UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2008
Commission
File No. 000-22490
FORWARD
AIR CORPORATION
(Exact
name of registrant as specified in its charter)
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Tennessee
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62-1120025
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer Identification No.)
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430
Airport Road
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Greeneville,
Tennessee
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37745
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(Address
of principal executive offices)
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(Zip
Code)
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(423)
636-7000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $0.01 par value
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The
NASDAQ Stock Market LLC
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(Title
of class)
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(Name
of exchange on which registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes þ No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting Company o
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(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes o No þ
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2008 was approximately $992,342,913 based upon the
$34.60 closing price of the stock as reported on The NASDAQ Stock Market
LLC on that date. For purposes of this computation, all directors and
executive officers of the registrant are assumed to be affiliates. This
assumption is not a conclusive determination for purposes other than this
calculation.
The
number of shares outstanding of the registrant’s common stock, $0.01 par value
per share as of February 20, 2009 was 28,941,358.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the proxy statement for the 2009 Annual Meeting of Shareholders are
incorporated by reference into Part III of this report.
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Table
of Contents
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Forward
Air Corporation
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Page
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Number
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Part
I.
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Item
1.
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3
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Item
1A.
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12
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Item
1B.
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17
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Item
2.
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17
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Item
3.
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17
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Item
4.
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17
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Part
II.
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Item
5.
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19
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Item
6.
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21
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Item
7.
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21
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Item
7A.
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41
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Item
8.
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42
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Item
9.
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42
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Item
9A.
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42
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Item
9B.
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44
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Part
III.
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Item
10.
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44
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Item
11.
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44
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Item
12.
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44
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Item
13.
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44
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Item
14.
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44
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Part
IV.
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Item
15.
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44
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45
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F2
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S1
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2
Introductory
Note
This
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (this
“Form 10-K”) contains “forward-looking statements,” as defined in Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements are statements other than historical information or
statements of current condition and relate to future events or our future
financial performance. Some forward-looking statements may be identified by use
of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,”
“projects” or “expects.” Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. The following is a list of factors, among others,
that could cause actual results to differ materially from those contemplated by
the forward-looking statements: economic factors such as recessions, inflation,
higher interest rates and downturns in customer business cycles, our inability
to maintain our historical growth rate because of a decreased volume of freight
or decreased average revenue per pound of freight moving through our network,
increasing competition and pricing pressure, surplus inventories, loss of a
major customer, the creditworthiness of our customers and their ability to pay
for services rendered, our ability to secure terminal facilities in desirable
locations at reasonable rates, the inability of our information systems to
handle an increased volume of freight moving through our network, changes in
fuel prices, claims for property damage, personal injuries or workers’
compensation, employment matters including rising health care costs, enforcement
of and changes in governmental regulations, environmental and tax matters, the
handling of hazardous materials, the availability and compensation of qualified
independent owner-operators and freight handlers needed to serve our
transportation needs and our inability to successfully integrate acquisitions.
As a result of the foregoing, no assurance can be given as to future financial
condition, cash flows or results of operations. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Part
I
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Item
1.
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We were
formed as a corporation under the laws of the State of Tennessee on October 23,
1981. Our operations can be broadly classified into two principal
segments: Forward Air, Inc. (“Forward Air”) and Forward Air
Solutions, Inc. (“FASI”).
Through
our Forward Air segment, we are a leading provider of time-definite surface
transportation and related logistics services to the North American deferred air
freight market. We offer our customers local pick-up and delivery (Forward Air
Complete™) and scheduled surface transportation of cargo as a cost-effective,
reliable alternative to air transportation. We transport cargo that must be
delivered at a specific time but is less time-sensitive than traditional air
freight. This type of cargo is frequently referred to in the transportation
industry as deferred air freight. We operate our Forward Air segment through a
network of terminals located on or near airports in 82 cities in the United
States and Canada, including a central sorting facility in Columbus, Ohio and 11
regional hubs serving key markets. We also offer our customers an array of
logistics and other services including: expedited truckload brokerage
(“TLX”); dedicated fleets; warehousing; customs brokerage; and shipment
consolidation, deconsolidation and handling.
Through
our Forward Air segment, we market our airport-to-airport services
primarily to air freight forwarders, integrated air cargo carriers, and
passenger and cargo airlines. To serve this market, we offer customers a very
high level of service with a focus on on-time, damage-free deliveries. We serve
our customers by locating terminals on or near airports and maintaining
regularly scheduled transportation service between major cities. We either
receive shipments at our terminals or pick up shipments directly from our
customers and transport them by truck (i) directly to the destination
terminal; (ii) to our Columbus, Ohio central sorting facility; or (iii) to one
of our 11 regional hubs, where they are unloaded, sorted and reloaded.
After reloading the shipments, we deliver them to the terminals nearest their
destinations and then, if requested by the customer, on to a final designated
site. We ship freight directly between terminals when justified
by the volume of shipments. During 2008, approximately 22.5% of the freight we
handled was for overnight delivery, approximately 60.1% was for delivery
within two to three days and the balance was for delivery in four or more days.
We generally do not market our airport-to-airport services directly to shippers
(where such services might compete with our freight forwarder customers). Also,
because we do not place significant size or weight restrictions on
airport-to-airport shipments, we generally do not compete directly with
integrated air cargo carriers such as United Parcel Service and Federal Express
in the overnight delivery of small parcels. In 2008, Forward Air’s five largest
customers accounted for approximately 21.6% of Forward Air’s operating revenue
and no single customer accounted for more than 10.0% of Forward Air’s operating
revenue.
We
continue to develop and implement complimentary services to the
airport-to-airport network. Other complimentary services including
expedited truckload (TLX); dedicated fleets; local pick-up and delivery;
warehousing; customs brokerage; and shipment consolidation,
deconsolidation and handling are critical to helping meet the changing
needs of our customers and for efficiently using the people and resources of our
airport-to-airport network.
Through
our FASI segment, which we formed in July 2007 in conjunction with our
acquisition of certain assets and liabilities of USA Carriers, Inc. (“USAC), we
provide pool distribution services throughout the Mid-Atlantic, Southeast,
Midwest and Southwest continental United States. Pool distribution
involves managing high-frequency handling and distribution of time-sensitive
product to numerous destinations in specific geographic regions. Our
primary customers for pool distribution are regional and nationwide distributors
and retailers, such as mall, strip mall and outlet based retail chains. We
service these customers through a network of terminals and service centers
located in 19 cities. FASI’s two largest customers accounted for
approximately 43.9% of FASI’s operating revenue, but revenues from these two
customers did not exceed 10.0% of our consolidated revenue. No other
customers accounted for more than 10.0% of FASI’s operating
revenue.
3
Our
Industry
As
businesses minimize inventory levels, close local distribution centers, perform
manufacturing and assembly operations in multiple locations and distribute their
products through multiple channels, they have an increased need for expedited or
time definite delivery services. Expedited or time definite shipments are those
shipments for which the customer requires delivery the next day or within two to
three days, usually by a specified time or within a specified time
window.
Shippers
with expedited or time definite delivery requirements have four principal
alternatives to transport freight: freight forwarders; integrated air cargo
carriers; less-than-truckload carriers; full truckload carriers, and passenger
and cargo airlines.
Although
expedited or time definite freight is often transported by aircraft, freight
forwarders and shippers often elect to arrange for its transportation by
truck, especially for shipments requiring deferred delivery within two to three
days. Generally, the cost of shipping freight, especially heavy freight, by
truck is substantially less than shipping by aircraft. We believe there are
several trends that are increasing demand for lower-cost truck transportation of
expedited air freight. These trends include:
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·
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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.
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·
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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.
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·
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Less-than-truckload
carriers also provide pick-up and delivery services through their own
fleet of trucks. These carriers operate terminals where freight is
unloaded, sorted and reloaded multiple times in a single shipment. This
additional handling increases transit time, handling costs and the
likelihood of cargo damage.
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·
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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.
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·
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Passenger
or cargo airlines provide airport-to-airport service, but have limited
cargo space and generally accept only shipments weighing less than 150
pounds.
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Competitive
Advantages
We
believe that the following competitive advantages are critical to our success in
both our Forward Air and FASI segments:
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·
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Focus on Specific Freight Markets. Our Forward
Air segment focuses on providing time-definite surface transportation
and related logistics services to the deferred air cargo
industry. Our FASI segment focuses on providing high-quality
pool distribution services to retailers and nationwide distributors of
retail products. This focused approach enables us to provide a
higher level of service in a more cost-effective manner than our
competitors.
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·
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Expansive Network of Terminals
and Sorting Facilities. We have built a network of Forward Air
terminals and sorting facilities throughout the United States and Canada
located on or near airports. We believe it would be difficult for a
competitor to duplicate our Forward Air network without the expertise and
strategic facility locations we have acquired and without expending
significant capital and management resources. Our expansive Forward Air
network enables us to provide regularly scheduled service between most
markets with low levels of freight damage or loss, all at rates generally
significantly below air freight
rates.
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Primarily
through acquisitions we have created a FASI network of terminals and service
centers throughout the Mid-Atlantic, Southeast, Midwest and
Southwest continental United States. The pool distribution
market is very fragmented and our competition primarily consists of regional and
local providers. We believe through our network of FASI terminals and
service locations we can offer our pool distribution customers comprehensive,
high-quality service across the majority of the continental United States.
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·
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Concentrated Marketing
Strategy. Forward Air provides our deferred air freight
services mainly to air freight forwarders, integrated air cargo carriers,
and passenger and cargo airlines rather than directly serving shippers.
Forward Air does not place significant size or weight restrictions on
shipments and, therefore, it does not compete with delivery services such
as United Parcel Service and Federal Express in the overnight small parcel
market. We believe that Forward Air customers prefer to purchase their
transportation services from us because, among other reasons, we generally
do not market Forward Air’s services to their shipper customers and,
therefore, do not compete directly with them for
customers.
|
FASI
provides pool distribution services primarily to regional and nationwide
distributors and retailers, such as mall, strip mall and outlet based retail
chains.
4
|
·
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Superior Service
Offerings. Forward Air’s
published deferred air freight schedule for transit times with specific
cut-off and arrival times generally provides Forward Air customers with
the predictability they need. In addition, our network of Forward Air
terminals allows us to offer our customers later cut-off times, a higher
percentage of direct shipments (which reduces damage and lost time caused
by additional sorting and reloading) and shorter delivery times than most
of our competitors.
|
Our
network of FASI terminals allows us the opportunity to provide deliveries to a
wider range of locations than most pool distribution providers with increased
on-time performance.
|
·
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Flexible Business
Model. Rather than owning and operating our own trucks, Forward Air
purchases most of its transportation requirements from owner-operators or
truckload carriers. This allows Forward Air to respond quickly to changing
demands and opportunities in our industry and to generate higher returns
on assets because of the lower capital
requirements.
|
Primarily
as a result of the structure of our acquisition targets and the nature of pool
distribution services, FASI utilizes a higher percentage of Company-employed
drivers and Company-owned equipment. However, as the conditions of
individual markets and requirements of our customers allow we are increasing the
usage of owner-operators in our pool distribution business.
|
·
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Comprehensive Logistic and
Other Service Offerings. Forward Air offers an array of logistic
and other services including: expedited truckload (TLX), pick-up and
delivery (Forward Air Complete™), dedicated fleet, warehousing, customs
brokerage and shipment consolidation and handling. These services are
an essential part of many of our Forward Air customers’
transportation needs and are not offered by many of our
competitors. Forward Air is able to provide these services
utilizing existing infrastructure and thereby able to earn additional
revenue without incurring significant additional fixed
costs.
|
|
·
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Leading Technology
Platform. We are committed to using information technology to
improve our Forward Air and FASI operations. Through improved
information technology, we believe we can increase the volume of
freight we handle in our networks, improve visibility of shipment
information and reduce our operating costs. Our Forward Air technology
allows us to provide our customers with electronic bookings and real-time
tracking and tracing of shipments while in our network, complete shipment
history, proof of delivery, estimated charges and electronic bill
presentment. We continue to enhance our Forward Air systems to permit us
and our customers to access vital information through both the Internet
and electronic data interchange. We have continued to invest in
information technology for Forward Air to the benefit of our customers and
our business processes. The primary example of this development is our
Terminal Automation Program (“TAP”), a wireless application utilized in
all our Forward Air terminals. The system enables individual operators to
perform virtually all data entry from our terminal floor locations. The
system provides immediate shipment updates, resulting in increased
shipment accuracy and improved data timeliness. The TAP system not only
reduces operational manpower, but also improves our on-time
performance. Additionally, in order to support our Forward Air
Complete service offering, we developed and installed a web-based system,
which coordinates activities between our customers, operations
personnel and external service
providers.
|
We are
committed to developing the same superior level of information technology for
FASI. One of the challenges FASI faces is the integration of many
different software applications utilized by not only the companies FASI acquired
but our individual customers as well. Our goal is to create a
comprehensive system that will provide our pool distribution customers with the
same level of visibility, interactivity and flexibility as experienced by our
Forward Air customers.
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·
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Strong Balance Sheet and
Availability of Funding. Our asset-light business model
and strong market position in the deferred air freight market provides the
foundation for operations that produce excellent cash flow from operations
even in challenging conditions. Our strong balance sheet can
also be a competitive advantage. Our competitors, particularly
in the pool distribution market, are mainly regional and local operations
and may struggle to maintain operations in the current economic
environment. The threat of financial instability may encourage
new and existing customers to use a more financially secure transportation
provider, such as FASI.
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5
Growth
Strategy
Our growth
strategy is to take advantage of our competitive strengths in order to increase
our profits and shareholder returns. Our “Completing the Model” strategic
initiative is designed to facilitate this overall strategy. The goal
of this initiative is to use our airport-to-airport network as the base for
which to expand and launch new services that will allow us to grow in any
economic environment. Principal components of our “Completing the
Model” strategy include efforts to:
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·
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Increase Freight Volume from
Existing Customers. Many of our customers currently use Forward Air
and FASI for only a portion of their overall transportation
needs. We believe we can increase freight volumes from existing
customers by offering more comprehensive services that address all of the
customer’s transportation needs, such as Forward Air Complete, our direct
to door pick-up and delivery service. By offering additional
services that can be integrated with our existing business we believe we
will attract additional business from existing
customers.
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·
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Develop New
Customers. We continue to actively market our Forward Air services
to potential new customers, such as international freight forwarders. We
believe air freight forwarders may move away from integrated air cargo
carriers because those carriers charge higher rates, and away from
less-than-truckload carriers because those carriers provide less reliable
service and compete for the same customers as do the air freight
forwarders. In addition, we believe Forward Air’s comprehensive
North American network and related logistics services are attractive to
domestic and international airlines. Forward Air Complete can
also help attract business from new customers who require pick-up and
delivery for their shipments.
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By
expanding our network of FASI terminals, we believe we can attract new customers
and new business from existing customers by offering our services across
multiple regions of the continental United States.
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·
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Improve Efficiency of Our
Transportation Network. We constantly seek to improve the
efficiency of our airport-to-airport and FASI networks. Regional hubs and
direct shuttles improve Forward Air’s efficiency by reducing the number of
miles freight must be transported and reducing the number of times freight
must be handled and sorted. As the volume of freight between key markets
increases, we intend to continue to add direct shuttles. In 2007, we
completed the purchase of two new facilities in Chicago, Illinois and
Atlanta, Georgia and purchased land and began construction on a new
regional terminal in Dallas/Fort Worth, Texas. Also, in 2006,
we completed the expansion of our national hub in Columbus, Ohio.
With these new and expanded facilities, we believe we will have the
necessary space to grow our business in key gateway cities and to offer
the additional services required by our “Completing the Model”
strategy.
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We can
improve our FASI operations by improving the efficiencies of our daily and
weekly routes and the cartons handled per hour on our docks. We are
constantly looking to improve our route efficiencies by consolidating loads and
utilizing owner-operators when available. During 2008, we also began
to invest in conveyor systems for our FASI terminals to increase productivity of
our cargo handlers.
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·
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Expand Logistics and
Other Services. We continue to expand our logistics and other
services to increase revenue and improve utilization of our Forward Air
terminal facilities and labor force. Because of the timing of the arrival
and departure of cargo, our Forward Air facilities are under-utilized
during certain portions of the day, allowing us to add logistics services
without significantly increasing our costs. Therefore, we have added a
number of Forward Air logistic services in the past few years, such as TLX
(expedited truckload services), dedicated fleet, warehousing, customs
brokerage and shipment consolidation and handling services. These services
directly benefit our existing customers and increase our ability to
attract new customers, particularly those air freight forwarders that
cannot justify providing the services directly. These services are not
offered by many transportation providers with whom we compete and are
attractive to customers who prefer to use one provider for all of their
transportation needs.
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·
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Expand Pool Distribution
Services and Integrate with our Forward Air Services. In addition to
increasing our revenue from traditional pool distribution services we
are working to integrate our Forward Air and FASI service
offerings. Through this process we are able to offer customers
linehaul or truckload services, with handling and sorting at the origin
and destination terminal, and final distribution to one or many locations
utilizing FASI pool distribution or Forward Air
Complete.
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·
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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.
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6
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·
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Pursue Strategic
Acquisitions. We intend to continue to evaluate acquisitions that
can increase our penetration of a geographic area, add new customers,
increase freight volume and add new service offerings. In
addition, we expect to explore acquisitions that may enable us to offer
additional services. Since our inception, we have acquired
certain assets and liabilities of twelve businesses that met one or
more of these criteria. During 2008 and 2007, we acquired certain
assets and liabilities of four companies that met these
criteria.
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|
Ø
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In
July 2007, we acquired certain assets and liabilities of USAC which
provided the base from which we launched our FASI pool distribution
services.
|
|
Ø
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In
December 2007, we acquired certain assets and liabilities of Black Hawk
Freight Services, Inc. (“Black Hawk”) which increased the penetration
of our Forward Air airport-to-airport network in the
Midwest.
|
|
Ø
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In
March 2008, we acquired certain assets and liabilities of Pinch Holdings,
Inc. and its related company AFTCO Enterprises, Inc. and certain of their
respective wholly-owned subsidiaries (“Pinch”). Pinch was a
privately-held provider of pool distribution, airport-to-airport,
truckload, custom, and cartage services primarily to the Southwestern
continental United States. This acquisition gave FASI a
presence primarily in Texas and strengthens the position of our Forward
Air network in the Southwest United
States.
|
|
Ø
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In
September 2008, we acquired certain assets and liabilities of Service
Express, Inc. (“Service Express”). The acquisition of Service
Express, a privately-held provider of pool distribution services, helped
us expand FASI’s geographic footprint in the Mid-Atlantic and Southeastern
continental United
States.
|
Operations
We
operate in two reportable segments, based on differences in the services
provided: Forward Air and FASI. Through Forward Air we
are a leading provider of time-definite transportation and related logistics
services to the North American deferred air freight market. Forward Air’s
activities can be broadly classified into three categories of services:
airport-to-airport, logistics and other.
Through
our FASI segment we provide pool distribution services throughout the
Mid-Atlantic, Southeast, Midwest and Southwest continental United
States. Pool distribution involves managing high-frequency handling
and distribution of time-sensitive product to numerous destinations in specific
geographic regions.
Forward
Air
Airport-to-airport
We
receive freight from air freight forwarders, integrated air cargo carriers and
passenger and cargo airlines at our terminals, which are located on or near
airports in the United States and Canada. We also pick up freight from customers
at designated locations via our Forward Air Complete service. We consolidate and
transport these shipments by truck through our network to our terminals nearest
the ultimate destinations of the shipments. We operate regularly scheduled
service to and from each of our terminals through our Columbus, Ohio central
sorting facility or through one of our eleven regional hubs. We also operate
regularly scheduled shuttle service directly between terminals where the volume
of freight warrants bypassing the Columbus, Ohio central sorting facility or a
regional hub. When a shipment arrives at our terminal nearest its destination,
the customer arranges for the shipment to be picked up and delivered to its
final destination, or we, in the alternative, through our Forward Air
Complete service, deliver the freight for the customer to its final
destination.
7
Terminals
Our
airport-to-airport network consists of terminals located in the following 82
cities:
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City
|
Airport
Served
|
City
|
Airport
Served
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|||
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Albany,
NY
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ALB
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Los
Angeles, CA
|
LAX
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|||
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Albuquerque,
NM*
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ABQ
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Louisville,
KY
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SDF
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|||
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Atlanta,
GA
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ATL
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Memphis,
TN
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MEM
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|||
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Austin,
TX
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AUS
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McAllen,
TX
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MFE
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|||
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Baltimore,
MD
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BWI
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Miami,
FL
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MIA
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|||
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Baton
Rouge, LA*
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BTR
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Milwaukee,
WI
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MKE
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|||
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Birmingham,
AL*
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BHM
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Minneapolis,
MN
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MSP
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|||
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Blountville,
TN*
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TRI
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Mobile,
AL*
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MOB
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|||
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Boston,
MA
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BOS
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Moline,
IA
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MLI
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|||
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Buffalo,
NY
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BUF
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Nashville,
TN
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BNA
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|||
|
Burlington,
IA
|
BRL
|
Newark,
NJ
|
EWR
|
|||
|
Cedar
Rapids, IA
|
CID
|
Newburgh,
NY
|
SWF
|
|||
|
Charleston,
SC
|
CHS
|
New
Orleans, LA
|
MSY
|
|||
|
Charlotte,
NC
|
CLT
|
New
York, NY
|
JFK
|
|||
|
Chicago,
IL
|
ORD
|
Norfolk,
VA
|
ORF
|
|||
|
Cincinnati,
OH
|
CVG
|
Oklahoma
City, OK
|
OKC
|
|||
|
Cleveland,
OH
|
CLE
|
Omaha,
NE
|
OMA
|
|||
|
Columbia,
SC*
|
CAE
|
Orlando,
FL
|
MCO
|
|||
|
Columbus,
OH
|
CMH
|
Pensacola,
FL*
|
PNS
|
|||
|
Corpus
Christi, TX*
|
CRP
|
Philadelphia,
PA
|
PHL
|
|||
|
Dallas/Ft.
Worth, TX
|
DFW
|
Phoenix,
AZ
|
PHX
|
|||
|
Dayton,
OH*
|
DAY
|
Pittsburgh,
PA
|
PIT
|
|||
|
Denver,
CO
|
DEN
|
Portland,
OR
|
PDX
|
|||
|
Des
Moines, IA
|
DSM
|
Raleigh,
NC
|
RDU
|
|||
|
Detroit,
MI
|
DTW
|
Richmond,
VA
|
RIC
|
|||
|
El
Paso, TX
|
ELP
|
Rochester,
NY
|
ROC
|
|||
|
Greensboro,
NC
|
GSO
|
Sacramento,
CA
|
SMF
|
|||
|
Greenville,
SC
|
GSP
|
Salt
Lake City, UT
|
SLC
|
|||
|
Hartford,
CT
|
BDL
|
San
Antonio, TX
|
SAT
|
|||
|
Harrisburg,
PA
|
MDT
|
San
Diego, CA
|
SAN
|
|||
|
Houston,
TX
|
IAH
|
San
Francisco, CA
|
SFO
|
|||
|
Huntsville,
AL*
|
HSV
|
Seattle,
WA
|
SEA
|
|||
|
Indianapolis,
IN
|
IND
|
St.
Louis, MO
|
STL
|
|||
|
Jackson,
MS*
|
JAN
|
Syracuse,
NY
|
SYR
|
|||
|
Jacksonville,
FL
|
JAX
|
Tampa,
FL
|
TPA
|
|||
|
Kansas
City, MO
|
MCI
|
Toledo,
OH*
|
TOL
|
|||
|
Knoxville,
TN*
|
TYS
|
Tucson,
AZ*
|
TUS
|
|||
|
Lafayette,
LA*
|
LFT
|
Tulsa,
OK
|
TUL
|
|||
|
Laredo,
TX
|
LRD
|
Washington,
DC
|
IAD
|
|||
|
Las
Vegas, NV
|
LAS
|
Montreal,
Canada*
|
YUL
|
|||
|
Little
Rock, AR*
|
LIT
|
Toronto,
Canada
|
YYZ
|
* Denotes
an independent agent location.
Independent
agents operate 17 of our locations. These locations typically handle lower
volumes of freight relative to our company-operated facilities.
8
Direct
Service and Regional Hubs
We
operate direct terminal-to-terminal services and regional overnight service
between terminals where justified by freight volumes. We currently provide
regional overnight service to many of the markets within our network. Direct
service allows us to provide quicker scheduled service at a lower cost because
it allows us to minimize out-of-route miles and eliminate the added time and
cost of handling the freight at our central or regional hub sorting facilities.
Direct shipments also reduce the likelihood of damage because of reduced
handling and sorting of the freight. As we continue to increase volume between
various terminals, we intend to add other direct services. Where warranted by
sufficient volume in a region, we utilize larger terminals as regional sorting
hubs, which allow us to bypass our Columbus, Ohio central sorting facility.
These regional hubs improve our operating efficiency and enhance customer
service. We operate regional hubs in Atlanta, Charlotte, Chicago, Dallas/Ft.
Worth, Kansas City, Los Angeles, New Orleans, Newark, Newburgh, Orlando and San
Francisco.
Shipments
The
average weekly volume of freight moving through our network
was approximately 34.2 million pounds per week in 2008. During 2008,
our average shipment weighed approximately 756 pounds and shipment sizes
ranged from small boxes weighing only a few pounds to large shipments of several
thousand pounds. Although we impose no significant size or weight restrictions,
we focus our marketing and price structure on shipments of 200 pounds or more.
As a result, we typically do not directly compete with integrated air cargo
carriers in the overnight delivery of small parcels. The table below summarizes
the average weekly volume of freight moving through our network for each year
since 1990.
|
Average
Weekly
|
||
|
Volume
in Pounds
|
||
|
Year
|
(In
millions)
|
|
|
1990
|
1.2 | |
|
1991
|
1.4 | |
|
1992
|
2.3 | |
|
1993
|
3.8 | |
|
1994
|
7.4 | |
|
1995
|
8.5 | |
|
1996
|
10.5 | |
|
1997
|
12.4 | |
|
1998
|
15.4 | |
|
1999
|
19.4 | |
|
2000
|
24.0 | |
|
2001
|
24.3 | |
|
2002
|
24.5 | |
|
2003
|
25.3 | |
|
2004
|
28.7 | |
|
2005
|
31.2 | |
|
2006
|
32.2 | |
|
2007
|
32.8 | |
|
2008
|
34.2 |
Logistics
and Other Services
Our
customers increasingly demand more than the movement of freight from their
transportation providers. To meet these demands, we continually seek ways to
customize our logistics services and add new services. Logistics and other
services increase our profit margins by increasing our revenue without
corresponding increases in our fixed costs, as airport-to-airport assets and
resources are primarily used to provide the logistics and other
services.
Our logistics
and other services allow customers to access the following services from a
single source:
|
·
|
expedited
truckload brokerage, or TLX;
|
|
·
|
dedicated
fleets;
|
|
·
|
customs
brokerage, such as assistance with U.S. Customs and Border Protection
(“U.S. Customs”) procedures for both import and export
shipments;
|
|
·
|
warehousing,
dock and office space; and
|
|
·
|
shipment
consolidation and handling, such as shipment build-up and break-down and
reconsolidation of air or ocean pallets or
containers.
|
9
These
services are critical to many of our air freight forwarder customers that do not
provide logistics services themselves or that prefer to use one provider for all
of their surface transportation needs.
Revenue
and purchased transportation for our TLX and dedicated fleet services are
largely determined by the number of miles driven. The table below
summarizes the average miles driven per week to support our logistics services
since 2003:
|
Average
Weekly Miles
|
|
|
Year
|
(In
thousands)
|
|
2003
|
211
|
|
2004
|
259
|
|
2005
|
248
|
|
2006
|
331
|
|
2007
|
529
|
|
2008
|
676
|
Forward
Air Solutions (FASI)
Pool
Distribution
Through
our FASI segment we provide pool distribution services through a network of
terminals and service locations in 19 cities throughout the Mid-Atlantic,
Southeast, Midwest and Southwest continental United States. Pool
distribution involves managing high-frequency handling and distribution of
time-sensitive product to numerous destinations in specific geographic
regions. Our primary customers for this product are regional and
nationwide distributors and retailers, such as mall, strip mall and outlet based
retail chains.
We
continue to expand the geographic footprint of our FASI pool distribution
business, primarily through acquisitions. On September 8, 2008, we
acquired certain assets and liabilities of Service Express. The
acquisition of Service Express helped us expand our geographic footprint in the
Mid-Atlantic and Southeastern continental United States. On March
17, 2008, we acquired certain assets and liabilities of Pinch. The
acquisition of Pinch’s pool distribution services expanded the geographic
footprint of FASI into Texas and the Southwestern United
States. During 2008, we added locations in Alabama, Georgia,
Maryland, Nevada, North Carolina, Texas and Virginia. Our pool
distribution network consists of terminals and service locations in the
following 19 cities:
|
City
|
||
|
Albuquerque,
NM
|
Kansas
City, MO
|
|
|
Atlanta,
GA
|
Lakeland,
FL
|
|
|
Baltimore,
MD
|
Las
Vegas, NV
|
|
|
Charlotte,
NC
|
Miami,
FL
|
|
|
Dallas/Ft.
Worth, TX
|
Montgomery,
AL
|
|
|
Denver,
CO
|
Nashville,
TN
|
|
|
Des
Moines, IA
|
Richmond,
VA
|
|
|
Greensboro,
NC
|
San
Antonio, TX
|
|
|
Houston,
TX
|
Tulsa,
OK
|
|
|
Jacksonville,
FL
|
||
Customers
and Marketing
Our
Forward Air wholesale customer base is primarily comprised of air freight
forwarders, integrated air cargo carriers and passenger and cargo airlines. Our
air freight forwarder customers vary in size from small, independent, single
facility companies to large, international logistics companies such as SEKO
Worldwide, AIT Worldwide Logistics, Associated Global, UPS Supply Chain
Solutions and Pilot Air Freight. Because we deliver dependable service,
integrated air cargo carriers such as UPS Cargo and DHL Worldwide Express use
our network to provide overflow capacity and other services, including shipment
of bigger packages and pallet-loaded cargo. Our passenger and cargo airline
customers include British Airways, United Airlines and Virgin
Atlantic.
Our FASI
pool distribution customers are primarily comprised of national and regional
retailers and distributors, such as The Limited, The Marmaxx Group, The GAP,
Blockbuster and Aeropostale. We also conduct business with other pool
distribution providers.
We market
all our services through a sales and marketing staff located in major markets of
the United States. Senior management also is actively involved in sales and
marketing at the national account level and supports local sales initiatives. We
also participate in air cargo and retail trade shows and advertise our
services through direct mail programs and through the Internet via
www.forwardair.com. The information contained on our website is not part of this
filing.
10
Technology
and Information Systems
Our
technology allows us to provide our Forward Air customers with real-time
tracking and tracing of shipments throughout the transportation process,
complete shipment history, proof of delivery, estimated charges and electronic
bill presentment. In addition, our Forward Air customers are able to
electronically transmit bookings to us from their own networks and schedule
transportation and obtain tracking and tracing information. We
continue to develop and enhance our systems to permit our customers to obtain
this information both through the Internet and through electronic data
interchange.
We
continue to enhance our Forward Air TAP application and website service
offerings in our continuing effort to automate and improve operations. TAP
enables operations personnel to perform data entry from our terminal floor
locations. This greatly reduces the need for data entry personnel and provides
immediate shipment updates. The result is increased shipment accuracy and
improved data timeliness. The TAP system improves our ability to provide
accurate, real-time information, and results in both competitive service
advantages and increased productivity throughout our network. Our Forward Air
Complete website coordinates activities between our customers, operations
personnel and external service providers. We believe that the TAP system,
Forward Air Complete website and other
technical enhancements will assist us in capitalizing on new
business opportunities and could encourage customers to increase the volume of
freight they send through our network.
We have
invested and expect to continue investing management and financial resources on
maintaining and upgrading our information systems, particularly for our FASI
operations, in an effort to increase the volume of freight we can handle in our
networks, improve the visibility of shipment information and reduce our
operating costs. The ability to provide accurate, real-time information on the
status of shipments is increasingly important to our customers and our
efforts in this area could result in both competitive service advantages, and
increased productivity throughout our networks. We believe our continuing
technical enhancements will assist us in capitalizing on new business
opportunities, capturing additional freight from existing customers, and
attracting new customers.
Purchased
Transportation
We
contract for most of our Forward Air transportation services on a per mile basis
from owner-operators. FASI also utilizes owner-operators for certain
of its transportation services, but relies more on Company-employed
drivers. The owner-operators own, operate and maintain their own
tractors and employ their own drivers. Our freight handlers load and unload our
trailers for hauling by owner-operators between our terminals.
We seek
to establish long-term relationships with owner-operators to assure dependable
service and availability. Historically, we have experienced significantly higher
than industry average retention of owner-operators. We have established specific
guidelines relating to safety records, driving experience and personal
evaluations that we use to select our owner-operators. To enhance our
relationship with the owner-operators, our per mile rates are generally above
prevailing market rates. In addition, we typically offer our owner-operators and
their drivers a consistent work schedule. Usually, schedules are between the
same two cities, improving quality of work life for the owner-operators and
their drivers and, in turn, increasing driver retention.
As a
result of efforts to expand our logistics and other services, seasonal demands
and volume surges in particular markets, we also purchase transportation from
other surface transportation providers to handle overflow volume. Of the $189.0
million incurred for purchased transportation during 2008, we purchased 66.3%
from owner-operators and 33.7% from other surface transportation
providers.
Competition
The air
freight and pool distribution transportation industries are highly competitive
and very fragmented. Our Forward Air and FASI competitors primarily include
regional trucking companies and regional less-than-truckload carriers. To a
lesser extent, Forward Air also competes with integrated air cargo carriers and
passenger and cargo airlines.
We
believe competition is based on service, primarily on-time delivery, flexibility
and reliability, as well as rates. We offer our Forward Air services at rates
that generally are significantly below the charge to transport the same shipment
to the same destination by air. We believe Forward Air has an advantage over
less-than-truckload carriers because Forward Air delivers faster, more reliable
service between many cities. We believe FASI has an advantage over
its competitors due to its presence in several regions across the continental
United States allowing us to provide consistent, high-quality service to our
customers regardless of location.
11
Seasonality
Historically,
our operating results have been subject to seasonal trends when measured on a
quarterly basis. The first quarter has traditionally been the weakest and the
third and fourth quarters have traditionally been the strongest. Typically, this
pattern has been the result of factors such as climate, national holidays,
customer demand and economic conditions. Additionally, a significant portion of
our revenue is derived from customers whose business levels are impacted by the
economy. The impact of seasonal trends is more pronounced on our pool
distribution business. The pool distribution business is seasonal and
operating revenues and results tend to be higher in the third and fourth
quarters than in the first and second quarters.
Employees
As of
December 31, 2008, we had 2,021 full-time employees, 559 of whom were
freight handlers. Also, as of that date, we had an additional 649 part-time
employees, of whom the majority were freight handlers. None of our employees are
covered by a collective bargaining agreement. We recognize that our workforce,
including our freight handlers, is one of our most valuable assets. The
recruitment, training and retention of qualified employees is essential to
support our continued growth and to meet the service requirements of our
customers.
Risk
Management and Litigation
Under
U.S. Department of Transportation (“DOT”) regulations, we are liable for
property damage and personal injuries caused by owner-operators and
Company-employed drivers while they are operating on our behalf. We currently
maintain liability insurance coverage that we believe is adequate to cover
third-party claims. We have a self-insured retention of $0.5 million per
occurrence for vehicle and general liability claims. We may also be subject to
claims for workers’ compensation. We maintain workers’ compensation insurance
coverage that we believe is adequate to cover such claims. We have a
self-insured retention of approximately $0.3 million for each such claim, except
in Ohio, where we are a qualified self-insured entity with an
approximately $0.4 million self-insured retention. We could incur claims in
excess of our policy limits or incur claims not covered by our
insurance.
From time
to time, we are a party to litigation arising in the normal course of our
business, most of which involve claims for personal injury, property damage
related to the transportation and handling of freight, or workers’ compensation.
We do not believe that any of these pending actions, individually or in the
aggregate, will have a materially adverse effect on our business, financial
condition or results of operations.
Regulation
The DOT
and various state agencies have been granted broad powers over our business.
These entities generally regulate such activities as authorization to engage in
property brokerage and motor carrier operations, safety and financial reporting.
We are licensed through our subsidiaries by the DOT as a motor carrier and as a
broker to arrange for the transportation of freight by truck. Our domestic
customs brokerage operations are licensed by U.S. Customs. We are subject to
similar regulation in Canada.
Service
Marks
Through
one of our subsidiaries, we hold federal trademark registrations or
applications for federal trademark registration, associated with the
following service marks: Forward Air, Inc. ®, North America’s Most Complete
Roadfeeder Network ®, Forward Air ™, Forward Air Solutions ®, and
Forward Air Complete ™. These marks are of significant value to our
business.
Website
Access
We file
reports with the Securities and Exchange Commission (the “SEC”), including
annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports
from time to time. We are an electronic filer and the SEC maintains an Internet
site at www.sec.gov that contains these reports and other information filed
electronically. We make available free of charge through our website our Code of
Ethics and our reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. Our website address is
www.forwardair.com. Please note that this website address is provided as an
inactive textual reference only. The information provided on the website is not
part of this report, and is therefore not incorporated by reference unless such
information is otherwise specifically referenced elsewhere in this
report.
|
Item
1A.
|
In
addition to the other information in this Form 10-K and other documents we have
filed with the SEC from time to time, the following factors should be carefully
considered in evaluating our business. Such factors could affect results and
cause results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, us. Some or all of these factors may apply
to our business.
12
The
severe economic downturn has resulted in weaker demand for ground transportation
services, which may continue to have a significant negative impact on
us.
We are
experiencing significantly weaker demand for our airport-to-airport and pool
distribution services driven by the severe downturn in the
economy. We began to experience weakening demand late in 2008, and
this weakness has continued into 2009. We are adjusting the size of
our owner-operator fleet and reducing employee headcount to compensate for the
drop in demand. If the economic downturn persists or worsens, demand
for our services may continue to weaken. No assurance can be given
that our reductions or other steps we may take will be adequate to offset the
effects of reduced demand.
In
a normal economic environment, our business is subject to general economic and
business factors that are largely out of our control, any of which could have a
materially adverse effect on our results of operations.
Our
business is dependent upon a number of factors that may have a materially
adverse effect on the results of our operations, many of which are beyond our
control. These factors include increases or rapid fluctuations in fuel prices,
capacity in the trucking industry, insurance premiums, self-insured retention
levels and difficulty in attracting and retaining qualified owner-operators and
freight handlers. Our profitability would decline if we were unable to
anticipate and react to increases in our operating costs, including purchased
transportation and labor, or decreases in the amount of revenue per pound of
freight shipped through our system. As a result of competitive factors, we may
be unable to raise our prices to meet increases in our operating costs, which
could result in a materially adverse effect on our business, results of
operations and financial condition.
Economic
conditions may adversely affect our customers and the amount of freight
available for transport. This may require us to lower our rates, and this may
also result in lower volumes of freight flowing through our network. Customers
encountering adverse economic conditions represent a greater potential for loss,
and we may be required to increase our reserve for bad-debt losses.
Our
results of operations may be affected by seasonal factors. Volumes of freight
tend to be lower in the first quarter after the winter holiday season. In
addition, it is not possible to predict the short or long-term effects of any
geopolitical events on the economy or on customer confidence in the United
States, or their impact, if any, on our future results of
operations.
In order to
continue growth in our business, we will need to increase the volume and revenue
per pound of the freight shipped through our networks.
Our
continued growth depends in significant part on our ability to increase the
amount and revenue per pound of the freight shipped through our networks. The
amount of freight shipped through our networks and our revenue per pound depend
on numerous factors, many of which are beyond our control, such as economic
conditions and our competitors’ pricing. Therefore, we cannot guarantee that the
amount of freight shipped or the revenue per pound we realize on that freight
will increase or even remain at current levels. If we fail to increase the
volume of the freight shipped through our networks or the revenue per pound of
the freight shipped, we may be unable to maintain or increase our
profitability.
Our
rates, overall revenue and expenses are subject to volatility.
Our rates
are subject to change based on competitive pricing and market
factors. Our overall transportation rates consist of base
transportation and fuel surcharge rates. Our base transportation
rates exclude fuel surcharges and are set based on numerous factors such as
length of haul, freight class and weight per shipment. The base rates
are subject to change based on competitive pricing pressures and market
factors. Most of our competitors impose fuel surcharges, but there is
no industry standard for the calculation of fuel surcharge rates. Our
fuel surcharge rates are set weekly based on the national average for fuel
prices as published by the U.S. Department of Energy (“DOE”) and our fuel
surcharge table. Historically, we have not adjusted our method for
determining fuel surcharge rates.
Our net
fuel surcharge revenue is the result of our fuel surcharge rates and the tonnage
transiting our networks. The fuel surcharge revenue is then netted
with the fuel surcharge we pay to our owner-operators and third party
transportation providers. Fluctuations in tonnage levels, related
load factors, and fuel prices may subject us to volatility in our net fuel
surcharge revenue. This potential volatility in net fuel surcharge
revenue may adversely impact our overall revenue, base transportation revenue
plus net fuel surcharge revenue, and results of operations.
Because
a portion of our network costs are fixed, we will be adversely affected by any
decrease in the volume or revenue per pound of freight shipped through our
networks.
Our
operations, particularly our networks of hubs and terminals, represent
substantial fixed costs. As a result, any decline in the volume or revenue per
pound of freight we handle may have an adverse effect on our operating margin
and our results of operations. Typically, Forward Air does not have contracts
with our customers and we cannot guarantee that our current customers will
continue to utilize our services or that they will continue at the same levels.
The actual shippers of the freight moved through our networks include various
manufacturers and distributors of electronics, telecommunications equipment,
machine parts, trade show exhibit materials and medical equipment. Adverse
business conditions affecting these shippers or adverse general economic
conditions are likely to cause a decline in the volume of freight shipped
through our networks.
13
We
operate in a highly competitive and fragmented industry, and our business will
suffer if we are unable to adequately address downward pricing pressures and
other factors that may adversely affect our operations and
profitability.
The
freight transportation industry is highly competitive, very fragmented and
historically has had few barriers to entry. Our principal competitors include
regional trucking companies that specialize in handling deferred air freight and
national and regional less-than-truckload carriers. To a lesser extent, we also
compete with integrated air cargo carriers and passenger airlines. Our
competition ranges from small operators that compete within a limited geographic
area to companies with substantially greater financial and other resources,
including greater freight capacity. We also face competition from air
freight forwarders who decide to establish their own networks to transport
deferred air freight. We believe competition is based on service, primarily
on-time delivery, flexibility and reliability, as well as rates. Many of our
competitors periodically reduce their rates to gain business, especially during
times of economic decline. In the past several years, several of our competitors
have reduced their rates to unusually low levels that we believe are
unsustainable in the long-term, but that may materially adversely affect our
business in the short-term. These competitors may cause a decrease in our volume
of freight, require us to lower the prices we charge for our services and
adversely affect both our growth prospects and profitability.
Claims
for property damage, personal injuries or workers’ compensation and related
expenses could significantly reduce our earnings.
Under DOT
regulations, we are liable for property damage and personal injuries caused by
owner-operators and Company-employed drivers while they are operating on our
behalf. We currently maintain liability insurance coverage that we believe is
adequate to cover third-party claims. We have a self-insured retention of $0.5
million per occurrence for vehicle and general liability claims. We may also be
subject to claims for workers’ compensation. We maintain workers’ compensation
insurance coverage that we believe is adequate to cover such claims. We have a
self-insured retention of approximately $0.3 million for each such claim, except
in Ohio, where we are a qualified self-insured entity with an approximately $0.4
million self-insured retention. We could incur claims in excess of our policy
limits or incur claims not covered by our insurance. Any claims beyond the
limits or scope of our insurance coverage may have a material adverse effect on
us. Because we do not carry “stop loss” insurance, a significant increase in the
number of claims that we must cover under our self-insurance retainage could
adversely affect our profitability. In addition, we may be unable to maintain
insurance coverage at a reasonable cost or in sufficient amounts or scope to
protect us against losses.
We
have grown and may grow, in part, through acquisitions, which involve various
risks, and we may not be able to identify or acquire companies consistent with
our growth strategy or successfully integrate acquired businesses into our
operations.
We have
grown through acquisitions and we intend to pursue opportunities to expand our
business by acquiring other companies in the future. Acquisitions involve risks,
including those relating to:
|
·
|
identification
of appropriate acquisition
candidates;
|
|
·
|
negotiation
of acquisitions on favorable terms and
valuations;
|
|
·
|
integration
of acquired businesses and
personnel;
|
|
·
|
implementation
of proper business and accounting
controls;
|
|
·
|
ability
to obtain financing, on favorable terms or at
all;
|
|
·
|
diversion
of management attention;
|
|
·
|
retention
of employees and customers;
|
|
·
|
unexpected
liabilities; and
|
|
·
|
potential
erosion of operating profits as new acquisitions may be unable to achieve
profitability comparable with our core airport-to-airport
business.
|
Acquisitions
also may affect our short-term cash flow and net income as we expend funds,
potentially increase indebtedness and incur additional expenses. If we are not
able to identify or acquire companies consistent with our growth strategy, or if
we fail to successfully integrate any acquired companies into our operations, we
may not achieve anticipated increases in revenue, cost savings and economies of
scale, our operating results may actually decline and acquired goodwill may
become impaired.
14
We
could be required to record a material non-cash charge to income if our recorded
intangible assets or goodwill are determined to be impaired.
We
have $40.7 million of recorded net intangible assets on our consolidated balance
sheet at December 31, 2008. Our definite-lived intangible assets
primarily represent the value of customer relationships and non-compete
agreements that were recorded in conjunction with our various
acquisitions. We review our long-lived assets, such as our
definite-lived intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Impairment is recognized on these assets when the sum of
undiscounted estimated cash flows expected to result from the use of the asset
is less than the carrying value. If such measurement indicates a
possible impairment, we would be required to record a non-cash impairment charge
to our statement of income in the amount that the carrying value of these assets
exceed the estimated fair value of the assets.
We also
have recorded goodwill of $50.2 million on our consolidated balance sheet at
December 31, 2008. Goodwill is also assessed for impairment annually
for each of our reportable segments. This assessment includes
comparing the fair value of each reportable segment to the carrying value of the
assets assigned to each reportable segment. If the carrying value of
the reportable segment was to exceed our estimated fair value of the reportable
segment, we would then be required to estimate the fair value of the individual
assets and liabilities within the reportable segment to ascertain the amount of
fair value of goodwill and any potential impairment. If we determine
that our fair value of goodwill is less than the related book value, we could be
required to record a non-cash impairment charge to our statement of income,
which could have a material adverse effect on our earnings.
We
may have difficulty effectively managing our growth, which could adversely
affect our results of operations.
Our
growth plans will place significant demands on our management and operating
personnel. Our ability to manage our future growth effectively will require us
to regularly enhance our operating and management information systems and to
continue to attract, retain, train, motivate and manage key employees. If we are
unable to manage our growth effectively, our business, results of operations and
financial condition may be adversely affected.
If
we fail to maintain and enhance our information technology systems, we may lose
orders and customers or incur costs beyond expectations.
We must
maintain and enhance our information technology systems to remain competitive
and effectively handle higher volumes of freight through our network. We expect
customers to continue to demand more sophisticated, fully integrated information
systems from their transportation providers. If we are unable to maintain and
enhance our information systems to handle our freight volumes and meet the
demands of our customers, our business and results of operations will be
adversely affected. If our information systems are unable to handle higher
freight volumes and increased logistics services, our service levels and
operating efficiency may decline. This may lead to a loss of customers and a
decline in the volume of freight we receive from customers.
Our
information technology systems are subject to risks that we cannot
control.
Our
information technology systems are dependent upon global communications
providers, web browsers, telephone systems and other aspects of the Internet
infrastructure that have experienced significant system failures and electrical
outages in the past. While we take measures to ensure our major systems have
redundant capabilities, our systems are susceptible to outages from fire,
floods, power loss, telecommunications failures, break-ins and similar events.
Despite our implementation of network security measures, our servers are
vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering with our computer systems. The occurrence of any of these
events could disrupt or damage our information technology systems and inhibit
our internal operations, our ability to provide services to our customers and
the ability of our customers to access our information technology systems. This
may result in the loss of customers or a reduction in demand for our
services.
If
we have difficulty attracting and retaining owner-operators or freight handlers,
our results of operations could be adversely affected.
We depend on
owner-operators for most of our transportation needs. In 2008, owner-operators
provided 66.3% of our purchased transportation. Competition for owner-operators
is intense, and sometimes there are shortages of available owner-operators. In
addition, we need a large number of freight handlers to operate our business
efficiently. During periods of low unemployment in the areas where our terminals
are located, we may have difficulty hiring and retaining a sufficient number of
freight handlers. If we have difficulty attracting and retaining enough
qualified owner-operators or freight handlers, we may be forced to increase
wages and benefits, which would increase our operating costs. This difficulty
may also impede our ability to maintain our delivery schedules, which could make
our service less competitive and force us to curtail our planned growth. If our
labor costs increase, we may be unable to offset the increased labor costs by
increasing rates without adversely affecting our business. As a result, our
profitability may be reduced.
15
A
determination by regulators that our independent owner-operators are employees
rather than independent contractors could expose us to various liabilities and
additional costs.
At times,
the Internal Revenue Service, the Department of Labor and state authorities have
asserted that owner-operators are “employees,” rather than “independent
contractors.” One or more governmental authorities may challenge our position
that the owner-operators we use are not our employees. A determination by
regulators that our independent owner-operators are employees rather than
independent contractors could expose us to various liabilities and additional
costs including, but not limited to, employment-related expenses such as
workers’ compensation insurance coverage and reimbursement of work-related
expenses.
We
operate in a regulated industry, and increased costs of compliance with, or
liability for violation of, existing or future regulations could have a material
adverse effect on our business.
The DOT
and various state agencies have been granted broad regulatory powers over our
business, and we are licensed by the DOT and U.S. Customs. If we fail to comply
with any applicable regulations, our licenses may be revoked or we could be
subject to substantial fines or penalties and to civil and criminal
liability.
We are
also subject to various environmental laws and regulations dealing with the
handling of hazardous materials. Our operations involve the risks of fuel
spillage or seepage. If we are involved in a spill or other accident involving
hazardous substances, our business and operating results may be adversely
affected. Changes to current environmental laws or regulations may increase our
operating costs and adversely affect our results of operations.
The
transportation industry is subject to legislative and regulatory changes that
can affect the economics of our business by requiring changes in operating
practices or influencing the demand for, and the cost of providing,
transportation services. Heightened security concerns may continue to result in
increased regulations, including the implementation of various security
measures, checkpoints or travel restrictions on trucks.
In
addition, there may be changes in applicable federal or state tax or other laws
or interpretations of those laws. If this happens, we may incur additional
taxes, as well as higher workers’ compensation and employee benefit costs, and
possibly penalties and interest for prior periods. This could have an adverse
effect on our results of operations.
We
are dependent on our senior management team, and the loss of any such personnel
could materially and adversely affect our business.
Our
future performance depends, in significant part, upon the continued service of
our senior management team. We cannot be certain that we can retain these
employees. The loss of the services of one or more of these or other key
personnel could have a material adverse effect on our business, operating
results and financial condition. We must continue to develop and retain a core
group of management personnel and address issues of succession planning if we
are to realize our goal of growing our business. We cannot be certain that we
will be able to do so.
If
our employees were to unionize, our operating costs would likely
increase.
None of
our employees are currently represented by a collective bargaining agreement.
However, we have no assurance that our employees will not unionize in the
future, which could increase our operating costs and force us to alter our
operating methods. This could have a material adverse effect on our operating
results.
Our
shareholder rights plan, charter and bylaws and provisions of Tennessee law
could discourage or prevent a takeover that may be considered
favorable.
We have a
shareholder rights plan that is scheduled to expire on May 18, 2009, that may
have the effect of discouraging unsolicited takeover proposals. The rights
issued under the shareholder rights plan would cause substantial dilution to a
person or group that attempts to acquire us on terms not approved in advance by
our Board of Directors. In addition, our shareholder rights plan, charter and
bylaws and provisions of Tennessee law may discourage, delay or prevent a
merger, acquisition or change in control that may be considered favorable. These
provisions could also discourage proxy contests and make it more difficult for
shareholders to elect directors and take other corporate actions. Among other
things, these provisions:
|
·
|
authorize
us to issue preferred stock, the terms of which may be determined at the
sole discretion of our Board of Directors and may adversely
affect the voting or economic rights of our shareholders;
and
|
|
·
|
establish
advance notice requirements for nominations for election to the Board of
Directors and for proposing matters that can be acted on by shareholders
at a meeting.
|
Our
shareholder rights plan, charter and bylaws and provisions of Tennessee law may
discourage transactions that otherwise could provide for the payment of a
premium over prevailing market prices for our common stock, $0.01 par value per
share, and also could limit the price that investors are willing to pay in the
future for shares of our common stock (“Common Stock”).
16
|
Item
1B.
|
None.
|
Item
2.
|
Properties
and Equipment
Management
believes that we have adequate facilities for conducting our business, including
properties owned and leased. Management further believes that in the event
replacement property is needed, it will be available on terms and at costs
substantially similar to the terms and costs experienced by competitors within
the transportation industry.
We lease
our 37,500 square foot headquarters in Greeneville, Tennessee from the
Greeneville-Greene County Airport Authority. The initial lease term ended in
2006 and has two ten-year and one five-year renewal options. During 2007, we
renewed the lease through 2016.
We own
our Columbus, Ohio central sorting facility. During 2006, we completed a
$5.5 million expansion of this facility. The expanded Columbus, Ohio
facility is 125,000 square feet with 168 trailer doors. This premier
facility can unload, sort and load upwards of 3.7 million pounds in five hours.
In addition to the expansion, we process-engineered the freight sorting in the
expanded building to improve handling efficiencies. The benefits include
reductions in the distance each shipment moves in the building to speed up the
transfer process, less handling of freight to further improve service integrity
and flexibility to operate multiple sorts at the same time.
In June
and March 2007, we completed the purchase of facilities near Atlanta, Georgia
and Chicago, Illinois for $14.9 million and $22.3 million,
respectively. The Atlanta, Georgia facility is over 142,000 square
feet with 118 trailer doors and approximately 12,000 square feet of office
space. The Chicago, Illinois facility is over 125,000 square feet
with 110 trailer doors and over 10,000 square feet of office space. In
addition, in February 2007, the Company acquired for $3.0 million 36.7 acres of
land near Dallas/Fort Worth, Texas on which we are currently building a new
regional hub facility. We anticipate completion of the Dallas/Fort Worth
facility in the third quarter of 2009.
We lease
and maintain 81 additional terminals, including 19
pool distribution terminals, located in major cities throughout the
United States and Canada. Lease terms for these terminals are typically for
three to five years. The remaining 17 terminals are agent stations operated by
independent agents who handle freight for us on a commission basis.
We own
the majority of trailers we use to move freight through our networks.
Substantially all of our trailers are 53’ long, some of which have specialized
roller bed equipment required to serve air cargo industry customers. At December
31, 2008, we had 2,219 owned trailers in our fleet with an average age of
approximately 3.7 years. In addition, as a result of our recent
acquisitions, at December 31, 2008, we also have 127 leased trailers in our
fleet.
Through
our recent acquisitions we have also increased the size of our tractor and
straight truck fleets. At December 31, 2008, we had 307 owned
tractors and straight trucks in our fleet, with an average age of approximately
5.0 years. In addition, at December 31, 2008, we also had 185 leased
tractors and straight trucks in our fleet.
|
Item
3.
|
From time
to time, we are a party to ordinary, routine litigation incidental to and
arising in the normal course of our business, most of which involve claims for
personal injury, property damage related to the transportation and handling of
freight, or workers’ compensation. We do not believe that any of these pending
actions, individually or in the aggregate, will have a material adverse effect
on our business, financial condition or results of operations.
During the
fourth quarter of the fiscal year ended December 31, 2008, no matters were
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
17
Executive
Officers of the Registrant
Pursuant
to Instruction 3 to Item 401(b) of Regulation S-K of the Securities Act and
General Instruction G(3) to Form 10-K, the following information is included in
Part I of this report. The ages listed below are as of December 31,
2008.
The
following are our executive officers:
|
Name
|
Age
|
Position
|
||
|
Bruce
A. Campbell
|
57 |
President
and Chief Executive Officer
|
||
|
Rodney
L. Bell
|
46 |
Chief
Financial Officer, Senior Vice President and Treasurer
|
||
|
Craig
A. Drum
|
53 |
Senior
Vice President, Sales
|
||
|
Matthew
J. Jewell
|
42 |
Executive
Vice President, Chief Legal Officer and Secretary
|
||
|
Chris
C. Ruble
|
46 |
Executive
Vice President, Operations
|
There are
no family relationships between any of our executive officers. All officers hold
office at the pleasure of the Board of Directors.
Bruce A.
Campbell has served as a director since April 1993, as President since August
1998, as Chief Executive Officer since October 2003 and as Chairman of the Board
since May 2007. Mr. Campbell was Chief Operating Officer from April 1990 until
October 2003 and Executive Vice President from April 1990 until August 1998.
Prior to joining us, Mr. Campbell served as Vice President of Ryder-Temperature
Controlled Carriage in Nashville, Tennessee from September 1985 until December
1989. Mr. Campbell also serves as a director of Greene County
Bancshares.
Rodney L.
Bell began serving as Chief Financial Officer, Senior Vice President and
Treasurer in June 2006. Mr. Bell, who is a Certified Public Accountant, was
appointed Chief Accounting Officer in February 2006 and continued to serve as
Vice President and Controller, positions held since October 2000 and February
1995, respectively. Mr. Bell joined the Company in March 1992 as Assistant
Controller after serving as a senior manager with the accounting firm of Adams
and Plucker in Greeneville, Tennessee.
Craig A.
Drum has served as Senior Vice President, Sales since July 2001 after joining us
in January 2000 as Vice President, Sales for one of our subsidiaries. In
February 2001, Mr. Drum was promoted to Vice President of National Accounts.
Prior to January 2000, Mr. Drum spent most of his 24-year career in air freight
with Delta Air Lines, Inc., most recently as the Director of Sales and Marketing
- Cargo.
Matthew
J. Jewell has served as Executive Vice President and Chief Legal Officer since
January 2008. From July 2002 until January 2008, he served as Senior Vice
President and General Counsel. In October 2002, he was also appointed
Secretary. From July 2002 until May 2004, Mr. Jewell was also the Senior Vice
President, General Counsel and Secretary of Landair Corporation. From January
2000 until joining us in July 2002, Mr. Jewell was a partner with the law firm
of Austin & Sparks, P.C. Mr. Jewell was an associate at Dennis, Corry &
Porter, L.L.P. from July 1991 to December 1998 and a partner from January 1999
to January 2000.
Chris C.
Ruble has served as Executive Vice President, Operations since August
2007. From October 2001 until August 2007, he served as Senior Vice
President, Operations. He was a Regional Vice President from September 1997 to
October 2001 and a regional manager from February 1997 to September 1997, after
starting with us as a terminal manager in January 1996. From June 1986 to August
1995, Mr. Ruble served in various management capacities at Roadway Package
System, Inc.
18
Part
II
Our
Common Stock trades on The NASDAQ Global Select Stock Market™ under the symbol
“FWRD.” The following table sets forth the high and low sales prices for
Common Stock as reported by The NASDAQ Global Select Stock Market™ for each full
quarterly period within the two most recent fiscal years.
|
2008
|
High
|
Low
|
Dividends
|
||||||
|
First
Quarter
|
$ | 36.86 | $ | 25.55 | $ | 0.07 | |||
|
Second
Quarter
|
39.09 | 32.54 | 0.07 | ||||||
|
Third
Quarter
|
38.58 | 25.77 | 0.07 | ||||||
|
Fourth
Quarter
|
28.16 | 17.31 | 0.07 | ||||||
|
2007
|
High
|
Low
|
Dividends
|
||||||
|
First
Quarter
|
$ | 35.32 | $ | 29.30 | $ | 0.07 | |||
|
Second
Quarter
|
35.78 | 29.67 | 0.07 | ||||||
|
Third
Quarter
|
41.90 | 29.18 | 0.07 | ||||||
|
Fourth
Quarter
|
34.93 | 27.07 | 0.07 | ||||||
There
were approximately 433 shareholders of record of our Common Stock as of
February 4, 2009.
Subsequent
to December 31, 2008, our Board of Directors declared a cash dividend of $0.07
per share that will be paid on March 26, 2009 to shareholders of record at
the close of business on March 11, 2009. We expect to continue to pay regular
quarterly cash dividends, though each subsequent quarterly dividend is subject
to review and approval by the Board of Directors.
There are
no material restrictions on our ability to declare dividends.
None of
our securities were sold during fiscal year 2008 without registration under the
Securities Act.
19
Securities
Authorized for Issuance Under Equity Compensation Plans
The following
table provides information as of December 31, 2008 with respect to shares of our
Common Stock that may be issued under existing equity compensation plans,
including the 1992 Amended and Restated Stock Option and Incentive Plan (the
“1992 Plan”), the 1999 Stock Option and Incentive Plan (the “1999 Plan”), the
Non-Employee Director Stock Option Plan (the “NED Plan”), the 2000 Non-Employee
Director Award (the “2000 NED Award”), the 2005 Employee Stock Purchase
Plan (the “ESPP”) and the Amended and Restated Non-Employee Director Stock Plan
(the “Amended Plan”). Our shareholders have approved each of these
plans.
|
Equity
Compensation Plan Information
|
||||||
|
Plan
Category
|
Number
of Securities to be Issued upon Exercise of Outstanding Options, Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans
|
|||
|
(a)
|
(b)
|
|||||
|
Equity
Compensation Plans Approved by Shareholders
|
2,577,691
|
$
|
26.74
|
4,121,170
|
||
|
Equity
Compensation Plans Not Approved by Shareholders
|
--
|
--
|
--
|
|||
|
Total
|
2,577,691
|
$
|
26.74
|
4,121,170
|
||
|
(a)
|
Excludes
purchase rights accruing under the ESPP, which has an original
shareholder-approved reserve of 500,000 shares. Under the ESPP, each
eligible employee may purchase up to 2,000 shares of Common Stock at
semi-annual intervals each year at a purchase price per share equal to
90.0% of the lower of the fair market value of the Common Stock at close
of (i) the first trading day of an option period or (ii) the last trading
day of an option period.
|
|
(b)
|
Includes
shares available for future issuance under the ESPP. As of December 31,
2008, an aggregate of 459,324 shares of Common Stock were available for
issuance under the ESPP.
|
Stock Performance
Graph
The
following graph compares the percentage change in the cumulative shareholder
return on our Common Stock with The NASDAQ Trucking and Transportation Stocks
Index and The NASDAQ Global Select Stock Market™ Index commencing on the last
trading day of December 2003 and ending on the last trading day of December
2008. The graph assumes a base investment of $100 made on December 31, 2003 and
the respective returns assume reinvestment of all dividends. The comparisons in
this graph are required by the SEC and, therefore, are not intended to forecast
or necessarily be indicative of any future return on our Common
Stock.
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||
|
Forward
Air Corporation
|
100 | 163 | 201 | 159 | 172 | 132 | ||||||
|
NASDAQ
Trucking and Transportation Stocks Index
|
100 | 127 | 139 | 147 | 152 | 107 | ||||||
|
NASDAQ
Stock Market Index
|
100 | 109 | 110 | 121 | 134 | 81 |
Issuer
Purchases of Equity Securities
No shares
of our Common Stock were repurchased by the Company during the quarter ended
December 31, 2008.
20
|
Item
6.
|
The
following table sets forth our selected financial data. The selected financial
data should be read in conjunction with our consolidated financial statements
and notes thereto, included elsewhere in this report.
|
Year
ended
|
||||||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Operating
revenue
|
$ | 474,436 | $ | 392,737 | $ | 352,758 | $ | 320,934 | $ | 282,197 | ||||||||||
|
Income
from operations
|
70,285 | 71,048 | 75,396 | 67,437 | 53,598 | |||||||||||||||
|
Operating
margin (1)
|
14.8 | % | 18.1 | % | 21.4 | % | 21.0 | % | 19.0 | % | ||||||||||
|
Net
income
|
42,542 | 44,925 | 48,923 | 44,909 | 34,421 | |||||||||||||||
|
Net
income per share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.48 | $ | 1.52 | $ | 1.57 | $ | 1.41 | $ | 1.07 | ||||||||||
|
Diluted
|
$ | 1.47 | $ | 1.50 | $ | 1.55 | $ | 1.39 | $ | 1.05 | ||||||||||
|
Cash
dividends declared per common share
|
$ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.24 | $ | -- | ||||||||||
|
Balance
Sheet Data (at end of period):
|
||||||||||||||||||||
|
Total
assets
|
$ | 307,527 | $ | 241,884 | $ | 213,014 | $ | 212,600 | $ | 214,553 | ||||||||||
|
Long-term
obligations, net of current portion
|
53,035 | 31,486 | 796 | 837 | 867 | |||||||||||||||
|
Shareholders'
equity
|
216,434 | 171,733 | 185,227 | 178,816 | 181,003 | |||||||||||||||
(1)
Income from operations as a percentage of operating revenue
Overview
and Executive Summary
Our
operations can be broadly classified into two principal
segments: Forward Air and FASI.
Through our
Forward Air segment, we are a leading provider of time-definite surface
transportation and related logistics services to the North American deferred air
freight market. We offer our customers local pick-up and delivery (Forward Air
Complete™) and scheduled surface transportation of cargo as a cost-effective,
reliable alternative to air transportation. We transport cargo that must be
delivered at a specific time, but is less time-sensitive than traditional air
freight. This type of cargo is frequently referred to in the transportation
industry as deferred air freight. We operate our Forward Air segment through a
network of terminals located on or near airports in 82 cities in the United
States and Canada, including a central sorting facility in Columbus, Ohio and 11
regional hubs serving key markets. We also offer our customers an array of
logistics and other services including: expedited truckload brokerage
(TLX); dedicated fleets; warehousing; customs brokerage; and shipment
consolidation, deconsolidation and handling.
On July
30, 2007, through our subsidiary and reporting segment, FASI, and in conjunction
with the acquisition of USAC, we began providing pool distribution services
throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental
United States. Pool distribution involves managing high-frequency
handling and distribution of time-sensitive product to numerous destinations in
specific geographic regions. Our primary customers for this product
are regional and nationwide distributors and retailers, such as mall, strip mall
and outlet based retail chains. We service these customers through a network of
terminals and service centers located in 19 cities.
Our
operations, particularly our network of hubs and terminals, represent
substantial fixed costs. Consequently, our continued growth depends in
significant part on our ability to increase the amount of freight and the
revenue per pound for the freight shipped through our networks and to grow other
lines of businesses, such as TLX, which will allow us to maintain revenue growth
in challenging shipping environments.
21
Trends
and Developments
Acquisitions
During the
year ended December 31, 2008 we experienced revenue growth across all product
lines and segments. The revenue growth was primarily driven by our
2008 and 2007 acquisitions and was partially offset by the challenging economic
conditions of 2008.
On September
8, 2008, we acquired certain assets and liabilities of Service
Express. Service Express was a privately-held provider of pool
distribution services primarily in the Mid-Atlantic and Southeastern continental
United States. Service Express generated approximately $39.0 million
in revenue during the year ended December 31, 2007. The acquisition
of Service Express’ pool distribution services added to the geographic footprint
of the FASI segment in the Mid-Atlantic and Southeastern United
States.
On March 17,
2008, we acquired certain assets and liabilities of Pinch. Pinch was
a privately-held provider of pool distribution, airport-to-airport, truckload,
custom, and cartage services primarily to the Southwestern continental United
States. Pinch generated approximately $35.0 million in revenue during
the year ended December 31, 2007. The acquisition of Pinch’s pool
distribution services expanded the geographic footprint of the FASI segment in
the Southwestern United States. In addition, it provided additional
tonnage density to the Forward Air airport-to-airport network, and the
acquisition of Pinch’s cartage and truckload business provided an opportunity
for Forward Air to expand its service options in the Southwestern United
States.
Further, on
December 3, 2007 we acquired certain assets and liabilities of Black Hawk for
approximately $35.2 million to increase the penetration of our
airport-to-airport network in the Midwest continental United
States. Also, on July 30, 2007, we acquired certain assets and
liabilities of USAC for approximately $12.9 million. Through this
acquisition we began providing pool distribution services throughout the
Southeast, Midwest and Southwest continental United
States.
While
providing different benefits, these acquisitions fit into our “Completing the
Model” strategic initiative of using acquisitions to grow our existing business
and to expand into new services and lines of business that will provide for
revenue growth in any market conditions. We will continue to evaluate
potential acquisitions that can increase our penetration of a geographic area,
add new customers, increase freight, or enable us to offer additional
services.
Results
of Operations
During the
year ended December 31, 2008, despite the increase in revenue driven primarily
by the above acquisitions, we experienced a year-over-year decrease in our
income from operations. The year-over-year decrease in income from
operations was largely due to the current economic recession and the resulting
decrease in our business levels during the fourth quarter of
2008. The depressed fourth quarter 2008 earnings were driven by the
decrease in airport-to-airport revenue during the fourth quarter of 2008 versus
the same period in 2007 and lower than expected FASI revenue and results of
operations. The significant decline in airport-to-airport revenue was
driven by an over 10.0% decrease in the tonnage shipped through our network
during the fourth quarter of 2008 compared to the same period in
2007. The decline in airport-to-airport tonnage was directly related
to the current economic recession. The economic recession was also
largely responsible for lower than expected revenue and reduced year-over-year
fourth quarter earnings in our FASI segment. FASI’s net income was
approximately $0.9 million less in the fourth quarter of 2008 versus the fourth
quarter of 2007 as depressed revenues due to the economic environment prevented
us from achieving results comparable with 2007.
Increases in
revenues from our logistics services, mainly TLX, and FASI offset the decline in
airport-to-airport revenue; however these services, are not as profitable and
did not generate comparable operating results with our airport-to-airport
business. We expect these year-over-year decreases to continue into
2009, as our airport-to-airport business continues to experience large
year-over-year decreases in business levels.
Also,
declining fuel prices may adversely affect our revenues in 2009. Our
net fuel surcharge revenue is the result of our fuel surcharge rates, which are
set weekly using the national average for diesel price per gallon, and the
tonnage transiting our network. The decline in tonnage levels
combined with the year-over-year decline in diesel fuel prices could result in a
significant reduction in our net fuel surcharge revenue during
2009.
Segments
Effective
July 30, 2007, in conjunction with FASI’s acquisition of certain assets and
liabilities of USAC, we began reporting our operations as two segments: Forward
Air and FASI.
Our Forward
Air segment includes our airport-to-airport, Forward Air Complete, and TLX
services as well as our other accessorial related services such as warehousing;
customs brokerage; and value-added handling services.
Our FASI
segment includes our pool distribution business and the related assets and
liabilities purchased from USAC, Pinch and Service Express.
22
Results
of Operations
The
following table sets forth our historical financial data for the years ended
December 31, 2008 and 2007 (in millions):
|
Year
ended
|
|||||||||||||||
|
December
31,
|
December
31,
|
Percent
|
|||||||||||||
|
2008
|
2007
|
Change
|
Change
|
||||||||||||
|
Operating
revenue
|
$ | 474.4 | $ | 392.7 | $ | 81.7 | 20.8 | % | |||||||
|
Operating
expenses:
|
|||||||||||||||
|
Purchased
transportation
|
189.0 | 164.4 | 24.6 | 15.0 | |||||||||||
|
Salaries,
wages, and employee benefits
|
116.5 | 88.8 | 27.7 | 31.2 | |||||||||||
|
Operating
leases
|
24.4 | 16.8 | 7.6 | 45.2 | |||||||||||
|
Depreciation
and amortization
|
16.6 | 10.9 | 5.7 | 52.3 | |||||||||||
|
Insurance
and claims
|
8.1 | 7.7 | 0.4 | 5.2 | |||||||||||
|
Fuel
expense
|
11.5 | 2.4 | 9.1 | 379.2 | |||||||||||
|
Other
operating expenses
|
38.0 | 30.7 | 7.3 | 23.8 | |||||||||||
|
Total
operating expenses
|
404.1 | 321.7 | 82.4 | 25.6 | |||||||||||
|
Income
from operations
|
70.3 | 71.0 | (0.7 | ) | (1.0 | ) | |||||||||
|
Other
income (expense):
|
|||||||||||||||
|
Interest
expense
|
(1.2 | ) | (0.5 | ) | (0.7 | ) | 140.0 | ||||||||
|
Other,
net
|
0.3 | 1.8 | (1.5 | ) | (83.3 | ) | |||||||||
|
Total
other (expense) income
|
(0.9 | ) | 1.3 | (2.2 | ) | (169.2 | ) | ||||||||
|
Income
before income taxes
|
69.4 | 72.3 | (2.9 | ) | (4.0 | ) | |||||||||
|
Income
taxes
|
26.9 | 27.4 | (0.5 | ) | (1.8 | ) | |||||||||
|
Net
income
|
$ | 42.5 | $ | 44.9 | $ | (2.4 | ) | (5.3 | ) | % | |||||
23
The
following table sets forth our historical financial data for the years ended
December 31, 2008 and 2007 (in millions):
|
Year
ended
|
|||||||||||||||||||||
|
December
31,
|
Percent
of
|
December
31,
|
Percent
of
|
Percent
|
|||||||||||||||||
|
2008
|
Revenue
|
2007
|
Revenue
|
Change
|
Change
|
||||||||||||||||
|
Operating
revenue
|
|||||||||||||||||||||
|
Forward
Air
|
$
|
421.2
|
88.8
|
%
|
$
|
376.8
|
95.9
|
%
|
$
|
44.4
|
11.8
|
%
|
|||||||||
|
FASI
|
55.3
|
11.6
|
16.0
|
4.1
|
39.3
|
245.6
|
|||||||||||||||
|
Intercompany
Eliminations
|
(2.1
|
)
|
(0.4
|
)
|
(0.1
|
)
|
--
|
(2.0
|
)
|
2,000.0
|
|||||||||||
|
Total
|
474.4
|
100.0
|
392.7
|
100.0
|
81.7
|
20.8
|
|||||||||||||||
|
Purchased
transportation
|
|||||||||||||||||||||
|
Forward
Air
|
179.9
|
42.7
|
162.4
|
43.1
|
17.5
|
10.8
|
|||||||||||||||
|
FASI
|
11.2
|
20.2
|
2.1
|
13.1
|
9.1
|
433.3
|
|||||||||||||||
|
Intercompany
Eliminations
|
(2.1
|
)
|
100.0
|
(0.1
|
)
|
100.0
|
(2.0
|
)
|
2,000.0
|
||||||||||||
|
Total
|
189.0
|
39.9
|
164.4
|
41.9
|
24.6
|
15.0
|
|||||||||||||||
|
Salaries,
wages and employee benefits
|
|||||||||||||||||||||
|
Forward
Air
|
92.5
|
22.0
|
82.0
|
21.8
|
10.5
|
12.8
|
|||||||||||||||
|
FASI
|
24.0
|
43.4
|
6.8
|
42.5
|
17.2
|
252.9
|
|||||||||||||||
|
Total
|
116.5
|
24.6
|
88.8
|
22.6
|
27.7
|
31.2
|
|||||||||||||||
|
Operating
leases
|
|||||||||||||||||||||
|
Forward
Air
|
18.5
|
4.4
|
15.8
|
4.2
|
2.7
|
17.1
|
|||||||||||||||
|
FASI
|
5.9
|
10.7
|
1.0
|
6.3
|
4.9
|
490.0
|
|||||||||||||||
|
Total
|
24.4
|
5.1
|
16.8
|
4.3
|
7.6
|
45.2
|
|||||||||||||||
|
Depreciation
and amortization
|
|||||||||||||||||||||
|
Forward
Air
|
14.4
|
3.4
|
10.4
|
2.8
|
4.0
|
38.5
|
|||||||||||||||
|
FASI
|
2.2
|
4.0
|
0.5
|
3.1
|
1.7
|
340.0
|
|||||||||||||||
|
Total
|
16.6
|
3.5
|
10.9
|
2.8
|
5.7
|
52.3
|
|||||||||||||||
|
Insurance
and claims
|
|||||||||||||||||||||
|
Forward
Air
|
7.3
|
1.7
|
7.2
|
1.9
|
0.1
|
1.4
|
|||||||||||||||
|
FASI
|
0.8
|
1.4
|
0.5
|
3.1
|
0.3
|
60.0
|
|||||||||||||||
|
Total
|
8.1
|
1.7
|
7.7
|
1.9
|
0.4
|
5.2
|
|||||||||||||||
|
Fuel
expense
|
|||||||||||||||||||||
|
Forward
Air
|
5.8
|
1.4
|
1.3
|
0.3
|
4.5
|
346.2
|
|||||||||||||||
|
FASI
|
5.7
|
10.3
|
1.1
|
6.9
|
4.6
|
418.2
|
|||||||||||||||
|
Total
|
11.5
|
2.4
|
2.4
|
0.6
|
9.1
|
379.2
|
|||||||||||||||
|
Other
operating expenses
|
|||||||||||||||||||||
|
Forward
Air
|
32.1
|
7.6
|
29.0
|
7.7
|
3.1
|
10.7
|
|||||||||||||||
|
FASI
|
5.9
|
10.7
|
1.7
|
10.6
|
4.2
|
247.1
|
|||||||||||||||
|
Total
|
38.0
|
8.0
|
30.7
|
7.8
|
7.3
|
23.8
|
|||||||||||||||
|
Income
(loss) from operations
|
|||||||||||||||||||||
|
Forward
Air
|
70.7
|
16.8
|
68.7
|
18.2
|
2.0
|
2.9
|
|||||||||||||||
|
FASI
|
(0.4
|
)
|
(0.7
|
)
|
2.3
|
14.4
|
(2.7
|
)
|
(117.4
|
)
|
|||||||||||
|
Total
|
$
|
70.3
|
14.8
|
%
|
$
|
71.0
|
18.1
|
%
|
$
|
(0.7
|
)
|
(1.0
|
)
|
%
|
|||||||
24
The
following table presents the components of the Forward Air segment’s
operating revenue and purchased transportation for the years ended December 31,
2008 and 2007 (in millions):
|
Percent
of
|
Percent
of
|
Percent
|
|||||||||||||||
|
2008
|
Revenue
|
2007
|
Revenue
|
Change
|
Change
|
||||||||||||
|
Forward
Air revenue
|
|||||||||||||||||
|
Airport-to-airport
|
$
|
336.2
|
79.8
|
%
|
$
|
313.2
|
83.1
|
%
|
$
|
23.0
|
7.3
|
%
|
|||||
|
Logistics
|
59.9
|
14.2
|
42.7
|
11.3
|
17.2
|
40.3
|
|||||||||||
|
Other
|
25.1
|
6.0
|
20.9
|
5.6
|
4.2
|
20.1
|
|||||||||||
|
Total
|
$
|
421.2
|
100.0
|
%
|
$
|
376.8
|
100.0
|
%
|
$
|
44.4
|
11.8
|
%
|
|||||
|
Forward
Air purchased transportation
|
|||||||||||||||||
|
Airport-to-airport
|
$
|
128.9
|
38.3
|
%
|
$
|
123.7
|
39.5
|
%
|
$
|
5.2
|
4.2
|
%
|
|||||
|
Logistics
|
44.5
|
74.3
|
32.7
|
76.6
|
11.8
|
36.1
|
|||||||||||
|
Other
|
6.5
|
25.9
|
6.0
|
28.7
|
0.5
|
8.3
|
|||||||||||
|
Total
|
$
|
179.9
|
42.7
|
%
|
$
|
162.4
|
43.1
|
%
|
$
|
17.5
|
10.8
|
%
|
|||||
Year
ended December 31, 2008 compared to Year ended December 31, 2007
Revenues
Operating
revenue increased by $81.7 million, or 20.8%, to $474.4 million for the year
ended December 31, 2008 from $392.7 million for the year ended December 31,
2007.
Forward
Air
Forward Air
operating revenue increased $44.4 million, or 11.8%, to $421.2 million from
$376.8 million, accounting for 88.8% of consolidated operating revenue for the
year ended December 31, 2008. Airport-to-airport revenue, which is the largest
component of our consolidated operating revenue, increased $23.0 million,
or 7.3%, to $336.2 million from $313.2 million, accounting for 79.8% of the
segment’s operating revenue during the year ended December 31, 2008 compared to
83.1% for the year ended December 31, 2007. The increase in
airport-to-airport revenue was driven by our recent acquisitions, increased
utilization of Forward Air Complete and increased net fuel surcharge
revenue. Revenue for Forward Air Complete, our pick-up and delivery
service for the airport-to-airport network increased $11.4 million in 2008 over
2007 due to increased customer utilization of the service. Also, net
fuel surcharge revenue increased $12.4 million in 2008 over 2007 primarily
driven by the increase in tonnage and fuel prices during the second and third
quarters of 2008. These increases were slightly offset by a $0.8
million decrease in our base airport-to-airport revenue. The 4.4%
increase in tonnage that transited our network was offset by a 4.5% decrease in
average revenue per pound before fuel surcharge and Forward Air Complete
revenues. The increase in tonnage was primarily driven by the
increased activity resulting from our acquisitions of Pinch and Black Hawk in
March 2008 and December 2007, respectively, offset by the impact of the economic
recession on our airport-to-airport network during the second half of 2008, but
most acutely in the fourth quarter of 2008. Average revenue per pound
before net fuel surcharge and Forward Air Complete revenues decreased due to a
shift in our business mix to shorter distance lower price per pound
routes. This shift was primarily the result of new business obtained
with the Pinch and Black Hawk acquisitions as well as increased business from
international and domestic airlines.
Logistics
revenue, which is primarily truckload brokerage (TLX) and priced on a per mile
basis, increased $17.2 million, or 40.3%, to $59.9 million in the year ended
December 31, 2008 from $42.7 million in the year ended December 31,
2007. The increase in logistics revenue is the result of our
continuing efforts as part of our “Completing the Model” strategic initiative to
grow TLX and $4.0 million in new revenue from service lines obtained through the
Pinch and Black Hawk acquisitions. We continue to place emphasis on
capturing a larger percentage of truckload opportunities and correspondingly
increasing our access to sufficient truckload capacity through the expansion of
our owner-operator fleet and the use of third-party transportation providers.
Through these efforts, we increased the number of miles driven to support our
TLX revenue by 27.9% during the year ended December 31, 2008 compared to the
year ended December 31, 2007. The average revenue per mile of our TLX
product, including the impact of fuel surcharges, increased 2.1% for the year
ended December 31, 2008 versus the year ended December 31, 2007. The increase in
revenue per mile is mainly attributable to increased fuel surcharges to offset
increased fuel costs.
Other
revenue, which includes warehousing services and terminal handling, accounts for
the final component of Forward Air operating revenue. Other revenue increased
$4.2 million to $25.1 million for the year ended December 31, 2008, a 20.1%
increase from $20.9 million for the year ended December 31, 2007. The
increase was primarily due to increased cartage, handling and storage revenue
due to new services offered through our recently expanded
facilities. The increased cartage revenue is also the result of new
business obtained in conjunction with the Pinch and Black Hawk
acquisitions.
25
FASI
FASI
operating revenue increased $39.3 million to $55.3 million for the year ended
December 31, 2008 from $16.0 million for the year ended December 31,
2007. The increase in revenue is the result of additional activity
from the Pinch acquisition on March 17, 2008 and the Service Express acquisition
on September 8, 2008. In addition, the year ended December 31, 2008
includes a full twelve months of revenue compared to only five months for the
year ended December 31, 2007, as FASI began operations on July 30, 2007 in
conjunction with the acquisition of USAC.
Intercompany
Eliminations
Intercompany
eliminations of $2.1 million are the result of truckload and airport-to-airport
services Forward Air provided to FASI during the year ended December 31,
2008. FASI also provides cartage services to Forward
Air.
Purchased
Transportation
Purchased
transportation increased by $24.6 million, or 15.0%, to $189.0 million for
the year ended December 31, 2008 from $164.4 million for the year ended December
31, 2007. As a percentage of total operating revenue, purchased
transportation was 39.9% during the year ended December 31, 2008 compared to
41.9% for the year ended December 31, 2007.
Forward
Air
Forward Air’s
purchased transportation increased by $17.5 million, or 10.8%, to
$179.9 million for the year ended December 31, 2008 from $162.4 million for the
year ended December 31, 2007. The increase in purchased transportation is
primarily attributable to an increase of approximately 6.4% in miles driven in
addition to a 4.1% increase in the total cost per mile for the year ended
December 31, 2008 versus the year ended December 31, 2007. As a percentage of
segment operating revenue, Forward Air purchased transportation was 42.7% during
the year ended December 31, 2008 compared to 43.1% for the year ended December
31, 2007.
Purchased
transportation costs for our airport-to-airport network increased $5.2
million, or 4.2%, to $128.9 million for the year ended December 31,
2008 from $123.7 million for the year ended December 31, 2007. For
the year ended December 31, 2008, purchased transportation for our
airport-to-airport network decreased to 38.3% of airport-to-airport revenue from
39.5% for the year ended December 31, 2007. The $5.2 million increase
is attributable to a 1.2% increase in miles driven by our network of
owner-operators or third party transportation providers plus a 3.0% increase in
cost per mile. The change in miles increased purchased transportation
by $1.5 million while the change in cost per mile increased purchased
transportation $3.7 million. Miles driven by our network of
owner-operators or third party transportation providers increased to support the
increased revenue activity, mainly in the first half of 2008 as discussed
above. The increase in cost per mile is attributable to increased
customer utilization of Forward Air Complete mitigated by increased utilization
of our network of owner-operators as opposed to more costly third party
transportation providers. Additionally, the increase in cost per mile
was also offset by the increased use of Company-employed drivers. The
increase in the number of Company-employed drivers and their use in the
airport-to-airport network is mainly a result of the Pinch and Black Hawk
acquisitions. The cost for the Company-employed drivers is included
in salaries, wages and benefits instead of purchased
transportation.
Purchased
transportation costs for our logistics revenue increased $11.8
million, or 36.1%, to $44.5 million for the year ended December 31,
2008 from $32.7 million for the year ended December 31, 2007. For the year ended
December 31, 2008, logistics’ purchased transportation costs represented 74.3%
of logistics revenue versus 76.6% for the year ended December 31, 2007. The
36.1% increase is partially attributable to a $2.3 million increase in costs
associated with new logistics business obtained through the acquisition of Pinch
and Black Hawk. The remaining increase is attributable to a 27.9%
increase in miles driven by our network of owner-operators or third party
transportation providers plus a 0.9% increase in the related cost per
mile. Miles driven by our network of owner-operators or third party
transportation providers increased to support our continuing efforts to grow our
TLX business as discussed above, and accounted for $9.1 million of the increase
in logistics purchased transportation. The change in the cost per
mile increased the logistics purchased transportation by $0.4 million. The increase in
cost per mile was mostly the result of increased rates from third party
transportation providers mostly offset by increased use of our network of
owner-operators. The decrease in logistics transportation as a
percentage of revenue is the result of the favorable change in business mix as
well as the addition of the new services from the Pinch and Black Hawk
acquisitions.
Purchased
transportation costs related to our other revenue increased $0.5
million, or 8.3%, to $6.5 million for the year ended December 31, 2008
from $6.0 million for the year ended December 31, 2007. Other purchased
transportation costs as a percentage of other revenue decreased to 25.9% of
other revenue for the year ended December 31, 2008 from 28.7% for the year ended
December 31, 2007. The improvement in other purchased
transportation costs as a percentage of other revenue is attributable to the use
of Company-employed drivers to provide the transportation services associated
with new business obtained from the Pinch and Black Hawk
acquisitions.
26
FASI
FASI
purchased transportation increased to $11.2 million for the year ended December
31, 2008 from $2.1 million for the year ended December 31, 2007. FASI
purchased transportation as a percentage of revenue was 20.2% for the year ended
December 31, 2008 compared to 13.1% for the year ended December 31,
2007. The increase in purchased transportation is mainly due to our
continued expansion of the FASI business through the acquisitions of Pinch and
Service Express in March 2008 and September 2008, respectively. In
addition, the year ended 2008 includes a full twelve months of FASI activity
compared to only five months for the year ended December 31, 2007, as FASI began
operations on July 30, 2007. Purchased transportation has increased
as a percentage of FASI revenue mainly due to the increased use of
owner-operators particularly in conjunction with the acquisition of
Pinch.
Intercompany
Eliminations
Intercompany
eliminations increased to $2.1 million and are the result of truckload and
airport-to-airport services Forward Air provided to FASI during the year ended
December 31, 2008. During the year ended December 31, 2008, FASI also
provided cartage services to Forward Air.
Salaries,
Wages, and Benefits
Salaries,
wages and employee benefits increased by $27.7 million, or 31.2%, to $116.5
million in the year ended 2008 from $88.8 million in the same period of
2007. As a percentage of total operating revenue, salaries, wages and
employee benefits was 24.6% during the year ended December 31, 2008 compared to
22.6% for the same period in 2007.
Forward
Air
Salaries,
wages and employee benefits of Forward Air increased by $10.5 million, or 12.8%,
to $92.5 million in the year ended December 31, 2008 from $82.0 million for the
year ended December 31, 2007. Salaries, wages and employee benefits
were 22.0% of Forward Air’s operating revenue in the year ended December 31,
2008 compared to 21.8% for the year ended December 31, 2007. The
increase in salaries, wages and employee benefits as a percentage of revenue was
the result of increases in health insurance costs and share-based compensation
offset by decreases in workers’ compensation and employee incentive
costs.
Employee
incentives decreased $0.4 million, or 0.2% as a percentage of revenue for the
year ended December 31, 2008 as compared to the year ended December 31,
2007. The decrease was due to a reduction of annual incentives for
key employees due to failures to achieve performance goals. During the
fourth quarter of 2008, salaries, wages and employee benefits were reduced by
$1.5 million as we reduced accruals for annual senior management incentives as
annual earnings goals were not met. Comparatively, we increased
salaries, wages and employee benefits by $1.1 million during the fourth quarter
of 2007 for annual incentives to senior management.
Workers’
compensation costs decreased approximately $1.1 million, or 0.3% as a percentage
of Forward Air operating revenue. The year-over-year difference is
primarily due to a $0.7 million increase in our workers’ compensation loss
reserves recorded in 2007 that resulted from an actuarial analysis. The
remaining decrease is due to 2008 reductions in our workers’ compensation loss
reserves as a result of lower claims experience than projected in previous
periods.
Share-based
compensation increased $2.4 million, or 0.5% as a percentage of Forward Air
operating revenue, due to the annual grants of stock options and non-vested
shares of common stock to key members of management and non-employee directors
from 2006 to the present. Health insurance costs increased $1.8
million and 0.3% as a percentage of Forward Air operating
revenue. The increase is driven by an increase in plan participants
primarily as a result of our Pinch and Black Hawk acquisitions in March 2008 and
December 2007, respectively.
The remaining
increase in total dollars is attributable to the increased headcount of mainly
terminal and Company-employed drivers associated with our acquisitions of Pinch
and Black Hawk.
FASI
FASI
salaries, wages and employee benefits increased to $24.0 million for the year
ended December 31, 2008 compared to $6.8 million for the year ended December 31,
2007. The $17.2 million increase is mainly attributable to the year
ended 2008 including twelve months of expense while 2007 included only five
months, as FASI was not operating until July 30, 2007. As a
percentage of FASI operating revenue, salaries, wages and benefits increased to
43.4% for the year ended December 31, 2008 compared to 42.5% for the year ended
December 31, 2007. FASI salaries, wages and employee benefits are
higher as a percentage of operating revenue than our Forward Air segment, as a
larger percentage of the transportation services are performed by
Company-employed drivers as opposed to independent
owner-operators. The increase in salaries, wages and employee
benefits as a percentage of revenue is attributable to the acquisition of
Service Express in September 2008. The terminals we acquired with the
Service Express acquisition utilize a much higher percentage of contract labor
for its dock personnel than used by preexisting FASI
terminals. Contract labor is more expensive in the short term than
Company-employed cargo handlers and dock personnel. We will evaluate
the proper utilization of contract labor in these terminals during the first
quarter of 2009.
27
Operating
Leases
Operating
leases increased by $7.6 million, or 45.2%, to $24.4 million in the year ended
December 31, 2008 from $16.8 million in the year ended December 31,
2007. Operating leases, the largest component of which is facility
rent, were 5.1% of consolidated operating revenue for the year ended December
31, 2008 compared with 4.3% for the year ended December 31, 2007.
Forward
Air
Operating
leases increased $2.7 million and 17.1% to $18.5 million in the year ended
December 31, 2008 from $15.8 million for the year ended December 31,
2007. Operating leases were 4.4% of Forward Air operating revenue for
the year ended December 31, 2008 compared with 4.2% for the year ended December
31, 2007. The increase in operating leases in total dollars was
attributable to $1.5 million in higher facility rent expense associated with the
assumption of additional facilities as a result of the Pinch and Black Hawk
acquisitions and the expansion of certain facilities. Operating leases also
increased $1.2 million for trailer and tractor leases assumed in conjunction
with the acquisitions of Pinch and Black Hawk.
FASI
FASI
operating lease expense increased $4.9 million to $5.9 million for the year
ended December 31, 2008 from $1.0 million for the year ended December 31,
2007. Approximately $2.8 million of the increase was attributable to
higher facility rent expense due to the increased number of terminals
resulting from the Pinch and Service Express acquisitions. Operating
leases also increased $2.1 million for trailer, tractor, and straight truck
leases assumed in conjunction with the acquisitions of Pinch and Service
Express. The increase in operating lease expense, both for facilities
and equipment, is also attributable to the year ended 2008 including twelve
months of lease expense while 2007 included only five months, as FASI was not
operating until July 30, 2007. The increase in lease expense for
tractors, straight trucks and trailers is the primary reason for the increase in
operating leases as a percentage of revenue.
Depreciation
and Amortization
Depreciation
and amortization increased $5.7 million, or 52.3%, to $16.6 million in the year
ended December 31, 2008 from $10.9 million for the year ended December 31,
2007. Depreciation and amortization was 3.5% of consolidated
operating revenue for the year ended December 31, 2008 compared with 2.8% for
the year ended December 31, 2007.
Forward
Air
Depreciation
and amortization expense as a percentage of Forward Air operating revenue was
3.4% in the year ended December 31, 2008 compared to 2.8% for the year ended
December 31, 2007. The increase in depreciation and amortization
expense as a percentage of revenue is primarily due to a $2.1 million, or 0.5%
as a percentage of revenue, increase in amortization expense for intangible
assets associated with the acquisitions of Pinch and Black Hawk. The
remaining increase represents depreciation on new forklifts and other
miscellaneous equipment and assets.
FASI
FASI
depreciation and amortization increased $1.7 million to $2.2 million for the
year ended December 31, 2008 from $0.5 million for the year ended December 31,
2007. Depreciation and amortization expense as a percentage of FASI
operating revenue was 4.0% in the year ended December 31, 2008 compared to 3.1%
for the year ended December 31, 2007. The increase in depreciation
and amortization expense as a percentage of revenue is partially due to a $0.6
million, or 0.4% as a percentage of revenue, increase in amortization expense
for intangible assets associated with the Service Express, Pinch and USAC
acquisitions. The remainder of the increase is attributable to a full year
of depreciation on assets acquired from USAC and increased depreciation from
tractors, trailers and other equipment assumed in conjunction with our
acquisitions of Pinch and Service Express.
Insurance
and Claims
Insurance and
claims expense increased $0.4 million, or 5.2%, to $8.1 million for the year
ended December 31, 2008 from $7.7 million for the year ended December 31,
2007. Insurance and claims were 1.7% of consolidated operating
revenue during 2008 compared with 1.9% in 2007.
28
Forward
Air
Insurance and
claims as a percentage of Forward Air operating revenue was 1.7% in the year
ended December 31, 2008 compared to 1.9% for the year ended December 31,
2007. The $0.1 million and 1.4% increase in insurance and claims
for the year ended 2008 compared to the year ended December 31, 2007 is the
result of increased insurance premiums resulting from the increased number of
owner-operators, Company-employed drivers, and rolling stock equipment in our
fleet.
FASI
FASI
insurance and claims increased $0.3 million to $0.8 million for the year ended
December 31, 2008 from $0.5 million for the year ended December 31, 2007. As a
percentage of operating revenue, insurance and claims was 1.4% for the year
ended December 31, 2008 compared to 3.1% for the year ended December 31, 2007.
The decrease as a percentage of revenue is attributable to the increase in
revenue outpacing the increase in claims and insurance premiums.
Fuel
Expense
Fuel expense
increased $9.1 million, to $11.5 million in the year ended December 31, 2008
from $2.4 million in the year ended December 31, 2007. Fuel expense
was 2.4% of consolidated operating revenue for the year ended December 31, 2008
compared with 0.6% for the year ended December 31, 2007.
Forward
Air
Fuel expense
was 1.4% of Forward Air operating revenue in the year ended December 31, 2008
compared to 0.3% in the year ended December 31, 2007. The $4.5 million increase
was primarily attributable to the increased number of Company-employed drivers
and Company-owned or operated equipment as a result of the Pinch and Black Hawk
acquisitions in March 2008 and December 2007, respectively. Also increasing fuel
expense was the significant year-over-year increase in average diesel fuel
prices during the second and third quarters of 2008.
FASI
FASI fuel
expense increased $4.6 million, to $5.7 million in the year ended December 31,
2008 from $1.1 million in the year ended December 31, 2007. Fuel
expenses were 10.3% of FASI operating revenue in the year ended December 31,
2008 compared to 6.9% for the year ended December 31, 2007. FASI fuel
expense is significantly higher as a percentage of operating revenue than
Forward Air’s fuel expense, as FASI utilizes a higher ratio of Company-employed
drivers and Company-owned or leased vehicles in its operations than Forward
Air. The increase in FASI fuel expense was attributable to the
increase in owned and leased tractors assumed with the Pinch and Service Express
acquisitions. The increase is also attributable to the year ended
2008 including a full year of FASI activity as opposed to only five months for
2007. Also increasing fuel expense was the significant year-over-year
increase in average diesel fuel prices during the second and third quarters of
2008.
Other
Operating Expenses
Other
operating expenses increased $7.3 million, or 23.8%, to $38.0 million in the
year ended December 31, 2008 from $30.7 million for the year ended December 31,
2007. Other operating expenses were 8.0% of consolidated operating
revenue for the year ended December 31, 2008 compared with 7.8% in the same
period of 2007.
Forward
Air
Other
operating expenses were 7.6% of Forward Air operating revenue in the year ended
December 31, 2008 compared to 7.7% for the year ended December 31, 2007. The
0.1% decrease in other operating expenses as a percentage of operating revenue
is the result of efforts to control discretionary costs by reducing expenses
such as management training, marketing and travel. In addition,
during the year ended December 31, 2008 other operating expenses were reduced by
$0.2 million related to the reversal of previous accruals for fines and
penalties associated with the settlement of a dispute with a state taxing
authority. The dispute was settled with the state taxing authority
for less than the amount previously reserved.
FASI
FASI other
operating expenses increased $4.2 million to $5.9 million for the year ended
December 31, 2008 compared to $1.7 million for the year ended December 31,
2007. The $4.2 million increase is mainly attributable to the year
ended 2008, including twelve months of expense while 2007 included only five
months, as FASI was not operating until July 30, 2007. FASI other
operating expenses for the year ended December 31, 2008 were 10.7% of the
segment’s operating revenue compared to 10.6% for the December 31,
2007. Other operating expenses are higher as a percentage of revenue
than our Forward Air segment due to the higher
utilization of Company-owned or leased vehicles resulting in higher
maintenance and related expenses.
29
Income
from Operations
Income from
operations decreased by $0.7 million or 1.0%, to $70.3 million for the year
ended December 31, 2008 compared with $71.0 million for the year ended December
31, 2007. Income from operations was 14.8% of consolidated operating
revenue for the year ended December 31, 2008 compared with 18.1% for the year
ended December 31, 2007.
Forward
Air
Income from
operations increased by $2.0 million, or 2.9%, to $70.7 million for the year
ended December 31, 2008 compared with $68.7 million for the year ended December
31, 2007. The increase in income from operations was primarily a
result of increased revenues partially offset by increased costs for salaries,
wages and benefits, operating leases and depreciation and
amortization. Income from operations as a percentage of Forward Air
operating revenue was 16.8% for the year ended December 31, 2008 compared with
18.2% for the year ended December 31, 2007. The decrease in income
from operations as a percentage of revenue was the result of increasing volumes
from our lower margin services, such as TLX, and declining airport-to-airport
volumes mainly during the fourth quarter of 2008 due to the economic
recession.
FASI
FASI results
from operations decreased approximately $2.7 million to a $0.4 million loss from
operations for the year ended December 31, 2008 from income of operations of
$2.3 million for the year ended December 31, 2007. The decrease in
FASI results from operations is mainly driven by integration costs that resulted
from the March 17, 2008 acquisition of Pinch. These costs primarily impacted
salaries, wages, and employee benefits, operating leases and other operating
expenses. The loss from operations as a percentage of FASI operating
revenue was (0.7)% for the year ended December 31, 2008 compared with 14.4%
income from operations as a percentage of revenue for the year ended December
31, 2007. As discussed above, the pool distribution business is
highly seasonal and as a result of the timing of the USAC acquisition, our 2007
results primarily included peak seasonal activity. Consequently, our
2007 results were better than we would expect for a full year of operations,
such as 2008, which would include less positive results from the non-peak
periods of operations. In addition, FASI’s fourth quarter of 2008
income from operations of $0.5 million was $1.3 million less than the $1.8
million of income from operations for the fourth quarter of
2007. This was primarily the result of lower peak season volumes than
anticipated due to the current economic recession.
Interest
Expense
Interest
expense increased $0.7 million to $1.2 million for the year ended December 31,
2008 compared to $0.5 million for the year ended December 31,
2007. The increase in interest expense was mostly the result of net
borrowings under our line of credit facility used to fund our acquisitions of
Service Express, Pinch and Black Hawk in September 2008, March 2008 and December
2007, respectively. These increases were net of a $0.1 million
reduction of interest expense resulting from the settlement of a dispute with a
state taxing authority during the year ended December 31, 2008. The
dispute was settled with the state taxing authority for less than the amount
previously reserved.
Other
Income, Net
Other income,
net was $0.3 million for the year ended December 31, 2008 compared with $1.8
million for the year ended December 31, 2007. The decrease in other income was
attributable to reduced tax-exempt interest income due to decreased average cash
and investment balances as a result of cash used for the acquisition of USAC in
July 2007 and stock repurchases during the fourth quarter of 2007.
Provision
for Income Taxes
The combined
federal and state effective tax rate for the year ended 2008 was 38.7% compared
to a rate of 37.9% for the year ended
December 31, 2007. Our effective federal and state rate increased to
provide for the decrease in tax-exempt interest income as discussed above and
the disallowance of share-based compensation on qualified stock options.
However, during the year ended December 31, 2008 we reduced the provision for
state income taxes by $0.3 million, net of federal benefit, for the settlement
of a dispute with a state taxing authority. The dispute was settled
with the state taxing authority for less than the previously reserved
amount.
Net
Income
As a result
of the foregoing factors, net income decreased by $2.4 million, or 5.3%, to
$42.5 million for the year ended December 31, 2008 compared to $44.9
million for the year ended December 31, 2007.
30
Results
of Operations
The
following table sets forth our historical consolidated financial data for the
year ended December 31, 2007 and 2006 (in millions):
|
Year
ended
|
|||||||||||||||
|
December
31,
|
December
31,
|
Percent
|
|||||||||||||
|
2007
|
2006
|
Change
|
Change
|
||||||||||||
|
Operating
revenue
|
$ | 392.7 | $ | 352.7 | $ | 40.0 | 11.3 | % | |||||||
|
Operating
expenses:
|
|||||||||||||||
|
Purchased
transportation
|
164.4 | 146.7 | 17.7 | 12.1 | |||||||||||
|
Salaries,
wages, and employee benefits
|
88.8 | 74.4 | 14.4 | 19.4 | |||||||||||
|
Operating
leases
|
16.8 | 14.5 | 2.3 | 15.9 | |||||||||||
|
Depreciation
and amortization
|
10.9 | 8.9 | 2.0 | 22.5 | |||||||||||
|
Insurance
and claims
|
7.7 | 6.0 | 1.7 | 28.3 | |||||||||||
|
Fuel
expense
|
2.4 | 1.0 | 1.4 | 140.0 | |||||||||||
|
Other
operating expenses
|
30.7 | 25.8 | 4.9 | 19.0 | |||||||||||
|
Total
operating expenses
|
321.7 | 277.3 | 44.4 | 16.0 | |||||||||||
|
Income
from operations
|
71.0 | 75.4 | (4.4 | ) | (5.8 | ) | |||||||||
|
Other
income (expense):
|
|||||||||||||||
|
Interest
expense
|
(0.5 | ) | (0.1 | ) | (0.4 | ) | 400.0 | ||||||||
|
Other,
net
|
1.8 | 3.2 | (1.4 | ) | (43.8 | ) | |||||||||
|
Total
other (expense) income
|
1.3 | 3.1 | (1.8 | ) | (58.1 | ) | |||||||||
|
Income
before income taxes
|
72.3 | 78.5 | (6.2 | ) | (7.9 | ) | |||||||||
|
Income
taxes
|
27.4 | 29.6 | (2.2 | ) | (7.4 | ) | |||||||||
|
Net
income
|
$ | 44.9 | $ | 48.9 | $ | (4.0 | ) | (8.2 | ) | % | |||||
31
The
following table sets forth our historical financial data for the years ended
December 31, 2007 and 2006 (in millions):
|
Percent
of
|
Percent
of
|
Percent
|
|||||||||||||||||||
|
2007
|
Revenue
|
2006
|
Revenue
|
Change
|
Change
|
||||||||||||||||
|
Operating
revenue
|
|||||||||||||||||||||
|
Forward
Air
|
$
|
376.8
|
95.9
|
%
|
$
|
352.7
|
100.0
|
%
|
$
|
24.1
|
6.8
|
%
|
|||||||||
|
FASI
|
16.0
|
4.1
|
--
|
--
|
16.0
|
100.0
|
|||||||||||||||
|
Intercompany
Eliminations
|
(0.1
|
)
|
--
|
--
|
--
|
(0.1
|
)
|
100.0
|
|||||||||||||
|
Total
|
392.7
|
100.0
|
352.7
|
100.0
|
40.0
|
11.3
|
|||||||||||||||
|
Purchased
transportation
|
|||||||||||||||||||||
|
Forward
Air
|
162.4
|
43.1
|
146.7
|
41.6
|
15.7
|
10.7
|
|||||||||||||||
|
FASI
|
2.1
|
13.1
|
--
|
--
|
2.1
|
100.0
|
|||||||||||||||
|
Intercompany
Eliminations
|
(0.1
|
)
|
100.0
|
--
|
--
|
(0.1
|
)
|
100.0
|
|||||||||||||
|
Total
|
164.4
|
41.9
|
146.7
|
41.6
|
17.7
|
12.1
|
|||||||||||||||
|
Salaries,
wages and employee benefits
|
|||||||||||||||||||||
|
Forward
Air
|
82.0
|
21.8
|
74.4
|
21.1
|
7.6
|
10.2
|
|||||||||||||||
|
FASI
|
6.8
|
42.5
|
--
|
--
|
6.8
|
100.0
|
|||||||||||||||
|
Total
|
88.8
|
22.6
|
74.4
|
21.1
|
14.4
|
19.4
|
|||||||||||||||
|
Operating
leases
|
|||||||||||||||||||||
|
Forward
Air
|
15.8
|
4.2
|
14.5
|
4.1
|
1.3
|
9.0
|
|||||||||||||||
|
FASI
|
1.0
|
6.3
|
--
|
--
|
1.0
|
100.0
|
|||||||||||||||
|
Total
|
16.8
|
4.3
|
14.5
|
4.1
|
2.3
|
15.9
|
|||||||||||||||
|
Depreciation
and amortization
|
|||||||||||||||||||||
|
Forward
Air
|
10.4
|
2.8
|
8.9
|
2.5
|
1.5
|
16.9
|
|||||||||||||||
|
FASI
|
0.5
|
3.1
|
--
|
--
|
0.5
|
100.0
|
|||||||||||||||
|
Total
|
10.9
|
2.8
|
8.9
|
2.5
|
2.0
|
22.5
|
|||||||||||||||
|
Insurance
and claims
|
|||||||||||||||||||||
|
Forward
Air
|
7.2
|
1.9
|
6.0
|
1.7
|
1.2
|
20.0
|
|||||||||||||||
|
FASI
|
0.5
|
3.1
|
--
|
--
|
0.5
|
100.0
|
|||||||||||||||
|
Total
|
7.7
|
1.9
|
6.0
|
1.7
|
1.7
|
28.3
|
|||||||||||||||
|
Fuel
expense
|
|||||||||||||||||||||
|
Forward
Air
|
1.3
|
0.3
|
1.0
|
0.3
|
0.3
|
30.0
|
|||||||||||||||
|
FASI
|
1.1
|
6.9
|
--
|
--
|
1.1
|
100.0
|
|||||||||||||||
|
Total
|
2.4
|
0.6
|
1.0
|
0.3
|
1.4
|
140.0
|
|||||||||||||||
|
Other
operating expenses
|
|||||||||||||||||||||
|
Forward
Air
|
29.0
|
7.7
|
25.8
|
7.3
|
3.2
|
12.4
|
|||||||||||||||
|
FASI
|
1.7
|
10.6
|
--
|
--
|
1.7
|
100.0
|
|||||||||||||||
|
Total
|
30.7
|
7.8
|
25.8
|
7.3
|
4.9
|
19.0
|
|||||||||||||||
|
Income
(loss) from operations
|
|||||||||||||||||||||
|
Forward
Air
|
68.7
|
18.2
|
75.4
|
21.4
|
(6.7
|
)
|
(8.9
|
)
|
|||||||||||||
|
FASI
|
2.3
|
14.4
|
--
|
--
|
2.3
|
100.0
|
|||||||||||||||
|
Total
|
$
|
71.0
|
18.1
|
%
|
$
|
75.4
|
21.4
|
%
|
$
|
(4.4
|
)
|
(5.8
|
)
|
%
|
|||||||
32
The following
table presents the components of the Forward Air segment’s revenue and
purchased transportation for the years ended December 31, 2007 and 2006 (in
millions):
|
Percent
of
|
Percent
of
|
Percent
|
|||||||||||||||
|
2007
|
Revenue
|
2006
|
Revenue
|
Change
|
Change
|
||||||||||||
|
Forward
Air revenue
|
|||||||||||||||||
|
Airport-to-airport
|
$
|
313.2
|
83.1
|
%
|
$
|
301.5
|
85.5
|
%
|
$
|
11.7
|
3.9
|
%
|
|||||
|
Logistics
|
42.7
|
11.3
|
31.3
|
8.9
|
11.4
|
36.4
|
|||||||||||
|
Other
|
20.9
|
5.6
|
19.9
|
5.6
|
1.0
|
5.0
|
|||||||||||
|
Total
|
$
|
376.8
|
100.0
|
%
|
$
|
352.7
|
100.0
|
%
|
$
|
24.1
|
6.8
|
%
|
|||||
|
Forward
Air purchased transportation
|
|||||||||||||||||
|
Airport-to-airport
|
$
|
123.7
|
39.5
|
%
|
$
|
119.0
|
39.5
|
%
|
$
|
4.7
|
3.9
|
%
|
|||||
|
Logistics
|
32.7
|
76.6
|
22.8
|
72.8
|
9.9
|
43.4
|
|||||||||||
|
Other
|
6.0
|
28.7
|
4.9
|
24.6
|
1.1
|
22.4
|
|||||||||||
|
Total
|
$
|
162.4
|
43.1
|
%
|
$
|
146.7
|
41.6
|
%
|
$
|
15.7
|
10.7
|
%
|
|||||
Year ended December 31, 2007
Compared to Year ended December 31, 2006
Revenues
Operating
revenue increased by $40.0 million, or 11.3%, to $392.7 million in 2007 from
$352.7 million in 2006.
Forward
Air
Forward
Air operating revenue increased $24.1 million, or 6.8%, to $376.8 million in
2007 from $352.7 million in 2006. Forward Air revenue accounted for
95.9% and 100.0% of consolidated operating revenue during 2007 and 2006,
respectively.
Airport-to-airport
revenue, which is the largest component of Forward Air operating revenue,
increased $11.7 million, or 3.9%, to $313.2 million in 2007 from $301.5 million
in 2006. Airport-to-airport revenue accounted for 83.1% of the
segment’s operating revenue during 2007, compared to 85.5% during 2006. The
increase in airport-to-airport revenue was driven by a 2.3% increase in tonnage
and a 1.6% increase in revenue per pound, including the impact of fuel
surcharges. The increase in tonnage was driven by new
airport-to-airport business generated by Forward Air Complete, our pick-up and
delivery product introduced during the second half of 2006, our December 2007
acquisition of Black Hawk, and the positive impact of a competitor ceasing
operations during the fourth quarter of 2007. These increases were
partially offset by a generally weak shipping environment. The
increase in average revenue per pound substantially resulted from increased
customer utilization of Forward Air Complete, increased fuel surcharges to
offset rising fuel costs, and rate increases implemented in March
2007.
Logistics
revenue, which is primarily truckload brokerage and priced on a per mile basis,
increased $11.4 million, or 36.4%, to $42.7 million in 2007 from $31.3 million
in 2006. The increase in logistics revenue is mainly the result of
our “Completing the Model” strategic initiative to grow these services. We are
placing emphasis on capturing a larger percentage of truckload opportunities and
correspondingly increasing our access to sufficient truckload capacity through
the use of third-party transportation providers. During 2007, we
increased the number of miles driven to support our logistics revenue by
60.5%. The average revenue per mile of our logistics product,
including the impact of fuel surcharges, decreased 15.0% for 2007 versus 2006.
The decrease in our revenue per mile is largely due to the weak shipping
environment and the change in our business mix resulting from our efforts to
capture additional truckload opportunities as well as utilizing truckload
opportunities to cost effectively position our owner-operators within our
airport-to-airport network.
Other revenue, which includes
warehousing services and terminal handling increased $1.0 million to $20.9
million, a 5.0% increase from $19.9 million for the same period in
2006. The increase was primarily due to increased handling and
storage revenue due to new services offered through our newly expanded
facilities.
FASI
FASI
operating revenue of $16.0 million represents revenue earned through our new
pool distribution service acquired with the acquisition of certain assets and
liabilities of USAC on July 30, 2007. 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.
33
Intercompany
Eliminations
Intercompany
eliminations of $0.1 million are the result of truckload and airport-to-airport
services Forward Air provided to FASI during the year ended December 31,
2007.
Purchased
Transportation
Purchased
transportation increased by $17.7 million, or 12.1%, to $164.4 million in 2007
from $146.7 million in 2006. As a percentage of consolidated
operating revenue, purchased transportation was 41.9% during 2007 compared to
41.6% for 2006.
Forward
Air
Forward
Air purchased transportation increased by $15.7 million, or 10.7%, to $162.4
million for 2007 from $146.7 million for 2006. As a percentage of Forward
Air operating revenue, purchased transportation was 43.1% during 2007
compared to 41.6% for 2006.
Purchased
transportation costs for Forward Air’s airport-to-airport network increased $4.7
million, or 3.9%, to $123.7 million for 2007 from $119.0 million for 2006.
During 2007 and 2006, airport-to-airport purchased transportation costs as a
percentage of airport-to-airport revenue was 39.5%. A 3.1% increase
in miles driven for the airport-to-airport network accounted for $3.7 million of
the increase in airport-to-airport purchased transportation. The increase in
airport-to-airport miles was due to changes in Forward Air’s shipping patterns
during the first half of 2007 as a result of changes in business mix, such as
increased shipments from our west coast terminals. Approximately $1.0
million of the increase in airport-to-airport purchased transportation is
attributable to a 0.8% increase in cost per mile. The increase in the
cost per mile is the result of increased customer utilization of Forward Air
Complete, which was introduced during the second half of 2006.
Purchased
transportation costs related to Forward Air’s logistics revenue increased
$9.9 million, or 43.4%, to $32.7 million for 2007 from $22.8 million for 2006.
For 2007, logistics’ purchased transportation costs represented 76.6% of
logistics revenue versus 72.8% for 2006. During 2007, Forward Air
increased the number of miles driven to support logistics revenue by
60.5%. The increase in miles accounted for a $13.7 million increase
in logistics purchased transportation. However, the increase in
logistics purchased transportation due to miles was partially offset by a $3.8
million decrease in logistics purchased transportation as a result of a 10.5%
decrease in the logistics cost per mile. Logistics cost per mile
decreased due to increased capacity resulting in improved purchasing power from
third party transportation providers and to a lesser extent increased use of our
less costly owner-operator network. The increase in logistics
purchased transportation costs as a percentage of revenue resulted from lower
revenue per mile as discussed above partially offset by the decrease in our
logistics cost per mile.
Purchased
transportation costs related to Forward Air’s other revenue increased $1.1
million, or 22.4%, to $6.0 million for 2007 from $4.9 million for 2006. Other
purchased transportation costs as a percentage of other revenue increased to
28.7% of other revenue for 2007 from 24.6% for 2006. The
increase in other purchased transportation is attributable to increased third
party transportation services associated with new value added
services.
FASI
FASI
purchased transportation of $2.1 million represents costs associated with
payment of drivers, both networked owner-operators and third party
transportation providers, for the transportation services provided to
FASI. FASI purchased transportation was 13.1% 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 $0.1 million are the result of truckload and airport-to-airport
services Forward Air provided to FASI during the year ended December 31,
2007.
Salaries,
Wages, and Benefits
Salaries,
wages and employee benefits increased by $14.4 million, or 19.4%, to $88.8
million for 2007 from $74.4 million in 2006. As a percentage of total
operating revenue, salaries, wages and employee benefits was 22.6% during 2007
compared to 21.1% for 2006.
Forward
Air
Salaries,
wages and employee benefits were 21.8% of Forward Air operating revenue for 2007
compared to 21.1% for 2006. The increase in salaries, wages and employee
benefits as a percentage of revenue was attributable to increased costs for
share-based compensation and workers compensation claims. Share-based
compensation increased $2.4 million, or 0.6% as a percentage of Forward Air
operating revenue, due to the issuance of stock options and non-vested shares of
common stock to key members of management and non-employee directors during
2007. In addition, workers’ compensation expense increased $0.8
million, or 0.1% as a percentage of Forward Air operating revenue, primarily due
to a $0.7 million adjustment recorded in June 2007 that resulted from
our actuarial analysis of our reserves for workers’ compensation
claims. The remaining increase in total dollars is attributable to
increases in our workforce to keep pace with the growth of Forward Air’s
business.
34
FASI
FASI salary,
wages and employee benefits of $6.8 million represents costs associated with
payment of employees, mainly Company drivers and employees located at our
terminals since our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI salary, wages and employee benefits
were 42.5% 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 $2.3 million, or 15.9%, to $16.8 million for 2007 from $14.5
million in 2006. Operating leases, the largest component of which is
facility rent, were 4.3% of consolidated operating revenue for 2007 compared
with 4.1% in 2006.
Forward
Air
Operating
leases were 4.2% of Forward Air operating revenue for 2007 compared with 4.1% in
2006. The increase in operating leases in total dollars and as a
percentage of operating revenue between periods was attributable to higher rent
costs associated with the expansion of certain facilities, offset by decreases
in facility rent due to the opening of Company-owned facilities.
FASI
FASI
operating leases of $1.0 million primarily represents facility rent for FASI’s
11 facilities since our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI does not currently own any of its
facilities. FASI operating leases were 6.3% of the segment’s
operating revenue.
Depreciation
and Amortization
Depreciation
and amortization increased $2.0 million, or 22.5%, to $10.9 million for 2007
from $8.9 million in 2006. Depreciation and amortization was 2.8% of
consolidated operating revenue for 2007 compared with 2.5% in 2006.
Forward
Air
Depreciation
and amortization expense as a percentage of Forward Air operating revenue was
2.8% for 2007 compared to 2.5% in 2006. The increase in depreciation and
amortization expense is due to increased depreciation related to our expanded
national hub in Columbus, Ohio, our new facilities in Chicago, Illinois and
Atlanta, Georgia, the implementation of TAP during the fourth quarter of 2006,
new tractors and trailers purchased during 2007 and the latter portion of 2006
and one month of amortization on acquired Black Hawk intangible
assets.
FASI
FASI
depreciation and amortization of $0.5 million represents $0.3 million of
depreciation on acquired equipment and $0.2 million of amortization on acquired
intangible assets since our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI depreciation and amortization expense as
a percentage of the segment’s operating revenue was 3.1%.
Insurance
and Claims
Insurance
and claims expense increased $1.7 million, or 28.3%, to $7.7 million for 2007
from $6.0 million for 2006. Insurance and claims were 1.9% of
consolidated operating revenue during 2007 compared with 1.7% in
2006.
Forward
Air
Insurance
and claims were 1.9% of Forward Air operating revenue during 2007 compared to
1.7% for 2006. The $1.2 million, or 20.0% increase in insurance and
claims is primarily the result of increased insurance premiums, current vehicle
claims and the associated legal fees. The increased insurance
premiums and claims result from our increased fleet size.
FASI
FASI
insurance and claims of $0.5 million represents the cost of insurance premiums,
cargo claims, and accrued vehicle claims including the effects of actuarial
valuations since our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI insurance and claims were 3.1% of
the segment’s operating revenue.
35
Fuel
Expense
Fuel expense
increased $1.4 million, to $2.4 million for the year ended December 31, 2007
from $1.0 million for the year ended December 31, 2006. Fuel expense
was 0.6% of consolidated operating revenue for the year ended December 31, 2007
compared with 0.3% for the year ended December 31, 2006.
Forward
Air
Fuel expense
increased $0.3 million, to $1.3 million for the year ended December 31, 2007
from $1.0 million for the year ended December 31, 2006. Fuel expense
was 0.3% of Forward Air operating revenue for the year ended December 31, 2007
and 2006.
FASI
FASI fuel
expense was $1.1 million for the year ended December 31, 2007. The
increase is the result of our acquisition of certain assets and liabilities of
USAC on July 30, 2007. FASI fuel expense will generally be
higher as a percentage of operating revenue than Forward Air’s fuel expense due
to the higher utilization of Company-employed drivers and Company-owned
equipment.
Other
Operating Expenses
Other
operating expenses increased $4.9 million, or 19.0%, to $30.7 million during
2007 from $25.8 million in 2006. Other operating expenses were 7.8%
of consolidated operating revenue for 2007 compared with 7.3% in
2006.
Forward
Air
Other
operating expenses were 7.7% of Forward Air operating revenue for 2007 compared
to 7.3% in 2006. The 0.4% increase in other operating expenses as a percentage
of operating revenue was primarily attributable to taxes, utilities and permits
associated with new or expanded facilities, facility relocation, specialized
training for key employees and additional sales and marketing efforts due to the
weak freight environment.
FASI
FASI
other operating expenses of $1.7 million represent costs such as routine vehicle
maintenance, utilities for our facilities, and miscellaneous office and
administrative expenses since our USAC acquisition on July 30,
2007. FASI other operating expenses were 10.6% 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
from operations
Income
from operations decreased by $4.4 million, or 5.8%, to $71.0 million for 2007
compared with $75.4 million in 2006. Income from operations was 18.1%
of consolidated operating revenue for 2007 compared with 21.4% in
2006.
Forward
Air
Income
from operations decreased by $6.7 million, or 8.9%, to $68.7 million for 2007
compared with $75.4 million for 2006. Income from operations
decreased as a percentage of Forward Air operating revenue to 18.2% for 2007
from 21.4% for 2006. The decrease in income from operations both in
total dollars and as a percentage of operating revenue is attributable to
increases in certain fixed and indirect costs, as outlined in the above
discussion, outpacing the increase in operating revenue and gross
profit. The decrease in income from operations as a percentage of
revenue was also a result of the change in our business mix resulting from
slower growth in revenue from the airport-to-airport service as a percentage of
total revenue and increased revenue from less profitable services such as
truckload service and Forward Air Complete.
FASI
FASI
income from operations since our acquisition of certain assets and liabilities
of USAC on July 30, 2007 was $2.3 million, or 14.4% of FASI
revenue. As discussed above, we expect the pool distribution business
to be highly seasonal and as a result of the timing of the USAC acquisition our
2007 results primarily include peak seasonal activity. Consequently,
we believe our 2008 income from operations as a percentage of operating revenue
will be lower than experienced during 2007.
Interest
Expense
Interest
expense increased by $0.4 million to $0.5 million for 2007 compared with $0.1
million in 2006. The increase in interest expense was mostly the
result of $40.0 million in borrowings under our new line of credit facility
primarily to fund our acquisition of Black Hawk in December 2007 and repurchases
of our common stock.
36
Other
Income, net
Other
income, net was $1.8 million, or 0.4% of operating revenue, for 2007 compared
with $3.2 million, or 0.9% as a percentage of operating revenue, for 2006. The
decrease in other income was attributable to lower interest income due to
decreased average investment balances as a result of cash used for stock
repurchases, purchases of real property for new facilities, and the
acquisition of certain assets and liabilities of USAC during
2007.
Provision
for Income Taxes
The
combined federal and state effective tax rate for 2007 was 37.9% compared to a
rate of 37.7% for
the same period in 2006. Our effective federal and state rate increased to
provide for 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”) and for the decrease in tax-exempt interest income during 2007 due
to acquisitions, increased capital expenditures and stock
repurchases.
Net
Income
As a
result of the foregoing factors, net income decreased by $4.0 million, or 8.2%,
to $44.9 million for 2007 compared to $48.9 million for 2006.
Discussion
of Critical Accounting Policies
Our
consolidated financial statements have been prepared in accordance with United
States generally accepted accounting principles (“GAAP”). The
preparation of financial statements in accordance with GAAP requires our
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Our
estimates and assumptions are based on historical experience and changes in the
business environment. However, actual results may differ from
estimates under different conditions, sometimes materially. Critical
accounting policies and estimates are defined as those that are both most
important to the portrayal of our financial condition and results and require
management’s most subjective judgments.
Allowance
for Doubtful Accounts
We
evaluate the collectibility of our accounts receivable based on a combination of
factors. In circumstances in which management is aware of a specific customer’s
inability to meet its financial obligations to us (for example, bankruptcy
filings or accounts turned over for collection or litigation), we record a
specific reserve for these bad debts against amounts due to reduce the net
recognized receivable to the amount we reasonably believe will be collected. For
all other customers, we recognize reserves for these bad debts based on the
length of time the receivables are past due. Specifically, amounts that are 90
days or more past due are reserved at 50.0% for Forward Air and 25.0% for FASI.
If circumstances change (i.e., we experience higher than expected defaults or an
unexpected material adverse change in a customer’s ability to meet its financial
obligations to us), the estimates of the recoverability of amounts due to us
could be changed by a material amount. Accounts are written off after all means
of collection, including legal action, have been exhausted.
Allowance
for Revenue Adjustments
Our
allowance for revenue adjustments consists of amounts reserved for billing rate
changes that are not captured upon load initiation. These adjustments generally
arise: (i) when the sales department contemporaneously grants small rate changes
(“spot quotes”) to customers that differ from the standard rates in the system;
(ii) when freight requires dimensionalization or is reweighed resulting in a
different required rate; (iii) when billing errors occur; and (iv) when data
entry errors occur. When appropriate, permanent rate changes are initiated and
reflected in the system. We monitor the manual revenue adjustments closely
through the employment of various controls that are in place to ensure that
revenue recognition is not compromised and that fraud does not occur. During
2008, average revenue adjustments per month were approximately $0.4 million, on
average revenue per month of approximately $39.5 million (approximately 1.0% of
monthly revenue). In order to estimate the allowance for revenue adjustments
related to ending accounts receivable, we prepare an analysis that considers
average monthly revenue adjustments and the average lag for identifying and
quantifying these revenue adjustments. Based on this analysis, we establish an
allowance for approximately 40-80 days (dependent upon experience in the last
twelve months) of average revenue adjustments, adjusted for rebates and billing
errors. The lag is periodically adjusted based on actual historical experience.
Additionally, the average amount of revenue adjustments per month can vary in
relation to the level of sales or based on other factors (such as personnel
issues that could result in excessive manual errors or in excessive spot quotes
being granted). Both of these significant assumptions are continually evaluated
for validity.
37
Self-Insurance
Loss Reserves
Given the
nature of our operating environment, we are subject to vehicle and general
liability, workers’ compensation and health insurance claims. To mitigate a
portion of these risks, we maintain insurance for individual vehicle and general
liability claims exceeding $0.5 million and workers’ compensation claims
and health insurance claims exceeding approximately $0.3 million, except in
Ohio, where we are a qualified self-insured entity with an approximately $0.4
million self-insured retention. The amount of self-insurance loss reserves and
loss adjustment expenses is determined based on an estimation process that uses
information obtained from both company-specific and industry data, as well as
general economic information. The estimation process for self-insurance loss
exposure requires management to continuously monitor and evaluate the life cycle
of claims. Using data obtained from this monitoring and our assumptions about
the emerging trends, management develops information about the size of ultimate
claims based on its historical experience and other available market
information. The most significant assumptions used in the estimation process
include determining the trend in loss costs, the expected consistency in the
frequency and severity of claims incurred but not yet reported to prior year
claims, changes in the timing of the reporting of losses from the loss date to
the notification date, and expected costs to settle unpaid claims. Management
also monitors the reasonableness of the judgments made in the prior year’s
estimation process (referred to as a hindsight analysis) and adjusts current
year assumptions based on the hindsight analysis. Additionally, we utilize
actuarial analysis to evaluate open vehicle liability and workers’ compensation
claims and estimate the ongoing development exposure.
Revenue
Recognition
Operating
revenue and related costs are recognized as of the date shipments are
completed. The transportation rates we charge our customers
consist of base transportation rates and fuel surcharge rates. The
revenues earned and related direct freight expenses incurred from our base
transportation services are recognized on a gross basis in revenue and in
purchased transportation. Transportation revenue is recognized on a
gross basis as we are the primary obligor. The fuel surcharges billed
to customers and paid to owner-operators and third party transportation
providers are recorded on a net basis in revenue as we are not the primary
obligor with regards to the fuel surcharges.
Income Taxes
The
Company accounts for income taxes using the liability method, whereby deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to be recovered or settled.
Effective
January 1, 2007, we adopted FIN 48. Accordingly, we report a
liability for unrecognized tax benefits resulting from uncertain tax positions
taken or expected to be taken in a tax return. We recognize interest
and penalties, if any, related to unrecognized tax benefits in interest expense
and operating expenses, respectively.
Valuation
of Goodwill
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No.
142, Goodwill and Other
Intangible Assets (“SFAS 142”), we conduct an annual (or more frequently
if circumstances indicate possible impairment) impairment test of goodwill for
each reportable segment at the end of the second quarter of each
year. The tests are based on judgments regarding the market value of
our Common Stock, ongoing profitability and cash flow of the reportable segments
and underlying assets. Changes in strategy or market conditions could
significantly impact these judgments and require adjustments to recorded asset
balances. For example, if we had reason to believe that our recorded goodwill
had become impaired due to decreases in the fair market value of the underlying
business, we would have to take a charge to income for that portion of goodwill
that we believe is impaired. The annual impairment test was conducted and it did
not result in any impairment charges. In addition, at December 31,
2008, we considered whether any impairment indicators existed and no impairment
charges were incurred.
Share-Based
Compensation
Prior to
January 1, 2006, as permitted by SFAS No. 123, Accounting for Stock Based
Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, we accounted for
share-based payments to employees using Accounting Principles Board (“APB”)
Opinion No. 25, Accounting for
Stock Issued to Employees. As such, we generally recognized no
compensation cost for employee stock options as options granted had exercise
prices equal to the fair market value of our Common Stock on the date of grant.
We also recorded no compensation expense in connection with our employee stock
purchase plan as the purchase price of the stock paid by employees was not less
than 85% of the fair market value of our Common Stock at the beginning and at
the end of each purchase period.
Effective
January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (“SFAS
123R”) and elected the modified prospective transition method. Under the
modified prospective transition method, awards that are granted, modified,
repurchased or canceled after the date of adoption should be measured and
accounted for in accordance with SFAS 123R. Share-based awards that are granted
prior to the effective date should 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, our Board of Directors accelerated
the vesting of all of our outstanding and unvested stock options awarded to
employees, officers and non-employee directors under our stock option award
plans. As a result of the acceleration of the vesting of our outstanding and
unvested options in 2005, the Company recognized $1.3 million of stock–based
compensation in 2005, but there was no additional compensation expense
recognized during the years ended December 31, 2008, 2007 and 2006 related to
options granted prior to January 1, 2006.
38
Our
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. In addition, we make annual grants to non-employee
directors in conjunction with their annual election to our Board of Directors or
at the time of their appointment to the Board of Directors. Prior to
the implementation of SFAS 123R, we utilized stock options as our sole form of
share-based awards. During the year ended December 31, 2006, we granted
non-vested shares of Common Stock (“non-vested shares”) to key employees, but
returned to granting stock options during the year ended December 31,
2007. We returned to granting stock options to key employees, as
we believe stock options more closely link long-term compensation with our
long-term goals. For non-employee directors, we continued to
issue non-vested shares during the year ended December 31, 2008.
Stock
options granted during the years ended December 31, 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. Based on our historical experience, forfeitures have been estimated. We
used the Black-Scholes option-pricing model to estimate the grant-date fair
value of options granted during the years ended December 31, 2008 and
2007.
The fair
value of non-vested shares’ issued to employees during 2006 and non-employee
directors during 2008, 2007 and 2006 were estimated using opening market prices
for the business day of the grant. The share-based compensation for the
non-vested shares is recognized, net of estimated forfeitures, ratably over the
requisite service period or vesting period. Forfeitures have been estimated
based on our historical experience, but will be adjusted for future changes in
forfeiture experience. We estimate the forfeitures of dividends paid on
non-vested shares and record expense for the estimated forfeitures in accordance
with SFAS 123R.
Under the
ESPP, which has been approved by shareholders, we are authorized to issue shares
of Common Stock to our employees. 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. As the ESPP
does not qualify as non-compensatory under the requirements of SFAS 123R, we
recognize share-based compensation on the date of purchase based on the
difference between the purchase date fair market value and the employee purchase
price.
SFAS 123R
also requires companies to calculate an initial “pool” of excess tax benefits
available at the adoption date to absorb any unused deferred tax assets that may
be recognized under SFAS 123R. The pool includes the net excess tax benefits
that would have been recognized if we had adopted SFAS 123 for recognition
purposes on its effective date. We have elected to calculate the pool of excess
tax benefits under the alternative transition method described in Financial
Accounting Standards Board (“FASB”) Staff Position
No. FAS 123(R)-3,
Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards , which also specifies the method we must use to calculate excess
tax benefits reported on the statement of cash flows.
Impact
of Recent Accounting Pronouncements
During
September 2006, the 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. We adopted SFAS 157 on January 1, 2008 for all
financial assets and liabilities, but the implementation did not have a
significant impact on our financial position or results of
operations. We have not fully determined the impact the
implementation of SFAS 157 will have on our non-financial assets and
liabilities, which are not recognized or disclosed on a recurring
basis. However, we do not anticipate that the full adoption of SFAS
157 will significantly impact our consolidated financial
statements.
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. We adopted SFAS 159 on January 1, 2008, but did not elect
the fair value measurement for any new assets or liabilities.
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
us beginning January 1, 2009. The impact of SFAS 141R will
depend on the nature of any business combinations subsequent to January 1,
2009.
39
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 us beginning January 1, 2009. The adoption of SFAS
160 will not have a significant impact on our financial position, results of
operations and cash flows as we do not have any noncontrolling
interests.
Liquidity
and Capital Resources
We have
historically financed our working capital needs, including capital expenditures,
with cash flows from operations and borrowings under our bank lines of credit.
Net cash provided by operating activities totaled approximately $59.1 million
for the year ended December 31, 2008 compared to approximately $62.4 million for
the year ended December 31, 2007. The $3.3 million decrease in cash provided by
operating activities for the year ended December 31, 2008 compared to the year
ended December 31, 2007 is mainly attributable to increased estimated income tax
payments and prepaid expenses, such as rent, offset by increased cash from
operations after non-cash items. The increase in cash paid for income taxes was
the result of increased earnings expectations during 2008 which were mainly
driven by our 2008 and 2007 acquisitions. Earnings shortfalls from
expectations resulted in overpayment of income taxes and income tax receivable
balances at December 31, 2008. The increase in prepaid assets was the
result of increased activity, such as prepaid insurance premiums, attributable
to our 2008 and 2007 acquisitions. Improvement in cash collected from
accounts receivable was mostly offset by increases in cash payments to vendors
for operating expenses.
Net cash used
in investing activities was approximately $56.2 million for the year ended
December 31, 2008 compared with approximately $34.1 million used in investing
activities during the year ended December 31, 2007. Investing activities during
the year ended December 31, 2008 consisted primarily of the acquisition of
certain assets and liabilities of Service Express and Pinch as well as capital
expenditures, most of which were for our new terminal in Dallas/Fort Worth,
Texas. The acquisitions were funded by borrowings from our line of
credit. The cash used in investing activities during 2007, for items
such as the purchase of certain assets and liabilities of USAC and Black Hawk
and purchases of property and equipment, were offset by cash received from the
liquidation of our short term investments.
Net cash
provided by financing activities totaled approximately $14.3 million for the
year ended December 31, 2008 compared with approximately $31.6 million used in
financing activities for the year ended December 31, 2007. The change in cash
provided by financing activities was primarily attributable to $55.1 million
reduction in share repurchases from 2007 to 2008, net of a $10.0 reduction in
net borrowings under our line of credit in 2008 compared to 2007. Current
year net borrowings from our line of credit were used to partially fund the
acquisitions of Service Express and Pinch.
On October
10, 2007, we entered into a $100.0 million senior credit
facility. The facility has a term of five years and includes an
accordion feature, which if approved by our lender, allows for an additional
$50.0 million in borrowings on such terms and conditions as set forth in the
credit agreement. Interest rates for advances under the senior credit
facility are at LIBOR plus 0.6% to 0.9% based upon covenants related
to total indebtness to earnings. The facility replaced our previous
$20.0 million line of credit. We entered into this new, larger credit
facility in order to fund potential acquisitions, repurchases of our common
stock, and for financing other general business purposes. At December
31, 2008, we had $42.2 million of available borrowing capacity under the senior
credit facility, not including the accordion feature, and had utilized $7.8
million of availability for outstanding letters of credit.
On November
17, 2005, we announced that our 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, our Board of Directors approved an
additional stock repurchase program for up to two million shares of our common
stock (the “2007 Repurchase Plan”). No shares were repurchased during
the year ended December 31, 2008. For the year ended December 31,
2007, the Company repurchased 1,613,327 shares, for $49.0 million or $30.42 per
share under the 2005 Repurchase Plan and repurchased an additional 211,173
shares of common stock under the 2007 Repurchase Plan for $6.1 million, or
$28.68 per share. As of December 31, 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.
During the
year ended December 31, 2007, we completed our purchase of new facilities near
Chicago, Illinois and Atlanta, Georgia for $22.3 million and $14.9 million,
respectively. Deposits of $3.3 million and $1.5 million paid during 2006 were
applied to the purchase price of the Chicago and Atlanta facilities,
respectively. In addition, during February 2007, we paid
approximately $3.0 million for land near Dallas/Fort Worth, Texas on which we
are building a new regional hub, which we estimate will be completed in
2009. At December 31, 2008 we have capitalized in construction in
progress approximately $13.9 million for the construction of the Dallas/Forth
Worth regional hub. We anticipate completion of this new regional hub
during the third quarter of 2009 and expect to incur an additional $14.0 in
capital expenditures during 2009 to complete its construction. We intend
to fund the expenditures for the Dallas/Fort Worth regional hub through cash
currently on our balance sheet, cash provided by operating activities, the sale
of existing equipment and/or borrowings under our senior credit facility, if
necessary.
40
During the
first, second, third and fourth quarters of 2008, 2007 and 2006, cash dividends
of $0.07 per share were declared on common stock outstanding. We expect to
continue to pay regular quarterly cash dividends, though each subsequent
quarterly dividend is subject to review and approval by our Board of
Directors.
We believe
that our available cash, investments, expected cash generated from future
operations and borrowings under the available senior credit facility will be
sufficient to satisfy our anticipated cash needs for at least the next twelve
months.
Off-Balance
Sheet Arrangements
At
December 31, 2008, we had letters of credit outstanding from banks totaling $7.8
million required by our workers’ compensation and vehicle liability insurance
providers.
Contractual
Obligations and Commercial Commitments
Our
contractual obligations and other commercial commitments as of December 31, 2008
(in thousands) are summarized below:
|
Contractual
Obligations
|
Payment
Due Period
|
||||||||||||||
|
2014
and
|
|||||||||||||||
|
Total
|
2009
|
2010-2011
|
2012-2013
|
Thereafter
|
|||||||||||
|
Capital
lease obligations
|
$
|
5,077
|
$
|
1,629
|
$
|
1,824
|
$
|
1,020
|
$
|
604
|
|||||
|
Other
long-term debt
|
168
|
147
|
21
|
--
|
--
|
||||||||||
|
Operating
leases
|
73,556
|
19,958
|
28,927
|
12,714
|
11,957
|
||||||||||
|
Senior
credit facility
|
50,000
|
--
|
--
|
50,000
|
--
|
||||||||||
|
Total
contractual cash obligations
|
$
|
128,801
|
$
|
21,734
|
$
|
30,772
|
$
|
63,734
|
$
|
12,561
|
|||||
Not
included in the above table are reserves for unrecognized tax benefits
and for self insurance claims of $0.6 million and $7.1 million,
respectively.
Forward-Looking
Statements
This
report contains “forward-looking statements,” as defined in Section 27A of the
Securities Act and Section 21E of 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 moving through our network or decreased average
revenue per pound of freight moving through our network, increasing competition
and pricing pressure, surplus inventories, loss of a major customer, the
creditworthiness of our customers and their ability to pay for services
rendered, our ability to secure terminal facilities in desirable locations at
reasonable rates, the inability of our information systems to handle an
increased volume of freight moving through our network, changes in fuel prices,
claims for property damage, personal injuries or workers’ compensation,
employment matters including rising health care costs, enforcement of and
changes in governmental regulations, environmental and tax matters, the handling
of hazardous materials, the availability and compensation of qualified
independent owner-operators and freight handlers needed to
serve our transportation needs and our inability to successfully integrate
acquisitions. As a result of the foregoing, no assurance can be given as to
future financial condition, cash flows or results of operations. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Our
exposure to market risk relates principally to changes in interest rates and
fuel prices. Our interest rate exposure relates principally to changes in
interest rates for borrowings under our senior credit facility. The senior
credit facility, which represents an aggregate principal amount of
$50.0 million at December 31, 2008, bears interest at variable rates. Based
on our outstanding borrowings at December 31, 2008, a hypothetical increase in
our senior credit facility borrowing rate of 150 basis points, or an increase in
the total effective interest rate from 1.0% to 2.5%, would increase our annual
interest expense by approximately $0.8 million and would have decreased our
annual cash flow from operations by approximately $0.8 million.
Our only
other debt is equipment notes and capital lease obligations totaling $4.6
million. These notes and lease obligations all bear interest at a
fixed rate. Accordingly, there is no exposure to market risk related
to these notes and capital lease obligations.
We are
exposed to the effects of changes in the price and availability of diesel fuel,
as more fully discussed in Item 1A, “Risk Factors.”
Our cash
equivalents and short-term investments are also subject to market risk,
primarily interest-rate and credit risk.
41
The
response to this item is submitted as a separate section of this
report.
None.
|
Item
9A.
|
Disclosure
Controls and Procedures
Our
management, including our principal executive and principal financial officers,
has evaluated the effectiveness of our disclosure controls and procedures as of
December 31, 2008. Our disclosure controls and procedures are
designed to provide reasonable assurance that the information required to be
disclosed in this annual report on Form 10-K has been appropriately recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and that such information
is accumulated and communicated to our management, including our principal
executive and principal financial officers, to allow timely decisions regarding
required disclosure. Based on that evaluation, our principal
executive and principal financial officers have concluded that our disclosure
controls and procedures are effective at the reasonable assurance
level.
Management’s Report on Internal
Control over Financial Reporting
Management
is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our
internal control over financial reporting is designed to provide reasonable
assurance to management and the Board of Directors regarding the preparation and
fair presentation of financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we assessed the effectiveness of
our internal control over financial reporting as of December 31, 2008. In making
this assessment, management used the framework set forth by the Committee on
Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated
Framework. Based on our assessment, we have concluded, as of December 31,
2008, that our internal control over financial reporting was effective based on
those criteria.
On March
17, 2008 and September 8, 2008, we acquired certain assets and liabilities of
Pinch and Service Express, which are included in the 2008 consolidated financial
statements of Forward Air Corporation and constituted $11.2 million and $12.6
million of total revenues, respectively, for the year ended December 31,
2008. We have excluded the internal controls over financial reporting
of these acquired businesses from our assessment of and conclusion on the
effectiveness of our internal control over financial
reporting.
Ernst
& Young LLP, the independent registered public accounting firm that audited
the Company’s consolidated financial statements for the year ended December 31,
2008, has issued an attestation report on the Company’s internal control over
financial reporting.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
fourth quarter of 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
42
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Forward
Air Corporation
We have
audited Forward Air Corporation’s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Forward Air Corporation’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
As
indicated in the accompanying Management’s Report on Internal Control over
Financial Reporting, management’s assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of Service Express, Inc. and Pinch Holdings, Inc, which are
included in the 2008 consolidated financial statements of Forward Air
Corporation and constituted $11.2 million and $12.6 million of total revenues,
respectively, for the year ended December 31, 2008. Our audit of internal
control over financial reporting of Forward Air Corporation also did not include
an evaluation of the internal control over financial reporting of the certain
assets and liabilities acquired by Forward Air Corporation through the Service
Express, Inc. and Pinch Holding, Inc. acquisitions.
In our
opinion, Forward Air Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Forward Air
Corporation as of December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2008 and our report dated February 23,
2009 expressed an unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
|
|
Nashville,
Tennessee
|
|
|
February
23, 2009
|
43
|
Item
9B.
|
Not
applicable.
Part
III
The
information required by this item with respect to our directors is incorporated
herein by reference to our proxy statement for the 2009 Annual Meeting of
Shareholders (the “2009 Proxy Statement”). The 2009 Proxy Statement will be
filed with the SEC not later than 120 days subsequent to December 31,
2008.
Pursuant
to Item 401(b) of Regulation S-K, the information required by this item with
respect to our executive officers is set forth in Part I of this
report.
|
Item
11.
|
The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement.
|
Item
12.
|
The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement.
The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement.
The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement.
Part
IV
|
(a)(1)
and (2)
|
List
of Financial Statements and Financial Statement
Schedules.
|
The
response to this portion of Item 15 is submitted as a separate section of this
report.
|
(a)(3)
|
List
of Exhibits.
|
The
response to this portion of Item 15 is submitted as a separate section of this
report.
|
(b)
|
Exhibits.
|
The
response to this portion of Item 15 is submitted as a separate section of this
report.
|
(c)
|
Financial
Statement Schedules.
|
The
response to this portion of Item 15 is submitted as a separate section of this
report.
44
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Forward
Air Corporation
|
|||
|
Date:
February 26, 2009
|
By:
|
/s/
Rodney L. Bell
|
|
|
Rodney
L. Bell
|
|||
|
Chief
Financial Officer, Senior Vice President
|
|||
|
and
Treasurer (Principal Financial
Officer)
|
|||
|
Forward
Air Corporation
|
|||
|
|
By:
|
/s/
Michael P. McLean
|
|
|
Michael
P. McLean
|
|||
|
Chief Accounting
Officer, Vice President
|
|||
|
and Controller
(Principal Accounting Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Bruce A. Campbell
|
Chairman,
President and Chief Executive
|
February
26, 2009
|
||
|
Bruce
A. Campbell
|
Officer
(Principal Executive Officer)
|
|||
|
/s/
Rodney L. Bell
|
Chief
Financial Officer, Senior Vice President
|
February
26, 2009
|
||
|
Rodney
L. Bell
|
and
Treasurer ( Principal Financial Officer)
|
|||
|
/s/
Michael P. McLean
|
Chief
Accounting Officer, Vice President and
|
February
26, 2009
|
||
|
Michael
P. McLean
|
Controller
|
|||
|
/s/
G. Michael Lynch
|
Lead
Director
|
February
26, 2009
|
||
|
G.
Michael Lynch
|
||||
|
/s/
C. Robert Campbell
|
Director
|
February
26, 2009
|
||
|
C.
Robert Campbell
|
||||
|
/s/
Richard W. Hanselman
|
Director
|
February
26, 2009
|
||
|
Richard
W. Hanselman
|
||||
|
/s/
C. John Langley, Jr.
|
Director
|
February
26, 2009
|
||
|
C.
John Langley, Jr.
|
||||
|
/s/
Tracy A. Leinbach
|
Director
|
February
26, 2009
|
||
|
Tracy
A. Leinbach
|
||||
|
/s/
Ray A. Mundy
|
Director
|
February
26, 2009
|
||
|
Ray
A. Mundy
|
||||
|
/s/
Gary L. Paxton
|
Director
|
February
26, 2009
|
||
|
Gary
L. Paxton
|
45
Annual
Report on Form 10-K
Item
8, Item 15(a)(1) and (2), (a)(3), (b) and (c)
List
of Financial Statements and Financial Statement Schedule
Financial
Statements and Supplementary Data
Certain
Exhibits
Financial
Statement Schedule
Year
Ended December 31, 2008
Forward
Air Corporation
Greeneville,
Tennessee
F-1
Form
10-K — Item 8 and Item 15(a)(1) and (2)
Index
to Financial Statements and Financial Statement Schedule
The
following consolidated financial statements of Forward Air Corporation are
included as a separate section of this report:
|
Page
No.
|
|
|
F-3
|
|
|
F-4
|
|
|
F-6
|
|
|
F-7
|
|
|
F-8
|
|
|
F-9
|
The
following financial statement schedule of Forward Air Corporation is included as
a separate section of this report.
All other
schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
F-2
The Board
of Directors and Shareholders
Forward
Air Corporation
We have
audited the accompanying consolidated balance sheets of Forward Air Corporation
as of December 31, 2008 and 2007, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2008. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Forward Air
Corporation at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As
discussed in Note 1 to the consolidated financial statements, in 2007 the
Company changed its method of accounting for income tax
contingencies.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Forward Air Corporation’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 23, 2009
expressed an unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
|
|
Nashville,
Tennessee
|
|
|
February
23, 2009
|
F-3
|
Consolidated
Balance Sheets
|
|||||
|
(Dollars
in thousands)
|
|||||
|
December
31,
|
December
31,
|
||||
|
2008
|
2007
|
||||
|
Assets
|
|||||
|
Current
assets:
|
|||||
|
Cash
|
$ | 22,093 | $ | 4,909 | |
|
Accounts
receivable, less allowance of $2,531 in 2008 and $1,142 in
2007
|
57,206 | 59,734 | |||
|
Income
taxes receivable
|
3,427 | -- | |||
|
Inventories
|
669 | 558 | |||
|
Prepaid
expenses and other current assets
|
6,089 | 4,463 | |||
|
Deferred
income taxes
|
2,105 | 1,786 | |||
|
Total
current assets
|
91,589 | 71,450 | |||
|
Property
and equipment:
|
|||||
|
Land
|
16,928 | 16,928 | |||
|
Buildings
|
39,895 | 39,895 | |||
|
Equipment
|
107,983 | 95,690 | |||
|
Leasehold
improvements
|
5,049 | 4,421 | |||
|
Construction
in progress
|
16,522 | 1,420 | |||
|
Total
property and equipment
|
186,377 | 158,354 | |||
|
Less
accumulated depreciation and amortization
|
63,401 | 55,322 | |||
|
Net
property and equipment
|
122,976 | 103,032 | |||
|
Goodwill
and other acquired intangibles:
|
|||||
|
Goodwill
|
50,230 | 36,053 | |||
|
Other
acquired intangibles, net of accumulated amortization of $8,103 in 2008
and $3,740 in 2007
|
40,708 | 29,991 | |||
|
Total
net goodwill and other acquired intangibles
|
90,938 | 66,044 | |||
|
Other
assets
|
2,024 | 1,358 | |||
|
Total
assets
|
$ | 307,527 | $ | 241,884 | |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4
|
Forward
Air Corporation
|
|||||
|
Consolidated
Balance Sheets (continued)
|
|||||
|
(Dollars
in thousands)
|
|||||
|
December
31,
|
December
31,
|
||||
|
2008
|
2007
|
||||
|
Liabilities
and Shareholders’ Equity
|
|||||
|
Current
liabilities:
|
|||||
|
Accounts
payable
|
$ | 11,633 | $ | 11,714 | |
|
Accrued
payroll and related items
|
3,652 | 4,474 | |||
|
Insurance
and claims accruals
|
4,620 | 3,345 | |||
|
Payables
to owner-operators
|
2,563 | 2,916 | |||
|
Collections
on behalf of customers
|
612 | 930 | |||
|
Other
accrued expenses
|
1,480 | 1,395 | |||
|
Income
taxes payable
|
-- | 1,214 | |||
|
Current
portion of capital lease obligations
|
1,455 | 213 | |||
|
Current
portion of long-term debt
|
147 | 617 | |||
|
Total
current liabilities
|
26,162 | 26,818 | |||
|
Capital
lease obligations, less current portion
|
3,014 | 1,351 | |||
|
Long-term
debt, less current portion
|
50,021 | 30,135 | |||
|
Other
long-term liabilities
|
3,055 | 4,476 | |||
|
Deferred
income taxes
|
8,841 | 7,371 | |||
|
Commitments
and contingencies (Note 8)
|
|||||
|
Shareholders’
equity:
|
|||||
|
Preferred
stock, $0.01 par value
|
|||||
|
Authorized
shares - 5,000,000
|
|||||
|
No
shares issued
|
-- | -- | |||
|
Common
stock, $0.01 par value
|
|||||
|
Authorized
shares – 50,000,000
|
|||||
|
Issued
and outstanding shares – 28,893,850 in 2008 and 28,648,068
in 2007
|
289 | 286 | |||
|
Additional
paid-in capital
|
10,249 | -- | |||
|
Retained
earnings
|
205,896 | 171,447 | |||
|
Total
shareholders’ equity
|
216,434 | 171,733 | |||
|
Total
liabilities and shareholders’ equity
|
$ | 307,527 | $ | 241,884 | |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-5
|
Consolidated
Statements of Income
|
|||||||||||
|
(In
thousands, except per share data)
|
|||||||||||
|
Year
ended
|
|||||||||||
|
December
31,
|
December
31,
|
December
31,
|
|||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
revenue:
|
|||||||||||
|
Forward
Air
|
|||||||||||
|
Airport-to-airport
|
$ | 334,860 | $ | 313,162 | $ | 301,551 | |||||
|
Logistics
|
59,290 | 42,626 | 31,321 | ||||||||
|
Other
|
25,133 | 20,923 | 19,886 | ||||||||
|
Forward
Air Solutions
|
|||||||||||
|
Pool
distribution
|
55,153 | 16,026 | -- | ||||||||
|
Total
operating revenue
|
474,436 | 392,737 | 352,758 | ||||||||
|
Operating
expenses:
|
|||||||||||
|
Purchased
transportation
|
|||||||||||
|
Forward
Air
|
|||||||||||
|
Airport-to-airport
|
128,785 | 123,658 | 119,011 | ||||||||
|
Logistics
|
44,560 | 32,727 | 22,767 | ||||||||
|
Other
|
6,425 | 6,049 | 4,943 | ||||||||
|
Forward
Air Solutions
|
|||||||||||
|
Pool
distribution
|
9,315 | 2,003 | -- | ||||||||
|
Total
purchased transportation
|
189,085 | 164,437 | 146,721 | ||||||||
|
Salaries,
wages and employee benefits
|
116,504 | 88,803 | 74,448 | ||||||||
|
Operating
leases
|
24,403 | 16,761 | 14,458 | ||||||||
|
Depreciation
and amortization
|
16,615 | 10,824 | 8,934 | ||||||||
|
Insurance
and claims
|
8,099 | 7,685 | 5,967 | ||||||||
|
Fuel
expense
|
11,465 | 2,421 | 1,010 | ||||||||
|
Other
operating expenses
|
37,980 | 30,758 | 25,824 | ||||||||
|
Total
operating expenses
|
404,151 | 321,689 | 277,362 | ||||||||
|
Income
from operations
|
70,285 | 71,048 | 75,396 | ||||||||
|
Other
income (expense):
|
|||||||||||
|
Interest
expense
|
(1,236 | ) | (491 | ) | (81 | ) | |||||
|
Other,
net
|
362 | 1,756 | 3,229 | ||||||||
|
Total
other income (expense)
|
(874 | ) | 1,265 | 3,148 | |||||||
|
Income
before income taxes
|
69,411 | 72,313 | 78,544 | ||||||||
|
Income
taxes
|
26,869 | 27,388 | 29,621 | ||||||||
|
Net
income
|
$ | 42,542 | $ | 44,925 | $ | 48,923 | |||||
|
Net
income per share:
|
|||||||||||
|
Basic
|
$ | 1.48 | $ | 1.52 | $ | 1.57 | |||||
|
Diluted
|
$ | 1.47 | $ | 1.50 | $ | 1.55 | |||||
|
Weighted
average shares outstanding:
|
|||||||||||
|
Basic
|
28,808 | 29,609 | 31,091 | ||||||||
|
Diluted
|
29,025 | 29,962 | 31,521 | ||||||||
|
Dividends
per share:
|
$ | 0.28 | $ | 0.28 | $ | 0.28 | |||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-6
|
Consolidated
Statements of Shareholders' Equity
|
||||||||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||||
|
Additional
|
Total
|
|||||||||||||||||
|
Common
Stock
|
Paid-in
|
Retained
|
Shareholders'
|
|||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Equity
|
||||||||||||||
|
Balance
at December 31, 2005
|
31,361 | $ | 314 | $ | -- | $ | 178,502 | $ | 178,816 | |||||||||
|
Net and comprehensive income for 2006
|
-- | -- | -- | 48,923 | 48,923 | |||||||||||||
|
Exercise of stock options
|
305 | 3 | 4,359 | -- | 4,362 | |||||||||||||
|
Common stock issued under employee stock purchase plan
|
9 | -- | 268 | -- | 268 | |||||||||||||
|
Share-based compensation
|
-- | -- | 1,307 | -- | 1,307 | |||||||||||||
|
Dividends ($0.28 per share)
|
-- | -- | -- | (8,694 | ) | (8,694 | ) | |||||||||||
|
Common stock repurchased under stock repurchase plan
|
(1,303 | ) | (13 | ) | (7,901 | ) | (33,808 | ) | (41,722 | ) | ||||||||
|
Income tax benefit from stock options exercised
|
-- | -- | 1,967 | -- | 1,967 | |||||||||||||
|
Balance
at December 31, 2006
|
30,372 | 304 | -- | 184,923 | 185,227 | |||||||||||||
|
Adoption of FIN 48
|
-- | -- | -- | (977 | ) | (977 | ) | |||||||||||
|
Net and comprehensive income for 2007
|
-- | -- | -- | 44,925 | 44,925 | |||||||||||||
|
Exercise of stock options
|
57 | -- | 1,017 | -- | 1,017 | |||||||||||||
|
Common stock issued under employee stock purchase plan
|
9 | -- | 259 | -- | 259 | |||||||||||||
|
Share-based compensation
|
-- | -- | 3,710 | -- | 3,710 | |||||||||||||
|
Dividends ($0.28 per share)
|
-- | -- | -- | (8,305 | ) | (8,305 | ) | |||||||||||
|
Vesting of previously non-vested shares
|
42 | -- | -- | -- | -- | |||||||||||||
|
Cash settlement of share-based awards for minimum tax
withholdings
|
(8 | ) | -- | (250 | ) | -- | (250 | ) | ||||||||||
|
Common stock repurchased under stock repurchase plan
|
(1,824 | ) | (18 | ) | (5,997 | ) | (49,119 | ) | (55,134 | ) | ||||||||
|
Income tax benefit from stock options exercised
|
-- | -- | 1,261 | -- | 1,261 | |||||||||||||
|
Balance
at December 31, 2007
|
28,648 | 286 | -- | 171,447 | 171,733 | |||||||||||||
|
Net and comprehensive income for 2008
|
-- | -- | -- | 42,542 | 42,542 | |||||||||||||
|
Exercise of stock options
|
191 | 2 | 3,083 | -- | 3,085 | |||||||||||||
|
Common stock issued under employee stock purchase plan
|
10 | -- | 255 | -- | 255 | |||||||||||||
|
Share-based compensation
|
-- | -- | 6,269 | (2 | ) | 6,267 | ||||||||||||
|
Dividends ($0.28 per share)
|
-- | -- | 2 | (8,091 | ) | (8,089 | ) | |||||||||||
|
Vesting of previously non-vested shares
|
56 | 1 | (1 | ) | -- | -- | ||||||||||||
|
Cash settlement of share-based awards for minimum tax
withholdings
|
(11 | ) | -- | (389 | ) | -- | (389 | ) | ||||||||||
|
Income tax benefit from stock options exercised
|
-- | -- | 1,030 | -- | 1,030 | |||||||||||||
|
Balance
at December 31, 2008
|
28,894 | $ | 289 | $ | 10,249 | $ | 205,896 | $ | 216,434 | |||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-7
|
Consolidated
Statements of Cash Flows
|
|||||||||||
|
(In
thousands)
|
|||||||||||
|
Year
ended
|
|||||||||||
|
December
31,
|
December
31,
|
December
31,
|
|||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
activities:
|
|||||||||||
|
Net
income
|
$ | 42,542 | $ | 44,925 | $ | 48,923 | |||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|||||||||||
|
Depreciation
and amortization
|
16,615 | 10,824 | 8,934 | ||||||||
|
Share-based
compensation
|
6,267 | 3,710 | 1,307 | ||||||||
|
Loss
(gain) on disposal of property and equipment
|
171 | (172 | ) | (42 | ) | ||||||
|
Provision
for loss (recovery) on receivables
|
903 | (33 | ) | (223 | ) | ||||||
|
Provision
for revenue adjustments
|
4,259 | 2,312 | 2,095 | ||||||||
|
Deferred
income taxes
|
1,151 | 596 | (136 | ) | |||||||
|
Tax
benefit for stock options exercised
|
(1,030 | ) | (1,261 | ) | (1,967 | ) | |||||
|
Changes
in operating assets and liabilities, net of acquisitions
|
|||||||||||
|
Accounts
receivable
|
(2,376 | ) | (11,474 | ) | (6,516 | ) | |||||
|
Prepaid
expenses and other current assets
|
(2,102 | ) | 291 | 407 | |||||||
|
Accounts
payable and accrued expenses
|
(2,665 | ) | 6,606 | (4,058 | ) | ||||||
|
Income
taxes
|
(4,652 | ) | 6,069 | 3,743 | |||||||
|
Net
cash provided by operating activities
|
59,083 | 62,393 | 52,467 | ||||||||
|
Investing
activities:
|
|||||||||||
|
Proceeds
from disposal of property and equipment
|
87 | 574 | 3,665 | ||||||||
|
Purchases
of property and equipment
|
(26,699 | ) | (47,026 | ) | (15,454 | ) | |||||
|
Deposits
in escrow for construction of new terminals
|
-- | -- | (4,793 | ) | |||||||
|
Proceeds
from sales or maturities of available-for-sale securities
|
-- | 143,410 | 229,330 | ||||||||
|
Purchases
of available-for-sale securities
|
-- | (82,282 | ) | (211,980 | ) | ||||||
|
Acquisition
of businesses
|
(29,566 | ) | (48,627 | ) | -- | ||||||
|
Other
|
(10 | ) | (119 | ) | 26 | ||||||
|
Net
cash (used in) provided by investing activities
|
(56,188 | ) | (34,070 | ) | 794 | ||||||
|
Financing
activities:
|
|||||||||||
|
Payments
of debt and capital lease obligations
|
(1,603 | ) | (493 | ) | (39 | ) | |||||
|
Borrowings
on line of credit
|
45,000 | 40,000 | -- | ||||||||
|
Payments
on line of credit
|
(25,000 | ) | (10,000 | ) | (1,504 | ) | |||||
|
Proceeds
from exercise of stock options
|
3,085 | 1,017 | 4,362 | ||||||||
|
Payments
of cash dividends
|
(8,089 | ) | (8,305 | ) | (8,694 | ) | |||||
|
Proceeds
from common stock issued under employee stock purchase
plan
|
255 | 259 | 268 | ||||||||
|
Cash
settlement of share-based awards for minimum tax
withholdings
|
(389 | ) | (250 | ) | -- | ||||||
|
Repurchase
of common stock
|
-- | (55,134 | ) | (41,722 | ) | ||||||
|
Tax
benefit for stock options exercised
|
1,030 | 1,261 | 1,967 | ||||||||
|
Net
cash provided by (used in) financing activities
|
14,289 | (31,645 | ) | (45,362 | ) | ||||||
|
Net
increase (decrease) in cash
|
17,184 | (3,322 | ) | 7,899 | |||||||
|
Cash
at beginning of year
|
4,909 | 8,231 | 332 | ||||||||
|
Cash
at end of year
|
$ | 22,093 | $ | 4,909 | $ | 8,231 | |||||
|
Non-cash
activity:
|
|||||||||||
|
Unpaid
capital expenditures included in accounts payable
|
$ | 1,640 | $ | -- | $ | -- | |||||
|
Uncollected
proceeds from disposal of equipment in accounts receivable
|
$ | -- | $ | -- | $ | 49 | |||||
The accompanying notes are an
integral part of the consolidated financial statements
F-8
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
(In
thousands, except share and per share data)
|
1.
|
Accounting
Policies
|
Basis
of Presentation and Principles of Consolidation
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 business 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 services. 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 provides 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 Mid-Atlantic, Southeast,
Midwest and Southwest continental United States. Pool
distribution involves managing high-frequency handling and distribution of
time-sensitive product to numerous destinations in specific geographic
regions. FASI’s primary customers for this product are regional and
nationwide distributors and retailers, such as mall, strip mall and outlet based
retail chains.
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.
Further,
revenues and associated purchased transportation by service line have been
disclosed on the face of the Consolidated Statements of Income.
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.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Significant areas requiring management
estimates include the following key financial areas:
Allowance
for Doubtful Accounts
The Company
evaluates the collectability of its accounts receivable based on a combination
of factors. In circumstances in which management is aware of a specific
customer’s inability to meet its financial obligations to the Company (for
example, bankruptcy filings, accounts turned over for collection or litigation),
the Company records a specific reserve for these bad debts against amounts due
to reduce the net recognized receivable to the amount the Company reasonably
believes will be collected. For all other customers, the Company recognizes
reserves for these bad debts based on the length of time the receivables are
past due. Specifically, amounts that are 90 days or more past due are reserved
at 50.0% for Forward Air and 25.0% for FASI. If circumstances change (i.e., the
Company experiences higher than expected defaults or an unexpected material
adverse change in a customer’s ability to meet its financial obligations to the
Company), the estimates of the recoverability of amounts due to the Company
could be changed by a material amount. Accounts are written off after all means
of collection, including legal action, have been exhausted.
Allowance
for Revenue Adjustments
The
Company’s allowance for revenue adjustments consists of amounts reserved for
billing rate changes that are not captured upon load initiation. These
adjustments generally arise: (1) when the sales department contemporaneously
grants small rate changes (“spot quotes”) to customers that differ from the
standard rates in the system; (2) when freight requires dimensionalization or is
reweighed resulting in a different required rate; (3) when billing errors occur;
and (4) when data entry errors occur. When appropriate, permanent rate changes
are initiated and reflected in the system. The Company monitors the manual
revenue adjustments closely through
the employment of various controls that are in place to ensure that revenue
recognition is not compromised and that fraud does not occur. During 2008,
average revenue adjustments per month were approximately $355, on average
revenue per month of approximately $39,536 (approximately 1.0% of monthly
revenue). In order to estimate the allowance for revenue adjustments related to
ending accounts receivable, the Company prepares an analysis that considers
average monthly revenue adjustments and the average lag for identifying and
quantifying these revenue adjustments. Based on this analysis, the Company
establishes an allowance for approximately 40-80 days (dependent upon experience
in the last twelve months) of average revenue adjustments, adjusted for rebates
and billing errors. The lag is periodically adjusted based on actual historical
experience. Additionally, the average amount of revenue adjustments per month
can vary in relation to the level of sales or based on other factors (such as
personnel issues that could result in excessive manual errors or in excessive
spot quotes being granted). Both of these significant assumptions are
continually evaluated for validity.
F-9
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
1.
|
Accounting
Policies (Continued)
|
Self-Insurance
Loss Reserves
Given the
nature of the Company’s operating environment, the Company is subject to vehicle
and general liability, workers’ compensation and health insurance claims. To
mitigate a portion of these risks, the Company maintains insurance for
individual vehicle and general liability claims exceeding $500 and workers’
compensation claims and health insurance claims exceeding $250, except in Ohio,
where for workers’ compensation we are a qualified self-insured entity with
a $350 self-insured retention. The amount of self-insurance loss reserves and
loss adjustment expenses is determined based on an estimation process that uses
information obtained from both company-specific and industry data, as well as
general economic information. The estimation process for self-insurance loss
exposure requires management to continuously monitor and evaluate the life cycle
of claims. Using data obtained from this monitoring and the Company’s
assumptions about the emerging trends, management develops information about the
size of ultimate claims based on its historical experience and other available
market information. The most significant assumptions used in the estimation
process include determining the trend in loss costs, the expected consistency in
the frequency and severity of claims incurred but not yet reported to prior year
claims, changes in the timing of the reporting of losses from the loss date to
the notification date, and expected costs to settle unpaid claims. Management
also monitors the reasonableness of the judgments made in the prior year’s
estimation process (referred to as a hindsight analysis) and adjusts current
year assumptions based on the hindsight analysis. Additionally, the Company
utilizes actuarial analyses to evaluate open claims and estimate the ongoing
development exposure.
Revenue
Recognition
Operating
revenue and related costs are recognized as of the date shipments are completed.
No single customer accounted for more than 10.0% of our consolidated operating
revenue in 2008, 2007 or 2006. While not significant on a
consolidated basis, two customers accounted for approximately 43.9% of FASI’s
2008 operating revenue. Receivables from these two customers totaled
approximately $1,926 at December 31, 2008. No collateral is required
to support these receivable balances.
The
transportation rates the Company charges its customers consist of base
transportation rates and fuel surcharge rates. The revenues earned
and related direct freight expenses incurred from the Company’s base
transportation services are recognized on a gross basis in revenue and in
purchased transportation. Transportation revenue is recognized on a
gross basis as the Company is the primary obligor. The fuel
surcharges billed to customers and paid to owner-operators and third party
transportation providers are recorded on a net basis as the Company is not the
primary obligor with regards to the fuel surcharges.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash and cash equivalents.
Inventories
Inventories
of tires, replacement parts, supplies, and fuel for equipment are stated at the
lower of cost or market utilizing the FIFO (first-in, first-out) method of
determining cost. Inventories of tires and replacement parts are not material in
the aggregate. Replacement parts are expensed when placed in service, while
tires are capitalized and amortized over their expected life. Replacement parts
and tires are included as a component of other operating expenses in the
consolidated statements of income.
F-10
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
1.
|
Accounting
Policies (Continued)
|
Property
and Equipment
Property and
equipment are stated at cost. Expenditures for normal repair and maintenance are
expensed as incurred. Depreciation of property and equipment is calculated based
upon the cost of the asset, reduced by its estimated salvage value, using the
straight-line method over the estimated useful lives as follows:
|
Buildings
|
30-40
years
|
|
Equipment
|
3-10
years
|
|
Leasehold
improvements
|
Lesser
of Useful Life or Initial Lease
Term
|
Depreciation
expense for each of the three years ended December 31, 2008, 2007 and 2006 was
$12,252, $9,103, and $7,659, respectively.
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable.
Impairment is recognized on assets classified as held and used when the sum of
undiscounted estimated cash flows expected to result from the use of the asset
is less than the carrying value. If such measurement indicates a possible
impairment, the estimated fair value of the asset is compared to its net book
value to measure the impairment charge, if any. When the criteria have been met
for long-lived assets to be classified as held for sale, the assets are recorded
at the lower of carrying value or fair market value (less selling
costs).
Operating
Leases
Certain
operating leases include rent increases during the initial lease term. For these
leases, the Company recognizes the related rental expenses on a straight-line
basis over the term of the lease, which includes any rent holiday period, and
records the difference between the amounts charged to operations and amount paid
as rent as a rent liability.
Goodwill
and Other Intangible Assets
Goodwill
is recorded at cost based on the excess of purchase price over the fair value of
net assets acquired. Under the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), goodwill and intangible assets with indefinite lives
are not amortized but are subject to annual impairment tests in accordance with
the statement. Other intangible assets are amortized over their useful lives.
The Company completed the required annual impairment test of goodwill during
each of the second quarters of 2008, 2007 and 2006, and determined that goodwill
had not been impaired. In addition, at December 31, 2008, the Company considered
whether any impairment indicators existed and no impairment charges were
incurred.
Acquisitions
are accounted for using the purchase method in accordance with SFAS No.
141, Business
Combinations ("SFAS 141"). The definite-lived intangible
assets of the Company resulting from acquisition activity and the related
amortization are described in Note 2 , Acquisition of
Businesses.
Software
Development
Costs
related to software developed or acquired for internal use are expensed or
capitalized based on the applicable stage of software development and any
capitalized costs are amortized in accordance with the American Institute of
Certified Public Accountants Statement Of Position No. 98-1 , Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The Company
uses a five-year straight line amortization for the capitalized amounts of
software development costs.
Income
Taxes
The Company
accounts for income taxes using the liability method, whereby deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to be recovered or settled.
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48 Accounting for
Uncertainty in Income Taxes (an interpretation of FASB Statement No.
109) (“FIN 48”). Accordingly, the Company reports a
liability for unrecognized tax benefits resulting from uncertain tax positions
taken or expected to be taken in a tax return. The Company recognizes
interest and penalties, if any, related to unrecognized tax benefits in interest
expense and operating expenses, respectively.
F-11
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
1.
|
Accounting
Policies (Continued)
|
Net
Income Per Share
The
Company calculates net income per share in accordance with SFAS No. 128, Earnings Per Share (“SFAS
128”). Under SFAS 128, income per basic share excludes any
dilutive effects of options, warrants and convertible securities. Diluted income
per share includes any dilutive effects of options, warrants and convertible
securities, and uses the treasury stock method in calculating
dilution.
Comprehensive
Income
Comprehensive
income includes any changes in the equity of the Company from transactions and
other events and circumstances from non-operational sources. Unrealized gains
and losses on available-for-sale securities are included in other comprehensive
income for all years presented. Comprehensive income for the years
ended December 31, 2008, 2007 and 2006 approximated net income.
Share-Based
Payments
Prior to
January 1, 2006, as permitted by SFAS No. 123, Accounting for Stock Based
Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, the Company accounted
for share-based payments to employees using Accounting Principles Board (“APB”)
Opinion No. 25, Accounting for Stock
Issued to Employees . As such, the Company generally recognized no
compensation cost for employee stock options as options granted had exercise
prices equal to the fair market value of our common stock on the date of grant.
The Company also recorded no compensation expense in connection with our
employee stock purchase plan.
Effective
January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (“SFAS
123R”), and elected the modified prospective transition method. Under the
modified prospective transition method, awards that are granted, modified,
repurchased or canceled after the date of adoption should be measured and
accounted for in accordance with SFAS 123R. Share-based awards that are granted
prior to the effective date should 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, the
Company recognized $1,300 of stock based compensation in 2005, but there was no
additional compensation expense recognized during the years ended December 31,
2008, 2007 and 2006 related to options granted prior to January 1,
2006.
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. In addition, the Company makes annual grants to
non-employee directors in conjunction with their annual election to our Board of
Directors or at the time of their appointment to the Board of
Directors. Prior to the implementation of SFAS 123R, the Company
utilized stock options as its sole form of share-based awards. During the year
ended December 31, 2006, the Company granted non-vested shares of Common Stock
(“non-vested shares”) to key employees, but returned to granting stock options
during the year ended December 31, 2007. The Company returned to
granting stock options to key employees as the Company believes stock options
more closely link long-term compensation with the Company’s long-term
goals. For non-employee directors, we continued to grant
non-vested shares during the years ended December 31, 2008 and
2007.
The
share-based compensation for these stock options and non-vested shares is
recognized, net of estimated forfeitures, ratably over the requisite service
period, or vesting period. Based on the Company’s historical experience,
forfeitures have been estimated. The Company uses the Black-Scholes
option-pricing model to estimate the grant-date fair value of options
granted. The fair values of non-vested shares issued to employees in
2006 and non-employee directors in 2008, 2007 and 2006 were estimated using
opening market prices for the business day of the grant. The
following table contains the weighted-average assumptions used to estimate the
fair value of options granted. These assumptions are highly
subjective and changes in these assumptions can materially affect the fair value
estimate.
F-12
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
1.
|
Accounting
Policies (Continued)
|
|
December
31,
|
December
31,
|
December
31,
|
||||||
|
2008
|
2007
|
2006
|
||||||
|
Expected
dividend yield
|
0.8 | % | 0.8 | % | -- | % | ||
|
Expected
stock price volatility
|
35.2 | % | 37.0 | % | -- | % | ||
|
Weighted
average risk-free interest rate
|
2.8 | % | 4.5 | % | -- | % | ||
|
Expected
life of options (years)
|
4.5 | 4.5 | -- |
Under the
2005 Employee Stock Purchase Plan (the “ESPP”), which has been approved by
shareholders, the Company is authorized to issue shares of common stock to our
employees. 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. As the ESPP does not qualify as
non-compensatory under the requirements of SFAS 123R, the Company recognizes
share-based compensation on the date of purchase based on the difference between
the purchase date fair market value and the employee purchase
price.
SFAS 123R
also requires companies to calculate an initial “pool” of excess tax benefits
available at the adoption date to absorb any unused deferred tax assets that may
be recognized under SFAS 123R. The pool includes the net excess tax
benefits that would have been recognized if the Company had adopted
SFAS 123 for recognition purposes on its effective date. The Company
elected to calculate the pool of excess tax benefits under the alternative
transition method described in FASB Staff Position
No. FAS 123(R)-3, Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards,
which also specifies the method the Company must use to calculate excess tax
benefits reported on the statement of cash flows.
Recently
Issued Accounting Pronouncements
During
September 2006, the 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 fully determined the impact the
implementation of SFAS 157 will have on its 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.
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 did
not elect the fair value measurement for any new assets or
liabilities.
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
beginning January 1, 2009. The impact of SFAS 141R will depend on the
nature of the Company’s business combinations subsequent to January 1,
2009.
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 beginning January 1, 2009. The adoption of SFAS 160 is
not expected to have a significant impact on the Company’s financial position,
results of operations and cash flows as the Company does not currently have any
noncontrolling interests.
F-13
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
1.
|
Accounting
Policies (Continued)
|
Reclassifications
Certain
reclassifications have been made to prior-year financial statements to conform
to the 2008 presentation. These reclassifications had no effect on net income as
previously reported.
|
2.
|
Acquisition
of Businesses
|
On September
8, 2008, the Company acquired certain assets and liabilities of Service Express,
Inc. (Service Express). Service Express was a privately-held provider
of pool distribution services primarily in the Mid-Atlantic and Southeastern
continental United States. Service Express generated approximately
$39,000 (unaudited) in revenue during the year ended December 31,
2007. The acquisition of Service Express’ pool distribution services
expands the geographic footprint of the FASI segment in the Mid-Atlantic and
Southeastern United States. The purchased assets and
liabilities and the results of operations of Service Express have been included
in the consolidated financial statements since September 8, 2008.
The aggregate
purchase price of $10,647 was paid with the Company’s available cash and
borrowings from the Company’s senior credit facility (see note
4). Under the purchase agreement, $1,050 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 if not utilized by the Company for
unknown liabilities.
The purchase
price allocation is preliminary as the Company is still finalizing the valuation
of certain acquired property and equipment. The preliminary purchase price
allocation is as follows:
|
Service
Express
|
||
|
Current
assets
|
$ | 258 |
|
Property
and equipment
|
2,874 | |
|
Customer
relationships
|
6,000 | |
|
Goodwill
|
5,149 | |
|
Total
assets acquired
|
14,281 | |
|
Current
liabilities
|
281 | |
|
Capital
lease obligations
|
3,353 | |
|
Total
liabilities assumed
|
3,634 | |
|
Net
assets acquired
|
$ | 10,647 |
The acquired
customer relationships from the Service Express acquisition are being amortized
on a straight-line basis over a weighted average life of 15
years. The Company began amortizing the assets as of the acquisition
date and recorded $133 during the year ended December 31, 2008.
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 (unaudited) 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 of $18,682 was paid with the Company’s available cash and
borrowings from the Company’s senior credit facility (see note
4). 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 if not utilized by the Company for
unknown liabilities.
F-14
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
2.
|
Acquisition
of Businesses (Continued)
|
The
purchase price allocation is preliminary as the Company is still finalizing the
valuation of certain acquired liabilities. 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
|
5,573 | 3,437 | 9,010 | |||||
|
Total
assets acquired
|
11,385 | 7,885 | 19,270 | |||||
|
Debt
and capital leases
|
480 | 108 | 588 | |||||
|
Total
liabilities assumed
|
480 | 108 | 588 | |||||
|
Net
assets acquired
|
$ | 10,905 | $ | 7,777 | $ | 18,682 | ||
The acquired
customer relationships and non-compete agreements from the Pinch acquisition 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 $655 during the year ended December 31,
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 December 31, 2008.
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 (unaudited) 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. During 2008, $237 was paid to the previous
owners of USAC for final settlement of the purchased working
capital.
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 (unaudited) 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.
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.
F-15
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
2.
|
Acquisition
of Businesses (Continued)
|
The purchase
price allocations of the respective 2007 acquisitions discussed above are as
follows:
|
USAC
|
Black
Hawk
|
Other
|
Total
|
||||||||
|
Current
assets
|
$ | 2,262 | $ | 17 | $ | -- | $ | 2,279 | |||
|
Property
and equipment
|
3,425 | 3,928 | -- | 7,353 | |||||||
|
Non-compete
agreements
|
200 | 1,500 | -- | 1,700 | |||||||
|
Customer
relationships
|
4,800 | 13,800 | 681 | 19,281 | |||||||
|
Goodwill
|
3,718 | 16,765 | -- | 20,483 | |||||||
|
Other
noncurrent assets
|
215 | -- | -- | 215 | |||||||
|
Total
assets acquired
|
14,620 | 36,010 | 681 | 51,311 | |||||||
|
Current
liabilities
|
456 | -- | -- | 456 | |||||||
|
Debt
and capital leases
|
1,214 | 759 | -- | 1,973 | |||||||
|
Total
liabilities assumed
|
1,670 | 759 | -- | 2,429 | |||||||
|
Net
assets acquired
|
$ | 12,950 | $ | 35,251 | $ | 681 | $ | 48,882 | |||
The Company’s
total acquired customer relationships and non-compete agreements of $47,031 and
$1,780, respectively, have weighted-average useful lives of 11.3 and 5.6 years,
respectively. Amortization expense on acquired customer relationships
and non-compete agreements for each of the three years ended December 31, 2008,
2007 and 2006 was $4,363, $1,721, and $1,275, respectively.
The
estimated amortization expense for the next five years on definite-lived
intangible assets as of December 31, 2008 is as follows:
|
2009
|
2010
|
2011
|
2012
|
2013
|
||||||||||
|
Customer
relationships
|
$ | 4,482 | $ | 4,296 | $ | 4,255 | $ | 4,254 | $ | 4,255 | ||||
|
Non-compete
agreements
|
336 | 336 | 336 | 311 | 24 | |||||||||
|
Total
|
$ | 4,818 | $ | 4,632 | $ | 4,591 | $ | 4,565 | $ | 4,279 | ||||
The
changes in the carrying value of goodwill by segment for the year ended December
31, 2008 are as follows:
|
Forward
Air
|
FASI
|
Total
|
||||||
|
Beginning
balance, December 31, 2006
|
$ | 15,588 | $ | -- | $ | 15,588 | ||
|
USAC
acquisition
|
-- | 3,709 | 3,709 | |||||
|
Black
Hawk acquisition
|
16,756 | -- | 16,756 | |||||
|
Ending
balance, December 31, 2007
|
32,344 | 3,709 | 36,053 | |||||
|
Pinch
acquisition
|
5,573 | 3,437 | 9,010 | |||||
|
Service
Express acquisition
|
-- | 5,149 | 5,149 | |||||
|
Adjustment
to Black Hawk and USAC acquisitions
|
9 | 9 | 18 | |||||
|
Ending
balance, December 31, 2008
|
$ | 37,926 | $ | 12,304 | $ | 50,230 | ||
The
goodwill for the above acquisitions is deductible for tax purposes.
|
3.
|
Property
|
In June 2007,
the Company completed the purchase of a new regional hub near Atlanta, Georgia
for $14,870. The deposit of $1,478 paid in September 2006, previously included
in noncurrent other assets, was applied to this purchase price.
In March
2007, the Company completed the purchase of a new terminal near Chicago,
Illinois for $22,312. The deposit of $3,316 paid in July 2006, previously
included in noncurrent other assets, was applied to this purchase
price.
In addition,
in February 2007, the Company acquired land near Dallas/Fort Worth, Texas for
$3,045 on which the Company is building
a new regional hub facility. At December 31, 2008, the Company has
capitalized in construction in progress $13,925 for the construction of the
Dallas/Forth Worth regional hub. The Company anticipates completion
of this facility during the third quarter of 2009.
F-16
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
4.
|
Debt
and Capital Lease Obligations
|
Credit
Facilities
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
if approved by the Company’s lender, 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
(1.0% at December 31, 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 December 31, 2008, the
Company had $50,000 outstanding under the senior credit facility. At December
31, 2008, the Company had $42,155 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. See discussion of the fair value of the Company’s debt and
capital lease obligations in Note 10.
Other
Long-Term Debt
In
conjunction with the July 2007 acquisition of certain assets and
liabilities of USAC, the Company assumed $1,188 in equipment notes. Interest on
the equipment notes is fixed at various rates between 5.9% and
8.5%.
Annual
maturities of long-term debt including the senior credit facility, at
December 31, 2008, are as follows:
|
2009
|
$ | 147 |
|
2010
|
21 | |
|
2011
|
-- | |
|
2012
|
50,000 | |
|
2013
|
-- | |
|
Total
|
$ | 50,168 |
Capital
Leases
In
September 2000, the Company entered into an agreement with the Rickenbacker Port
Authority (“Rickenbacker”) to lease a building located near the Company’s
Columbus, Ohio hub facility. At the inception of the lease, the Company made a
$2,004 loan to Rickenbacker. The lease agreement has a ten-year initial term,
with two five-year renewal options. At December 31, 2008, the present
value of the future minimum lease payments was $796. Because the lease met the
criteria for classification as a capital lease, the leased building was recorded
in property and equipment at $3,015 (which represented the present value of the
total minimum lease payments, including the $2,004 initial payment), as it is
less than the fair value at the inception date. The building is being
depreciated over the initial lease term.
In 2008
and 2007 in conjunction with the acquisitions discussed in Note 2, the Company
assumed several equipment leases that met the criteria for classification as a
capital lease. The leased equipment is being amortized over the
shorter of the lease term or their useful life.
F-17
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
4.
|
Debt
and Capital Lease Obligations
(continued)
|
Property
and equipment include the following amounts for assets under capital
leases:
|
December
31,
|
December
31,
|
||||||
|
2008
|
2007
|
||||||
|
Buildings
|
$
|
3,015
|
$
|
3,015
|
|||
|
Equipment
|
2,975
|
621
|
|||||
|
Accumulated
amortization
|
(2,061
|
)
|
(1,260
|
)
|
|||
|
$
|
3,929
|
$
|
2,376
|
||||
Amortization
of assets under capital leases is included in depreciation and amortization
expense.
Future
minimum payments, by year and in the aggregate, under non-cancelable capital
leases with initial or remaining terms of one year or more consist of the
following at December 31, 2008:
|
2009
|
$ | 1,629 |
|
2010
|
1,041 | |
|
2011
|
783 | |
|
2012
|
663 | |
|
2013
|
357 | |
|
Thereafter
|
604 | |
|
Total
|
5,077 | |
|
Less
amounts representing interest
|
608 | |
|
Present
value of net minimum lease payments (including current portion of
$1,455)
|
$ | 4,469 |
Interest
Payments
Interest
payments during 2008, 2007 and 2006 were $1,628, $433 and $81,
respectively. During the year ended December 31, 2008, $301 of
interest payments were capitalized.
|
5.
|
Shareholders’
Equity, Stock Options and Net Income per
Share
|
Preferred
Stock
The
Company has a shareholder rights plan, that expires May 18, 2009, that allows
the Board of Directors to issue, at its discretion, up to 5,000,000 shares of
preferred stock, par value $0.01. The terms and conditions of the preferred
shares are to be determined by the Board of Directors. No shares have been
issued to date. The shareholder rights plan also establishes notice
requirements for nominations for election to the Board of Directors and for
proposing matters that can be acted upon by shareholders at a
meeting.
Cash
Dividends
Prior to
February 15, 2005, the Company had never declared a cash dividend. During each
quarter of 2008, 2007 and 2006, the Company’s Board of Directors declared a cash
dividend of $0.07 per share of common stock. On February 9, 2009, the Company’s
Board of Directors declared a $0.07 per share dividend that will be paid in
the first quarter of 2009. 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.
Repurchase of Common
Stock
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”). During the year ended December 31, 2007, the Company
repurchased the remaining available shares of common stock under the 2005
Repurchase plan, or 1,613,327 shares, for $49,079, or $30.42 per
share. For the year ended December 31, 2006, the Company repurchased
1,302,695 shares of common stock under the 2005 Repurchase Plan for $41,722, or
$32.03 per share. As of December 31, 2008, no shares remained
eligible for purchase under the 2005 Repurchase Plan.
F-18
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
5.
|
Shareholders’
Equity, Stock Options and Net Income per Share
(continued)
|
On July
31, 2007 our 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”). During the year ended December 31, 2007, the Company
repurchased 211,173 shares of common stock under the 2007 Repurchase Plan for
$6,055, or $28.68 per share. No shares were repurchased during the
year ended December 31, 2008. As of December 31, 2008, 1,788,827 shares of
common stock remain that may be repurchased under the 2007 Repurchase
Plan.
Share-Based
Compensation
The
Company had previously reserved 4,500,000 common shares under the 1999 Stock
Option and Incentive Plan (“the 1999 Plan”). Options issued under the 1999 Plan
have seven to ten-year terms and originally vested over a one to five year
period. On December 31, 2005, the Company's Board of Directors accelerated the
vesting of all of the Company's outstanding and unvested stock options awarded
to employees, officers and non-employee directors under the Company's stock
option award plans.
In May
2008, with the approval of shareholders, the Company amended and restated the
1999 Stock Option and Incentive Plan (“1999 Amended Plan”) to reserve an
additional 3,000,000 common shares, increasing the total number of reserved
common shares under the 1999 Amended Plan to 7,500,000.
Employee
Activity - Options
The
following table summarizes the Company’s employee stock option activity and
related information for the years ended December 31, 2008, 2007 and
2006:
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||
|
Options
|
Exercise
|
Options
|
Exercise
|
Options
|
Exercise
|
|||||||||||||||
| (000) |
Price
|
(000) |
Price
|
(000) |
Price
|
|||||||||||||||
|
Outstanding
at beginning of year
|
2,246 | $ | 26 | 1,475 | $ | 23 | 1,957 | $ | 23 | |||||||||||
|
Granted/converted
|
387 | 30 | 847 | 31 | -- | -- | ||||||||||||||
|
Exercised
|
(153 | ) | 15 | (64 | ) | 20 | (476 | ) | 23 | |||||||||||
|
Forfeited
|
(34 | ) | 32 | (12 | ) | 29 | (6 | ) | 34 | |||||||||||
|
Outstanding
at end of year
|
2,446 | $ | 28 | 2,246 | $ | 26 | 1,475 | $ | 23 | |||||||||||
|
Exercisable
at end of year
|
1,528 | $ | 26 | 1,409 | $ | 23 | 1,475 | $ | 23 | |||||||||||
|
Options/shares
available for grant
|
3,004 | 357 | 1,192 | |||||||||||||||||
|
Average
aggregate intrinsic value for options outstanding
|
$ | 7,840 | ||||||||||||||||||
|
Average
aggregate intrinsic value for exercisable options
|
$ | 7,770 | ||||||||||||||||||
|
Weighted-average
fair value of options granted during the year
|
$ | 9.17 | $ | 10.98 | $ | -- | ||||||||||||||
F-19
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
5.
|
Shareholders’
Equity, Stock Options and Net Income per Share
(continued)
|
The
following table summarizes information about stock options outstanding as of
December 31, 2008:
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||
|
Range
of
|
Number
|
Average
|
Average
|
Number
|
Average
|
||||||||
|
Exercise
|
Outstanding
|
Remaining
|
Exercise
|
Exercisable
|
Exercise
|
||||||||
|
Price
|
(000)
|
Contractual
Life
|
Price
|
(000)
|
Price
|
||||||||
|
$
|
13.25-18.82
|
333
|
4.3
|
$
|
15.64
|
333
|
$
|
15.64
|
|||||
|
20.05-29.44
|
1,284
|
5.7
|
28.10
|
928
|
27.58
|
||||||||
|
30.35-36.84
|
829
|
5.4
|
31.39
|
267
|
31.36
|
||||||||
|
$
|
13.25-36.84
|
2,446
|
5.4
|
$
|
27.50
|
1,528
|
$
|
25.60
|
|||||
Share-based
compensation expense for options granted in 2008 and 2007 was recognized in
salaries, wages and employee benefits. Share-based compensation
expense for options granted was $4,036 and $1,823 during 2008 and 2007,
respectively. The total tax benefit related to the share-based
expense for these options was $1,032 and $390 for 2008 and 2007, respectively.
Total compensation cost, net of estimated forfeitures, related to the options
not yet recognized in earnings was $6,148 at December 31, 2008. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
Employee
Activity – Non-vested shares
During the
year ended December 31, 2006, the Company granted 129,350 non-vested shares to
key employees with a weighted-average fair value of
$36.09. Share-based compensation expense of $1,403, $1,286 and $1,175
for non-vested shares granted to employees during 2006 was recognized in
salaries, wages and employee benefits during the years ended December 31, 2008,
2007 and 2006, respectively. The total tax benefit related to this share-based
expense was $550, $487 and $443 for the years ended December 31, 2008, 2007 and
2006, respectively.
During the
year ended December 31, 2008, 38,078 previously non-vested shares with a total
grant date fair value of $1,374 vested to employees. During the year
ended December 31, 2007, 38,540 previously non-vested shares with a total grant
date fair value of $1,391 vested to employees. During the years ended
December 31, 2008, 2007 and 2006 1,350, 0 and 13,750, respectively, of
non-vested shares were forfeited by employees. At December 31, 2008
there were 37,632 non-vested shares granted to employees that had yet to
vest. Total compensation cost, net of estimated forfeitures, related
to the non-vested shares not yet recognized in earnings was $203 at December 31,
2008. Total unrecognized compensation cost will be adjusted for future changes
in estimated forfeitures.
Employee
Activity – ESPP
Under
the ESPP, the Company is authorized to issue up to a remaining 459,324
shares of common stock to employees of the Company. For the years ended December
31, 2008, 2007 and 2006, participants under the plan purchased 10,377,
9,378 and 9,237 shares, respectively, at an average price of $24.57, $27.66 and
$28.54 per share, respectively. The weighted-average fair value of each purchase
right under the ESPP granted for the years ended December 31, 2008, 2007 and
2006, which is equal to the discount from the market value of the common stock
at the end of each six month purchase period, was $5.00, $5.09 and $4.90 per
share, respectively. Share-based compensation expense of $51, $48 and $45 was
recognized in salaries, wages and employee benefits, during the years ended
December 31, 2008, 2007 and 2006, respectively.
Non-employee
Directors – Non-vested shares
On May
23, 2006, the Company’s shareholders approved the Company’s 2006 Non-Employee
Director Stock Plan (the “2006 Plan”). The Company’s shareholders
then approved the Company’s Amended and Restated Non-Employee Director Stock
Plan (the “Amended Plan”) on May 22, 2007. The Amended Plan is
designed to better enable the Company to attract and retain well-qualified
persons for service as directors of the Company. Under the Amended
Plan, on the first business day after each Annual Meeting of Shareholders, each
non-employee director will automatically be granted an award (the “Annual
Grant”), in such form and size as the Board determines from year to
year. Unless otherwise determined by the Board, Annual Grants will
become vested and nonforfeitable one year after the date of grant so long as the
non-employee director’s service with the Company does not earlier
terminate. Each director may elect to defer receipt of the shares
under a non-vested share award until the director terminates service on the
Board of Directors. If a director elects to defer receipt, the
Company will issue deferred stock units to the director, which do not represent
actual ownership in shares and the director will not have voting rights or other
incidents of ownership until the shares are issued. However, the
Company will credit the director with dividend equivalent payments in the form
of additional deferred stock units for each cash dividend payment made by the
Company.
F-20
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
5.
|
Shareholders’
Equity, Stock Options and Net Income per Share
(continued)
|
During
2008, under the Amended Plan, 18,448 non-vested shares were issued to the
Company’s non-employee directors with a weighted-average fair value of
$34.69. During 2007, under the Amended Plan, 14,268
non-vested shares and 4,756 deferred stock units were issued to the Company’s
non-employee directors with a weighted-average fair value of
$33.64. The share-based compensation for these awards are recognized,
net of estimated forfeitures, ratably over the requisite service period, or
vesting period, of one year.
Under the
2006 Plan, during 2006, 11,250 non-vested shares and 2,250 deferred stock units
were issued to the Company’s non-employee directors with a weighted-average fair
value of $36.27. In April 2007, 375 non-vested shares with fair
values of $30.88 per share were issued to a new non-employee
director. The share-based compensation for these awards are
recognized, net of estimated forfeitures, ratably over the requisite service
period, or vesting period, of three years.
During
the year ended December 31, 2008, 18,143 of previously non-vested shares and
5,506 of deferred stock units with a total grant date fair value of $807 vested
to non-employee directors. During 2008, a non-employee director
resigned from our Board of Directors and forfeited approximately 3,056
non-vested shares. At December 31, 2008 20,142 non-vested shares granted
to non-employee directors had yet to vest.
During
the years ended December 31, 2008, 2007 and 2006, share-based compensation
expense for non-vested shares granted to non-employee directors under the above
plans was $777, $552 and $82, respectively, and was recognized in salaries,
wages and employee benefits. The total tax benefits related to this share-based
expense was $305, $209 and $31 for the years ended December 31, 2008, 2007 and
2006, respectively. Total compensation cost, net of estimated
forfeitures, related to these non-vested shares granted to non-employee
directors not yet recognized in earnings was $262 at December 31, 2008. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
Non-employee
Directors - Options
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. The following tables summarize the
Company’s non-employee stock option activity and related information for the
three years ended December 31, 2008:
|
2008
|
2007
|
2006
|
||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||
|
Options
|
Exercise
|
Options
|
Exercise
|
Options
|
Exercise
|
|||||||||||||
|
(000)
|
Price
|
(000)
|
Price
|
(000)
|
Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
112
|
$
|
22
|
112
|
$
|
22
|
114
|
$
|
22
|
|||||||||
|
Granted/converted
|
--
|
--
|
--
|
--
|
--
|
--
|
||||||||||||
|
Exercised
|
(38
|
)
|
22
|
--
|
--
|
(2
|
)
|
20
|
||||||||||
|
Forfeited
|
--
|
--
|
--
|
--
|
--
|
--
|
||||||||||||
|
Outstanding
and exercisable at end of year
|
74
|
$
|
22
|
112
|
$
|
22
|
112
|
$
|
22
|
|||||||||
|
Average
aggregate intrinsic value for options outstanding and
exercisable
|
$
|
1,876
|
||||||||||||||||
At December
31, 2008, weighted average remaining contractual term for these options was 4.1
years.
F-21
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
5.
|
Shareholders’
Equity, Stock Options and Net Income per Share
(continued)
|
Net
Income per Share
The
following table sets forth the computation of net income per basic and diluted
share:
|
2008
|
2007
|
2006
|
||||||
|
Numerator:
|
||||||||
|
Numerator
for basic and diluted net income per share
|
$ | 42,542 | $ | 44,925 | $ | 48,923 | ||
|
Denominator:
|
||||||||
|
Denominator
for basic net income per share - weighted-average shares (in
thousands)
|
28,808 | 29,609 | 31,091 | |||||
|
Effect
of dilutive stock options and non-vested shares (in
thousands)
|
217 | 353 | 430 | |||||
|
Denominator
for diluted net income per share - adjusted weighted-average
shares (in thousands)
|
29,025 | 29,962 | 31,521 | |||||
|
Basic
net income per share
|
$ | 1.48 | $ | 1.52 | $ | 1.57 | ||
|
Diluted
net income per share
|
$ | 1.47 | $ | 1.50 | $ | 1.55 | ||
The
number of options and non-vested shares that could potentially
dilute income per basic share in the future, but that were not
included in the computation of income per diluted share because to do
so would have been anti-dilutive for the periods presented, were approximately
1,153,000, 120,000 and 105,000 in 2008, 2007 and 2006,
respectively.
|
6.
|
Income
Taxes
|
The
provision for income taxes consists of the following:
|
2008
|
2007
|
2006
|
|||||||
|
Current:
|
|||||||||
|
Federal
|
$ | 22,242 | $ | 23,179 | $ | 25,663 | |||
|
State
|
3,476 | 3,613 | 4,094 | ||||||
| 25,718 | 26,792 | 29,757 | |||||||
|
Deferred:
|
|||||||||
|
Federal
|
1,061 | 525 | (57 | ) | |||||
|
State
|
90 | 71 | (79 | ) | |||||
| 1,151 | 596 | (136 | ) | ||||||
| $ | 26,869 | $ | 27,388 | $ | 29,621 | ||||
The tax
benefits associated with the exercise of stock options during the years ended
December 31, 2008, 2007 and 2006 were $1,030, $1,261 and $1,967,
respectively, and are reflected as an increase in additional paid-in capital in
the accompanying consolidated statements of shareholders’ equity.
F-22
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
6.
|
Income
Taxes (continued)
|
The
historical income tax expense differs from the amounts computed by applying the
federal statutory rate of 35.0% to income before income taxes as
follows:
|
2008
|
2007
|
2006
|
|||||||||
|
Tax
expense at the statutory rate
|
$
|
24,294
|
$
|
25,310
|
$
|
27,490
|
|||||
|
State
income taxes, net of federal benefit
|
2,318
|
2,574
|
2,839
|
||||||||
|
Qualified
stock options
|
503
|
294
|
--
|
||||||||
|
Meals
and entertainment
|
194
|
289
|
233
|
||||||||
|
Tax-exempt
interest income
|
(6
|
)
|
(406
|
)
|
(1,005
|
)
|
|||||
|
Federal
income tax credits
|
(328
|
)
|
(498
|
)
|
--
|
||||||
|
Other
|
(106
|
)
|
(175
|
)
|
64
|
||||||
|
$
|
26,869
|
$
|
27,388
|
$
|
29,621
|
||||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax liabilities and assets are as follows:
|
December
31,
|
December
31,
|
||||||
|
2008
|
2007
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Accrued
expenses
|
$
|
3,049
|
$
|
2,509
|
|||
|
Allowance
for doubtful accounts
|
979
|
440
|
|||||
|
Non-compete
agreements
|
1,090
|
488
|
|||||
|
Share-based
compensation
|
2,467
|
1,426
|
|||||
|
Accruals
for income tax contingencies
|
113
|
478
|
|||||
|
Net
operating loss carryforwards
|
276
|
408
|
|||||
|
Total
deferred tax assets
|
7,974
|
5,749
|
|||||
|
Valuation
allowance
|
(276
|
)
|
(408
|
)
|
|||
|
Total
deferred tax assets, net of valuation allowance
|
7,698
|
5,341
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Tax
over book depreciation
|
8,951
|
7,412
|
|||||
|
Prepaid
expenses deductible when paid
|
1,922
|
1,163
|
|||||
|
Goodwill
|
3,561
|
2,351
|
|||||
|
Total
deferred tax liabilities
|
14,434
|
10,926
|
|||||
|
Net
deferred tax liabilities
|
$
|
(6,736
|
)
|
$
|
(5,585
|
)
|
|
The balance
sheet classification of deferred income taxes is as follows:
|
December
31,
|
December
31,
|
||||||
|
2008
|
2007
|
||||||
|
Current
assets
|
$
|
2,105
|
$
|
1,786
|
|||
|
Noncurrent
liabilities
|
(8,841
|
)
|
(7,371
|
)
|
|||
|
$
|
(6,736
|
)
|
$
|
(5,585
|
)
|
||
Total income
tax payments, net of refunds, during fiscal years 2008, 2007 and 2006 were
$30,293, $20,995 and $26,019, respectively.
At
December 31, 2008 and 2007, the Company had state net operating loss
carryforwards of $16,018 that will expire between 2013 and 2024. The use of
these state net operating losses is limited to the future taxable income of
separate legal entities. As a result, the valuation allowance has been provided
for certain state loss carryforwards. The valuation allowance decreased $132
during 2008 but was unchanged during 2007. Based on expectations of future
taxable income, management believes that it is more likely than not that the
results of operations will not generate sufficient taxable income to realize
such net operating loss benefits.
F-23
FORWARD AIR
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
6.
|
Income
Taxes (continued)
|
Income
Tax Contingencies
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 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 total 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.
During the
year ended December 31, 2008, the Company reached a settlement with a state
taxing authority regarding the taxability of two Company subsidiaries in the
related state for tax years 1996 through 2007. As a result of this
settlement, the Company has agreed to pay the state $306, including interest and
penalties. Also, the Company further agreed that if the state was
successful in certain litigation efforts the Company would pay an additional
$213, including interest and penalties. Based on the settlement, the
Company has reclassified $306 to income taxes payable, maintained a contingent
tax liability for $213, and reversed the excess accrual. The Company
had previously reserved $1,393 for this contingency, and as a result of the
settlement, was able to reduce current state income tax expense by $611,
interest expense by $104 and penalties by $159.
A
reconciliation of the beginning and ending amount of unrecognized tax benefit is
as follows:
|
Liability
for
|
|||
|
Unrecognized
Tax
|
|||
|
Benefits
|
|||
|
Balance
at January 1, 2007
|
$ | 1,020 | |
|
Additions
for tax positions of current year
|
157 | ||
|
Reductions
for tax positions taken in prior year
|
(60 | ) | |
|
Balance
at December 31, 2007
|
1,117 | ||
|
Additions
for tax positions of current year
|
126 | ||
|
Reductions
for settlement with state taxing authorities
|
(815 | ) | |
|
Balance
at December 31, 2008
|
$ | 428 | |
Included in
the liability for unrecognized tax benefits at December 31, 2008 and December
31, 2007 are tax positions of $428 and $1,117 respectively, 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.
Included
in the liability for unrecognized tax benefits at December 31, 2008 and December
31, 2007, are accrued penalties of $57 and $220, respectively. The
liability for unrecognized tax benefits at December 31, 2008 and December 31,
2007 also included accrued interest of $68 and $240,
respectively.
|
7.
|
Operating
Leases
|
The
Company leases certain facilities under noncancellable operating leases that
expire in various years through 2019. Certain leases may be renewed for periods
varying from one to ten years. In 2008 and 2007, in conjunction with
the acquisitions discussed in Note 2, the Company assumed several operating
leases for tractors, straight trucks and trailers with original lease terms
between three and six years. These leases expire in various years
through 2014 and may not be renewed beyond the original term.
Sublease
rental income, was $615, $452 and $622 in 2008, 2007 and 2006. The
Company expects to receive aggregate future minimum rental payments under
noncancellable subleases of approximately $102.
F-24
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
7.
|
Operating
Leases (continued)
|
Future
minimum rental payments under noncancellable operating leases with initial or
remaining terms in excess of one year consisted of the following at December 31,
2008:
|
2009
|
$ | 19,958 |
|
2010
|
16,758 | |
|
2011
|
12,169 | |
|
2012
|
7,625 | |
|
2013
|
5,089 | |
|
Thereafter
|
11,957 | |
|
Total
|
$ | 73,556 |
|
8.
|
Commitments
and Contingencies
|
From time
to time, the Company is party to ordinary, routine litigation incidental to and
arising in the normal course of business. The Company does not
believe that any of these pending actions, individually or in the aggregate,
will have a material adverse effect on its business, financial condition or
results of operations.
The
primary claims in the Company’s business relate to workers’ compensation,
property damage, vehicle liability and medical benefits. Most of the Company’s
insurance coverage provides for self-insurance levels with primary and excess
coverage which management believes is sufficient to adequately protect the
Company from catastrophic claims. In the opinion of management, adequate
provision has been made for all incurred claims up to the self-insured limits,
including provision for estimated claims incurred but not reported.
The
Company estimates its self-insurance loss exposure by evaluating the merits and
circumstances surrounding individual known claims and by performing hindsight
and actuarial analysis to determine an estimate of probable losses on claims
incurred but not reported. Such losses could be realized immediately
as the events underlying the claims have already occurred as of the balance
sheet dates.
Because
of the uncertainty of the ultimate resolution of outstanding claims, as well as
uncertainty regarding claims incurred but not reported, it is possible that
management’s provision for these losses could change materially in the near
term. However, no estimate can currently be made of the range of additional loss
that is at least reasonably possible.
|
9.
|
Employee
Benefit Plan
|
The
Company has a retirement savings plan (the “401(k) Plan”). The 401(k) Plan is a
defined contribution plan whereby employees who have completed 90 days of
service, a minimum of 1,000 hours of service and are age 21 or older are
eligible to participate. The 401(k) Plan allows eligible employees to make
contributions of 2.0% to 80.0% of their annual compensation. Employer
contributions were made at 25.0% during 2008, 2007 and 2006 of the employee’s
contribution up to a maximum of 6.0% for all periods presented of total annual
compensation except where government limitations prohibit.
Employer
contributions vest 20.0% after two years of service and continue vesting 20.0%
per year until fully vested. The Company’s matching contributions expensed in
2008, 2007 and 2006 were approximately $615, $405 and $365,
respectively.
|
10.
|
Financial
Instruments
|
Off
Balance Sheet Risk
At
December 31, 2008, the Company had letters of credit outstanding totaling $7,845
as required by its workers’ compensation and vehicle liability insurance
providers.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade accounts receivable. The
Company does not generally require collateral from its customers. Concentrations
of credit risk with respect to trade accounts receivable on a consolidated basis
are limited due to the large number of entities comprising the Company’s
customer base and their dispersion across many different
industries. However, while not significant to the Company on a consolidated
basis, two customers account for approximately 43.9% of FASI’s 2008 operating
revenue. Receivables from these two customers totaled approximately
$1,926 at December 31, 2008.
F-25
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
10.
|
Financial
Instruments (continued)
|
Fair
Value of Financial Instruments
The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Accounts
receivable and accounts payable: The carrying amounts reported in the balance
sheet for accounts receivable and accounts payable approximate their fair value
based on their short-term nature.
The
Company’s senior credit facility bears interest at LIBOR plus 0.6% to 0.9% based
upon covenants related to total indebtedness to earnings. However,
due to current economic conditions, the Company believes its borrowing rate to
be favorable to current market rates. Using borrowing rates currently
available in the market, the Company estimated the fair value of its senior
credit facility, notes payable and capital lease obligations as
follows:
|
December
31, 2008
|
|||||
|
Carrying
|
Fair
|
||||
|
Value
|
Value
|
||||
|
Senior
credit facility
|
$ | 50,000 | $ | 46,995 | |
|
Notes
payable
|
168 | 174 | |||
|
Capital
lease obligations
|
4,469 | 4,669 | |||
At December
31, 2007, the fair value of the Company’s senior credit facility, notes payable
and capital lease obligations did not differ materially from the carrying
amounts.
|
11.
|
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 Note 1.
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
tables summarize 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 years ended
December 31, 2008 and 2007. No segment information has been
presented for the year ended December 31, 2006 as FASI did not exist until July
30, 2007 and all 2006 activity would have been solely related to Forward
Air.
|
Year
ended December 31, 2008
|
Forward
Air
|
FASI
|
Eliminations
|
Consolidated
|
||||||||||
|
External
revenues
|
$ | 419,283 | $ | 55,153 | $ | -- | $ | 474,436 | ||||||
|
Intersegment
revenues
|
1,929 | 127 | (2,056 | ) | -- | |||||||||
|
Depreciation
and amortization
|
14,414 | 2,201 | -- | 16,615 | ||||||||||
|
Share-based
compensation expense
|
6,130 | 137 | -- | 6,267 | ||||||||||
|
Interest
expense
|
1,157 | 79 | -- | 1,236 | ||||||||||
|
Interest
income
|
344 | 10 | -- | 354 | ||||||||||
|
Income
tax expense
|
26,996 | (127 | ) | -- | 26,869 | |||||||||
|
Net
income
|
42,910 | (368 | ) | -- | 42,542 | |||||||||
|
Total
assets
|
298,585 | 46,901 | (37,959 | ) | 307,527 | |||||||||
|
Capital
expenditures
|
23,337 | 3,362 | -- | 26,699 | ||||||||||
F-26
FORWARD
AIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER
31, 2008
|
11.
|
Segment
Reporting (continued)
|
|
Year
ended December 31, 2007
|
Forward
Air
|
FASI
|
Eliminations
|
Consolidated
|
|||||||||
|
External
revenues
|
$ | 376,711 | $ | 16,026 | $ | -- | $ | 392,737 | |||||
|
Intersegment
revenues
|
108 | -- | (108 | ) | -- | ||||||||
|
Depreciation
and amortization
|
10,372 | 452 | -- | 10,824 | |||||||||
|
Share-based
compensation expense
|
3,698 | 12 | -- | 3,710 | |||||||||
|
Interest
expense
|
452 | 39 | -- | 491 | |||||||||
|
Interest
income
|
1,745 | 5 | -- | 1,750 | |||||||||
|
Income
tax expense
|
26,498 | 890 | -- | 27,388 | |||||||||
|
Net
income
|
43,531 | 1,394 | -- | 44,925 | |||||||||
|
Total
assets
|
236,978 | 17,910 | (13,004 | ) | 241,884 | ||||||||
|
Capital
expenditures
|
42,986 | 4,040 | -- | 47,026 | |||||||||
|
12.
|
Quarterly
Results of Operations (Unaudited)
|
The
following is a summary of the quarterly results of operations for the years
ended December 31, 2008 and 2007:
|
2008
|
|||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||
|
Operating
revenue
|
$ | 107,938 | $ | 121,563 | $ | 121,484 | $ | 123,451 | |||
|
Income
from operations
|
16,650 | 20,262 | 19,328 | 14,045 | |||||||
|
Net
income
|
10,008 | 12,102 | 12,097 | 8,335 | |||||||
|
Net
income per share:
|
|||||||||||
|
Basic
|
$ | 0.35 | $ | 0.42 | $ | 0.42 | $ | 0.29 | |||
|
Diluted
|
$ | 0.35 | $ | 0.42 | $ | 0.42 | $ | 0.29 | |||
|
2007
|
|||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||
|
Operating
revenue
|
$ | 87,353 | $ | 93,147 | $ | 97,746 | $ | 114,491 | |||
|
Income
from operations
|
15,839 | 18,313 | 16,904 | 19,992 | |||||||
|
Net
income
|
10,293 | 11,475 | 10,753 | 12,404 | |||||||
|
Net
income per share:
|
|||||||||||
|
Basic
|
$ | 0.34 | $ | 0.38 | $ | 0.36 | $ | 0.43 | |||
|
Diluted
|
$ | 0.34 | $ | 0.38 | $ | 0.36 | $ | 0.43 | |||
During
the fourth quarter of 2008, salaries, wages, and employee benefits were reduced
by $1,482 as the Company reduced accruals for annual senior management
incentives as annual earnings goals were not met. Comparatively, the
Company increased salaries, wages, and employee benefits by $1,105 during the
fourth quarter of 2007 for annual incentives to senior management.
F-27
|
Col.
A
|
Col.
B
|
Col.
C
|
Col.
D
|
Col.
E
|
||||||||||||||
|
Balance
at
|
Charged
to
|
Charged
to
|
Deductions
|
Balance
at
|
||||||||||||||
|
Beginning
|
Costs
and
|
Other
Accounts
|
-Describe
|
End
of
|
||||||||||||||
|
of
Period
|
Expenses
(1)
|
Describe
(2)
|
Period
|
|||||||||||||||
|
Year
ended December 31, 2008
|
||||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
805
|
$
|
903
|
$
|
--
|
$
|
33
|
(2)
|
$
|
1,675
|
|||||||
|
Allowance
for revenue adjustments
|
(1)
|
337
|
4,259
|
--
|
3,740
|
(3)
|
856
|
|||||||||||
|
1,142
|
5,162
|
--
|
3,773
|
2,531
|
||||||||||||||
|
Year
ended December 31, 2007
|
||||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
624
|
$
|
(33
|
)
|
--
|
$
|
(214
|
)
|
(2)
|
$
|
805
|
||||||
|
Allowance
for revenue adjustments
|
(1)
|
236
|
2,312
|
--
|
2,211
|
(3)
|
337
|
|||||||||||
|
860
|
2,279
|
--
|
1,997
|
1,142
|
||||||||||||||
|
Year
ended December 31, 2006
|
||||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
637
|
$
|
(223
|
)
|
--
|
$
|
(210
|
)
|
(2)
|
$
|
624
|
||||||
|
Allowance
for revenue adjustments
|
(1)
|
285
|
2,095
|
--
|
2,144
|
(3)
|
236
|
|||||||||||
|
922
|
1,872
|
--
|
1,934
|
860
|
||||||||||||||
| (1) Represents an allowance for adjustments to accounts receivable due to disputed rates, accessorial charges and other aspects of previously billed shipments. |
|
(2)
Uncollectible accounts written off, net of recoveries
|
|
(3)
Adjustments to billed accounts
receivable
|
S-1
|
Exhibit
|
||
|
3.1
|
Restated
Charter of the registrant (incorporated herein by reference to Exhibit 3
to the registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 28, 1999 (File No.
0-22490))
|
|
|
3.2
|
Amended
and Restated Bylaws of the registrant (incorporated herein by reference to
Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2007 filed with the Securities and
Exchange Commission on August 2, 2007 (File No.
0-22490))
|
|
|
4.1
|
Form
of Landair Services, Inc. Common Stock Certificate (incorporated herein by
reference to Exhibit 4.1 to the registrant’s Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on September
27, 1993 (File No. 0-22490))
|
|
|
4.2
|
Form
of Forward Air Corporation Common Stock Certificate (incorporated herein
by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998 (File No.
0-22490))
|
|
|
4.3
|
Rights
Agreement, dated May 18, 1999, between the registrant and SunTrust Bank,
Atlanta, N.A., including the Form of Rights Certificate (Exhibit A) and
the Form of Summary of Rights (Exhibit B) (incorporated herein by
reference to Exhibit 4 to the registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 28, 1999 (File
No. 0-22490))
|
|
|
10.1
|
*
|
Forward
Air Corporation 2005 Employee Stock Purchase Plan (incorporated herein by
reference to the registrant's Proxy Statement filed with the Securities
and Exchange Commission on April 20, 2005 (File No.
0-22490))
|
|
10.2
|
*
|
Amended
and Restated Stock Option and Incentive Plan (incorporated herein by
reference to Exhibit 10.1 to the registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995 filed with the
Securities and Exchange Commission on August 14, 1995 (File No.
0-22490))
|
|
10.3
|
Lease
Agreement, dated as of June 1, 2006, between the Greeneville-Greene County
Airport Authority and the registrant (incorporated herein by reference to
Exhibit 10.3 to the registrant's Annaul Report on Form 10-K for the fiscal
year ended December 31, 2006 filed with the Securities and Exchange
Commission on February 27, 2007 (File No. 0-22490))
|
|
|
10.4
|
Air
Carrier Certificate, effective August 28, 2003 (incorporated herein by
reference to Exhibit 10.5 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 filed with the Securities and
Exchange Commission on March 11, 2004 (File No.
0-22490))
|
|
|
10.5
|
*
|
Non-Employee
Director Stock Option Plan (incorporated herein by reference to Exhibit
10.2 to the registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995 filed with the Securities and Exchange
Commission on August 14, 1995 (File No. 0-22490))
|
|
10.6
|
*
|
Amendment
to the Non-Employee Director Stock Plan (incorporated herein by reference
to Exhibit 10.7 to the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 filed with the Securities and Exchange
Commission on March 11, 2004 (File No. 0-22490))
|
|
10.7
|
Five-year
senior, unsecured revolving credit facility (incorporated herein by
reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 11, 2007
(File No. 0-22490))
|
|
|
10.8
|
*
|
Employment
Agreement dated October 30, 2007, between Forward Air Corporation and
Bruce A. Campbell, including Attachment B, Restrictive Covenants Agreement
entered into contemporaneously with and as part of the Employment
Agreement (incorporated herein by reference to Exhibit 99.1 to the
registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 31, 2007 (File No.
0-22490))
|
|
10.9
|
*
|
Amendment
dated December 30, 2008 to Employee Agreement dated October 30, 2007,
between Forward Air Corporation and Bruce A. Campbell
|
|
10.10
|
*
|
Second
Amendment dated February 24, 2009 to Employee Agreement dated October 30,
2007, between Forward Air Corporation and Bruce A.
Campbell
|
|
10.11
|
*
|
Form
of Incentive Stock Option Agreement under the registrant's Amended and
Restated Stock Option and Incentive Plan, as amended and 1999 Stock Option
and Incentive Plan, as amended, for grants prior to February 12, 2006
(incorporated herein by reference to Exhibit 10.12 to the registrant's
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005
filed with the Securities and Exchange Commission on March 22, 2006 (File
No. 0-22490))
|
|
10.12
|
*
|
Form
of Non-Qualified Stock Option Agreement under the registrant's
Non-Employee Director Stock Option Plan, as amended, for grants prior to
February 12, 2006 (incorporated herein by reference to Exhibit 10.13 to
the registrant's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2005 filed with the Securities and Exchange Commission on
March 22, 2006 (File No. 0-22490))
|
|
10.13
|
*
|
1999
Stock Option and Incentive Plan (incorporated herein by reference to
Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999 filed with the Securities and
Exchange Commission on May 17, 1999 (File No. 0-22490))
|
|
10.14
|
*
|
Amendment
to the 1999 Stock Option and Incentive Plan (incorporated herein by
reference to Exhibit 10.14 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 filed with the Securities and
Exchange Commission on March 11, 2004 (File No.
0-22490))
|
|
10.15
|
*
|
Non-Qualified
Stock Option Agreement dated August 21, 2000 between the registrant and
Ray A. Mundy (incorporated herein by reference to Exhibit 10.1 to the
registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000 filed with the Securities and Exchange Commission on
November 6, 2000 (File No. 0-22490))
|
|
10.16
|
Forward
Air Corporation Section 125 Plan (incorporated herein by reference to
Exhibit 10.18 to the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 filed with the Securities and Exchange
Commission on March 15, 2002 (File No. 0-22490))
|
|
|
10.17
|
*
|
Forward
Air Corporation Amended and Restated Stock Option and Incentive Plan
(incorporated herein by reference to Appendix A of the registrant's Proxy
Statement on Schedule 14A filed with the Securities and Exchange
Commission on April 2, 2008 (File No. 0-22490))
|
|
10.18
|
*
|
Forward
Air Corporation Amended and Restated Stock Option and Incentive Plan, as
further amended and restated on December 17, 2008
|
|
10.19
|
*
|
Form
of Incentive Stock Option Agreement under the registrant's Amended and
Restated Stock Option and Incentive Plan
|
|
10.20
|
*
|
Form
of Option Restriction Agreement between the registrant and each executive
officer regarding certain restrictions on transferability of accelerated
stock options granted under the registrant's 1999 Stock Option and
Incentive Plan, as amended (incorporated herein by reference to Exhibit
10.18 to the registrant's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2005 filed with the Securities and Exchange Commission
on March 22, 2006 (File No. 0-22490))
|
|
10.21
|
*
|
Form
of Restricted Stock Agreement for an award of restricted stock under the
registrant's 1999 Stock Option and Incentive Plan, as amended, granted on
or after February 12, 2006 (incorporated herein by reference to Exhibit
10.19 to the registrant's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2005 filed with the Securities and Exchange Commission
on March 22, 2006 (File No. 0-22490))
|
|
10.22
|
*
|
2006
Non-Employee Director Stock Plan (incorporated herein by reference to
Appendix A of the registrant's Proxy Statement filed with the Securities
and Exchange Commission on April 24, 2006 (File No.
0-22490))
|
|
10.23
|
*
|
Form
of Non-Employee Director Restricted Stock Agreement for an award of
restricted stock under the registrant's 2006 Non-Employee Director Stock
Plan (incorporated herein by reference to Exhibit 99.2 to the registrant's
Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on May 19, 2006 (File No. 0-22490))
|
|
10.24
|
*
|
Amended
and Restated Non-Employee Director Stock Plan (incorporated herein by
reference to Appendix B of the registrant's Proxy Statement filed with the
Securities and Exchange Commission on April 19, 2007 (File No.
0-22490))
|
|
10.25
|
*
|
Amended
and Restated Non-Employee Director Stock Plan, as further amended and
restated on December 17, 2008
|
|
10.26
|
*
|
Schedule
of Non-Employee Director Compensation effective May 23, 2007 (incorporated
herein by reference to the registrant's Proxy Statement filed
with the Securities and Exchange Commission on April 3, 2008 (File No.
0-22490))
|
|
10.27
|
Agreement
of Purchase and Sale, dated as of July 10, 2006, among AMB Property II,
L.P., Headlands Realty Corporation and Forward Air, Inc. (incorporated
herein by reference to Exhibit 10.2 to the registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2006 filed with the
Securities and Exchange Commission on August 4, 2006 (File No.
0-22490))
|
|
|
10.28
|
Agreement
of Purchase and Sale, dated as of September 14, 2006, by and between
Headlands Realty Corporation and Forward Air, Inc. (incorporated herein by
reference to Exhibit 10.2 to the registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2006 filed with the
Securities and Exchange Commission on November 3, 2006 (File No.
0-22490))
|
|
|
10.29
|
Asset
Purchase Agreement dated November 26, 2007 by and among Forward Air
Corporation, Black Hawk Freight Services, Inc. and the stockholders of
Black Hawk Freight Services, Inc. (incorporated herein by reference to
Exhibit 2.1 to the registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 30, 2007 (File No.
0-22490))
|
|
|
14.1
|
Code
of Ethics (incorporated herein by reference to Exhibit 14.1 to the
registrant's Annual Report of Form 10-K for the fiscal year ended December
31, 2003 filed with the Securities and Exchange Commission on March 11,
2004 (File No. 0-22490))
|
|
|
21.1
|
Subsidiaries
of the registrant
|
|
|
23.1
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting
Firm
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a))
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a))
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*Denotes
a management contract or compensatory plan or arrangement.