Thomas Schmitt out as CEO at beleaguered Forward Air

S&P Global Ratings said Tuesday that it was lowering its rating on Forward to B+ from BB-, citing renewed review of its acquisition of Omni. Both ratings are under the cutoff mark for investment-grade ratings.

Meanwhile, Fitch Ratings Services did not reduce its rating on LTL carrier Forward (NASDAQ: FWRD), which is at BB-, but it did revise the outlook on Forward to negative from stable, which is often a step taken as a prelude to a downgrade. By contrast, S&P has a stable rating on Forward Air, a sign that it believes the metrics at the LTL carrier have nowhere to go but up.

Michael Hance, Forward’s chief legal officer and secretary, has been named interim CEO. He has been with the company since 2006 and has served as general counsel since 2008 and chief legal officer since 2014. He also headed the team’s human resources department between 2010 and 2014.

Schmitt’s departure, which has been predicted in some quarters given the collapse in Forward Air’s stock price, means that the two key architects of the Forward Air purchase of Omni Logistics — Schmitt and Omni CEO J.J. Schickel — will both be gone from the much larger company. 

Schickel’s departure was announced a week after the two companies reached an out-of-court settlement over a lawsuit brought by Forward Air that sought to invalidate the merger deal announced in August. 

The erosion of Forward Air’s stock price has been stunning. Since hitting a 52-week high on July 27, the stock is down almost 63%. The investor community sees the structure of the Omni acquisition as dilutive to existing Forward shareholders. 

Schmitt also had been president and chairman at Forward Air. Chris Ruble, COO since 2018 and an employee going back to 1996, will add the president title. In the prepared statement announcing Schmitt’s departure, Ruble was said to have “played a critical role in the successful integration of all of Forward’s acquisitions.”

The independent chairman of the company will be George Mayes. Mayes has been on the board since 2021. He is the founder and CEO of LeanVue, “which provides strategic analysis for global supply chain design and strategy development for managing complex global supply webs,” the company’s website said.

The original agreement called for Omni shareholders to receive $150 million in cash and a 37.7% equity stake in Forward. The enterprise value of Omni at the time of the acquisition was $3.2 billion. Under the revised deal that came out of the lawsuit settlement, the cash going to Omni shareholders was cut to $20 million and the equity distribution was cut to 35% from 37.7% The enterprise value was estimated to have fallen to $2.1 billion.

But the announcement of the deal did not stop the stock from sliding, with Forward Air regularly notching 52-week lows in the two weeks since the revised agreement was announced Jan. 22.

Ratings agencies were originally positive on the deal

The move on ratings by S&P and Fitch mark a significant reversal from what the ratings agencies said in September when the deal was announced. At that time, both agencies made no changes in their ratings but issued comments that, in the case of S&P, could be interpreted as supportive of the deal while Fitch was more cautious.

Debt taken on by Forward Air to complete the acquisition of Omni was its first foray into the public debt markets. The initial BB- rating was placed on $925 million in senior secured notes.

With S&P Global Ratings making a cut in its rating and Fitch going to the less drastic step of a cut in the outlook, it is the former whose actions are more negative.

For the ratings agencies, their decisions always come down to numbers and a company’s ability to service its debt. The numbers laid out by S&P in its rating were stark in describing the changes it now sees in Forward Air’s ability to service its debt.

S&P said it expects Forward Air’s adjusted debt-to-EBITDA ratio to have come in at 8.6X in 2023 (the company has not yet issued its earnings) and 6.2X in 2024. The earlier forecasts were 7.2X and 5.1X, respectively. Funds from Operations (FFO) are projected to have been 4.5% in 2023 and 8.2% in 2024, deteriorating from 5.4% and 9.9%, respectively. (S&P defines FFO as a “company’s ability to generate recurring cash flows from operations independent of changes in working capital. We derive our FFO metric from adjusted EBITDA and subtract cash interest and cash taxes.”)

S&P was not optimistic about the state of the freight market that Forward/Omni faces. It said the combined revenue at Forward was likely to have declined 24% to 26%, compared to S&P’s earlier estimates that it was facing a 20% drop. It also sees revenue growth of just 3% to 5% next year, down from an earlier estimate of 9%.

The numbers on Omni are particularly negative. S&P estimates that Omni as a stand-alone company had a drop in revenue of 30% to 32% last year, compared to an earlier estimate of 22% to 24%. Freight forwarding was particularly troubled, with a decline of 35% last year versus an earlier estimate of 25%.

Revenue growth at Omni this year is expected to be 1% to 3%, according to S&P, versus an earlier estimate of 7% to 9%.

Those revenue declines, combined with what S&P said were “elevated labor and transaction expenses” and slower growth, led S&P to cut its estimate on EBITDA at stand-alone Omni, which now is under the Forward banner.

The S&P estimate for Omni had been EBITDA of about $220 million last year and $470 million this year. But assumptions now have been cut to $175 million and $300 million, respectively.

Decisions made by management are part of the problem, S&P said. “The rapid deterioration of ocean and air freight rates going into 2023 left Omni with a bloated cost structure in a softer demand environment,” the ratings agency said. “This reflects labor-related expenses in its selling, general, and administrative costs that we now expect to be above $500 million compared with about $400 million in our previous forecast.”

“Rightsizing” those costs was supposed to have commenced as part of the deal with Forward Air, S&P said. “Instead, Omni’s management chose to invest in its International air sales resources — delaying targeted cost reduction.”

And S&P said it saw damage from the battle over whether the merger would go through. “Recent litigation between Forward Air and Omni has delayed the start of integration between the companies amid a rapidly evolving freight environment, likely delaying deleveraging,” it said. “We believe management’s execution of its previously stated strategy also continues to shift with changes to growth prospects at Omni.”

The S&P report was published late Tuesday. But by Wednesday morning, this sentence was moot: “The executive team, after the close of the merger and following a period of litigation between the companies, is uncertain as of the current writing,” S&P said. 

A spokesman for Forward Air declined comment on the ratings agencies’ report.

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