Celadon is restating its earnings reports going back through 2014, a dramatic widening of an accounting issue that was first revealed almost a year ago.
On May 1 last year, Celadon, a company that in its most recent 10-K (from 2016) reported revenue of $978.7 million net of fuel surcharges, said then that its financial statements for 2016 and the quarter ending September 30 of that year “should no longer be relied on.” Celadon’s website describes the company as the “premier NAFTA carrier” in the U.S.
It also said that the Audit Committee of the company’s board had begun an investigation of the earnings, leading to the Monday announcement that the investigation had “identified errors that will require adjustments” to the financial statements from 2014, 2015, 2016 and 2017 “and potentially periods prior thereto.” The prepared statement issued late Monday by Celadon said the investigation is ongoing.
The statement cautioned that its discussion of the issues found in its investigation can change. But it provided a detailed recap of some of the things it found, “provided to indicate a general sense of the magnitude of the expected changes.”
- Equipment held by the Quality Companies former subsidiary of Celadon was the subject of “transactions…that included undisclosed arrangements that overstated the values of equipment traded in those transactions.” An unidentified “particular counterparty” was cited by Celadon has having engaged in transactions that “omitted material, agreed upon terms in order to enable (Celadon) to account for those transactions as a separate, independent purchases and sales.” But they weren’t independent and separate, and they weren’t at arm’s length. Projected writedown: $20 million.
- Transactions with a company called Element Financial Corp., which describes itself as a fleet management company, and 19 Capital, “did not sufficiently transfer the risks of ownership to qualify for sales accounting.” Instead, they were “borrowings” and the assets would have been carried on the books differently. The deals with Element and 19 would have been carried as financial obligations. Making adjustments will involve both increasing the company’s assets by $500 million, but also increase liabilities by approximately $700 million. Net income is expected to be reduced by $200-$250 million for the three years ended June 30, 2016. But the change in accounting procedures will also result in a non-cash gain.
- Investments by Element and Celadon in 19 Capital will be restated and may end up reducing the Celadon equity in 19 Capital to zero.
- A reclassification of leases, to capitalized leases rather than operating leases, will have a $150 million impact over three years’ of restatements.
The end result? “(T)he cumulative effect of the adjustments, along with operating losses and other expenses since the Company's last filed financial reports, are expected to reduce its reported stockholders' equity materially,” the company said. “The adjustments are also anticipated to have a material impact on assets, liabilities, revenue, income (loss), and individual expense items in certain periods.”
The Celadon statement came on the same day that Roadrunner Transportation held a call with analysts and investors to discuss its recovery from accounting issues that also go back several years.
The good news announced by Celadon is that it shored up its capital structure. Celadon announced a new $100 million asset-based revolving credit facility, and is in discussions on a broader refinancing that would include roughly $200 million in term debt and the issuance of new equity.
In a prepared statement, CEO Paul Svindland, who was brought in last July to be CEO, conceded the magnitude of the investigation’s discoveries. But he stressed four points:
- The Quality Leasing business, the heart of many of the lease arrangements, was sold last year.
- The equity investment in 19 Capital doesn’t impact Celadon cash flows.
- The accounting for assets involved in the Element transactions will be reversed back to 2016.
- The people responsible for the deals in question are gone from the company.
Because the company is not current in its financial reporting, and has not been for months, it will be losing its New York Stock Exchange listing and will be traded on the OTC Pink Sheets.
Like the collapse in Roadrunner’s stock price, Celadon shareholders also have taken a beating. In April 2015, Celadon was trading at approximately $27. It closed Monday down 25 cts to $3.45, but that was before the late-day announcement.
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