Edgar Filing: FORWARD AIR CORP

FWRD 2012 10K

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, 2012

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 þ No o

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 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 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, 2012 was approximately $922,515,140 based upon the $32.27 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 11, 2013 was 29,602,342.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.



Table of Contents

	Forward Air Corporation	Page Number
		Page Number
Part I.
Item 1.	Business	3

Item 1A.	Risk Factors	13

Item 1B.	Unresolved Staff Comments	18

Item 2.	Properties	18

Item 3.	Legal Proceedings	19

Item 4.	Mine Safety Disclosures	19

Part II.

Item 5.	Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	19

Item 6.	Selected Financial Data	22

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 8.	Financial Statements and Supplementary Data	46

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	46

Item 9A.	Controls and Procedures	46

Item 9B.	Other Information	48

Part III.

Item 10.	Directors, Executive Officers and Corporate Governance	48

Item 11.	Executive Compensation	49

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	49

Item 13.	Certain Relationships and Related Transactions, and Director Independence	49

Item 14.	Principal Accounting Fees and Services	49

Part IV.

Item 15.	Exhibits, Financial Statement Schedules	49

Signatures		50

Index to Financial Statements		F-2

Financial Statement Schedule		S-1

Exhibit Index

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Introductory Note

This Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (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. Except as required by law, 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. Business

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 expedited ground 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 87 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 full truckload (“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 freight forwarders, integrated air cargo carriers, and passenger and cargo airlines. To serve this market, we offer customers a high level of service with a focus on on-time, damage-free deliveries. We serve our customers by locating our terminals on or near airports and maintaining regularly scheduled transportation service between major cities. We either receive shipments at our terminals or if instructed to do so pick up shipments directly from our customers. We then transport the freight by truck (i) directly to the destination terminal; (ii) to our Columbus, Ohio central sorting facility; or (iii) to one of our 12 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 tonnage volume.

During 2012, approximately 23.9% of the freight we handled was for overnight delivery, approximately 61.3% 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 2012, Forward Air’s ten largest customers accounted for approximately 47.2% of Forward Air’s operating revenue and no single customer accounted for more than 10.0% of Forward Air’s operating revenue.

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We continue to develop and implement complimentary services to the airport-to-airport network. Our complimentary services including TLX full truckload; 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, we provide pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency, last mile 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 specialty 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 three largest customers accounted for approximately 61.9% of FASI’s 2012 operating revenue, but revenues from these three customers did not exceed 10.0% of our consolidated revenue. No other customers accounted for more than 10.0% of FASI’s operating revenue.

Our Industry

As businesses minimize inventory levels, close regional and 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 several principal alternatives to transport freight: freight forwarders; integrated air cargo carriers; less-than-truckload carriers; full truckload carriers, and passenger and cargo airlines.


•	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 a single shipment is unloaded, sorted and reloaded multiple times. This additional handling increases transit time, handling costs and the likelihood of cargo damage or theft.


•	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 North American expedited ground freight market. 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 developed 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 with the expertise and strategic facility locations we have acquired 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 which in general are significantly below air freight rates.

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We have established 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 that through our network of FASI terminals and service locations we can offer our pool distribution customers comprehensive, high-quality, consistent service across the majority of the continental United States.

•

Concentrated Marketing Strategy. Forward Air provides our expedited ground freight services mainly to 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 specialty retailers, such as mall, strip mall and outlet-based retail chains.

•

Superior Service Offerings. Forward Air’s published expedited ground 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 shortens transit times) and earlier delivery times than most of our competitors. Our network of FASI terminals allows us the opportunity to provide precision deliveries to a wider range of locations than most pool distribution providers with increased on-time performance. Recent economic uncertainty resulted in reduced inventory levels and increased shippers' need for reliable, expedited delivery. We believe the trend of minimal inventories and increased expedited shipping will continue, and that our network of terminals and expedited capabilities put us in an excellent position to benefit from these trends.

•

Flexible Business Model. Rather than owning and operating our own fleet of trucks, Forward Air purchases most of its transportation requirements from owner-operators or truckload carriers. Due to the nature of pool distribution services, FASI utilizes a higher percentage of Company-employed drivers and Company-owned equipment than Forward Air. However, as the conditions of individual markets and requirements of our customers allow, we utilize owner-operators in our pool distribution business. This approach allows us to respond quickly to changing demands and opportunities in our industry and to generate higher returns on assets because of the lower capital requirements.

•

Comprehensive Logistic and Other Service Offerings. Through our two segments we offer an array of logistic and other services including: 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 customers’ transportation needs and are not offered by many of our competitors. We are often able to provide these services utilizing existing infrastructure and thereby earning additional revenue without incurring significant additional fixed costs.

•

Leading Technology Platform. We are committed to using information technology to improve our 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 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 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 to the benefit of our customers and our business processes.

•

Strong Balance Sheet and Availability of Funding. Our asset-light business model and strong market position in the expedited ground freight market provides the foundation for operations that have produced 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 an uncertain economic environment. The threat of financial instability may encourage new and existing customers to use a more financially secure transportation provider, such as FASI.

Growth Strategy

Our growth strategy is to take advantage of our competitive strengths in order to increase our profits and shareholder returns. Our goal is to use our established networks as the base from which to expand and launch new services that will allow us to grow in any economic environment. Principal components of our efforts include:

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•

Increase Freight Volume from Existing Customers. Many of our customers currently use us 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™ ("Complete"), our direct to door pick-up and delivery service. By offering additional services that can be integrated with our existing services, we believe we will attract additional business from existing customers. In 2012, 23.1% of airport-to-airport linehaul shipments had a Complete component. We believe increasing this Complete attachment rate is a key to growing the revenue of our airport-to-airport service.

•

Develop New Customers. We continue to actively market our services to potential new customers. In our Forward Air segment, we believe freight forwarders will continue to 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 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. In our pool distribution business, we are emphasizing the development of relationships with customers who have peak volume seasons outside of the traditional fourth quarter peak season in order to stabilize FASI’s earnings throughout the calendar year. We are currently targeting customers from industries such as hospitality, healthcare, lawn and garden and publishing. We continue to evaluate plans to expand FASI’s terminal footprint by opening FASI operations in select Forward Air terminals. We believe the utilization of existing Forward Air terminals will allow us to increase our FASI revenues with minimal addition of fixed costs.

•

Improve Efficiency of Our Transportation Network. We constantly seek to improve the efficiency of our networks. Regional hubs and direct shuttles improve Forward Air’s efficiency by reducing the number of miles freight must be transported and the number of times freight must be handled and sorted. As the volume of freight between key markets increases, we intend to continue adding direct shuttles. In key gateway cities we have constructed or expanded terminals. With these expanded facilities, we believe we have the necessary space to grow our business in key gateway cities and to offer additional services. We are working to improve our FASI operations by increasing the efficiencies of our daily and weekly transportation routes and the cartons handled per hour on our docks. We are constantly looking to improve FASI route efficiencies by consolidating loads and utilizing owner-operators when available. We are investing in conveyor systems for certain FASI terminals to increase the productivity of our cargo handlers. Finally, we are actively looking to reduce or eliminate the number of duplicate facilities in cities which have both Forward Air and FASI terminals. We have combined Forward Air and FASI facilities in Dallas/Fort Worth, Texas, Des Moines, Iowa, Denver, Colorado, Kansas City, Missouri, Nashville, Tennessee, Richmond, Virginia and Tulsa, Oklahoma, and will continue this process in upcoming years as the expiration of leases and business volumes allow.

•

Expand Logistics and Other Services. We continue to expand our logistics and other services to increase revenue and improve utilization of our terminal facilities and labor force. Because of the timing of the arrival and departure of cargo, our 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 logistic services in the past few years, such as TLX, 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 customers 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 expand FASI’s customer base beyond retail and 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 and 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.

•

Pursue Strategic Acquisitions. We continue to evaluate and pursue acquisitions that can increase our penetration of a geographic area, add new customers, add new business verticals, increase freight volume and add new service offerings. In addition, we expect to explore acquisitions that may enable us to offer additional services. Acquisitions may affect our short-term cash flow and net income as we expend funds, potentially increase indebtedness and incur additional expenses.

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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 expedited ground 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 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, through one of our 12 regional hubs or, as volumes require, direct point-to-point service. 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.

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Terminals

Our airport-to-airport network consists of terminals located in the following 87 cities:



City	Airport Served	City	Airport Served
Albany, NY	ALB	Louisville, KY	SDF
Albuquerque, NM*	ABQ	Memphis, TN	MEM
Allentown, PA*	ABE	McAllen, TX	MFE
Atlanta, GA	ATL	Miami, FL	MIA
Austin, TX	AUS	Milwaukee, WI	MKE
Baltimore, MD	BWI	Minneapolis, MN	MSP
Baton Rouge, LA*	BTR	Mobile, AL*	MOB
Birmingham, AL*	BHM	Moline, IA	MLI
Blountville, TN*	TRI	Montgomery, AL*	MGM
Boston, MA	BOS	Nashville, TN**	BNA
Buffalo, NY	BUF	Newark, NJ	EWR
Burlington, IA	BRL	Newburgh, NY	SWF
Cedar Rapids, IA	CID	New Orleans, LA	MSY
Charleston, SC	CHS	New York, NY	JFK
Charlotte, NC	CLT	Norfolk, VA	ORF
Chicago, IL	ORD	Oklahoma City, OK	OKC
Cincinnati, OH	CVG	Omaha, NE	OMA
Cleveland, OH	CLE	Orlando, FL	MCO
Columbia, SC*	CAE	Pensacola, FL*	PNS
Columbus, OH***	CMH	Philadelphia, PA	PHL
Corpus Christi, TX*	CRP	Phoenix, AZ	PHX
Dallas/Ft. Worth, TX**	DFW	Pittsburgh, PA	PIT
Dayton, OH*	DAY	Portland, OR	PDX
Denver, CO**	DEN	Raleigh, NC	RDU
Des Moines, IA**	DSM	Richmond, VA**	RIC
Detroit, MI	DTW	Rochester, NY	ROC
El Paso, TX	ELP	Sacramento, CA	SMF
Fort Wayne, IN*	FWA	Salt Lake City, UT	SLC
Grand Rapids, MI*	GRR	San Antonio, TX	SAT
Greensboro, NC	GSO	San Diego, CA	SAN
Greenville, SC	GSP	San Francisco, CA	SFO
Hartford, CT	BDL	Seattle, WA	SEA
Harrisburg, PA	MDT	Shreveport, LA*	SHV
Houston, TX	IAH	South Bend, IN*	SBN
Huntsville, AL*	HSV	St. Louis, MO	STL
Indianapolis, IN	IND	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
Los Angeles, CA	LAX

* Denotes an independent agent location.

** Denotes a location with combined Forward Air and FASI operations.

*** Denotes a location in which Forward Air is an agent for FASI.

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Independent agents operate 22 of our Forward Air locations. These locations typically handle lower volumes of freight relative to our Company-operated facilities.

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, Denver, Kansas City, Los Angeles, New Orleans, Newark, Newburgh, Orlando, and Sacramento.

Shipments

The average weekly volume of freight moving through our network was approximately 34.9 million pounds per week in 2012. During 2012, our average shipment weighed approximately 637 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 1997.



	Average Weekly
	Volume in Pounds
Year	(In millions)
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
2009	28.5
2010	32.6
2011	34.0
2012	34.9

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 full truckload, or TLX;


•	dedicated fleet;


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

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•	warehousing, dock and office space;


•	drayage and intermodal;


•	hotshot or ad-hoc ultra expedited services; and


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

These services are critical to many of our 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 service, which is the largest component of our Logistics revenue, are largely determined by the number of miles driven. The table below summarizes the average miles driven per week to support our TLX service since 2003:



	Average Weekly Miles
Year	(In thousands)
2003	211
2004	259
2005	248
2006	331
2007	529
2008	676
2009	672
2010	788
2011	876
2012	1,005

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. However, in order to reduce the seasonal volatility of FASI’s revenue, we are focused on diversifying the FASI customer base to include customers from industries such as hospitality, health care, lawn and garden and publishing.

Our pool distribution network consists of terminals and service locations in the following 19 cities:



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

* Denotes a location in which Forward Air is an agent for FASI.

** Denotes a location with combined Forward Air and FASI operations.

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Customers and Marketing

Our Forward Air wholesale customer base is primarily comprised of freight forwarders, integrated air cargo carriers and passenger and cargo airlines. Our freight forwarder customers vary in size from small, independent, single facility companies to large, international logistics companies such as SEKO Worldwide, AIT Worldwide Logistics, Expeditors International of Washington, Associated Global, UPS Supply Chain Solutions, FedEx Corporation and Pilot Air Freight. Because we deliver dependable service, integrated air cargo carriers such as UPS Cargo, FedEx Corporation 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 United Airlines and Delta.

Our FASI pool distribution customers are primarily comprised of national and regional retailers and distributors, such as The Limited, The Marmaxx Group, The GAP, and Aeropostale. However, in order to reduce the seasonal volatility of FASI’s revenue, we are focused on diversifying the FASI customer base to include customers from industries such as hospitality, health care, lawn and garden and publishing.

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 and www.forwardairsolutions.com. The information contained on our websites is not part of this filing and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

Technology and Information Systems

Our technology allows us to provide our 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 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 operational applications and website service offerings in our continuing effort to automate and improve our operations. Our Forward Air Complete™ website coordinates activities between our customers, operations personnel and external service providers. We believe that our systems, websites 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 continued to make significant investments in technology for FASI. We continued our development of FASI driven enhancements to our existing applications. These enhancements, collectively known as FASTRACS, are designed specifically to meet the retail distribution business demands, and make use of the most modern wireless technologies available. FASTRACS has been implemented for a select group of customers and is being designed so as to be the primary technology platform for all future customers.

Purchased Transportation

We contract with owner-operators for most of our transportation services. The owner-operators own, operate and maintain their own tractors and employ their own drivers. Our freight handlers load and unload our trailers and vehicles 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 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 or along a consistent route, 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 $252.7 million incurred for purchased transportation during 2012, we purchased 59.8% from owner-operators and 40.2% from other surface transportation providers.

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Competition

The expedited ground freight and pool distribution segments of the transportation industry are highly competitive and very fragmented. Our Forward Air and FASI competitors primarily include national and regional truckload and 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 primarily on service, 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.

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 economic conditions, customer demand, weather and national holidays. Additionally, a significant portion of our revenue is derived from customers whose business levels are impacted by the economy. The impact of seasonal trends and the economy is more pronounced on our pool distribution business. The pool distribution business is seasonal and operating revenues and results tend to improve in the third and fourth quarters compared to the first and second quarters.

Employees

As of December 31, 2012, we had 1,007 full-time employees, 611 of whom were freight handlers. Also, as of that date, we had an additional 1,121 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 material adverse effect on our business, financial condition or results of operations.

Regulation

The DOT and various state and federal 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 property 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.

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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 ®, Forward Air TLX™, 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 Business Conduct and Ethics and our reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website addresses are www.forwardair.com and www.forwardairsolutions.com. Our goal is to maintain our website as a portal through which investors can easily find or navigate to pertinent information about us. 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. Risk Factors

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.

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

Our business is dependent upon a number of factors that may have a material 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 material 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 consumer confidence in the United States, or their impact, if any, on our future results of operations.

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

Our growth depends in significant part on our ability to increase the amount and revenue per pound of 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.

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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 its customers. FASI does have contracts with its customers but these contracts typically have terms allowing cancellation within 30 to 60 days. As a result, 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, distributors and/or retailers of electronics, clothing, 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.

We operate in highly competitive and fragmented segments of our 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 segments of the freight transportation industry we participate in are highly competitive, very fragmented and historically have few barriers to entry. Our principal competitors include national and regional truckload and 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 freight forwarders who decide to establish their own networks to transport expedited ground freight. We believe competition is based primarily on service, 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.

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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, at favorable terms or at all;


•	diversion of management attention;


•	retention of employees and customers;


•	unexpected liabilities;


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


•	detrimental issues not discovered during due diligence.

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.

Severe economic downturns like the recession experienced in 2008 and 2009 can result in weaker demand for ground transportation services, which may have a significant negative impact on our results of operations.

During 2008 and 2009, we experienced significantly weaker demand for our airport-to-airport and pool distribution services as a result of the severe downturn in the economy. During the time in question, we adjusted the size of our owner-operator fleet and reduced employee headcount to compensate for the drop in demand. If the economic downturn persisted or worsened, demand for our services may have continued to weaken. No assurance can be given that reductions in owner-operators and employees or other steps we may take during similar times in the future will be adequate to offset the effects of reduced demand. If we experience another economic downturn it may have a negative impact on our results of operations.

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 $22.1 million of recorded net definite-lived intangible assets on our consolidated balance sheet at December 31, 2012. 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 an impairment, we would be required to record a non-cash impairment charge to our consolidated statement of comprehensive 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 $43.3 million on our consolidated balance sheet at December 31, 2012. Goodwill is assessed for impairment annually (or more frequently if circumstances indicate possible impairment) for each of our reporting units. This assessment includes comparing the fair value of each reporting unit to the carrying value of the assets assigned to each reporting unit. If the carrying value of the reporting unit was to exceed our estimated fair value of the reporting unit, we would then be required to estimate the fair value of the individual assets and liabilities within the reporting unit 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 consolidated statement of comprehensive income, which could have a material adverse effect on our earnings.

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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. 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.

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, cyber-attacks 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 hamper our internal operations, our ability to provide services to our customers and the ability of our customers to access our information technology systems. A material network breach in the security of our information technology systems could include the theft of our intellectual property or trade secrets. To the extent that any disruptions or security breach results in a loss or damage to our data, or in inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, reduce the demand for our services, lead to claims against us and ultimately harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

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 2012, owner-operators provided 59.8% 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.

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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 and federal 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.

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 subject to various environmental laws and regulations, and costs of compliance with, or liabilities for violations of, existing or future laws and regulations could significantly increase our costs of doing business.

Our operations are subject to environmental laws and regulations dealing with, among other things, the handling of hazardous materials and discharge and retention of stormwater. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage, environmental damage, and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable environmental laws or regulations, it could significantly increase our cost of doing business. Under specific environmental laws and regulations, we could be held responsible for all of the costs relating to any contamination at our past or present terminals and at third-party waste disposal sites. If we fail to comply with applicable environmental laws and regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

In addition, as global warming issues become more prevalent, federal and local governments and our customers are beginning to respond to these issues. This increased focus on sustainability may result in new regulations and customer requirements that could negatively affect us. This could cause us to incur additional direct costs or to make changes to our operations in order to comply with any new regulations and customer requirements, as well as increased indirect costs or loss of revenue resulting from, among other things, our customers incurring additional compliance costs that affect our costs and revenues. We could also lose revenue if our customers divert business from us because we have not complied with their sustainability requirements. These costs, changes and loss of revenue could have a material adverse affect on our business, financial condition and 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.

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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 charter and bylaws and provisions of Tennessee law could discourage or prevent a takeover that may be considered favorable.

Our 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 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 and also could limit the price that investors are willing to pay in the future for shares of our Common Stock.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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. 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.

We also own facilities near Dallas/Fort Worth, Texas, Chicago, Illinois and Atlanta, Georgia. The Dallas/Fort Worth, Texas facility has over 216,000 square feet with 134 trailer doors and approximately 28,000 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. The Atlanta, Georgia facility is over 142,000 square feet with 118 trailer doors and approximately 12,000 square feet of office space.

We lease and maintain 72 additional terminals, including our 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 22 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, 2012, we had 2,746 owned trailers in our fleet with an average age of approximately 5.7 years. In addition, at December 31, 2012, we also had 54 leased trailers in our fleet.

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At December 31, 2012, we had 389 owned tractors and straight trucks in our fleet, with an average age of approximately 4.8 years. In addition, at December 31, 2012, we also had 35 leased tractors and straight trucks in our fleet.

Item 3. Legal Proceedings

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, results of operations or cash flow.

Item 4. Mine Safety Disclosures

Not applicable.

Part II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

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.



2012	High		Low		Dividends
First Quarter	$	37.39	$	31.78	$	0.07
Second Quarter	37.12		30.17		0.07
Third Quarter	36.66		30.28		0.10
Fourth Quarter	35.09		29.65		0.10

2011	High		Low		Dividends
First Quarter	$	32.30	$	26.34	$	0.07
Second Quarter	35.53		29.76		0.07
Third Quarter	36.32		23.70		0.07
Fourth Quarter	34.19		24.10		0.07

There were approximately 442 shareholders of record of our Common Stock as of January 15, 2013.

Subsequent to December 31, 2012, our Board of Directors declared a cash dividend of $0.10 per share that will be paid in the first quarter of 2013. 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.

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

None of our securities were sold during fiscal year 2012 without registration under the Securities Act.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2012 with respect to shares of our Common Stock that may be issued under existing equity compensation plans, the 1999 Stock Option and Incentive Plan (the “1999 Plan”), the Amended and Restated Stock Option and Incentive Plan (“1999 Amended 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.

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Equity Compensation Plan Information
Plan Category	Number of Securities to be Issued upon Exercise or Vesting of Outstanding/Unvested Shares, 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	3,189,542	$	26	2,202,531
Equity Compensation Plans Not Approved by Shareholders	—	—		—
Total	3,189,542	$	26	2,202,531

(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, 2012, an aggregate of 421,122 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 2007 and ending on the last trading day of December 2012. The graph assumes a base investment of $100 made on December 31, 2007 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.

The performance graph and related information shall not be deemed “soliciting material” or be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.

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	2007		2008		2009		2010		2011		2012
Forward Air Corporation	$	100	$	77	$	80	$	90	$	102	$	111
Nasdaq Trucking and Transportation Stocks Index	100		70		73		96		81		85
Nasdaq Global Select Stock Market Index	100		60		87		102		100		116

Issuer Purchases of Equity Securities

No shares of our Common Stock were repurchased by the Company during the year ended December 31, 2012.

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Item 6. Selected Financial Data

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,
	2012			2011			2010			2009			2008
	(In thousands, except per share data)
Income Statement Data:
Operating revenue	$	584,446		$	536,402		$	483,939		$	417,410		$	474,436
Income from operations	83,532			77,110			53,739			18,550			70,285
Operating margin (1)	14.3		%	14.4		%	11.1		%	4.4		%	14.8		%

Net income	52,668			47,199			32,036			9,802			42,542
Net income per share:
Basic	$	1.82		$	1.62		$	1.11		$	0.34		$	1.48
Diluted	$	1.78		$	1.60		$	1.10		$	0.34		$	1.47

Cash dividends declared per common share	$	0.34		$	0.28		$	0.28		$	0.28		$	0.28

Balance Sheet Data (at end of period):
Total assets	$	399,187		$	341,151		$	348,796		$	316,730		$	307,527
Long-term obligations, net of current portion
Long-term obligations, net of current portion	58			333			50,883			52,169			53,035
Shareholders' equity	351,671			286,902			256,086			224,507			216,434

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

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Item 7. 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 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 expedited ground 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 87 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: TLX; 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 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 ability to increase our earnings depends in significant part on our ability to increase the amount of freight and the revenue per pound or carton 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 year ended December 31, 2012, we experienced a 8.9% and 8.3% increase in our consolidated revenues and income from operations, respectively, compared to the year ended December 31, 2011. Forward Air revenue and income from operations increased 8.0% and 6.5%, respectively. Forward Air revenue increases were driven by the airport-to-airport and logistics service lines. Airport-to-airport increased primarily on higher utilization of Forward Air Complete™ ("Complete") and increases in our price per pound. Our airport-to-airport price per pound increased on general rate increases initiated in September 2012 and June 2011. Volumes or tonnage shipped through our airport-to-airport business increased 2.5% in 2012 compared to 2011, but volume gains were mainly in the first half of 2012 as volumes were down slightly year-over-year in the second half of 2012. The logistics revenue increase was attributable to higher TLX revenue on an increase in miles driven partially offset by a decline in our TLX revenue per mile.

FASI revenue increased 16.1% during the year ended December 31, 2012 compared to the year ended December 31, 2011. In conjunction with the revenue growth, FASI's income from operations improved $1.4 million and over 200%, from $0.6 million in 2011 to $2.0 million during 2012. The increase in revenue and the corresponding increase in operating income was the result of new business wins in the fourth quarters of 2012 and 2011.

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. For the majority of 2012 higher diesel prices and improved volumes did combine to increase our net fuel surcharge revenue by 5.0% during the year end December 31, 2012 compared to the year ended December 31, 2011.

Goodwill

In accordance with our accounting policy, we conducted our annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 2012 and no impairment charges were required. As of December 31, 2012, the carrying value of goodwill related to the Forward Air and FASI segments was $37.9 million and $5.4 million, respectively. Based on our qualitative assessment of Forward Air we believed it was more likely than not that the fair value of the reporting unit continued to exceed the reporting unit's carrying value. During the second quarter of 2012, we prepared an estimation of the FASI reporting unit's fair value. The estimation of fair value related to the impairment test for goodwill is particularly sensitive to projected financial

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information used in the calculations. 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.

Results of Operations

The following table sets forth our historical financial data for the years ended December 31, 2012 and 2011 (in millions):



	Year ended
	December 31,			December 31,						Percent
	2012			2011			Change			Change
Operating revenue	$	584.4		$	536.4		$	48.0		8.9	%
Operating expenses:
Purchased transportation	252.7			223.0			29.7			13.3
Salaries, wages, and employee benefits	135.0			130.7			4.3			3.3
Operating leases	28.0			27.1			0.9			3.3
Depreciation and amortization	21.1			21.0			0.1			0.5
Insurance and claims	11.3			8.8			2.5			28.4
Fuel expense	10.0			10.0			—			—
Other operating expenses	42.8			38.7			4.1			10.6
Total operating expenses	500.9			459.3			41.6			9.1
Income from operations	83.5			77.1			6.4			8.3
Other income (expense):
Interest expense	(0.4		)	(0.6		)	0.2			(33.3	)
Other, net	—			0.1			(0.1		)	(100.0	)
Total other expense	(0.4		)	(0.5		)	0.1			(20.0	)
Income before income taxes	83.1			76.6			6.5			8.5
Income taxes	30.4			29.4			1.0			3.4
Net income	$	52.7		$	47.2		$	5.5		11.7	%

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The following table sets forth our historical financial data by segment for the years ended December 31, 2012 and 2011 (in millions):



	Year ended
	December 31,			Percent of		December 31,			Percent of					Percent
	2012			Revenue		2011			Revenue		Change			Change
Operating revenue
Forward Air	$	501.7		85.9	%	$	464.5		86.6	%	$	37.2		8.0	%
FASI	85.0			14.5		73.2			13.6		11.8			16.1
Intercompany eliminations	(2.3		)	(0.4	)	(1.3		)	(0.2	)	(1.0		)	76.9
Total	584.4			100.0		536.4			100.0		48.0			8.9

Purchased transportation
Forward Air	231.4			46.1		206.0			44.4		25.4			12.3
FASI	23.3			27.4		18.2			24.9		5.1			28.0
Intercompany eliminations	(2.0		)	87.0		(1.2		)	92.3		(0.8		)	66.7
Total	252.7			43.3		223.0			41.6		29.7			13.3

Salaries, wages and employee benefits
Forward Air	103.1			20.6		101.3			21.8		1.8			1.8
FASI	31.9			37.5		29.4			40.2		2.5			8.5
Total	135.0			23.1		130.7			24.4		4.3			3.3

Operating leases
Forward Air	20.4			4.1		19.7			4.2		0.7			3.6
FASI	7.6			9.0		7.4			10.1		0.2			2.7
Total	28.0			4.8		27.1			5.0		0.9			3.3

Depreciation and amortization
Forward Air	16.4			3.3		16.8			3.6		(0.4		)	(2.4	)
FASI	4.7			5.5		4.2			5.7		0.5			11.9
Total	21.1			3.6		21.0			3.9		0.1			0.5

Insurance and claims
Forward Air	8.9			1.8		7.2			1.6		1.7			23.6
FASI	2.4			2.8		1.6			2.2		0.8			50.0
Total	11.3			1.9		8.8			1.6		2.5			28.4

Fuel expense
Forward Air	4.2			0.8		4.4			0.9		(0.2		)	(4.5	)
FASI	5.8			6.8		5.6			7.6		0.2			3.6
Total	10.0			1.7		10.0			1.9		—			—

Other operating expenses
Forward Air	35.8			7.1		32.6			7.0		3.2			9.8
FASI	7.3			8.6		6.2			8.5		1.1			17.7
Intercompany eliminations	(0.3		)	13.0		(0.1		)	7.7		(0.2		)	200.0
Total	42.8			7.3		38.7			7.2		4.1			10.6

Income from operations
Forward Air	81.5			16.2		76.5			16.5		5.0			6.5
FASI	2.0			2.4		0.6			0.8		1.4			233.3
Total	$	83.5		14.3	%	$	77.1		14.4	%	$	6.4		8.3	%

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The following table presents the components of the Forward Air segment’s operating revenue and purchased transportation for the years ended December 31, 2012 and 2011 (in millions):



			Percent of				Percent of					Percent
	2012		Revenue		2011		Revenue		Change			Change
Forward Air revenue
Airport-to-airport	$	391.2	78.0	%	$	362.1	78.0	%	$	29.1		8.0	%
Logistics	84.2		16.8		74.7		16.1		9.5			12.7
Other	26.3		5.2		27.7		5.9		(1.4		)	(5.1	)
Total	$	501.7	100.0	%	$	464.5	100.0	%	$	37.2		8.0	%

Forward Air purchased transportation
Airport-to-airport	$	160.7	41.1	%	$	143.0	39.5	%	$	17.7		12.4	%
Logistics	63.5		75.4		56.2		75.2		7.3			13.0
Other	7.2		27.4		6.8		24.5		0.4			5.9
Total	$	231.4	46.1	%	$	206.0	44.4	%	$	25.4		12.3	%

Year ended December 31, 2012 compared to Year ended December 31, 2011

Revenues

Operating revenue increased by $48.0 million, or 8.9%, to $584.4 million for the year ended December 31, 2012 from $536.4 million for the year ended December 31, 2011.

Forward Air

Forward Air operating revenue increased $37.2 million, or 8.0%, to $501.7 million from $464.5 million, accounting for 85.9% of consolidated operating revenue for the year ended December 31, 2012. Airport-to-airport revenue, which is the largest component of our consolidated operating revenue, increased $29.1 million, or 8.0%, to $391.2 million from $362.1 million, accounting for 78.0% of the segment’s operating revenue during the years ended December 31, 2012 and 2011. An increase in tonnage and our base revenue per pound, excluding net fuel surcharge revenue and Forward Air Complete™ (“Complete”) revenue, accounted for $13.1 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 1.9% for the year ended December 31, 2012 versus the year ended December 31, 2011. Tonnage that transited our network increased by 2.5% during the year ended December 31, 2012 compared with the year ended December 31, 2011. Average base revenue per pound increased as a result of general rate increases implemented in September 2012 and June 2011. The remaining increase in airport-to-airport revenue is the result of increased net fuel surcharge revenue and Complete pick-up and delivery revenue. Net fuel surcharge revenue increased $2.6 million, or 8.3%, during the year ended December 31, 2012 as compared to the year ended December 31, 2011 as a result of higher average fuel prices and increased overall business volumes. Complete pick-up and delivery revenue increased $13.4 million, or 34.1%, during the year ended December 31, 2012 compared to 2011. The increase in Complete revenue is attributable to an increased attachment rate of the Complete service to our standard airport-to-airport service to 23.1% in 2012 compared to 15.5% in 2011 and the overall improvement in airport-to-airport tonnage volumes during the year ended December 31, 2012 compared to the year ended December 31, 2011.

Logistics revenue, which is primarily TLX and priced on a per mile basis, increased $9.5 million, or 12.7%, to $84.2 million for the year ended December 31, 2012 from $74.7 million for the year ended December 31, 2011. TLX revenue increased $9.4 million year-over-year as miles driven to support our TLX revenue increased 14.7%, but the mileage increase was partially offset by a 0.8% decline in TLX average revenue per mile. The change in miles and average revenue per mile is mainly attributable to a change in customer mix. The remaining $0.1 million increase in Logistics revenue was attributable to other non-mileage based services.

Other revenue, which includes warehousing services and terminal handling, accounts for the final component of Forward Air operating revenue. Other revenue decreased $1.4 million, or 5.1%, to $26.3 million during the year ended December 31, 2012 from $27.7 million during the year ended December 31, 2011. The decrease in revenue was primarily due to ceasing certain dedicated local pick up and delivery services in the fourth quarter of 2011.

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FASI

FASI operating revenue increased $11.8 million, or 16.1%, to $85.0 million for the year ended December 31, 2012 from $73.2 million for the year ended December 31, 2011. The increase in revenue was mostly attributable to new business wins for new and previously existing customers. Approximately $1.7 million of the new business was from new customers, including non-specialty retailers. Another $2.3 million of revenue was attributable to truckload direct to store business for a previously existing customer that started in the fourth quarter of 2011. The remainder of the FASI revenue increase was attributable to higher volumes as well as new market wins from existing customers.

Intercompany Eliminations

Intercompany eliminations increased $1.0 million, or 76.9%, to $2.3 million during the year ended December 31, 2012 from $1.3 million during the year ended December 31, 2011. The intercompany eliminations are the result of truckload, airport-to-airport and handling services Forward Air provided to FASI. FASI also provided cartage and handling services to Forward Air.

Purchased Transportation

Purchased transportation increased by $29.7 million, or 13.3%, to $252.7 million for the year ended December 31, 2012 from $223.0 million for the year ended December 31, 2011. As a percentage of total operating revenue, purchased transportation was 43.3% during the year ended December 31, 2012 compared to 41.6% for the year ended December 31, 2011.

Forward Air

Forward Air’s purchased transportation increased by $25.4 million, or 12.3%, to $231.4 million for the year ended December 31, 2012 from $206.0 million for the year ended December 31, 2011. The increase in purchased transportation is primarily attributable to an increase of approximately 8.2% in miles driven and a 3.8% increase in the total cost per mile for the year ended December 31, 2012 versus the year ended December 31, 2011. As a percentage of segment operating revenue, Forward Air purchased transportation was 46.1% during the year ended December 31, 2012 compared to 44.4% for the year ended December 31, 2011.

Purchased transportation costs for our airport-to-airport network increased $17.7 million, or 12.4%, to $160.7 million for the year ended December 31, 2012 from $143.0 million for the year ended December 31, 2011. For the year ended December 31, 2012, purchased transportation for our airport-to-airport network increased to 41.1% of airport-to-airport revenue from 39.5% for the year ended December 31, 2011. The $17.7 million increase is partially attributable to a 5.4% increase in miles driven by our network of owner-operators or third party transportation providers in addition to a 1.2% increase in cost per mile paid to our network of owner-operators or third party transportation providers. The increase in miles increased purchased transportation by $6.3 million while the increase in cost per mile increased purchased transportation $1.5 million. Miles driven by our network of owner-operators or third party transportation providers increased in conjunction with the tonnage increase discussed above and a shift in our customer mix. The 1.2% increase in airport-to-airport cost per mile was mostly the result of increased utilization of more costly third party transportation providers as opposed to our network of owner-operators and increased rates paid to third party transportation providers and our network of owner operators. The increase in the rates paid to third party transportation providers and our network of owner operators was largely attributable to a shift in business and customer mix and the impact of these changes on the routes driven. The remaining increase was attributable to a $9.9 million increase in third party transportation costs associated with the increased Complete volumes discussed above.

Purchased transportation costs for our logistics revenue increased $7.3 million, or 13.0%, to $63.5 million for the year ended December 31, 2012 from $56.2 million for the year ended December 31, 2011. For the year ended December 31, 2012, logistics’ purchased transportation costs represented 75.4% of logistics revenue versus 75.2% for the year ended December 31, 2011. The increase in logistics’ purchased transportation was largely attributable to a $7.2 million, or 13.9%, increase in TLX purchased transportation. Miles driven to support our TLX revenue increased 14.7% but the cost per mile decreased 0.7% year-over-year. The improvement in the cost per mile was the result of increased utilization of our network of owner-operators, as opposed to more costly third party transportation providers. Other non-mileage based logistics' purchased transportation costs increased $0.1 million in 2012 compared to 2011.

Purchased transportation costs related to our other revenue increased $0.4 million, or 5.9%, to $7.2 million for the year ended December 31, 2012 from $6.8 million for the year ended December 31, 2011. Other purchased transportation costs as a percentage of other revenue increased to 27.4% of other revenue for the year ended December 31, 2012 from 24.5% for the year ended December 31, 2011. The increase in other purchased transportation costs as a percentage of revenue is primarily attributable to the cessation of certain, dedicated local pick up and delivery business in the fourth quarter of 2011. This business was primarily

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serviced by Company-employed drivers so revenues were reduced without a corresponding decrease in other purchased transportation. Also, contributing to the increase as a percentage of revenue was the adverse impact on other terminal revenue of the slowing airport-to-airport tonnage growth during the second half of 2012 compared to the same period in 2011. Further, certain new airport-to-airport linehaul business required the use of local pick-up and delivery services. This new business required us to incur other purchased transportation costs without direct corresponding other revenue.

FASI

FASI purchased transportation increased $5.1 million, or 28.0%, to $23.3 million for the year ended December 31, 2012 from $18.2 million for the year ended December 31, 2011. FASI purchased transportation as a percentage of revenue was 27.4% for the year ended December 31, 2012 compared to 24.9% for the year ended December 31, 2011. The increase in FASI purchased transportation in total dollars and as a percentage of revenue was attributable to our continued efforts to convert from Company-employed drivers to owner-operators and certain new business having an increased linehaul component which increased the utilization of owner-operators and third-party transportation providers.

Intercompany Eliminations

Intercompany eliminations increased $0.8 million, or 66.7%, to $2.0 million during the year ended December 31, 2012 from $1.2 million during the year ended December 31, 2011. The intercompany eliminations are the result of truckload and airport-to-airport services Forward Air provided to FASI during the year end December 31, 2012. FASI also provided cartage services to Forward Air.

Salaries, Wages, and Benefits

Salaries, wages and employee benefits increased $4.3 million, or 3.3%, to $135.0 million for the year ended December 31, 2012 from $130.7 million for the year ended December 31, 2011. As a percentage of total operating revenue, salaries, wages and employee benefits was 23.1% during the year ended December 31, 2012 compared to 24.4% in December 31, 2011.

Forward Air

Salaries, wages and employee benefits of Forward Air increased by $1.8 million, or 1.8%, to $103.1 million for the year ended December 31, 2012 from $101.3 million for the year ended December 31, 2011. Salaries, wages and employee benefits were 20.6% of Forward Air’s operating revenue for the year ended December 31, 2012 compared to 21.8% for the year ended December 31, 2011. The increase in salaries, wages and employee benefits in total dollars is attributable to a $4.1 million increase in employee wages and benefits net of a $2.3 million decrease in employee incentive expense. Employee wages and benefits increased in conjunction with the revenue volume increases discussed previously. The decrease in employee incentives was largely due to failures to meet revenue and operating income goals during 2012. The improvement as a percentage of revenue is attributable to the increase in revenue outpacing the increase in salaries, wages and employee benefits.

FASI

Salaries, wages and employee benefits of FASI increased by $2.5 million, or 8.5%, to $31.9 million for the year ended December 31, 2012 from $29.4 million for the year ended December 31, 2011. As a percentage of FASI operating revenue, salaries, wages and benefits decreased to 37.5% for the year ended December 31, 2012 compared to 40.2% for the year ended December 31, 2011. 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. The increase in salaries, wages and employee benefits in total dollars is due to increased wages and benefits for terminal employees, which increased in conjunction with the revenue volume increases discussed previously. Approximately 0.9% of the the improvement in salaries, wages and employee benefits as a percentage of revenue is the result of certain new business being primarily linehaul based and requiring no significant salaries, wages and benefits. Also, during 2012 we continued our efforts to shift, wherever feasible, from Company-employed drivers to owner-operators or third party transportation providers. As a result we reduced pay to Company-employed drivers by 0.7% as a percentage of revenue. The remaining improvement as a percentage of revenue is the increase in revenue outpacing the increase in salaries, wages and employee benefits.

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Operating Leases

Operating leases increased by $0.9 million, or 3.3%, to $28.0 million for the year ended December 31, 2012 from $27.1 million in the year ended December 31, 2011. Operating leases, the largest component of which is facility rent, were 4.8% of consolidated operating revenue for the year ended December 31, 2012 compared with 5.0% for the year ended December 31, 2011.

Forward Air

Operating leases increased $0.7 million, or 3.6%, to $20.4 million for the year ended December 31, 2012 from $19.7 million for the year ended December 31, 2011. Operating leases were 4.1% of Forward Air’s operating revenue for the year ended December 31, 2012 compared with 4.2% for the year ended December 31, 2011. The $0.7 million increase was the result of a $0.4 million increase in facility rent and $0.3 million increase in trailer rentals. Facility rent increased due to new or renewed lease agreements that become effective during 2012. Trailer rentals increased $0.2 million on trailer rentals associated with our non-mileage based Logistics operations and $0.1 million to provide additional capacity in support of the higher revenue volumes discussed above.

FASI

Operating leases increased $0.2 million, or 2.7%, to $7.6 million for the year ended December 31, 2012 from $7.4 million for the year ended December 31, 2011. Operating leases were 9.0% of FASI operating revenue for the year ended December 31, 2012 compared with 10.1% for the year ended December 31, 2011. The $0.2 million increase was attributable to increased trailer rentals in conjunction with the higher revenue volumes discussed above.

Depreciation and Amortization

Depreciation and amortization increased $0.1 million, or 0.5%, to $21.1 million for the year ended December 31, 2012 from $21.0 million for the year ended December 31, 2011. Depreciation and amortization was 3.6% of consolidated operating revenue for the year ended December 31, 2012 compared with 3.9% for the year ended December 31, 2011.

Forward Air

Depreciation and amortization decreased $0.4 million, or 2.4%, to $16.4 million for the year ended December 31, 2012 from $16.8 million for the year ended December 31, 2011. Depreciation and amortization expense as a percentage of Forward Air operating revenue was 3.3% in the year ended December 31, 2012 compared to 3.6% for the year ended December 31, 2011. Depreciation decreased year-over-year as certain internally developed software and older trailers became fully depreciated, but these decreases were partially offset by depreciation on new trailers purchased during 2012.

FASI

Depreciation and amortization increased $0.5 million, or 11.9%, to $4.7 million for the year ended December 31, 2012 from $4.2 million for the year ended December 31, 2011. Depreciation and amortization expense as a percentage of FASI operating revenue was 5.5% for the year ended December 31, 2012 compared to 5.7% for the year ended December 31, 2011. The increase in FASI depreciation and amortization is largely due to new vehicles and terminal conveyor equipment purchased during 2012.

Insurance and Claims

Insurance and claims expense increased $2.5 million, or 28.4%, to $11.3 million for the year ended December 31, 2012 from $8.8 million for the year ended December 31, 2011. Insurance and claims was 1.9% of consolidated operating revenue during 2012 compared with 1.6% in 2011.

Forward Air

Forward Air insurance and claims expense increased $1.7 million, or 23.6%, to $8.9 million for the year ended December 31, 2012 from $7.2 million for the year ended December 31, 2011. Insurance and claims as a percentage of Forward Air’s operating revenue was 1.8% in the year ended December 31, 2012 compared to 1.6% for the year ended December 31, 2011. The increase in Forward Air insurance and claims was driven by a $0.7 million increase in cargo claims, a $0.8 million increase in vehicle accident repairs and a $0.4 million increase in professional fees associated with litigating vehicle accident claims. These increases were offset by a $0.2 million reduction in reserves for accident claims.

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FASI

FASI insurance and claims increased $0.8 million to $2.4 million for the year ended December 31, 2012 from $1.6 million for the year ended December 31, 2011. As a percentage of operating revenue, insurance and claims was 2.8% for the year ended December 31, 2012 compared to 2.2% for the year ended December 31, 2011. The increase in FASI insurance and claims was largely attributable to a $0.5 million increase in cargo claims primarily from our specialty retail customers, a $0.2 million increase in vehicle accident repairs and $0.1 million increase in reserves for accident claims.

Fuel Expense

Fuel expense was $10.0 million in the year ended December 31, 2012 and 2011. Fuel expense was 1.7% of consolidated operating revenue for the year ended December 31, 2012 compared to 1.9% for the year ended December 31, 2011.

Forward Air

Forward Air fuel expense decreased $0.2 million, or 4.5%, to $4.2 million for the year ended December 31, 2012 from $4.4 million in the year ended December 31, 2011. Fuel expense was 0.8% of Forward Air’s operating revenue for the years ended December 31, 2012 compared to 0.9% for the year ended December 31, 2011. The decrease in fuel expense resulted from the cessation of certain dedicated local pick up and delivery services in the fourth quarter of 2011 which was performed mostly by Company-owned vehicles. This decrease was partially offset by increased average fuel prices.

FASI

FASI fuel expense increased $0.2 million, or 3.6%, to $5.8 million for the year ended December 31, 2012 from $5.6 million for the year ended December 31, 2011. Fuel expenses were 6.8% of FASI operating revenue during the year ended December 31, 2012 compared to 7.6% for the year ended December 31, 2011. 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 mostly the result of increased Company miles associated with the higher business volumes discussed previously and changes in average fuel prices.

Other Operating Expenses

Other operating expenses increased $4.1 million, or 10.6%, to $42.8 million for the year ended December 31, 2012 from $38.7 million for the year ended December 31, 2011. Other operating expenses were 7.3% of consolidated operating revenue for the year ended December 31, 2012 compared with 7.2% for the year ended December 31, 2011.

Forward Air

Forward Air other operating expenses increased $3.2 million, or 9.8%, to $35.8 million for the year ended December 31, 2012 from $32.6 million for the year ended December 31, 2011. Forward Air other operating expenses were 7.1% of operating revenue for the year ended December 31, 2012 compared to 7.0% for the year ended December 31, 2011. The increase in other operating expenses in total dollars is attributable to increased variable costs, such as vehicle maintenance and dock and terminal supplies, during the year ended December 31, 2012 compared to the year end December 31, 2011. The increase in other operating expenses as a percentage of revenue during 2012 compared to 2011 was attributable to a $0.4 million, or 0.1% as a percentage of revenue, increase in reserves for bad debts.

FASI

FASI other operating expenses increased $1.1 million, or 17.7%, to $7.3 million for the year ended December 31, 2012 compared to $6.2 million for the year ended December 31, 2011. FASI other operating expenses were 8.6% of operating revenue for the year ended December 31, 2012 compared to 8.5% for the year ended December 31, 2011. The increase in FASI's other operating expenses is partially attributable to increases in variable dock and maintenance costs in conjunction with the increased revenue volumes discussed previously. Also, contributing to the increase in total dollars and as a percentage of revenue, was $0.2 million incurred for the implementation of certain strategic initiatives during the first quarter of 2012.

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Intercompany Eliminations

Intercompany eliminations were $0.3 million during the year ended December 31, 2012 compared to $0.1 million for the year ended December 31, 2011. The intercompany eliminations are for agent station services Forward Air and FASI provided one another during the years ended December 31, 2012 and 2011.

Income from Operations

Income from operations increased by $6.4 million, or 8.3%, to $83.5 million for the year ended December 31, 2012 compared with $77.1 million for the year ended December 31, 2011. Income from operations was 14.3% of consolidated operating revenue for the year ended December 31, 2012 compared with 14.4% for the year ended December 31, 2011.

Forward Air

Forward Air income from operations increased by $5.0 million, or 6.5%, to $81.5 million for the year ended December 31, 2012 compared with $76.5 million for the year ended December 31, 2011. Forward Air’s income from operations was 16.2% of operating revenue for the year ended December 31, 2012 compared with 16.5% for the year ended December 31, 2011. The increase in income from operations was primarily the result of the increased revenue discussed previously. The 0.3% decline in operating income as a percentage of revenue was due to the increases in insurance and claims and purchased transportation partially offset by the leverage on fixed costs obtained from the increase in Forward Air revenue.

FASI

FASI income from operations improved by $1.4 million to $2.0 million for the year ended December 31, 2012 from $0.6 million for the year ended December 31, 2011. FASI income from operations was 2.4% of operating revenue for the year ended December 31, 2012 compared 0.8% of operating revenue for the year ended December 31, 2011. The improvement in FASI’s results from operations was primarily attributable to higher revenue volumes associated with new business wins partially offset by increased cargo claims and costs incurred to implement strategic initiatives.

Interest Expense

Interest expense was $0.4 million for the year ended December 31, 2012 and decreased $0.2 million, or 33.3%, from $0.6 million for the year ended December 31, 2011. Decrease in interest expense was primarily attributable to the maturity of capital lease arrangements and the corresponding decrease in associated interest expense.

Other, Net

Other, net decreased $0.1 million from $0.1 million for the year ended December 31, 2011. Decline is due to declining interest rates on our cash accounts and lower average cash on hand during 2012.

Provision for Income Taxes

The combined federal and state effective tax rate for the year ended December 31, 2012 was 36.7% compared to an effective rate of 38.4% for the year ended December 31, 2011. The decrease in our effective tax rate is attributable to federal refunds we have received and accrued for prior years resulting from a change in an income tax reporting position.

Net Income

As a result of the foregoing factors, net income increased by $5.5 million, or 11.7%, to $52.7 million for the year ended December 31, 2012 compared to $47.2 million for the year ended December 31, 2011.

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Results of Operations

The following table sets forth our historical financial data for the years ended December 31, 2011 and 2010 (in millions):



	Year ended
	December 31,			December 31,					Percent
	2011			2010			Change		Change
Operating revenue	$	536.4		$	483.9		$	52.5	10.8	%
Operating expenses:
Purchased transportation	223.0			201.4			21.6		10.7
Salaries, wages, and employee benefits	130.7			129.1			1.6		1.2
Operating leases	27.1			26.3			0.8		3.0
Depreciation and amortization	21.0			20.4			0.6		2.9
Insurance and claims	8.8			8.4			0.4		4.8
Fuel expense	10.0			8.5			1.5		17.6
Other operating expenses	38.7			36.1			2.6		7.2
Total operating expenses	459.3			430.2			29.1		6.8
Income from operations	77.1			53.7			23.4		43.6
Other income (expense):
Interest expense	(0.6		)	(0.7		)	0.1		(14.3	)
Other, net	0.1			0.1			—		—
Total other expense	(0.5		)	(0.6		)	0.1		(16.7	)
Income before income taxes	76.6			53.1			23.5		44.3
Income taxes	29.4			21.1			8.3		39.3
Net income	$	47.2		$	32.0		$	15.2	47.5	%

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The following table sets forth our historical financial data by segment for the years ended December 31, 2011 and 2010 (in millions):



	Year ended
	December 31,			Percent of		December 31,			Percent of					Percent
	2011			Revenue		2010			Revenue		Change			Change
Operating revenue
Forward Air	$	464.5		86.6	%	$	412.9		85.3	%	$	51.6		12.5	%
FASI	73.2			13.6		72.5			15.0		0.7			1.0
Intercompany eliminations	(1.3		)	(0.2	)	(1.5		)	(0.3	)	0.2			(13.3	)
Total	536.4			100.0		483.9			100.0		52.5			10.8

Purchased transportation
Forward Air	206			44.4		185.8			45.0		20.2			10.9
FASI	18.2			24.9		16.9			23.3		1.3			7.7
Intercompany eliminations	(1.2		)	92.3		(1.3		)	86.7		0.1			(7.7	)
Total	223			41.6		201.4			41.6		21.6			10.7

Salaries, wages and employee benefits
Forward Air	101.3			21.8		98.3			23.8		3			3.1
FASI	29.4			40.2		30.8			42.5		(1.4		)	(4.5	)
Total	130.7			24.4		129.1			26.7		1.6			1.2

Operating leases
Forward Air	19.7			4.2		18.6			4.5		1.1			5.9
FASI	7.4			10.1		7.7			10.6		(0.3		)	(3.9	)
Total	27.1			5.0		26.3			5.4		0.8			3.0

Depreciation and amortization
Forward Air	16.8			3.6		16.5			4.0		0.3			1.8
FASI	4.2			5.7		3.9			5.4		0.3			7.7
Total	21			3.9		20.4			4.2		0.6			2.9

Insurance and claims
Forward Air	7.2			1.6		6.2			1.5		1.0			16.1
FASI	1.6			2.2		2.2			3.0		(0.6		)	(27.3	)
Total	8.8			1.6		8.4			1.7		0.4			4.8

Fuel expense
Forward Air	4.4			0.9		3.8			0.9		0.6			15.8
FASI	5.6			7.6		4.7			6.5		0.9			19.1
Total	10			1.9		8.5			1.8		1.5			17.6

Other operating expenses
Forward Air	32.6			7.0		29.8			7.2		2.8			9.4
FASI	6.2			8.5		6.5			9.0		(0.3		)