form10-k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2008
Commission File No. 000-22490
 
FORWARD AIR CORPORATION
(Exact name of registrant as specified in its charter)

Tennessee
 
62-1120025
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
430 Airport Road
   
Greeneville, Tennessee
 
37745
(Address of principal executive offices)
 
(Zip Code)

(423) 636-7000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value
 
The NASDAQ Stock Market LLC
(Title of class)
 
(Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
 
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 þ  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes þ  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting Company o 
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o  No þ

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2008 was approximately $992,342,913 based upon the $34.60 closing price of the stock as reported on The NASDAQ Stock Market LLC on that date. For purposes of this computation, all directors and executive officers of the registrant are assumed to be affiliates. This assumption is not a conclusive determination for purposes other than this calculation.

The number of shares outstanding of the registrant’s common stock, $0.01 par value per share as of February 20, 2009 was 28,941,358.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2009 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
 

 
Table of Contents
     
Forward Air Corporation
     
   
Page
   
Number
Part I.
   
     
Item 1.
3
     
Item 1A.
12
     
Item 1B.
17
     
Item 2.
17
     
Item 3.
17
     
Item 4.
17
     
Part II.
   
     
Item 5.
19
     
Item 6.
21
     
Item 7.
21
     
Item 7A.
41
     
Item 8.
42
     
Item 9.
42
     
Item 9A.
42
     
Item 9B.
44
     
Part III.
   
     
Item 10.
44
     
Item 11.
44
     
Item 12.
44
     
Item 13.
44
     
Item 14.
44
     
Part IV.
   
     
Item 15.
44
     
45
     
F2
     
S1
     
 
 
2

 
Introductory Note

This Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (this “Form 10-K”) contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 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.

Part I
Item 1.

We were formed as a corporation under the laws of the State of Tennessee on October 23, 1981. Our operations can be broadly classified into two principal segments:  Forward Air, Inc. (“Forward Air”) and Forward Air Solutions, Inc. (“FASI”).  
 
Through our Forward Air segment, we are a leading provider of time-definite surface transportation and related logistics services to the North American deferred air freight market. We offer our customers local pick-up and delivery (Forward Air Complete™) and scheduled surface transportation of cargo as a cost-effective, reliable alternative to air transportation. We transport cargo that must be delivered at a specific time but is less time-sensitive than traditional air freight. This type of cargo is frequently referred to in the transportation industry as deferred air freight. We operate our Forward Air segment through a network of terminals located on or near airports in 82 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and 11 regional hubs serving key markets.  We also offer our customers an array of logistics and other services including: expedited truckload brokerage (“TLX”); dedicated fleets; warehousing; customs brokerage; and shipment consolidation, deconsolidation and handling.

Through our Forward Air segment, we market our airport-to-airport services primarily to air freight forwarders, integrated air cargo carriers, and passenger and cargo airlines. To serve this market, we offer customers a very high level of service with a focus on on-time, damage-free deliveries. We serve our customers by locating terminals on or near airports and maintaining regularly scheduled transportation service between major cities. We either receive shipments at our terminals or pick up shipments directly from our customers and transport them by truck (i) directly to the destination terminal; (ii) to our Columbus, Ohio central sorting facility; or (iii) to one of our 11 regional hubs, where they are unloaded, sorted and reloaded. After reloading the shipments, we deliver them to the terminals nearest their destinations and then, if requested by the customer, on to a final designated site. We ship freight directly between terminals when justified by the volume of shipments. During 2008, approximately 22.5% of the freight we handled was for overnight delivery, approximately 60.1% was for delivery within two to three days and the balance was for delivery in four or more days. We generally do not market our airport-to-airport services directly to shippers (where such services might compete with our freight forwarder customers). Also, because we do not place significant size or weight restrictions on airport-to-airport shipments, we generally do not compete directly with integrated air cargo carriers such as United Parcel Service and Federal Express in the overnight delivery of small parcels. In 2008, Forward Air’s five largest customers accounted for approximately 21.6% of Forward Air’s operating revenue and no single customer accounted for more than 10.0% of Forward Air’s operating revenue. 
 
We continue to develop and implement complimentary services to the airport-to-airport network.  Other complimentary services including expedited truckload (TLX); dedicated fleets; local pick-up and delivery; warehousing; customs brokerage; and shipment consolidation, deconsolidation and handling are critical to helping meet the changing needs of our customers and for efficiently using the people and resources of our airport-to-airport network.

Through our FASI segment, which we formed in July 2007 in conjunction with our acquisition of certain assets and liabilities of USA Carriers, Inc. (“USAC), we provide pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States.  Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions.  Our primary customers for pool distribution are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains. We service these customers through a network of terminals and service centers located in 19 cities.  FASI’s two largest customers accounted for approximately 43.9% of FASI’s operating revenue, but revenues from these two customers did not exceed 10.0% of our consolidated revenue.  No other customers accounted for more than 10.0% of FASI’s operating revenue.

3

 
Our Industry

As businesses minimize inventory levels, close local distribution centers, perform manufacturing and assembly operations in multiple locations and distribute their products through multiple channels, they have an increased need for expedited or time definite delivery services. Expedited or time definite shipments are those shipments for which the customer requires delivery the next day or within two to three days, usually by a specified time or within a specified time window.

Shippers with expedited or time definite delivery requirements have four principal alternatives to transport freight: freight forwarders; integrated air cargo carriers; less-than-truckload carriers; full truckload carriers, and passenger and cargo airlines.

Although expedited or time definite freight is often transported by aircraft, freight forwarders and shippers often elect to arrange for its transportation by truck, especially for shipments requiring deferred delivery within two to three days. Generally, the cost of shipping freight, especially heavy freight, by truck is substantially less than shipping by aircraft. We believe there are several trends that are increasing demand for lower-cost truck transportation of expedited air freight. These trends include:

·  
Freight forwarders obtain requests for shipments from customers, make arrangements for transportation of the cargo by a third-party carrier and usually arrange for both delivery from the shipper to the carrier and from the carrier to the recipient.

·  
Integrated air cargo carriers provide pick-up and delivery services primarily using their own fleet of trucks and provide transportation services generally using their own fleet of aircraft.

·  
Less-than-truckload carriers also provide pick-up and delivery services through their own fleet of trucks. These carriers operate terminals where freight is unloaded, sorted and reloaded multiple times in a single shipment. This additional handling increases transit time, handling costs and the likelihood of cargo damage.

·  
Full truckload carriers provide transportation services generally using their own fleet of trucks.  A freight forwarder or shipper must have a shipment of sufficient size to justify the cost of a full truckload.  These cost benefit concerns can inhibit the flexibility often required by freight forwarders or shippers.

·  
Passenger or cargo airlines provide airport-to-airport service, but have limited cargo space and generally accept only shipments weighing less than 150 pounds.

Competitive Advantages

We believe that the following competitive advantages are critical to our success in both our Forward Air and FASI segments:

·  
Focus on Specific Freight Markets. Our Forward Air segment focuses on providing time-definite surface transportation and related logistics services to the deferred air cargo industry.  Our FASI segment focuses on providing high-quality pool distribution services to retailers and nationwide distributors of retail products.  This focused approach enables us to provide a higher level of service in a more cost-effective manner than our competitors.

·  
Expansive Network of Terminals and Sorting Facilities. We have built a network of Forward Air terminals and sorting facilities throughout the United States and Canada located on or near airports. We believe it would be difficult for a competitor to duplicate our Forward Air network without the expertise and strategic facility locations we have acquired and without expending significant capital and management resources. Our expansive Forward Air network enables us to provide regularly scheduled service between most markets with low levels of freight damage or loss, all at rates generally significantly below air freight rates.

Primarily through acquisitions we have created a FASI network of terminals and service centers throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States.  The pool distribution market is very fragmented and our competition primarily consists of regional and local providers.  We believe through our network of FASI terminals and service locations we can offer our pool distribution customers comprehensive, high-quality service across the majority of the continental United States.  

·  
Concentrated Marketing Strategy.  Forward Air provides our deferred air freight services mainly to air freight forwarders, integrated air cargo carriers, and passenger and cargo airlines rather than directly serving shippers. Forward Air does not place significant size or weight restrictions on shipments and, therefore, it does not compete with delivery services such as United Parcel Service and Federal Express in the overnight small parcel market. We believe that Forward Air customers prefer to purchase their transportation services from us because, among other reasons, we generally do not market Forward Air’s services to their shipper customers and, therefore, do not compete directly with them for customers.

FASI provides pool distribution services primarily to regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains.
 
4

 
·  
Superior Service Offerings. Forward Air’s published deferred air freight schedule for transit times with specific cut-off and arrival times generally provides Forward Air customers with the predictability they need. In addition, our network of Forward Air terminals allows us to offer our customers later cut-off times, a higher percentage of direct shipments (which reduces damage and lost time caused by additional sorting and reloading) and shorter delivery times than most of our competitors.

Our network of FASI terminals allows us the opportunity to provide deliveries to a wider range of locations than most pool distribution providers with increased on-time performance.

·  
Flexible Business Model. Rather than owning and operating our own trucks, Forward Air purchases most of its transportation requirements from owner-operators or truckload carriers. This allows Forward Air to respond quickly to changing demands and opportunities in our industry and to generate higher returns on assets because of the lower capital requirements.

Primarily as a result of the structure of our acquisition targets and the nature of pool distribution services, FASI utilizes a higher percentage of Company-employed drivers and Company-owned equipment.  However, as the conditions of individual markets and requirements of our customers allow we are increasing the usage of owner-operators in our pool distribution business.

·  
Comprehensive Logistic and Other Service Offerings. Forward Air offers an array of logistic and other services including: expedited truckload (TLX), pick-up and delivery (Forward Air Complete™), dedicated fleet, warehousing, customs brokerage and shipment consolidation and handling. These services are an essential part of many of our Forward Air customers’ transportation needs and are not offered by many of our competitors.  Forward Air is able to provide these services utilizing existing infrastructure and thereby able to earn additional revenue without incurring significant additional fixed costs.

·  
Leading Technology Platform. We are committed to using information technology to improve our Forward Air and FASI operations.  Through improved information technology, we believe we can increase the volume of freight we handle in our networks, improve visibility of shipment information and reduce our operating costs. Our Forward Air technology allows us to provide our customers with electronic bookings and real-time tracking and tracing of shipments while in our network, complete shipment history, proof of delivery, estimated charges and electronic bill presentment. We continue to enhance our Forward Air systems to permit us and our customers to access vital information through both the Internet and electronic data interchange.  We have continued to invest in information technology for Forward Air to the benefit of our customers and our business processes. The primary example of this development is our Terminal Automation Program (“TAP”), a wireless application utilized in all our Forward Air terminals. The system enables individual operators to perform virtually all data entry from our terminal floor locations. The system provides immediate shipment updates, resulting in increased shipment accuracy and improved data timeliness. The TAP system not only reduces operational manpower, but also improves our on-time performance. Additionally, in order to support our Forward Air Complete service offering, we developed and installed a web-based system, which coordinates activities between our customers, operations personnel and external service providers.

We are committed to developing the same superior level of information technology for FASI.  One of the challenges FASI faces is the integration of many different software applications utilized by not only the companies FASI acquired but our individual customers as well.  Our goal is to create a comprehensive system that will provide our pool distribution customers with the same level of visibility, interactivity and flexibility as experienced by our Forward Air customers.

·  
Strong Balance Sheet and Availability of Funding.  Our asset-light business model and strong market position in the deferred air freight market provides the foundation for operations that produce excellent cash flow from operations even in challenging conditions.  Our strong balance sheet can also be a competitive advantage.  Our competitors, particularly in the pool distribution market, are mainly regional and local operations and may struggle to maintain operations in the current economic environment.  The threat of financial instability may encourage new and existing customers to use a more financially secure transportation provider, such as FASI.
 
5

 
Growth Strategy
 
    Our growth strategy is to take advantage of our competitive strengths in order to increase our profits and shareholder returns. Our “Completing the Model” strategic initiative is designed to facilitate this overall strategy.  The goal of this initiative is to use our airport-to-airport network as the base for which to expand and launch new services that will allow us to grow in any economic environment.  Principal components of our “Completing the Model” strategy include efforts to:

·  
Increase Freight Volume from Existing Customers. Many of our customers currently use Forward Air and FASI for only a portion of their overall transportation needs.  We believe we can increase freight volumes from existing customers by offering more comprehensive services that address all of the customer’s transportation needs, such as Forward Air Complete, our direct to door pick-up and delivery service.  By offering additional services that can be integrated with our existing business we believe we will attract additional business from existing customers.

·  
Develop New Customers. We continue to actively market our Forward Air services to potential new customers, such as international freight forwarders. We believe air freight forwarders may move away from integrated air cargo carriers because those carriers charge higher rates, and away from less-than-truckload carriers because those carriers provide less reliable service and compete for the same customers as do the air freight forwarders.  In addition, we believe Forward Air’s comprehensive North American network and related logistics services are attractive to domestic and international airlines.   Forward Air Complete can also help attract business from new customers who require pick-up and delivery for their shipments.

By expanding our network of FASI terminals, we believe we can attract new customers and new business from existing customers by offering our services across multiple regions of the continental United States.

·  
Improve Efficiency of Our Transportation Network. We constantly seek to improve the efficiency of our airport-to-airport and FASI networks. Regional hubs and direct shuttles improve Forward Air’s efficiency by reducing the number of miles freight must be transported and reducing the number of times freight must be handled and sorted. As the volume of freight between key markets increases, we intend to continue to add direct shuttles. In 2007, we completed the purchase of two new facilities in Chicago, Illinois and Atlanta, Georgia and purchased land and began construction on a new regional terminal in Dallas/Fort Worth, Texas.  Also, in 2006, we completed the expansion of our national hub in Columbus, Ohio.  With these new and expanded facilities, we believe we will have the necessary space to grow our business in key gateway cities and to offer the additional services required by our “Completing the Model” strategy.

We can improve our FASI operations by improving the efficiencies of our daily and weekly routes and the cartons handled per hour on our docks.  We are constantly looking to improve our route efficiencies by consolidating loads and utilizing owner-operators when available.  During 2008, we also began to invest in conveyor systems for our FASI terminals to increase productivity of our cargo handlers.

·  
Expand Logistics and Other Services. We continue to expand our logistics and other services to increase revenue and improve utilization of our Forward Air terminal facilities and labor force. Because of the timing of the arrival and departure of cargo, our Forward Air facilities are under-utilized during certain portions of the day, allowing us to add logistics services without significantly increasing our costs. Therefore, we have added a number of Forward Air logistic services in the past few years, such as TLX (expedited truckload services), dedicated fleet, warehousing, customs brokerage and shipment consolidation and handling services. These services directly benefit our existing customers and increase our ability to attract new customers, particularly those air freight forwarders that cannot justify providing the services directly. These services are not offered by many transportation providers with whom we compete and are attractive to customers who prefer to use one provider for all of their transportation needs.

·  
Expand Pool Distribution Services and Integrate with our Forward Air Services. In addition to increasing our revenue from traditional pool distribution services we are working to integrate our Forward Air and FASI service offerings.  Through this process we are able to offer customers linehaul or truckload services, with handling and sorting at the origin and destination terminal, and final distribution to one or many locations utilizing FASI pool distribution or Forward Air Complete.

·  
Enhance Information Systems. We are committed to the continued development and enhancement of our information systems in ways that will continue to provide us competitive service advantages and increased productivity. We believe our enhanced systems have and will assist us in capitalizing on new business opportunities with existing customers and developing relationships with new customers.
 
6

 
·  
Pursue Strategic Acquisitions. We intend to continue to evaluate acquisitions that can increase our penetration of a geographic area, add new customers, increase freight volume and add new service offerings.  In addition, we expect to explore acquisitions that may enable us to offer additional services.  Since our inception, we have acquired certain assets and liabilities of twelve businesses that met one or more of these criteria. During 2008 and 2007, we acquired certain assets and liabilities of four companies that met these criteria.  

Ø  
In July 2007, we acquired certain assets and liabilities of USAC which provided the base from which we launched our FASI pool distribution services. 

Ø  
In December 2007, we acquired certain assets and liabilities of Black Hawk Freight Services, Inc. (“Black Hawk”) which increased the penetration of our Forward Air airport-to-airport network in the Midwest.

Ø  
In March 2008, we acquired certain assets and liabilities of Pinch Holdings, Inc. and its related company AFTCO Enterprises, Inc. and certain of their respective wholly-owned subsidiaries (“Pinch”).  Pinch was a privately-held provider of pool distribution, airport-to-airport, truckload, custom, and cartage services primarily to the Southwestern continental United States.  This acquisition gave FASI a presence primarily in Texas and strengthens the position of our Forward Air network in the Southwest United States.  

Ø  
In September 2008, we acquired certain assets and liabilities of Service Express, Inc. (“Service Express”).  The acquisition of Service Express, a privately-held provider of pool distribution services, helped us expand FASI’s geographic footprint in the Mid-Atlantic and Southeastern continental United States.  
 
Operations

We operate in two reportable segments, based on differences in the services provided:   Forward Air and FASI.  Through Forward Air we are a leading provider of time-definite transportation and related logistics services to the North American deferred air freight market. Forward Air’s activities can be broadly classified into three categories of services: airport-to-airport, logistics and other.

Through our FASI segment we provide pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States.  Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions.

Forward Air

Airport-to-airport

We receive freight from air freight forwarders, integrated air cargo carriers and passenger and cargo airlines at our terminals, which are located on or near airports in the United States and Canada. We also pick up freight from customers at designated locations via our Forward Air Complete service. We consolidate and transport these shipments by truck through our network to our terminals nearest the ultimate destinations of the shipments. We operate regularly scheduled service to and from each of our terminals through our Columbus, Ohio central sorting facility or through one of our eleven regional hubs. We also operate regularly scheduled shuttle service directly between terminals where the volume of freight warrants bypassing the Columbus, Ohio central sorting facility or a regional hub. When a shipment arrives at our terminal nearest its destination, the customer arranges for the shipment to be picked up and delivered to its final destination, or we, in the alternative, through our Forward Air Complete service, deliver the freight for the customer to its final destination.
 
7

 
Terminals

 Our airport-to-airport network consists of terminals located in the following 82 cities:

City
 
Airport Served
 
City
 
Airport Served
Albany, NY
 
ALB
 
Los Angeles, CA
 
LAX
Albuquerque, NM*
 
ABQ
 
Louisville, KY
 
SDF
Atlanta, GA
 
ATL
 
Memphis, TN
 
MEM
Austin, TX
 
AUS
 
McAllen, TX
 
MFE
Baltimore, MD
 
BWI
 
Miami, FL
 
MIA
Baton Rouge, LA*
 
BTR
 
Milwaukee, WI
 
MKE
Birmingham, AL*
 
BHM
 
Minneapolis, MN
 
MSP
Blountville, TN*
 
TRI
 
Mobile, AL*
 
MOB
Boston, MA
 
BOS
 
Moline, IA
 
MLI
Buffalo, NY
 
BUF
 
Nashville, TN
 
BNA
Burlington, IA
 
BRL
 
Newark, NJ
 
EWR
Cedar Rapids, IA
 
CID
 
Newburgh, NY
 
SWF
Charleston, SC
 
CHS
 
New Orleans, LA
 
MSY
Charlotte, NC
 
CLT
 
New York, NY
 
JFK
Chicago, IL
 
ORD
 
Norfolk, VA
 
ORF
Cincinnati, OH
 
CVG
 
Oklahoma City, OK
 
OKC
Cleveland, OH
 
CLE
 
Omaha, NE
 
OMA
Columbia, SC*
 
CAE
 
Orlando, FL
 
MCO
Columbus, OH
 
CMH
 
Pensacola, FL*
 
PNS
Corpus Christi, TX*
 
CRP
 
Philadelphia, PA
 
PHL
Dallas/Ft. Worth, TX
 
DFW
 
Phoenix, AZ
 
PHX
Dayton, OH*
 
DAY
 
Pittsburgh, PA
 
PIT
Denver, CO
 
DEN
 
Portland, OR
 
PDX
Des Moines, IA
 
DSM
 
Raleigh, NC
 
RDU
Detroit, MI
 
DTW
 
Richmond, VA
 
RIC
El Paso, TX
 
ELP
 
Rochester, NY
 
ROC
Greensboro, NC
 
GSO
 
Sacramento, CA
 
SMF
Greenville, SC
 
GSP
 
Salt Lake City, UT
 
SLC
Hartford, CT
 
BDL
 
San Antonio, TX
 
SAT
Harrisburg, PA
 
MDT
 
San Diego, CA
 
SAN
Houston, TX
 
IAH
 
San Francisco, CA
 
SFO
Huntsville, AL*
 
HSV
 
Seattle, WA
 
SEA
Indianapolis, IN
 
IND
 
St. Louis, MO
 
STL
Jackson, MS*
 
JAN
 
Syracuse, NY
 
SYR
Jacksonville, FL
 
JAX
 
Tampa, FL
 
TPA
Kansas City, MO
 
MCI
 
Toledo, OH*
 
TOL
Knoxville, TN*
 
TYS
 
Tucson, AZ*
 
TUS
Lafayette, LA*
 
LFT
 
Tulsa, OK
 
TUL
Laredo, TX
 
LRD
 
Washington, DC
 
IAD
Las Vegas, NV
 
LAS
 
Montreal, Canada*
 
YUL
Little Rock, AR*
 
LIT
 
Toronto, Canada
 
YYZ

* Denotes an independent agent location.
 
 Independent agents operate 17 of our locations. These locations typically handle lower volumes of freight relative to our company-operated facilities.

8

 
Direct Service and Regional Hubs

We operate direct terminal-to-terminal services and regional overnight service between terminals where justified by freight volumes. We currently provide regional overnight service to many of the markets within our network. Direct service allows us to provide quicker scheduled service at a lower cost because it allows us to minimize out-of-route miles and eliminate the added time and cost of handling the freight at our central or regional hub sorting facilities. Direct shipments also reduce the likelihood of damage because of reduced handling and sorting of the freight. As we continue to increase volume between various terminals, we intend to add other direct services. Where warranted by sufficient volume in a region, we utilize larger terminals as regional sorting hubs, which allow us to bypass our Columbus, Ohio central sorting facility. These regional hubs improve our operating efficiency and enhance customer service. We operate regional hubs in Atlanta, Charlotte, Chicago, Dallas/Ft. Worth, Kansas City, Los Angeles, New Orleans, Newark, Newburgh, Orlando and San Francisco.  

Shipments

The average weekly volume of freight moving through our network was approximately 34.2 million pounds per week in 2008. During 2008, our average shipment weighed approximately 756 pounds and shipment sizes ranged from small boxes weighing only a few pounds to large shipments of several thousand pounds. Although we impose no significant size or weight restrictions, we focus our marketing and price structure on shipments of 200 pounds or more. As a result, we typically do not directly compete with integrated air cargo carriers in the overnight delivery of small parcels. The table below summarizes the average weekly volume of freight moving through our network for each year since 1990.

   
Average Weekly
   
Volume in Pounds
Year
 
(In millions)
1990
  1.2
1991
  1.4
1992
  2.3
1993
  3.8
1994
  7.4
1995
  8.5
1996
  10.5
1997
  12.4
1998
  15.4
1999
  19.4
2000
  24.0
2001
  24.3
2002
  24.5
2003
  25.3
2004
  28.7
2005
  31.2
2006
  32.2
2007
  32.8
2008
  34.2

Logistics and Other Services

Our customers increasingly demand more than the movement of freight from their transportation providers. To meet these demands, we continually seek ways to customize our logistics services and add new services. Logistics and other services increase our profit margins by increasing our revenue without corresponding increases in our fixed costs, as airport-to-airport assets and resources are primarily used to provide the logistics and other services.
 
    Our logistics and other services allow customers to access the following services from a single source:

·  
expedited truckload brokerage, or TLX;

·  
dedicated fleets;

·  
customs brokerage, such as assistance with U.S. Customs and Border Protection (“U.S. Customs”) procedures for both import and export shipments;

·  
warehousing, dock and office space; and

·  
shipment consolidation and handling, such as shipment build-up and break-down and reconsolidation of air or ocean pallets or containers.

9

 
    These services are critical to many of our air freight forwarder customers that do not provide logistics services themselves or that prefer to use one provider for all of their surface transportation needs.

Revenue and purchased transportation for our TLX and dedicated fleet services are largely determined by the number of miles driven.  The table below summarizes the average miles driven per week to support our logistics services since 2003:

 
Average Weekly Miles
Year
(In thousands)
2003
211
2004
259
2005
248
2006
331
2007
529
2008
676

Forward Air Solutions (FASI)

Pool Distribution

Through our FASI segment we provide pool distribution services through a network of terminals and service locations in 19 cities throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States.  Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions.  Our primary customers for this product are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains.

We continue to expand the geographic footprint of our FASI pool distribution business, primarily through acquisitions.  On September 8, 2008, we acquired certain assets and liabilities of Service Express.  The acquisition of Service Express helped us expand our geographic footprint in the Mid-Atlantic and Southeastern continental United States.   On March 17, 2008, we acquired certain assets and liabilities of Pinch.   The acquisition of Pinch’s pool distribution services expanded the geographic footprint of FASI into Texas and the Southwestern United States.  During 2008, we added locations in Alabama, Georgia, Maryland, Nevada, North Carolina, Texas and Virginia.  Our pool distribution network consists of terminals and service locations in the following 19 cities:

City
Albuquerque, NM
 
Kansas City, MO
Atlanta, GA
 
Lakeland, FL
Baltimore, MD
 
Las Vegas, NV
Charlotte, NC
 
Miami, FL
Dallas/Ft. Worth, TX
 
Montgomery, AL
Denver, CO
 
Nashville, TN
Des Moines, IA
 
Richmond, VA
Greensboro, NC
 
San Antonio, TX
Houston, TX
 
Tulsa, OK
Jacksonville, FL
   

Customers and Marketing

Our Forward Air wholesale customer base is primarily comprised of air freight forwarders, integrated air cargo carriers and passenger and cargo airlines. Our air freight forwarder customers vary in size from small, independent, single facility companies to large, international logistics companies such as SEKO Worldwide, AIT Worldwide Logistics, Associated Global, UPS Supply Chain Solutions and Pilot Air Freight. Because we deliver dependable service, integrated air cargo carriers such as UPS Cargo and DHL Worldwide Express use our network to provide overflow capacity and other services, including shipment of bigger packages and pallet-loaded cargo. Our passenger and cargo airline customers include British Airways, United Airlines and Virgin Atlantic.  

Our FASI pool distribution customers are primarily comprised of national and regional retailers and distributors, such as The Limited, The Marmaxx Group, The GAP, Blockbuster and Aeropostale.  We also conduct business with other pool distribution providers.

We market all our services through a sales and marketing staff located in major markets of the United States. Senior management also is actively involved in sales and marketing at the national account level and supports local sales initiatives. We also participate in air cargo and retail trade shows and advertise our services through direct mail programs and through the Internet via www.forwardair.com. The information contained on our website is not part of this filing.

10

 
Technology and Information Systems

Our technology allows us to provide our Forward Air customers with real-time tracking and tracing of shipments throughout the transportation process, complete shipment history, proof of delivery, estimated charges and electronic bill presentment. In addition, our Forward Air customers are able to electronically transmit bookings to us from their own networks and schedule transportation and obtain tracking and tracing information.  We continue to develop and enhance our systems to permit our customers to obtain this information both through the Internet and through electronic data interchange.

We continue to enhance our Forward Air TAP application and website service offerings in our continuing effort to automate and improve operations. TAP enables operations personnel to perform data entry from our terminal floor locations. This greatly reduces the need for data entry personnel and provides immediate shipment updates. The result is increased shipment accuracy and improved data timeliness. The TAP system improves our ability to provide accurate, real-time information, and results in both competitive service advantages and increased productivity throughout our network. Our Forward Air Complete website coordinates activities between our customers, operations personnel and external service providers. We believe that the TAP system, Forward Air Complete website and other technical enhancements will assist us in capitalizing on new business opportunities and could encourage customers to increase the volume of freight they send through our network.

We have invested and expect to continue investing management and financial resources on maintaining and upgrading our information systems, particularly for our FASI operations, in an effort to increase the volume of freight we can handle in our networks, improve the visibility of shipment information and reduce our operating costs. The ability to provide accurate, real-time information on the status of shipments is increasingly important to our customers and our efforts in this area could result in both competitive service advantages, and increased productivity throughout our networks. We believe our continuing technical enhancements will assist us in capitalizing on new business opportunities, capturing additional freight from existing customers, and attracting new customers.

Purchased Transportation

We contract for most of our Forward Air transportation services on a per mile basis from owner-operators.  FASI also utilizes owner-operators for certain of its transportation services, but relies more on Company-employed drivers.  The owner-operators own, operate and maintain their own tractors and employ their own drivers. Our freight handlers load and unload our trailers for hauling by owner-operators between our terminals.

We seek to establish long-term relationships with owner-operators to assure dependable service and availability. Historically, we have experienced significantly higher than industry average retention of owner-operators. We have established specific guidelines relating to safety records, driving experience and personal evaluations that we use to select our owner-operators. To enhance our relationship with the owner-operators, our per mile rates are generally above prevailing market rates. In addition, we typically offer our owner-operators and their drivers a consistent work schedule. Usually, schedules are between the same two cities, improving quality of work life for the owner-operators and their drivers and, in turn, increasing driver retention.

As a result of efforts to expand our logistics and other services, seasonal demands and volume surges in particular markets, we also purchase transportation from other surface transportation providers to handle overflow volume. Of the $189.0 million incurred for purchased transportation during 2008, we purchased 66.3% from owner-operators and 33.7% from other surface transportation providers.

Competition

The air freight and pool distribution transportation industries are highly competitive and very fragmented. Our Forward Air and FASI competitors primarily include regional trucking companies and regional less-than-truckload carriers. To a lesser extent, Forward Air also competes with integrated air cargo carriers and passenger and cargo airlines.

We believe competition is based on service, primarily on-time delivery, flexibility and reliability, as well as rates. We offer our Forward Air services at rates that generally are significantly below the charge to transport the same shipment to the same destination by air. We believe Forward Air has an advantage over less-than-truckload carriers because Forward Air delivers faster, more reliable service between many cities.  We believe FASI has an advantage over its competitors due to its presence in several regions across the continental United States allowing us to provide consistent, high-quality service to our customers regardless of location.

11

 
Seasonality

Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third and fourth quarters have traditionally been the strongest. Typically, this pattern has been the result of factors such as climate, national holidays, customer demand and economic conditions. Additionally, a significant portion of our revenue is derived from customers whose business levels are impacted by the economy.  The impact of seasonal trends is more pronounced on our pool distribution business.  The pool distribution business is seasonal and operating revenues and results tend to be higher in the third and fourth quarters than in the first and second quarters.

Employees

As of December 31, 2008, we had 2,021 full-time employees, 559 of whom were freight handlers. Also, as of that date, we had an additional 649 part-time employees, of whom the majority were freight handlers. None of our employees are covered by a collective bargaining agreement. We recognize that our workforce, including our freight handlers, is one of our most valuable assets. The recruitment, training and retention of qualified employees is essential to support our continued growth and to meet the service requirements of our customers.

Risk Management and Litigation

Under U.S. Department of Transportation (“DOT”) regulations, we are liable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on our behalf. We currently maintain liability insurance coverage that we believe is adequate to cover third-party claims. We have a self-insured retention of $0.5 million per occurrence for vehicle and general liability claims. We may also be subject to claims for workers’ compensation. We maintain workers’ compensation insurance coverage that we believe is adequate to cover such claims. We have a self-insured retention of approximately $0.3 million for each such claim, except in Ohio, where we are a qualified self-insured entity with an approximately $0.4 million self-insured retention. We could incur claims in excess of our policy limits or incur claims not covered by our insurance.

From time to time, we are a party to litigation 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 materially adverse effect on our business, financial condition or results of operations.

Regulation

The DOT and various state agencies have been granted broad powers over our business. These entities generally regulate such activities as authorization to engage in property brokerage and motor carrier operations, safety and financial reporting. We are licensed through our subsidiaries by the DOT as a motor carrier and as a broker to arrange for the transportation of freight by truck. Our domestic customs brokerage operations are licensed by U.S. Customs. We are subject to similar regulation in Canada.

Service Marks

Through one of our subsidiaries, we hold federal trademark registrations or applications for federal trademark registration, associated with the following service marks: Forward Air, Inc. ®, North America’s Most Complete Roadfeeder Network ®, Forward Air ™, Forward Air Solutions ®, and Forward Air Complete ™. These marks are of significant value to our business.
 
Website Access

We file reports with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. We are an electronic filer and the SEC maintains an Internet site at www.sec.gov that contains these reports and other information filed electronically. We make available free of charge through our website our Code of Ethics and our reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is www.forwardair.com. Please note that this website address is provided as an inactive textual reference only. The information provided on the website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

Item 1A.

In addition to the other information in this Form 10-K and other documents we have filed with the SEC from time to time, the following factors should be carefully considered in evaluating our business. Such factors could affect results and cause results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us. Some or all of these factors may apply to our business.

12

 
The severe economic downturn has resulted in weaker demand for ground transportation services, which may continue to have a significant negative impact on us.

We are experiencing significantly weaker demand for our airport-to-airport and pool distribution services driven by the severe downturn in the economy.  We began to experience weakening demand late in 2008, and this weakness has continued into 2009.  We are adjusting the size of our owner-operator fleet and reducing employee headcount to compensate for the drop in demand.  If the economic downturn persists or worsens, demand for our services may continue to weaken.  No assurance can be given that our reductions or other steps we may take will be adequate to offset the effects of reduced demand.

In a normal economic environment, our business is subject to general economic and business factors that are largely out of our control, any of which could have a materially adverse effect on our results of operations.

Our business is dependent upon a number of factors that may have a materially adverse effect on the results of our operations, many of which are beyond our control. These factors include increases or rapid fluctuations in fuel prices, capacity in the trucking industry, insurance premiums, self-insured retention levels and difficulty in attracting and retaining qualified owner-operators and freight handlers. Our profitability would decline if we were unable to anticipate and react to increases in our operating costs, including purchased transportation and labor, or decreases in the amount of revenue per pound of freight shipped through our system. As a result of competitive factors, we may be unable to raise our prices to meet increases in our operating costs, which could result in a materially adverse effect on our business, results of operations and financial condition.

Economic conditions may adversely affect our customers and the amount of freight available for transport. This may require us to lower our rates, and this may also result in lower volumes of freight flowing through our network. Customers encountering adverse economic conditions represent a greater potential for loss, and we may be required to increase our reserve for bad-debt losses.

Our results of operations may be affected by seasonal factors. Volumes of freight tend to be lower in the first quarter after the winter holiday season. In addition, it is not possible to predict the short or long-term effects of any geopolitical events on the economy or on customer confidence in the United States, or their impact, if any, on our future results of operations. 

 In order to continue growth in our business, we will need to increase the volume and revenue per pound of the freight shipped through our networks.

Our continued growth depends in significant part on our ability to increase the amount and revenue per pound of the freight shipped through our networks. The amount of freight shipped through our networks and our revenue per pound depend on numerous factors, many of which are beyond our control, such as economic conditions and our competitors’ pricing. Therefore, we cannot guarantee that the amount of freight shipped or the revenue per pound we realize on that freight will increase or even remain at current levels. If we fail to increase the volume of the freight shipped through our networks or the revenue per pound of the freight shipped, we may be unable to maintain or increase our profitability.

Our rates, overall revenue and expenses are subject to volatility.

Our rates are subject to change based on competitive pricing and market factors.  Our overall transportation rates consist of base transportation and fuel surcharge rates.  Our base transportation rates exclude fuel surcharges and are set based on numerous factors such as length of haul, freight class and weight per shipment.  The base rates are subject to change based on competitive pricing pressures and market factors.  Most of our competitors impose fuel surcharges, but there is no industry standard for the calculation of fuel surcharge rates.  Our fuel surcharge rates are set weekly based on the national average for fuel prices as published by the U.S. Department of Energy (“DOE”) and our fuel surcharge table.  Historically, we have not adjusted our method for determining fuel surcharge rates.

Our net fuel surcharge revenue is the result of our fuel surcharge rates and the tonnage transiting our networks.  The fuel surcharge revenue is then netted with the fuel surcharge we pay to our owner-operators and third party transportation providers.  Fluctuations in tonnage levels, related load factors, and fuel prices may subject us to volatility in our net fuel surcharge revenue.  This potential volatility in net fuel surcharge revenue may adversely impact our overall revenue, base transportation revenue plus net fuel surcharge revenue, and results of operations.

Because a portion of our network costs are fixed, we will be adversely affected by any decrease in the volume or revenue per pound of freight shipped through our networks.

Our operations, particularly our networks of hubs and terminals, represent substantial fixed costs. As a result, any decline in the volume or revenue per pound of freight we handle may have an adverse effect on our operating margin and our results of operations. Typically, Forward Air does not have contracts with our customers and we cannot guarantee that our current customers will continue to utilize our services or that they will continue at the same levels. The actual shippers of the freight moved through our networks include various manufacturers and distributors of electronics, telecommunications equipment, machine parts, trade show exhibit materials and medical equipment. Adverse business conditions affecting these shippers or adverse general economic conditions are likely to cause a decline in the volume of freight shipped through our networks.

13

 
We operate in a highly competitive and fragmented industry, and our business will suffer if we are unable to adequately address downward pricing pressures and other factors that may adversely affect our operations and profitability.

The freight transportation industry is highly competitive, very fragmented and historically has had few barriers to entry. Our principal competitors include regional trucking companies that specialize in handling deferred air freight and national and regional less-than-truckload carriers. To a lesser extent, we also compete with integrated air cargo carriers and passenger airlines. Our competition ranges from small operators that compete within a limited geographic area to companies with substantially greater financial and other resources, including greater freight capacity.  We also face competition from air freight forwarders who decide to establish their own networks to transport deferred air freight. We believe competition is based on service, primarily on-time delivery, flexibility and reliability, as well as rates. Many of our competitors periodically reduce their rates to gain business, especially during times of economic decline. In the past several years, several of our competitors have reduced their rates to unusually low levels that we believe are unsustainable in the long-term, but that may materially adversely affect our business in the short-term. These competitors may cause a decrease in our volume of freight, require us to lower the prices we charge for our services and adversely affect both our growth prospects and profitability.

Claims for property damage, personal injuries or workers’ compensation and related expenses could significantly reduce our earnings.

Under DOT regulations, we are liable for property damage and personal injuries caused by owner-operators and Company-employed drivers while they are operating on our behalf. We currently maintain liability insurance coverage that we believe is adequate to cover third-party claims. We have a self-insured retention of $0.5 million per occurrence for vehicle and general liability claims. We may also be subject to claims for workers’ compensation. We maintain workers’ compensation insurance coverage that we believe is adequate to cover such claims. We have a self-insured retention of approximately $0.3 million for each such claim, except in Ohio, where we are a qualified self-insured entity with an approximately $0.4 million self-insured retention. We could incur claims in excess of our policy limits or incur claims not covered by our insurance. Any claims beyond the limits or scope of our insurance coverage may have a material adverse effect on us. Because we do not carry “stop loss” insurance, a significant increase in the number of claims that we must cover under our self-insurance retainage could adversely affect our profitability. In addition, we may be unable to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses.

We have grown and may grow, in part, through acquisitions, which involve various risks, and we may not be able to identify or acquire companies consistent with our growth strategy or successfully integrate acquired businesses into our operations.

We have grown through acquisitions and we intend to pursue opportunities to expand our business by acquiring other companies in the future. Acquisitions involve risks, including those relating to:

·  
identification of appropriate acquisition candidates;

·  
negotiation of acquisitions on favorable terms and valuations;

·  
integration of acquired businesses and personnel;

·  
implementation of proper business and accounting controls;

·  
ability to obtain financing, on favorable terms or at all;

·  
diversion of management attention;

·  
retention of employees and customers;

·  
unexpected liabilities; and

·  
potential erosion of operating profits as new acquisitions may be unable to achieve profitability comparable with our core airport-to-airport business.

Acquisitions also may affect our short-term cash flow and net income as we expend funds, potentially increase indebtedness and incur additional expenses. If we are not able to identify or acquire companies consistent with our growth strategy, or if we fail to successfully integrate any acquired companies into our operations, we may not achieve anticipated increases in revenue, cost savings and economies of scale, our operating results may actually decline and acquired goodwill may become impaired.

14

 
We could be required to record a material non-cash charge to income if our recorded intangible assets or goodwill are determined to be impaired.

 We have $40.7 million of recorded net intangible assets on our consolidated balance sheet at December 31, 2008.  Our definite-lived intangible assets primarily represent the value of customer relationships and non-compete agreements that were recorded in conjunction with our various acquisitions.  We review our long-lived assets, such as our definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  Impairment is recognized on these assets when the sum of undiscounted estimated cash flows expected to result from the use of the asset is less than the carrying value.  If such measurement indicates a possible impairment, we would be required to record a non-cash impairment charge to our statement of income in the amount that the carrying value of these assets exceed the estimated fair value of the assets.

We also have recorded goodwill of $50.2 million on our consolidated balance sheet at December 31, 2008.  Goodwill is also assessed for impairment annually for each of our reportable segments.  This assessment includes comparing the fair value of each reportable segment to the carrying value of the assets assigned to each reportable segment.  If the carrying value of the reportable segment was to exceed our estimated fair value of the reportable segment, we would then be required to estimate the fair value of the individual assets and liabilities within the reportable segment to ascertain the amount of fair value of goodwill and any potential impairment.  If we determine that our fair value of goodwill is less than the related book value, we could be required to record a non-cash impairment charge to our statement of income, which could have a material adverse effect on our earnings.

We may have difficulty effectively managing our growth, which could adversely affect our results of operations.

Our growth plans will place significant demands on our management and operating personnel. Our ability to manage our future growth effectively will require us to regularly enhance our operating and management information systems and to continue to attract, retain, train, motivate and manage key employees. If we are unable to manage our growth effectively, our business, results of operations and financial condition may be adversely affected.

If we fail to maintain and enhance our information technology systems, we may lose orders and customers or incur costs beyond expectations.

We must maintain and enhance our information technology systems to remain competitive and effectively handle higher volumes of freight through our network. We expect customers to continue to demand more sophisticated, fully integrated information systems from their transportation providers. If we are unable to maintain and enhance our information systems to handle our freight volumes and meet the demands of our customers, our business and results of operations will be adversely affected. If our information systems are unable to handle higher freight volumes and increased logistics services, our service levels and operating efficiency may decline. This may lead to a loss of customers and a decline in the volume of freight we receive from customers.

Our information technology systems are subject to risks that we cannot control.
 
    Our information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant system failures and electrical outages in the past. While we take measures to ensure our major systems have redundant capabilities, our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, break-ins and similar events. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. The occurrence of any of these events could disrupt or damage our information technology systems and inhibit our internal operations, our ability to provide services to our customers and the ability of our customers to access our information technology systems. This may result in the loss of customers or a reduction in demand for our services.

If we have difficulty attracting and retaining owner-operators or freight handlers, our results of operations could be adversely affected.
    
    We depend on owner-operators for most of our transportation needs. In 2008, owner-operators provided 66.3% of our purchased transportation. Competition for owner-operators is intense, and sometimes there are shortages of available owner-operators. In addition, we need a large number of freight handlers to operate our business efficiently. During periods of low unemployment in the areas where our terminals are located, we may have difficulty hiring and retaining a sufficient number of freight handlers. If we have difficulty attracting and retaining enough qualified owner-operators or freight handlers, we may be forced to increase wages and benefits, which would increase our operating costs. This difficulty may also impede our ability to maintain our delivery schedules, which could make our service less competitive and force us to curtail our planned growth. If our labor costs increase, we may be unable to offset the increased labor costs by increasing rates without adversely affecting our business. As a result, our profitability may be reduced.

15

 
A determination by regulators that our independent owner-operators are employees rather than independent contractors could expose us to various liabilities and additional costs.

At times, the Internal Revenue Service, the Department of Labor and state authorities have asserted that owner-operators are “employees,” rather than “independent contractors.” One or more governmental authorities may challenge our position that the owner-operators we use are not our employees. A determination by regulators that our independent owner-operators are employees rather than independent contractors could expose us to various liabilities and additional costs including, but not limited to, employment-related expenses such as workers’ compensation insurance coverage and reimbursement of work-related expenses.

We operate in a regulated industry, and increased costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.

The DOT and various state agencies have been granted broad regulatory powers over our business, and we are licensed by the DOT and U.S. Customs. If we fail to comply with any applicable regulations, our licenses may be revoked or we could be subject to substantial fines or penalties and to civil and criminal liability.

We are also subject to various environmental laws and regulations dealing with the handling of hazardous materials. Our operations involve the risks of fuel spillage or seepage. If we are involved in a spill or other accident involving hazardous substances, our business and operating results may be adversely affected. Changes to current environmental laws or regulations may increase our operating costs and adversely affect our results of operations.
 
The transportation industry is subject to legislative and regulatory changes that can affect the economics of our business by requiring changes in operating practices or influencing the demand for, and the cost of providing, transportation services. Heightened security concerns may continue to result in increased regulations, including the implementation of various security measures, checkpoints or travel restrictions on trucks.

In addition, there may be changes in applicable federal or state tax or other laws or interpretations of those laws. If this happens, we may incur additional taxes, as well as higher workers’ compensation and employee benefit costs, and possibly penalties and interest for prior periods. This could have an adverse effect on our results of operations.

We are dependent on our senior management team, and the loss of any such personnel could materially and adversely affect our business.

Our future performance depends, in significant part, upon the continued service of our senior management team. We cannot be certain that we can retain these employees. The loss of the services of one or more of these or other key personnel could have a material adverse effect on our business, operating results and financial condition. We must continue to develop and retain a core group of management personnel and address issues of succession planning if we are to realize our goal of growing our business. We cannot be certain that we will be able to do so.

If our employees were to unionize, our operating costs would likely increase.

None of our employees are currently represented by a collective bargaining agreement. However, we have no assurance that our employees will not unionize in the future, which could increase our operating costs and force us to alter our operating methods. This could have a material adverse effect on our operating results.

Our shareholder rights plan, charter and bylaws and provisions of Tennessee law could discourage or prevent a takeover that may be considered favorable.

We have a shareholder rights plan that is scheduled to expire on May 18, 2009, that may have the effect of discouraging unsolicited takeover proposals. The rights issued under the shareholder rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms not approved in advance by our Board of Directors. In addition, our shareholder rights plan, charter and bylaws and provisions of Tennessee law may discourage, delay or prevent a merger, acquisition or change in control that may be considered favorable. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors and take other corporate actions. Among other things, these provisions:

·  
authorize us to issue preferred stock, the terms of which may be determined at the sole discretion of our Board of Directors and may adversely affect the voting or economic rights of our shareholders; and

·  
establish advance notice requirements for nominations for election to the Board of Directors and for proposing matters that can be acted on by shareholders at a meeting.
 
    Our shareholder rights plan, charter and bylaws and provisions of Tennessee law may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices for our common stock, $0.01 par value per share, and also could limit the price that investors are willing to pay in the future for shares of our common stock (“Common Stock”).
 
16

 
Item 1B.
 
    None.

Item 2.

Properties and Equipment
 
Management believes that we have adequate facilities for conducting our business, including properties owned and leased. Management further believes that in the event replacement property is needed, it will be available on terms and at costs substantially similar to the terms and costs experienced by competitors within the transportation industry.
 
We lease our 37,500 square foot headquarters in Greeneville, Tennessee from the Greeneville-Greene County Airport Authority. The initial lease term ended in 2006 and has two ten-year and one five-year renewal options. During 2007, we renewed the lease through 2016.

We own our Columbus, Ohio central sorting facility. During 2006, we completed a $5.5 million expansion of this facility.  The expanded Columbus, Ohio facility is 125,000 square feet with 168 trailer doors. This premier facility can unload, sort and load upwards of 3.7 million pounds in five hours. In addition to the expansion, we process-engineered the freight sorting in the expanded building to improve handling efficiencies. The benefits include reductions in the distance each shipment moves in the building to speed up the transfer process, less handling of freight to further improve service integrity and flexibility to operate multiple sorts at the same time.
 
In June and March 2007, we completed the purchase of facilities near Atlanta, Georgia and Chicago, Illinois for $14.9 million and $22.3 million, respectively.  The Atlanta, Georgia facility is over 142,000 square feet with 118 trailer doors and approximately 12,000 square feet of office space.  The Chicago, Illinois facility is over 125,000 square feet with 110 trailer doors and over 10,000 square feet of office space. In addition, in February 2007, the Company acquired for $3.0 million 36.7 acres of land near Dallas/Fort Worth, Texas on which we are currently building a new regional hub facility.  We anticipate completion of the Dallas/Fort Worth facility in the third quarter of 2009.

We lease and maintain 81 additional terminals, including 19 pool distribution terminals, located in major cities throughout the United States and Canada. Lease terms for these terminals are typically for three to five years. The remaining 17 terminals are agent stations operated by independent agents who handle freight for us on a commission basis.
 
We own the majority of trailers we use to move freight through our networks. Substantially all of our trailers are 53’ long, some of which have specialized roller bed equipment required to serve air cargo industry customers. At December 31, 2008, we had 2,219 owned trailers in our fleet with an average age of approximately 3.7 years.  In addition, as a result of our recent acquisitions, at December 31, 2008, we also have 127 leased trailers in our fleet.
 
Through our recent acquisitions we have also increased the size of our tractor and straight truck fleets.  At December 31, 2008, we had 307 owned tractors and straight trucks in our fleet, with an average age of approximately 5.0 years.  In addition, at December 31, 2008, we also had 185 leased tractors and straight trucks in our fleet.

Item 3.
 
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.

Item 4.
 
    During the fourth quarter of the fiscal year ended December 31, 2008, no matters were submitted to a vote of security holders through the solicitation of proxies or otherwise.

17

 
Executive Officers of the Registrant

Pursuant to Instruction 3 to Item 401(b) of Regulation S-K of the Securities Act and General Instruction G(3) to Form 10-K, the following information is included in Part I of this report. The ages listed below are as of December 31, 2008.

The following are our executive officers:

Name
 
Age
 
Position
Bruce A. Campbell
  57  
President and Chief Executive Officer
Rodney L. Bell
  46  
Chief Financial Officer, Senior Vice President and Treasurer
Craig A. Drum
  53  
Senior Vice President, Sales
Matthew J. Jewell
  42  
Executive Vice President, Chief Legal Officer and Secretary
Chris C. Ruble
  46  
Executive Vice President, Operations

There are no family relationships between any of our executive officers. All officers hold office at the pleasure of the Board of Directors.

Bruce A. Campbell has served as a director since April 1993, as President since August 1998, as Chief Executive Officer since October 2003 and as Chairman of the Board since May 2007. Mr. Campbell was Chief Operating Officer from April 1990 until October 2003 and Executive Vice President from April 1990 until August 1998. Prior to joining us, Mr. Campbell served as Vice President of Ryder-Temperature Controlled Carriage in Nashville, Tennessee from September 1985 until December 1989. Mr. Campbell also serves as a director of Greene County Bancshares.
 
Rodney L. Bell began serving as Chief Financial Officer, Senior Vice President and Treasurer in June 2006. Mr. Bell, who is a Certified Public Accountant, was appointed Chief Accounting Officer in February 2006 and continued to serve as Vice President and Controller, positions held since October 2000 and February 1995, respectively. Mr. Bell joined the Company in March 1992 as Assistant Controller after serving as a senior manager with the accounting firm of Adams and Plucker in Greeneville, Tennessee.
 
Craig A. Drum has served as Senior Vice President, Sales since July 2001 after joining us in January 2000 as Vice President, Sales for one of our subsidiaries.  In February 2001, Mr. Drum was promoted to Vice President of National Accounts. Prior to January 2000, Mr. Drum spent most of his 24-year career in air freight with Delta Air Lines, Inc., most recently as the Director of Sales and Marketing - Cargo.

Matthew J. Jewell has served as Executive Vice President and Chief Legal Officer since January 2008. From July 2002 until January 2008, he served as Senior Vice President and General Counsel.  In October 2002, he was also appointed Secretary. From July 2002 until May 2004, Mr. Jewell was also the Senior Vice President, General Counsel and Secretary of Landair Corporation. From January 2000 until joining us in July 2002, Mr. Jewell was a partner with the law firm of Austin & Sparks, P.C. Mr. Jewell was an associate at Dennis, Corry & Porter, L.L.P. from July 1991 to December 1998 and a partner from January 1999 to January 2000.

Chris C. Ruble has served as Executive Vice President, Operations since August 2007.  From October 2001 until August 2007, he served as Senior Vice President, Operations. He was a Regional Vice President from September 1997 to October 2001 and a regional manager from February 1997 to September 1997, after starting with us as a terminal manager in January 1996. From June 1986 to August 1995, Mr. Ruble served in various management capacities at Roadway Package System, Inc.

18

 
Part II

Item 5.

Our Common Stock trades on The NASDAQ Global Select Stock Market™ under the symbol “FWRD.” The following table sets forth the high and low sales prices for Common Stock as reported by The NASDAQ Global Select Stock Market™ for each full quarterly period within the two most recent fiscal years.

2008
 
High
 
Low
 
Dividends
First Quarter
  $ 36.86   $ 25.55   $ 0.07
Second Quarter
    39.09     32.54     0.07
Third Quarter
    38.58     25.77     0.07
Fourth Quarter
    28.16     17.31     0.07

2007
 
High
 
Low
 
Dividends
First Quarter
  $ 35.32   $ 29.30   $ 0.07
Second Quarter
    35.78     29.67     0.07
Third Quarter
    41.90     29.18     0.07
Fourth Quarter
    34.93     27.07     0.07
 
There were approximately 433 shareholders of record of our Common Stock as of February 4, 2009.
 
Subsequent to December 31, 2008, our Board of Directors declared a cash dividend of $0.07 per share that will be paid on March 26, 2009 to shareholders of record at the close of business on March 11, 2009. 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.

There are no material restrictions on our ability to declare dividends. 

None of our securities were sold during fiscal year 2008 without registration under the Securities Act.

19

 
Securities Authorized for Issuance Under Equity Compensation Plans
 
    The following table provides information as of December 31, 2008 with respect to shares of our Common Stock that may be issued under existing equity compensation plans, including the 1992 Amended and Restated Stock Option and Incentive Plan (the “1992 Plan”), the 1999 Stock Option and Incentive Plan (the “1999 Plan”), the Non-Employee Director Stock Option Plan (the “NED Plan”), the 2000 Non-Employee Director Award (the “2000 NED Award”), the 2005 Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated Non-Employee Director Stock Plan (the “Amended Plan”).  Our shareholders have approved each of these plans.

Equity Compensation Plan Information
 
Plan Category
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
     
(a)
 
(b)
Equity Compensation Plans Approved by Shareholders
2,577,691
 
$
26.74
 
4,121,170
Equity Compensation Plans Not Approved by Shareholders
--
   
--
 
--
Total
2,577,691
 
$
26.74
 
4,121,170

(a)
Excludes purchase rights accruing under the ESPP, which has an original shareholder-approved reserve of 500,000 shares. Under the ESPP, each eligible employee may purchase up to 2,000 shares of Common Stock at semi-annual intervals each year at a purchase price per share equal to 90.0% of the lower of the fair market value of the Common Stock at close of (i) the first trading day of an option period or (ii) the last trading day of an option period.
(b)
Includes shares available for future issuance under the ESPP. As of December 31, 2008, an aggregate of 459,324 shares of Common Stock were available for issuance under the ESPP.
 
Stock Performance Graph

The following graph compares the percentage change in the cumulative shareholder return on our Common Stock with The NASDAQ Trucking and Transportation Stocks Index and The NASDAQ Global Select Stock Market™ Index commencing on the last trading day of December 2003 and ending on the last trading day of December 2008. The graph assumes a base investment of $100 made on December 31, 2003 and the respective returns assume reinvestment of all dividends. The comparisons in this graph are required by the SEC and, therefore, are not intended to forecast or necessarily be indicative of any future return on our Common Stock.
 

   
2003
 
2004
 
2005
 
2006
 
2007
 
2008
Forward Air Corporation
  100   163   201   159   172   132
NASDAQ Trucking and Transportation Stocks Index
  100   127   139   147   152   107
NASDAQ Stock Market Index
  100   109   110   121   134   81
 
Issuer Purchases of Equity Securities
 
No shares of our Common Stock were repurchased by the Company during the quarter ended December 31, 2008.
 
20

 
Item 6.

The following table sets forth our selected financial data. The selected financial data should be read in conjunction with our consolidated financial statements and notes thereto, included elsewhere in this report.

   
Year ended
 
   
December 31,
   
December 31,
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
   
(In thousands, except per share data)
 
Income Statement Data:
                             
Operating revenue
  $ 474,436     $ 392,737     $ 352,758     $ 320,934     $ 282,197  
Income from operations
    70,285       71,048       75,396       67,437       53,598  
Operating margin (1)
    14.8 %     18.1 %     21.4 %     21.0 %     19.0 %
Net income
    42,542       44,925       48,923       44,909       34,421  
Net income per share:
                                       
   Basic
  $ 1.48     $ 1.52     $ 1.57     $ 1.41     $ 1.07  
   Diluted
  $ 1.47     $ 1.50     $ 1.55     $ 1.39     $ 1.05  
                                         
Cash dividends declared per common share
  $ 0.28     $ 0.28     $ 0.28     $ 0.24     $ --  
                                         
Balance Sheet Data (at end of period):
                                       
Total assets
  $ 307,527     $ 241,884     $ 213,014     $ 212,600     $ 214,553  
Long-term obligations, net of current portion
    53,035       31,486       796       837       867  
Shareholders' equity
    216,434       171,733       185,227       178,816       181,003  

(1) Income from operations as a percentage of operating revenue
 
Item 7.

Overview and Executive Summary
 
    Our operations can be broadly classified into two principal segments:  Forward Air and FASI.
 
    Through our Forward Air segment, we are a leading provider of time-definite surface transportation and related logistics services to the North American deferred air freight market. We offer our customers local pick-up and delivery (Forward Air Complete™) and scheduled surface transportation of cargo as a cost-effective, reliable alternative to air transportation. We transport cargo that must be delivered at a specific time, but is less time-sensitive than traditional air freight. This type of cargo is frequently referred to in the transportation industry as deferred air freight. We operate our Forward Air segment through a network of terminals located on or near airports in 82 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and 11 regional hubs serving key markets.  We also offer our customers an array of logistics and other services including: expedited truckload brokerage (TLX); dedicated fleets; warehousing; customs brokerage; and shipment consolidation, deconsolidation and handling.

On July 30, 2007, through our subsidiary and reporting segment, FASI, and in conjunction with the acquisition of USAC, we began providing pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States.  Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions.  Our primary customers for this product are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains. We service these customers through a network of terminals and service centers located in 19 cities.
 
    Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our continued growth depends in significant part on our ability to increase the amount of freight and the revenue per pound for the freight shipped through our networks and to grow other lines of businesses, such as TLX, which will allow us to maintain revenue growth in challenging shipping environments.

21

 
Trends and Developments

Acquisitions
 
    During the year ended December 31, 2008 we experienced revenue growth across all product lines and segments.  The revenue growth was primarily driven by our 2008 and 2007 acquisitions and was partially offset by the challenging economic conditions of 2008.
 
    On September 8, 2008, we acquired certain assets and liabilities of Service Express.  Service Express was a privately-held provider of pool distribution services primarily in the Mid-Atlantic and Southeastern continental United States.  Service Express generated approximately $39.0 million in revenue during the year ended December 31, 2007.  The acquisition of Service Express’ pool distribution services added to the geographic footprint of the FASI segment in the Mid-Atlantic and Southeastern United States.  
 
    On March 17, 2008, we acquired certain assets and liabilities of Pinch.  Pinch was a privately-held provider of pool distribution, airport-to-airport, truckload, custom, and cartage services primarily to the Southwestern continental United States.  Pinch generated approximately $35.0 million in revenue during the year ended December 31, 2007.  The acquisition of Pinch’s pool distribution services expanded the geographic footprint of the FASI segment in the Southwestern United States.  In addition, it provided additional tonnage density to the Forward Air airport-to-airport network, and the acquisition of Pinch’s cartage and truckload business provided an opportunity for Forward Air to expand its service options in the Southwestern United States.
 
    Further, on December 3, 2007 we acquired certain assets and liabilities of Black Hawk for approximately $35.2 million to increase the penetration of our airport-to-airport network in the Midwest continental United States.  Also, on July 30, 2007, we acquired certain assets and liabilities of USAC for approximately $12.9 million.  Through this acquisition we began providing pool distribution services throughout the Southeast, Midwest and Southwest continental United States.  
 
    While providing different benefits, these acquisitions fit into our “Completing the Model” strategic initiative of using acquisitions to grow our existing business and to expand into new services and lines of business that will provide for revenue growth in any market conditions.  We will continue to evaluate potential acquisitions that can increase our penetration of a geographic area, add new customers, increase freight, or enable us to offer additional services. 

Results of Operations
 
    During the year ended December 31, 2008, despite the increase in revenue driven primarily by the above acquisitions, we experienced a year-over-year decrease in our income from operations.  The year-over-year decrease in income from operations was largely due to the current economic recession and the resulting decrease in our business levels during the fourth quarter of 2008.  The depressed fourth quarter 2008 earnings were driven by the decrease in airport-to-airport revenue during the fourth quarter of 2008 versus the same period in 2007 and lower than expected FASI revenue and results of operations.  The significant decline in airport-to-airport revenue was driven by an over 10.0% decrease in the tonnage shipped through our network during the fourth quarter of 2008 compared to the same period in 2007.  The decline in airport-to-airport tonnage was directly related to the current economic recession.  The economic recession was also largely responsible for lower than expected revenue and reduced year-over-year fourth quarter earnings in our FASI segment.  FASI’s net income was approximately $0.9 million less in the fourth quarter of 2008 versus the fourth quarter of 2007 as depressed revenues due to the economic environment prevented us from achieving results comparable with 2007.
 
    Increases in revenues from our logistics services, mainly TLX, and FASI offset the decline in airport-to-airport revenue; however these services, are not as profitable and did not generate comparable operating results with our airport-to-airport business.  We expect these year-over-year decreases to continue into 2009, as our airport-to-airport business continues to experience large year-over-year decreases in business levels.
 
    Also, declining fuel prices may adversely affect our revenues in 2009.  Our net fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and the tonnage transiting our network.  The decline in tonnage levels combined with the year-over-year decline in diesel fuel prices could result in a significant reduction in our net fuel surcharge revenue during 2009.

Segments
 
    Effective July 30, 2007, in conjunction with FASI’s acquisition of certain assets and liabilities of USAC, we began reporting our operations as two segments: Forward Air and FASI.  
 
    Our Forward Air segment includes our airport-to-airport, Forward Air Complete, and TLX services as well as our other accessorial related services such as warehousing; customs brokerage; and value-added handling services.
 
    Our FASI segment includes our pool distribution business and the related assets and liabilities purchased from USAC, Pinch and Service Express.

22

 
Results of Operations

The following table sets forth our historical financial data for the years ended December 31, 2008 and 2007 (in millions):

 
Year ended
   
 
December 31,
   
December 31,
         
Percent
   
 
2008
   
2007
   
Change
   
Change
   
Operating revenue
$ 474.4     $ 392.7     $ 81.7     20.8   %
Operating expenses:
                             
   Purchased transportation
  189.0       164.4       24.6     15.0    
   Salaries, wages, and employee benefits
  116.5       88.8       27.7     31.2    
   Operating leases
  24.4       16.8       7.6     45.2    
   Depreciation and amortization
  16.6       10.9       5.7     52.3    
   Insurance and claims
  8.1       7.7       0.4     5.2    
   Fuel expense
  11.5       2.4       9.1     379.2    
   Other operating expenses
  38.0       30.7       7.3     23.8    
      Total operating expenses
  404.1       321.7       82.4     25.6    
Income from operations
  70.3       71.0       (0.7 )   (1.0 )  
Other income (expense):
                             
   Interest expense
  (1.2 )     (0.5 )     (0.7 )   140.0    
   Other, net
  0.3       1.8       (1.5 )   (83.3 )  
      Total other (expense) income
  (0.9 )     1.3       (2.2 )   (169.2 )  
Income before income taxes
  69.4       72.3       (2.9 )   (4.0 )  
Income taxes
  26.9       27.4       (0.5 )   (1.8 )  
Net income
$ 42.5     $ 44.9     $ (2.4 )   (5.3 ) %
 
23

 
The following table sets forth our historical financial data for the years ended December 31, 2008 and 2007 (in millions):

 
Year ended
 
 
December 31,
   
Percent of
   
December 31,
   
Percent of
         
Percent
   
 
2008
   
Revenue
   
2007
   
Revenue
   
Change
   
Change
   
Operating revenue
                                         
      Forward Air
$
421.2
   
88.8
%
 
$
376.8
   
95.9
%
 
$
44.4
   
11.8
 
%
      FASI
 
55.3
   
11.6
     
16.0
   
4.1
     
39.3
   
245.6
   
      Intercompany Eliminations
 
(2.1
)
 
(0.4
)
   
(0.1
)
 
--
     
(2.0
)
 
2,000.0
   
            Total
 
474.4
   
100.0
     
392.7
   
100.0
     
81.7
   
20.8
   
                                           
Purchased transportation
                                         
      Forward Air
 
179.9
   
42.7
     
162.4
   
43.1
     
17.5
   
10.8
   
      FASI
 
11.2
   
20.2
     
2.1
   
13.1
     
9.1
   
433.3
   
      Intercompany Eliminations
 
(2.1
)
 
100.0
     
(0.1
)
 
100.0
     
(2.0
)
 
2,000.0
   
            Total
 
189.0
   
39.9
     
164.4
   
41.9
     
24.6
   
15.0
   
                                           
Salaries, wages and employee benefits
                                         
      Forward Air
 
92.5
   
22.0
     
82.0
   
21.8
     
10.5
   
12.8
   
      FASI
 
24.0
   
43.4
     
6.8
   
42.5
     
17.2
   
252.9
   
            Total
 
116.5
   
24.6
     
88.8
   
22.6
     
27.7
   
31.2
   
                                           
Operating leases
                                         
      Forward Air
 
18.5
   
4.4
     
15.8
   
4.2
     
2.7
   
17.1
   
      FASI
 
5.9
   
10.7
     
1.0
   
6.3
     
4.9
   
490.0
   
            Total
 
24.4
   
5.1
     
16.8
   
4.3
     
7.6
   
45.2
   
                                           
Depreciation and amortization
                                         
      Forward Air
 
14.4
   
3.4
     
10.4
   
2.8
     
4.0
   
38.5
   
      FASI
 
2.2
   
4.0
     
0.5
   
3.1
     
1.7
   
340.0
   
            Total
 
16.6
   
3.5
     
10.9
   
2.8
     
5.7
   
52.3
   
                                           
Insurance and claims
                                         
      Forward Air
 
7.3
   
1.7
     
7.2
   
1.9
     
0.1
   
1.4
   
      FASI
 
0.8
   
1.4
     
0.5
   
3.1
     
0.3
   
60.0
   
            Total
 
8.1
   
1.7
     
7.7
   
1.9
     
0.4
   
5.2
   
                                           
Fuel expense
                                         
      Forward Air
 
5.8
   
1.4
     
1.3
   
0.3
     
4.5
   
346.2
   
      FASI
 
5.7
   
10.3
     
1.1
   
6.9
     
4.6
   
418.2
   
            Total
 
11.5
   
2.4
     
2.4
   
0.6
     
9.1
   
379.2
   
                                           
Other operating expenses
                                         
      Forward Air
 
32.1
   
7.6
     
29.0
   
7.7
     
3.1
   
10.7
   
      FASI
 
5.9
   
10.7
     
1.7
   
10.6
     
4.2
   
247.1
   
            Total
 
38.0
   
8.0
     
30.7
   
7.8
     
7.3
   
23.8
   
                                           
Income (loss) from operations
                                         
      Forward Air
 
70.7
   
16.8
     
68.7
   
18.2
     
2.0
   
2.9
   
      FASI
 
(0.4
)
 
(0.7
)
   
2.3
   
14.4
     
(2.7
)
 
(117.4
)
 
            Total
$
70.3
   
14.8
%
 
$
71.0
   
18.1
%
 
$
(0.7
)
 
(1.0
)
%
 
24

 
The following table presents the components of the Forward Air segment’s operating revenue and purchased transportation for the years ended December 31, 2008 and 2007 (in millions):

     
Percent of
       
Percent of
         
Percent
 
 
2008
 
Revenue
   
2007
 
Revenue
   
Change
 
Change
 
Forward Air revenue
                                 
      Airport-to-airport
$
336.2
 
79.8
%
 
$
313.2
 
83.1
%
 
$
23.0
 
7.3
%
      Logistics
 
59.9
 
14.2
     
42.7
 
11.3
     
17.2
 
40.3
 
      Other
 
25.1
 
6.0
     
20.9
 
5.6
     
4.2
 
20.1
 
            Total
$
421.2
 
100.0
%
 
$
376.8
 
100.0
%
 
$
44.4
 
11.8
%
                                   
Forward Air purchased transportation
                                 
      Airport-to-airport
$
128.9
 
38.3
%
 
$
123.7
 
39.5
%
 
$
5.2
 
4.2
%
      Logistics
 
44.5
 
74.3
     
32.7
 
76.6
     
11.8
 
36.1
 
      Other
 
6.5
 
25.9
     
6.0
 
28.7
     
0.5
 
8.3
 
            Total
$
179.9
 
42.7
%
 
$
162.4
 
43.1
%
 
$
17.5
 
10.8
%
 

Year ended December 31, 2008 compared to Year ended December 31, 2007

Revenues
 
    Operating revenue increased by $81.7 million, or 20.8%, to $474.4 million for the year ended December 31, 2008 from $392.7 million for the year ended December 31, 2007.

Forward Air
 
    Forward Air operating revenue increased $44.4 million, or 11.8%, to $421.2 million from $376.8 million, accounting for 88.8% of consolidated operating revenue for the year ended December 31, 2008. Airport-to-airport revenue, which is the largest component of our consolidated operating revenue, increased $23.0 million, or 7.3%, to $336.2 million from $313.2 million, accounting for 79.8% of the segment’s operating revenue during the year ended December 31, 2008 compared to 83.1% for the year ended December 31, 2007.  The increase in airport-to-airport revenue was driven by our recent acquisitions, increased utilization of Forward Air Complete and increased net fuel surcharge revenue.  Revenue for Forward Air Complete, our pick-up and delivery service for the airport-to-airport network increased $11.4 million in 2008 over 2007 due to increased customer utilization of the service.  Also, net fuel surcharge revenue increased $12.4 million in 2008 over 2007 primarily driven by the increase in tonnage and fuel prices during the second and third quarters of 2008.  These increases were slightly offset by a $0.8 million decrease in our base airport-to-airport revenue.  The 4.4% increase in tonnage that transited our network was offset by a 4.5% decrease in average revenue per pound before fuel surcharge and Forward Air Complete revenues.  The increase in tonnage was primarily driven by the increased activity resulting from our acquisitions of Pinch and Black Hawk in March 2008 and December 2007, respectively, offset by the impact of the economic recession on our airport-to-airport network during the second half of 2008, but most acutely in the fourth quarter of 2008.  Average revenue per pound before net fuel surcharge and Forward Air Complete revenues decreased due to a shift in our business mix to shorter distance lower price per pound routes.  This shift was primarily the result of new business obtained with the Pinch and Black Hawk acquisitions as well as increased business from international and domestic airlines.
 
    Logistics revenue, which is primarily truckload brokerage (TLX) and priced on a per mile basis, increased $17.2 million, or 40.3%, to $59.9 million in the year ended December 31, 2008 from $42.7 million in the year ended December 31, 2007.  The increase in logistics revenue is the result of our continuing efforts as part of our “Completing the Model” strategic initiative to grow TLX and $4.0 million in new revenue from service lines obtained through the Pinch and Black Hawk acquisitions.  We continue to place emphasis on capturing a larger percentage of truckload opportunities and correspondingly increasing our access to sufficient truckload capacity through the expansion of our owner-operator fleet and the use of third-party transportation providers. Through these efforts, we increased the number of miles driven to support our TLX revenue by 27.9% during the year ended December 31, 2008 compared to the year ended December 31, 2007.  The average revenue per mile of our TLX product, including the impact of fuel surcharges, increased 2.1% for the year ended December 31, 2008 versus the year ended December 31, 2007. The increase in revenue per mile is mainly attributable to increased fuel surcharges to offset increased fuel costs.
 
    Other revenue, which includes warehousing services and terminal handling, accounts for the final component of Forward Air operating revenue. Other revenue increased $4.2 million to $25.1 million for the year ended December 31, 2008, a 20.1% increase from $20.9 million for the year ended December 31, 2007.  The increase was primarily due to increased cartage, handling and storage revenue due to new services offered through our recently expanded facilities.  The increased cartage revenue is also the result of new business obtained in conjunction with the Pinch and Black Hawk acquisitions.
 
25

 
FASI
 
    FASI operating revenue increased $39.3 million to $55.3 million for the year ended December 31, 2008 from $16.0 million for the year ended December 31, 2007.  The increase in revenue is the result of additional activity from the Pinch acquisition on March 17, 2008 and the Service Express acquisition on September 8, 2008.  In addition, the year ended December 31, 2008 includes a full twelve months of revenue compared to only five months for the year ended December 31, 2007, as FASI began operations on July 30, 2007 in conjunction with the acquisition of USAC.

Intercompany Eliminations
 
    Intercompany eliminations of $2.1 million are the result of truckload and airport-to-airport services Forward Air provided to FASI during the year ended December 31, 2008.  FASI also provides cartage services to Forward Air.

Purchased Transportation
 
    Purchased transportation increased by $24.6 million, or 15.0%, to $189.0 million for the year ended December 31, 2008 from $164.4 million for the year ended December 31, 2007.  As a percentage of total operating revenue, purchased transportation was 39.9% during the year ended December 31, 2008 compared to 41.9% for the year ended December 31, 2007.

Forward Air
 
    Forward Air’s purchased transportation increased by $17.5 million, or 10.8%, to $179.9 million for the year ended December 31, 2008 from $162.4 million for the year ended December 31, 2007. The increase in purchased transportation is primarily attributable to an increase of approximately 6.4% in miles driven in addition to a 4.1% increase in the total cost per mile for the year ended December 31, 2008 versus the year ended December 31, 2007. As a percentage of segment operating revenue, Forward Air purchased transportation was 42.7% during the year ended December 31, 2008 compared to 43.1% for the year ended December 31, 2007.
 
    Purchased transportation costs for our airport-to-airport network increased $5.2 million, or 4.2%, to $128.9 million for the year ended December 31, 2008 from $123.7 million for the year ended December 31, 2007.  For the year ended December 31, 2008, purchased transportation for our airport-to-airport network decreased to 38.3% of airport-to-airport revenue from 39.5% for the year ended December 31, 2007.  The $5.2 million increase is attributable to a 1.2% increase in miles driven by our network of owner-operators or third party transportation providers plus a 3.0% increase in cost per mile.  The change in miles increased purchased transportation by $1.5 million while the change in cost per mile increased purchased transportation $3.7 million.  Miles driven by our network of owner-operators or third party transportation providers increased to support the increased revenue activity, mainly in the first half of 2008 as discussed above.  The increase in cost per mile is attributable to increased customer utilization of Forward Air Complete mitigated by increased utilization of our network of owner-operators as opposed to more costly third party transportation providers.  Additionally, the increase in cost per mile was also offset by the increased use of Company-employed drivers.  The increase in the number of Company-employed drivers and their use in the airport-to-airport network is mainly a result of the Pinch and Black Hawk acquisitions.  The cost for the Company-employed drivers is included in salaries, wages and benefits instead of purchased transportation.
 
    Purchased transportation costs for our logistics revenue increased $11.8 million, or 36.1%, to $44.5 million for the year ended December 31, 2008 from $32.7 million for the year ended December 31, 2007. For the year ended December 31, 2008, logistics’ purchased transportation costs represented 74.3% of logistics revenue versus 76.6% for the year ended December 31, 2007. The 36.1% increase is partially attributable to a $2.3 million increase in costs associated with new logistics business obtained through the acquisition of Pinch and Black Hawk.  The remaining increase is attributable to a 27.9% increase in miles driven by our network of owner-operators or third party transportation providers plus a 0.9% increase in the related cost per mile.   Miles driven by our network of owner-operators or third party transportation providers increased to support our continuing efforts to grow our TLX business as discussed above, and accounted for $9.1 million of the increase in logistics purchased transportation.  The change in the cost per mile increased the logistics purchased transportation by $0.4 million.  The increase in cost per mile was mostly the result of increased rates from third party transportation providers mostly offset by increased use of our network of owner-operators.  The decrease in logistics transportation as a percentage of revenue is the result of the favorable change in business mix as well as the addition of the new services from the Pinch and Black Hawk acquisitions.
 
    Purchased transportation costs related to our other revenue increased $0.5 million, or 8.3%, to $6.5 million for the year ended December 31, 2008 from $6.0 million for the year ended December 31, 2007. Other purchased transportation costs as a percentage of other revenue decreased to 25.9% of other revenue for the year ended December 31, 2008 from 28.7% for the year ended December 31, 2007.   The improvement in other purchased transportation costs as a percentage of other revenue is attributable to the use of Company-employed drivers to provide the transportation services associated with new business obtained from the Pinch and Black Hawk acquisitions.
 
26

 
FASI
 
    FASI purchased transportation increased to $11.2 million for the year ended December 31, 2008 from $2.1 million for the year ended December 31, 2007.  FASI purchased transportation as a percentage of revenue was 20.2% for the year ended December 31, 2008 compared to 13.1% for the year ended December 31, 2007.  The increase in purchased transportation is mainly due to our continued expansion of the FASI business through the acquisitions of Pinch and Service Express in March 2008 and September 2008, respectively.  In addition, the year ended 2008 includes a full twelve months of FASI activity compared to only five months for the year ended December 31, 2007, as FASI began operations on July 30, 2007.  Purchased transportation has increased as a percentage of FASI revenue mainly due to the increased use of owner-operators particularly in conjunction with the acquisition of Pinch.

Intercompany Eliminations
 
    Intercompany eliminations increased to $2.1 million and are the result of truckload and airport-to-airport services Forward Air provided to FASI during the year ended December 31, 2008.  During the year ended December 31, 2008, FASI also provided cartage services to Forward Air.

Salaries, Wages, and Benefits
 
    Salaries, wages and employee benefits increased by $27.7 million, or 31.2%, to $116.5 million in the year ended 2008 from $88.8 million in the same period of 2007.  As a percentage of total operating revenue, salaries, wages and employee benefits was 24.6% during the year ended December 31, 2008 compared to 22.6% for the same period in 2007.

Forward Air
 
    Salaries, wages and employee benefits of Forward Air increased by $10.5 million, or 12.8%, to $92.5 million in the year ended December 31, 2008 from $82.0 million for the year ended December 31, 2007.  Salaries, wages and employee benefits were 22.0% of Forward Air’s operating revenue in the year ended December 31, 2008 compared to 21.8% for the year ended December 31, 2007.  The increase in salaries, wages and employee benefits as a percentage of revenue was the result of increases in health insurance costs and share-based compensation offset by decreases in workers’ compensation and employee incentive costs.
 
    Employee incentives decreased $0.4 million, or 0.2% as a percentage of revenue for the year ended December 31, 2008 as compared to the year ended December 31, 2007.  The decrease was due to a reduction of annual incentives for key employees due to failures to achieve performance goals.  During the fourth quarter of 2008, salaries, wages and employee benefits were reduced by $1.5 million as we reduced accruals for annual senior management incentives as annual earnings goals were not met.  Comparatively, we increased salaries, wages and employee benefits by $1.1 million during the fourth quarter of 2007 for annual incentives to senior management.
 
    Workers’ compensation costs decreased approximately $1.1 million, or 0.3% as a percentage of Forward Air operating revenue.  The year-over-year difference is primarily due to a $0.7 million increase in our workers’ compensation loss reserves recorded in 2007 that resulted from an actuarial analysis. The remaining decrease is due to 2008 reductions in our workers’ compensation loss reserves as a result of lower claims experience than projected in previous periods.
 
    Share-based compensation increased $2.4 million, or 0.5% as a percentage of Forward Air operating revenue, due to the annual grants of stock options and non-vested shares of common stock to key members of management and non-employee directors from 2006 to the present.  Health insurance costs increased $1.8 million and 0.3% as a percentage of Forward Air operating revenue.  The increase is driven by an increase in plan participants primarily as a result of our Pinch and Black Hawk acquisitions in March 2008 and December 2007, respectively.
 
    The remaining increase in total dollars is attributable to the increased headcount of mainly terminal and Company-employed drivers associated with our acquisitions of Pinch and Black Hawk.

FASI
 
    FASI salaries, wages and employee benefits increased to $24.0 million for the year ended December 31, 2008 compared to $6.8 million for the year ended December 31, 2007.  The $17.2 million increase is mainly attributable to the year ended 2008 including twelve months of expense while 2007 included only five months, as FASI was not operating until July 30, 2007.  As a percentage of FASI operating revenue, salaries, wages and benefits increased to 43.4% for the year ended December 31, 2008 compared to 42.5% for the year ended December 31, 2007.  FASI salaries, wages and employee benefits are higher as a percentage of operating revenue than our Forward Air segment, as a larger percentage of the transportation services are performed by Company-employed drivers as opposed to independent owner-operators.  The increase in salaries, wages and employee benefits as a percentage of revenue is attributable to the acquisition of Service Express in September 2008.  The terminals we acquired with the Service Express acquisition utilize a much higher percentage of contract labor for its dock personnel than used by preexisting FASI terminals.  Contract labor is more expensive in the short term than Company-employed cargo handlers and dock personnel.  We will evaluate the proper utilization of contract labor in these terminals during the first quarter of 2009.

27

 
Operating Leases
 
    Operating leases increased by $7.6 million, or 45.2%, to $24.4 million in the year ended December 31, 2008 from $16.8 million in the year ended December 31, 2007.  Operating leases, the largest component of which is facility rent, were 5.1% of consolidated operating revenue for the year ended December 31, 2008 compared with 4.3% for the year ended December 31, 2007.

Forward Air
 
    Operating leases increased $2.7 million and 17.1% to $18.5 million in the year ended December 31, 2008 from $15.8 million for the year ended December 31, 2007.  Operating leases were 4.4% of Forward Air operating revenue for the year ended December 31, 2008 compared with 4.2% for the year ended December 31, 2007.  The increase in operating leases in total dollars was attributable to $1.5 million in higher facility rent expense associated with the assumption of additional facilities as a result of the Pinch and Black Hawk acquisitions and the expansion of certain facilities. Operating leases also increased $1.2 million for trailer and tractor leases assumed in conjunction with the acquisitions of Pinch and Black Hawk.

FASI
 
    FASI operating lease expense increased $4.9 million to $5.9 million for the year ended December 31, 2008 from $1.0 million for the year ended December 31, 2007.  Approximately $2.8 million of the increase was attributable to higher facility rent expense due to the increased number of terminals resulting from the Pinch and Service Express acquisitions.  Operating leases also increased $2.1 million for trailer, tractor, and straight truck leases assumed in conjunction with the acquisitions of Pinch and Service Express.  The increase in operating lease expense, both for facilities and equipment, is also attributable to the year ended 2008 including twelve months of lease expense while 2007 included only five months, as FASI was not operating until July 30, 2007.  The increase in lease expense for tractors, straight trucks and trailers is the primary reason for the increase in operating leases as a percentage of revenue.

Depreciation and Amortization
 
    Depreciation and amortization increased $5.7 million, or 52.3%, to $16.6 million in the year ended December 31, 2008 from $10.9 million for the year ended December 31, 2007.  Depreciation and amortization was 3.5% of consolidated operating revenue for the year ended December 31, 2008 compared with 2.8% for the year ended December 31, 2007.

Forward Air
 
    Depreciation and amortization expense as a percentage of Forward Air operating revenue was 3.4% in the year ended December 31, 2008 compared to 2.8% for the year ended December 31, 2007.  The increase in depreciation and amortization expense as a percentage of revenue is primarily due to a $2.1 million, or 0.5% as a percentage of revenue, increase in amortization expense for intangible assets associated with the acquisitions of Pinch and Black Hawk.  The remaining increase represents depreciation on new forklifts and other miscellaneous equipment and assets.

FASI
 
    FASI depreciation and amortization increased $1.7 million to $2.2 million for the year ended December 31, 2008 from $0.5 million for the year ended December 31, 2007. Depreciation and amortization expense as a percentage of FASI operating revenue was 4.0% in the year ended December 31, 2008 compared to 3.1% for the year ended December 31, 2007.  The increase in depreciation and amortization expense as a percentage of revenue is partially due to a $0.6 million, or 0.4% as a percentage of revenue, increase in amortization expense for intangible assets associated with the Service Express, Pinch and USAC acquisitions. The remainder of the increase is attributable to a full year of depreciation on assets acquired from USAC and increased depreciation from tractors, trailers and other equipment assumed in conjunction with our acquisitions of Pinch and Service Express. 

Insurance and Claims
 
    Insurance and claims expense increased $0.4 million, or 5.2%, to $8.1 million for the year ended December 31, 2008 from $7.7 million for the year ended December 31, 2007.  Insurance and claims were 1.7% of consolidated operating revenue during 2008 compared with 1.9% in 2007.
 
28

 
Forward Air
 
    Insurance and claims as a percentage of Forward Air operating revenue was 1.7% in the year ended December 31, 2008 compared to 1.9% for the year ended December 31, 2007.  The $0.1 million and 1.4% increase in insurance and claims for the year ended 2008 compared to the year ended December 31, 2007 is the result of increased insurance premiums resulting from the increased number of owner-operators, Company-employed drivers, and rolling stock equipment in our fleet.

FASI
 
    FASI insurance and claims increased $0.3 million to $0.8 million for the year ended December 31, 2008 from $0.5 million for the year ended December 31, 2007. As a percentage of operating revenue, insurance and claims was 1.4% for the year ended December 31, 2008 compared to 3.1% for the year ended December 31, 2007. The decrease as a percentage of revenue is attributable to the increase in revenue outpacing the increase in claims and insurance premiums.

Fuel Expense
 
    Fuel expense increased $9.1 million, to $11.5 million in the year ended December 31, 2008 from $2.4 million in the year ended December 31, 2007.  Fuel expense was 2.4% of consolidated operating revenue for the year ended December 31, 2008 compared with 0.6% for the year ended December 31, 2007.

Forward Air
 
    Fuel expense was 1.4% of Forward Air operating revenue in the year ended December 31, 2008 compared to 0.3% in the year ended December 31, 2007. The $4.5 million increase was primarily attributable to the increased number of Company-employed drivers and Company-owned or operated equipment as a result of the Pinch and Black Hawk acquisitions in March 2008 and December 2007, respectively. Also increasing fuel expense was the significant year-over-year increase in average diesel fuel prices during the second and third quarters of 2008.

FASI
 
    FASI fuel expense increased $4.6 million, to $5.7 million in the year ended December 31, 2008 from $1.1 million in the year ended December 31, 2007.  Fuel expenses were 10.3% of FASI operating revenue in the year ended December 31, 2008 compared to 6.9% for the year ended December 31, 2007.  FASI fuel expense is significantly higher as a percentage of operating revenue than Forward Air’s fuel expense, as FASI utilizes a higher ratio of Company-employed drivers and Company-owned or leased vehicles in its operations than Forward Air.  The increase in FASI fuel expense was attributable to the increase in owned and leased tractors assumed with the Pinch and Service Express acquisitions.  The increase is also attributable to the year ended 2008 including a full year of FASI activity as opposed to only five months for 2007.  Also increasing fuel expense was the significant year-over-year increase in average diesel fuel prices during the second and third quarters of 2008.  

Other Operating Expenses
 
    Other operating expenses increased $7.3 million, or 23.8%, to $38.0 million in the year ended December 31, 2008 from $30.7 million for the year ended December 31, 2007.  Other operating expenses were 8.0% of consolidated operating revenue for the year ended December 31, 2008 compared with 7.8% in the same period of 2007.

Forward Air
 
    Other operating expenses were 7.6% of Forward Air operating revenue in the year ended December 31, 2008 compared to 7.7% for the year ended December 31, 2007. The 0.1% decrease in other operating expenses as a percentage of operating revenue is the result of efforts to control discretionary costs by reducing expenses such as management training, marketing and travel.  In addition, during the year ended December 31, 2008 other operating expenses were reduced by $0.2 million related to the reversal of previous accruals for fines and penalties associated with the settlement of a dispute with a state taxing authority.  The dispute was settled with the state taxing authority for less than the amount previously reserved.

FASI
 
    FASI other operating expenses increased $4.2 million to $5.9 million for the year ended December 31, 2008 compared to $1.7 million for the year ended December 31, 2007.  The $4.2 million increase is mainly attributable to the year ended 2008, including twelve months of expense while 2007 included only five months, as FASI was not operating until July 30, 2007.  FASI other operating expenses for the year ended December 31, 2008 were 10.7% of the segment’s operating revenue compared to 10.6% for the December 31, 2007.  Other operating expenses are higher as a percentage of revenue than our Forward Air segment due to the higher utilization of Company-owned or leased vehicles resulting in higher maintenance and related expenses.

29

 
Income from Operations
 
    Income from operations decreased by $0.7 million or 1.0%, to $70.3 million for the year ended December 31, 2008 compared with $71.0 million for the year ended December 31, 2007.  Income from operations was 14.8% of consolidated operating revenue for the year ended December 31, 2008 compared with 18.1% for the year ended December 31, 2007.

Forward Air
 
    Income from operations increased by $2.0 million, or 2.9%, to $70.7 million for the year ended December 31, 2008 compared with $68.7 million for the year ended December 31, 2007.   The increase in income from operations was primarily a result of increased revenues partially offset by increased costs for salaries, wages and benefits, operating leases and depreciation and amortization.  Income from operations as a percentage of Forward Air operating revenue was 16.8% for the year ended December 31, 2008 compared with 18.2% for the year ended December 31, 2007.  The decrease in income from operations as a percentage of revenue was the result of increasing volumes from our lower margin services, such as TLX, and declining airport-to-airport volumes mainly during the fourth quarter of 2008 due to the economic recession.

FASI
 
    FASI results from operations decreased approximately $2.7 million to a $0.4 million loss from operations for the year ended December 31, 2008 from income of operations of $2.3 million for the year ended December 31, 2007.  The decrease in FASI results from operations is mainly driven by integration costs that resulted from the March 17, 2008 acquisition of Pinch. These costs primarily impacted salaries, wages, and employee benefits, operating leases and other operating expenses.  The loss from operations as a percentage of FASI operating revenue was (0.7)% for the year ended December 31, 2008 compared with 14.4% income from operations as a percentage of revenue for the year ended December 31, 2007.  As discussed above, the pool distribution business is highly seasonal and as a result of the timing of the USAC acquisition, our 2007 results primarily included peak seasonal activity.  Consequently, our 2007 results were better than we would expect for a full year of operations, such as 2008, which would include less positive results from the non-peak periods of operations.  In addition, FASI’s fourth quarter of 2008 income from operations of $0.5 million was $1.3 million less than the $1.8 million of income from operations for the fourth quarter of 2007.  This was primarily the result of lower peak season volumes than anticipated due to the current economic recession.

Interest Expense
 
    Interest expense increased $0.7 million to $1.2 million for the year ended December 31, 2008 compared to $0.5 million for the year ended December 31, 2007.  The increase in interest expense was mostly the result of net borrowings under our line of credit facility used to fund our acquisitions of Service Express, Pinch and Black Hawk in September 2008, March 2008 and December 2007, respectively.   These increases were net of a $0.1 million reduction of interest expense resulting from the settlement of a dispute with a state taxing authority during the year ended December 31, 2008.  The dispute was settled with the state taxing authority for less than the amount previously reserved.

Other Income, Net
 
    Other income, net was $0.3 million for the year ended December 31, 2008 compared with $1.8 million for the year ended December 31, 2007. The decrease in other income was attributable to reduced tax-exempt interest income due to decreased average cash and investment balances as a result of cash used for the acquisition of USAC in July 2007 and stock repurchases during the fourth quarter of 2007.
 
Provision for Income Taxes
 
    The combined federal and state effective tax rate for the year ended 2008 was 38.7% compared to a rate of 37.9% for the year ended December 31, 2007.  Our effective federal and state rate increased to provide for the decrease in tax-exempt interest income as discussed above and the disallowance of share-based compensation on qualified stock options.  However, during the year ended December 31, 2008 we reduced the provision for state income taxes by $0.3 million, net of federal benefit, for the settlement of a dispute with a state taxing authority.  The dispute was settled with the state taxing authority for less than the previously reserved amount.

Net Income
    
    As a result of the foregoing factors, net income decreased by $2.4 million, or 5.3%, to $42.5 million for the year ended December 31, 2008 compared to $44.9 million for the year ended December 31, 2007.

30

 
Results of Operations

The following table sets forth our historical consolidated financial data for the year ended December 31, 2007 and 2006 (in millions):

 
Year ended
   
 
December 31,
   
December 31,
         
Percent
   
 
2007
   
2006
   
Change
   
Change
   
Operating revenue
$ 392.7     $ 352.7     $ 40.0     11.3   %
Operating expenses:
                             
   Purchased transportation
  164.4       146.7       17.7     12.1    
   Salaries, wages, and employee benefits
  88.8       74.4       14.4     19.4    
   Operating leases
  16.8       14.5       2.3     15.9    
   Depreciation and amortization
  10.9       8.9       2.0     22.5    
   Insurance and claims
  7.7       6.0       1.7     28.3    
   Fuel expense
  2.4       1.0       1.4     140.0    
   Other operating expenses
  30.7       25.8       4.9     19.0    
      Total operating expenses
  321.7       277.3       44.4     16.0    
Income from operations
  71.0       75.4       (4.4 )   (5.8 )  
Other income (expense):
                             
   Interest expense
  (0.5 )     (0.1 )     (0.4 )   400.0    
   Other, net
  1.8       3.2       (1.4 )   (43.8 )  
      Total other (expense) income
  1.3       3.1       (1.8 )   (58.1 )  
Income before income taxes
  72.3       78.5       (6.2 )   (7.9 )  
Income taxes
  27.4       29.6       (2.2 )   (7.4 )  
Net income
$ 44.9     $ 48.9     $ (4.0 )   (8.2 ) %

31

 
The following table sets forth our historical financial data for the years ended December 31, 2007 and 2006 (in millions):

       
Percent of
         
Percent of
         
Percent
   
 
2007
   
Revenue
   
2006
   
Revenue
   
Change
   
Change
   
Operating revenue
                                         
      Forward Air
$
376.8
   
95.9
%
 
$
352.7
   
100.0
%
 
$
24.1
   
6.8
 
%
      FASI
 
16.0
   
4.1
     
--
   
--
     
16.0
   
100.0
   
      Intercompany Eliminations
 
(0.1
)
 
--
     
--
   
--
     
(0.1
)
 
100.0
   
            Total
 
392.7
   
100.0
     
352.7
   
100.0
     
40.0
   
11.3
   
                                           
Purchased transportation
                                         
      Forward Air
 
162.4
   
43.1
     
146.7
   
41.6
     
15.7
   
10.7
   
      FASI
 
2.1
   
13.1
     
--
   
--
     
2.1
   
100.0
   
      Intercompany Eliminations
 
(0.1
)
 
100.0
     
--
   
--
     
(0.1
)
 
100.0
   
            Total
 
164.4
   
41.9
     
146.7
   
41.6
     
17.7
   
12.1
   
                                           
Salaries, wages and employee benefits
                                         
      Forward Air
 
82.0
   
21.8
     
74.4
   
21.1
     
7.6
   
10.2
   
      FASI
 
6.8
   
42.5
     
--
   
--
     
6.8
   
100.0
   
            Total
 
88.8
   
22.6
     
74.4
   
21.1
     
14.4
   
19.4
   
                                           
Operating leases
                                         
      Forward Air
 
15.8
   
4.2
     
14.5
   
4.1
     
1.3
   
9.0
   
      FASI
 
1.0
   
6.3
     
--
   
--
     
1.0
   
100.0
   
            Total
 
16.8
   
4.3
     
14.5
   
4.1
     
2.3
   
15.9
   
                                           
Depreciation and amortization
                                         
      Forward Air
 
10.4
   
2.8
     
8.9
   
2.5
     
1.5
   
16.9
   
      FASI
 
0.5
   
3.1
     
--
   
--
     
0.5
   
100.0
   
            Total
 
10.9
   
2.8
     
8.9
   
2.5
     
2.0
   
22.5
   
                                           
Insurance and claims
                                         
      Forward Air
 
7.2
   
1.9
     
6.0
   
1.7
     
1.2
   
20.0
   
      FASI
 
0.5
   
3.1
     
--
   
--
     
0.5
   
100.0
   
            Total
 
7.7
   
1.9
     
6.0
   
1.7
     
1.7
   
28.3
   
                                           
Fuel expense
                                         
      Forward Air
 
1.3
   
0.3
     
1.0
   
0.3
     
0.3
   
30.0
   
      FASI
 
1.1
   
6.9