Roadrunner Transportation is all caught up.
After being months behind on the release of its 2017 earnings and into 2018 due to the fallout from a scandal at Roadrunner, the company has closed the books on 2017 and has released its first quarter 2018 earnings. They show a company that has improved its operating performance significantly, but in doing so is following the performance of most of its peers riding a terrific freight market. The company’s 10-Q report shows Roadrunner has a capital structure far different than almost any you will find in the industry, with a preponderance of goodwill on the asset side of its balance sheet.
For example, at the end of the first quarter, Roadrunner listed its goodwill assets at about $264.8 million, against a total asset base of $884.4 million. That’s almost 30 percent. Old Dominion Freight, by contrast, had goodwill of $19.4 million against total assets of about $3 billion. That’s not even one percent. Landstar had goodwill of about $39.3 million against total assets of about $1.3 billion. That’s about 3 percent.
Goodwill has many definitions. It is not a measure of hard assets. The website Investopedia defines goodwill as “the value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology.”
Only one analyst, from a company called Crimson Resources which has no obvious web presence, asked a question during the conference call, and it was about the Roadrunner capital structure. The analyst—whose name was not reported by the Seeking Alpha transcript of the call, and was hard to discern in a listening of the call—asked about the capital structure and whether Roadrunner would consider any changes to it.
CEO Curtis Stoelting said that with financial reporting now on track with the calendar, “we are certainly in a much better position to look at all of our opportunities to improve the capital structure and we’ll have more to report on that I think here in the second half of the year.”
Stoelting had warned in a call a few months ago that the turnaround at Roadrunner was going to be slow. He did not change that tune in the call about the end-2017 and first quarter 2018 earnings in his response to the sole analyst question. “We have recognized that the recovery is taking a little longer than maybe some had anticipated originally, we are happy with the progress we are making on the operations side that, but we recognize we need a more resilient capital structure to support that recovery,” he said. “So we’re in process on that.”
The analyst community has mostly dropped coverage of Roadrunner; just one analyst question on a call for a company the admittedly reduced size of Roadrunner is shocking. Still, investors liked what they heard, driving the price of the stock up almost 37% in trading Monday, gaining roughly 77 cents to close at $2.86. But given that the increase came off a closing Friday price of $2.09, it doesn’t take a big move for an eye-popping percentage increase.
The earnings report for RoadRunner was solid on an operating basis. Revenues of $570 million were up 19% from the first quarter of 2017, but a lot of trucking companies were in that territory. Roadrunner posted an operating loss for the quarter of $13.4 million. It was an improvement over the corresponding quarter of 2017, but it was still a loss in a very strong quarter for the industry.
Most of the losses for the company can be attributed to the performance of the LTL division, which is undergoing a major overhaul. As several companies reported in their first quarter earnings, they are moving to a more targeted strategy, chasing more profitable lanes at the expense of seeking ever-increasing tonnage. As a result, the LTL division at Roadrunner only posted revenue gains of 4%, far less than most companies reported in the strong market. The division’s operating loss blew out to $8.7 million in the quarter, widening from a $2.7 million operating loss in the first quarter of last year.
During the conference call, Michael Gettle, president and COO, said some of the loss could be attributed to that strategy shift. Roadrunner Freight, the name of the LTL division, is seeking to “focus on our core competency as a metro-to-metro long haul carrier.” That strategy includes exiting “unprofitable areas (to) redeploy assets to more focused lanes.”
Gettle said the LTL division did have “high single-digit improvement in revenue per shipment and yield.” He attributed it to the shift in the division’s “freight profile and lane density activities.”
During the call, Stoelting warned that the shifts at LTL would continue to impact Roadrunner negatively in the short term. Second quarter revenue in the division will be down from the corresponding quarter of last year, but profitability should be better than in 2018’s first quarter loss. “We anticipate improvements in operating trends in the second half of 2018, compared to the first half,” Stoelting said.
One of the reasons for the weak Roadrunner performance is its interest costs tied to a preferred share sale earlier this year to Elliott Management Corp. The company’s 10-Q statement lays out a dividend rate tied to those preferred shares between 15.3% and a bit more than 17%. In the conference call, CFO Terence Rogers said interest expenses in the 2018 first quarter were $41.2 million more than in the first quarter of 2017, “as the rates on the preferred stock issued in May is higher than our prior bank financing.”
Roadrunner’s cash assets dropped about $5 million between 2017 and 2018, going to $20.7 million at the end of the first quarter from $25.7 million. In the call, Rogers said Roadrunner feels confident it has enough liquidity, with the proceeds from the preferred share sale, $40 million in asset backed financed, and a “standby commitment” from the preferred stock investors.
Email questions sent by Freightwaves to Roadrunner following the conference call had not been answered at publication time.