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Activists Claim 'Substandard' Results, 'Disingenuous' Disclosure By Forward Air

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The activist investor group seeking changes at asset-light trucking and logistics company Forward Air (NASDAQ: FWRD) issued another letter to shareholders Tuesday. The group provided its summary on Forward's fourth-quarter earnings results as well as a rebuttal to Forward's take on the recent dialogue between the two parties.

The group, which is led by Ancora Advisors and includes Forward founder Scott Niswonger and former CFO Andy Clarke, said it remains "highly disappointed by the operating performance at Forward Air as recent results and guidance continue to underwhelm." The group also called into question the timing of Forward's earnings announcement, suggesting that it delayed reporting until after the period for nominating directors to the board had passed.

Ancora wants changes made to Forward's capital allocation strategy as well as changes to the management team and board. The group announced Wednesday that it nominated four candidates for election to the board after talks between the two parties failed to produce an agreeable solution.

The two were also unable to come to terms on the composition of a special committee to oversee capital allocation and Ancora's request that the chairman and CEO roles be separated.

The group's thesis is that Forward's margins and returns are lagging its competitors as the company continues to diversify into other offerings like intermodal, drayage and final mile. Specifically, Ancora wants to implement operational changes to improve margins, appoint Clarke as the chairman and divest the intermodal segment. It wants to use the proceeds from the sale of the intermodal unit along with other available capital to buy back stock.

Fourth-quarter results show ‘lack of operating discipline'

The group labeled the company's fourth-quarter performance, which was negatively impacted by a cyberattack, and its first-quarter guidance as "substandard."

On Thursday, Forward reported earnings per share of 55 cents, which included a 19 cent-per-share impact from lost revenue and charges related to the attack. Excluding the attack and an increased earnout related to an acquisition, earnings would have been ahead of the prior guidance range, according to management.

Ancora noted in Tuesday's letter that adding back an earnout from an acquisition is essentially "double counting as the positive impact is already reflected in the reported operating results." Even crediting the quarter with the one-offs, Ancora said results were flattish compared to the prior year.

The group said that when adjusting for the impacts of the attack, the company's expedited LTL operating ratio still declined 200 basis points year-over-year in the quarter.

Ancora asserts the positive contribution in the quarter from Forward's final-mile segment, half of which it claims was the result of the acquisition of Linn Star in early 2020, implies "zero organic growth." Ancora views the lack of growth in final mile as "highly unlikely given the backdrop for final mile services in 2020."

In sum, the group estimates that on an adjusted basis, core organic EPS, excluding acquisitions, was 73 cents per share, an 8% year-over-year decline.

Expedited operating ratio underperformance

A primary concern Ancora has had with Forward has been the OR in the expedited LTL division. The letter said the expedited LTL OR deteriorated an additional 425 bps in 2020, compared to other LTLs, which it said saw 100 bps of improvement on average. Ancora said since 2014, the expedited LTL OR is down 825 bps, while competitors have seen an average of 675 bps of improvement.

The letter points to an approximate 35% year-over-year decline in operating income per ton and per shipment in the division compared to average increases in the mid- and high-single digits that were seen by competitors.

Ancora also rejects a statement in Forward's response to its first shareholder letter. Forward indicated it was pursuing many of the initiatives that Ancora had outlined. Ancora insists that isn't the case and that the recent purchase of another intermodal company is evidence of that.

Guidance comes in light

Forward's first-quarter expectations for revenue growth of 11% to 15% and earnings per share of 55 to 59 cents, including 7 cents in costs related to the attack and "shareholder engagement activities," came in light of consensus estimates at the time, which ranged from 60 to 64 cents. Forward reported EPS of 41 cents in the first quarter of 2020.

The letter stated that the guidance implies earnings growth of roughly 60% year-over-year but notes that the 2020 period was down 35% from the first quarter of 2019 due to the impacts of COVID. Further, when comparing the results to the 2019 period, revenue is expected to increase 25% year-over-year with only a 5% increase in earnings.

Ancora's implication is that the diversification strategy has resulted in further declines in margins as revenue growth continues to outpace operating income and earnings growth. This has occurred in a period when other LTL carriers have reported higher incremental margins, retaining more profit from each additional dollar of revenue.

The letter said the "outcome is particularly disappointing" as Forward has made roughly $100 million in accretive acquisitions, which represent more than the earnings growth seen in the last two years. By comparison, the group says that based on current consensus estimates for first-quarter 2021 compared to first-quarter 2019 Old Dominion Freight Line (NASDAQ: ODFL) is expected to grow revenue 10% and earnings by 45%. Saia (NASDAQ: SAIA) is expected to grow revenue 15% and earnings 65%.

"Ancora believes these calculations directly confirm the crux of our thesis that management and the board have and continue to pursue revenue growth over profitability and ROIC," the letter said.

The letter also points to a lack of cost control as leading to low incremental margins on net revenue dollar growth. For the same period, Ancora estimates that Forward will generate a 9% incremental margin.

"It is incredibly perplexing that even after isolating the largest variable cost on the P&L (purchased transportation), Forward Air would effectively achieve a ~9% incremental margin on what is mostly fixed costs," the letter added.

The group points to an opportunity for cost rationalization, noting that incremental margins should be in the 40% to 45% range.

‘Disingenuous' actions ahead of filing deadline

Ancora also alleges "disingenuous communication ahead of the nomination deadline" by issuing separate filings. The first was filed on Feb. 3 and showed the negative impact to EPS from the cyberattack. The second was a Feb. 9 filing ahead of an appearance at an investor conference, showing metrics by month including favorable results for January. No reference was made to margins or earnings. Shares of FWRD increased 5% that day.

"Ancora is concerned that this may have potentially been an attempt to ‘juice' the stock ahead of the nomination deadline by providing an incomplete picture considering the financial metrics indicated a strong top-line performance, but no detail was offered regarding margins/earnings."

The group contends that Forward has filed fourth-quarter results ahead of this conference every year in the past and has never disclosed tonnage, shipments and revenue per hundredweight by month. The letter said the company issued what it categorized as a "substandard" fourth-quarter performance and first-quarter guide two days later, following the closing of the nomination window.

Forward filed fourth-quarter results after the close of business last Thursday, the day the nomination window closed. Since 2015, Forward has issued results before 4:30 p.m. and usually at 4:05 p.m. The implication by Ancora is that other nominees may have been put forth if fourth-quarter results had been issued prior to the deadline.

Next steps

The group now has a 6.3% stake in the $2.4 billion company and advocates ending the acquisition strategy and pursuing divestitures of non-core assets, which include the intermodal drayage segment. It said doing so would "kill two birds with one stone," getting rid of the lower-margined segments and refocusing attention to the traditionally higher-margined core expedited LTL segment.

Forward's management contends that the intermodal segment is producing a return well above the cost of capital and that the division is capable of seeing double-digit revenue and margin growth moving forward.

Ancora also pointed to work done by FreightWaves last week that outlined a sum of the parts valuation of more than $130 per share. "We believe that the per-share value of Forward Air could be substantially higher than the outcome reached by FreightWaves," it said.

"If a negotiated resolution cannot be achieved that enacts the level of change that we believe is necessary at Forward Air to drive meaningful value, we are committed to presenting shareholders with an opportunity to vote for new leadership and a revamped strategy to enhance shareholder value at the 2021 annual meeting," the letter concluded.

Shares are up 2% to $87.85 in midday trading compared to the S&P 500, which is flat.

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