Overview and Executive Summary

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

Through our Forward Air segment, we are a leading provider of time-definite surface transportation and related logistics services to the North American expedited ground freight market. We offer our customers local pick-up and delivery (Forward Air Complete™) and scheduled surface transportation of cargo as a cost-effective, reliable alternative to air transportation. We transport cargo that must be delivered at a specific time, but is less time-sensitive than traditional air freight. This type of cargo is frequently referred to in the transportation industry as deferred air freight. We operate our Forward Air segment through a network of terminals located on or near airports in 87 cities in the United States and Canada, including a central sorting facility in Columbus, Ohio and 12 regional hubs serving key markets. We also offer our customers an array of logistics and other services including: TLX; warehousing; customs brokerage; and shipment consolidation, deconsolidation and handling.

FASI provides pool distribution services throughout the Mid-Atlantic, Southeast, Midwest and Southwest continental United States. Pool distribution involves managing high-frequency handling and distribution of time-sensitive product to numerous destinations in specific geographic regions. Our primary customers for this product are regional and nationwide distributors and retailers, such as mall, strip mall and outlet-based retail chains. We service these customers through a network of terminals and service centers located in 19 cities.

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

Trends and Developments

Results from Operations

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

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

Our net fuel surcharge revenue is the result of our fuel surcharge rates, which are set weekly using the national average for diesel price per gallon, and the tonnage transiting our network. For the majority of 2012 higher diesel prices and improved volumes did combine to increase our net fuel surcharge revenue by 5.0% during the year end December 31, 2012 compared to the year ended December 31, 2011.

Goodwill

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

information used in the calculations. Our FASI segment is currently facing the challenges of building, expanding and diversifying its revenue base. If FASI's efforts are significantly delayed, future estimates of projected financial information may be reduced, and we may be required to record an impairment charge against the carrying value of FASI's goodwill.

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Revenues

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

Forward Air

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

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

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

FASI

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

Intercompany Eliminations

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

Purchased Transportation

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

Forward Air

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

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

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

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

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

FASI

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

Intercompany Eliminations

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

Salaries, Wages, and Benefits

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

Forward Air

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

FASI

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

Operating Leases

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

Forward Air

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

FASI

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

Depreciation and Amortization

. . .