Roadrunner faces the music after revealing multiple years of financial re-statements

Less than 24 hours after its surprising disclosure that it would re-state several years of financial results due to accounting irregularities at two operating units, the management of Roadrunner Transportation Systems Inc. issued mea culpas, vowed to permanently fix its reporting and compliance issues, and outlined plans to recover from stresses inflicted by a multi-year spree of acquisitions and internal expansion.

Late yesterday, Cudahy, Wis.-based Roadrunner said it would re-state results dating back to 2014 because of unrecorded expenses at its Morgan Southern Inc. and Bruenger subsidiaries. Morgan is an intermodal provider and Bruenger is an asset-based trucker. Both companies were acquired in 2011 for a combined sum of about $30 million.

During a call today with analysts and the media, Roadrunner executives extended the re-statement period back to 2013, meaning there will be four years of revisions. It has delayed issuing fourth-quarter and full-year results until March. Based on the current status of its investigation, Roadrunner said the accounting issues will result in a $20 million to $25 million hit to operating income. However, the company has widened its probe to other parts of its business, and executives said the cost could escalate before the inquiry is complete. Roadrunner executives said there is no evidence of fraud or intentional misstatements.

Roadrunner said it has beefed up its internal controls by adding financial experts to its payroll. The company said it continues to maintain adequate levels of short-term cash liquidity.

Multi-year financial restatements are not met warmly by investors, and Roadrunner stock fell more than 31 percent today to close at $7.92 a share. David G. Ross, an analyst who covers Roadrunner for investment firm Stifel Financial Corp., said in a note late last night that the firm has suspended coverage of the company because it can't reasonably value its assets. Ross predicted that there will be more re-statements to come, and said the "future of this company is likely selling off pieces to pay back its lenders, in our view." In a separate note tonight, Ross said Roadrunner's lenders will remain flexible throughout 2017 to give the company breathing room to operate.

Roadrunner offers truckload, less-than-truckload (LTL), and assorted logistics services, supported by an "asset-light" model in which it effectively controls its truck capacity but generally doesn't employ drivers or own equipment. Roadrunner was one of the most acquisitive transport companies over the past 10-plus years, acquiring 34 companies between 2005 and mid-2015. During that time, it evolved from being exclusively an LTL carrier to one where truckload services would generate most of its revenue.

However, in 2016, as economic and industry conditions worsened for truckload and LTL carriers, Roadrunner hit the wall. Its organizational structure, which consisted of 20 operating units, became stretched by its years of acquisition-fueled growth. It also acknowledged today that it was slow to respond last year to shifting market conditions. In addition, Roadrunner lost $5 to $7 million a year from a 2013 venture in which it acquired and leased older tractors to independent contractors. The practice, common within trucking, backfired on Roadrunner as it spent significant sums modifying the aging rigs to meet federal emission guidelines. The program has been discontinued.

Roadrunner said it has restructured its 20 operating units into six operating groups. Four of those groups will be in truckload, and there will be one each in LTL and Roadrunner's logistics group, which is known as Global Solutions. The four groups in the new truckload segment cover air and ground expedited; temperature-controlled; intermodal; and asset-based brokerage. Global Solutions was re-branded last week as "Ascent Global Logistics." The new structure will help Roadrunner go to market as a more streamlined and integrated organization, executives said.

Roadrunner executives said they expect modest macroeconomic growth and no improvement in rates, at least through the first half of the year. Rates may firm during the second half, as the industry prepares to fully comply with a federal mandate that electronic logging devices (ELDs) be installed in every truck built after the year 2000. A host of trucking executives and industry experts said mandatory ELD compliance, which takes effect in mid-December, would reduce capacity from 3 to 5 percent as many small fleets and independent operators exit the market because of the trouble and expense of complying with the mandate. However, any tightening of capacity may not be felt until sometime in 2018.