Edgar Filing: FORWARD AIR CORP

form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2011

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)		(I.R.S. Employer Identification No.)
430 Airport Road Greeneville, Tennessee		37745
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x 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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of July 25, 2011 was 29,508,864.

Table of Contents

Forward Air Corporation

		Page
		Number
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets – June 30, 2011 and December 31, 2010	3

	Condensed Consolidated Statements of Operations- Three and six months ended June 30, 2011 and 2010	4

	Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2011 and 2010	5

	Notes to Condensed Consolidated Financial Statements – June 30, 2011	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

Part II.	Other Information

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

Signatures		31

Part I.	Financial Information

Item 1.	Financial Statements (Unaudited).

Forward Air Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)

	June 30,		December 31,
	2011		2010 (a)
Assets
Current assets:
Cash	$	96,119	$	74,504
Accounts receivable, less allowance of $1,447 in 2011 and $1,996 in 2010		69,779		62,763
Other current assets		10,053		8,696
Total current assets		175,951		145,963

Property and equipment		221,715		213,704
Less accumulated depreciation and amortization		88,517		87,272
Total property and equipment, net		133,198		126,432
Goodwill and other acquired intangibles:
Goodwill		43,332		43,332
Other acquired intangibles, net of accumulated amortization of $19,167 in 2011 and $16,871 in 2010		28,963		31,259
Total goodwill and other acquired intangibles		72,295		74,591
Other assets		1,535		1,810
Total assets	$	382,979	$	348,796

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	15,354	$	10,687
Accrued expenses		17,933		16,280
Current portion of debt and capital lease obligations		583		638
Total current liabilities		33,870		27,605

Long-term debt and capital lease obligations, less current portion		50,611		50,883
Other long-term liabilities		7,782		8,106
Deferred income taxes		7,980		6,116

Shareholders’ equity:
Preferred stock		--		--
Common stock, $0.01 par value:
Authorized shares – 50,000,000
Issued and outstanding shares – 29,377,550 in 2011 and 29,030,919 in 2010		294		290
Additional paid-in capital		35,231		24,300
Retained earnings		247,211		231,496
Total shareholders’ equity		282,736		256,086
Total liabilities and shareholders’ equity	$	382,979	$	348,796

(a) Taken from audited financial statements, which are not presented in their entirety.

The accompanying notes are an integral part of the financial statements.

Forward Air Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
Operating revenue:
Forward Air
Airport-to-airport	$	91,493		$	81,741		$	173,640		$	152,628
Logistics		18,005			17,160			34,500			31,015
Other		6,871			6,389			13,274			12,264
Forward Air Solutions
Pool distribution		15,823			16,842			30,980			33,201
Total operating revenue		132,192			122,132			252,394			229,108

Operating expenses:
Purchased transportation
Forward Air
Airport-to-airport		35,675			32,501			68,269			61,300
Logistics		13,373			13,071			26,173			23,839
Other		1,659			1,616			3,132			3,108
Forward Air Solutions
Pool distribution		3,502			3,503			6,958			6,945
Total purchased transportation		54,209			50,691			104,532			95,192
Salaries, wages and employee benefits		31,439			33,167			61,934			63,837
Operating leases		6,705			6,252			13,411			12,880
Depreciation and amortization		5,222			5,107			10,304			10,055
Insurance and claims		1,845			2,106			4,020			4,437
Fuel expense		2,564			2,044			4,952			4,102
Other operating expenses		10,332			9,263			20,079			19,048
Total operating expenses		112,316			108,630			219,232			209,551
Income from operations		19,876			13,502			33,162			19,557

Other income (expense):
Interest expense		(141	)		(181	)		(336	)		(366	)
Other, net		31			(19	)		47			11
Total other expense		(110	)		(200	)		(289	)		(355	)
Income before income taxes		19,766			13,302			32,873			19,202
Income taxes		7,797			5,390			13,035			7,871
Net income	$	11,969		$	7,912		$	19,838		$	11,331

Net income per share:
Basic	$	0.41		$	0.27		$	0.68		$	0.39
Diluted	$	0.40		$	0.27		$	0.67		$	0.39
Weighted average shares outstanding:
Basic		29,337			28,973			29,236			28,962
Diluted		29,851			29,119			29,618			29,093

Dividends per share:	$	0.07		$	0.07		$	0.14		$	0.14

The accompanying notes are an integral part of the financial statements.

Forward Air Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Six months ended
	June 30,			June 30,
	2011			2010
Operating activities:
Net income	$	19,838		$	11,331
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		10,304			10,055
Share-based compensation		2,955			3,381
Gain on disposal of property and equipment		--			(7	)
Provision for (recovery) loss on receivables		(28	)		224
Provision for revenue adjustments		933			837
Deferred income taxes		1,939			(1,664	)
Tax benefit for stock options exercised		(219	)		(9	)
Changes in operating assets and liabilities
Accounts receivable		(7,921	)		(8,882	)
Prepaid expenses and other current assets		(1,745	)		(614	)
Accounts payable and accrued expenses		6,503			4,259
Net cash provided by operating activities		32,559			18,911

Investing activities:
Proceeds from disposal of property and equipment		667			42
Purchases of property and equipment		(15,441	)		(8,739	)
Other		301			(30	)
Net cash used in investing activities		(14,473	)		(8,727	)

Financing activities:
Payments of debt and capital lease obligations		(328	)		(490	)
Proceeds from exercise of stock options		7,631			144
Payments of cash dividends		(4,121	)		(4,057	)
Common stock issued under employee stock purchase plan		128			91
Tax benefit for stock options exercised		219			9
Net cash provided by (used in) financing activities		3,529			(4,303	)
Net increase in cash		21,615			5,881
Cash at beginning of period		74,504			42,035
Cash at end of period	$	96,119		$	47,916

The accompanying notes are an integral part of the financial statements.

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands)

(Unaudited)

June 30, 2011

1.	Basis of Presentation

Forward Air Corporation's (“the Company”) services can be classified into two principal reporting segments: Forward Air, Inc. (“Forward Air”) and Forward Air Solutions, Inc. (“FASI”).

Through the Forward Air segment, the Company is a leading provider of time-definite transportation and related logistics services to the North American deferred air freight market and its activities can be classified into three categories of service: airport-to-airport, logistics, and other. Forward Air’s airport-to-airport service operates a comprehensive national network for the time-definite surface transportation of deferred air freight. The airport-to-airport service offers customers local pick-up and delivery and scheduled surface transportation of cargo as a cost effective, reliable alternative to air transportation. Forward Air’s logistics services provide expedited truckload brokerage and dedicated fleet services. Forward Air’s other services include shipment consolidation and deconsolidation, warehousing, customs brokerage, and other handling. The Forward Air segment primarily provides its transportation services through a network of terminals located at or near airports in the United States and Canada.

FASI provides 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. FASI’s primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company’s operating results are subject to seasonal trends when measured on a quarterly basis, therefore operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and notes thereto included in the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2010.

The balance sheet at December 31, 2010, as presented in this filing, has been derived from the audited financial statements at that date, but does not include all of the financial information and notes required by United States generally accepted accounting principles for complete financial statements.

The accompanying consolidated financial statements of the Company include Forward Air Corporation and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

2.	Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“the FASB”) expanded the disclosure requirements for fair value measurements. The expanded disclosures require a greater level of disaggregated information and additional disclosures about valuation techniques and inputs to fair value measurements. The amendment requires expanded disclosures on transfers in and out of Level 1 and Level 2 fair values, activity in Level 3 investments and inputs and valuation techniques. For level 3 fair value measurements, the disclosure requirements were effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the provisions of this amendment required for periods beginning after December 15, 2010 did not have a material impact on the Company’s financial statement disclosures.

3.	Comprehensive Income

Comprehensive income includes any changes in the equity of the Company from transactions and other events and circumstances from non-owner sources. Comprehensive income for the three months ended June 30, 2011 and 2010 was $11,969 and $7,912, respectively. Comprehensive income for the six months ended June 30, 2011 and 2010 was $19,838 and $11,331, respectively. The comprehensive results approximated net income.

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

4.	Goodwill and Long-Lived Assets

The Company conducts an annual (or more frequently if circumstances indicate possible impairment) impairment test of goodwill for each reporting unit at June 30 of each year. The first step of the goodwill impairment test is the estimation of the reporting unit’s fair value. If step one indicates that impairment potentially exists, the second step is performed to measure the amount of the impairment, if any. Goodwill impairment exists when the calculated implied fair value of goodwill is less than its carrying value. Changes in strategy or market conditions could significantly impact these fair value estimates and require adjustments to recorded asset balances.

The Company conducted its annual impairment test of goodwill for each reporting unit as of June 30, 2011 and no impairment charges were required. For the goodwill impairment calculations, the Company calculates the fair value of the applicable reportable units, using a combination of discounted projected cash flows and market valuations for comparable companies as of the valuation date. The Company's fair value calculations for goodwill are classified within level 3 of the fair value hierarchy as defined in the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“the FASB Codification”).

As of June 30, 2011, the carrying value of goodwill related to the Forward Air and FASI segments was $37,926 and $5,406, respectively. The estimation of fair value related to the impairment test for goodwill is particularly sensitive to projected financial information used in the calculations. Earnings estimated to be generated by the Forward Air segment are expected to continue supporting the carrying value of its goodwill. The FASI segment is currently facing the challenges of building, expanding and diversifying its revenue base. If FASI’s efforts are significantly delayed, future estimates of projected financial information may be reduced, and the Company may be required to record an impairment charge against the carrying value of FASI’s goodwill. There were no changes in the carrying amount of goodwill during the three and six months ended June 30, 2011.

5.	Share-Based Payments

The Company’s general practice has been to make a single annual grant of share-based compensation to key employees and to make other employee grants only in connection with new employment or promotions. Forms of share-based compensation granted to employees by the Company include stock options, non-vested shares of common stock (“non-vested share”), and performance shares. The Company also typically makes a single annual grant of non-vested shares to non-employee directors in conjunction with the annual election of non-employee directors to the Board of Directors. Share-based compensation is based on the grant date fair value of the instrument and is recognized, net of estimated forfeitures, ratably over the requisite service period, or vesting period. The Company estimates forfeitures based upon historical experience. All share-based compensation expense is recognized in salaries, wages and employee benefits.

Employee Activity

Stock option grants to employees typically expire seven years from the grant date and vest ratably over a three-year period. The Company used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted. The weighted-average fair value of options granted during the six months ended June 30, 2011 and 2010 was $10.68 and $8.24, respectively. No stock options were granted during the three months ended June 30, 2011 and 2010. The fair values were estimated using the following weighted-average assumptions:

	Three months ended
	June 30,		June 30,
	2011		2010
Expected dividend yield	1.0	%	1.3	%
Expected stock price volatility	44.9	%	45.7	%
Weighted average risk-free interest rate	2.4	%	2.5	%
Expected life of options (years)	4.6		4.5

During the three months ended June 30, 2011 and 2010, share-based compensation expense for options granted to employees was $952 and $1,459, respectively. The total tax benefit related to the share-based expense for these options for the three months ended June 30, 2011 and 2010, was $252 and $372, respectively. During the six months ended June 30, 2011 and 2010, share-based compensation expense for options granted to employees was $2,064 and $3,083, respectively. The total tax benefit related to the share-based expense for these options for the six months ended June 30, 2011 and 2010, was $556 and $862, respectively. Total compensation cost, net of estimated forfeitures, related to the options not yet recognized in earnings was $4,727 at June 30, 2011. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

5.	Share-Based Payments (continued)

The following tables summarize the Company’s employee stock option activity and related information for the three months ended June 30, 2011:

	Three months ended June 30, 2011
							Weighted-
			Weighted-		Aggregate		Average
			Average		Intrinsic		Remaining
	Options		Exercise		Value		Contractual
	(000)		Price		(000)		Term
Outstanding at March 31, 2011	3,616		$	26
Granted	-			-
Exercised	(116	)		24
Forfeited	(2	)		29
Outstanding at June 30, 2011	3,498		$	26	$	22,871	3.9
Exercisable at June 30, 2011	2,718		$	27	$	15,692	3.4

The following tables summarize the Company’s employee stock option activity and related information for the six months ended June 30, 2011:

	Six months ended June 30, 2011
							Weighted-
			Weighted-		Aggregate		Average
			Average		Intrinsic		Remaining
	Options		Exercise		Value		Contractual
	(000)		Price		(000)		Term
Outstanding at December 31, 2010	3,702		$	26
Granted	118			29
Exercised	(317	)		23
Forfeited	(5	)		25
Outstanding at June 30, 2011	3,498		$	26	$	22,871	3.9
Exercisable at June 30, 2011	2,718		$	27	$	15,692	3.4

During the first quarter of 2011, the Company granted 108 non-vested shares to key employees with a weighted-average fair value of $28.61. The non-vested shares’ fair values were estimated using closing market prices on the day of grant. Share-based compensation expense was $252 and $388 during the three and six months ended June 30, 2011 for non-vested shares granted to employees. The total tax benefit related to this share-based expense was $100 and $154 for the three and six months ended June 30, 2011. As of June 30, 2011, total compensation cost, net of estimated forfeitures, related to the non-vested shares not yet recognized in earnings was $2,601.

During the first quarter of 2011, the Company granted performance shares to key employees. Under the terms of the performance share agreements, on the third anniversary of the grant date, the Company will issue to the employees a calculated number of common stock shares based on the three year performance of the Company’s common stock share price as compared to the share price performance of a selected peer group. The median number of shares eligible for issuance to employees under these agreements is 38. No shares may be issued if the Company share price performance outperforms 30 percent or less of the peer group, but the number of shares issued may be increased to 75 shares if the Company share price performs better than 90 percent of the peer group. The fair value of the performance shares was estimated to be $30.17 using a Monte Carlo simulation with a risk free rate of return of 1.4% and a three year volatility of 47.7%. Share-based compensation expense for the performance shares was $94 and $145 during the three and six months ended June 30, 2011. As of June 30, 2011, total compensation cost, net of estimated forfeitures, related to the performance shares not yet recognized in earnings was $988.

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

5.	Share-Based Payments (continued)

Under the 2005 Employee Stock Purchase Plan (the “ESPP”), which has been approved by shareholders, the Company is authorized to issue up to a remaining 434 shares of common stock to employees of the Company. These shares may be issued at a price equal to 90% of the lesser of the market value on the first day or the last day of each six-month purchase period. Common stock purchases are paid for through periodic payroll deductions and/or up to two large lump sum contributions. For the six months ended June 30, 2011, participants under the plan purchased 5 shares at an average price of $25.82 per share. For the six months ended June 30, 2010, participants under the plan purchased 4 shares at an average price of $22.98 per share. The weighted-average fair value of each purchase right under the ESPP granted for the six months ended June 30, 2011, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $7.97 per share. The weighted-average fair value of each purchase right under the ESPP granted for the six months ended June 30, 2010, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $4.27 per share. Share-based compensation expense of $40 and $17 was recognized during the six months ended June 30, 2011 and 2010, respectively.

Non-employee Director Activity

Grants of non-vested shares to non-employee directors vest ratably over the elected term to the Board of Directors, or one year. Share-based compensation expense for non-vested shares granted to non-employee directors during the three months ended June 30, 2011 and 2010 was $180 and $142, respectively. The total tax benefit related to this share-based expense was $72 and $57 for the three months ended June 30, 2011 and 2010, respectively. Share-based compensation expense during the six months ended June 30, 2011 and 2010 was $318 and $281, respectively. The total tax benefit related to this share-based expense was $126 and $113 for the six months ended June 30, 2011 and 2010, respectively. Total compensation cost, net of estimated forfeitures, related to the non-vested shares granted to non-employee directors not yet recognized in earnings was $660 at June 30, 2011. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

In addition to the above activity, each May from 1995 to 2005 options were granted to the non-employee directors of the Company. The options have terms of ten years and are fully exercisable. At June 30, 2011, 52 options were outstanding and will expire between May 2012 and May 2015. At June 30, 2011, the weighted average exercise price per share and remaining contractual term for the outstanding options of non-employee directors were $21 and 2.5 years, respectively.

6.	Senior Credit Facility

On October 10, 2007, the Company entered into a $100,000 senior credit facility. This facility has a term of five years and includes an accordion feature, which allows for an additional $50,000 in borrowings. However, at this time the Company believes that to access the accordion feature the Company’s lender would require that the interest rates for the senior credit facility be reset to match current market rates. The senior credit facility matures on October 10, 2012. The Company entered into this larger credit facility in order to fund potential acquisitions, the repurchase of its common stock, and for financing other general business purposes. Interest rates for advances under the facility are at LIBOR plus 0.6% to 0.9% based upon covenants related to total indebtedness to earnings (0.8% at June 30, 2011). The agreement contains certain covenants and restrictions, none of which are expected to significantly affect the Company’s operations or ability to pay dividends. No assets are pledged as collateral against the senior credit facility. As of June 30, 2011, the Company had $50,000 outstanding under the senior credit facility. At June 30, 2011, the Company had utilized $11,784 of availability for outstanding letters of credit and had $38,216 of available borrowing capacity outstanding under the senior credit facility.

7.	Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:

	Three months ended				Six months ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010
Numerator:
Numerator for basic and diluted income per share - net income	$	11,969	$	7,912	$	19,838	$	11,331

Denominator (in thousands):
Denominator for basic income per share - weighted-average shares		29,337		28,973		29,236		28,962
Effect of dilutive stock options and non-vested shares		514		146		382		131
Denominator for diluted income per share - adjusted weighted-average shares		29,851		29,119		29,618		29,093
Basic net income per share	$	0.41	$	0.27	$	0.68	$	0.39
Diluted net income per share	$	0.40	$	0.27	$	0.67	$	0.39

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

7.	Net Income Per Share (continued)

The number of options and non-vested shares that could potentially dilute net earnings per share in the future, but that were not included in the computation of income per diluted share because to do so would have been anti-dilutive for the periods presented, were approximately 642 and 2,659 at June 30, 2011 and 2010, respectively.

8.	Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various states and Canada. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or Canadian examinations by tax authorities for years before 2005.

For the three months ended June 30, 2011 and 2010, the effective income tax rates varied from the statutory federal income tax rate of 35.0%, primarily as a result of the effect of state income taxes, net of the federal benefit and permanent differences between book and tax net income.

9.	Financial Instruments

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company does not generally require collateral from its customers. Concentrations of credit risk with respect to trade accounts receivable on a consolidated basis are limited due to the large number of entities comprising the Company’s customer base and their dispersion across many different industries. However, while not significant to the Company on a consolidated basis, four customers accounted for approximately 70.4% of FASI’s 2010 annual operating revenue.

In February 2010, the Company notified one of FASI’s largest customers that it would cease providing services and concluded the business relationship by July 2010. During the six months ended June 30, 2010, revenues from this customer were 15.4% of FASI’s operating revenue and 2.3% of the Company’s consolidated operating revenue. The revenue associated with this customer was low yielding and the impact on 2011 and 2010’s operating results from curtailing these services were minimal.

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value based on their short-term nature.

The Company’s senior credit facility bears interest at LIBOR plus 0.6% to 0.9% based upon covenants related to total indebtedness to earnings. Using interest rate quotes and discounted cash flows, the Company estimated the fair value of its senior credit facility and debt and capital lease obligations as follows:

	June 30, 2011
	Carrying		Fair
	Value		Value
Senior credit facility	$	50,000	$	49,584
Other debt and capital leases		1,194		1,243

The Company's fair value calculations for the above financial instruments are classified within level 3 of the fair value hierarchy.

10.	Shareholders' Equity

During each quarter of 2011 and 2010, the Company’s Board of Directors declared a cash dividend of $0.07 per share of common stock. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

11.	Commitments and Contingencies

From time to time, the Company is party to ordinary, routine litigation incidental to and arising in the normal course of business. The Company does not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on its business, financial condition or results of operations.

The primary claims in the Company’s business relate to workers’ compensation, property damage, vehicle liability and medical benefits. Most of the Company’s insurance coverage provides for self-insurance levels with primary and excess coverage which management believes is sufficient to adequately protect the Company from catastrophic claims. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured limits, including provision for estimated claims incurred but not reported.

The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing hindsight and actuarial analysis to determine an estimate of probable losses on claims incurred but not reported. Such losses could be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates.

Because of the uncertainty of the ultimate resolution of outstanding claims, as well as uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially in the near term. However, no estimate can currently be made of the range of additional loss that is at least reasonably possible.

12.	Segment Reporting

The Company operates in two reportable segments based on differences in services provided. Forward Air provides time-definite transportation and logistics services to the deferred air freight market. FASI provides pool distribution services primarily to regional and national distributors and retailers.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in Note 1 to the Consolidated Financial Statements included in the Company’s 2010 Annual Report on Form 10-K. Segment data includes intersegment revenues. Assets and costs of the corporate headquarters are allocated to the segments based on usage. The Company evaluates the performance of its segments based on net income (loss). The Company’s business is conducted in the U.S. and Canada.

The following tables summarize segment information about net income (loss) and assets used by the chief operating decision maker of the Company in making decisions regarding allocation of assets and resources as of and for the three and six months ended June 30, 2011 and 2010.

	Three months ended June 30, 2011
	Forward Air		FASI			Eliminations			Consolidated
External revenues	$	116,369	$	15,823		$	--		$	132,192
Intersegment revenues		141		82			(223	)		--
Depreciation and amortization		4,156		1,066			--			5,222
Share-based compensation expense		1,433		79			--			1,512
Interest expense		131		10			--			141
Interest income		55		--			--			55
Income tax expense (benefit)		7,975		(178	)		--			7,797
Net income (loss)		12,284		(315	)		--			11,969
Total assets		385,665		36,688			(39,374	)		382,979
Capital expenditures		7,562		550			--			8,112

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

12.	Segment Reporting (continued)

	Three months ended June 30, 2010
	Forward Air		FASI			Eliminations			Consolidated
External revenues	$	105,290	$	16,842		$	--		$	122,132
Intersegment revenues		288		78			(366	)		--
Depreciation and amortization		4,124		983			--			5,107
Stock-based compensation expense		1,523		95			--			1,618
Interest expense		166		15			--			181
Interest income		5		1			--			6
Income tax expense (benefit)		5,664		(274	)		--			5,390
Net income (loss)		8,381		(469	)		--			7,912
Total assets		331,721		38,475			(39,699	)		330,497
Capital expenditures		2,747		566			--			3,313


	Six months ended June 30, 2011
	Forward Air		FASI			Eliminations			Consolidated
External revenues	$	221,414	$	30,980		$	--		$	252,394
Intersegment revenues		263		163			(426	)		--
Depreciation and amortization		8,227		2,077			--			10,304
Share-based compensation expense		2,786		169			--			2,955
Interest expense		313		23			--			336
Interest income		104		--			--			104
Income tax expense (benefit)		13,589		(554	)		--			13,035
Net income (loss)		20,792		(954	)		--			19,838
Total assets		385,665		36,688			(39,374	)		382,979
Capital expenditures		12,943		2,498			--			15,441


	Six months ended June 30, 2010
	Forward Air		FASI			Eliminations			Consolidated
External revenues	$	195,907	$	33,201		$	--		$	229,108
Intersegment revenues		563		145			(708	)		--
Depreciation and amortization		8,163		1,892			--			10,055
Stock-based compensation expense		3,178		203			--			3,381
Interest expense		334		32			--			366
Interest income		10		3			--			13
Income tax expense (benefit)		8,565		(694	)		--			7,871
Net income (loss)		12,506		(1,175	)		--			11,331
Total assets		331,721		38,475			(39,699	)		330,497
Capital expenditures		5,398		3,341			--			8,739

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview and Executive Summary

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 84 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and 12 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.

FASI provides 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 service 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 ability to increase our earnings 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.

Trends and Developments

Results from Operations

During the three months ended June 30, 2011, we experienced an 8.3% increase in our consolidated revenues compared to the three months ended June 30, 2010. The increase in revenue is attributable to our Forward Air segment which experienced revenue increases of 10.3% during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. Forward Air revenue increases were driven by general rate increases initiated in June 2011 and May 2010, increased net fuel surcharge revenues and increased shipping volumes.

However, FASI revenue decreased 5.9% for the three months ended June 30, 2011, compared to the same period in 2010. The FASI revenue decrease was the result of a FASI customer termination partially offset by new business wins. The customer termination resulted in approximately $2.6 million and $5.4 million less FASI revenue for the three and six months ended June 30, 2011, compared to the same periods in 2010, respectively. This customer termination was offset by increased volumes from existing customers as well as new customer wins. While the customer termination adversely impacted revenue growth during the three and six month ended June 30, 2011, the lost revenue was low yielding and the impact on operating results from curtailing these services was minimal. FASI’s loss from operations is largely attributable to the low retail volumes, as the first and second quarters are historically the slowest quarters of the year for retail sales. We continue our efforts to diversify FASI’s customer base with non-specialty retail customers so as to maintain consistent revenue levels throughout the year.

During the three and six months ended June 30, 2011 increasing fuel prices have positively impacted our revenues and results of operations as compared to prior periods. 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 increase in shipping activity combined with the increasing diesel fuel prices have resulted in an increase in our net fuel surcharge revenue. Total net fuel surcharge revenue increased 55.7% and 55.9% during the three and six months ended June 30, 2011 as compared to the same periods in 2010, respectively.

Goodwill

In accordance with our accounting policy, we conducted our annual impairment test of goodwill for each reporting unit as of June 30, 2011 and no impairment charges were required. As of June 30, 2011, the carrying value of goodwill related to the Forward Air and FASI segments was $37.9 million and $5.4 million, respectively. The estimation of fair value related to the impairment test for goodwill is particularly sensitive to projected financial information used in the calculations. Earnings estimated to be generated by our Forward Air segment are expected to continue supporting the carrying value of its goodwill. Our FASI segment is currently facing the challenges of building, expanding and diversifying its revenue base. If FASI’s efforts are significantly delayed, future estimates of projected financial information may be reduced, and we may be required to record an impairment charge against the carrying value of FASI’s goodwill.

Segments

Our operations can be broadly classified into two principal segments: Forward Air and FASI.

Our Forward Air segment includes our airport-to-airport network, 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.

Results of Operations

The following table sets forth our consolidated historical financial data for the three months ended June 30, 2011 and 2010 (in millions):

	Three months ended
	June 30,			June 30,						Percent
	2011			2010			Change			Change
Operating revenue	$	132.2		$	122.1		$	10.1		8.3	%
Operating expenses:
Purchased transportation		54.2			50.7			3.5		6.9
Salaries, wages, and employee benefits		31.4			33.1			(1.7	)	(5.1	)
Operating leases		6.7			6.3			0.4		6.4
Depreciation and amortization		5.2			5.1			0.1		2.0
Insurance and claims		1.9			2.1			(0.2	)	(9.5	)
Fuel expense		2.6			2.0			0.6		30.0
Other operating expenses		10.3			9.3			1.0		10.8
Total operating expenses		112.3			108.6			3.7		3.4
Income from operations		19.9			13.5			6.4		47.4
Other expense:
Interest expense		(0.1	)		(0.2	)		0.1		(50.0	)
Other, net		--			--			--		--
Total other expense		(0.1	)		(0.2	)		0.1		(50.0	)
Income before income taxes		19.8			13.3			6.5		48.9
Income taxes		7.8			5.4			2.4		44.4
Net income	$	12.0		$	7.9		$	4.1		51.9	%

The following table sets forth our historical financial data by segment for the three months ended June 30, 2011 and 2010 (in millions):

	Three months ended
	June 30,			Percent of		June 30,			Percent of					Percent
	2011			Revenue		2010			Revenue		Change			Change
Operating revenue
Forward Air	$	116.5		88.1	%	$	105.6		86.5	%	$	10.9		10.3	%
FASI		15.9		12.0			16.9		13.8			(1.0	)	(5.9	)
Intercompany Eliminations		(0.2	)	(0.1	)		(0.4	)	(0.3	)		0.2		(50.0	)
Total		132.2		100.0			122.1		100.0			10.1		8.3

Purchased transportation
Forward Air		50.8		43.6			47.3		44.8			3.5		7.4
FASI		3.6		22.7			3.8		22.5			(0.2	)	(5.3	)
Intercompany Eliminations		(0.2	)	100.0			(0.4	)	100.0			0.2		(50.0	)
Total		54.2		41.0			50.7		41.5			3.5		6.9

Salaries, wages and employee benefits
Forward Air		24.7		21.2			25.4		24.0			(0.7	)	(2.8	)
FASI		6.7		42.1			7.7		45.5			(1.0	)	(13.0	)
Total		31.4		23.7			33.1		27.1			(1.7	)	(5.1	)

Operating leases
Forward Air		5.0		4.3			4.4		4.2			0.6		13.6
FASI		1.7		10.7			1.9		11.2			(0.2	)	(10.5	)
Total		6.7		5.1			6.3		5.2			0.4		6.3

Depreciation and amortization
Forward Air		4.1		3.5			4.1		3.9			--		--
FASI		1.1		6.9			1.0		5.9			0.1		10.0
Total		5.2		3.9			5.1		4.2			0.1		2.0

Insurance and claims
Forward Air		1.5		1.3			1.6		1.5			(0.1	)	(6.3	)
FASI		0.4		2.5			0.5		3.0			(0.1	)	(20.0	)
Total		1.9		1.4			2.1		1.7			(0.2	)	(9.5	)

Fuel expense
Forward Air		1.2		1.0			0.9		0.9			0.3		33.3
FASI		1.4		8.8			1.1		6.5			0.3		27.3
Total		2.6		2.0			2.0		1.6			0.6		30.0

Other operating expenses
Forward Air		8.8		7.6			7.7		7.3			1.1		14.3
FASI		1.5		9.4			1.6		9.5			(0.1	)	(6.3	)
Total		10.3		7.8			9.3		7.6			1.0		10.8

Income (loss) from operations
Forward Air		20.4		17.5			14.2		13.4			6.2		43.7
FASI		(0.5	)	(3.1	)		(0.7	)	(4.1	)		0.2		(28.6	)
Total	$	19.9		15.1	%	$	13.5		11.1	%	$	6.4		47.4	%

The following table presents the components of the Forward Air segment’s operating revenue and purchased transportation for the three months ended June 30, 2011 and 2010 (in millions):

	Three months ended
	June 30,		Percent of		June 30,		Percent of				Percent
	2011		Revenue		2010		Revenue		Change		Change
Forward Air revenue
Airport-to-airport	$	91.6	78.6	%	$	81.8	77.5	%	$	9.8	12.0	%
Logistics		18.0	15.5			17.4	16.5			0.6	3.4
Other		6.9	5.9			6.4	6.0			0.5	7.8
Total	$	116.5	100.0	%	$	105.6	100.0	%	$	10.9	10.3	%

Forward Air purchased transportation
Airport-to-airport	$	35.7	39.0	%	$	32.6	39.9	%	$	3.1	9.5	%
Logistics		13.4	74.4			13.1	75.3			0.3	2.3
Other		1.7	24.6			1.6	25.0			0.1	6.3
Total	$	50.8	43.6	%	$	47.3	44.8	%	$	3.5	7.4	%

Three Months Ended June 30, 2011 compared to Three Months Ended June 30, 2010

Revenues

Operating revenue increased by $10.1 million, or 8.3%, to $132.2 million for the three months ended June 30, 2011 from $122.1 million in the same period of 2010.

Forward Air

Forward Air operating revenue increased $10.9 million, or 10.3%, to $116.5 million from $105.6 million, accounting for 88.1% of consolidated operating revenue for the three months ended June 30, 2011 compared to 86.5% for the same period in 2010. Airport-to-airport revenue, which is the largest component of our consolidated operating revenue, increased $9.8 million, or 12.0%, to $91.6 million from $81.8 million, accounting for 78.6% of the segment’s operating revenue during the three months ended June 30, 2011 compared to 77.5% for the same period in June 30, 2010. Increased tonnage and an increase in our base revenue per pound, excluding net fuel surcharge revenue and Forward Air Complete (“Complete”) revenue, accounted for $4.4 million of the increase in airport-to-airport revenue. Our airport-to-airport business is priced on a per pound basis and the average revenue per pound, excluding the impact of fuel surcharges and Complete, increased 3.0% for the three months ended June 30, 2011 versus the three months ended June 30, 2010. Tonnage that transited our network increased by 3.4% in the three months ended June 30, 2011 compared with the three months ended June 30, 2010. Average base revenue per pound increased as a result of general rate increases that we implemented in June 2011 and May 2010. The remaining increase in airport-to-airport revenue is the result of increased net fuel surcharge revenue and revenue from our Complete pick-up and delivery service. Net fuel surcharge revenue increased $3.3 million during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 in response to increased fuel prices and overall business volumes. In addition, Complete revenue increased $2.1 million during the three months ended June 30, 2011 compared to the same period of 2010. The increase in Complete revenue is attributable to the overall increase in airport-to-airport shipping volumes as well as higher customer utilization of our Complete service.

Logistics revenue, which is primarily TLX, increased $0.6 million, or 3.4%, to $18.0 million in the second quarter of 2011 from $17.4 million in the same period of 2010. TLX revenue, which is priced on a per mile basis, increased $0.6 million as miles driven to support our TLX revenue increased by approximately 2.9% during the three months ended June 30, 2011 compared to the same period in 2010. Also, TLX average revenue per mile increased 0.8%. The increase in miles and average revenue per mile is mainly attributable to new business wins in the first quarter of 2011 and change in overall business mix.

Other revenue, which includes warehousing services and terminal handling, accounted for the final component of Forward Air operating revenue. Other revenue increased $0.5 million, or 7.8%, to $6.9 million in the second quarter of 2011 from $6.4 million in the same period of 2010. The increase in revenue was primarily due to increases in other pick-up and delivery services as well as handling and sorting services that primarily increased in conjunction with the increase in our airport-to-airport business.

FASI

FASI operating revenue decreased $1.0 million, or 5.9%, to $15.9 million for the three months ended June 30, 2011 from $16.9 million for the same period in 2010. The decrease in revenue is primarily attributable to a FASI customer termination, which accounted for approximately $2.6 million in revenue during the second quarter of 2010. The lost revenue was low yielding and the impact on operating results from curtailing these services was minimal. This revenue loss was partially offset by improved volumes from existing customers as well as new business wins.

Intercompany Eliminations

Intercompany eliminations decreased $0.2 million, or 50.0%, to $0.2 million in the second quarter of 2011 from $0.4 million in the same period of 2010. The intercompany eliminations are the result of truckload and airport-to-airport services Forward Air provided to FASI and FASI cartage services provided to Forward Air during the three months ended June 30, 2011. The decrease in intercompany eliminations was the result of reduced airport-to-airport and truckload services Forward Air provided to FASI.

Purchased Transportation

Purchased transportation increased by $3.5 million, or 6.9%, to $54.2 million in the second quarter of 2011 from $50.7 million in the same period of 2010. As a percentage of total operating revenue, purchased transportation was 41.0% during the three months ended June 30, 2011 compared to 41.5% for the same period in 2010.

Forward Air

Forward Air’s purchased transportation increased by $3.5 million, or 7.4%, to $50.8 million for the three months ended June 30, 2011 from $47.3 million for the three months ended June 30, 2010. The increase in purchased transportation is primarily attributable to a 4.5% increase in miles driven and a 2.9% increase in the total cost per mile for the second quarter of 2011 versus the same period in 2010. As a percentage of segment operating revenue, Forward Air purchased transportation was 43.6% during the three months ended June 30, 2011 compared to 44.8% for the same period in 2010.

Purchased transportation costs for our airport-to-airport network increased $3.1 million, or 9.5%, to $35.7 million for the three months ended June 30, 2011 from $32.6 million for the three months ended June 30, 2010. For the three months ended June 30, 2011, purchased transportation for our airport-to-airport network decreased to 39.0% of airport-to-airport revenue from 39.9% for the same period in 2010. The $3.1 million increase is mostly attributable to a 5.4% increase in miles driven by our network of owner-operators or third party transportation providers and a 1.2% increase in the cost per mile paid to our network of owner-operators or third party transportation providers. The increase in miles increased purchased transportation by $1.5 million while the increase in cost per mile increased purchased transportation by $0.3 million. Miles driven by our network of owner-operators or third party transportation providers increased in conjunction with the tonnage increase discussed above. The cost per mile increase was primarily attributable to increased use of more costly third party transportation providers as additional capacity was required to accommodate the increased tonnage volumes. The remaining increase was attributable to a $1.3 million increase in third party transportation costs associated with the increased Complete volumes discussed above.

Purchased transportation costs for our logistics revenue increased $0.3 million, or 2.3%, to $13.4 million for the three months ended June 30, 2011 from $13.1 million for the three months ended June 30, 2010. For the three months ended June 30, 2011, logistics’ purchased transportation costs represented 74.4% of logistics revenue compared to 75.3% for the same period in 2010. The increase in logistics’ purchased transportation was mostly attributable to a $0.2 million, or 1.3% increase in TLX purchased transportation. Miles driven to support our TLX revenue increased 2.9% while our TLX cost per mile decreased approximately 1.6% during the three months ended June 30, 2011 compared to the same period in 2010. The decrease in cost per mile was mostly attributable to increased utilization of our network of owner-operators as opposed to more costly third party transportation providers. The remaining $0.1 million increase in logistics’ purchased transportation costs was attributable to increases in other non-mileage based costs such as drayage services.

Purchased transportation costs related to our other revenue increased $0.1 million, or 6.3%, to $1.7 million for the three months ended June 30, 2011 from $1.6 million for the three months ended June 30, 2010. Other purchased transportation costs as a percentage of other revenue decreased to 24.6% of other revenue for the three months ended June 30, 2011 from 25.0% for the same period in 2010. The decrease in other purchased transportation costs is primarily attributable to rate reductions received from pick-up and delivery transportation providers in certain large markets.

FASI

FASI purchased transportation decreased $0.2 million, or 5.3%, to $3.6 million for the three months ended June 30, 2011 from $3.8 million for the three months ended June 30, 2010. FASI purchased transportation as a percentage of revenue was 22.7% for the three months ended June 30, 2011 compared to 22.5% for the three months ended June 30, 2010. The decrease in FASI purchased transportation in total dollars was attributable to the reduced volumes discussed above. However, the increase in FASI purchased transportation as a percentage of revenue is attributable to the customer termination discussed above. A substantial portion of the revenue from this customer was handling-related and had no associated transportation charges.

Intercompany Eliminations

Intercompany eliminations decreased $0.2 million, or 50.0%, to $0.2 million for the three months ended June 30, 2011 from $0.4 million for the three months ended June 30, 2010. The intercompany eliminations are the result of truckload and airport-to-airport services Forward Air provided to FASI and FASI cartage services provided to Forward Air during the three months ended June 30, 2011. The decrease in intercompany eliminations was the result of reduced airport-to-airport and truckload services Forward Air provided to FASI.

Salaries, Wages, and Benefits

Salaries, wages and employee benefits decreased by $1.7 million, or 5.1%, to $31.4 million in the second quarter of 2011 from $33.1 million in the same period of 2010. As a percentage of total operating revenue, salaries, wages and employee benefits was 23.7% during the three months ended June 30, 2011 compared to 27.1% for the same period in 2010.

Forward Air

Salaries, wages and employee benefits of Forward Air decreased by $0.7 million, or 2.8%, to $24.7 million in the second quarter of 2011 from $25.4 million in the same period of 2010. Salaries, wages and employee benefits were 21.2% of Forward Air’s operating revenue in the second quarter of 2011 compared to 24.0% for the same period of 2010. The decrease in salaries, wages, and benefits was primarily driven by a $1.2 million decrease in reserves for workers’ compensation losses offset by increased wages, primarily terminal personnel, which increased in conjunction with the increased business volumes discussed above. The loss development reserve reductions were driven by a current year actuary analysis of our workers’ compensation claims. In 2010, the actuary analysis of the workers’ compensation claims required an increase of $0.6 million.

FASI

FASI salaries, wages and employee benefits decreased $1.0 million, or 13.0%, to $6.7 million for the three months ended June 30, 2011 compared to $7.7 million for the three months ended June 30, 2010. As a percentage of FASI operating revenue, salaries, wages and benefits decreased to 42.1% for the three months ended June 30, 2011 compared to 45.5% for the same period in 2010. The decrease in salaries, wages and benefits in total dollars was in conjunction with the decreased revenue volumes discussed above. The decrease in salaries, wages and employee benefits as a percentage of revenue is the result of reduced dock wages and reduced workers’ compensation and health insurance losses. For the second quarter of 2011 we reduced our dock wages by 1.4% as a percentage of revenue compared to the same period in 2010. The improvement in dock wages is largely the result of efficiencies gained by installing conveyor systems in our larger facilities and replacing contract labor with Company-employed dock personnel. Workers’ compensation and health insurance losses decreased 2.0% as a percentage of revenue due to reductions in workers’ compensation loss development reserves attributable to a current year actuary analysis as well as reduced health claims during the three months ended June 30, 2011 compared to the same period in 2010.

Operating Leases

Operating leases increased by $0.4 million, or 6.3%, to $6.7 million in the second quarter of 2011 from $6.3 million in the same period of 2010. Operating leases, the largest component of which is facility rent, were 5.1% of consolidated operating revenue for the three months ended June 30, 2011 compared with 5.2% in the same period of 2010.

Forward Air

Operating leases increased $0.6 million, or 13.6%, to $5.0 million in the second quarter of 2011 from $4.4 million in the same period of 2010. Operating leases were 4.3% of Forward Air operating revenue for the three months ended June 30, 2011 compared with 4.2% in the same period of 2010. The $0.6 million increase was the result of a $0.4 million increase in facility rent and $0.2 million increase in trailer rentals. Facility rent increased as certain existing terminals were relocated to larger facilities during the second and third quarters of 2010. Trailer rentals increased to provide additional capacity until new trailers are received in early third quarter of 2011.

FASI

FASI operating lease expense decreased $0.2 million, or 10.5%, to $1.7 million for the three months ended June 30, 2011 from $1.9 million for the same period in 2010. The $0.2 million decrease was attributable to lower facility rent and reduced costs for leased and rented equipment. Leased and rented equipment costs declined $0.1 million as leased and rented equipment was replaced with either owner-operator units or Company-owned units. Office rent decreased $0.1 million due to the consolidation of over-lapping facilities with Forward Air.

Depreciation and Amortization

Depreciation and amortization increased $0.1 million, or 2.0%, to $5.2 million in the second quarter of 2011 from $5.1 million in the same period of 2010. Depreciation and amortization was 3.9% of consolidated operating revenue for the three months ended June 30, 2011 compared with 4.2% in the same period of 2010.

Forward Air

Depreciation and amortization was $4.1 million in the second quarter of 2011 and 2010. Depreciation and amortization expense as a percentage of Forward Air operating revenue was 3.5% in the second quarter of 2011 compared to 3.9% in the same period of 2010.

FASI

FASI depreciation and amortization increased $0.1 million, or 10.0%, to $1.1 million for the three months ended June 30, 2011 from $1.0 million for the same period in 2010. Depreciation and amortization expense as a percentage of FASI operating revenue was 6.9% in the second quarter of 2011 compared to 5.9% in the same period of 2010. The $0.1 million increase is primarily attributable to new tractors and vehicles purchased during the second half of 2010 and the second quarter of 2011.

Insurance and Claims

Insurance and claims expense decreased $0.2 million, or 9.5%, to $1.9 million for the three months ended June 30, 2011 from $2.1 million for the three months ended June 30, 2010. Insurance and claims were 1.4% of consolidated operating revenue for the three months ended June 30, 2011 compared with 1.7% for the same period in 2010.

Forward Air

Forward Air insurance and claims expense decreased $0.1 million, or 6.3%, to $1.5 million for the three months ended June 30, 2011 from $1.6 million for the three months ended June 30, 2010. The $0.1 million decrease in insurance and claims is mainly attributable to a decrease in insurance premiums on renewed and renegotiated insurance plans.

FASI

FASI insurance and claims expense decreased $0.1 million, or 20.0%, to $0.4 million for the three months ended June 30, 2011 from $0.5 million for the three months ended June 30, 2010. The $0.1 million decrease in FASI insurance and claims was attributable to a decrease in FASI cargo claims. FASI cargo claims were reduced by improved dock efficiencies and security measures implemented at our FASI terminals.

Fuel Expense

Fuel expense increased $0.6 million, or 30.0%, to $2.6 million in the second quarter of 2011 from $2.0 million in the same period of 2010. Fuel expense was 2.0% of consolidated operating revenue for the three months ended June 30, 2011 compared with 1.6% for the same period in 2010.

Forward Air

Fuel expense was 1.0% of Forward Air operating revenue in the second quarter of 2011 compared to 0.9% in the same period of 2010. The $0.3 million, or 33.3%, increase was primarily due to an increase in average fuel prices during the three months ended June 30, 2011 as compared to the same period in 2010.

FASI

FASI fuel expense increased $0.3 million, or 27.3%, to $1.4 million for the second quarter of 2011 from $1.1 million for the second quarter of 2010. Fuel expenses were 8.8% of FASI operating revenue in the second quarter of 2011 compared to 6.5% in the second quarter of 2010. 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 average fuel prices experienced during the second quarter of 2011 compared to the same period in 2010, partially offset by reductions in Company-employed miles driven during the three months ended June 30, 2011 as compared to the same period in 2010. As a percentage of revenue, FASI fuel expense was also adversely impacted by the lost handling revenue discussed previously.

Other Operating Expenses

Other operating expenses increased $1.0 million, or 10.8%, to $10.3 million in the second quarter of 2011 from $9.3 million in the same period of 2010. Other operating expenses were 7.8% of consolidated operating revenue for the three months ended June 30, 2011 compared with 7.6% in the same period of 2010.

Forward Air

Other operating expenses increased $1.1 million, or 14.3%, to $8.8 million during the three months ended June 30, 2011 from $7.7 million in the same period of 2010. Other operating expenses were 7.6% of Forward Air operating revenue in the second quarter of 2011 compared to 7.3% in the same period of 2010. The $1.1 million increase in other operating expenses is attributable to increased variable costs, such as vehicle maintenance and dock supplies that increased in conjunction with the shipping volume increases discussed previously. Forward Air other operating expenses increased as percentage of revenue primarily due to vehicle maintenance associated with aging units that are largely scheduled to be replaced in the third quarter of 2011.

FASI

FASI other operating expenses decreased $0.1 million, or 6.3%, to $1.5 million for the three months ended June 30, 2011 compared to $1.6 million for the same period in 2010. FASI other operating expenses for the second quarter of 2011 were 9.4% of the segment’s operating revenue compared to 9.5% for the same period in 2010. The $0.1 million decrease is attributable to reductions in variable costs, such as vehicle maintenance and dock supplies, which decreased in conjunction with the shipping and handling volume decreases discussed above.

Results from Operations

Income from operations increased by $6.4 million, or 47.4%, to $19.9 million for the second quarter of 2011 compared to $13.5 million in the same period of 2010. Income from operations was 15.1% of consolidated operating revenue for the three months ended June 30, 2011 compared with 11.1% in the same period of 2010.

Forward Air

Income from operations increased by $6.2 million to $20.4 million for the second quarter of 2011 compared with $14.2 million for the same period in 2010. Income from operations as a percentage of Forward Air operating revenue was 17.5% for the three months ended June 30, 2011 compared with 13.4% in the same period of 2010. The increase in income from operations was primarily the result of the increased revenue discussed previously and the resulting positive leverage the additional revenue provides against the fixed costs of the Forward Air network. Also contributing to the improvement in results was the favorable workers’ compensation reserve adjustment discussed previously.

FASI

FASI’s loss from operations improved approximately $0.2 million, or 28.6%, to a $0.5 million loss for the three months ended June 30, 2011 from a $0.7 million loss for the three months ended June 30, 2010. The decrease in FASI’s loss from operations was primarily driven by the discontinuance of low yield business and continuing efforts to improve operating efficiencies and control variable and discretionary costs.

Interest Expense

Interest expense was approximately $0.1 million for the three months ended June 30, 2011 compared to $0.2 million for the same period of 2010. The decrease in interest expense was primarily attributable to maturity of capital lease arrangements and the corresponding decrease in associated interest expense.

Other, Net

Other income for the three months ended June 30, 2011 and 2010 was less than $0.1 million.

Income Taxes

The combined federal and state effective tax rate for the second quarter of 2011 was 39.4% compared to a rate of 40.5% for the same period in 2010. The change in our effective tax rate is primarily attributable to the increase in our net income before income taxes combined with reductions in non-deductible expenses such as share-based compensation for incentive stock options.

Net Income

As a result of the foregoing factors, net income increased by $4.1 million, or 51.9%, to $12.0 million for the second quarter of 2011 compared to $7.9 million for the same period in 2010.

Results of Operations

The following table sets forth our consolidated historical financial data for the six months ended June 30, 2011 and 2010 (in millions):

	Six months ended
	June 30,			June 30,						Percent
	2011			2010			Change			Change
Operating revenue	$	252.4		$	229.1		$	23.3		10.2	%
Operating expenses:
Purchased transportation		104.5			95.2			9.3		9.8
Salaries, wages, and employee benefits		61.9			63.8			(1.9	)	(3.0	)
Operating leases		13.4			12.9			0.5		3.9
Depreciation and amortization		10.3			10.1			0.2		2.0
Insurance and claims		4.0			4.4			(0.4	)	(9.1	)
Fuel expense		5.0			4.1			0.9		22.0
Other operating expenses		20.1			19.0			1.1		5.8
Total operating expenses		219.2			209.5			9.7		4.6
Income from operations		33.2			19.6			13.6		69.4
Other expense:
Interest expense		(0.3	)		(0.4	)		0.1		(25.0	)
Other, net		--			--			--		--
Total other expense		(0.3	)		(0.4	)		0.1		(25.0	)
Income before income taxes		32.9			19.2			13.7		71.4
Income taxes		13.1			7.9			5.2		65.8
Net income	$	19.8		$	11.3		$	8.5		75.2	%

The following table sets forth our historical financial data by segment for the six months ended June 30, 2011 and 2010 (in millions):

	Six months ended
	June 30,			Percent of		June 30,			Percent of					Percent
	2011			Revenue		2010			Revenue		Change			Change
Operating revenue
Forward Air	$	221.7		87.8	%	$	196.5		85.8	%	$	25.2		12.8	%
FASI		31.1		12.3			33.3		14.5			(2.2	)	(6.6	)
Intercompany Eliminations		(0.4	)	(0.1	)		(0.7	)	(0.3	)		0.3		(42.9	)
Total		252.4		100.0			229.1		100.0			23.3		10.2

Purchased transportation
Forward Air		97.7		44.1			88.3		44.9			9.4		10.6
FASI		7.2		23.1			7.5		22.5			(0.3	)	(4.0	)
Intercompany Eliminations		(0.4	)	100.0			(0.6	)	85.7			0.2		(33.3	)
Total		104.5		41.4			95.2		41.6			9.3		9.8

Salaries, wages and employee benefits
Forward Air		48.7		22.0			48.7		24.8			--		--
FASI		13.3		42.8			15.1		45.4			(1.8	)	(11.9	)
Total		62.0		24.6			63.8		27.8			(1.8	)	(2.8	)

Operating leases
Forward Air		9.8		4.4			8.8		4.5			1.0		11.4
FASI		3.6		11.6			4.1		12.3			(0.5	)	(12.2	)
Total		13.4		5.3			12.9		5.6			0.5		3.9

Depreciation and amortization
Forward Air		8.2		3.7			8.2		4.2			--		--
FASI		2.1		6.7			1.9		5.7			0.2		10.5
Total		10.3		4.1			10.1		4.4			0.2		2.0

Insurance and claims
Forward Air		3.1		1.4			3.5		1.8			(0.4	)	(11.4	)
FASI		0.9		2.9			0.9		2.7			--		--
Total		4.0		1.6			4.4		1.9			(0.4	)	(9.1	)

Fuel expense
Forward Air		2.3		1.0			1.8		0.9			0.5		27.8
FASI		2.6		8.4			2.3		6.9			0.3		13.0
Total		4.9		1.9			4.1		1.8			0.8		19.5

Other operating expenses
Forward Air		17.2		7.8			15.8		8.0			1.4		8.9
FASI		2.9		9.3			3.3		9.9			(0.4	)	(12.1	)
Intercompany Eliminations		--		--