Roadrunner Turns To Barclays For Financial Advice; Sees Aggressive Earnings Growth To 2020

Roadrunner Transportation Systems Inc. RRTS has hired an outside adviser to review its goodwill-heavy capital structure.

In a prepared statement release Wednesday morning, the company said it had "engaged" Barclays Capital to provide advice "regarding the company's capital structure and to provide financial advisory services in connection with the strategic development of the company's business plans."

It also said it had created a special committee of the Roadrunner directors that will consist solely of independent directors—so no members of the company's management—"to review and evaluate the company's financing alternatives."

While Roadrunner has not specifically mentioned the amount of goodwill on its books as an issue, it is part of its capital structure, and it is way out of whack with industry norms.  First quarter goodwill constitutes about 30 percent of the company's balance sheet, while other trucking companies are down in the single digit range.

Goodwill has several definitions, but one of them is tied to the value of acquired assets. Following the release last week of overdue company financial reports, delayed by the accounting irregularities that forced out prior management, a spokeswoman for Roadrunner said the earlier acquisitions were one of the reasons for the high level of goodwill. "Roadrunner was very acquisitive from 2010 thru 2015, acquiring over 20 companies which resulted a build-up of intangible assets including goodwill," she said in response to queries from FreightWaves. "The company is required to periodically evaluate its goodwill carrying values and in 2016 and 2017 non-cash goodwill adjustments were recorded."

But any study of the capital structure will not only focus on goodwill, the spokeswoman added. "The goals for improving the capital structure are to reduce the total amount of debt and preferred stock and lower the overall cost of capital," she said. "Secondarily, depending on the structure of the transaction, goodwill might get adjusted." (Those comments were made prior to the July 11 statement.)

In the earnings statement and conference call last week, CEO Curt Stoelting gave some general outlooks on the future, all of which were positive. But he was far more specific in the most recent statement on the Barclays hire. He said Roadrunner "expects to achieve" revenue of more than $2.2 billion and adjusted EBITDA of more than $100 million by the end of 2020. Revenue in 2017 was approximately $2 billion. But adjusted EBITDA of $100 million would compare with 2017 adjusted EBITDA of $5 million, and $7.8 million in 2016, so it would mark a significant turnaround.

The earnings call of last week marked Roadrunner "catching up" with earlier results that were found to be questionable. Roadrunner said it expects to be timely with earnings and SEC filings in the future. 

The target actually is 2015 performance, Stoelting said. "(The forecast) represents a 2020 target for Adjusted EBITDA margin similar to the company's restated 2015 revenue and Adjusted EBITDA of $2.0 billion and $93.6 million, respectively," he said in the statement. "We believe that the structural changes currently being implemented will make future profitability more resilient and better position the company for growth. We plan to work with Barclays to identify the optimal capital structure given our long-term business plans."

Earlier this year, Roadrunner accepted an investment in preferred shares by to Elliott Management Corp., but paying a hefty double-digit interest rate on the shares. In the July 11 statement, Stoelting said the freedom that fund-raising provided—without covenants that one might find in some sort of debt—had been key to improved performance. "The lack of financial covenants afforded us the flexibility to navigate through a very challenging period and to set the operational momentum on a positive path," Stoelting said.

But that is clearly not sufficient, and the directors' subcommittee will look at alternatives. "Capital raising alternatives could include a rights offering or other forms of new equity or debt capital," the Roadrunner statement said. "Roadrunner may enter into discussions with its various stakeholders as part of this evaluation."

On the release of its earnings and strong outlook last week, the price soared—in relative terms—to $3.15 per share. But it has fallen since then, back to a $2.70 closing price on July 10.

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