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 March 31, 1999
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 May 11, 1999 was 13,682,073.
TABLE OF CONTENTS
FORWARD AIR CORPORATION
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements -
March 31, 1999 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Forward Air Corporation
Condensed Consolidated Balance Sheets
March 31, December 31,
1999 1998
-------------------------
(Unaudited) (Note 1)
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 117 $ 455
Accounts receivable, less allowance of $986 in 1999 and $952
in 1998 21,600 19,754
Other current assets 3,123 3,207
-------------------------
Total current assets 24,840 23,416
Property and equipment 41,979 40,072
Less accumulated depreciation and amortization 11,252 10,152
-------------------------
30,727 29,920
Other assets 3,457 3,472
-------------------------
Total assets $59,024 $56,808
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,037 $ 4,120
Accrued expenses 8,258 7,056
Current portion of long-term debt 3,888 4,529
Current portion of capital lease obligations 571 676
-------------------------
Total current liabilities 17,754 16,381
Long-term debt, less current portion 12,105 15,403
Capital lease obligations, less current portion 4,289 4,723
Deferred income taxes 2,210 1,230
Shareholders' equity:
Preferred stock -- --
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 12,678,480 in 1999 and 12,587,818
in 1998 127 126
Additional paid-in capital 16,262 15,768
Retained earnings 6,277 3,177
-------------------------
Total shareholders' equity 22,666 19,071
-------------------------
Total liabilities and shareholders' equity $59,024 $56,808
=========================
See notes to condensed consolidated financial statements.
3
Forward Air Corporation
Condensed Consolidated Statements of Income
(Unaudited)
Three months ended
---------------------------------
March 31, March 31,
1999 1998
---------------------------------
(In thousands, except per share data)
Operating revenue $ 37,728 $ 28,850
Operating expenses:
Purchased transportation:
Provided by Landair Corporation 709 1,318
Provided by others 15,520 11,056
Salaries, wages and employee benefits 8,722 7,196
Operating leases 2,126 1,540
Depreciation and amortization 1,199 954
Insurance and claims 340 780
Other operating expenses 3,637 3,221
---------------------------------
32,253 26,065
---------------------------------
Income from operations 5,475 2,785
Other income (expense):
Interest expense (446) (210)
Other, net 32 10
---------------------------------
(414) (200)
---------------------------------
Income from continuing operations before income taxes 5,061 2,585
Income taxes 1,961 1,020
---------------------------------
Income from continuing operations 3,100 1,565
---------------------------------
Discontinued operations:
Income from operations (less income taxes
of $-0- and $441, respectively) -- 676
---------------------------------
Net income $ 3,100 $ 2,241
=================================
Income per share:
Basic
Income from continuing operations $ .25 $ .13
Income from discontinued operations -- .06
---------------------------------
Net income $ .25 $ .19
=================================
Diluted
Income from continuing operations $ .24 $ .12
Income from discontinued operations -- .06
---------------------------------
Net income $ .24 $ .18
=================================
See notes to condensed consolidated financial statements.
4
Forward Air Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
---------------------------------
March 31, March 31,
1999 1998
---------------------------------
(In thousands)
Cash provided by (used in) operations $ 5,561 $(2,690)
Investing activities:
Proceeds from disposal of property and equipment 265 --
Purchases of property and equipment (2,161) (378)
Other (20) (42)
---------------------------------
(1,916) (420)
Financing activities:
Proceeds from long-term debt -- 1,909
Payments of long-term debt (3,939) (195)
Payments of capital lease obligations (539) (295)
Proceeds from exercise of stock options 495 1,041
---------------------------------
(3,983) 2,460
---------------------------------
Decrease in cash and cash equivalents $ (338) $ (650)
================================
See notes to condensed consolidated financial statements.
5
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
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 month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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, 1998.
The balance sheet at December 31, 1998 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. DISCONTINUED OPERATIONS
The accompanying condensed consolidated financial statements include Forward Air
Corporation and its subsidiaries. On July 9, 1998 (the "Measurement Date"), the
Board of Directors of the Company authorized the separation of the Company into
two publicly-held corporations, one owning and operating the deferred air
freight operations and the other owning and operating the truckload operations
(the "Spin-off").
The Spin-off was effected on September 23, 1998 through the distribution to
shareholders of the Company of all the outstanding shares of common stock of a
new truckload holding company, Landair Corporation. Pursuant to the Spin-off,
the common stock of Landair Corporation was distributed on a pro rata basis of
one share of Landair Corporation common stock for every share of the common
stock of the Company. Subsequent to the Spin-off, the Company has continued as
the legal entity that owns and operates the deferred air freight operations
through its operating subsidiaries and Landair Corporation is the legal entity
that owns and operates the truckload operations. Additionally, the name Landair
Services, Inc. was changed to Forward Air Corporation on August 26, 1998. As a
result of the Spin-off, the results of operations and cash flows of the
truckload operations have been reported as discontinued operations in the
accompanying condensed consolidated financial statements.
6
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
As used in the accompanying condensed consolidated financial statements, the
term "Forward Air" refers to the deferred air freight operations; the term
"truckload" refers to the truckload operations; and the term "the Company"
refers to the entity which, prior to the Spin-off, operated both the deferred
air freight and truckload groups and which, after the Spin-off, operates the
deferred air freight group.
Summarized income statement information relating to the truckload operations (as
reported in discontinued operations) for the period presented prior to the
Spin-off is as follows (in thousands):
Three months ended
March 31, 1998
--------------
Operating revenue $ 25,323
Operating expenses 23,745
--------
Income from operations 1,578
Interest expense (467)
Other, net 6
--------
Income before income taxes 1,117
Income taxes 441
--------
Income from discontinued
truckload operations $ 676
========
3. COMPREHENSIVE INCOME
The Company had no items of other comprehensive income in 1999 or 1998 and,
accordingly, comprehensive income is equivalent to net income.
4. NET INCOME PER SHARE
On February 24, 1999, the Board of Directors approved a two-for-one split of the
common shares 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 this split for all years 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 split.
7
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
4. NET INCOME PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three months ended
-----------------------
March 31, March 31,
1999 1998
------- -------
Numerator:
Numerator for basic and diluted income per share:
Income from continuing operations $ 3,100 $ 1,565
Income from discontinued operations -- 676
------- -------
Net income $ 3,100 $ 2,241
======= =======
Denominator:
Denominator for basic income per share - weighted-average shares 12,629 12,152
Effect of dilutive stock options 494 612
------- -------
Denominator for diluted income per share - adjusted weighted-
average shares 13,123 12,764
======= =======
Income per share - basic:
Income from continuing operations $ .25 $ .13
Income from discontinued operations -- .06
------- -------
Net income $ .25 $ .19
======= =======
Income per share - diluted:
Income from continuing operations $ .24 $ .12
Income from discontinued operations -- .06
------- -------
Net income $ .24 $ .18
======= =======
Securities that could potentially dilute basic income per share in the future
that were not included in the computation of diluted income per share
because to do so would have been antidilutive for the periods
presented -- --
======= =======
5. INCOME TAXES
For the three months ended March 31, 1999 and 1998, 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.
6. CONTINGENCIES
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 none of these actions,
8
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
6. CONTINGENCIES (CONTINUED)
individually or in the aggregate, will have a material adverse effect on the
financial condition or results of operations of the Company.
7. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial statements
to conform to the 1999 presentation. These reclassifications had no effect on
net income as previously reported.
8. SUBSEQUENT EVENT
On April 29, 1999, 1.0 million shares of the common stock of the Company were
sold under a Form S-3 Registration Statement dated April 23, 1999. The net
proceeds of the offering were approximately $18.3 million and were used
principally to repay outstanding debt.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We provide scheduled ground transportation of cargo on a time-definite basis. As
a result of our established transportation schedule and network of terminals,
our operating cost structure includes significant fixed costs. Our ability to
improve our operating margins will depend on our ability to increase the volume
of freight moved through our network.
The following does not include a discussion and analysis of the truckload
carrier business, which has been accounted for as a discontinued operation as a
result of the Spin-off effected on September 23, 1998. (See Note 2 to the
Condensed Consolidated Financial Statements.)
RESULTS OF OPERATIONS
The following table shows the percentage relationship of expense items to
operating revenue for the periods indicated.
Three months ended
----------------------------------
March 31, 1999 March 31, 1998
----------------------------------
Operating revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 43.0 42.9
Salaries, wages and employee
benefits 23.1 24.9
Operating leases 5.6 5.3
Depreciation and amortization 3.2 3.3
Insurance and claims 0.9 2.7
Other operating expenses 9.7 11.2
-----------------------------
85.5 90.3
Income from operations 14.5 9.7
Other income (expense):
Interest expense (1.2) (0.7)
Other, net 0.1 0.0
-----------------------------
(1.1) (0.7)
-----------------------------
Income before income taxes 13.4 9.0
Income taxes 5.2 3.6
-----------------------------
Income from continuing operations 8.2% 5.4%
=============================
10
Three Months Ended March 31, 1999 compared to Three Months Ended March 31, 1998
Operating revenue increased by $8.8 million, or 30.5%, to $37.7 million in the
first three months of 1999 from $28.9 million in the same period of 1998. The
increase resulted primarily from increased volume of freight shipments from
domestic and international air cargo customers, increased operating terminals
and direct shuttles and enhanced logistics services.
Purchased transportation represented 43.0% of operating revenue in the first
quarter of 1999 compared to 42.9% in the same period of 1998.
Salaries, wages and employee benefits were 23.1% of operating revenue in the
first quarter of 1999 compared to 24.9% in the same period of 1998. The decrease
in salaries, wages and employee benefits as a percentage of operating revenue
was due primarily to operating efficiencies resulting from increased volume of
freight transported through our network coupled with a reduction in Company
linehaul drivers which were hired initially as a part of the acquisition of
certain of the assets of Adams Air Cargo, Inc. in October 1997.
Operating leases, the largest component of which is terminal rent, were 5.6% of
operating revenue in the first quarter of 1999 compared to 5.3% in the same
period of 1998. The increase in operating leases as a percentage of operating
revenue between periods was attributable to an increase in rent expense for
trailers. The increase in operating lease expense attributable to trailers was
partially offset by greater operating revenue through our network.
Depreciation and amortization expense as a percentage of operating revenue was
3.2% in the first quarter of 1999, compared to 3.3% in the same period of 1998.
Insurance and claims were 0.9% of operating revenue in the first quarter of
1999, compared with 2.7% in the same period of 1998. The decrease in insurance
and claims as a percentage of operating revenue was due primarily to a decrease
in the frequency and severity of accidents and lower premium costs.
Other operating expenses were 9.7% of operating revenue in the first quarter of
1999 compared to 11.2% in the same period of 1998. The decrease in other
operating expenses as a percentage of operating revenue was primarily
attributable to a lower operating cost structure due to increased operating
revenue and a reduction in commissions paid to agent terminals.
Income from operations increased by $2.7 million, or 96.4%, to $5.5 million for
the first quarter of 1999 compared to $2.8 million for the same period in 1998.
The improvement in income from operations is due primarily to a lower operating
cost structure in the current year resulting from 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 $446,000, or 1.2%, of operating revenue in the first
quarter of 1999, compared to $210,000, or 0.7%, for the same period in 1998. The
increase was due to higher
11
average net borrowings, primarily as a result of a $5.0 million capital
contribution to Landair Corporation and the settlement of intercompany balances
with Landair Corporation prior to the Spin-off.
The combined federal and state effective tax rate for the three months of 1999
was 38.8%, compared to a rate of 39.5%, for the same period in 1998.
As a result of the foregoing factors, income from continuing operations
increased by $1.5 million, or 93.8%, to $3.1 million for the first quarter of
1999, compared to $1.6 million for the same period of 1998.
Liquidity and Capital Resources
Prior to the Spin-off in September 1998, we operated our business and the
Truckload operations together. As a result, our statement of cash flows for 1998
does not fully reflect the cash flows of our business as a stand-alone company.
We have historically financed working capital needs, including capital
purchases, with cash flows from operations and borrowings under our bank lines
of credit. Net cash provided by operating activities totaled approximately $5.6
million for the first three months of 1999 compared with cash used in operating
activities of $2.7 million in the same period of 1998.
Net cash used in investing activities was approximately $1.9 million in the
first three months of 1999 compared with $420,000 in the same period of 1998.
Our investing activities consisted primarily of the purchase of operating
equipment and management information systems during these periods.
Net cash used in financing activities was $4.0 million in the first three months
of 1999 compared with net cash provided by financing activities of $2.5 million
in the same period of 1998. Our financing activities included the continued
financing of operating equipment and working capital needs, the repayment of
long-term debt and capital leases and proceeds received from the exercise of
stock options.
On April 29, 1999, 1.0 million shares of the common stock of the Company were
sold under a Form S-3 Registration Statement dated April 23, 1999. The net
proceeds of the offering were approximately $18.3 million and were used
principally to repay outstanding debt.
Our credit facilities include a working capital line of credit and an equipment
financing facility. As long as we comply with the financial covenants and ratios
established in the credit facility agreements, these credit facilities permit us
to borrow up to $20.0 million under the working capital line of credit and up to
$25.0 million under equipment financing facilities. Interest rates for advances
under the facilities vary based on 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 September and December 2000 and are secured
by accounts receivable and most of our
12
equipment. The amount we can borrow under the line of credit is reduced by the
amount of any outstanding letters of credit.
We believe that our available cash, together with proceeds from the recent
public offering of the common stock of the Company, expected cash generated from
future operations and borrowings under available lines of credit, will be
sufficient to satisfy our anticipated cash needs for at least the next 12
months.
Impact of Year 2000
We depend upon a significant number of computer software programs and operating
systems to conduct our business. Some of our older software programs are not
year 2000 compliant. We are in the process of replacing most of our key
financial and operating systems as a part of the normal upgrading of our
systems. In addition to our replacement program, we intend to modify some of our
software and hardware so that our computer systems will function properly in and
after the year 2000. We expect to complete this process by June 30, 1999.
We are in the process of obtaining year 2000 compliance letters and reports from
our significant suppliers and customers. We presently do not anticipate any
major interruption in our business as a result of year 2000 issues. Therefore,
we do not expect that year 2000 issues will have a material adverse effect on
our business or operations or that we will incur any material expense associated
with year 2000 compliance. We have not established a contingency plan to address
potential year 2000 noncompliance in our systems or in those of our major
suppliers or customers. We are currently considering whether we need a
contingency plan. Because of our dependence on systems outside our control and
because third parties with whom we have relationships may not have adequately
addressed year 2000 issues, we could face unexpected problems associated with
year 2000 issues. These problems could affect our operations, business or
financial condition.
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 due to a decreased
volume of freight moving through the
13
Company's network, competition, surplus inventories, loss of a major customer,
the Company's lack of prior operating history as an entity independent of the
truckload operations, the ability of the Company's information systems to handle
increased volume of freight moving through its network, and the availability and
compensation of qualified independent owner-operators 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
On April 29, 1999, the Company sold 1.0 million shares of its common stock in a
public offering. The net proceeds of approximately $18.3 million were used
principally to repay outstanding debt. With this repayment, the Company's
exposure to market risk related to its remaining outstanding debt is not
significant.
14
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 - There were no reports on Form 8-K during the first
quarter of 1999.
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: May 14, 1999 By: /s/ Edward W. Cook
-------------------------------------
Edward W. Cook
Chief Financial Officer
and Senior Vice President
16
EXHIBIT INDEX
Exhibit No.
-----------
10.1 1999 Stock Option and Incentive Plan
10.2 Loan and Security Agreement ($10.0 million Line of Credit),
dated as of January 13, 1999 among SunTrust Bank, Nashville,
N.A. and the Registrant, FAF, Inc. and Forward Air, Inc.
(Certain exhibits to this document are omitted from this
filing but the Registrant will furnish supplemental copies of
the omitted materials to the Securities and Exchange
Commission upon request.)
27.1 Financial Data Schedule - Period Ended March 31, 1999
(Electronic Filing Only)
27.2 Financial Data Schedule (Restated) - Period Ended March 31,
1998 (Electronic Filing Only)
17