form10q.htm
 


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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2008
Commission File No. 000-22490

 
 

FORWARD AIR CORPORATION
(Exact name of registrant as specified in its charter)


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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o  No x
 
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of July 25, 2008 was 28,906,031.
 

 
Table of Contents
     
Forward Air Corporation
     
   
Page
   
Number
Part I.
Financial Information
 
     
Item 1.
 
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
14
     
Item 3.
30
     
Item 4.
31
     
Part II.
Other Information
 
     
Item 1.
31
     
Item 1A.
31
     
Item 2.
31
     
Item 3.
31
     
Item 4.
32
     
Item 5.
32
     
Item 6.
32
     
Signatures
33
     
Exhibit Index
 

2


Part I.
Financial Information
   
Item 1.


 
Condensed Consolidated Balance Sheets
 
(Dollars in thousands)
 
(Unaudited)
 
             
   
June 30,
   
December 31,
 
   
2008
   
2007
 
Assets
           
Current assets:
           
   Cash
  $ 1,082     $ 4,909  
   Accounts receivable, less allowance of $1,618 in 2008 and $1,142 in 2007
    76,018       59,734  
   Income taxes receivable
    1,041       --  
   Other current assets
    8,067       6,807  
Total current assets
    86,208       71,450  
                 
Property and equipment
    160,988       158,354  
Less accumulated depreciation and amortization
    57,240       55,322  
Total property and equipment, net
    103,748       103,032  
Goodwill and other acquired intangibles:
               
   Goodwill
    45,045       36,053  
   Other acquired intangibles, net of accumulated amortization of $5,744 in 2008 and
               
   $3,740 in 2007
    37,067       29,991  
Total goodwill and other acquired intangibles
    82,112       66,044  
Other assets
    1,955       1,358  
Total assets
  $ 274,023     $ 241,884  
                 
Liabilities and Shareholders’ Equity
               
Current liabilities:
               
   Accounts payable
  $ 13,512     $ 11,714  
   Accrued expenses
    16,688       13,060  
   Income taxes payable
    --       1,214  
   Current portion of debt and capital lease obligations
    592       830  
Total current liabilities
    30,792       26,818  
                 
Long-term debt and capital lease obligations, less current portion
    36,441       31,486  
Other long-term liabilities
    2,740       4,476  
Deferred income taxes
    8,138       7,371  
                 
Shareholders’ equity:
               
   Preferred stock
    --       --  
   Common stock, $0.01 par value:
               
      Authorized shares – 50,000,000
               
      Issued and outstanding shares – 28,842,841 in 2008 and 28,648,068 in 2007
    288       286  
   Additional paid-in capital
    6,106       --  
   Retained earnings
    189,518       171,447  
Total shareholders’ equity
    195,912       171,733  
Total liabilities and shareholders’ equity
  $ 274,023     $ 241,884  

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

3

 
 
Condensed Consolidated Statements of Income
 
(In thousands, except per share data)
 
(Unaudited)
 
                         
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Operating revenue:
                       
Forward Air
                       
   Airport-to-airport
  $ 89,187     $ 77,237     $ 171,246     $ 151,458  
   Logistics
    14,838       10,680       27,091       18,865  
   Other
    6,188       5,230       11,977       10,178  
Forward Air Solutions
                               
   Pool distribution
    11,350       --       19,187       --  
Total operating revenue
    121,563       93,147       229,501       180,501  
                                 
Operating expenses:
                               
Purchased transportation
                               
Forward Air
                               
   Airport-to-airport
    33,472       29,739       65,011       60,271  
   Logistics
    10,818       8,150       19,998       14,296  
   Other
    1,572       1,477       3,205       2,773  
Forward Air Solutions
                               
   Pool distribution
    2,069       --       3,242       --  
      Total purchased transportation
    47,931       39,366       91,456       77,340  
      Salaries, wages and employee benefits
    29,404       19,964       55,851       38,977  
      Operating leases
    5,884       3,882       10,735       7,617  
      Depreciation and amortization
    3,998       2,494       7,696       4,874  
      Insurance and claims
    1,614       1,900       3,874       3,602  
      Fuel expense
    3,289       271       5,413       509  
      Other operating expenses
    9,181       6,957       17,564       13,429  
Total operating expenses
    101,301       74,834       192,589       146,348  
Income from operations
    20,262       18,313       36,912       34,153  
                                 
Other income (expense):
                               
   Interest expense
    (328 )     (41 )     (629 )     (81 )
   Other, net
    56       469       210       1,221  
Total other income (expense)
    (272 )     428       (419 )     1,140  
Income before income taxes
    19,990       18,741       36,493       35,293  
Income taxes
    7,888       7,266       14,383       13,525  
Net income
  $ 12,102     $ 11,475     $ 22,110     $ 21,768  
                                 
Net income per share:
                               
Basic
  $ 0.42     $ 0.38     $ 0.77     $ 0.72  
Diluted
  $ 0.42     $ 0.38     $ 0.76     $ 0.72  
Weighted average shares outstanding:
                               
Basic
    28,805       29,805       28,737       30,070  
Diluted
    29,126       30,162       29,041       30,412  
                                 
Dividends per share:
  $ 0.07     $ 0.07     $ 0.14     $ 0.14  
 
The accompanying notes are an integral part of the financial statements.
 
4

 
 
Condensed Consolidated Statements of Cash Flows
 
(In thousands)
 
(Unaudited)
 
             
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2008
   
2007
 
Operating activities:
           
Net Income
  $ 22,110     $ 21,768  
Adjustments to reconcile net income to net cash provided by operating activities
               
   Depreciation and amortization
    7,696       4,874  
   Share-based compensation
    3,120       1,483  
   Loss (gain) on sale of property and equipment
    21       (235 )
   Provision for loss (recovery) on receivables
    113       (114 )
   Provision for revenue adjustments
    1,904       1,165  
   Deferred income taxes
    1,428       1,514  
   Tax benefit for stock options exercised
    (1,079 )     (8 )
   Changes in operating assets and liabilities, net of acquisitions:
               
      Accounts receivable
    (18,301 )     (4,312 )
      Prepaid expenses and other current assets
    (2,371 )     1,347  
      Accounts payable and accrued expenses
    2,514       (2,240 )
Net cash provided by operating activities
    17,155       25,242  
                 
Investing activities:
               
Proceeds from disposal of property and equipment
    33       273  
Purchases of property and equipment
    (5,355 )     (38,535 )
Proceeds from sales or maturities of available-for-sale securities
    --       126,635  
Purchases of available-for-sale securities
    --       (75,560 )
Acquisition of business
    (18,646 )     --  
Other
    (93 )     (676 )
Net cash (used in) provided by investing activities
    (24,061 )     12,137  
                 
Financing activities
               
Payments of debt and capital lease obligations
    (870 )     (19 )
Borrowings on line of credit
    30,000       --  
Payments on line of credit
    (25,000 )     --  
Proceeds from exercise of stock options
    2,138       275  
Payments of cash dividends
    (4,036 )     (4,222 )
Repurchase of common stock
    --       (31,220 )
Common stock issued under employee stock purchase plan
    145       138  
Cash settlement of share-based awards for minimum tax withholdings
    (377 )     (234 )
Tax benefit for stock options exercised
    1,079       8  
Net cash provided by (used in) financing activities
    3,079       (35,274 )
Net (decrease) increase in cash
    (3,827 )     2,105  
Cash at beginning of period
    4,909       8,231  
Cash at end of period
  $ 1,082     $ 10,336  

The accompanying notes are an integral part of the financial statements.
 
5


Forward Air Corporation

Notes to Condensed Consolidated Financial Statements
 (In thousands, except share and per share data)
(Unaudited)
June 30, 2008

1.
Basis of Presentation

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

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

FASI was formed in July 2007 in conjunction with the Company’s acquisition of certain assets and liabilities of USA Carriers, Inc. ("USAC").  FASI provides pool distribution services throughout the Southeast, Midwest and Southwest continental United States.  Pool distribution involves the consolidation and shipment of several smaller less than truckload shipments to a common area or region.  Once at the regional destination, the consolidated loads are then deconsolidated and delivered to their unique destinations.

In connection with the USAC acquisition, the Company reorganized its management reporting structure along these lines of business. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), the Company has evaluated the segment reporting requirements and determined that it has two reportable segments.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company’s operating results are subject to seasonal trends when measured on a quarterly basis, therefore operating results for the three month and six month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2007.
 
The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date, but does not include all of the financial information and notes required by United States generally accepted accounting principles for complete financial statements.

The accompanying consolidated financial statements of the Company include Forward Air Corporation and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
 
2.
Recent Accounting Pronouncements

During September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 with earlier adoption encouraged. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009.   The Company adopted SFAS 157 on January 1, 2008 for all financial assets and liabilities, but the implementation did not have a significant impact on the Company's financial position or results of operations.  The Company has not yet determined the impact the implementation of SFAS 157 will have on the Company’s non-financial assets and liabilities which are not recognized or disclosed on a recurring basis.  However, the Company does not anticipate that the full adoption of SFAS 157 will significantly impact our consolidated financial statements.
 
6


Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

2.
Recent Accounting Pronouncements (continued)

During February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted SFAS 159 on January 1, 2008, but the implementation of SFAS 159 did not have a significant impact on the Company's financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for the Company beginning January 1, 2009. The Company is currently evaluating the potential impact of the adoption of SFAS 141R on its consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for the Company beginning January 1, 2009. The Company is currently evaluating the potential impact of the adoption of SFAS 160 on its consolidated financial position, results of operations or cash flows.

3.
Comprehensive Income

Comprehensive income includes any changes in the equity of the Company from transactions and other events and circumstances from non-owner sources. Comprehensive income for the three and six months ended June 30, 2008 was $12,102 and $22,110, respectively. Comprehensive income for the three and six months ended June 30, 2007 was $11,475 and $21,768, respectively. In each case, comprehensive income approximated net income.

4.
Fair Value

The Company’s investments consist of state municipal bonds (often referred to as auction rate securities). The Company had a total of $500 and $522 in available-for-sale securities as of June 30, 2008 and December 31, 2007, respectively. These available-for-sale securities are remeasured to fair value on a recurring basis and are valued using level 1 inputs and the market approach as defined by SFAS 157.
    
5.
Share-Based Payments

The Company accounts for its share-based payments using SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), and elected the modified prospective transition method on January 1, 2006. Under the modified prospective transition method, awards that are granted, modified, repurchased or canceled after the date of adoption are measured and accounted for in accordance with SFAS 123R. Share-based awards that were granted prior to the effective date continue to be valued in accordance with SFAS 123 and stock option expense for unvested options must be recognized in the statement of income. On December 31, 2005, the Company’s Board of Directors accelerated the vesting of all outstanding and unvested stock options awarded to employees, officers and non-employee directors under the Company’s stock option award plans. The primary purpose of the accelerated vesting of these options was to eliminate future compensation expense that the Company would otherwise have recognized in its statement of income with respect to these unvested options upon the adoption of SFAS 123R. As a result of the acceleration of the vesting of the Company’s outstanding and unvested options in 2005, there was no additional compensation expense recognized during the three months and six months ended June 30, 2008 and 2007 related to options granted prior to January 1, 2006. All share-based compensation expense is recognized in salaries, wages and employee benefits.
 
7

 
Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

5.
Share-Based Payments (continued)

Employee Activity

On May 12, 2008, the Company’s shareholders approved the Company’s Amended and Restated Stock Option and Incentive Plan (the “Restated Plan”) which amended the Company’s 1999 Stock Option and Incentive Plan (the “1999 Plan”).  Among other changes, the Restated Plan increases the remaining shares available for grant by 3,000,000 shares.   

The Company’s general practice has been to make a single annual grant to key employees and to generally make other grants only in connection with new employment or promotions.  During 2006, the Company issued non-vested shares of common stock (“non-vested shares”) to key employees as the form of share-based awards. However, in 2007 and 2008, the Company elected to issue stock options to key employees, as the Company believes stock options more closely link long-term compensation with the Company’s long-term goals. Stock options issued during the three and six months ended June 30, 2008 and 2007 expire seven years from the grant date and vest ratably over a three-year period. The share-based compensation for these stock options will be recognized, net of estimated forfeitures, ratably over the requisite service period, or vesting period. The Company has estimated forfeitures based upon historical experience.

The Company used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted during the three and six months ended June 30, 2008 and 2007.  The weighted-average fair values of options granted during the three and six months ended June 30, 2008 were $10.76 and $9.17, respectively.  The weighted-average fair values of options granted during the three and six months ended June 30, 2007 were $11.01 and $11.19, respectively.  The fair values were estimated using the following weighted-average assumptions:

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Expected dividend yield
    0.8 %     0.8 %     0.8 %     0.8 %
Expected stock price volatility
    35.2 %     37.0 %     35.2 %     37.0 %
Weighted average risk-free interest rate
    3.2 %     4.6 %     2.8 %     4.7 %
Expected life of options (years)
    4.5       4.5       4.5       4.5  

During the three and six months ended June 30, 2008, share-based compensation expense for options granted to employees after December 31, 2005 was $962 and $1,888, respectively.   During the three and six months ended June 30, 2007, share-based compensation expense for options granted to employees after December 31, 2005 was $437 and $722, respectively.  The total tax benefit related to the share-based expense for these options for the three and six months ended June 30, 2008 was $232 and $475, respectively.  The total tax benefit related to the share-based expense for these options for the three and six months ended June 30, 2007 was $170 and $277, respectively.  Total compensation cost, net of estimated forfeitures, related to the options not yet recognized in earnings was $7,821 at June 30, 2008. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

The following tables summarize the Company’s employee stock option activity and related information for the three and six months ended June 30, 2008:

   
Three months ended June 30, 2008
                 
Weighted-
       
Weighted-
   
 
 
Average
       
Average
   
Aggregate
 
Remaining
   
Options
 
Exercise
   
Intrinsic
 
Contractual
    (000)  
Price
   
Value (000)
 
Term
Outstanding at March 31, 2008
  2,526   $ 27          
Granted
  5     34          
Exercised
  (44 )   18          
Forfeited
  (9 )   31          
Outstanding at June 30, 2008
  2,478   $ 27   14,547  
7.3
Exercisable at June 30, 2008
  1,460   $ 25   11,846  
6.0

8


Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

5.
Share-Based Payments (continued)

   
Six months ended June 30, 2008
                 
Weighted-
       
Weighted-
       
Average
       
Average
   
Aggregate
 
Remaining
   
Options
 
Exercise
   
Intrinsic
 
Contractual
    (000)  
Price
   
Value (000)
 
Term
Outstanding at January 1, 2008
  2,246   $ 26          
Granted
  387     30          
Exercised
  (127 )   13          
Forfeited
  (28 )   31          
Outstanding at June 30, 2008
  2,478   $ 27   14,547  
7.3
Exercisable at June 30, 2008
  1,460   $ 25   11,846  
6.0

Share-based compensation expense was $342 and $750 during the three and six months ended June 30, 2008, respectively, for non-vested shares granted to employees during 2006. The total tax benefit related to this share-based expense was $135 and $296 for the three and six months ended June 30, 2008, respectively. Share-based compensation expense was $325 and $597 during the three and six months ended June 30, 2007, respectively, for non-vested shares granted to employees during 2006. The total tax benefit related to this share-based expense was $126 and $229 for the three and six months ended June 30, 2007, respectively.  Total compensation cost, net of estimated forfeitures, related to the non-vested shares not yet recognized in earnings was $841 at June 30, 2008. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Under the 2005 Employee Stock Purchase Plan (the “ESPP”), which has been approved by shareholders, the Company is authorized to issue up to a remaining 464,370 shares of common stock to employees of the Company. These shares may be issued at a price equal to 90% of the lesser of the market value on the first day or the last day of each six-month purchase period. Common stock purchases are paid for through periodic payroll deductions and/or up to two large lump sum contributions. For the three and six months ended June 30, 2008, participants under the plan purchased 5,331 shares at an average price of $27.16 per share. For the three and six months ended June 30, 2007, participants under the plan purchased 5,049 shares at an average price of $27.32 per share. The weighted-average fair value of each purchase right under the ESPP granted for the three and six months ended June 30, 2008, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $7.44 per share.  The weighted-average fair value of each purchase right under the ESPP granted for the three and six months ended June 30, 2007, was $6.78 per share. Share-based compensation expense of $39 and $34 was recognized during the three and six months ended June 30, 2008 and 2007, respectively. The total tax benefit related to the share-based expense was $6 and $13 for the three and six months ended June 30, 2008 and 2007, respectively.

Non-employee Director Activity

During the three months ended June 30, 2008, the Company granted 16,142 shares of non-vested shares to non-employee directors with an average grant price of $34.69 per share.  During the three months ended June 30, 2007, the Company granted 19,024 shares of non-vested shares to non-employee directors with an average grant price of $33.64 per share.  The 2008 and 2007 grants of non-vested shares were issued from the Company’s Amended and Restated Non-Employee Director Stock Plan and vest over a 12 month period.

Share-based compensation expense during the three months and six months ended June 30, 2008 was $242 and $443, respectively, for non-vested shares granted to non-employee directors.  The total tax benefit related to this share-based expense was $95 and $175 for the three and six months ended June 30, 2008, respectively.  Share-based compensation expense during the three months and six months ended June 30, 2007 was $93 and $128, respectively, for non-vested shares granted to non-employee directors.  The total tax benefit related to this share-based expense was $37 and $50 for the three and six months ended June 30, 2007, respectively.  Total compensation cost, net of estimated forfeitures, related to the non-vested shares granted to non-employee directors not yet recognized in earnings was $623 at June 30, 2008.  Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

In addition to the above activity, each May from 1995 to 2005 options were granted to the non-employee directors of the Company.  The options have terms of ten years and are fully exercisable. During the three months end June 30, 2008, non-employee directors exercised 18,750 options with a weighted average exercise price of $22.47.  At June 30, 2008, 93,125 options were outstanding and will expire between July 2010 and May 2015.  At June 30, 2008, the total aggregate intrinsic value of these options was $1,049 and the weighted-average exercise price per share and remaining contractual term were $22 and 4.9 years, respectively.
 
9

 
Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

6.
Debt

On October 10, 2007, the Company entered into a $100,000 senior credit facility. This facility has a term of five years and includes an accordion feature, which allows for an additional $50,000 in borrowings on such terms and conditions as set forth in the Credit Agreement. The senior credit facility matures on October 10, 2012. The facility replaced the Company's previous $20,000 line of credit. The Company entered into this larger credit facility in order to fund potential acquisitions, the repurchase of its common stock, and for financing other general business purposes.  Interest rates for advances under the facility are at LIBOR plus 0.6% to 0.9% based upon covenants related to total indebtedness to earnings (3.1% at June 30, 2008). The agreement contains certain covenants and restrictions, none of which are expected to significantly affect our operations or ability to pay dividends.  No assets are pledged as collateral against the senior credit facility.  As of June 30, 2008, the Company had $35,000 outstanding under the senior credit facility. At June 30, 2008, the Company had $57,155 of available borrowing capacity outstanding under the senior credit facility, not including the accordion feature, and had utilized $7,845 of availability for outstanding letters of credit.

7.
Acquisition of Businesses

On March 17, 2008, the Company acquired certain assets and liabilities of Pinch Holdings, Inc. and its related company AFTCO Enterprises, Inc. and certain of their respective wholly owned subsidiaries (Pinch).  Pinch was a privately held provider of pool distribution, airport-to-airport, truckload, custom, and cartage services primarily in the Southwestern continental United States.  Pinch generated approximately $35,000 in revenue during the year ended December 31, 2007.  The acquisition of Pinch’s pool distribution services expands the geographic footprint of the FASI segment in the Southwestern United States.  In addition to providing additional tonnage density to the Forward Air airport-to-airport network, the acquisition of Pinch’s cartage and truckload business provides an opportunity for Forward Air to expand its service options in the Southwestern United States.  The purchased assets and liabilities and the results of operations of Pinch have been included in the consolidated financial statements since March 17, 2008.

The aggregate purchase price was $18,646, paid with the Company’s available cash and borrowings from the Company’s senior credit facility (see note 6).  Under the purchase agreement, $1,825 of the purchase price was paid into an escrow account to protect the Company against potential unknown liabilities.  The amount paid into escrow will be released to the sellers one year after the acquisition date.

The purchase price allocation is preliminary as the Company is still finalizing the valuation of the acquired non-compete agreements and customer relationships. The preliminary purchase price allocation is as follows:

   
Forward Air
   
FASI
   
Total
Current assets
  $ 72     $ -     $ 72
Property and equipment
    960       148       1,108
Non-compete agreements
    80       -       80
Customer relationships
    4,700       4,300       9,000
Goodwill
    5,537       3,437       8,974
Total assets acquired
    11,349       7,885       19,234
                       
Debt and capital leases
    480       108       588
Total liabilities assumed
    480       108       588
Net assets acquired
  $ 10,869     $ 7,777     $ 18,646

The acquired customer relationships and non-compete agreements are being amortized on a straight-line basis over a weighted average life of 12 and 5 years, respectively.  The Company began amortizing the assets as of the acquisition date and recorded $218 of amortization expense during the three and six months ended June 30, 2008.  The assumed debt included notes payable on purchased equipment of $350 and capital lease obligations of $238.  The notes payable of $350 were settled on the date of purchase and there are no related amounts outstanding on June 30, 2008.  
 
10


Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

7.
Acquisition of Businesses (continued)

On July 30, 2007, the Company acquired certain assets and liabilities of USAC. The purchased assets and liabilities and the results of operations of USAC have been included in the consolidated financial statements, in our FASI segment, since July 30, 2007.  USAC was a well-established transportation service provider with 11 facilities that specialized in pool distribution services throughout the Southeast, Midwest and Southwest continental United States. USAC generated approximately $32,000 in revenue during the year ended December 31, 2006.  In conjunction with the Company’s strategy to expand into new services complimentary to the airport-to-airport business, the acquisition provides the opportunity for the Company to introduce new services to new and existing customers and to drive efficiencies in existing businesses.  The aggregate purchase price was $12,950, paid with the Company’s available cash. Under the purchase agreement, $1,250 of the purchase price was paid into an escrow account to protect the Company against potential unknown liabilities.  The amount paid into escrow will be released to the sellers one year after the acquisition date. 
 
On December 3, 2007, the Company acquired certain assets and liabilities of Black Hawk Freight Services, Inc. ("Black Hawk").  The purchased assets and liabilities and the results of operations of Black Hawk have been included in the consolidated financial statements, in our Forward Air segment, since December 3, 2007.  Black Hawk was a privately held provider of airport-to-airport, truckload, custom, and cartage services that generated approximately $30,000 in revenue during the year ended December 31, 2006.  The acquisition of Black Hawk operations is complimentary to those of the Forward Air segment and will increase the geographic footprint of the segment in the Midwestern United States.  The aggregate purchase price was $35,251, paid with the Company’s available cash and borrowings from the Company’s senior credit facility.  Under the purchase agreement, $3,500 of the purchase price was paid into an escrow account to protect the Company against potential unknown liabilities.  The amount paid into escrow will be released to the sellers one year after the acquisition date. 

Also during 2007, the Company acquired certain assets of two other operations for $681 in cash.  The assets purchased were truckload and cargo handling customer relationships.  These acquisitions were completed to expand existing logistics and other services currently provided.  

Acquired customer relationships and non-compete agreements have weighted-average useful lives of 10.7 and 5.6 years, respectively. Amortization expense on acquired customer relationships and non-compete agreements during the three and six months ended June 30, 2008 was $1,110 and $2,004, respectively.  Amortization expense on acquired customer relationships and non-compete agreements during the three and six months ended June 30, 2007 was $360 and $679, respectively.

The changes in the carrying value of goodwill for the six months ended June 30, 2008 are as follows:

   
Forward Air
   
FASI
   
Total
Beginning balance, December 31, 2007
  $ 32,344     $ 3,709     $ 36,053
Pinch acquisition
    5,537       3,437       8,974
Adjustment to Black Hawk and USAC acquisitions
    9       9       18
Ending balance, June 30, 2008
  $ 37,890     $ 7,155     $ 45,045


8.
Net Income Per Share

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

   
Three months ended
   
Six months ended
   
June 30,
   
June 30,
   
June 30,
   
June 30,
   
2008
   
2007
   
2008
   
2007
Numerator:
                     
Numerator for basic and diluted income per share - net income
  $ 12,102     $ 11,475     $ 22,110     $ 21,768
                               
Denominator:
                             
Denominator for basic income per share - weighted-average shares
    28,805       29,805       28,737       30,070
Effect of dilutive stock options and non-vested shares
    321       357       304       342
Denominator for diluted income per share - adjusted weighted-average shares
    29,126       30,162       29,041       30,412
Basic income per share
  $ 0.42     $ 0.38     $ 0.77     $ 0.72
Diluted income per share
  $ 0.42     $ 0.38     $ 0.76     $ 0.72

11

 
Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

9.
Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various states and Canada. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or Canadian examinations by tax authorities for years before 2003.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $1,397 increase in the liability for income tax contingencies, including related interest and penalties, which net of federal benefit of $420 was accounted for as a reduction to the January 1, 2007 balance of retained earnings. The liability for income tax contingencies at January 1, 2007, net of federal benefit was $977, which represented tax positions where the realization of the ultimate benefit was uncertain and the disallowance of which would affect the Company’s annual effective income tax rate.

Included in the liability for unrecognized tax benefits at June 30, 2008 are tax positions of $1,185, which represents tax positions where the realization of the ultimate benefit is uncertain and the disallowance of which would affect the Company’s annual effective income tax rate. Approximately $1,004 of the unrecognized tax benefits relate to a contingency involving two of our subsidiaries and related state tax issues.  It is reasonably possible that within the next twelve months the entire accrued amount of $1,004 related to this matter will be settled with the applicable state.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

There were no significant changes to the accruals for unrecognized tax benefits and related interest and penalties during the three and six months ended June 30, 2008.

For the three and six months ended June 30, 2008 and 2007, the effective income tax rates varied from the statutory federal income tax rate of 35.0%, primarily as a result of the effect of state income taxes, net of the federal benefit and permanent differences between book and tax net income.
 
10.
Shareholders' Equity

During the first and second quarters of 2008 and 2007, the Company’s Board of Directors declared a cash dividend of $0.07 per share of common stock.  The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.

On November 17, 2005, the Company announced that its Board of Directors approved a stock repurchase program for up to three million shares of common stock (the “2005 Repurchase Plan”). In addition, on July 31, 2007, the Company’s Board of Directors approved an additional stock repurchase program for up to two million shares of the Company’s common stock (the “2007 Repurchase Plan”).  No shares were repurchased during the three and six months ended June 30, 2008.  For the three and six months ended June 30, 2007, the Company repurchased 737,300 and 979,500 shares of common stock, respectively, under the 2005 Repurchase Plan for $23,682, or $32.12 per share and $31,220, or $31.87 per share, respectively.    As of June 30, 2008, no shares remained eligible for purchase under the 2005 Repurchase Plan and 1,788,827 shares remained eligible for repurchase under the 2007 Repurchase Plan.
 
11.
Commitments and Contingencies

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

The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims and by performing hindsight and actuarial analysis to determine an estimate of probable losses on claims incurred but not reported.  Such losses could be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates.
 
12

 
Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

11.
Commitments and Contingencies (continued)

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

12.
Segment Reporting

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in Note 1 to the Consolidated Financial Statements included in our 2007 Annual Report on Form 10-K. Segment data includes intersegment revenues.  Assets and costs of the corporate headquarters are allocated to the segments based on usage.  The Company evaluates the performance of its segments based on net income.  The Company’s business is conducted principally in the U.S. and Canada.

The following table summarizes segment information about net income and assets used by the chief operating decision maker of the Company in making decisions regarding allocation of assets and resources as of and for the three and six months ended June 30, 2008.   No segment information has been presented for the three and six months ended June 30, 2007 as FASI did not exist until July 30, 2007 and all 2007 data would have been solely related to Forward Air.
 
   
Three months ended June 30, 2008
   
Forward Air
   
FASI
   
Eliminations
   
Consolidated
External revenues
  $ 110,213     $ 11,350     $ --     $ 121,563
Intersegment revenues
    662       13       (675 )     --
Depreciation and amortization
    3,610       388       --       3,998
Stock-based compensation expense
    1,551       34       --       1,585
Interest expense
    315       13       --       328
Interest income
    53       3       --       56
Income tax expense (benefit)
    8,050       (162 )     --       7,888
Net income (loss)
    12,389       (287 )     --       12,102
Total assets
    270,127       25,162       (21,266 )     274,023
Capital expenditures
    2,585       125       --       2,710


   
Six months ended June 30, 2008
   
Forward Air
   
FASI
   
Eliminations
   
Consolidated
External revenues
  $ 210,314     $ 19,187     $ --     $ 229,501
Intersegment revenues
    893       13       (906 )     --
Depreciation and amortization
    7,004       692       --       7,696
Stock-based compensation expense
    3,060       60       --       3,120
Interest expense
    603       26       --       629
Interest income
    199       5       --       204
Income tax expense (benefit)
    14,742       (359 )     --       14,383
Net income (loss)
    22,735       (625 )     --       22,110
Total assets
    270,127       25,162       (21,266 )     274,023
Capital expenditures
    5,045       310       --       5,355

13


Item 2.

Overview and Executive Summary

Our operations can be broadly classified into two principal segments:  Forward Air, Inc. (Forward Air) and Forward Air Solutions, Inc. (FASI).  
 
Through our Forward Air segment, we are a leading provider of time-definite surface transportation and related logistics services to the North American deferred air freight market. We offer our customers local pick-up and delivery (Forward Air Complete™) and scheduled surface transportation of cargo as a cost-effective, reliable alternative to air transportation. We transport cargo that must be delivered at a specific time, but is less time-sensitive than traditional air freight. This type of cargo is frequently referred to in the transportation industry as deferred air freight. We operate our Forward Air segment through a network of terminals located on or near airports in 83 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and eleven regional hubs serving key markets.  We also offer our customers an array of logistics and other services including: expedited truckload brokerage (TLX); dedicated fleets; warehousing; customs brokerage; and shipment consolidation, deconsolidation and handling.

On July 30, 2007, through our subsidiary and reporting segment, FASI, and in conjunction with the acquisition of USA Carriers, Inc. (“USAC”), we began providing pool distribution services throughout the Southeast, Midwest and Southwest continental United States.  Pool distribution involves the consolidation and shipment of several smaller less-than-truckload shipments to a common area or region.  Once at the regional destination, the consolidated loads are then deconsolidated and delivered to their unique destinations.  Our primary customers for this product are regional and nationwide distributors and retailers.  We service these customers through a network of thirteen terminals.

Our operations, particularly our network of hubs and terminals, represent substantial fixed costs. Consequently, our continued growth depends in significant part on our ability to increase the amount of freight and the revenue per pound for the freight shipped through our networks and to grow other lines of businesses, such as TLX, which will allow us to maintain revenue growth in challenging shipping environments.

Trends and Developments

During the three and six months ended June 30, 2008 we experienced significant revenue growth across all product lines and segments over the same periods in the prior year.  The revenue growth was primarily driven by our 2008 and 2007 acquisition activity, partially offset by challenging economic conditions.  On March 17, 2008, we acquired certain assets and liabilities of Pinch Holdings, Inc. and its related company AFTCO Enterprises, Inc. and certain of their respective wholly-owned subsidiaries (“Pinch”).  Pinch was a privately held provider of pool distribution, airport-to-airport, truckload, custom, and cartage services primarily to the Southwestern continental United States.  Pinch generated approximately $35.0 million in revenue during the year ended December 31, 2007.  The acquisition of Pinch’s pool distribution services expands the geographic footprint of the FASI segment in the Southwestern United States.  In addition to providing additional tonnage density to the Forward Air airport-to-airport network, the acquisition of Pinch’s cartage and truckload business provides an opportunity for Forward Air to expand its service options in the Southwestern United States.

Further, on December 3, 2007 we acquired certain assets and liabilities of Black Hawk Freight Services, Inc. (“Black Hawk”) to increase the penetration of our airport-to-airport network in the Midwest, Southwest and West continental United States.  Also, on July 30, 2007, we acquired certain assets and liabilities of USAC.  Through this acquisition we began providing pool distribution services throughout the Southeast, Midwest and Southwest continental United States.  Additionally, the acquisition of certain assets and liabilities of USAC provides an important operating platform that will enable further expansion of our Forward Air Complete™ pick-up and delivery product, TLX and value-added handling services.  

Despite providing different benefits, these acquisitions fit into our “Completing the Model” strategic initiative of using acquisitions to grow existing business and to expand into new services and lines of business that will provide for revenue growth in any market conditions.  We will continue to evaluate acquisitions that can increase our penetration of a geographic area, add new customers, increase freight, or enable us to offer additional services. 

During the three and six months ended June 30, 2008, we continued to experience a decrease in our income from operations as a percentage of operating revenue.  The decrease in income from operations as a percentage of operating revenue was driven primarily by changes in our revenue mix and increasing fuel expense.  Revenue increases from our lower margin products have continued to outpace the revenue growth from our higher margin airport-to-airport service resulting in negative pressure on our operating margins.  In addition, revenue growth in airport-to-airport service has been primarily driven by shorter distance lower yielding business.  These changes in revenue mix have been accelerated by our recent acquisitions.  In addition to the revenue mix, the recent acquisitions have increased the number of Company-employed drivers and Company-owned equipment.  These increases have significantly increased our salaries, wage and benefits, fuel and other operating expenses as we, not independent owner-operators, now incur these costs directly.  

14

 
Segments

Effective July 30, 2007 in conjunction with FASI’s acquisition of certain assets and liabilities of USAC, we began reporting our operations as two segments: Forward Air and FASI.  As the creation of the second segment was the result of our July 2007 acquisition, no reclassification of prior year financial information was necessary.

Our Forward Air segment includes our pre-existing airport-to-airport and TLX services as well as our other accessorial related services such as warehousing; customs brokerage; and value-added handling services.
 
Our FASI segment includes our pool distribution business and the related assets and liabilities purchased from USAC and Pinch.

 Results of Operations

The following table sets forth our consolidated historical financial data for the three months ended June 30, 2008 and 2007 (in millions):

   
June 30,
   
June 30,
             
   
2008
   
2007
   
Change
   
% Change
 
Operating revenue
  $ 121.6     $ 93.1     $ 28.5       30.6 %
Operating expenses:
                               
   Purchased transportation
    47.9       39.4       8.5       21.6  
   Salaries, wages, and employee benefits
    29.4       19.9       9.5       47.7  
   Operating leases
    5.9       3.9       2.0       51.3  
   Depreciation and amortization
    4.0       2.5       1.5       60.0  
   Insurance and claims
    1.6       1.9       (0.3 )     (15.8 )
   Fuel expense
    3.3       0.3       3.0       1,000.0  
   Other operating expenses
    9.2       6.9       2.3       33.3  
      Total operating expenses
    101.3       74.8       26.5       35.4  
Income from operations
    20.3       18.3       2.0       10.9  
Other income (expense):
                               
   Interest expense
    (0.3 )     --       (0.3 )     (100.0 )
   Other, net
    --       0.4       (0.4 )     (100.0 )
      Total other (expense) income
    (0.3 )     0.4       (0.7 )     (175.0 )
Income before income taxes
    20.0       18.7       1.3       7.0  
Income taxes
    7.9       7.2       0.7       9.7  
Net income
  $ 12.1     $ 11.5     $ 0.6       5.2 %

15

 
The following table sets forth our historical financial data by segment for the three months ended June 30, 2008 and 2007 (in millions):

 
Three months ended
 
   
June 30,
   
Percent of
     
June 30,
 
Percent of
 
   
2008
   
Revenue
     
2007
 
Revenue
 
Operating revenue
                       
      Forward Air
$
110.9
   
91.2
%
 
$
93.1
 
100.0
%
      FASI
 
11.4
   
9.4
     
--
 
--
 
      Intercompany Eliminations
 
(0.7
)
 
(0.6
)
   
--
 
--
 
            Total
 
121.6
   
100.0
     
93.1
 
100.0
 
                         
Purchased transportation
                       
      Forward Air
 
45.9
   
41.4
     
39.4
 
42.3
 
      FASI
 
2.7
   
23.7
     
--
 
--
 
      Intercompany Eliminations
 
(0.7
)
 
100.0
     
--
 
--
 
            Total
 
47.9
   
39.4
     
39.4
 
42.3
 
                         
Salaries, wages and employee benefits
                     
      Forward Air
 
24.7
   
22.3
     
19.9
 
21.4
 
      FASI
 
4.7
   
41.2
     
--
 
--
 
            Total
 
29.4
   
24.2
     
19.9
 
21.4
 
                         
Operating leases
                       
      Forward Air
 
4.6
   
4.2
     
3.9
 
4.2
 
      FASI
 
1.3
   
11.4
     
--
 
--
 
            Total
 
5.9
   
4.8
     
3.9
 
4.2
 
                         
Depreciation and amortization
                       
      Forward Air
 
3.6
   
3.2
     
2.5
 
2.7
 
      FASI
 
0.4
   
3.5
     
--
 
--
 
            Total
 
4.0
   
3.3
     
2.5
 
2.7
 
                         
Insurance and claims
                       
      Forward Air
 
1.6
   
1.4
     
1.9
 
2.0
 
      FASI
 
--
   
--
     
--
 
--
 
            Total
 
1.6
   
1.3
     
1.9
 
2.0
 
                         
Fuel expense
                       
      Forward Air
 
1.8
   
1.6
     
0.3
 
0.3
 
      FASI
 
1.5
   
13.2
     
--
 
--
 
            Total
 
3.3
   
2.7
     
0.3
 
0.3
 
                         
Other operating expenses
                       
      Forward Air
 
8.0
   
7.2
     
6.9
 
7.4
 
      FASI
 
1.2
   
10.5
     
--
 
--
 
            Total
 
9.2
   
7.6
     
6.9
 
7.4
 
                         
Income (loss) from operations
                       
      Forward Air
 
20.7
   
18.7
     
18.3
 
19.7
 
      FASI
 
(0.4
)
 
(3.5
)
   
--
 
--
 
            Total
$
20.3
   
16.7
%
 
$
18.3
 
19.7
%

16


The following table presents the components of the Forward Air segment’s operating revenue and purchased transportation for the three months ended June 30, 2008 (in millions):

 
For three months ended
   
For three months ended
 
 
June 30,
 
Percent of
   
June 30,
   
Percent of
 
 
2008
 
Revenue
   
2007
   
Revenue
 
Forward Air revenue
                   
      Airport-to-airport
$ 89.2     80.4 %   $ 77.2       82.9 %
      Logistics
  15.5     14.0       10.7       11.5  
      Other
  6.2     5.6       5.2       5.6  
            Total
$ 110.9     100.0 %   $ 93.1       100.0 %
                             
Forward Air purchased transportation
                           
      Airport-to-airport
$ 33.5     37.6 %   $ 29.7       38.5 %
      Logistics
  10.8     69.7       8.2       76.6  
      Other
  1.6     25.8       1.5       28.8  
            Total
$ 45.9     41.4 %   $ 39.4       42.3 %


Three Months Ended June 30, 2008 compared to Three Months Ended June 30, 2007

Revenues
 
Operating revenue increased by $28.5 million, or 30.6%, to $121.6 million for the three months ended June 30, 2008 from $93.1 million in the same period of 2007.

Forward Air

Forward Air operating revenue increased $17.8 million, or 19.1%, to $110.9 million from $93.1, accounting for 91.2% of consolidated operating revenue for the three months ended June 30, 2008. Airport-to-airport revenue, which is the largest component of our consolidated operating revenue, increased $12.0 million, or 15.5%, to $89.2 million from $77.2 million, accounting for 80.4% of the segment’s operating revenue during the three months ended June 30, 2008 compared to 82.9% for the three months ended June 30, 2007.  The increase in airport-to-airport revenue was driven by an increase in tonnage and a minor increase in revenue per pound. Our airport-to-airport business is priced on a per pound basis and the average revenue per pound, including the impact of fuel surcharges, increased 1.9% for the three months ended June 30, 2008 versus the three months ended June 30, 2007. Tonnage that transited our network increased by 13.6% in the three months ended June 30, 2008 compared with the three months ended June 30, 2007.  The increase in tonnage was primarily driven by the increased activity resulting from our acquisitions of Black Hawk and Pinch in December 2007 and March 2008, respectively.  Average revenue per pound increased due to increased utilization of our Forward Air Complete pick-up and delivery service in addition to increased fuel surcharges to offset rising fuel costs.  These increases were offset by yield decreases resulting from a shift in our revenue mix to shorter distance lower price per pound routes.  This shift was primarily the result of new business obtained with the Pinch and Black Hawk acquisitions as well as increased business from international and domestic airlines.
 
Logistics revenue, which is primarily truckload brokerage (TLX) and priced on a per mile basis, increased $4.8 million, or 44.9%, to $15.5 million in the second quarter of 2008 from $10.7 million in the same period of 2007.  The increase in logistics revenue is the result of new revenue obtained with the Pinch and Black Hawk acquisitions and our continuing efforts as part of our “Completing the Model” strategic initiative to grow TLX. We continue to place emphasis on capturing a larger percentage of truckload opportunities and correspondingly increasing our access to sufficient truckload capacity through the expansion of our owner-operator fleet and the use of third-party transportation providers. Through these efforts we increased the number of miles driven to support our logistics revenue by 24.3% during the three months ended June 30, 2008 compared to the same period in 2007.  The average revenue per mile of our logistics product, including the impact of fuel surcharges, increased 16.8% for the three months ended June 30, 2008 versus the three months ended June 30, 2007. The increase in our revenue per mile is mainly attributable to new logistics business obtained through our acquisitions of Pinch and Black Hawk.  The new business accounted for $1.3 million of the logistics revenue increase and 57.7% of the increase in logistics revenue per mile.  The remaining increase in logistics revenue per mile was from increased fuel surcharges to offset rising fuel costs.

Other revenue, which includes warehousing services and terminal handling, accounts for the final component of Forward Air operating revenue. Other revenue increased $1.0 million to $6.2 million, a 19.2% increase from $5.2 million for the same period in 2007.  The increase was primarily due to increased cartage, handling and storage revenue due to new services offered through our newly expanded facilities.  The increased cartage revenue is also the result of new business obtained in conjunction with the Pinch and Black Hawk acquisitions.
 
17

 
FASI

FASI operating revenue of $11.4 million represents revenue earned through our pool distribution service acquired with the USAC and Pinch acquisitions on July 30, 2007 and March 17, 2008, respectively. The pool distribution business is seasonal and operating revenues tend to be higher in the third and fourth quarters than the first and second quarters.  Typically, this pattern is the result of factors such as national holidays, customer demand and economic conditions. Additionally, a significant portion of FASI’s revenue is derived from customers whose business levels are impacted by the economy.

Intercompany Eliminations

Intercompany eliminations of $0.7 million are the result of truckload and airport-to-airport services Forward Air provided to FASI during the three months ended June 30, 2008.

Purchased Transportation

Purchased transportation increased by $8.5 million, or 21.6%, to $47.9 million in the second quarter of 2008 from $39.4 million in the same period of 2007.  As a percentage of total operating revenue, purchased transportation was 39.4% during the three months ended June 30, 2008 compared to 42.3% for the same period in 2007.

Forward Air

Forward Air’s purchased transportation increased by $6.5 million, or 16.5%, to $45.9 million for the three months ended June 30, 2008 from $39.4 million for the three months ended June 30, 2007. The increase in purchased transportation is primarily attributable to an increase of approximately 12.6% in miles in addition to a 3.5% increase in the total cost per mile for the second quarter of 2008 versus the same period in 2007. As a percentage of segment operating revenue, Forward Air purchased transportation was 41.4% during the three months ended June 30, 2008 compared to 42.3% for the same period in 2007.

Purchased transportation costs for our airport-to-airport network increased $3.8 million, or 12.8%, to $33.5 million for the three months ended June 30, 2008 from $29.7 million for the three months ended June 30, 2007.  For the three months ended June 30, 2008, purchased transportation for our airport-to-airport network decreased to 37.6% of airport-to-airport revenue from 38.5% for the same period in 2007.  The 12.8% increase is mainly attributable to a 9.6% increase in miles driven by our network of owner-operators or third party transportation providers plus a 2.8% increase in cost per mile.  Miles driven by our network of owner-operators or third party transportation providers increased to support the increased revenue activity discussed above.  However, the increased activity was offset by efforts to consolidate the number of loads carried, which in turn reduces the number of miles driven to support the airport-to-airport network.  In addition, as a result of the Pinch and Black Hawk acquisitions, we now utilize Company-employed drivers in our airport-to-airport network which shifts a percentage of transportation costs from purchased transportation to salaries, wages and benefits.  The increase in cost per mile is attributable to increased customer utilization of Forward Air Complete, offset by savings obtained from increased utilization of our owner-operator fleet instead of third party transportation providers, whose rate per mile is generally more costly than that of our owner-operator fleet.

Purchased transportation costs related to our logistics revenue increased $2.6 million, or 31.7%, to $10.8 million for the three months ended June 30, 2008 from $8.2 million for the three months ended June 30, 2007. For the three months ended June 30, 2008, logistics’ purchased transportation costs represented 69.7% of logistics revenue versus 76.6% for the three months ended June 30, 2007. The 31.7% increase is mainly attributable to a 24.3% increase in miles driven by our network of owner-operators or third party transportation providers plus a 6.8% increase in cost per mile.   Miles driven by our network of owner-operators or third party transportation providers increased to support the increased logistics revenue activity discussed above and accounted for $2.0 million of the increase in logistics purchased transportation.  The increase in our purchased transportation cost per mile was attributable to the new logistics business obtained through the acquisitions of Pinch and Black Hawk.  The transit distances for the new business are shorter than our legacy logistics business and transportation costs for freight traveling shorter distances are generally priced at a higher rate per mile. The decrease in logistics purchased transportation as a percentage of logistics revenue is the result of the new business obtained from Pinch and Black Hawk as well as increased utilization of Company-employed drivers which shifts a percentage of the transportation costs from purchased transportation to salaries, wages and benefits.

Purchased transportation costs related to our other revenue increased $0.1 million, or 6.7%, to $1.6 million for the three months ended June 30, 2008 from $1.5 million for the three months ended June 30, 2007. Other purchased transportation costs as a percentage of other revenue decreased to 25.8% of other revenue for the three months ended June 30, 2008 from 28.8% for the same period in 2007.   The improvement in other purchased transportation costs as a percentage of other revenue is attributable to the use of Company-employed drivers to provide the transportation services associated with new business obtained from the Pinch and Black Hawk acquisitions.

18

 
FASI

FASI purchased transportation of $2.7 million represents costs associated with payment of drivers, including FASI networked owner-operators, owner-operators from the Forward Air network, and third party transportation providers, for the transportation services provided to FASI. FASI purchased transportation was 23.7% of the segment’s operating revenue.  Due to the nature of the services provided FASI purchased transportation is lower as a percentage of revenue than our Forward Air segment as a larger percentage of the transportation services are performed by Company-employed drivers.

Intercompany Eliminations

Intercompany eliminations of $0.7 million are the result of truckload and airport-to-airport services Forward Air provided to FASI during the three months ended June 30, 2008.

Salaries, Wages, and Benefits

Salaries, wages and employee benefits increased by $9.5 million, or 47.7%, to $29.4 million in the second quarter of 2008 from $19.9 million in the same period of 2007.  As a percentage of total operating revenue, salaries, wages and employee benefits was 24.2% during the three months ended June 30, 2008 compared to 21.4% for the same period in 2007.

Forward Air

Salaries, wages and employee benefits of Forward Air increased by $4.8 million, or 24.1%, to $24.7 million in the second quarter of 2008 from $19.9 million in the same period of 2007.  Salaries, wages and employee benefits were 22.3% of Forward Air’s operating revenue in the second quarter of 2008 compared to 21.4% for the same period of 2007. The increase in salaries, wages and employee benefits as a percentage of revenue was attributable to increased costs for employee incentives and share-based compensation.  Share-based compensation increased $0.7 million, or 0.4% as a percentage of Forward Air operating revenue, due to the annual grants of stock options and non-vested shares of common stock to key members of management and non-employee directors from 2006 to the present.  Employee incentives increased $1.3 million, or 1.1% as a percentage of revenue due to increased accruals for quarterly and annual incentives for key employees based on achievement of performance goals.  The remaining increase in total dollars is attributable to the increased headcount of mainly terminal and Company-employed drivers associated with our acquisitions of Pinch and Black Hawk.

FASI

FASI salaries, wages and employee benefits of $4.7 million represents costs associated with payment of employees, mainly company drivers and employees located at our terminals since our acquisitions of USAC and Pinch in the third quarter of 2007 and first quarter of 2008, respectively.  FASI salaries, wages and employee benefits were 41.2% of the segment’s operating revenue.  FASI salary, 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.

Operating Leases

Operating leases increased by $2.0 million, or 51.3%, to $5.9 million in the second quarter of 2008 from $3.9 million in the same period of 2007.  Operating leases, the largest component of which is facility rent, were 4.8% of consolidated operating revenue for the three months ended June 30, 2008 compared with 4.2% in the same period of 2007.

Forward Air

Operating leases were 4.2% of Forward Air operating revenue for the three months ended June 30, 2008 compared with 4.2% in the same period of 2007.  The increase in operating leases in total dollars was attributable to $0.4 million in higher facility rent expense associated with the assumption of additional facilities as a result of the Pinch and Black Hawk acquisitions and the expansion of certain facilities. Operating leases also increased $0.3 million for trailer and tractor leases assumed in conjunction with the acquisitions of Pinch and Black Hawk.

FASI

FASI operating lease expense of $1.3 million represents $0.7 of facility rent for FASI’s 13 facilities and $0.6 million for operating leases on trailers and tractors assumed in conjunction with the acquisition of Pinch.  FASI does not currently own any of its facilities.  FASI operating leases were 11.4% of the segment’s operating revenue.

Depreciation and Amortization

Depreciation and amortization increased $1.5 million, or 60.0%, to $4.0 million in the second quarter of 2008 from $2.5 million in the same period of 2007.  Depreciation and amortization was 3.3% of consolidated operating revenue for the three months ended June 30, 2008 compared with 2.7% in the same period of 2007.

19

 
Forward Air

Depreciation and amortization expense as a percentage of Forward Air operating revenue was 3.2% in the second quarter of 2008 compared to 2.7% in the same period of 2007. The increase in depreciation and amortization expense is primarily due to the amortization of intangible assets and property and equipment associated with the acquisitions of Pinch and Black Hawk.  Amortization expense increased $0.6 million as a result of the non-compete and customer relationships purchased with the acquisitions of Pinch and Black Hawk.  Depreciation on tractors and trailers increased $0.2 million due to the purchase of tractors and trailers purchased during the third quarter of 2007 and in conjunction with our acquisitions of Pinch and Black Hawk.  Also, depreciation on other property and equipment increased $0.3 million due to the expansion of our infrastructure as result of our new terminal in Atlanta, Georgia, placed in service in July 2007, and other assets and facilities assumed with the Pinch and Black Hawk acquisitions.

FASI

FASI depreciation and amortization of $0.4 million represents $0.2 million of depreciation on property and equipment and $0.2 million of amortization on intangible assets acquired with our USAC and Pinch acquisitions in the third quarter of 2007 and first quarter of 2008, respectively.  FASI depreciation and amortization expenses, as a percentage of the segment’s operating revenue, was 3.5%.

Insurance and Claims

Insurance and claims expense decreased $0.3 million, or 15.8%, to $1.6 million for the three months ended June 30, 2008 from $1.9 million for the three months ended June 30, 2007.  Insurance and claims were 1.3% of consolidated operating revenue during 2008 compared with 2.0% in 2007.

Forward Air

Insurance and claims were 1.4% of Forward Air operating revenue in the second quarter of 2008 compared to 1.9% for the same period of 2007.  The $0.3 million, or 15.8% decrease in insurance and claims for the second quarter of 2008 compared to second quarter of 2007 is the result of 2007 including $0.3 million of expense for an adjustment to our vehicle loss reserves due to an actuarial analysis.  An actuarial analysis was performed during the three months ended June 30, 2008 but no additional reserves were required.

FASI

FASI insurance and claims for the three months ended June 30, 2008 was less than $0.1 million due to a reduction of reserves as the result of favorable premium audits offsetting current vehicle and cargo claims.  

Fuel Expense

Fuel expenses increased $3.0 million, to $3.3 million in the second quarter of 2008 from $0.3 million in the same period of 2007.  Fuel expenses were 2.7% of consolidated operating revenue for the three months ended June 30, 2008 compared with 0.3% in the same period of 2007.

Forward Air

Fuel expenses were 1.6% of Forward Air operating revenue in the second quarter of 2008 compared to 0.3% in the same period of 2007. The $1.5 million increase or the 1.3% increase as a percentage of operating revenue was primarily attributable to the increased number of Company-employed drivers as a result of the Pinch and Black Hawk acquisitions in March 2008 and December 2007, respectively. Also, increasing fuel expense was the significant year over year increase in average diesel fuel prices.  

FASI

Fuel expenses were 13.2% of FASI operating revenue in the second quarter of 2008.  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 vehicles in its operations than Forward Air.  

Other Operating Expenses

Other operating expenses increased $2.3 million, or 33.3%, to $9.2 million in the second quarter of 2008 from $6.9 million in the same period of 2007.  Other operating expenses were 7.6% of consolidated operating revenue for the three months ended June 30, 2008 compared with 7.4% in the same period of 2007.
 
20

 
Forward Air

Other operating expenses were 7.2% of Forward Air operating revenue in the second quarter of 2008 compared to 7.4% in the same period of 2007. The 0.2% decrease in other operating expenses as a percentage of operating revenue is the result of 2007 including expenses associated with the relocation or expansion of certain terminals and specialized executive training.  In addition, during 2008 we reduced our marketing expenses.  These decreases were offset by increases in other volume related costs as a result of the increased tonnage transiting our system, such as vehicle maintenance.

FASI

FASI other operating expenses of $1.2 million represent costs such as routine vehicle maintenance, utilities for our facilities, and miscellaneous office and administrative expenses incurred since our USAC and Pinch acquisitions in July 2007 and March 2008, respectively.  FASI other operating expenses were 10.5% of the segment’s operating revenue.  Other operating expenses are higher as a percentage of revenue than our Forward Air segment due to the higher utilization of Company-owned equipment.

Income (loss) from operations

Income from operations increased by $2.0 million, or 10.9%, to $20.3 million for the second quarter of 2008 compared with $18.3 million for the same period in 2007.  Income from operations was 16.7% of consolidated operating revenue for the three months ended June 30, 2008 compared with 19.7% in the same period of 2007.

Forward Air

Income from operations increased by $2.4 million, or 13.1%, to $20.7 million for the second quarter of 2008 compared with $18.3 million for the same period in 2007.   The increase in income from operations was primarily a result of increased revenues mostly offset by increased costs for fuel expense, salaries, wages and benefits, and depreciation and amortization.  Income from operations decreased as a percentage of Forward Air operating revenue to 18.7% for the three months ended June 30, 2008 from 19.7% for the same period in 2007.  The decrease in income from operations as a percentage of revenue is a result of the change in our business mix resulting from the largest increases in our revenue continuing to be from services and business that are generally not as profitable as our core airport-to-airport service.

FASI

FASI loss from operations, in the three months ended June 30, 2008 was $0.4 million, or 3.5% of FASI operating revenue.  The FASI loss is mainly driven by integration costs that resulted from the March 17, 2008 acquisition of Pinch. These costs primarily impacted salaries and wages, operating leases and other operating expenses.  

Interest Expense

Interest expense increased to $0.3 million for the three months ended June 30, 2008.  The increase in interest expense was mostly the result of net borrowings under our line of credit facility used to fund our acquisitions of Pinch and Black Hawk in March 2008 and December 2007, respectively.

Other Income, net
 
Other income, net was less than $0.1 million compared with $0.4 million, for the same period in 2007. The decrease in other income was attributable to the decreased average cash and investment balances as a result of cash used for stock repurchases during 2007, the purchase of real property for regional hubs and terminals, and the acquisitions of USAC and Black Hawk in 2007 and Pinch in 2008.
 
Provision for Income Taxes

The combined federal and state effective tax rate for the second quarter of 2008 was 39.5% compared to a rate of 38.8% for the same period in 2007. Our effective federal and state rate increased to provide for the decrease in tax-exempt interest income as discussed above, disallowance of share-based compensation on qualified stock options, and uncertain tax positions as required by Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) , (“FIN 48”). 
 
Net Income

As a result of the foregoing factors, net income increased by $0.6 million, or 5.2%, to $12.1 million for the second quarter of 2008 compared to $11.5 million for the same period in 2007.
 
21

 
The following table sets forth our historical consolidated financial data for the six months ended June 30, 2008 and 2007 (in millions):

   
June 30,
   
June 30,
             
   
2008
   
2007
   
Change
   
% Change
 
Operating revenue
  $ 229.5     $ 180.5     $ 49.0       27.1 %
Operating expenses:
                               
   Purchased transportation
    91.4       77.4       14.0       18.1  
   Salaries, wages, and employee benefits
    55.9       38.9       17.0       43.7  
   Operating leases
    10.7       7.6       3.1       40.8  
   Depreciation and amortization
    7.7       4.9       2.8       57.1  
   Insurance and claims
    3.9       3.6       0.3       8.3  
   Fuel expense
    5.4       0.5       4.9       980.0  
   Other operating expenses
    17.5       13.4       4.1       30.6  
      Total operating expenses
    192.5       146.3       46.2       31.6  
Income from operations
    37.0       34.2       2.8       8.2  
Other income (expense):
                               
   Interest expense
    (0.6 )     (0.1 )     (0.5 )     500.0  
   Other, net
    0.2       1.2       (1.0 )     (83.3 )
      Total other (expense) income
    (0.4 )     1.1       (1.5 )     (136.4 )
Income before income taxes
    36.6       35.3       1.3       3.7  
Income taxes
    14.4       13.5       0.9       6.7  
Net income
  $ 22.2     $ 21.8     $ 0.4       1.8 %
 
22

 
The following table sets forth our historical financial data by segment for the six months ended June 30, 2008 and 2007 (in millions):

 
Six months ended
 
   
June 30,
   
Percent of
     
June 30,
 
Percent of
 
   
2008
   
Revenue
     
2007
 
Revenue
 
Operating revenue
                       
      Forward Air
$
211.2
   
92.0
%
 
$
180.5
 
100.0
%
      FASI
 
19.2
   
8.4
     
--
 
--
 
      Intercompany Eliminations
 
(0.9
)
 
(0.4
)
   
--
 
--
 
            Total
 
229.5
   
100.0
     
180.5
 
100.0
 
                         
Purchased transportation
                       
      Forward Air
 
88.2
   
41.8
     
77.4
 
42.9
 
      FASI
 
4.1
   
21.4
     
--
 
--
 
      Intercompany Eliminations
 
(0.9
)
 
100.0
     
--
 
--
 
            Total
 
91.4
   
39.8
     
77.4
 
42.9
 
                         
Salaries, wages and employee benefits
                       
      Forward Air
 
47.3
   
22.4
     
38.9
 
21.6
 
      FASI
 
8.6
   
44.8
     
--
 
--
 
            Total
 
55.9
   
24.3
     
38.9
 
21.6
 
                         
Operating leases
                       
      Forward Air
 
8.9
   
4.2
     
7.6
 
4.2
 
      FASI
 
1.8
   
9.4
     
--
 
--
 
            Total
 
10.7
   
4.7
     
7.6
 
4.2
 
                         
Depreciation and amortization
                       
      Forward Air
 
7.0
   
3.3
     
4.9
 
2.7
 
      FASI
 
0.7
   
3.6
     
--
 
--
 
            Total
 
7.7
   
3.4
     
4.9
 
2.7
 
                         
Insurance and claims
                       
      Forward Air
 
3.4
   
1.6
     
3.6
 
2.0
 
      FASI
 
0.5
   
2.6
     
--
 
--
 
            Total
 
3.9
   
1.7
     
3.6
 
2.0
 
                         
Fuel expense
                       
      Forward Air
 
3.1
   
1.4
     
0.5
 
0.3
 
      FASI
 
2.3
   
12.0
     
--
 
--
 
            Total
 
5.4