UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2015

Commission File No. 000-22490

FORWARD AIR CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

Yes x No ¨

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

Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

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

Yes o No x

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 19, 2015 was 30,832,143.

Table of Contents
Forward Air Corporation
		Page
		Number
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – September 30, 2015 and December 31, 2014	3
	Condensed Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2015 and 2014	4
	Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2015 and 2014	5
	Notes to Condensed Consolidated Financial Statements – September 30, 2015	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
Part II.	Other Information
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46
Signatures		47

2

Part I.	Financial Information
Item 1.	Financial Statements (Unaudited).

Forward Air Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
	September 30, 2015		December 31, 2014
Assets
Current assets:
Cash	$	47,444	$	41,429
Accounts receivable, less allowance of $2,794 in 2015 and $2,563 in 2014	114,674		95,326
Other current assets	23,579		13,200
Total current assets	185,697		149,955
Property and equipment	322,681		305,188
Less accumulated depreciation and amortization	150,180		132,699
Total property and equipment, net	172,501		172,489
Goodwill and other acquired intangibles:
Goodwill	206,899		144,412
Other acquired intangibles, net of accumulated amortization of $48,481 in 2015 and $40,307 in 2014	130,531		72,705
Total net goodwill and other acquired intangibles	337,430		217,117
Other assets	3,037		2,244
Total assets	$	698,665	$	541,805
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	27,435	$	20,572
Accrued expenses	29,691		22,583
Current portion of debt and capital lease obligations	55,898		276
Total current liabilities	113,024		43,431
Long-term debt and capital lease obligations, less current portion	42,830		1,275
Other long-term liabilities	12,198		8,356
Deferred income taxes	38,257		25,180
Shareholders’ equity:
Preferred stock	—		—
Common stock, $0.01 par value: Authorized shares - 50,000,000, Issued and outstanding shares - 30,626,467 in 2015 and 30,255,182 in 2014	306		303
Additional paid-in capital	152,700		130,107
Retained earnings	339,350		333,153
Total shareholders’ equity	492,356		463,563
Total liabilities and shareholders’ equity	$	698,665	$	541,805
The accompanying notes are an integral part of the financial statements.

3

Forward Air Corporation
Condensed Consolidated Statements of Comprehensive Income
(In thousands, except per share data)
(Unaudited)
	Three months ended						Nine months ended
	September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Operating revenue	$	247,093		$	201,477		$	702,705		$	566,897
Operating expenses:
Purchased transportation	104,434			85,874			301,253			242,259
Salaries, wages and employee benefits	59,025			45,651			174,815			131,464
Operating leases	17,072			8,503			51,105			25,019
Depreciation and amortization	9,399			8,115			27,601			22,879
Insurance and claims	5,161			3,747			16,531			10,978
Fuel expense	3,826			5,012			12,034			14,990
Other operating expenses	23,575			17,669			66,608			48,537
Total operating expenses	222,492			174,571			649,947			496,126
Income from operations	24,601			26,906			52,758			70,771
Other income (expense):
Interest expense	(554		)	(172		)	(1,489		)	(355		)
Other, net	10			(55		)	(127		)	144
Total other income (expense)	(544		)	(227		)	(1,616		)	(211		)
Income before income taxes	24,057			26,679			51,142			70,560
Income taxes	8,370			9,935			18,795			26,437
Net income and comprehensive income	$	15,687		$	16,744		$	32,347		$	44,123
Net income per share:
Basic	$	0.51		$	0.55		$	1.04		$	1.44
Diluted	$	0.50		$	0.54		$	1.03		$	1.41
Dividends per share:	$	0.12		$	0.12		$	0.36		$	0.36

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

4

Forward Air Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
	Nine months ended
	September 30, 2015			September 30, 2014
Operating activities:
Net income	$	32,347		$	44,123
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	27,601			22,879
Share-based compensation	5,562			5,005
Gain on disposal of property and equipment	(3		)	(441		)
Provision for loss (recovery) on receivables	463			(39		)
Provision for revenue adjustments	3,391			1,896
Deferred income tax	5,546			1,729
Excess tax benefit for stock options exercised	(2,365		)	(554		)
Changes in operating assets and liabilities
Accounts receivable	866			(15,875		)
Prepaid expenses and other current assets	(1,531		)	(1,397		)
Accounts payable and accrued expenses	(14,562		)	7,767
Net cash provided by operating activities	57,315			65,093
Investing activities:
Proceeds from disposal of property and equipment	1,200			1,582
Purchases of property and equipment	(18,541		)	(37,101		)
Acquisition of business, net of cash acquired	(62,375		)	(84,348		)
Other	(101		)	53
Net cash used in investing activities	(79,817		)	(119,814		)
Financing activities:
Proceeds from term loan	125,000			—
Payments of debt and capital lease obligations	(87,367		)	(9,662		)
Proceeds from exercise of stock options	11,351			13,083
Payments of cash dividends	(11,133		)	(11,141		)
Repurchase of common stock (repurchase program)	(9,996		)	(39,972		)
Common stock issued under employee stock purchase plan	228			148
Cash settlement of share-based awards for minimum tax withholdings	(1,931		)	(1,083		)
Excess tax benefit for stock options exercised	2,365			554
Net cash provided by (used in) financing activities	28,517			(48,073		)
Net increase (decrease) in cash	6,015			(102,794		)
Cash at beginning of period	41,429			127,367
Cash at end of period	$	47,444		$	24,573

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

5

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

1.    Basis of Presentation

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

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

FASI provides pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. FASI’s primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains.

TQI is a provider of maximum security and temperature-controlled logistics services, primarily truckload services, to the life sciences sector (pharmaceutical and biotechnology products). In addition to core pharmaceutical services and other cold chain services, TQI provides truckload and less-than-truckload brokerage transportation services.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company’s operating results are subject to seasonal trends when measured on a quarterly basis; therefore operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and notes thereto included in the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2014.

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

2.    Recent Accounting Pronouncements

In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017 (early adoption is permitted for interim and annual periods beginning on or after December 15, 2016). The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.

6

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

3.    Acquisitions and Goodwill

Acquisition of Towne

On March 9, 2015, the Company acquired CLP Towne Inc. (“Towne”) pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) resulting in Towne becoming an indirect, wholly-owned subsidiary of the Company. For the acquisition of Towne, the Company paid $62,375 in net cash and assumed $59,544 in debt and capital leases. With the exception of assumed capital leases, the assumed debt was immediately paid in full after funding of the acquisition. Of the total aggregate cash consideration paid, $16,500 was placed into an escrow account, with $2,000 of such amount being available to settle any shortfall in Towne’s net working capital and with $14,500 of such amount being available for a period of time to settle certain possible claims against Towne’s common stockholders for indemnification. To the extent the escrow fund is insufficient, certain equity holders have agreed to indemnify Forward Air, subject to certain limitations set forth in the Merger Agreement, as a result of inaccuracies in or breaches of certain of Towne’s representations, warranties, covenants and agreements and other matters. Forward Air financed the Merger Agreement with a $125,0002 year term loan available under the senior credit facility discussed in note 5.

Towne is a full-service trucking provider offering time-sensitive less-than-truckload shipping, full truckload service, an extensive cartage network, container freight stations and dedicated trucking. Towne’s airport-to-airport network provides scheduled deliveries to 61 service points. A fleet of approximately 525 independent contractor tractors provides the line-haul between those service points. The acquisition of Towne provides the Forward Air segment with opportunities to expand its service points and service offerings, such as pick up and delivery services. Additional benefits of the acquisition include increased linehaul network shipping density and a significant increase to our owner operator fleet, both of which are key to the profitability of Forward Air.

Towne had 2014 revenue of approximately $230,000. The assets, liabilities, and operating results of Towne have been included in the Company's consolidated financial statements from the date of acquisition and have been assigned to the Forward Air reportable segment. As the operations of Towne were fully integrated into the existing Forward Air network and operations, the Company is not able to provide the revenue and operating results from Towne included in our consolidated revenue and results since the date of acquisition.

Effective with the acquisition of Towne, the Company immediately entered into a restructuring plan to remove duplicate costs, primarily in the form of, but not limited to salaries, wages and benefits and facility leases. As a result of these plans, during the nine months ended September 30, 2015 the Company recognized expense and recorded liabilities of $2,588 and $11,290 for severance obligations and remaining net payments on vacated, duplicate facilities, respectively. The expenses associated with the severance obligations and vacated, duplicate facilities were recognized in the salaries, wages and benefits and operating lease line items, respectively. The Company also incurred expense of $9,059 for various other integration and transaction related costs which are largely included in other operating expenses.

Acquisition of CST

On February 2, 2014, the Company acquired all of the outstanding capital stock of Central States Trucking Co. and Central States Logistics, Inc. (collectively referred to as “CST”). Pursuant to the terms of the Agreement and concurrently with the execution of the Agreement, the Company acquired all of the outstanding capital stock of CST in exchange for $82,997 in net cash and $11,215 in assumed debt. With the exception of capital leases, the assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using the Company's cash on hand. Under the purchase agreement, $10,000 of the purchase price was paid into an escrow account to protect the Company against potential unknown liabilities.

CST provides industry leading container and intermodal drayage services primarily within the Midwest region of the United States. CST also provides dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. The acquisition of CST provides the Company with a scalable platform for which to enter the intermodal drayage space and thereby continuing to expand and diversify the Company's service offerings.

As part of the Company's strategy to scale CST's operations, in September 2014, CST acquired certain assets of Recob Great Lakes Express, Inc. ("RGL") for $1,350 and in November 2014, acquired Multi-Modal Trucking, Inc. and Multi-Modal Services, Inc. (together referred to as "MMT") for approximately $5,825 in cash and $1,000 in available earn out. The MMT earn out is based

7

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

on acquired operations exceeding 2015 earnings goals, and the earn out was fully accrued as of September 30, 2015. The acquisition of RGL and MMT's assets provided an opportunity for CST to expand into additional Midwest markets.

The Company incurred total transaction costs related to the acquisitions of approximately $900, which were expensed during the three months ended March 31, 2014, in accordance with U.S. GAAP. These transaction costs were primarily included in "Other operating expenses" in the consolidated statements of comprehensive income.

The assets, liabilities, and operating results of CST, RGL and MMT ("CST acquisitions") have been included in the Company's consolidated financial statements from the dates of acquisition and have been assigned to the Forward Air reportable segment. The results of CST, RGL and MMT operations reflected in the Company's consolidated statements of comprehensive income for the three and nine months ended September 30, 2014 from the date of acquisition (February 2, 2014) are as follows (in thousands, except per share data):

	Three months ended September 30, 2014		Dates of acquisition to September 30, 2014
Operating revenue	$	21,100	$	49,975
Income from operations	2,517		4,804
Net income	1,553		2,934
Net income per share
Basic	$	0.05	$	0.10
Diluted	$	0.05	$	0.09

8

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

Allocations of Purchase Prices

The following table presents the allocations of the Towne, CST, RGL and MMT purchase prices to the assets acquired and liabilities assumed based on their estimated fair values and resulting residual goodwill (in thousands):

	Towne		CST		RGL & MMT
	March 9, 2015		February 2, 2014		September & November 2014
Tangible assets:
Accounts receivable	$	24,068	$	9,339	$	—
Prepaid expenses and other current assets	2,916		101		—
Property and equipment	2,095		2,132		287
Other assets	614		35		—
Deferred income taxes	2,159		—		—
Total tangible assets	31,852		11,607		287
Intangible assets:
Non-compete agreements	—		930		92
Trade name	—		500		—
Customer relationships	66,000		36,000		3,590
Goodwill	62,487		51,710		4,206
Total intangible assets	128,487		89,140		7,888
Total assets acquired	160,339		100,747		8,175
Liabilities assumed:
Current liabilities	27,642		6,535		1,000
Other liabilities	3,885		—		—
Debt and capital lease obligations	59,544		11,215		—
Deferred income taxes	6,893		—		—
Total liabilities assumed	97,964		17,750		1,000
Net assets acquired	$	62,375	$	82,997	$	7,175

The above purchase price allocation for Towne is preliminary as the Company is still in the process of finalizing the valuation of the acquired assets and liabilities assumed. The above estimated fair values of assets acquired and liabilities assumed for Towne are based on the information that was available as of the acquisition dates through the date of this filing. The acquired definite-live intangible assets have the following useful lives:

	Useful Lives
	Towne	CST	RGL
Customer relationships	20 years	15 years	15 years
Non-compete agreements	-	5 years	5 years
Trade name	-	2 years	-

The fair value of the non-compete agreements and customer relationships assets were estimated using an income approach (level 3). Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. The fair value of the acquired trade

9

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

name was estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be paid if the Company did not own the applicable name and had to license the trade name. The Company derived the hypothetical royalty income from the projected revenues of CST. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.

Pro forma

The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if the acquisitions occurred as of January 1, 2014 (in thousands, except per share data).

	Three months ended				Nine months ended
	September 30, 2015		September 30, 2014		September 30, 2015		September 30, 2014
Operating revenue	$	247,093	$	260,502	$	736,932	$	743,975
Income from operations	24,601		26,901		50,451		64,326
Net income	15,687		16,486		29,868		39,331
Net income per share
Basic	$	0.51	$	0.54	$	0.97	$	1.28
Diluted	$	0.50	$	0.53	$	0.96	$	1.25

The unaudited pro forma consolidated results for the three and nine month periods are based on the historical financial information of Towne and CST. The unaudited pro forma consolidated results incorporate historical financial information since January 1, 2014. The historical financial information has been adjusted to give effect to pro forma adjustments that are: (i) directly attributable to the acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been had it completed these acquisitions on January 1, 2014.

Goodwill

The following is a summary of the changes in goodwill for the nine months ended September 30, 2015. Approximately $99,248 of goodwill, not including the goodwill acquired with the Towne acquisition, is deductible for tax purposes.

	Forward Air				FASI					TQI				Total
			Accumulated				Accumulated					Accumulated
	Goodwill		Impairment		Goodwill		Impairment			Goodwill		Impairment		Net
Beginning balance, December 31, 2014	$	93,842	$	—	$	12,359	$	(6,953	)	$	45,164	$	—	$	144,412
Towne acquisition	62,487		—		—		—			—		—		62,487
Ending balance, September 30, 2015	$	156,329	$	—	$	12,359	$	(6,953	)	$	45,164	$	—	$	206,899

The Company conducted its annual impairment assessments and tests of goodwill for each reporting unit as of June 30, 2015 and no impairment charges were required.  The first step of the goodwill impairment test is the Company assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, including goodwill. When performing the qualitative assessment, the Company considers the impact of factors including, but not limited to, macroeconomic and industry conditions, overall financial performance of each reporting unit, litigation and new legislation. If based on the qualitative assessments, the Company believes it more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount, or periodically as deemed appropriate by management, the Company will prepare an estimation of the respective reporting unit's fair value utilizing a quantitative approach.  If a quantitative fair value estimation is required, the Company calculates the fair value of the applicable reportable units, using a combination of discounted projected cash flows and market valuations for comparable companies as of the valuation date.  The Company's inputs into the fair value calculations for goodwill are classified within level 3 of the fair value hierarchy as defined in the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“the FASB Codification”). If this

10

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

estimation of fair value indicates that impairment potentially exists, the Company will then measure the amount of the impairment, if any.  Goodwill impairment exists when the calculated implied fair value of goodwill is less than its carrying value.  Changes in strategy or market conditions could significantly impact these fair value estimates and require adjustments to recorded asset balances.

4.    Share-Based Payments

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

Employee Activity - Stock Options

Stock option grants to employees generally expire seven years from the grant date and typically vest ratably over a three-year period.  The Company used the Black-Scholes option-pricing model to estimate the grant-date fair value of options granted.  The weighted-average fair value of options granted and assumptions used to calculate their fair value during the three and nine months ended September 30, 2015 and 2014 were as follows:

	Three months ended
	September 30, 2015			September 30, 2014
Expected dividend yield	1.2		%	—		%
Expected stock price volatility	29.8		%	—		%
Weighted average risk-free interest rate	1.4		%	—		%
Expected life of options (years)	4.5			0.0
Weighted average grant date fair value	$	12		$	—

	Nine months ended
	September 30, 2015			September 30, 2014
Expected dividend yield	1.0		%	1.2		%
Expected stock price volatility	33.7		%	38.8		%
Weighted average risk-free interest rate	1.6		%	1.6		%
Expected life of options (years)	6.0			5.3
Weighted average grant date fair value	$	16		$	14

11

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

The following tables summarize the Company’s employee stock option activity and related information:

	Three months ended September 30, 2015
							Weighted-
			Weighted-		Aggregate		Average
			Average		Intrinsic		Remaining
	Options		Exercise		Value		Contractual
	(000)		Price		(000)		Term
Outstanding at June 30, 2015	902		$	31
Granted	5		52
Exercised	—		—
Forfeited	(1	)	23
Outstanding at September 30, 2015	906		$	31	$	14,819	2.7
Exercisable at September 30, 2015	713		$	27	$	14,507	1.9

	Three months ended
	September 30, 2015		September 30, 2014
Share-based compensation for options	$	352	$	343
Tax benefit for option compensation	$	137	$	131
Unrecognized compensation cost for options, net of estimated forfeitures	$	1,977	$	1,971

	Nine months ended September 30, 2015
							Weighted-
			Weighted-		Aggregate		Average
			Average		Intrinsic		Remaining
	Options		Exercise		Value		Contractual
	(000)		Price		(000)		Term
Outstanding at December 31, 2014	1,363		$	28
Granted	87		51
Exercised	(530	)	27
Forfeited	(14	)	29
Outstanding at September 30, 2015	906		$	31	$	14,819	2.7
Exercisable at September 30, 2015	713		$	27	$	14,507	1.9

	Nine months ended
	September 30, 2015		September 30, 2014
Share-based compensation for options	$	1,029	$	989
Tax benefit for option compensation	$	403	$	377
Unrecognized compensation cost for options, net of estimated forfeitures	$	1,977	$	1,971

12

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

Employee Activity - Non-vested Shares

Non-vested share grants to employees vest ratably over a three-year period.  The non-vested shares’ fair values were estimated using closing market prices on the day of grant. The following tables summarize the Company’s employee non-vested share activity and related information:

	Three months ended September 30, 2015
			Weighted-		Aggregate
	Non-vested		Average		Grant Date
	Shares		Grant Date		Fair Value
	(000)		Fair Value		(000)
Outstanding and non-vested at June 30, 2015	194		$	46
Granted	—		—
Vested	—		—
Forfeited	(1	)	48
Outstanding and non-vested at September 30, 2015	193		$	46	$	8,808

	Three months ended
	September 30, 2015		September 30, 2014
Share-based compensation for non-vested shares	$	1,031	$	906
Tax benefit for non-vested share compensation	$	403	$	345
Unrecognized compensation cost for non-vested shares, net of estimated forfeitures	$	6,148	$	5,241

	Nine months ended September 30, 2015
			Weighted-		Aggregate
	Non-vested		Average		Grant Date
	Shares		Grant Date		Fair Value
	(000)		Fair Value		(000)
Outstanding and non-vested at December 31, 2014	190		$	40
Granted	100		51
Vested	(92	)	39
Forfeited	(5	)	45
Outstanding and non-vested at September 30, 2015	193		$	46	$	8,808

	Nine months ended
	September 30, 2015		September 30, 2014
Share-based compensation for non-vested shares	$	3,042	$	2,726
Tax benefit for non-vested share compensation	$	1,190	$	1,039
Unrecognized compensation cost for non-vested shares, net of estimated forfeitures	$	6,148	$	5,241

13

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

Employee Activity - Performance Shares

The Company annually grants performance shares to key employees.  Under the terms of the performance share agreements, on the third anniversary of the grant date, the Company will issue to the employees a calculated number of common stock shares based on the three year performance of the Company’s common stock share price as compared to the share price performance of a selected peer group.  No shares may be issued if the Company share price performance outperforms 30% or less of the peer group, but the number of shares issued may be doubled if the Company share price performs better than 90% of the peer group.  The fair value of the performance shares was estimated using a Monte Carlo simulation. The weighted average assumptions used in the Monte Carlo calculation were as follows:

	Nine months ended
	September 30, 2015		September 30, 2014
Expected stock price volatility	23.5	%	32.5	%
Weighted average risk-free interest rate	1.0	%	0.7	%

The following tables summarize the Company’s employee performance share activity, assuming median share awards, and related information:

	Three months ended September 30, 2015
		Weighted-		Aggregate
	Performance	Average		Grant Date
	Shares	Grant Date		Fair Value
	(000)	Fair Value		(000)
Outstanding and non-vested at June 30, 2015	77	$	52
Granted	—	—
Additional shares awarded based on performance	—	—
Vested	—	—
Outstanding and non-vested at September 30, 2015	77	$	52	$	4,016

	Three months ended
	September 30, 2015		September 30, 2014
Share-based compensation for performance shares	$	337	$	275
Tax benefit for performance share compensation	$	132	$	105
Unrecognized compensation cost for performance shares, net of estimated forfeitures	$	2,062	$	1,500

14

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

	Nine months ended September 30, 2015
			Weighted-		Aggregate
	Performance		Average		Grant Date
	Shares		Grant Date		Fair Value
	(000)		Fair Value		(000)
Outstanding and non-vested at December 31, 2014	74		$	44
Granted	27		67
Additional shares awarded based on performance	—		—
Vested	(24	)	45
Outstanding and non-vested at September 30, 2015	77		$	52	$	4,016

	Nine months ended
	September 30, 2015		September 30, 2014
Share-based compensation for performance shares	$	972	$	822
Tax benefit for performance share compensation	$	380	$	313
Unrecognized compensation cost for performance shares, net of estimated forfeitures	$	2,062	$	1,500

Employee Activity - Employee Stock Purchase Plan

Under the 2005 Employee Stock Purchase Plan (the “ESPP”), which has been approved by shareholders, the Company is authorized to issue up to a remaining 398,705 shares of common stock to employees of the Company. These shares may be issued at a price equal to 90% of the lesser of the market value on the first day or the last day of each 6-month purchase period. Common stock purchases are paid for through periodic payroll deductions and/or up to two large lump sum contributions. For the nine months ended September 30, 2015, participants under the plan purchased 5,087 shares at an average price of $44.74 per share. For the nine months ended September 30, 2014, participants under the plan purchased 3,814 shares at an average price of $38.88 per share. The weighted-average fair value of each purchase right under the ESPP granted for the nine months ended September 30, 2015, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $7.52 per share. The weighted-average fair value of each purchase right under the ESPP granted for the nine months ended September 30, 2014, which is equal to the discount from the market value of the common stock at the end of each six month purchase period, was $8.97 per share. Share-based compensation expense of $37 and $35 was recognized during the nine months ended September 30, 2015 and 2014, respectively.

Non-employee Director Activity - Non-vested Shares

Grants of non-vested shares to non-employee directors vest ratably over the elected term to the Board of Directors, or approximately one year.  The following tables summarize the Company’s non-employee non-vested share activity and related information:

	Three months ended September 30, 2015
		Weighted-		Aggregate
	Non-vested	Average		Grant Date
	Shares	Grant Date		Fair Value
	(000)	Fair Value		(000)
Outstanding and non-vested at June 30, 2015	12	$	52
Granted	1	45
Vested	—	—
Outstanding and non-vested at September 30, 2015	13	$	52	$	699

15

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

	Three months ended
	September 30, 2015		September 30, 2014
Share-based compensation for non-vested shares	$	166	$	152
Tax benefit for non-vested share compensation	$	65	$	58
Unrecognized compensation cost for non-vested shares, net of estimated forfeitures	$	424	$	363

	Nine months ended September 30, 2015
			Weighted-		Aggregate
	Non-vested		Average		Grant Date
	Shares		Grant Date		Fair Value
	(000)		Fair Value		(000)
Outstanding and non-vested at December 31, 2014	15		$	44
Granted	12		52
Vested	(14	)	43
Outstanding and non-vested at September 30, 2015	13		$	52	$	699

	Nine months ended
	September 30, 2015		September 30, 2014
Share-based compensation for non-vested shares	$	482	$	433
Tax benefit for non-vested share compensation	$	189	$	165
Unrecognized compensation cost for non-vested shares, net of estimated forfeitures	$	424	$	363

5.    Senior Credit Facility

On February 4, 2015, the Company entered into a five-year senior, unsecured credit facility (the “Facility”) with a maximum aggregate principal amount of $275,000, including a revolving credit facility of $150,000 and a term loan facility of $125,000. The revolving credit facility has a sublimit of $25,000 for letters of credit and a sublimit of $15,000 for swing line loans. The revolving credit facility is scheduled to expire in February 2020 and may be used to refinance existing indebtedness of the Company and for working capital, capital expenditures and other general corporate purposes. Unless the Company elects otherwise under the credit agreement, interest on borrowings under the Facility are based on the highest of (a) the federal funds rate plus 0.5%, (b) the administrative agent's prime rate and (c) the LIBOR Rate plus 1.0%, in each case plus a margin that can range from 0.1% to 0.6% with respect to the term loan facility and from 0.3% to 0.8% with respect to the revolving credit facility depending on the Company’s ratio of consolidated funded indebtedness to earnings as set forth in the credit agreement. The Facility contains financial covenants and other covenants that, among other things, restrict the ability of the Company, without the approval of the lenders, to engage in certain mergers, consolidations, asset sales, investments, transactions or to incur liens or indebtedness, as set forth in the credit agreement. As of September 30, 2015, the Company had no borrowings outstanding under the revolving credit facility. At September 30, 2015, the Company had utilized $13,653 of availability for outstanding letters of credit and had $136,347 of available borrowing capacity outstanding under the revolving credit facility.  

In conjunction with the acquisition of Towne (see note 2), the Company borrowed $125,000 on the available term loan. The term loan is payable in quarterly installments of 11.1% of the original principal amount of the term loan plus accrued and unpaid interest, and matures in March 2017. The interest rate on the term loan was 1.4% at September 30, 2015. The remaining balance on the term loan was $97,225 as of September 30, 2015. Of that amount, $55,550 is a current liability.

16

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

6.    Net Income Per Share

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

	Three months ended					Nine months ended
	September 30, 2015			September 30, 2014		September 30, 2015			September 30, 2014
Numerator:
Net income and comprehensive income	$	15,687		$	16,744	$	32,347		$	44,123
Income allocated to participating securities	(104		)	—		(215		)	—
Numerator for basic and diluted income per share - net income	$	15,583		$	16,744	$	32,132		$	44,123
Denominator (in thousands):
Denominator for basic income per share - weighted-average shares	30,715			30,415		30,750			30,710
Effect of dilutive stock options (in thousands)	250			480		300			483
Effect of dilutive performance shares (in thousands)	33			37		34			41
Denominator for diluted income per share - adjusted weighted-average shares	30,998			30,932		31,084			31,234
Basic net income per share	$	0.51		$	0.55	$	1.04		$	1.44
Diluted net income per share	$	0.50		$	0.54	$	1.03		$	1.41

The number of instruments that could potentially dilute net income per basic share in the future, but that were not included in the computation of net income per diluted share because to do so would have been anti-dilutive for the periods presented, are as follows:

	September 30, 2015	September 30, 2014
Anti-dilutive stock options (in thousands)	176	108
Anti-dilutive performance shares (in thousands)	23	—
Total anti-dilutive shares (in thousands)	199	108

7.    Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various states and Canada. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or Canadian examinations by tax authorities for years before 2010.

For the three and nine months ended September 30, 2015 and 2014, the effective income tax rates varied from the statutory federal income tax rate of 35.0%, primarily as a result of the effect of state income taxes, net of the federal benefit, and permanent differences between book and tax net income. The combined federal and state effective tax rate for the nine months ended September 30, 2015 was 36.8% compared to a rate of 37.5%for the same period in 2014.  The reduction in the 2015 effective tax rate was attributable to amending of prior year federal and state income tax returns to take advantage of qualified production property deductions. This reduction was partially offset by large non-deductible Towne acquisition costs incurred in 2015.

8.    Financial Instruments

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.

17

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

The Company’s revolving credit facility and term loan bear variable interest rates plus additional basis points based upon covenants related to total indebtedness to earnings.  As the term loan bears a variable interest rate, the carrying value approximates fair value. Using interest rate quotes and discounted cash flows, the Company estimated the fair value of its outstanding capital lease obligations as follows:

	September 30, 2015
	Carrying Value		Fair Value
Capital leases	$	1,503	$	1,611

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

9.    Shareholders' Equity

During each quarter of 2014 and the first, second and third quarter of 2015, the Company's Board of Directors declared a cash dividend of $0.12 per share of common stock. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors

On February 7, 2014, our Board of Directors approved a new stock repurchase authorization for up to two million shares of our common stock. During the three and nine months ended September 30, 2015, we repurchased 204,590 for $9,996, or $48.86 per share. During the three months ended September 30, 2014, the company repurchased 434,993 for $19,987, or $45.95 per share. During the nine months ended September 30, 2014, the Company repurchased 881,979 for $39,972, or $45.32 per share. As of September 30, 2015, 913,431 shares remain that may be repurchased.

10.    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.

11.    Segment Reporting

The Company operates in three reportable segments based on information available to and used by the chief operating decision maker.  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. TQI is a provider of high security and temperature-controlled logistics services, primarily truckload services, to the pharmaceutical and life science industries. The assets, liabilities, and operating results of our most recent acquisitions, Towne and CST, have been assigned to the Forward Air reportable segment.

18

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in Note 1 to the Consolidated Financial Statements included in the Company’s 2014 Annual Report on Form 10-K. Segment data includes intersegment revenues.  Assets and costs of the corporate headquarters are allocated to the segments based on usage.  The Company evaluates the performance of its segments based on net income.  The Company’s business is conducted 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 three and nine months ended September 30, 2015 and 2014.

	Three months ended September 30, 2015
	Forward Air		FASI		TQI		Eliminations			Consolidated
External revenues	$	205,072	$	31,948	$	10,073	$	—		$	247,093
Intersegment revenues	1,227		184		100		(1,511		)	—
Depreciation and amortization	6,911		1,480		1,008		—			9,399
Share-based compensation expense	1,808		62		16		—			1,886
Interest expense	554		—		—		—			554
Interest income	1		—		—		—			1
Income tax expense	7,994		209		167		—			8,370
Net income	15,091		332		264		—			15,687
Total assets	770,981		45,017		89,659		(206,992		)	698,665
Capital expenditures	3,592		1,108		1,879		—			6,579
	Three months ended September 30, 2014
	Forward Air		FASI		TQI		Eliminations			Consolidated
External revenues	$	159,025	$	30,462	$	11,990	$	—		$	201,477
Intersegment revenues	1,060		153		39		(1,252		)	—
Depreciation and amortization	5,669		1,502		944		—			8,115
Share-based compensation expense	1,608		47		21		—			1,676
Interest expense	167		—		5		—			172
Interest income	1		—		—		—			1
Income tax expense	8,970		686		279		—			9,935
Net income	15,010		1,097		637		—			16,744
Total assets	595,447		43,771		88,462		(197,735		)	529,945
Capital expenditures	2,064		1,610		7		—			3,681

19

Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

September 30, 2015

	Nine months ended September 30, 2015
	Forward Air		FASI		TQI			Eliminations			Consolidated
External revenues	$	583,252	$	86,460	$	32,993		$	—		$	702,705
Intersegment revenues	3,189		580		263			(4,032		)	—
Depreciation and amortization	20,095		4,566		2,940			—			27,601
Share-based compensation expense	5,358		158		46			—			5,562
Interest expense	1,489		—		—			—			1,489
Interest income	3		—		—			—			3
Income tax expense	17,580		329		886			—			18,795
Net income	30,424		502		1,421			—			32,347
Total assets	770,981		45,017		89,659			(206,992		)	698,665
Capital expenditures	9,229		3,344		5,968			—			18,541
	Nine months ended September 30, 2014
	Forward Air		FASI		TQI			Eliminations			Consolidated
External revenues	$	445,874	$	84,482	$	36,541		$	—		$	566,897
Intersegment revenues	2,664		390		230			(3,284		)	—
Depreciation and amortization	15,976		4,229		2,674			—			22,879
Share-based compensation expense	4,829		128		48			—			5,005
Interest expense	377		2		(24		)	—			355
Interest income	8		—		—			—			8
Income tax expense	24,367		1,034		1,036			—			26,437
Net income	40,196		1,693		2,234			—			44,123
Total assets	595,447		43,771		88,462			(197,735		)	529,945
Capital expenditures	24,766		6,165		6,170			—			37,101

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

Overview and Executive Summary

Our operations can be broadly classified into three principal segments: Forward Air, Forward Air Solutions (“FASI”) and Total Quality ("TQI").

Through our Forward Air segment, we provide time-definite surface transportation and related logistics services to the North American expedited ground freight market. Our licensed property broker utilizes qualified motor carriers, including our own, and other third-party transportation companies, to 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 90 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and 12 regional hubs serving key markets. We also offer our customers an array of logistics and other services including: expedited truckload brokerage (“TLX”); intermodal drayage; dedicated fleets; warehousing; customs brokerage; and shipment consolidation, deconsolidation and handling.

FASI provides pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. Our primary customers for this service are regional and nationwide distributors and retailers, such as mall, strip mall and outlet based retail chains. We service these customers through a network of terminals and service centers located in 29 cities.

TQI is a provider of maximum security and temperature-controlled logistics services, primarily truckload services, to the life sciences sector (pharmaceutical and biotechnology products). In addition to core pharmaceutical services and other cold chain services, TQI provides truckload and less-than-truckload brokerage transportation services.

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

Trends and Developments

Acquisition of Towne

On March 9, 2015, we completed the acquisition of CLP Towne Inc. (“Towne”). Towne is a full-service trucking provider offering time-sensitive less-than-truckload shipping, full truckload service, an extensive cartage network, container freight stations and dedicated trucking. For the acquisition of Towne, we paid $62.4 million in net cash and assumed $59.5 million in debt and capital leases. The purchase is subject to an adjustment for working capital. The transaction was funded with proceeds from a $125 million two year term loan. The assets, liabilities, and operating results of Towne have been included in the Forward Air reportable segment.

Acquisitions of CST and Related Companies

On February 2, 2014, we acquired all of the outstanding capital stock of Central States Trucking Co. and Central States Logistics, Inc. (collectively referred to as “CST”). CST provides industry leading container and intermodal drayage services primarily within the Midwest region of the United States. CST also provides dedicated contract and Container Freight Station (“CFS”) warehouse and handling services. We acquired all of the outstanding capital stock of CST in exchange for $83.0 million in net cash and $11.2 million in assumed debt. With the exception of the assumed capital leases, the assumed debt was immediately paid in full after funding of the acquisition. The acquisition and settlement of the assumed debt were funded using our cash on hand. The assets, liabilities, and operating results of CST have been included in the Forward Air reportable segment.

The acquisition of CST provides us with a scalable platform for which to enter the intermodal drayage space and thereby continuing to expand and diversify our service offerings. As part of our strategy to scale CST's operations, in September 2014, CST acquired certain assets of Recob Great Lakes Express, Inc. ("RGL") for $1.4 million and in November 2014, acquired Multi-Modal Trucking,

21

Inc. and Multi-Modal Services, Inc. (together referred to as "MMT") for approximately $5.8 million. The acquisition of RGL and MMT's assets provided an opportunity for CST to expand into additional midwest markets.

Results from Operations

During the three months ended September 30, 2015, we experienced a 22.6% increase in our consolidated revenues compared to the three months ended September 30, 2014, but a 8.6% deterioration in our operating income.

Forward Air's revenue increased $46.2 million, or 28.9%, but operating income decreased 2.1% for the three months ended September 30, 2015, compared to the same period in 2014. The increase of Forward Air revenue was the result of higher airport-to-airport volumes mostly attributable to the acquisition of Towne. The decline in operating income was mostly attributable to integration and deal costs related to the Towne acquisition. The integration and deal costs were partially offset by the increase in operating income from CST, September rate increases implemented in our airport-to-airport business and improved efficiencies on the additional revenue from the Towne acquisition.

FASI revenue increased $1.5 million, or 4.9%, while operating results decreased $1.3 million for the three months ended September 30, 2015, compared to the same period in 2014.  The decline in FASI operating income was primarily the result of increased insurance and claims, continuing costs related to opening a new facility in the second quarter of 2015 and relocating certain facilities in the third quarter of 2015.

TQI's revenue decreased $1.8 million, or 15.0%, and operating income decreased $0.5 million, or 55.6%, for the three months ended September 30, 2015, compared to the same period in 2014. Operating income as a percentage of revenue decreased to 3.9% for the three months ended September 30, 2015 compared to 7.5% for the three months ended September 30, 2014. The decrease in operating income in total dollars and as a percentage of revenue is primarily attributable to the decrease in revenue as well as increases in vehicle insurance premiums.

Fuel Surcharge

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.  During the three months ended September 30, 2015, total net fuel surcharge revenue decreased 24.4% as compared to the same period in 2014. The decrease in net fuel surcharge revenue for the three months ended September 30, 2015 compared to the same periods in 2014 was mostly due to decreased fuel prices offset by increased Forward Air business volumes mostly due to the Towne and CST acquisitions. Partially offsetting the decline in net fuel surcharge revenue was a 24.0% decline in fuel expense which was also the result of the declining fuel prices.

22

Results of Operations

The following table sets forth our consolidated historical financial data for the three months ended September 30, 2015 and 2014 (in millions):

	Three months ended September 30
	2015			2014			Change			Percent Change
Operating revenue	$	247.1		$	201.5		$	45.6		22.6	%
Operating expenses:
Purchased transportation	104.4			85.9			18.5			21.5
Salaries, wages, and employee benefits	59.1			45.7			13.4			29.3
Operating leases	17.0			8.5			8.5			100.0
Depreciation and amortization	9.4			8.1			1.3			16.0
Insurance and claims	5.2			3.7			1.5			40.5
Fuel expense	3.8			5.0			(1.2		)	(24.0	)
Other operating expenses	23.6			17.7			5.9			33.3
Total operating expenses	222.5			174.6			47.9			27.4
Income from operations	24.6			26.9			(2.3		)	(8.6	)
Other expense:
Interest expense	(0.5		)	(0.2		)	(0.3		)	150.0
Total other expense	(0.5		)	(0.2		)	(0.3		)	150.0
Income before income taxes	24.1			26.7			(2.6		)	(9.7	)
Income taxes	8.4			9.9			(1.5		)	(15.2	)
Net income	$	15.7		$	16.8		$	(1.1	)	(6.5	)%

23

The following table sets forth our historical financial data by segment for the three months ended September 30, 2015 and 2014 (in millions):

	Three months ended September 30
Forward Air			Percent of				Percent of					Percent
	2015		Revenue		2014		Revenue		Change			Change
Operating revenue	$	206.3	83.5	%	$	160.1	79.4	%	$	46.2		28.9	%
Operating expenses:
Purchased transportation	92.0		44.6		71.9		44.9		20.1			28.0
Salaries, wages, and employee benefits	44.5		21.6		33.1		20.7		11.4			34.4
Operating leases	14.5		7.0		6.5		4.1		8.0			123.1
Depreciation and amortization	6.9		3.4		5.7		3.6		1.2			21.1
Insurance and claims	4.0		1.9		3.1		1.9		0.9			29.0
Fuel expense	1.7		0.8		2.1		1.3		(0.4		)	(19.0	)
Other operating expenses	19.0		9.2		13.5		8.4		5.5			40.7
Income from operations	$	23.7	11.5	%	$	24.2	15.1	%	$	(0.5	)	(2.1	)%
FASI			Percent of				Percent of					Percent
	2015		Revenue		2014		Revenue		Change			Change
Operating revenue	$	32.1	13.0	%	$	30.6	15.2	%	$	1.5		4.9	%
Operating expenses:
Purchased transportation	8.8		27.4		8.8		28.8		—			—
Salaries, wages, and employee benefits	12.2		38.0		10.4		34.0		1.8			17.3
Operating leases	2.5		7.8		2.0		6.5		0.5			25.0
Depreciation and amortization	1.5		4.7		1.5		4.9		—			—
Insurance and claims	0.9		2.8		0.4		1.3		0.5			125.0
Fuel expense	1.3		4.0		1.8		5.9		(0.5		)	(27.8	)
Other operating expenses	4.4		13.7		3.9		12.7		0.5			12.8
Income from operations	$	0.5	1.6	%	$	1.8	5.9	%	$	(1.3	)	(72.2	)%
TQI