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, 2005
Commission File No. 000-22490
FORWARD AIR CORPORATION
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (423) 636-7000
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of November 3, 2005 was 31,259,023.
Table of Contents
Forward Air Corporation
Page Number
Part I.
Financial Information
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - September 30, 2005 and December 31, 2004
3
Condensed Consolidated Statements of Income - Three and nine months ended September 30, 2005 and 2004
4
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2005 and 2004
5
Notes to Condensed Consolidated Financial Statements - September 30, 2005
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
15
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
16
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Item 6.
Exhibits and Reports on Form 8-K
17
Signatures
18
2
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2005
December 31, 2004
(Unaudited)
(Note 1)
(In thousands, except share data)
Assets
Current assets:
Cash
$
141
78
Short-term investments
78,190
111,600
Accounts receivable, less allowance of $1,042 in 2005 and $1,072 in 2004
48,137
38,334
Other current assets
7,026
9,410
Total current assets
133,494
159,422
Property and equipment
82,849
81,225
Less accumulated depreciation and amortization
45,518
43,939
Total property and equipment, net
37,331
37,286
Goodwill and other acquired intangibles, net of accumulated amortization of $2,356 in 2005 and $1,931 in 2004
27,913
15,588
Other assets
920
2,257
Total assets
199,658
214,553
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
12,552
10,026
Accrued expenses
13,722
15,592
Line of credit
1,404
—
Current portion of capital lease obligations
37
39
Total current liabilities
27,715
25,657
Capital lease obligations, less current portion
846
867
Deferred income taxes
6,226
Shareholders’ equity:
Preferred stock
Common stock, $0.01 par value:
Authorized shares - 50,000,000
Issued and outstanding shares – 31,114,664 in 2005 and 32,397,747 in 2004
311
324
Additional paid-in capital
36,279
Accumulated other comprehensive income
1
Retained earnings
164,559
144,396
Total shareholders’ equity
164,871
181,003
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of the financial statements.
Condensed Consolidated Statements of Income
Three months ended
Nine months ended
September 30, 2004
(In thousands, except per share data)
Operating revenue
84,841
71,905
231,861
204,618
Operating expenses:
Purchased transportation
35,512
30,568
94,994
85,487
Salaries, wages and employee benefits
17,486
15,609
49,305
45,392
Operating leases
3,448
3,279
10,159
9,731
Depreciation and amortization
2,815
1,692
6,637
5,088
Insurance and claims
841
1,297
3,862
4,546
Other operating expenses
6,070
5,653
18,063
16,428
Total operating expenses
66,172
58,098
183,020
166,672
Income from operations
18,669
13,807
48,841
37,946
Other income (expense):
Interest expense
(24
)
(14
(69
(42
Other, net
587
305
3,340
703
Total other income
563
291
3,271
661
Income before income taxes
19,232
14,098
52,112
38,607
Income taxes
7,167
5,086
19,400
14,280
Net income
12,065
9,012
32,712
24,327
Income per share:
Basic
0.38
0.28
1.02
0.75
Diluted
0.27
1.00
0.74
Dividends declared per share
0.06
0.18
Condensed Consolidated Statements of Cash Flows
(In thousands)
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Atlanta condemnation settlement gain
(1,428
Other non-cash charges
274
(Gain) loss on sale of property and equipment
(261
33
(821
2,696
Changes in operating assets and liabilities:
Accounts receivable
(8,249
(6,304
Inventories
(264
64
Prepaid expenses and other current assets
(179
(930
Accounts payable and accrued expenses
656
3,012
2,848
(3,183
Tax benefit of stock options exercised
1,922
1,874
Net cash provided by operating activities
33,847
26,677
Investing activities:
Proceeds from disposal of property and equipment
86
10
Purchases of property and equipment
(7,528
(5,029
Proceeds from sales or maturities of available-for-sale securities
167,150
185,427
Purchases of available-for-sale securities
(133,740
(206,475
Acquisition of business
(12,750
Proceeds from Atlanta condemnation settlement
2,765
Other
(112
1,163
Net cash provided by (used in) investing activities
15,871
(24,904
Financing activities:
Payments of capital lease obligations
(23
(22
Borrowings under line of credit
Proceeds from exercise of stock options
3,709
2,955
Payments of cash dividends
(5,782
Cash paid for fractional shares in stock split
(44
Common stock issued under employee stock purchase plan
130
Repurchase of common stock
(49,049
(8,087
Net cash used in financing activities
(49,655
(5,024
Net increase in cash
63
(3,251
Cash at beginning of period
16,362
Cash at end of period
13,111
Uncollected proceeds from disposal of property and equipment in accounts receivable
1,554
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States 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 United States 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, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004.
The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date, but does not include all of the financial information and footnotes required by United States generally accepted accounting principles for complete financial statements.
2. Investments
The Company had a total of $78.2 million and $111.6 million in available-for-sale securities as of September 30, 2005 and December 31, 2004, respectively. In the 2004 quarterly reporting, the Company had considered its municipal bonds with the option to go to auction every 7-35 days (“auction rate securities”) as cash and cash equivalents. Since the stated maturities on the auction rate securities were in excess of three months from the time of purchase, the auction rate securities meet the Company’s policy for classification as available-for-sale securities. Securities are classified as available for sale when the Company does not intend to hold the securities to maturity nor regularly trade the securities. There was a reclassification of $20.0 million from net increase in cash and cash equivalents to net cash used in investing activities related to the purchases and sales of available-for-sale securities for the nine months ended September 30, 2004 in the condensed consolidated statements of cash flows.
3. Comprehensive Income
Comprehensive income includes any changes in the equity of the Company from transactions and other events and circumstances from non-owner sources. Comprehensive income for the quarter and nine months ended September 30, 2005 was $12.1 million and $32.7 million, respectively, which includes $-0- and $3,000 in unrealized losses, respectively, on available-for-sale securities. Comprehensive income for the quarter and nine months ended September 30, 2004 was $9.0 million and $24.3 million, respectively, which includes $1,000 and $0 in unrealized losses, respectively, on available-for-sale securities.
4. Employee Stock Options
The Company grants options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the grant date. The Company accounts for employee stock option grants using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. The Company follows the disclosure option of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which requires that the information be disclosed as if the Company accounted for its stock options granted subsequent to December 31, 1994 under the fair value method.
4. Employee Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of the stock options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows (in thousands, except per share data):
Net income, as reported
Pro forma compensation expense, net of tax
1,037
694
2,890
2,006
Pro forma net income
11,028
8,318
29,822
22,321
As reported net income per share:
Pro forma net income per share:
0.35
0.26
0.93
0.69
0.34
0.25
0.91
0.68
5. Net Income and Dividends Per Share
On February 15, 2005, the Company’s Board of Directors declared a three-for-two stock split of common stock to be effected in the form of a stock dividend to shareholders of record as of March 18, 2005. Common stock issued and additional paid-in capital have been restated to reflect the split 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 split.
During the three months ended March 31, 2005, June 30, 2005 and September 30, 2005, dividends of $0.06 per share were declared on shares of common stock then outstanding. The quarterly dividends were paid on April 18, 2005, June 3, 2005 and September 2, 2005. The Company had never declared a dividend prior to February 15, 2005. Subsequent to September 30, 2005, the Company declared a $0.06 per share dividend that will be paid in the first quarter of 2006. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.
The following table sets forth the computation of basic and diluted income per share (in thousands, except per share data):
7
5. Net Income and Dividends Per Share (continued)
Numerator:
Numerator for basic and diluted income per share - net income
Denominator:
Denominator for basic income per share - weighted-average shares
31,353
32,346
32,031
32,285
Effect of dilutive stock options
695
642
590
603
Denominator for diluted income per share - adjusted weighted-average shares
32,048
32,988
32,621
32,888
Basic income per share
Diluted income per share
6. Acquisition of Certain Assets of the Airport-to-Airport Operations of U.S. Xpress Enterprises, Inc.
On May 28, 2005, the Company acquired certain assets of the airport-to-airport operations of U.S. Xpress Enterprises, Inc. (“USX”) for $12.75 million in cash. In connection with the purchase, the Company acquired the airport-to-airport customer list of USX and USX agreed not to compete in the airport-to-airport market for a period of ten years. The purchase price allocation in accordance with SFAS No 141, Business Combinations, is acquired intangible assets with a total value of $12.75 million (majority of the allocation to the non-compete agreement). The acquired intangible assets will be amortized over a period of ten years. The Company began amortizing the assets on a straight-line basis during the last month of the second quarter and anticipates that the ongoing quarterly amortization expense will be $0.3 million. The results of operations of the USX airport-to-airport operations are included in the consolidated income statement from May 28, 2005 through September 30, 2005.
The airport-to-airport business had been reported by USX as a part of the Xpress Global Systems (“XGS”) business segment. XGS had total revenue for the year ended December 31, 2004 of approximately $159.0 million, of which an estimated $57.0 million was attributable to the airport-to-airport operations. The XGS segment reported an operating loss of $5.0 million for the year ended December 31, 2004. USX did not account for the related expenses of the airport-to-airport operations separately within the XGS segment and, accordingly, the USX operating profit or loss attributable to the airport-to-airport operations is not known.
7. Income Taxes
For the three and nine months ended September 30, 2005 and September 30, 2004, the effective income tax rates varied from the statutory federal income tax rate of 35.0% primarily as a result of the effect of state income taxes, net of the federal benefit, and permanent differences between book and tax net income. Additionally, the effective tax rate was favorably impacted during the three and nine months ended September 30, 2004 as a result of previously accrued income taxes, resulting from the favorable resolution of certain tax issues upon the closing of open tax years.
8
8. Commitments and Contingencies
The primary claims in the Company’s business are workers’ compensation, property damage, vehicle 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 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.
Atlanta Terminal Condemnation
During the fourth quarter of 2002, the City of Atlanta filed a Petition for Condemnation and Declaration of Taking for a terminal facility owned by Transportation Properties, Inc. and leased by Forward Air, Inc., two of the Company’s wholly owned subsidiaries. The condemnation was filed in connection with the fifth runway airport expansion project at Atlanta Hartsfield-Jackson International Airport. According to the 2002 condemnation petition, the City of Atlanta took ownership of the property and building and deposited $2.6 million into the Registry of the Court as compensation to Transportation Properties, Inc. The Company filed a protest to the City of Atlanta’s evaluation of the property and building and also challenged the method of condemnation it utilized. Prior to December 2003, the City of Atlanta destroyed the condemned building in conjunction with the runway expansion project. On or about December 30, 2003, the Superior Court of Clayton County, Georgia (the “Court”) ruled that the City of Atlanta’s method of condemnation was improper and returned ownership of the land to the Company.
During January 2004, the City of Atlanta filed a second condemnation petition to obtain title to the land. In connection with this second petition, the City of Atlanta deposited an additional $1.3 million into the Registry of the Court, which was the City of Atlanta’s estimated fair market value of the land. The City of Atlanta petitioned the Court and was granted the right to withdraw the original $2.6 million escrow balance it paid into the Court as part of the first petition for condemnation. The Company and its outside counsel believed that the December 30, 2003 ruling by the Court and the City of Atlanta’s actions subsequent to the first condemnation gave rise to additional theories of recovery. The Company challenged the method of condemnation set forth in the second petition and the withdrawal of the original $2.6 million escrow balance. Additionally, the Company had claims for damages arising from the City of Atlanta’s destruction of the Company’s building during the wrongful possession of the property by the City of Atlanta. As of December 31, 2004, the Company had received the $1.3 million escrow into cash and had a $1.3 million receivable for the difference in the original $2.6 million escrow and actual $1.3 million in escrow received.
In the second quarter of 2005, an agreement was reached with the City of Atlanta to settle the dispute. In the settlement, the City of Atlanta paid the Company approximately $2.7 million, which represents payment of the receivable of $1.3 million along with additional pre-tax gain of approximately $1.4 million, included in other income, net. The cash received is net of attorney’s fees.
Trailer Purchases
During the fourth quarter of 2005, the Company has commitments to acquire 625 new trailers with an approximate cost of $14.0 million. These commitments are expected to be funded by proceeds from the sale of existing equipment, cash flows from operations, as well as cash and short-term investments on hand.
9
9. Impact of Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an option.
Originally, SFAS No. 123R was to be adopted no later than July 1, 2005, although early adoption was allowable. However, on April 14, 2005, the Securities and Exchange Commission (“SEC”) announced that the effective date of SFAS No. 123R will be suspended until January 1, 2006, for calendar year companies. SFAS No. 123R permits public companies to adopt its requirements using one of two methods, a “modified prospective” method or a “modified retrospective” method. At this time, the Company has not determined which method of adoption it will use.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair value method will have significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and income per share in Note 4 to the condensed consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, sets forth criteria under which a company must consolidate certain variable interest entities. Interpretation No. 46 places increased emphasis on controlling financial interests when determining if a company should consolidate a variable interest entity. The Company adopted the provisions of Interpretation No. 46 during the first quarter of fiscal 2004 as a result of the FASB deferring the effective date of FASB Interpretation No. 46 for variable interests held by public companies. The adoption of Interpretation No. 46 had no impact on the Company’s financial position or results of operations.
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, among other things, our ability to increase the volume of freight moving through our network. Additional information regarding our business is described in our 2004 Annual Report on Form 10-K.
Critical Accounting Policies
A summary of significant accounting policies is disclosed in Note 1 to the consolidated financial statements included in our 2004 Annual Report on Form 10-K. Our critical accounting policies are further described under the caption “Discussion of Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2004 Annual Report on Form 10-K. There have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2004.
Risk Factors
A summary of factors which could affect results and cause results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf, are further described under the caption “Risk Factors” in the Business portion of our 2004 Annual Report on Form 10-K. There have been no changes in the nature of these factors since December 31, 2004.
Results of Operations
The following table shows the percentage relationship of expense items to operating revenue for the periods indicated. In the accompanying discussion, all percentage figures are as a percent of operating revenue with the exception of revenue growth rates.
100.0
%
41.9
42.5
41.0
41.8
20.6
21.7
21.3
22.2
4.1
4.6
4.4
4.8
3.3
2.4
2.9
2.5
1.0
1.8
1.7
2.2
7.1
7.8
7.6
8.0
78.0
80.8
78.9
81.5
22.0
19.2
21.1
18.5
0.7
0.4
1.4
22.7
19.6
22.5
18.9
8.5
8.4
7.0
14.2
12.5
14.1
11.9
Three Months Ended September 30, 2005 compared to Three Months Ended September 30, 2004
Operating revenue increased by $12.9 million, or 17.9%, to $84.8 million in the third quarter of 2005 from $71.9 million in the same period of 2004. This increase resulted from an increase in traditional airport-to-airport revenue of $12.4 million to $73.3 million, an increase in logistics revenue of $0.4 million to $6.5 million and an increase in other accessorial revenue, including warehousing services and terminal handling revenue, of $0.1 million to $5.0 million. Traditional airport-to-airport revenue was impacted by an increase in average weekly tonnage of 12.4% and a 7.1% increase in average revenue per pound including the effect of fuel surcharge versus the third quarter of 2004. The increase in airport-to-airport revenue was driven, in part, by the acquisition of certain assets of the Xpress Global Systems (“XGS”) business segment of U.S. Xpress Enterprises, Inc. (“USX”) in May 2005.
Purchased transportation represented 41.9% of operating revenue in the third quarter of 2005 compared to 42.5% in the same period of 2004. For the third quarter of 2005, traditional airport-to-airport purchased transportation costs represented 40.5% of airport-to-airport revenue versus 40.9% during the same period in 2004. During this period, we were able to increase both the volume and revenue per pound of freight transported which enabled us to more efficiently operate the airport-to-airport network. These increases were offset, in part, by an increase in the number of miles needed to operate our system as well as an increase in the average rate per mile paid. For the third quarter 2005, logistics purchased transportation costs represented 69.8% of logistics revenue versus 73.6% last year. During the period, our average revenue per mile for this service increased at a faster rate than our average cost per mile.
Salaries, wages and employee benefits were 20.6% of operating revenue in the third quarter of 2005 compared to 21.7% for the same period of 2004. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was primarily attributed to a year over year improvement in tonnage and revenue per pound which allowed us to operate our network more efficiently in this quarter versus 2004. A 1.3% decrease in salaries and wages, which was offset by a 0.2% increase in workers’ compensation insurance and expenses, resulted in this improvement.
Operating leases, the largest component of which is facility rent, were 4.1% of operating revenue in the third quarter of 2005 compared to 4.6% in the same period of 2004. The decrease in operating leases as a percentage of operating revenue between periods was primarily attributable to an increase in operating revenue as the dollar amount in this category increased slightly between the two periods.
Depreciation and amortization expense as a percentage of operating revenue was 3.3% in the third quarter of 2005 compared with 2.4% in the same period of 2004. Of that increase, 0.6% was attributable to the acceleration of depreciation resulting from the reduction of useful lives of trailers being sold in the third and fourth quarters of 2005. Additionally, 0.4% of the increase was due to the amortization of certain assets of XGS acquired at the end of May 2005 offset by 0.1% from assets that became fully depreciated in the quarter.
Insurance and claims were 1.0% of operating revenue in the third quarter of 2005, compared to 1.8% in the same period of 2004. The decrease in insurance and claims as a percentage of operating revenue resulted from an increase in operating revenue in addition to better claims experience during the period. Additionally, an independent third party performed an actuarial study of our loss development factor for vehicle liability claims. The results of the study caused us to lower our loss development reserve for vehicle liability claims. For the quarter, insurance expenses and claims expenses as a percentage of operating revenue decreased 0.5% and 0.3%, respectively.
Other operating expenses were 7.1% of operating revenue in the third quarter of 2005 compared to 7.8% in the same period of 2004. The decrease in other operating expenses as a percentage of operating revenue was primarily attributable to a 0.3% decrease from a gain on the sale of operating assets versus the prior period. Additionally, we experienced a 0.2% decrease in communication and utilities expenses and a 0.2% decrease in other operating expenses.
Income from operations increased by $4.9 million, or 35.5%, to $18.7 million for the third quarter of 2005 compared with $13.8 million for the same period in 2004. The increase in income from operations was primarily a result of the increase in operating revenue, including fuel surcharge, which was offset by increases in variable costs components while fixed costs components remained essentially the same leading to greater profitability.
Interest expense was $24,000, or less than 0.1% of operating revenue, in the third quarter of 2005, compared with $14,000, or less than 0.1%, for the same period in 2004. The increase in interest expense was attributed to higher average net borrowings during the period.
12
Other income, net was $0.6 million, or 0.7% of operating revenue, in the third quarter of 2005, compared to $0.3 million, or 0.4%, for the same period in 2004. The increase in other income, net resulted from higher interest income attributed to higher yields on available-for-sale securities during the third quarter of 2005.
The combined federal and state effective tax rate for the third quarter of 2005 was 37.3% of pre-tax income compared to a rate of 36.1% for the same period in 2004. During the third quarter of 2004, we reduced previously accrued income taxes as a result of the favorable resolution of certain tax issues upon the closing of open tax years, thus lowering the effective tax rate.
As a result of the foregoing factors, net income increased by $3.1 million, or 34.4%, to $12.1 million for the third quarter of 2005, compared to $9.0 million for the same period in 2004.
Nine Months Ended September 30, 2005 compared to Nine Months Ended September 30, 2004
Operating revenue increased by $27.3 million, or 13.3%, to $231.9 million in the first nine months of 2005 from $204.6 million in the same period of 2004. This increase resulted from an increase in traditional airport-to-airport revenue of $26.1 million to $198.7 million, an increase in logistics revenue of $1.0 million to $18.4 million and an increase in other accessorial revenue, including warehousing services and terminal handling revenue, of $0.2 million to $14.8 million. Traditional airport-to-airport revenue was impacted by an increase in average weekly tonnage of 8.2% and a 6.3% increase in average revenue per pound including the effect of fuel surcharge versus the first nine months of 2004. The increase in airport-to-airport revenue was driven, in part, by the acquisition of certain assets of USX in May 2005.
Purchased transportation represented 41.0% of operating revenue in the first nine months of 2005 compared to 41.8% in the same period of 2004. For the first nine months of 2005, traditional airport-to-airport purchased transportation costs represented 39.6% of operating revenue versus 40.6% during the same period in 2004. During the first nine months of this year, we were able to increase both the volume and revenue per pound of freight transported through our airport-to-airport network. These increases were offset, in part, by an increase in the number of miles needed to operate our network as well as the average rate per mile paid. For the first nine months of 2005, logistics purchased transportation costs represented 70.2% of logistics revenue versus 69.0% in 2004 due to an increased dependency on more costly third-party transportation providers.
Salaries, wages and employee benefits were 21.3% of operating revenue in the first nine months of 2005 compared to 22.2% for the same period of 2004. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was attributed to an increase in operating revenue and increased efficiencies. These results led to a 0.9% decrease in salaries and wages, including incentives, and a 0.1% decrease in health care expenses, which was offset, in part, by a 0.1% increase in workers’ compensation insurance and expenses.
Operating leases, the largest component of which is facility rent, were 4.4% of operating revenue in the first nine months of 2005 compared to 4.8% in the same period of 2004. Operating leases as a percentage of operating revenue decreased as a result of an increase in operating revenue as the dollar amount essentially remained flat between the two periods.
Depreciation and amortization expense as a percentage of operating revenue was 2.9% in the first nine months of 2005 compared to 2.5% in the same period of 2004. Of that increase 0.2% was attributable to the acceleration of depreciation resulting from the reduction of useful lives of trailers being sold in the third and fourth quarters of 2005. Additionally, 0.2% of the increase was due to the amortization of certain assets of XGS acquired at the end of May 2005.
Insurance and claims were 1.7% of operating revenue in the first nine months of 2005, compared to 2.2% in the same period of 2004. The decrease in insurance and claims as a percentage of operating revenue resulted, in part, from an increase in operating revenue during the period in addition to better claims experience during the first nine months. Additionally, an independent third party performed an actuarial study of our loss development factor for vehicle liability claims. The results of the study caused us to lower our loss development reserve for such claims. Insurance expense decreased by 0.3% during the period while claims expense also decreased by 0.2%.
Other operating expenses were 7.6% of operating revenue in the first nine months of 2005 compared to 8.0% in the same period of 2004. The decrease in other operating expenses as a percentage of operating revenue was attributable to a 0.2% decrease in miscellaneous corporate expenses and a 0.1% decrease in communication and utilities
13
expenses. Additionally, we experienced a 0.1% decrease in expenses caused by a gain on the sale of operating assets.
Income from operations increased by $10.9 million, or 28.8%, to $48.8 million for the first nine months of 2005 compared with $37.9 million for the same period in 2004. The increase in income from operations was primarily a result of the increase in operating revenue, including fuel surcharge, which was offset by increases in variable costs components while fixed costs components remained essentially the same leading to greater profitability.
Interest expense was $69,000, or less than 0.1% of operating revenue, in the first nine months of 2005, compared with $42,000, or less than 0.1%, for the same period in 2004. The increase in interest expense was attributed to higher average net borrowings during the period.
Other income, net was $3.3 million, or 1.4% of operating revenue, in the first nine months of 2005, compared to $0.7 million, or 0.4%, for the same period in 2004. Approximately $1.4 million of the increase was the result of a lawsuit settlement discussed in Note 8 to our condensed consolidated financial statements. The remaining increase in other income, net resulted from higher interest income attributed to higher yields on higher average balances in both cash and cash equivalents and available-for-sale securities during the first nine months of 2005.
The combined federal and state effective tax rate for the first nine months of 2005 was 37.2% of pre-tax income compared to a rate of 37.0% for the same period in 2004. During the first nine months of 2004, we reduced previously accrued income taxes as a result of the favorable resolution of certain tax issues upon the closing of open tax years, thus lowering the effective tax rate.
As a result of the foregoing factors, net income increased by $8.4 million, or 34.6%, to $32.7 million for the first nine months of 2005, compared to $24.3 million for the same period in 2004.
Liquidity and Capital Resources
We have historically financed our 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 $33.8 million for the nine months ended September 30, 2005, compared with $26.7 million in the same period of 2004.
Net cash provided by investing activities was approximately $15.9 million for the nine months ended September 30, 2005 compared with $24.9 million used in investing activities during the same period of 2004. Investing activities consisted primarily of the purchase and sale or maturities of available-for-sale securities, the acquisition of certain assets of USX and the purchase of operating equipment and management information systems during the nine months ended September 30, 2005.
Net cash used in financing activities totaled approximately $49.7 million for the nine months ended September 30, 2005 compared with approximately $5.0 million for the same period of 2004. Financing activities included the repurchase of our common stock, the repayment of capital leases, the payment of dividends, proceeds received from the exercise of stock options and common stock issued under the employee stock purchase plan. In 2005, we used approximately $49.0 million to repurchase our common stock while we received $3.7 million from the exercise of stock options.
Our credit facility consists of a working capital line of credit. As long as we comply with the financial covenants and ratios, the credit facility permits us to borrow up to $20.0 million less the amount of any outstanding letters of credit. Interest rates for advances under the facility vary based on how our performance measures against covenants related to total indebtedness, cash flows, results of operations and other ratios. The facility bears interest at LIBOR plus 1.0% to 1.9%, expires in April 2007 and is unsecured. At September 30, 2005, we had $1.4 million outstanding under the line of credit facility and had utilized $4.3 million of availability for outstanding letters of credit. We were in compliance with the financial covenants and ratios under the credit facility at September 30, 2005.
On July 25, 2002, we announced that our Board of Directors approved a stock repurchase program for up to 3.0 million shares of our common stock. Since inception, we paid approximately $72.5 million for the repurchased shares of our common stock for an average purchase price of $24.17 per share. We funded the repurchases of our common stock from cash, available-for-sale securities and cash generated from operating activities. We repurchased 658,547 of our shares during the third quarter of 2005 and a total of 1,605,900 for the nine months ended September 30, 2005, thus completing the authorized repurchase program.
14
On February 15, 2005, our Board of Directors declared a three-for-two stock split of common stock to be effected in the form of a stock dividend to shareholders of record as of March 18, 2005. Common stock issued and additional paid-in capital have been restated to reflect the split 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 split.
During the three months ended March 31, 2005, June 30, 2005 and September 30, 2005, dividends of $0.06 per share were declared on shares of common stock then outstanding. The quarterly dividends were paid on April 18, 2005, June 3, 2005 and September 2, 2005. We had never declared a dividend prior to February 15, 2005. Subsequent to September 30, 2005, we declared a $0.06 per share dividend that will be paid in the first quarter of 2006. We expect to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.
Management believes that our available cash, investments, expected cash generated from future operations and borrowings under available credit facilities will be sufficient to satisfy our anticipated cash needs for at least the next twelve months.
Forward-Looking Statements
This report contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition and relate to future events or our future financial performance. Some forward-looking statements may be identified by use of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,” “projects” or “expects.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The following is a list of factors, among others, that could cause actual results to differ materially from those contemplated by the forward-looking statements: economic factors such as recessions, inflation, higher interest rates and downturns in customer business cycles, our inability to maintain our historical growth rate because of a decreased volume of freight moving through our network or decreased average revenue per pound of freight moving through our network, increasing competition and pricing pressure, surplus inventories, loss of a major customer, the creditworthiness of our customers and their ability to pay for services rendered, our ability to secure terminal facilities in desirable locations at reasonable rates, the inability of our information systems to handle an increased volume of freight moving through our network, changes in fuel prices, claims for property damage, personal injuries or workers’ compensation, employment matters including rising health care costs, enforcement of and changes in governmental regulations, environmental and tax matters, the handling of hazardous materials, the availability and compensation of qualified independent owner-operators and freight handlers needed to serve our transportation needs and our inability to successfully integrate acquisitions. As a result of the foregoing, no assurance can be given as to future financial condition, cash flows or results of operations. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Our exposure to market risk related to our remaining outstanding debt and available-for-sale securities is not significant and has not changed materially since December 31, 2004.
Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that we are able to collect the information required to be disclosed in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.
Changes in Internal Controls
There were no changes in our internal control over financial reporting during the third quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
From time to time, we are a party to ordinary, routine litigation incidental to and arising in the normal course of our business, most of which involve claims for personal injury, property damage related to the transportation and handling of freight, or workers’ compensation. We do not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations.
The following table provides information with respect to purchases we made of shares of our common stock during each month in the quarter ended September 30, 2005:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Number of Shares that May Yet Be Purchased Under the Program (1)
July 1-31, 2005
36,700
28.38
2,378,153
621,847
August 1-31, 2005
325,600
33.70
2,703,753
296,247
September 1-30, 2005
35.76
3,000,000
Total
658,547
34.33
(1)
On July 25, 2002, we announced that our Board of Directors approved a stock repurchase program for up to 3.0 million shares of our common stock.
Not Applicable
Item 6. Exhibits
In accordance with SEC Release No. 33-8212, Exhibits 32.1 and 32.2 are to be treated as “accompanying” this report rather than “filed” as part of the report.
3.1
Restated Charter of the registrant (incorporated herein by reference to Exhibit 3 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 28, 1999 (File No. 0-22490))
3.2
Amended and Restated Bylaws of the registrant (incorporated herein by reference to Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, filed with the Securities and Exchange Commission on November 2, 2004 (File No. 0-22490))
Form of Landair Services, Inc. Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on September 27, 1993 (File No. 0-22490))
4.2
Form of Forward Air Corporation Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, filed with the Securities and Exchange Commission on November 16, 1998 (File No. 0-22490))
4.3
Rights Agreement, dated May 18, 1999, between the registrant and SunTrust Bank, Atlanta, N.A., including the Form of Rights Certificate (Exhibit A) and the Form of Summary of Rights (Exhibit B) (incorporated herein by reference to Exhibit 4 to the registrant’s Current Report on Form 8-K filed with the Commission on May 28, 1999 (File No. 0-22490))
31.1
Certification Pursuant to 15 U.S.C. Section 10A, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Bruce A. Campbell, President and Chief Executive Officer of Forward Air Corporation
31.2
Certification Pursuant to 15 U.S.C. Section 10A, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Andrew C. Clarke, Chief Financial Officer, Senior Vice President and Treasurer of Forward Air Corporation
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Bruce A. Campbell, President and Chief Executive Officer of Forward Air Corporation
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Andrew C. Clarke, Chief Financial Officer, Senior Vice President and Treasurer of Forward Air Corporation
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.
Date: November 7, 2005
By:
/s/ Andrew C. Clarke
Andrew C. Clarke Chief Financial Officer and Senior Vice President
EXHIBIT INDEX
No.
Exhibit