In an open letter to shareholders on Wednesday, activist investor Ancora Advisors announced that it has nominated four candidates for election to the board of asset-light trucking and logistics company Forward Air (NASDAQ: FWRD).
After unsuccessful discussions between the board and the investor group, which also includes Forward’s founder Scott Niswonger and former CFO Andy Clarke, it appears a proxy battle is now in the works.
The letter asserts Forward has the potential to be a “best-in-class asset-light transportation company” as it operates one of the largest linehaul networks in North America. However, it “has been hampered by a board that has provided poor operational oversight, pursued an ineffective capital allocation strategy focused on acquisitions of margin- and return-dilutive service offerings and failed to optimize the company’s balance sheet.”
A December SEC filing revealed that the activist group led by Ancora had acquired a 5.3% — $89.5 million — stake in the company with plans to make changes to the company’s capital allocation strategy and divest noncore assets as well as make changes to the management team and board.
The group now has a 6.3% stake in the $2.2 billion Greeneville, Tennessee-based company.
The nominees are Niswonger, Clarke, James Chadwick, a managing director at Ancora with an activist background, and Dawn Garibaldi, who runs an independent consulting firm and has experience in supply chain design. If elected, the group will occupy four of the 10 seats on the company’s board.
Board and investors can’t agree on terms
Clarke told FreightWaves Wednesday that the board offered two seats to the investor group. He noted that he and Niswonger were former board members at Forward and that the group wanted a greater influence in the direction of the company.
Clarke said Forward wasn’t interested in separating the chairman and CEO roles, which he described as “good corporate governance.” Forward was also unwilling to agree to forming a capital allocation committee, according to Clarke. Clarke said as discussions failed to meet the group’s objectives, they decided to move forward with the nominations before a filing deadline.
“Over the past several months, Ancora has attempted to reach an amicable resolution with the company regarding its concerns identified above; however, the incumbent board and management team have refused to enact the changes that we believe are necessary to drive shareholder value, leaving us little choice but to nominate a competing slate of director candidates,” the report read.
Clarke said the investor group has talked with other Forward investors, current and prospective, about the company’s performance and many of them have echoed the same sentiment. “We do feel very confident in our approach,” Clarke added.
The results of the vote will be announced at the annual meeting in May.
Margins and returns lagging
Ancora points to Forward’s investment of almost $1 billion in acquisitions and capital expenditures since 2007 that have been focused on noncore services. The letter said that those actions have weakened margins and returns, noting the company’s return on invested capital has been cut in half to roughly 15%. The report said that during Clarke’s time as CFO, that level averaged 39%.
The group points to declines in Forward’s operating ratio and financial returns while competitors like Old Dominion Freight Line (NASDAQ: ODFL), Saia (NASDAQ: SAIA) and XPO Logistics (NYSE: XPO) are seeing improvement. The group contends that Forward’s continued diversification into other offerings like intermodal, drayage and final mile, and away from its core expedited less-than-truckload offering, is the reason.
The investors believe the current diversification strategy may be spreading the company’s resources thin and causing valuation to sag. By comparison, the market capitalization of Old Dominion (6x), Saia (10x) and XPO (5x) have increased by several multiples of what they were five years ago. Forward’s has yet to double.
Forward’s current management team has several initiatives in the works that are designed to improve volumes and margins. The company started providing traditional LTL service, in addition to its airport-to-airport routes, at some of its terminals to improve freight flows and offset COVID-related declines. The company has also been acquiring final-mile and intermodal drayage providers in recent years.
The company’s consolidated OR was in the high-70% range during the mid-2000s when its focus was expedited LTL. The letter says that despite significant revenue growth, the OR in the expedited segment has worsened approximately 350 bps since 2014 and 675 bps since 2011. The group said higher operating expenses have led to a decline in operating income per shipment during this period.
The expedited segment barely broke 90% in 2019 and was 91.7% in the third quarter. Old Dominion’s was 76.3% in the recent period, Saia’s was 89.4%, with management guiding to more than 200 basis points of improvement in 2021. XPO reports results after the close Wednesday but posted a low-80% OR in the third quarter, 79.7% inclusive of a gain on sale.
Ancora noted that the company’s competitors have seen margins improve by an average of 600 bps since 2014 as Forward’s expedited segment has seen a reversal.
“Inadequate execution by management” was cited as the reason for underperformance versus peers during 2020. While Forward’s 2020 results aren’t final, the company has provided preliminary numbers. The report states that Forward’s expedited OR deteriorated 400 bps year-over-year with earnings before interest, taxes, depreciation and amortization (EBITDA) down 35% and adjusted earnings per share off 25%.
“This compares to LTL peers who have driven year-over-year improvement in ORs (to record levels), EBITDA and EPS in FY 2020,” the report stated.
Lastly, Ancora calls out an “ineffective board which lacks material share ownership,” noting there has not been a purchase of the company’s stock by an insider since 2009, “a stark contrast to the more than $125 million worth of shares sold by company insiders (current and former insiders) over this period.”
“We are concerned that the lack of vested financial interest in the company by directors coupled with Thomas Schmitt’s dual role as chairman and CEO is hindering the board’s ability to hold management accountable,” the report stated.
Fourth quarter negatively impacted by cyberattack
Forward will report fourth-quarter results Thursday. However, the company’s organic and inorganic initiatives will be muted again as it was the victim of a cyberattack in the quarter. A loss of revenue and incremental costs associated with the attack will result in earnings per share of 53 cents to 55 cents, below the original guide of 71 cents to 75 cents.
In total, the attack resulted in a 19-cent-per-share hit to earnings, 11 cents of which was in the expedited segment. Excluding the attack and an increased earnout related to a prior acquisition, the result would have been above the prior range.
In a separate filing, the company reported that December tonnage in the expedited segment declined 12.1% year-over-year with shipments falling 14.8%. It appears the company may have recaptured a good portion of the lost revenue in January as tonnage increased 10.9% and shipments were up 14.4%. Revenue per hundredweight excluding fuel was up 2.2% in the fourth quarter and 1.3% in January.
As other LTL carriers have done recently, Forward implemented a 6% general rate increase at the beginning of February.
“While Ancora remains open to reaching an amicable resolution with the company, we firmly believe that significant changes are necessary to transform the company into an industry leader. We are very excited about the prospects for value creation upon the execution of our plan and look forward to sharing more specifics with shareholders as we approach the 2021 annual meeting,” the letter concluded.
Forward’s response to investor activism
Forward Air issued a press release Wednesday afternoon in which it acknowledged the receipt of the director nominations. The release stated that the company has a “strong and experienced board,” with nine of the 10 directors being independent.
“While we believe Forward is on the right path to deliver sustainable growth for shareholders, we are also open-minded and receptive to ideas that may enhance value or our operations,” it said. The company acknowledged having numerous meetings with the investor group and determined it was “either already executing on – or intends to undertake – many of the initiatives suggested by Ancora.”
Forward said it made an offer to Ancora to add three new directors, two of which would be appointed by Ancora and one to be mutually agreed upon. The company said it also offered to create a new five-person committee with two representatives from Ancora and two independent directors, with Schmitt acting as the committee chair.
“Ancora summarily rejected the proposal and demanded the appointment of three Ancora-selected candidates and 50% control of the proposed board committee such that the Ancora Group would have veto rights,” the release read.
The company sees no issues with Schmitt holding both roles of chairman and CEO as “it ensures the board is led by a voice with in-depth, critical knowledge of our business, while enhancing transparency between the board and management overall.” It believes the presence of a lead independent director “provides an effective balance.”
“Forward remains focused on driving continued improvements in operational performance and shipment-level profitability, while delivering enhanced offerings and service to customers,” the release continued. “As volumes continue to rebound, we are confident that we have emerged from the depths of the pandemic a stronger company.
“While we believe this proxy contest is unreasonable and disregards multiple constructive settlement offers by the board, we remain committed to constructive and reasonable engagement with the Ancora Group moving forward, while ensuring that the best interests of all shareholders – not only those of the Ancora Group – are protected and represented.”
Morgan Stanley (NYSE: MS) is serving as financial adviser to Forward.