Forward Air Corp (Delaware) (FWRD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forward Air Corporation's second quarter earnings conference call. My name is Jeremy, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS.)

I would now like to turn the call over to your host, Ms. [Sandy Underwood], Assistant Corporate Secretary and Director of Shareholder Services. You may proceed.

Good morning. Thank you for joining us. Before we begin, I'd like to point out that both our press release and this call are accessible on the Investor Relations Section of our website at forwardair.com.

With us this morning are our Chairman, President, and CEO, Bruce Campbell, and our CFO, Rodney Bell.

By now, you should have received our press release announcing our second quarter 2007 results, which we furnished to the SEC on Form 8-K and on the wire yesterday after market close.

Please be aware that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others regarding the Company's expected future financial performance.

For this purpose, any statements made during the call that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "believes, anticipates, plans, expects," and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that these statements may be affected by the important factors, among others set forth in our filings with the Securities & Exchange Commission and in the press release issued yesterday, and consequently actual operations and results may differ materially from the results discussed in the forward-looking statements.

The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

And, now, I'll turn the call over to our Chairman, President, and CEO, Bruce Campbell.

Thank you, and good morning. Welcome to the Forward Air's second quarter conference call. In spite of a very challenging freight environment and the most difficult quarterly comparison we have ever faced the Forward Air Team performed well during the second quarter. I would like to touch on a few highlights.

First, after a dismal network purchased transportation performance in the first quarter our entire Team worked diligently to improve this critical measurement and were most successful, reducing our spend to a more normalized 38.5% of revenues.

Secondly, we continued to make significant progress in each of our four initiatives, which comprise our completing the model strategy. Once again, our truckload brokerage led the way with over 35% revenue growth.

And, finally, we are most pleased to complete the purchase of USA Carriers, a premiere full distributor. This purchase allows us to gain an important operating platform in this unique transportation segment, one which we feel will allow us significant future growth opportunities. We are most pleased to have this team of professionals join us and share a bright future with us.

I would not -- pardon me -- I will now like to turn the program over to Rodney Bell, our CFO, for his comments.

Thank you, Bruce, and thank you, all, for joining us. After my comments we will open the lines for your questions.

Financial results for the second quarter are as follows. Operating revenue increased $6.3 million or 7.3% to $93.1 million from $86.8 million in 2006. Traditional linehaul revenue increased 4.3 or $3.2 million from $74.0 million to $77.2 million, 2% of that increase was attributable to tonnage growth, 2% came from our Forward Air Complete pickup and delivery product, and the balance was due to better pricing. Average shipment size for the quarter declined 3% versus 2006, while shipments for the quarter were actually up 5%. Logistics revenue, which is primarily our truckload brokerage business, increased 35% from $7.9 million to $10.7 million. and other revenue increased 6.1% to $5.2 million.

Purchased transportation as a percentage of revenue for our airport-to-airport network was 38.5% compared to 38.2% in 2006. As Bruce mentioned, we're very pleased with the excellent job our people did getting that cost back into line after the first quarter.

Purchased transportation for logistics revenue was 76.6% of logistics revenue compared to 70.9% in 2006. The percentage increase in logistics was due to utilizing more costly outside care capacity to cover the increase in our truckload brokerage business, as well as the impact of some lower yielding loads that provide balance to our airport-to-airport network.

Overall PT as a percentage of revenue was 42.3% versus 40.5%. As anticipated, the change in our revenue mix as a result of our previously announced strategic initiatives result in reduced profitability due to a higher purchased transportation component, primarily from our truckload brokerage and to a lesser degree from Forward Air Complete.

Income from operations was $18.3 million compared to $19.8 million last year or a $1.5 million decline. As a percentage of revenue, income from operations was 19.7% compared to 22.8% in Q2 of '06, again, which Bruce mentioned was the toughest operating comp in the Company's history.

Net income for the period was $11.5 million, $1.5 million shy of the $13 million posted in 2006. In addition to the impact of the shift in business mix, the quarter was also negatively impacted by an insurance adjustment, as well as a change in our tax rate.

As previously stated in our press release, as a result of an actuarial review we adjusted our self- insurance accruals by approximately $1 million or $0.02 per share. Due to changes brought on by FIN 48, our tax rate changed from 36.9% to 38.8%. We anticipate a 38.4% tax rate going forward. This resulted in approximately $400,000 of additional tax expense and approximately $0.01 per share as compared to 2006.

Fully diluted EPS for the second quarter was $0.38 compared to $0.41 in 2006 without regard to the two items previously mentioned. Other relevant operating statistics are total assets at the end of the quarter were $200 million compared to $213 million at yearend. Cash flow from operations was $14.8 million for the quarter and YTD $25.2 million. Cash and short-term investments decreased $26.6 million to $20.9 million at quarter end as a result of funding our Atlanta Facility for approximately $14 million and $23.7 million we spent repurchasing Forward Air stock. We repurchased 737,000 shares for the quarter at an average price of just over $32.00 per share. 634,000 shares remain from the 2005 repurchase plan.

Finally, guidance for the third quarter is as follows: 6 to 10% revenue growth and EPS in a $0.40 to $0.44 per share range, that's compared to $0.41 per share last year in the third quarter.

Comments on the acquisition, we anticipate closing on USA Carriers next week in an asset purchase for $12.5 million. We are not anticipating or planning for any impact, positive or negative, on our earnings for the balance of the year. We are currently planning on accounting for USAC as its own operating segment.

Thank you for joining us, and I will now turn the call over to the Operator for your questions.

(OPERATOR INSTRUCTIONS.)

And your first question comes from the line of John Barnes with BB&T Capital Markets. You may proceed.

Good morning, Bruce.

Hey, John.

Hey, nice quarter, guys. Just as you look out already kind of, you know, your feel on third quarter volumes, you know, how July has gotten started and your guidance that you're providing and that 6% to 10% revenue growth, I mean are you, you know, are you looking for any sizable increase in --in peak season or, Bruce, what's your thoughts on the economy right now? Are you kind of predicting more of the same?

My thoughts are I'll listen to you because we don't have a clue. You know, we're having good weeks and bad weeks. What I would call becoming, unfortunately, somewhat typical. And how to anticipate the peak this year, you know, and what will it do, we have no idea. We're -- we go through a planning session every year to prepare for the peak. We have done that. We're hoping it occurs, but certainly we're not spending a lot of money anticipating that it will occur in a big way.

Okay. All right. Do you feel like -- I mean given that outlook and just the uncertainty, you know, do you feel like you're completely right sized at this point with the airport-to-airport network?

We do, we do.

Okay. So lanes are kind of in balance, no need to take down anything? You feel like --

Actually, you know, our people did a great job with that in the second quarter. Some of the lanes that were no longer performing the way we wanted, and you see the results, they did a great job. But we've got it positioned, you know, unless there is something dramatic that would occur in the economy in a negative manner, we think we have it positioned perfectly right now, and -- but that's an ongoing process for us.

Okay. Now, let me ask you the opposite. You know, one of your, you know, competitors has announced, you know, this formal, strategic review process which I'm always inclined to believe in their situation means potential failures on the horizon. Is your network prepared to see an influx of business if a competitor left the marketplace?

Yes.

Okay. So you could handle it relatively easily?

Yes.

Okay. Let's see -- looking at your truck brokerage business, can you just remind us, you know, what is setting you apart? And there are a lot of companies that I follow that are reporting pretty good growth in startup truck brokerage operations -- what is it that sets your product or your ability apart? Is it, you know, are you focused on more your traditional type of freights or are you playing a more, you know, nichey role in truck brokerage, or are you out there competing with some of these other startup operations?

Actually, John, we have two focuses. One is we -- we're after expedited truckload brokerage, so we don't want to deal with hauling dog food unless it needs to be expedited. So that's the number one focus. The number two focus is how do we balance our current LTL or airport-to-airport network.

An example of that is out of LA we may close 50 loads this Friday night going eastbound, there's no way we can cover that in the normal LTL network because we simply can't put enough trucks out there for the weekend. So we sell to that, and by that we go out and find specific customers who have specific loads going anywhere from the east coast or the Midwest to the west, and we take those loads to the west, deliver them, and then we have our equipment positioned to pull the LTL back.

We do not make as much money on those loads going west for -- compared to what we make on the LTL side for obvious reasons. But what it does do is it allows us to pull that load off the west coast in Los Angeles for around $1.00 a mile as opposed to paying an outside carrier $1.50. So it's significant to us. It allows us a growth opportunity and it allows us a cost containment opportunity.

Very good. Okay. In terms of the insurance adjustment, Rodney, could you give us just a little bit more color? I mean what exactly happened there? I mean is it --

Sure.

-- just over the -- number one, how often do you go through this actuarial review? And then in the period between reviews what exactly happened that would cause a million dollar adjustment?

That's a fair question, John. The lion's share of that adjustment came -- what -- jumping back to the first part of your question, we do that biannually. And we've always done that on auto liability, but we had a little bit of a different process in work comp. We started looking at yearend with the help of our auditors, looking at ways to refine that, and we came to the conclusion that we needed to do an actuarial study on that. And there were some, simply some development of some past sins that -- that surprised everybody, quite frankly, so there's going to continue to be actuarial studies, there'll continue to be tweaking up and down. We've had it down with the auto liability just as often as we had up, but it won't be in the, you know, hopefully in the magnitude that you'd be now. I would never say never, but I don't think it'll be in the magnitude that we've seen this quarter.

Okay. And then, lastly, Bruce, in terms of your balance sheet condition, number one, I would assume given your current cash position and balance sheet condition that you're making the acquisition with cash?

Correct.

Okay. And this is one of the lower cash balances that I remember for you guys in awhile, and I'm not complaining, I mean the [knock] has always been use of cash for you guys, and I think you're doing a good job of that. But, you know, if you saw another handful of these kind of tuck-in deals that are out there are we going to see -- are we potentially going to see debt on the balance sheet on a go-forward basis?

You know, I think it all depends on the opportunity, John. It could be a small tuck-in or it could be a large, strategically important acquisition for us, and you would see debt at that point.

Okay. And does the current balance sheet, you know, give the current cash position in any way cause you to reevaluate your share repurchase authorization that's left? And any further -- are you kind of shifting your focus away from that and more towards looking at these acquisitions again?

Well, our focus is going to be twofold. One is, again, we like making good, strategic acquisitions. The problem, as you'll recall, is in the past few years that's been difficult to do, but we have continued and we will continue. On the other hand, it's an ongoing item for the Board to consider additional repurchases. We currently have just about exhausted our allocation for repurchases, and that will be a Board item next week for us to continue to speak to. We like to buy opportunistically, as we have in the past. We think that's been a great investment, both for us and for our shareholders, and we'll continue to do that on an opportunistic basis.

Very good. Guys, nice quarter. Thanks for your time, Bruce.

Thanks, John.

And your next question comes from the line of Brannon Cook of JP Morgan. You may proceed.

Good morning.

Good morning.

I had a question, a little more color on the USA Carriers acquisition. It sounds like kind of entering a new market for you guys. Could you talk about your plans in that market, is that an area you think you can grow and become significantly larger? And, you know, should we think about you doing that through organic means from here or could we look for additional acquisitions?

Great questions. We -- a number of different [tacts] here. First, we, in fact, think we can grow it and, hopefully, can grow it fairly quickly. They have a good team. They have provided us with a great platform to start in this business. The beauty of the business, for those of you who don't know pull distribution, is it primarily moves from a distribution or a point of manufacturing to be a truckload, all the way to the furthest destination where it is then broken down and distributed throughout the city where they have adequate density. And what that basically does is take 15 LTL shipments and convert them to a truckload shipment for the longest portion of their transportation, and then it becomes LTL. So there's significant savings to the shipper and there are also significant service improvements in most cases.

All of that having been said, we think that's the way the market is going. We think we're going to see more and more of that in the future, and we believe that we can build this and build it, hopefully, fairly quickly. If we do it organically or via other acquisitions will simply depend on what our opportunities are there. We think we now have both of those avenues open and we would consider doing it either way.

Brannon, it's Rodney, if I could jump in. You made an important point, this is a different business than we've been in in the past, and I just would be remiss if I didn't mention we're very -- we continue to be very cognizant of channel conflicts with our existing customer base and we'll be vigilant not to step on the toes of the folks that brought us this far.

Okay. That's helpful. And just following up on that, could you maybe talk a bit about where the margins are in that business? I assume they're -- they're below where your typical airport-to-airport business is, and where you think you can get those margins to over time?

Brannon, you're right, those margins are less than what we have in the airport-to-airport business. The, you know, we've done some work on that. Obviously, when we valued the company and some pro forma stuff, the problem is it was privately held, and with small privately held companies there's a lot of question marks as to just how much you can take out.

We think there's a lot of opportunity there. We believe over time that we can get this to margins in the double digits. It's not there today so we're going to be spending the next several weeks really digging in and evaluating and then -- I don't like to use the S word, but I'll say it anyway, is the synergies that are there with our existing business, because this does play into what we do with Forward Air Complete, what we do with truckload brokerage, our value added handling, so -- and leveraging facilities, as well. So there's a ton of opportunity but it's going to take us a little while to really understand and realize that.

Okay. And then just a question on the competitive dynamics in the marketplace. It sounds like there's a potentially good opportunity out there with a competitor in potential financial trouble. Could you talk about the broader competitive landscape and how you see things? And how competitors are responding to what continues to be kind of a soft freight environment? Are you seeing more discounting out there by your competitors? I know a lot of times you say you kind of just focus on doing your own thing and focus on the higher service and don't discount on price as much, but could you give a little color around that?

It has -- probably the discounting has increased -- it's exactly what you would think when you have poorly run companies who can't make a profit. Their only way to handle that is to cut rates. You know, they cut service, they cut rates, they cut people, and they just overall run not good businesses, and that applies across the board on the major competitors that we have today. Now, you know my true feelings. And the way to deal with that is to cut prices, which is really stupid.

So we're dealing with that. As you said earlier, we don't -- we really don't look back and say, "Gee, we're going to match this irrational rate." We try to continue to provide a high level of service. We continue to provide information technology. We continue to provide the people side of the business and don't get worried about just providing low, irrational rates.

Okay. And just a final question, could you update us where share count was at the end of the quarter?

Brannon, I don't have that in front of me.

Okay. I'll follow-up.

We're remote -- Mike, do you know what that is? Okay. He can't speak. I apologize. I'll get back with you on that.

Thanks, guys.

Thank you.

And your next question is from the line of Jon Langenfeld with Robert W. Baird. You may proceed.

Good morning, gentlemen.

Hi, Jon.

Rodney, first off on the stats, the stat sheet, can you just clarify for me the average system pounds per week, does that include Complete, or not?

It does not include Complete.

Does not, okay. Great. And then if you look at just that portion of the business related to linehaul and leaving Complete out of it for a minute, how did that trend in the quarter and kind of the expectations I guess here into July, as well?

You know, it trended up -- I have that, too, Jon. It's tough doing these remotely. In April it -- tonnage was up, the latter part of April, into May, the first couple of weeks of June, and then we saw very similar but to a lesser degree what we had at the end of the first quarter of May or in March where it's normally strong, it went negative in the first quarter, it actually went to pretty well flat the second, the second half of June.

Okay. And then into July?

Into July, just like Bruce said, really kind of spotty, some positive days, negative days.

Okay.

But, you know, July is notorious for being that way.

Yes, absolutely. Now, on the cost side, the purchased transportation side, it looks like that's back under control relative to where it was in the first quarter, so did the experience in the first quarter better prepare you for what you saw there at the end of June? It must have, I'm assuming?

Yes, correct, really we were positioned not to have that, as we say in east Tennessee, hit us up side of the head.

Got it, got it. Okay. And then switching over to the acquisition for a moment, can you talk about what the growth trajectory of this Company has been on the top line?

It's been in the low single digit -- or I'm sorry -- the low double digits.

And how does it react, I mean with the economy and the freight weakening, is it small enough it's been growing through it or has it felt the softer economy?

It's been growing through it and it's been handling the soft times okay.

Okay. And then moving forward, would the thought be that given your, you know, given your capabilities and some of your indirect relationships that you would be able to grow that faster than the Company was as a standalone?

We think so. The exciting things -- thing is we've been talking not only to their people but, as well as to their customer base, is with our resources we really think we can crank this thing up.

Okay. And I think you've actually won some business in this area recently, independent of this acquisition, you know, so it sounds like your sales effort has already started to focus on these types of engagements; is that correct?

That is.

Okay. All right. Good. And then, lastly, on the CapEx side, are we still in the $50 million range this year? And then if we look out to '08 is that -- does that normalize back to the sub $10 million range?

Yes, but let me preface my answer with a caveat that we're not real sure how our Dallas Facility is going to shake out, how much expense will fall into '07 and '08. We're having some challenges there. Right now, I would anticipate CapEx for the balance of the year to be $8 million to $10 million outside of Dallas and $8 million to $10 million in the coming years outside of Dallas.

Okay. And then anything else on the horizon that you look at, whether it's related to the [pool] distribution or otherwise that would imply a higher CapEx potential down the road?

No, not really. Not materially, anyway.

Got it. Okay. Thanks a lot, guys.

Thank you.

And your next question is from the line of David Ross with Stifel Nicolaus. You may proceed.

Good morning, Bruce. Good morning, Rodney.

Hi, David.

Just another question on the acquisition. Is this an asset light acquisition, at all?

Basically, yes. The only assets they have are limited -- I shouldn't say limited -- a number of city units, pickup and delivery, primarily straight trucks. No trailers, there are very few trailers, and no buildings.

Okay. They have 11 facilities, though?

Yes.

Are you planning to keep those?

We will initially, all 11 facilities, and they are leased facilities.

Okay. Also, can you give us an update I guess on the other growth segments besides brokerage, you know, the airline, road feeder service, the handling?

Yes, the Forward Air Complete continues to show good growth, continues to gain traction, and we like the way we've positioned that. And if you think about it strategically down the road, may be helpful in this acquisition because of the delivery component that it provides.

Our value added handling continues to gain strength. We should be able to announce a deal in the next few weeks that will help significantly in the southeast. And then our airline road feeder has made some great strides. They have two things working against them. One is the airline business, in general, or air cargo business in general is soft, so the business that we've traditionally handled over the past years is just a little bit lighter, as you might expect, than it has been in the past.

And then on top of that they have to go through the RFQ process with many of the airlines, so their process -- and we expected this -- is just going to be a little bit slower, but they've made great strides, they had a major win two weeks ago on the west coast that's really helped us with our balance out there. So a lot of positives going on.

Basically, in each of the initiatives, David, we like where we're positioned, we think they're going to add a lot to us as we go forward.

So are they all right now, I guess, where you thought they would be when you set out the growth targets maybe 6 to 12 months ago?

They are. The one that's surprising, and we've talked about it before, is truckload brokerage. I mean it continues to do really well and that's great, and we think it has even a bigger future. But so far it's the one that's surprised us.

And back to USA Carriers real quick. Is the Management Team at USA staying in place?

There were two owners, both of them excellent people. One will go ahead and retire, and the other will -- has stayed on, has accepted a position of sales leadership for the Company, and so we're excited to have him onboard. And then the balance of the people, the terminal managers, region managers in the field, have all -- we just had them in here to Atlanta yesterday and they're all staying on. So we think it's going to be a very smooth transition. They have excellent people, good backgrounds, professionals, and we're excited to have them onboard.

And then on the sales side, I guess, also, the salespeople are going to stick around and are the Forward Air salespeople going to be soon trained on the pool distribution product, as well?

Initially there will be separation there, and we will not have cross selling going on. We need to get our arms around USA Carriers and get it positioned the way we want it, and then we'll make strategic decisions as we go forward.

Okay. Thank you very much.

Thank you.

And your next question is from the line of Alex Brand with Stephens. You may proceed.

Hey, guys.

Hey, Alex.

Bruce, do you have any sort of guess as to why all of a sudden, you know, two of your best freight months of the year, March and June, just suddenly the last half is not there? I mean that at the margin must be a pretty meaningful impact to your results?

Yes, we've had, as you might imagine, a lot of discussions about that. Number one, I do believe that the market is softer, as everybody has talked about. Number two, I think when the market gets softer there's less panic at the end of the quarter that you have during a more busy quarter, if you will, so you don't see those big upticks. And then, thirdly, there's a lot of truckload capacity out there, so a shipment that would normally be a 5,000 pound LTL shipment may very well be running on a truckload, because they'll price it low enough to pull it out of our network or FedEx' network or anybody's network and run it as a truckload. The economics are there for that to happen, and we firmly believe it is happening. So I think between those three areas that's where we're seeing the softness.

Okay. And I apologize if I missed it, but did you mention what your weight per shipment trends were versus maybe what the shipment growth trends were?

Yes, our shipment growth was actually up over 5%. Our weight per shipment continues on about a 50 pound per shipment decline, and we've experienced that for probably this is the third quarter that --

Pardon me, it was actually down 23% or 23 pounds or 3.2%.

Yes. And that's about the third quarter in a row, if I recall correctly, that we've experienced that.

Okay. And in terms of, you know, your Atlanta Facility just opened, you're working on some others, is there a real financial impact that comes out of that in the coming years or is this really that the impact is that you can just handle more business more efficiently as you grow?

There's some financial, positive financial impact there in the coming years, as well, Alex.

Okay. That's what I thought.

The biggest negative right now is the move out, what we call move out expense, and that has been significant, both in Chicago, here, we're in Atlanta, pardon me. And that's been a big hit on us, but that's part of making a move. We think we've made the right decisions. We think in the long term that not only do we have more room and more capabilities as a result of the moves, but we probably have a better economic position than we've ever had.

Okay. Great. I appreciate it, guys.

How do you feel?

Getting there.

Good.

Thank you.

Thank you.

Your next question is from the line of David Campbell with Thompson, Davis & Co. You may proceed.

Yes, good morning. Thanks. You know, USA Carriers are -- is not going to add to your earnings this year, as you said. Why is that? I mean it's not -- it doesn't sound like there's a lot of integration expenses because you're -- you said you're going to operate it as a continuing company, as a continuing separate operation?

David, it's Rodney. As you might imagine, with the size of this deal and the lower margins it could impact us slightly positively but it wouldn't be a meaningful number from an EPS perspective. It -- the Company is profitable today, it's -- we're probably being a little bit conservative when we say earnings, earnings neutral, but even if we came out it wouldn't be a meaningful number.

And your strategy for making it meaningful next year? I assume it will be accretive in 2008, although you haven't said so?

Yes, it will be. And it's, again, we've got some work to do to -- this is a very quick process but it's -- we like the platform and there's a lot of potential there, we just need to shake the tree and figure out how much potential there is.

Now what is the size, the -- do you have any idea of what the size of this overall market is for that specific service that this Company provides?

You know, it depends on who you talk to. We've seen numbers as high as the -- correct me if I'm wrong, Bruce, $5 billion, was that? In the range of $5 billion as far as the market.

Uh-huh. So it's a potentially -- assuming you can get synergies going, I assume there are synergies with your Forward Air Complete product, that's -- there's some synergies there, along with I guess with some of your truckload brokerage business; is that correct?

That's correct, and it's a very fragmented market, and we see some potential for both organic growth as well as growth from consolidation.

Uh-huh. And earlier on you mentioned the costs of -- in the logistics costs, purchased transportation costs, I guess you were referring to the problem of putting freight on the westbound trucks so that you can get more capacity on the west coast; is that what you were referring to?

There's two things going on there, David. The bigger factor is as we've grown this proportionately we're putting more, we're running more miles with outside carriers as opposed to our own owner/operators, as you would expect. The second thing, to a lesser degree, is we're willing to take a lesser yielding load to the west coast, for example, if it can position us to be able to bring LTL freight back in our system, in our network, our airport-to-airport network to provide balance, so it's those two factors but much more the first than the second.

And the principal cost impact is in this other purchased transportation line that you started in this quarter?

It is not, it's in the logistics line.

It's in the logistics line. Uh-huh. Right. So this other purchased transportation cost line is associated with logistics, linehaul, or what is it associated with?

It's a catchall, it's really neither, it's other, various transportation costs, whether it be inter-line type expense, that type of thing, it's not a large number, but it is somewhat of a catchall.

It's not all -- it's not appropriate to put it in either one of those, either one of those?

Yes, correct.

And I assume that the extraordinary insurance accruals was in your other costs, other operating expense line?

it was primarily in the salaries, wages, and benefits line item. That's where we -- that's where work comp expense rolls up and to a lesser degree in insurance and claims.

Okay. So the salaries, wages, and benefits included the $1 million extraordinary charge?

Right at $700,000 of that, and the balance, the $200,000 or $300,000 -- I think $300,000 is in insurance and claims.

Uh-huh, uh-huh. Okay. So the solution on the -- I mean you had a solution for the purchased transportation costs in the first quarter, and thank you very much, you did a great job of fixing that. But what is the solution on the -- this other problem of higher costs, the -- incurred by the -- doing more miles with outside carriers?

It's a fact of life going forward, quite frankly, David. That's when we rolled out our strategic initiatives we stated that to be able to sustain double-digit growth and that's our goal that the giveaway is call it a couple hundred basis points on the PT line item. But the good news is from the standpoint of return on invested capital, you know, those are not our assets when we get outside power, so there's no capital investment, it's -- it still makes a lot of sense, it's still good margins, it's still good business.

Uh-huh. And your revenue growth forecast, 6% to 10% for the third quarter, does that include USAC?

It does not.

But USA we'll see in there for two months; right?

It'll be in there for two months in the third quarter and, as I mentioned earlier, we will be accounting for that in a separate segment, not to muddy the waters on our existing business.

Uh-huh, uh-huh. So that'll be a separate line item in revenues?

It'll be a separate segment.

Right. But the expenses will be all mixed in with the other expenses of the Company?

What you'll see, it'll be like accounting for two separate companies, David, with a rollup and a consolidation, so the consolidation will have it in there, but you can drill-down a level and see -- Forward Air, as you know it today, as well as USA Carriers in a separate P&L.

Uh-huh. Okay, okay. So that'll be quite obvious what it did or didn't do for our profits?

Correct.

And do you have any comment on the fuel surcharge reduction by FedEx? It announced yesterday that, obviously -- is it going to have any impact on your Company?

No.

No impact; okay?

No impact.

And have you seen any of Kitty Hawk's business rolling over into -- in the last three months or can't you tell?

It's practically impossible, and we serve the same customers, and there's no way we can tell you definitely if it is their business or not.

Uh-huh, uh-huh. Right. Okay. And what about the outlook for your truckload brokerage business? You mentioned it was doing very well. I assume that's the principal reason for the growth in the logistics line; is that correct?

It is.

And do you expect that to continue?

We expect and have budgeted growth of -- for the balance of the year and beyond in the 25 to 30% range, David.

Uh-huh, uh-huh. Good. And is USAC a seasonal company, like most trucking companies? That is does it have more business in the fourth quarter than the third, or third than the second?

It does. It's --

The first three quarters are typically light with a ramping up starting in the third quarter and their peak season is the fourth quarter.

Uh-huh, uh-huh, uh-huh. Right. Okay. Well, congratulations. Keep up the good work.

Thanks.

And your next question is from the line of Todd Fowler with Keybanc Capital Markets. You may go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

Hey, just a couple of quick questions I guess here. Bruce, can you talk a little bit about, you know, looking at the shipment count here in the quarter, how much of that is attributable to the network expansion. I think that you guys moved your LA terminal here in the quarter, can you talk a little bit about, I guess, how the network expansion is going and how much you would attribute to shipment count, just the larger facilities versus customer wins and that sort of thing?

Yes, actually, I don't think we would attribute anything to the expansion. We have Chicago up and running today, and we just a few weeks back were able to open this facility in Atlanta for business. LA, hopefully, will move next week so it has not occurred yet, Todd. So none of the expansion, the shipment growth, can be attributed to facilities.

And then what should that do for you going forward, though, looking at LA, looking at Atlanta, you know, how do you think about those as far as contributing for the back half of the year?

Well, we hope it has major contributions for the Company. We've made a big investment. We've positioned our people for not only additional normal Forward Air LTL type of shipments but also for bigger handling opportunities than we've ever had the opportunity to take advantage of in the past. So, hopefully, you're going to see some good numbers there.

Okay. Sounds good. And then, Rodney, just real quickly on this health insurance adjustment, will that impact going forward a higher insurance expense run rate?

It shouldn't, but, you know, as we do actuarial studies, again, Todd, that number is -- it's a little bit of a moving target and, quite frankly, depending on our experience it can go up or down as easily as it went up, but there was, again, a change in methodology of refinement, as you will, so we don't anticipate any movement along the lines of what we experienced in the second quarter.

Okay. So you won't be accruing more on a go-forward basis?

No.

Your expense run rate won't be higher on a go-forward basis than what it's been historically -- the $1 million (inaudible)?

I think that's fair, Todd, yes.

Okay. Good. Thanks a lot, guys.

Thank you.

And, at this time, there are no further questions, except for Edward Wolfe of Bear Stearns.

Hey, guys. Good morning.

Good morning.

Hey, Ed.

Sorry, and I apologize, because there's just three calls at once, so some things that you asked -- if you already asked it I can go back and get the transcript. So I apologize.

Can you talk a little bit about the CapEx and what your plans are, you know, your guidance now for this year and as you look out to next year if we're going to have an above CapEx kind of year again in '08?

Ed, it's Rodney. For the balance of the -- what the difficulty is, we're -- is figuring out where Dallas is going to fall. It's a pay-as-you-go versus pay-at-the-end-of-the-construction. We're having some difficulties, some regulatory issues, if you will, in Dallas right now. We don't know how much of that facility is going to fall into '07 or '08, right now, it looks like the bulk of it, '08. But if you pull Dallas totally out of the mix we've got another call it $8 million in 2007, and from here on out barring any, you know, big changes due to, you know, additional acquisitions or what have you, we're looking at the normal $8 million to $10 million.

So if you say there's another $8 million without Dallas, you did $38.5 million so far plus $8 million, gets you to $46.5 million. I think the guidance was $55 million, so there's about another $10 million from Dallas that would spill into next year? Is that the way to look at it?

That's the way to look at it.

Okay. Bruce, the acquisition that you purchased, I think you've stated, you know, you chose your words carefully, you bought certain assets of the $33 million or whatever. What's the amount of revenue of that, of the assets you bought, what's the run rate of that give or take?

About $32 million, $33 million annually.

Okay. So we should be adding that divided by 4 per quarter or is there some seasonality? How do we think about that?

Actually, their fourth quarter because it's primarily retailer type of business, their fourth quarter tends to get exaggerated, Ed. So, you know, we'll give you better numbers with the third quarter earnings call, but you should anticipate more of the business in the fourth quarter.

Okay. And are you going to report this under other, or which line -- it's not linehaul, I'm guessing, is it logistics or other?

We're going to break this out into its own separate segment, Ed.

Okay. And the margin on it, you said was high single digit, operating margin?

We think we can get to that.

So we should start off where? We should start off flat and then model towards that, or--?

That would be my suggestion.

Okay. In terms of Kitty Hawk, we've been hearing, you know, they very publicly said all -- they're exploring all options, they're running out of money pretty quickly it looks like -- have you seen some business come towards you? And do you get a sense at this point, you know, when you talk to your salespeople that there's some business you really want to target that you can go get in the near term, even if they don't close, just based on their weakness right now?

Again, we have difficulties, as you know, Ed, determining which business was Kitty Hawk's and which isn't. We have had specific examples of where we were able to get business away from them. They probably have specific examples of where they've priced business to get it away from us. You know, what I foresee happening is not a lot of change there until whatever strategic alternative they take, they take, primarily because they're just going to price their way into the business, and we just simply don't go there.

Okay. Bruce, I remember last time Kitty Hawk was -- before they went into bankruptcy several years back, Scott held a conference call and said that you were considering as a Company leasing planes, not owning any planes but as long as you could get your customers to commit to the business, leasing planes for a year and running them through your hub. Is that something you would consider in this scenario that Kitty Hawk closed its air business, and I'm not--?

Not for even three seconds.

Glad to hear that. Just thought I'd throw it out there.

Thank you very much.

Hey, in terms of sequentials, did you go through kind of the quarter in terms of demand from April through June, and then how July feels?

Yes, we did, Ed. It started off, May was stronger than April, and then the first couple weeks of June were relatively strong and then much like the first quarter, the last two weeks, it wasn't as exaggerated as the first quarter but the second quarter it went kind of flat, and then into July it's been a little bit spotty, but July is always a little bit spotty.

So it's kind of typical July seasonality?

Correct.

Okay. And the -- you talked about a $1 million -- I kind of heard this, but I didn't hear your response right before I got on, the million dollar that you put in your response -- in your release as a negative drag on insurance accruals, does that go forward?

It does not.

Okay. So the sense is that's kind of onetime, how you feel about it?

Well, we think it's -- you know, there's always going to be adjustments based on actuarial studies, both up and down, but this particular item is -- is what we consider onetime.

Okay. Thanks, guys. I appreciate it.

Thanks.

And there are now no further questions.

Okay. Operator, if you would have the replay instructions repeated, I think we're good.

I'm sorry?

The replay instructions?

There is no replay for this, sir.

Okay. I think we're done.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.