. 11 Income from operations increased by $8.9 million, or 49.4%, to $26.9 million for the first nine months of 2000 compared to $18.0 million for the same period in 1999. The increase in income from operations was primarily a result of lower operating cost structure on a percentage of revenue basis resulting from an increase in operating revenue, which allowed the Company to spread the fixed costs of the network over a larger revenue base. The increase in income from operations during the first nine months of 2000 was partially offset by operating losses of approximately $1,213,000 relating to the Company's new information technology subsidiary, LogTech Corporation. Interest expense was $107,000, or 0.1% of operating revenue, during the nine months ended September 30, 2000, compared to $766,000, or 0.6%, for the same period in 1999. The decrease in interest expense was a result of the capitalization of interest costs totaling $191,000 during the nine months ended September 30, 2000 related to the development of Internet-based software at LogTech Corporation coupled with lower average net borrowings during the first nine months of 2000. Other income, net, was $498,000, or 0.3% of operating revenue, in the first nine months of 2000, compared to $172,000, or 0.1%, for the same period in 1999. The increase in other income resulted from higher interest income attributed to higher average cash and cash equivalent balances during the first nine months of 2000. The combined federal and state effective tax rate for the first nine months of 2000 was 38.2% compared to a rate of 38.7% for the same period in 1999. As a result of the foregoing factors, net income increased by $6.2 million, or 57.9%, to $16.9 million for the first nine months of 2000, compared to $10.7 million for the same period in 1999. 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 $22.7 million for the nine months ended September 30, 2000 compared with $14.1 million in the same period of 1999. Net cash used in investing activities was approximately $13.7 million in the nine months ended September 30, 2000 compared with $5.4 million in the same period of 1999. Investing activities consisted primarily of the purchase of operating equipment and management information systems and the capitalization of computer software costs relating to the LogTech system during these periods. Net cash provided by financing activities totalled approximately $400,000 in the nine months ended September 30, 2000 compared with net cash used in financing activities of $1.4 million in the same period of 1999. Financing activities for the first nine months of 2000 and 1999 included the repayment of long-term debt and capital leases, proceeds received from the exercise of stock options and proceeds received from the issuance of common stock under the Company's employee 12 stock purchase plan. In addition, results for the first nine months of 1999 included the proceeds from common stock issued under a public offering. The Company's credit facilities include a working capital line of credit and an equipment financing facility. As long as the Company complies with the financial covenants and ratios established in the credit facility agreements, these credit facilities permit borrowings of up to $20.0 million under the working capital line of credit and up to $25.0 million under the equipment financing facilities. Interest rates for advances under the facilities vary based on how the Company's performance measures against covenants related to total indebtedness, cash flows, results of operations and other ratios. The facilities bear interest at LIBOR plus .80% to 1.90%, expire in December 2000 and April 2001, and are secured by accounts receivable and the majority of the Company's equipment. The amount the Company can borrow under the line of credit is reduced by the amount of any outstanding letters of credit. At September 30, 2000 and December 31, 1999, the Company had no borrowings outstanding under the line of credit facility or the equipment financing facility. Management believes that its available cash, expected cash generated from future operations and borrowings under available lines of credit 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 resulting from 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 Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The response to this portion of Item 6 is submitted as a separate section of this report. (b) Reports on Form 8-K - The Company did not file any reports on Form 8-K during the three months ended September 30, 2000. 14 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: November 6, 2000 By: /s/ Edward W. Cook ------------------------------- Edward W. Cook Chief Financial Officer and Senior Vice President 15 EXHIBIT INDEX
Exhibit No. ----------- 10.1 Non-Qualified Stock Option Agreement dated August 21, 2000 between the registrant and Ray A. Mundy 27.1 Financial Data Schedule - Period Ended September 30, 2000 (Electronic Filing Only)
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