UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2016
Commission File Number 001-34734
ROADRUNNER TRANSPORTATION SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 20-2454942 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
1431 Opus Place, Suite 530 Downers Grove, Illinois | 60515 | |
(Address of Principal Executive Offices) | (Zip Code) |
(414) 615-1500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | o | |||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | |||
Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of January 24, 2018, there were outstanding 38,423,391 shares of the registrant’s Common Stock, par value $.01 per share.
EXPLANATORY NOTE
We are filing this Amendment No. 1 on Form 10-Q/A (the “Amendment” or “Form 10-Q/A”) to amend our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, which was originally filed with the Securities and Exchange Commission (“SEC”) on November 14, 2016 (the “Original Form 10-Q”). The purpose of this Amendment is to restate our previously issued condensed consolidated financial statements and related financial information in the Original Form 10-Q. This Form 10-Q/A also revises our previous evaluation of disclosure controls and procedures.
Restatement Background
In November 2016, we commenced an internal investigation into certain accounting discrepancies at our Morgan Southern and Bruenger operating companies. Subsequently, an independent internal investigation was undertaken by the Audit Committee of our Board of Directors (the “Audit Committee”), with assistance from outside counsel and outside consultants to provide forensic and investigative support (the “Audit Committee Investigation”). The expanded Audit Committee Investigation included detailed reviews of financial records at other operating companies and at our corporate headquarters. The Audit Committee Investigation identified material accounting errors that impacted substantially all financial statement line items and disclosures.
On January 27, 2017, the Audit Committee, as a result of the information obtained in connection with the ongoing internal investigation and after considering the recommendation of management, determined that previously issued (1) consolidated financial statements as of December 31, 2015 and 2014 and for the three years in the period ended December 31, 2015; (2) unaudited condensed consolidated financial statements for the quarterly periods in the years ended December 31, 2015 and 2014; and (3) the unaudited condensed consolidated financial statements for the quarterly periods ended March 31, 2016, June 30, 2016, and September 30, 2016, should no longer be relied upon due to the identification of material accounting errors.
Based on the Audit Committee Investigation, current management determined that there were deficiencies in the design and/or execution of internal controls that constituted material weaknesses. Current management determined that structural and environmental factors, including the increased size and complexity arising from the acquisition of 25 non-public companies between February 2011 and September 2015, the inconsistency of our accounting systems, policies and procedures, and management override of internal controls contributed to the material weaknesses and resulting material accounting errors. Our internal controls failed to prevent or were overridden by management in certain instances to allow recording accounting entries without appropriate support, recording accounting entries that were inconsistent with information known by management at the time, not communicating relevant information within our organization and, in some cases, withholding information from our independent directors, our Audit Committee, and our independent auditors, which resulted in material accounting errors.
As a result of these errors, we have restated the unaudited condensed consolidated financial statements and related information as of September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015.
Other Amended Filings
In addition to this Form 10-Q/A, we are concurrently filing an amendment to our Annual Report on Form 10-K for the year ended December 31, 2015 to restate our previously issued consolidated financial statements and related financial information and revise our previous conclusion with respect to the effectiveness of our internal control over financial reporting. We are also concurrently filing amendments to our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016 to restate our previously issued condensed consolidated financial statements and related financial information presented therein and to revise our previous conclusion with respect to the effectiveness of our disclosure controls and procedures.
Internal Control Consideration
Management has determined that the material accounting errors resulted from deficiencies in our internal control over financial reporting that constitute material weaknesses.
Items Amended in this Form 10-Q/A
For the convenience of the reader, this Form 10-Q/A amends and restates the Original Form 10-Q in its entirety. As a result, it includes both items that have been changed as a result of the restatement and items that are unchanged from the Original Form 10-Q. This Form 10-Q/A speaks as of the date of the Original Form 10-Q and has not been updated to reflect events occurring subsequent to the filing of the Original Form 10-Q other than those associated with the restatement of our condensed consolidated financial statements. The following items in the Original Form 10-Q have been amended as a result of, and to reflect, the restatement:
•Part I. Item 1. Financial Statements
•Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
•Part I. Item 4. Controls and Procedures
•Part II. Item 1. Legal Proceedings
•Part II. Item 1A. Risk Factors
In accordance with applicable SEC rules, this Form 10-Q/A includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 from our Chief Executive Officer (as Principal Executive Officer and Principal Financial Officer) dated as of the filing date of this Form 10-Q/A.
ROADRUNNER TRANSPORTATION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q/A
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. | FINANACIAL STATEMENTS. |
ROADRUNNER TRANSPORTATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)
September 30, 2016 | December 31, 2015 | ||||||
As Restated (1) | As Restated (1) | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 3,064 | $ | 7,930 | |||
Accounts receivable, net of allowances of $15,100 and $14,026, respectively | 298,307 | 260,029 | |||||
Deferred income taxes | 19,230 | 20,891 | |||||
Income tax receivable | 28,993 | 20,663 | |||||
Prepaid expenses and other current assets | 37,829 | 37,051 | |||||
Total current assets | 387,423 | 346,564 | |||||
Property and equipment, net of accumulated depreciation of $81,735 and $64,780, respectively | 184,226 | 195,364 | |||||
Other assets: | |||||||
Goodwill | 312,509 | 682,810 | |||||
Intangible assets, net | 69,268 | 75,694 | |||||
Other noncurrent assets | 10,880 | 7,321 | |||||
Total other assets | 392,657 | 765,825 | |||||
Total assets | $ | 964,306 | $ | 1,307,753 | |||
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | |||||||
Current liabilities: | |||||||
Current maturities of debt | $ | 404,180 | $ | 432,830 | |||
Accounts payable | 169,598 | 116,166 | |||||
Accrued expenses and other current liabilities | 81,700 | 81,922 | |||||
Total current liabilities | 655,478 | 630,918 | |||||
Long-term deferred tax liabilities | 61,017 | 105,088 | |||||
Other long-term liabilities | 11,917 | 15,308 | |||||
Total liabilities | 728,412 | 751,314 | |||||
Commitments and contingencies (Note 10) | |||||||
Stockholders’ investment: | |||||||
Common stock $.01 par value; 100,000 shares authorized; 38,335 and 38,266 shares issued and outstanding | 383 | 383 | |||||
Additional paid-in capital | 398,165 | 397,253 | |||||
Retained (deficit) earnings | (162,654 | ) | 158,803 | ||||
Total stockholders’ investment | 235,894 | 556,439 | |||||
Total liabilities and stockholders’ investment | $ | 964,306 | $ | 1,307,753 |
(1) See Note 13 “Restatement of Previously Issued Financial Statements.”
See accompanying notes to unaudited condensed consolidated financial statements.
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ROADRUNNER TRANSPORTATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
As Restated (1) | As Restated (1) | As Restated (1) | As Restated (1) | ||||||||||||
Revenues | $ | 532,009 | $ | 496,764 | $ | 1,481,972 | $ | 1,503,221 | |||||||
Operating expenses: | |||||||||||||||
Purchased transportation costs | 358,271 | 324,812 | 981,971 | 997,614 | |||||||||||
Personnel and related benefits | 72,767 | 66,921 | 212,806 | 195,988 | |||||||||||
Other operating expenses | 80,433 | 88,567 | 239,967 | 236,789 | |||||||||||
Depreciation and amortization | 9,248 | 8,206 | 27,636 | 22,447 | |||||||||||
Impairment charges | 372,081 | — | 372,081 | — | |||||||||||
Acquisition transaction expenses | — | 564 | — | 564 | |||||||||||
Total operating expenses | 892,800 | 489,070 | 1,834,461 | 1,453,402 | |||||||||||
Operating (loss) income | (360,791 | ) | 7,694 | (352,489 | ) | 49,819 | |||||||||
Interest expense | 5,757 | 4,913 | 17,060 | 13,895 | |||||||||||
(Loss) Income before provision for income taxes | (366,548 | ) | 2,781 | (369,549 | ) | 35,924 | |||||||||
(Benefit from) provision for income taxes | (46,930 | ) | 1,076 | (48,092 | ) | 13,828 | |||||||||
Net (loss) income | $ | (319,618 | ) | $ | 1,705 | $ | (321,457 | ) | $ | 22,096 | |||||
(Loss) earnings per share: | |||||||||||||||
Basic | $ | (8.34 | ) | $ | 0.04 | $ | (8.39 | ) | $ | 0.58 | |||||
Diluted | $ | (8.34 | ) | $ | 0.04 | $ | (8.39 | ) | $ | 0.56 | |||||
Weighted average common stock outstanding: | |||||||||||||||
Basic | 38,328 | 38,264 | 38,310 | 38,149 | |||||||||||
Diluted | 38,328 | 39,471 | 38,310 | 39,441 |
(1) See Note 13 “Restatement of Previously Issued Financial Statements.”
See accompanying notes to unaudited condensed consolidated financial statements.
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ROADRUNNER TRANSPORTATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30, | |||||||
2016 | 2015 | ||||||
As Restated (1) | As Restated (1) | ||||||
Cash flows from operating activities: | |||||||
Net (loss) income | $ | (321,457 | ) | $ | 22,096 | ||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 29,675 | 24,040 | |||||
(Gain) loss on disposal of property and equipment | (310 | ) | 1,553 | ||||
Gain on sale of business | (5,416 | ) | — | ||||
Share-based compensation | 1,653 | 2,044 | |||||
Adjustment to contingent purchase obligation | (2,458 | ) | (191 | ) | |||
Provision for bad debts | 2,826 | 4,426 | |||||
Tax deficiency (excess tax benefit) on share-based compensation | 465 | (1,175 | ) | ||||
Deferred tax (benefit) provision | (46,899 | ) | 2,054 | ||||
Impairment charges | 372,081 | — | |||||
Changes in: | |||||||
Accounts receivable | (41,102 | ) | (2,100 | ) | |||
Income tax receivable | (8,330 | ) | (8,814 | ) | |||
Prepaid expenses and other assets | 1,063 | (5,260 | ) | ||||
Accounts payable | 53,432 | (5,535 | ) | ||||
Accrued expenses and other liabilities | 5,597 | 5,787 | |||||
Net cash provided by operating activities | 40,820 | 38,925 | |||||
Cash flows from investing activities: | |||||||
Acquisition of business, net of cash acquired | — | (32,364 | ) | ||||
Capital expenditures | (16,156 | ) | (39,436 | ) | |||
Proceeds from sale of business | 1,000 | — | |||||
Proceeds from sale of property and equipment | 6,014 | 5,313 | |||||
Net cash used in investing activities | (9,142 | ) | (66,487 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings under revolving credit facilities | 197,789 | 154,127 | |||||
Payments under revolving credit facilities | (213,038 | ) | (231,127 | ) | |||
Debt borrowings | — | 110,000 | |||||
Debt payments | (14,750 | ) | (5,000 | ) | |||
Debt issuance costs | (692 | ) | (2,713 | ) | |||
Payments of contingent purchase obligations | (798 | ) | (3,317 | ) | |||
Proceeds from issuance of restricted stock units, net of taxes paid | (276 | ) | (929 | ) | |||
Proceeds from issuance of common stock, net of issuance costs | — | 3,786 | |||||
(Tax deficiency) excess tax benefit on share-based compensation | (465 | ) | 1,175 | ||||
Reduction of capital lease obligation | (4,314 | ) | (873 | ) | |||
Net cash (used in) provided by financing activities | (36,544 | ) | 25,129 | ||||
Net decrease in cash and cash equivalents | (4,866 | ) | (2,433 | ) | |||
Cash and cash equivalents: | |||||||
Beginning of period | 7,930 | 10,809 | |||||
End of period | $ | 3,064 | $ | 8,376 |
(1) See Note 13 “Restatement of Previously Issued Financial Statements.”
See accompanying notes to unaudited condensed consolidated financial statements.
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Nine Months Ended September 30, | |||||||
2016 | 2015 | ||||||
As Restated (1) | As Restated (1) | ||||||
Supplemental cash flow information: | |||||||
Cash paid for interest | $ | 14,731 | $ | 11,831 | |||
Cash paid for income taxes (net of refunds) | $ | 993 | $ | 20,241 | |||
Non-cash sale of business | $ | 3,860 | $ | — | |||
Non-cash capital leases and other obligations to acquire assets | $ | — | $ | 6,476 | |||
Non-cash contingent purchase obligation recorded on the opening balance sheet | $ | — | $ | 4,114 |
(1) See Note 13 “Restatement of Previously Issued Financial Statements.”
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Roadrunner Transportation Systems, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization, Nature of Business and Significant Accounting Policies
Nature of Business
Roadrunner Transportation Systems, Inc. (the “Company”) is headquartered in Cudahy, Wisconsin and has the following three segments: Truckload Logistics (“TL”), Less-than-Truckload (“LTL”), and Global Solutions. Within its TL business, the Company operates a network of 46 TL service centers and 20 company dispatch offices and is augmented by over 100 independent brokerage agents. Within its LTL business, the Company operates 45 LTL service centers throughout the United States, complemented by relationships with over 150 delivery agents. Within its Global Solutions business, the Company operates from seven service centers, ten dispatch offices, and five freight consolidation and inventory management centers throughout the United States. From pickup to delivery, the Company leverages relationships with a diverse group of third-party carriers to provide scalable capacity and reliable, customized service to its customers, including domestic and international air and ocean transportation services. The Company operates primarily in the United States.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All intercompany balances and transactions have been eliminated in consolidation. In the Company's opinion, except as noted below with respect to the change in accounting principle and the change in segments and the adjustments related to the restatement of previously issued financial statements as disclosed in Note 13, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
Change in Accounting Principle
On January 1, 2016, the Company adopted a new methodology for accounting for debt issuance costs in accordance with the Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), which requires debt issuance costs related to a recognized debt liability in the balance sheet to be presented as a direct reduction from the carrying amount of that debt liability. The change in methodology has been applied retrospectively. The balance of the debt issuance costs has been reclassified from other noncurrent assets to a direct reduction of debt on the condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Segment Reporting
The Company determines its segments based on the information utilized by the chief operating decision maker, the Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it has three segments: TL, LTL, and Global Solutions. In 2016, the Company realigned two of its operating companies to different existing segments based on consideration of services provided and consistent with how the business is viewed by the chief operating decision maker. The change in segments, which affected the TL and Global Solutions segments, did not have any impact on previously reported consolidated financial results, but prior year segment results have been retrospectively revised to align with the new segment structure.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which was updated in August 2015 by Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued Accounting Standards Update No. 2016-08 (“ASU 2016-08”), Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net). Under ASU 2016-08, when another party is involved in providing goods or services to a customer, an entity is required to
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determine whether the nature of its promise is to provide the specified good or service (that is, the entity is a principal) or to arrange for that good or service to be provided by another party. When the principal entity satisfies a performance obligation, the entity recognizes revenue in the gross amount. When an entity that is an agent satisfies the performance obligation, that entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled. Both ASU 2014-09 and ASU 2016-08 will be effective for the Company in 2018. The Company is in the process of evaluating the guidance in these Accounting Standards Updates and has not yet determined if the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740), which will be effective for the Company in 2017. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. Under this amendment, deferred tax liabilities and assets would still be offset and presented as a single amount. Early adoption of the amendments is permitted and may either be applied prospectively or retrospectively. Deferred tax assets are currently reported as deferred income taxes and included as current assets in the condensed consolidated balance sheets. Adoption of the revised Accounting Standard will require the Company to reclassify the balance currently reported as deferred income taxes to other long-term liabilities in the condensed consolidated balance sheets.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), which will be effective for the Company in 2019. For financing leases, a lessee is required to: 1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments; 2) recognize interest on the lease liability separately from amortization of the right-of-use asset; and 3) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases, a lessee is required to: 1) recognize the right-to-use asset and a lease liability, initially measured at the present value of the lease payments; 2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and 3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying assets not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company is in the process of evaluating the guidance in this Accounting Standards Update and has not yet determined if the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 will be effective for the Company in 2017 and includes simplification of the following aspects of share-based payment transactions:
Accounting for income taxes - All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.
Classification of excess tax benefits on the statement of cash flow - Excess tax benefits should be classified along with other income tax cash flows as an operating activity.
Forfeitures - An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur.
The Company expects to prospectively adopt ASU 2016-09 in January 2017. Upon adoption of ASU 2016-09 in January 2017, the Company will recognize any excess tax benefits or tax deficiencies through the condensed consolidated statements of operations. The Company has historically been able to offset excess tax benefits and/or tax deficiencies against taxes payable, so no cumulative effect adjustment to retained earnings is expected upon adoption. Effective January 1, 2017, the Company will no longer present excess tax benefits and/or tax deficiencies under both operating activities and financing activities within the condensed consolidated statements of cash flows for any period presented. The Company will elect to recognize forfeitures as they occur and the Company expects that the cumulative effect of adjustments to retained earnings, if any, will be de minimis.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”), which will be effective for the Company in 2018. ASU 2016-15 provides guidance on specific cash flow issues, including but not limited to: debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; and distributions received from equity method investees. ASU 2016-15 provides guidance on how to account for the cash inflows and/or outflows in the statement of cash flows. The Company is in the process of evaluating the guidance in this Accounting Standards Update and has not yet determined if the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
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In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”), which will be effective for the Company in 2018. Current GAAP prohibits the recognition of current and deferred income taxes for intra-entity asset transfers other than inventory (e.g. property and equipment) until the asset has been sold to an outside party. Under ASU 2016-16, the FASB decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset when the transfer occurs. ASU 2016-16 does not include any new disclosure requirements; however, existing disclosure around the rate reconciliations and types of temporary differences and/or carryforward that give rise to a significant portion of deferred income taxes may be applicable. The Company is in the process of evaluating the guidance in this Accounting Standards Update and has not yet determined if the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
2. Acquisitions
On July 28, 2015, the Company acquired all of the outstanding partnership interests of Stagecoach Cartage and Distribution LP (“Stagecoach”) for the purpose of expanding its presence within the TL segment. Cash consideration paid was $32.3 million. The acquisition was financed with borrowings under the Company's credit facility discussed in Note 5. The Stagecoach purchase agreement calls for contingent consideration in the form of a contingent purchase obligation capped at $5.0 million. The former owners of Stagecoach were entitled to receive a payment equal to the amount by which Stagecoach's operating income before depreciation and amortization, as defined in the purchase agreement, exceeded $7.0 million for the twelve month periods ending July 31, 2016, 2017, 2018, and 2019. Approximately $4.1 million was recorded as a contingent purchase obligation on the opening balance sheet.
The results of operations and financial condition of this acquisition have been included in the Company's condensed consolidated financial statements since its acquisition date. The acquisition of Stagecoach is considered immaterial. The goodwill for the acquisition is a result of acquiring and retaining the existing workforce and expected synergies from integrating the operations into the Company. Purchase accounting for the Stagecoach acquisition is considered final.
3. Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of all acquisitions over the estimated fair value of the net assets acquired. The Company evaluates goodwill and intangible assets for impairment at least annually or more frequently whenever events or changes in circumstances indicate that the asset may be impaired, or in the case of goodwill, the fair value of the reporting unit is below its carrying amount. The analysis of potential impairment of goodwill requires a two-step approach, the first of which is to compare the estimated fair value at each of its reporting units to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. The second step includes valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, a non-cash goodwill impairment loss is recognized in an amount equal to the excess, not to exceed the carrying amount.
For purposes of the impairment analysis, the fair value of the Company’s reporting units is estimated based upon an average of the market approach and the income approach, both of which incorporate numerous assumptions and estimates such as company forecasts, discount rates and growth rates, among others. The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, and capital expenditures. The allocation requires several analyses to determine fair value of assets and liabilities including, among others, customer relationships, and property and equipment. Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. Future declines in the overall market value of the Company's stock may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.
The Company has four reporting units for its three segments: TL, LTL, Global Solutions, and Warehousing & Consolidation, which is consolidated into the Company's Global Solutions segment. The Company conducts its goodwill impairment analysis for each of its four reporting units as of July 1 of each year. As a result of the first step of the Company's goodwill impairment analysis as of July 1, 2016, the Company determined that the fair value of the Global Solutions reporting unit exceeded its carrying value by 8.4%; thus no impairment was indicated for this reporting unit. However, resulting from a combination of weakened environment, the inability to meet forecast results, and the lower share price, the Company determined that the fair value of the TL, LTL, and Warehousing & Consolidation reporting units were less than their respective carrying values, requiring the Company to perform the second step of the goodwill impairment analysis for its TL, LTL, and Warehousing & Consolidation reporting units.
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The Company completed the second step of the goodwill impairment analysis for its TL, LTL, and Warehousing & Consolidation reporting units and recorded non-cash goodwill impairment charges of $157.5 million, $197.3 million, and $17.2 million in the third quarter of 2016 for its TL, LTL, and Warehousing & Consolidation reporting units, respectively. No goodwill impairment charges were recorded in 2015.
As indicated in Note 1, in connection with the change in segments, the Company reallocated goodwill of $77.5 million between the TL and Global Solutions segments as of December 31, 2015. Additionally, the goodwill balances have been adjusted for the effects of the restatement discussed in Note 13. The following is a rollforward of goodwill from December 31, 2015 to September 30, 2016 by segment (in thousands):
TL | LTL | Global Solutions | Total | ||||||||||||
Goodwill balance as of December 31, 2015 | $ | 254,940 | $ | 197,312 | $ | 230,558 | $ | 682,810 | |||||||
Adjustments to goodwill for purchase accounting | 1,780 | — | — | 1,780 | |||||||||||
Impairment charges | (157,538 | ) | (197,312 | ) | (17,231 | ) | (372,081 | ) | |||||||
Goodwill balance as of September 30, 2016 | $ | 99,182 | $ | — | $ | 213,327 | $ | 312,509 |
Intangible assets consist primarily of customer relationships acquired from business acquisitions. As indicated in Note 1, in connection with the change in segments, the Company reallocated net intangible assets of $2.7 million between the TL and Global Solutions segments as of December 31, 2015. Additionally, the intangible asset balances have been adjusted for the effects of the restatement discussed in Note 13. Intangible assets as of September 30, 2016 and December 31, 2015 were as follows (in thousands):
September 30, 2016 | December 31, 2015 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||
TL | $ | 57,468 | $ | (13,320 | ) | $ | 44,148 | $ | 57,468 | $ | (9,714 | ) | $ | 47,754 | |||||||||
LTL | 1,358 | (1,067 | ) | 291 | 1,358 | (1,017 | ) | 341 | |||||||||||||||
Global Solutions | 38,427 | (13,598 | ) | 24,829 | 38,427 | (10,828 | ) | 27,599 | |||||||||||||||
Total | $ | 97,253 | $ | (27,985 | ) | $ | 69,268 | $ | 97,253 | $ | (21,559 | ) | $ | 75,694 |
The customer relationships intangible assets are amortized over their estimated five to 12 year useful lives. Amortization expense was $2.1 million and $2.0 million for the three months ended September 30, 2016 and 2015, respectively. Amortization expense was $6.4 million and $6.1 million for the nine months ended September 30, 2016 and 2015, respectively. Estimated amortization expense for each of the next five years based on intangible assets as of September 30, 2016 is as follows (in thousands):
Remainder 2016 | $ | 2,140 | |
2017 | 8,447 | ||
2018 | 8,183 | ||
2019 | 7,879 | ||
2020 | 7,506 | ||
2021 | 7,324 | ||
Thereafter | 27,789 | ||
Total | $ | 69,268 |
4. Fair Value Measurement
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted market prices in active markets for identical assets or liabilities.
Level 2 — Observable market-based inputs or unobservable inputs that are corroborated by market data.
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Level 3 — Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
Certain of the Company’s acquisitions contain contingent purchase obligations as described in Note 2. The contingent purchase obligation related to acquisitions is measured at fair value on a recurring basis, according to the valuation techniques the Company used to determine fair value. Changes to the fair value are recognized as income or expense within other operating expenses in the condensed consolidated statements of operations. In measuring the fair value of the contingent purchase obligation, the Company used an income approach that considers the expected future earnings of the acquired businesses, for the varying performance periods, based on historical performance and the resulting contingent payments, discounted at a risk-adjusted rate. The Company expects to pay an additional $1.7 million in the fourth quarter of 2016 associated with the contingent purchase obligations. Based on future expected earnings the Company does not expect to pay any additional contingent purchase obligation subsequent to the fourth quarter of 2016.
The following table presents information, as of September 30, 2016 and December 31, 2015, about the Company’s financial liabilities (in thousands):
September 30, 2016 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
Contingent purchase obligation related to acquisitions | $ | — | $ | — | $ | 1,657 | $ | 1,657 | |||||||
Total liabilities at fair value | $ | — | $ | — | $ | 1,657 | $ | 1,657 |
December 31, 2015 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
Contingent purchase obligation related to acquisitions | $ | — | $ | — | $ | 4,913 | $ | 4,913 | |||||||
Total liabilities at fair value | $ | — | $ | — | $ | 4,913 | $ | 4,913 |
The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 financial liability balance for the three and nine months ended September 30, 2016 and 2015 (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Balance, beginning of period | $ | 4,211 | $ | 3,482 | $ | 4,913 | $ | 6,842 | |||||||
Contingent purchase obligation related to acquisitions | — | 4,114 | — | 4,114 | |||||||||||
Payments of contingent purchase obligations | — | — | (798 | ) | (3,317 | ) | |||||||||
Interest expense | (96 | ) | 57 | — | 205 | ||||||||||
Adjustments to contingent purchase obligations (1) | (2,458 | ) | — | (2,458 | ) | (191 | ) | ||||||||
Balance, end of period | $ | 1,657 | $ | 7,653 | $ | 1,657 | $ | 7,653 |
(1) | Adjustments to contingent purchase obligations are reported in other operating expenses in the condensed consolidated statements of operations. |
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5. Debt
Debt as of September 30, 2016 and December 31, 2015 consisted of the following (in thousands):
September 30, 2016 | December 31, 2015 | ||||||
Senior debt: | |||||||
Revolving credit facility | $ | 127,900 | $ | 143,149 | |||
Term loan | 281,500 | 296,250 | |||||
Total debt | 409,400 | 439,399 | |||||
Less: Debt issuance costs | (5,220 | ) | (6,569 | ) | |||
Total debt, net of debt issuance costs | 404,180 | 432,830 | |||||
Less: Current maturities | (404,180 | ) | (432,830 | ) | |||
Total debt, net of current maturities | $ | — | $ | — |
On September 24, 2015, the Company entered into a sixth amended and restated credit agreement (the “credit agreement”) with U.S. Bank National Association and other lenders, which increased the revolving credit facility from $350.0 million to $400.0 million and the term loan from $200.0 million to $300.0 million. The credit facility matures on July 9, 2019. Principal on the term loan is due in quarterly installments of $3.8 million. On June 17, 2016, the Company entered into a Consent, Waiver, and First Amendment (the “Amendment”) to the credit agreement. Pursuant to the Amendment, the Company, among other things, reduced the revolving line of credit under the senior credit facility from a maximum aggregate amount of $400.0 million to $300.0 million. The Company further reduced the revolving line of credit under the senior credit facility to $250.0 million pursuant to the Waiver discussed below.
The credit agreement is collateralized by all assets of the Company and contains certain financial covenants, including a maximum cash flow leverage ratio and a minimum fixed charge coverage ratio. Pursuant to the Amendment, the maximum cash flow leverage ratio and minimum fixed charge coverage ratio were modified for certain future periods. As modified by the Amendment, the maximum cash flow leverage ratio was 4.00 to 1.0 for the four quarters ended September 30, 2016 and then decreases to 3.75 to 1.0 for the four quarters ending December 31, 2016, 3.50 to 1.0 for the four quarters ending March 31, 2017, 3.25 to 1.0 for the four quarters ending June 30, 2017, and finally to 3.00 to 1.0 for all periods thereafter. As modified by the Amendment, the minimum fixed charge coverage ratio was 1.15 to 1.0 for the four quarters ended September 30, 2016 and December 31, 2016, and increases to 1.25 to 1.0 for all periods thereafter.
As of September 30, 2016, the Company was not in compliance with its cash flow leverage ratio requirement and obtained a waiver from U.S. Bank and the other lenders. However, after considering the effects of the restatement adjustments, the Company was also not in compliance with its fixed charge ratio requirement and as a result reclassified all of its debt as current in the accompanying condensed consolidated balance sheet as of September 30, 2016.
Additionally, the credit agreement contains negative covenants limiting, among other things, additional indebtedness, capital expenditures, transactions with affiliates, additional liens, sales of assets, dividends, investments, advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements. The credit agreement also prohibits the Company from paying dividends without the consent of the lenders.
The Company categorizes the borrowings under the credit agreement as Level 2 in the fair value hierarchy described in Note 4. The carrying value of the Company's debt approximates fair value as the debt agreement bears interest based on prevailing variable market rates currently available. Borrowings under the credit agreement bear interest at either (a) the Eurocurrency Rate (as defined in the credit agreement), plus an applicable margin in the range of 2.0% to 3.50%, or (b) the Base Rate (as defined in the credit agreement), plus an applicable margin in the range of 1.0% to 2.50%. The revolving credit facility also provides for the issuance of up to $40.0 million in letters of credit. As of September 30, 2016, the Company had outstanding letters of credit totaling $22.8 million. As of September 30, 2016, total availability under the revolving credit facility was $99.3 million and the average interest rate on the credit agreement was 4.1%.
6. Stockholders’ Investment
Changes in stockholders’ investment for the three and nine months ended September 30, 2016 and 2015 consisted of the following (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Beginning balance | $ | 555,264 | $ | 550,640 | $ | 556,439 | $ | 524,287 | |||||||
Net (loss) income | (319,618 | ) | 1,705 | (321,457 | ) | 22,096 | |||||||||
Share-based compensation | 527 | 423 | 1,653 | 2,044 | |||||||||||
Issuance costs from secondary stock offering | — | (225 | ) | — | (225 | ) | |||||||||
Issuance of restricted stock units, net of taxes paid | (99 | ) | (68 | ) | (276 | ) | (929 | ) | |||||||
Issuance of common stock from stock options | — | — | — | 4,011 | |||||||||||
(Tax deficiency) excess tax benefit on share-based compensation | (180 | ) | (16 | ) | (465 | ) | 1,175 | ||||||||
Ending balance | $ | 235,894 | $ | 552,459 | $ | 235,894 | $ | 552,459 |
7. Earnings Per Share
Basic (loss) earnings per common share is calculated by dividing net income or net loss by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share is calculated by dividing net (loss) income by the weighted average common stock outstanding plus stock equivalents that would arise from the assumed exercise of stock options, the conversion of warrants, and the delivery of stock underlying restricted stock units using the treasury stock method. There is no difference, for any of the periods presented, in the amount of net (loss) income used in the computation of basic and diluted (loss) earnings per share.
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The Company had stock options and warrants outstanding of 3,265,393 as of September 30, 2016 that were not included in the computation of diluted (loss) earnings per share because they were not assumed to be exercised under the treasury stock method or because they were anti-dilutive. All restricted stock units were anti-dilutive for the three and nine months ended September 30, 2016. As of September 30, 2015, all stock options, warrants, and restricted stock units were included in the computation of diluted (loss) earnings per share.
The following table reconciles basic weighted average common stock outstanding to diluted weighted average common stock outstanding (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||
Basic weighted average common stock outstanding | 38,328 | 38,264 | 38,310 | 38,149 | |||||||
Effect of dilutive securities | |||||||||||
Employee stock options | — | 70 | — | 94 | |||||||
Warrants | — | 1,089 | — | 1,150 | |||||||
Restricted stock units | — | 48 | — | 48 | |||||||
Diluted weighted average common stock outstanding | 38,328 | 39,471 | 38,310 | 39,441 |
8. Income Taxes
The effective income tax rate was 12.8% for three months ended September 30, 2016 and 13.0% for nine months ended September 30, 2016. The effective income tax rate was 38.7% for three months ended September 30, 2015 and 38.5% for the nine months ended September 30, 2015. In determining the provision for income taxes, the Company used an estimated annual effective tax rate, which was based on expected annual income, statutory tax rates, and the Company's best estimate of non-deductible and non-taxable items of income and expense. Income tax expense varies from the amount computed by applying the federal corporate income tax rate of 35.0% to income before income taxes primarily due to state income taxes, net of federal income tax effect, and adjustments for permanent differences. The non-deductible goodwill impairment charges incurred during the third quarter of 2016 decreased the overall income tax benefit the Company received during the three and nine months ended September 30, 2016.
9. Guarantees
The Company provides a guarantee for a portion of the value of certain independent contractors' (“IC”) leased tractors. The guarantees expire at various dates through 2020. The potential maximum exposure under these lease guarantees was approximately $13.2 million as of September 30, 2016. Upon an IC default, the Company has the option to purchase the tractor or return the tractor to the leasing company if the residual value is greater than the Company’s guarantee. Alternatively, the Company can contract another IC to assume the lease. The Company estimated the fair value of its liability under this on-going guarantee to be $3.4 million and $4.7 million as of September 30, 2016 and December 31, 2015, respectively.
During the third quarter of 2015, the Company experienced an acceleration of its IC recruiting costs, guarantee payments, and reseating and reconditioning costs associated with these lease purchase programs. Accordingly, the Company decided to terminate certain lease purchase guarantee programs during the third quarter of 2015 and established a loss reserve of $3.0 million. As of December 31, 2015, the loss reserve was $1.3 million in accrued expenses and other current liabilities. There was no loss reserve recorded as of September 30, 2016. The Company paid $2.4 million and $2.0 million during the third quarter of 2016 and 2015, respectively, and $7.8 million and $4.1 million during the first nine months of 2016 and 2015, respectively.
10. Commitments and Contingencies
In the ordinary course of business, the Company is a defendant in several legal proceedings arising out of the conduct of its business. These proceedings include claims for property damage or personal injury incurred in connection with the Company’s services. Although there can be no assurance as to the ultimate disposition of these proceedings, the Company does not believe, based upon the information available at this time, that these property damage or personal injury claims, in the aggregate, will have a material impact on its consolidated financial statements. The Company maintains liability insurance coverage for claims in excess of $1,000,000 per occurrence and cargo coverage for claims in excess of $100,000 per occurrence. The Company believes it has adequate insurance to cover losses in excess of the deductible amount. As of September 30, 2016 and December 31, 2015, the Company had reserves for estimated uninsured losses of $23.3 million and $25.9 million, respectively, included in accrued expenses and other current liabilities.
In addition to the legal proceedings described above, like many others in the transportation services industry, the Company is a defendant in six purported class-action lawsuits in California alleging violations of various California labor laws and one purported class-action lawsuit in Illinois alleging violations of the Illinois Wage Payment and Collection Act. The plaintiffs in each of these lawsuits seek to recover unspecified monetary damages and other items. In addition, the California Division of Labor Standards and Enforcement has brought administrative actions against the Company on behalf of twelve individuals alleging that the Company violated California labor laws. Given the early stage of all of the proceedings described in this paragraph, the Company is not able to assess with certainty the outcome of these proceedings or the amount or range of potential damages or
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future payments associated with these proceedings at this time. The Company believes it has meritorious defenses to these actions and intends to defend these proceedings vigorously. However, any legal proceeding is subject to inherent uncertainties, and the Company cannot assure that the expenses associated with defending these actions or their resolution will not have a material adverse effect on its business, operating results, or financial condition.
11. Related Party Transactions
The Company has an advisory agreement with HCI Equity Management L.P. (“HCI”) that requires the Company to pay transaction fees and an annual advisory fee of $0.1 million. The Company made no payments to HCI during the three months ended September 30, 2016 or 2015. The Company paid an aggregate of $0.2 million and $0.1 million to HCI during the nine months ended September 30, 2016 and 2015, respectively, for the annual advisory fee and travel expenses incurred. The Company owed an aggregate of $0.8 million to HCI as of September 30, 2015 for services rendered in connection with the sixth amended and restated credit agreement.
The Company has a number of dedicated carriers that haul freight for the operating companies that are owned by employees of the operating companies. The Company paid an aggregate of $2.1 million and $1.3 million to these carriers during the three months ended September 30, 2016 and 2015, respectively. The Company paid an aggregate of $5.6 million and $4.1 million to these carriers during the nine months ended September 30, 2016 and 2015, respectively.
The Company has a number of facility leases with related parties and paid an aggregate of $1.1 million and $0.5 million under these leases during the three months ended September 30, 2016 and 2015, respectively. The Company paid an aggregate of $2.4 million and $0.8 million under these leases during the nine months ended September 30, 2016 and 2015, respectively.
During the quarter ended June 30, 2016, the Company entered into and completed a sale leaseback transaction to sell the Stagecoach warehouse and corporate office to an entity owned by the employee who manages Stagecoach for a total sale price of $3.5 million.
The Company leases certain equipment through leasing companies owned by related parties and paid an aggregate of $0.4 million during the during the three months ended September 30, 2016. The amount paid for the leased equipment was minimal during the three months ended September 30, 2015. The company paid an aggregate of $0.6 million and $0.1 million during the nine months ended September 30, 2016 and 2015, respectively.
12. Segment Reporting
The Company determines its segments based on the information utilized by the chief operating decision maker, the Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it has three segments: TL, LTL, and Global Solutions. As indicated in Note 1, the Company realigned two of its operating companies into different segments. Segment disclosures as of December 31, 2015 and for the three and nine months ended September 30, 2015 have been retrospectively revised to reflect this change in segments.
These segments are strategic business units through which the Company offers different services. The Company evaluates the performance of the segments primarily based on their respective revenues and operating income. Accordingly, interest expense and other non-operating items are not reported in segment results. In addition, the Company has disclosed corporate, which is not a segment and includes lease purchase guarantee reserve expenses, acquisition transaction expenses, corporate salaries, and share-based compensation expense.
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The following table reflects certain financial data of the Company’s segments, which has been adjusted for the effects of the restatement described in Note 13, for the three and nine months ended September 30, 2016 and 2015 and as of September 30, 2016 and December 31, 2015 (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues: | |||||||||||||||
TL | $ | 335,183 | $ | 281,003 | $ | 890,752 | $ | 838,455 | |||||||
LTL | 118,918 | 127,284 | 355,617 | 397,872 | |||||||||||
Global Solutions | 83,294 | 94,198 | 250,299 | 286,896 | |||||||||||
Eliminations | (5,386 | ) | (5,721 | ) | (14,696 | ) | (20,002 | ) | |||||||
Total | 532,009 | 496,764 | 1,481,972 | 1,503,221 | |||||||||||
Impairment charges: | |||||||||||||||
TL | $ | 157,538 | $ | — | $ | 157,538 | $ | — | |||||||
LTL | 197,312 | — | 197,312 | — | |||||||||||
Global Solutions | 17,231 | — | 17,231 | — | |||||||||||
Total | $ | 372,081 | $ | — | $ | 372,081 | $ | — | |||||||
Operating (loss) income: | |||||||||||||||
TL | $ | (147,091 | ) | $ | 7,346 | $ | (143,403 | ) | $ | 35,326 | |||||
LTL | (196,635 | ) | 1,865 | (194,109 | ) | 16,116 | |||||||||
Global Solutions | (11,176 | ) | 8,221 | 3,016 | 20,421 | ||||||||||
Corporate | (5,889 | ) | (9,738 | ) | (17,993 | ) | (22,044 | ) | |||||||
Total operating (loss) income | (360,791 | ) | 7,694 | (352,489 | ) | 49,819 | |||||||||
Interest expense | 5,757 | 4,913 | 17,060 | 13,895 | |||||||||||
(Loss) income before provision for income taxes | $ | (366,548 | ) | $ | 2,781 | $ | (369,549 | ) | $ | 35,924 | |||||
Depreciation and amortization: | |||||||||||||||
TL | $ | 6,632 | $ | 5,994 | $ | 20,074 | $ | 15,728 | |||||||
LTL | 999 | 686 | 2,733 | 2,027 | |||||||||||
Global Solutions | 1,229 | 1,183 | 3,684 | 3,720 | |||||||||||
Corporate | 388 | 343 | 1,145 | 972 | |||||||||||
Total | $ | 9,248 | $ | 8,206 | $ | 27,636 | $ | 22,447 | |||||||
Capital expenditures(1): | |||||||||||||||
TL | $ | 4,265 | $ | 11,369 | $ | 9,259 | $ | 37,058 | |||||||
LTL | 1,008 | 1,445 | 3,422 | 6,715 | |||||||||||
Global Solutions | 431 | 75 | 3,395 | 225 | |||||||||||
Corporate | (179 | ) | 612 | 80 | 1,914 | ||||||||||
Total | $ | 5,525 | $ | 13,501 | $ | 16,156 | $ | 45,912 |
(1) The total capital expenditures for the three and nine months ended September 30, 2015 includes both cash and non-cash portions as reflected in the Condensed Consolidated Statements of Cash Flows.
September 30, 2016 | December 31, 2015 | |||||||
Assets: | ||||||||
TL | $ | 523,095 | $ | 656,491 | ||||
LTL | 146,474 | 330,203 | ||||||
Global Solutions | 292,627 | 317,453 | ||||||
Corporate | 4,308 | 8,057 | ||||||
Eliminations (1) | (2,198 | ) | (4,451 | ) | ||||
Total | $ | 964,306 | $ | 1,307,753 |
(1) Eliminations represents intercompany trade receivable balances between the three segments.
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13. Restatement of Previously Issued Financial Statements
In November 2016, the Company commenced an internal investigation into certain accounting discrepancies at its Morgan Southern and Bruenger operating companies. Subsequently, an independent internal investigation was undertaken by the Audit Committee of the Board of Directors (the “Audit Committee”), with assistance from outside counsel and outside consultants to provide forensic and investigative support (the “Audit Committee Investigation”). The expanded Audit Committee Investigation included detailed reviews of financial records at other operating companies and at the Company's corporate headquarters. The Audit Committee Investigation identified material accounting errors that impacted substantially all financial statement line items and disclosures.
On January 27, 2017, the Audit Committee, as a result of the information obtained in connection with the ongoing internal investigation and after considering the recommendation of management, determined that previously issued (1) consolidated financial statements as of December 31, 2015 and 2014 and for the three years in the period ended December 31, 2015; (2) unaudited condensed consolidated financial statements for the quarterly periods in the years ended December 31, 2015 and 2014; and (3) the unaudited condensed consolidated financial statements for the quarterly periods ended March 31, 2016, June 30, 2016, and September 30, 2016, should no longer be relied upon due to the identification of material accounting errors.
Based on the Audit Committee Investigation, current management determined that there were deficiencies in the design and/or execution of internal controls that constituted material weaknesses. Current management determined that structural and environmental factors, including the increased size and complexity arising from the acquisition of 25 non-public companies between February 2011 and September 2015, the inconsistency of the Company's accounting systems, policies and procedures, and management override of internal controls contributed to the material weaknesses and resulting material accounting errors. The Company's internal controls failed to prevent or were overridden by management in certain instances to allow recording accounting entries without appropriate support, recording accounting entries that were inconsistent with information known by management at the time, not communicating relevant information within the organization and, in some cases, withholding information from the Company's independent directors, Audit Committee, and independent auditors, which resulted in material accounting errors.
Accounting Adjustments
The following is a discussion of the significant accounting adjustments that were made to the Company's previously issued financial statements.
Receivables and Related Reserves
Trade Receivables and Allowance for Doubtful Accounts
The Company identified and corrected certain errors related to its accounting for trade receivables and related allowance for doubtful accounts that were misstated. In its original analysis, the Company did not consider all of the relevant information available with respect to the deteriorated aging and collection information available at the time its condensed consolidated financial statements were previously issued, which resulted in an understatement of the allowance for doubtful accounts and other operating expenses. There were also instances in which a customer's receivables and the corresponding revenue were overstated for shipments that did not occur. Accounts receivable and allowance for doubtful accounts and the corresponding revenue and other operating expenses have been corrected in the restated condensed consolidated financial statements.
The Company also corrected goodwill in the restated condensed consolidated financial statements related to an allowance for doubtful accounts at the acquisition date.
Contractor Receivables and Related Reserves
The Company identified and corrected certain errors related to its accounting for contractor receivables and related reserves recorded as either contra liabilities or other assets. The Company determined gross contractor receivables were understated because amounts were reported as contra liabilities with no right of offset. The Company also noted that contractor receivables were overstated and other operating expenses understated because the Company, in its original analysis, did not consider all of the relevant information available with respect to historical IC turnover or the collectibility of contractor receivables when a driver was no longer contracted by the Company. Contractor receivables and related reserves and the corresponding other operating expenses have been corrected in the restated condensed consolidated financial statements.
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Unrecorded Charges and Contingent Liabilities
Unrecorded Charges
The Company identified and corrected certain errors related to the overstatement of cash and prepaid expenses (including other receivables) and understatement of accounts payable and accrued expenses, which resulted in an understatement of the related other operating expenses. Errors in the cash accounts resulted from certain operating companies failing to complete their bank reconciliations on-time. Errors in the prepaid expense and other current assets, accounts payable, and accrued expense accounts resulted from not amortizing prepaid balances across relevant service periods, not considering collectibility of other receivables (excluding contractor receivables), and not recording expenses in the period incurred. Cash, prepaid expenses and other current assets, accounts payable, and accrued expenses and other current liabilities and the related other operating expenses have been corrected in the restated condensed consolidated financial statements.
The Company determined that it did not properly establish an accrual for contractor or driver payables incurred but not paid at the acquisition date for one of its operating companies. It was also determined that subsequent accruals were also not established thereby understating purchase transportation costs. Using actual payment data, the Company determined the accrual for its driver and contractor payables at the date of acquisition and at the end of each subsequent period. Additionally, the Company identified discrepancies between how certain operating companies were recording settlement deductions for ICs resulting in an overstatement of purchased transportation costs and an understatement of other operating expenses. The Company corrected purchased transportation costs and other operating expenses in the restated condensed consolidated financial statements.
The Company also corrected goodwill and intangible assets in the restated condensed consolidated financial statements related to an incorrect allocation recorded at the acquisition date.
Lease Purchase Guarantee
The Company identified and corrected errors related to its accounting for the lease purchase guarantees it makes for its IC's that lease tractors from certain leasing companies. The Company previously underestimated the default rate under these leases, which resulted in an understatement of accrued expenses, the corresponding prepaid expense, and other operating expenses in subsequent periods. The Company corrected other operating expenses resulting from subsequent amortization of the prepaid expense and increased accrued expense and other liabilities in the restated condensed consolidated financial statements.
Contingent Purchase Obligations
The Company identified and corrected errors related to its subsequent accounting for contingent purchase obligation reserves related to certain acquisitions. The subsequent adjustments of the contingent purchase obligations were not based on management's best estimate or information available at the time the Company completed its analysis for each period resulting in the misstatement of other operating expenses in particular periods. The Company recorded adjustments to other operating expenses, accrued expenses and other current liabilities, and other long-term liabilities in the restated condensed consolidated financial statements.
Sale Leaseback
In June 2016, the Company entered into a sale leaseback transaction to sell a warehouse and office for $3.5 million recognizing an initial gain of $0.9 million and deferring a gain of $0.5 million during the second quarter of 2016. The building and land were acquired by the Company and initially recorded at $2.1 million at the date of acquisition. The Company subsequently determined, due to the timing of the sale leaseback transaction relative to the date of acquisition, the building and land were under-valued at the acquisition date resulting in an overstatement of goodwill and accrued expenses and an understatement of property and equipment and other operating expenses. The Company reversed the gain and deferred gain and corrected goodwill, property and equipment, and other operating expenses in the restated condensed consolidated financial statements.
Insurance Reserves and Related Receivables
The Company identified and corrected certain errors related to its accounting for insurance reserves. The Company did not consider certain information available at the time its condensed consolidated financial statements were previously issued, resulting in an understatement of accrued expenses and other current liabilities and related other operating expenses. The Company reviewed claims submitted and paid, as well as claims incurred but not reported for auto liability, workers compensation, and short or damaged cargo to estimate the required reserves. The Company corrected accrued expenses and other current liabilities and other operating expenses for the increased insurance reserves in the restated condensed consolidated financial statements.
The Company also recorded receivables from insurers related to some of these claims but over-estimated the amount of the reimbursement, which resulted in an overstatement of prepaid expenses and other current assets and an understatement of other operating expenses. The Company corrected the prepaid expenses and other current assets and other operating expenses in the restated condensed consolidated financial statements.
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Capital Improvements and Aircraft Spare Parts
Capital Improvements
The Company identified and corrected errors related to its accounting for capitalized improvements. Specifically, the Company capitalized certain repair and maintenance expenses and other operating expenses that did not extend the useful life of the primary asset. This resulted in an understatement of operating expenses in the period which this occurred and an overstatement of depreciation expense in subsequent periods. Property and equipment and accumulated depreciation and related other operating expenses and depreciation expenses have been corrected in the restated condensed consolidated financial statements.
Aircraft Spare Parts
The Company identified and corrected certain errors related to its accounting for its spare parts associated with its aircraft fleet, which were previously expensed when purchased as opposed to capitalizing. In connection with the restatement, the Company determined that the cost of the spare parts for its aircraft was material at the acquisition date and should have been capitalized. The Company corrected its accounting policy accordingly. The Company recorded the capitalization of spare parts for aircraft, which increased property and equipment and decreased other operating expenses as the spare parts were purchased. The Company recorded increases to depreciation and amortization in subsequent periods. The Company also increased property and equipment and reduced goodwill to capitalize the spare parts on-hand at acquisition.
Goodwill Impairment
As discussed in Note 3 “Goodwill and Intangible Assets,” the Company performed its goodwill impairment analysis as of July 1. The Company initially recorded the impairment charge in the fourth quarter of 2016 when it completed the second step of its goodwill impairment analysis. The accounting guidance around goodwill impairment analysis requires a company to estimate an impairment charge in the period the impairment is identified. Additionally, the Company's carrying value of its goodwill changed as a result of the restatement adjustments. The Company updated its goodwill impairment analysis taking the restatement adjustments into consideration and recorded a goodwill impairment charge in the third quarter of 2016.
Income Taxes and Debt Reclassification
Income Taxes
The Company reviewed the tax impact of the above mentioned restatement adjustments and has recorded the tax effects of these adjustments to taxes receivable, deferred tax assets and liabilities, and provision for income taxes as appropriate. Tax adjustments reflect the nature and timing of the specific accounting adjustments and the ability to amend federal and state income tax returns for tax periods beginning after December 31, 2012. Changes to the Company's effective tax rate are primarily the result of changes to contingent purchase obligations on non-taxable transactions.
Debt Reclassification
As discussed in Note 5, after considering the effects of the restatement adjustments, the Company was not in compliance with its debt covenants and as such, reclassified all of its debt to current.
16
Impact on Condensed Consolidated Statements of Operations
The net effect of the restatement described above on the Company's previously issued condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015 is as follows (in thousands, except per share data):
Three Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||
As Previously Reported | Receivables & Related Reserves | Unrecorded Charges & Contingent Liabilities | Insurance Reserves & Related Receivables | Capital Improvements & Aircraft Spare Parts | Goodwill Impairment | Income Taxes & Debt Reclassification | As Restated | ||||||||||||||||||||||||
Revenues | $ | 532,209 | $ | (200 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 532,009 | ||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||
Purchased transportation costs | 360,548 | — | (2,277 | ) | — | — | — | — | 358,271 | ||||||||||||||||||||||
Personnel and related benefits | 71,197 | — | 1,570 | — | — | — | — | 72,767 | |||||||||||||||||||||||
Other operating expenses | 71,838 | 3,087 | 1,940 | 871 | 2,697 | — | — | 80,433 | |||||||||||||||||||||||
Depreciation and amortization | 9,723 | — | — | — | (475 | ) | — | — | 9,248 | ||||||||||||||||||||||
Impairment charges | — | — | — | — | — | 372,081 | — | 372,081 | |||||||||||||||||||||||
Total operating expenses | 513,306 | 3,087 | 1,233 | 871 | 2,222 | 372,081 | — | 892,800 | |||||||||||||||||||||||
Operating (loss) income | 18,903 | (3,287 | ) | (1,233 | ) | (871 | ) | (2,222 | ) | (372,081 | ) | — | (360,791 | ) | |||||||||||||||||
Interest expense | 5,949 | — | (192 | ) | — | — | — | — | 5,757 | ||||||||||||||||||||||
Income (loss) before provision for income taxes | 12,954 | (3,287 | ) | (1,041 | ) | (871 | ) | (2,222 | ) | (372,081 | ) | — | (366,548 | ) | |||||||||||||||||
Provision for (benefit from) income taxes | 5,015 | (51,945 | ) | (46,930 | ) | ||||||||||||||||||||||||||
Net income (loss) | $ | 7,939 | $ | (3,287 | ) | $ | (1,041 | ) | $ | (871 | ) | $ | (2,222 | ) | $ | (372,081 | ) | $ | 51,945 | $ | (319,618 | ) | |||||||||
Earnings per share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.21 | $ | (8.34 | ) | ||||||||||||||||||||||||||
Diluted | $ | 0.21 | $ | (8.34 | ) | ||||||||||||||||||||||||||
Weighted average common stock outstanding: | |||||||||||||||||||||||||||||||
Basic(1) | 38,328 | 38,328 | |||||||||||||||||||||||||||||
Diluted(1) | 38,340 | 38,328 |
(1) As restated amounts for basic and diluted weighted average common stock outstanding have been corrected for the effects of the restatement, which resulted in a net loss.
17
Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||
As Previously Reported | Receivables & Related Reserves | Unrecorded Charges & Contingent Liabilities | Insurance Reserves & Related Receivables | Capital Improvements & Aircraft Spare Parts | Goodwill Impairment | Income Taxes & Debt Reclassification | As Restated | ||||||||||||||||||||||||
Revenues | $ | 1,481,273 | $ | 1,699 | $ | (1,000 | ) | $ | — | $ | — | $ | — | $ | — | $ | 1,481,972 | ||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||
Purchased transportation costs | 986,477 | — | (4,506 | ) | — | — | — | — | 981,971 | ||||||||||||||||||||||
Personnel and related benefits | 210,354 | — | 2,452 | — | — | — | — | 212,806 | |||||||||||||||||||||||
Other operating expenses | 217,514 | 5,275 | 8,075 | 1,656 | 7,447 | — | — | 239,967 | |||||||||||||||||||||||
Depreciation and amortization | 28,790 | — | — | — | (1,154 | ) | — | — | 27,636 | ||||||||||||||||||||||
Impairment charges | — | — | — | — | — | 372,081 | — | 372,081 | |||||||||||||||||||||||
Total operating expenses | 1,443,135 | 5,275 | 6,021 | 1,656 | 6,293 | 372,081 | — | 1,834,461 | |||||||||||||||||||||||
Operating (loss) income | 38,138 | (3,576 | ) | (7,021 | ) | (1,656 | ) | (6,293 | ) | (372,081 | ) | — | (352,489 | ) | |||||||||||||||||
Interest expense | 17,252 | — | (192 | ) | — | — | — | — | 17,060 | ||||||||||||||||||||||
Income (loss) before provision for income taxes | 20,886 | (3,576 | ) | (6,829 | ) | (1,656 | ) | (6,293 | ) | (372,081 | ) | — | (369,549 | ) | |||||||||||||||||
Provision for (benefit from) income taxes | 8,084 | — | — | — | — | — | (56,176 | ) | (48,092 | ) | |||||||||||||||||||||
Net income (loss) | $ | 12,802 | $ | (3,576 | ) | $ | (6,829 | ) | $ | (1,656 | ) | $ | (6,293 | ) | $ | (372,081 | ) | $ | 56,176 | $ | (321,457 | ) | |||||||||
Earnings per share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.33 | $ | (8.39 | ) | ||||||||||||||||||||||||||
Diluted | $ | 0.33 | $ | (8.39 | ) | ||||||||||||||||||||||||||
Weighted average common stock outstanding: | |||||||||||||||||||||||||||||||
Basic(1) | 38,310 | 38,310 | |||||||||||||||||||||||||||||
Diluted(1) | 38,360 | 38,310 |
(1) As restated amounts for basic and diluted weighted average common stock outstanding have been corrected for the effects of the restatement, which resulted in a net loss.
18
Three Months Ended September 30, 2015 | |||||||||||||||||||||||||||
As Previously Reported | Receivables & Related Reserves | Unrecorded Charges & Contingent Liabilities | Insurance Reserves & Related Receivables | Capital Improvements & Aircraft Spare Parts | Income Taxes & Debt Reclassification | As Restated | |||||||||||||||||||||
Revenues | $ | 497,173 | $ | (409 | ) | $ | — | $ | — | $ | — | $ | — | $ | 496,764 | ||||||||||||
Operating expenses: | |||||||||||||||||||||||||||
Purchased transportation costs | 326,251 | — | (1,439 | ) | — | — | — | 324,812 | |||||||||||||||||||
Personnel and related benefits | 65,997 | — | 924 | — | — | — | 66,921 | ||||||||||||||||||||
Other operating expenses | 81,559 | 3,093 | 1,120 | 671 | 2,124 | — | 88,567 | ||||||||||||||||||||
Depreciation and amortization | 8,443 | — | — | — | (237 | ) | — | 8,206 | |||||||||||||||||||
Acquisition transaction expenses | 564 | — | — | — | — | — | 564 | ||||||||||||||||||||
Total operating expenses | 482,814 | 3,093 | 605 | 671 | 1,887 | — | 489,070 | ||||||||||||||||||||
Operating income | 14,359 | (3,502 | ) | (605 | ) | (671 | ) | (1,887 | ) | — | 7,694 | ||||||||||||||||
Interest expense | 4,913 | — | — | — | — | — | 4,913 | ||||||||||||||||||||
Income before provision for income taxes | 9,446 | (3,502 | ) | (605 | ) | (671 | ) | (1,887 | ) | — | 2,781 | ||||||||||||||||
Provision for income taxes | 3,655 | — | — | — | — | (2,579 | ) | 1,076 | |||||||||||||||||||
Net income | $ | 5,791 | $ | (3,502 | ) | $ | (605 | ) | $ | (671 | ) | $ | (1,887 | ) | $ | 2,579 | $ | 1,705 | |||||||||
Earnings per share: | |||||||||||||||||||||||||||
Basic | $ | 0.15 | $ | 0.04 | |||||||||||||||||||||||
Diluted | $ | 0.15 | $ | 0.04 | |||||||||||||||||||||||
Weighted average common stock outstanding: | |||||||||||||||||||||||||||
Basic | 38,264 | 38,264 | |||||||||||||||||||||||||
Diluted | 39,471 | 39,471 |
Nine Months Ended September 30, 2015 | |||||||||||||||||||||||||||
As Previously Reported | Receivables & Related Reserves | Unrecorded Charges & Contingent Liabilities | Insurance Reserves & Related Receivables | Capital Improvements & Aircraft Spare Parts | Income Taxes & Debt Reclassification | As Restated | |||||||||||||||||||||
Revenues | $ | 1,504,073 | $ | (852 | ) | $ | — | $ | — | $ | — | $ | — | $ | 1,503,221 | ||||||||||||
Operating expenses: | |||||||||||||||||||||||||||
Purchased transportation costs | 1,000,815 | — | (3,201 | ) | — | — | — | 997,614 | |||||||||||||||||||
Personnel and related benefits | 193,846 | — | 2,142 | — | — | — | 195,988 | ||||||||||||||||||||
Other operating expenses | 213,590 | 6,728 | 7,265 | 3,498 | 5,708 | — | 236,789 | ||||||||||||||||||||
Depreciation and amortization | 22,855 | — | — | — | (408 | ) | — | 22,447 | |||||||||||||||||||
Acquisition transaction expenses | 564 | — | — | — | — | — | 564 | ||||||||||||||||||||
Total operating expenses | 1,431,670 | 6,728 | 6,206 | 3,498 | 5,300 | — | 1,453,402 | ||||||||||||||||||||
Operating income | 72,403 | (7,580 | ) | (6,206 | ) | (3,498 | ) | (5,300 | ) | — | 49,819 | ||||||||||||||||
Interest expense | 13,895 | — | — | — | — | — | 13,895 | ||||||||||||||||||||
Income before provision for income taxes | 58,508 | (7,580 | ) | (6,206 | ) | (3,498 | ) | (5,300 | ) | — | 35,924 | ||||||||||||||||
Provision for income taxes | 22,642 | — | — | — | — | (8,814 | ) | 13,828 | |||||||||||||||||||
Net income | $ | 35,866 | $ | (7,580 | ) | $ | (6,206 | ) | $ | (3,498 | ) | $ | (5,300 | ) | $ | 8,814 | $ | 22,096 | |||||||||
Earnings per share: | |||||||||||||||||||||||||||
Basic | $ | 0.94 | $ | 0.58 | |||||||||||||||||||||||
Diluted | $ | 0.91 | $ | 0.56 | |||||||||||||||||||||||
Weighted average common stock outstanding: | |||||||||||||||||||||||||||
Basic(1) | 38,149 | 38,149 | |||||||||||||||||||||||||
Diluted(1) | 39,446 | 39,441 |
(1) As restated amounts for basic and diluted weighted average common stock outstanding have been corrected for a computational error identified.
19
Impact on Condensed Consolidated Balance Sheets
The net effect of the restatement described above on the Company's previously issued condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 is as follows (in thousands):
September 30, 2016 | |||||||||||||||||||||||||||||||
As Previously Reported (1) | Receivables & Related Reserves | Unrecorded Charges & Contingent Liabilities | Insurance Reserves & Related Receivables | Capital Improvements & Aircraft Spare Parts | Goodwill Impairment | Income Taxes & Debt Reclassification | As Restated | ||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,868 | $ | — | $ | (1,804 | ) | $ | — | $ | — | $ | — | $ | — | $ | 3,064 | ||||||||||||||
Accounts receivable | 310,357 | (12,050 | ) | — | — | — | — | — | 298,307 | ||||||||||||||||||||||
Deferred income taxes | 3,215 | — | — | — | — | — | 16,015 | 19,230 | |||||||||||||||||||||||
Income tax receivable | 11,262 | — | — | — | — | — | 17,731 | 28,993 | |||||||||||||||||||||||
Prepaid expenses and other current assets | 58,775 | (1,534 | ) | (12,638 | ) | (2,733 | ) | (4,041 | ) | — | — | 37,829 | |||||||||||||||||||
Total current assets | 388,477 | (13,584 | ) | (14,442 | ) | (2,733 | ) | (4,041 | ) | — | 33,746 | 387,423 | |||||||||||||||||||
Property and equipment | 190,979 | — | (674 | ) | — | (6,079 | ) | — | — | 184,226 | |||||||||||||||||||||
Other assets: | |||||||||||||||||||||||||||||||
Goodwill | 694,302 | (2,174 | ) | (1,896 | ) | — | (9,626 | ) | (372,081 | ) | 3,984 | 312,509 | |||||||||||||||||||
Intangible assets, net | 70,268 | — | (1,000 | ) | — | — | — | — | 69,268 | ||||||||||||||||||||||
Other noncurrent assets | 7,266 | (326 | ) | 3,602 | — | 338 | — | — | 10,880 | ||||||||||||||||||||||
Total other assets | 771,836 | (2,500 | ) | 706 | — | (9,288 | ) | (372,081 | ) | 3,984 | 392,657 | ||||||||||||||||||||
Total assets | $ | 1,351,292 | $ | (16,084 | ) | $ | (14,410 | ) | $ | (2,733 | ) | $ | (19,408 | ) | $ | (372,081 | ) | $ | 37,730 | $ | 964,306 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | |||||||||||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||||||||||
Current maturities of debt | $ | 404,180 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 404,180 | |||||||||||||||
Accounts payable | 152,676 | 13,028 | 3,894 | — | — | — | — | 169,598 | |||||||||||||||||||||||
Accrued expenses and other current liabilities | 46,259 | 502 | 15,859 | 18,972 | — | — | 108 | 81,700 | |||||||||||||||||||||||
Total current liabilities | 603,115 | 13,530 | 19,753 | 18,972 | — | — | 108 | 655,478 | |||||||||||||||||||||||
Long-term deferred tax liabilities | 108,175 | (47,158 | ) | 61,017 | |||||||||||||||||||||||||||
Other long-term liabilities | 12,981 | — | (1,064 | ) | — | — | — | — | 11,917 | ||||||||||||||||||||||
Total liabilities | 724,271 | 13,530 | 18,689 | 18,972 | — | — | (47,050 | ) | 728,412 | ||||||||||||||||||||||
Commitments and contingencies (Note 10) | |||||||||||||||||||||||||||||||
Stockholders’ investment: | |||||||||||||||||||||||||||||||
Common stock | 383 | — | — | — | — | — | — | 383 | |||||||||||||||||||||||
Additional paid-in capital | 398,165 | — | — | — | — | — | — | 398,165 | |||||||||||||||||||||||
Retained (deficit) earnings | 228,473 | (29,614 | ) | (33,099 | ) | (21,705 | ) | (19,408 | ) | (372,081 | ) | 84,780 | (162,654 | ) | |||||||||||||||||
Total stockholders’ investment | 627,021 | (29,614 | ) | (33,099 | ) | (21,705 | ) | (19,408 | ) | (372,081 | ) | 84,780 | 235,894 | ||||||||||||||||||
Total liabilities and stockholders’ investment | $ | 1,351,292 | $ | (16,084 | ) | $ | (14,410 | ) | $ | (2,733 | ) | $ | (19,408 | ) | $ | (372,081 | ) | $ | 37,730 | $ | 964,306 |
(1) As previously reported balances have been revised to separate taxes receivable from prepaid expenses and other current assets and long-term deferred tax liabilities from other long-term liabilities.
20
December 31, 2015 | |||||||||||||||||||||||||||
As Previously Reported (1) | Receivables & Related Reserves | Unrecorded Charges & Contingent Liabilities | Insurance Reserves & Related Receivables | Capital Improvements & Aircraft Spare Parts | Income Taxes & Debt Reclassification | As Restated | |||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||||||
Cash and cash equivalents | $ | 8,664 | $ | — | $ | (734 | ) | $ | — | $ | — | $ | — | $ | 7,930 | ||||||||||||
Accounts receivable | 272,176 | (12,147 | ) | — | — | — | — | 260,029 | |||||||||||||||||||
Deferred income taxes | 4,876 | — | — | — | — | 16,015 | 20,891 | ||||||||||||||||||||
Income tax receivable | 11,262 | — | — | — | — | 9,401 | 20,663 | ||||||||||||||||||||
Prepaid expenses and other current assets | 50,839 | (112 | ) | (10,464 | ) | (2,405 | ) | (807 | ) | — | 37,051 | ||||||||||||||||
Total current assets | 347,817 | (12,259 | ) | (11,198 | ) | (2,405 | ) | (807 | ) | 25,416 | 346,564 | ||||||||||||||||
Property and equipment | 197,744 | — | 302 | — | (2,682 | ) | — | 195,364 | |||||||||||||||||||
Other assets: | |||||||||||||||||||||||||||
Goodwill | 691,118 | (2,136 | ) | (530 | ) | — | (9,626 | ) | 3,984 | 682,810 | |||||||||||||||||
Intangible assets, net | 76,694 | — | (1,000 | ) | — | — | — | 75,694 | |||||||||||||||||||
Other noncurrent assets | 6,183 | (230 | ) | 1,368 | — | — | — | 7,321 | |||||||||||||||||||
Total other assets | 773,995 | (2,366 | ) | (162 | ) | — | (9,626 | ) | 3,984 | 765,825 | |||||||||||||||||
Total assets | $ | 1,319,556 | $ | (14,625 | ) | $ | (11,058 | ) | $ | (2,405 | ) | $ | (13,115 | ) | $ | 29,400 | $ | 1,307,753 | |||||||||
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | |||||||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||||||
Current maturities of debt | $ | 15,000 | $ | — | $ | — | $ | — | $ | — | $ | 417,830 | $ | 432,830 | |||||||||||||
Accounts payable | 104,357 | 11,125 | 684 | — | — | — | 116,166 | ||||||||||||||||||||
Accrued expenses and other current liabilities | 48,657 | 288 | 15,225 | 17,644 | — | 108 | 81,922 | ||||||||||||||||||||
Total current liabilities | 168,014 | 11,413 | 15,909 | 17,644 | — | 417,938 | 630,918 | ||||||||||||||||||||
Long-term debt, net of current maturities | 417,830 | — | — | — | — | (417,830 | ) | — | |||||||||||||||||||
Long-term deferred tax liabilities | 104,400 | 688 | 105,088 | ||||||||||||||||||||||||
Other long-term liabilities | 16,005 | — | (697 | ) | — | — | — | 15,308 | |||||||||||||||||||
Total liabilities | 706,249 | 11,413 | 15,212 | 17,644 | — | 796 | 751,314 | ||||||||||||||||||||
Commitments and contingencies (Note 10) | |||||||||||||||||||||||||||
Stockholders’ investment: | |||||||||||||||||||||||||||
Common stock | 383 | — | — | — | — | — | 383 | ||||||||||||||||||||
Additional paid-in capital | 397,253 | — | — | — | — | — | 397,253 | ||||||||||||||||||||
Retained earnings | 215,671 | (26,038 | ) | (26,270 | ) | (20,049 | ) | (13,115 | ) | 28,604 | 158,803 | ||||||||||||||||
Total stockholders’ investment | 613,307 | (26,038 | ) | (26,270 | ) | (20,049 | ) | (13,115 | ) | 28,604 | 556,439 | ||||||||||||||||
Total liabilities and stockholders’ investment | $ | 1,319,556 | $ | (14,625 | ) | $ | (11,058 | ) | $ | (2,405 | ) | $ | (13,115 | ) | $ | 29,400 | $ | 1,307,753 |
(1) As previously reported balances have been revised to separate taxes receivable from prepaid expenses and other current assets and long-term deferred tax liabilities from other long-term liabilities.
21
Impact on Condensed Consolidated Statements of Cash Flows
The net effect of the restatement described above on the Company's previously issued condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 is as follows (in thousands):
Nine Months Ended September 30, 2016 | |||||||||||
As Previously Reported | Adjustments | As Restated | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 12,802 | $ | (334,259 | ) | $ | (321,457 | ) | |||
Depreciation and amortization | 30,829 | (1,154 | ) | 29,675 | |||||||
Gain on disposal of property and equipment | (1,467 | ) | 1,157 | (310 | ) | ||||||
Gain on sale of business | (4,916 | ) | (500 | ) | (5,416 | ) | |||||
Provision for bad debts | 1,386 | 1,440 | 2,826 | ||||||||
Deferred tax provision | 947 | (47,846 | ) | (46,899 | ) | ||||||
Share-based compensation | 1,653 | — | 1,653 | ||||||||
Adjustment to contingent purchase obligation | — | (2,458 | ) | (2,458 | ) | ||||||
Tax deficiency on share-based compensation | 465 | — | 465 | ||||||||
Impairment charges | — | 372,081 | 372,081 | ||||||||
Changes in: | |||||||||||
Accounts receivable | (39,603 | ) | (1,499 | ) | (41,102 | ) | |||||
Income tax receivable | — | (8,330 | ) | (8,330 | ) | ||||||
Prepaid expenses and other assets | (4,119 | ) | 5,182 | 1,063 | |||||||
Accounts payable | 48,319 | 5,113 | 53,432 | ||||||||
Accrued expenses and other liabilities | 1,223 | 4,374 | 5,597 | ||||||||
Net cash provided by operating activities | 47,519 | (6,699 | ) | 40,820 | |||||||
Cash flows from investing activities: | |||||||||||
Capital expenditures | (21,892 | ) | 5,736 | (16,156 | ) | ||||||
Proceeds from sale of business | 1,000 | — | 1,000 | ||||||||
Proceeds from sale of property and equipment | 6,014 | — | 6,014 | ||||||||
Net cash used in investing activities | (14,878 | ) | 5,736 | (9,142 | ) | ||||||
Cash flows from financing activities: | |||||||||||
Net cash used in financing activities | (36,437 | ) | (107 | ) | (36,544 | ) | |||||
Net decrease in cash and cash equivalents | (3,796 | ) | (1,070 | ) | (4,866 | ) | |||||
Cash and cash equivalents: | |||||||||||
Beginning of period | 8,664 | (734 | ) | 7,930 | |||||||
End of period | $ | 4,868 | $ | (1,804 | ) | $ | 3,064 |
22
Nine Months Ended September 30, 2015 | |||||||||||
As Previously Reported | Adjustments | As Restated | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 35,866 | $ | (13,770 | ) | $ | 22,096 | ||||
Depreciation and amortization | 24,448 | (408 | ) | 24,040 | |||||||
(Gain) loss on disposal of property and equipment | (205 | ) | 1,758 | 1,553 | |||||||
Provision for bad debts | 1,852 | 2,574 | 4,426 | ||||||||
Deferred tax provision | 2,054 | — | 2,054 | ||||||||
Share-based compensation | 2,044 | — | 2,044 | ||||||||
Adjustment to contingent purchase obligation | — | (191 | ) | (191 | ) | ||||||
Excess tax benefit on share-based compensation | (1,175 | ) | — | (1,175 | ) | ||||||
Changes in: | |||||||||||
Accounts receivable | (3,340 | ) | 1,240 | (2,100 | ) | ||||||
Income tax receivable | — | (8,814 | ) | (8,814 | ) | ||||||
Prepaid expenses and other assets | (7,287 | ) | 2,027 | (5,260 | ) | ||||||
Accounts payable | (9,936 | ) | 4,401 | (5,535 | ) | ||||||
Accrued expenses and other liabilities | (1,859 | ) | 7,646 | 5,787 | |||||||
Net cash provided by operating activities | 42,462 | (3,537 | ) | 38,925 | |||||||
Cash flows from investing activities: | |||||||||||
Acquisition of business, net of cash acquired | (32,364 | ) | — | (32,364 | ) | ||||||
Capital expenditures | (43,206 | ) | 3,770 | (39,436 | ) | ||||||
Proceeds from sale of property and equipment | 5,313 | — | 5,313 | ||||||||
Net cash used in investing activities | (70,257 | ) | 3,770 | (66,487 | ) | ||||||
Cash flows from financing activities: | |||||||||||
Net cash provided by financing activities | 25,521 | (392 | ) | 25,129 | |||||||
Net decrease in cash and cash equivalents | (2,274 | ) | (159 | ) | (2,433 | ) | |||||
Cash and cash equivalents: | |||||||||||
Beginning of period | 11,345 | (536 | ) | 10,809 | |||||||
End of period | $ | 9,071 | $ | (695 | ) | $ | 8,376 |
14. Subsequent Events
Following the Company's press release on January 30, 2017, three putative class actions were filed in the United States District Court for the Eastern District of Wisconsin on behalf of a class of persons who acquired common stock of the Company between May 8, 2014 and January 30, 2017, inclusive. The Complaints allege that the Company, Mark A. DiBlasi, and Peter R. Armbruster violated Section 10(b) of the Exchange Act, and Messrs. DiBlasi and Armbruster violated Section 20(a) of the Exchange Act, by making materially false or misleading statements, or failing to disclose material facts, regarding the Company's internal control over financial reporting and financial statements. The Complaints seek certification as a class action, compensatory damages, and attorney’s fees and costs. On May 19, 2017, the Court consolidated the actions under the caption In re Roadrunner Transportation Systems, Inc. Securities Litigation, and appointed Public Employees’ Retirement System as lead plaintiff. Counsel for lead plaintiff has advised the Company of their intent to file a consolidated Amended Complaint after the Company issues its restated financial statements.
On May 25, 2017, Richard Flanagan filed a complaint alleging derivative claims on the Company's behalf in the Circuit Court of Milwaukee County, State of Wisconsin (Case No. 17-cv-004401) against Scott Rued, Mark DiBlasi, Christopher Doerr, John Kennedy, III, Brian Murray, James Staley, Curtis Stoelting, William Urkiel, Judith Vijums, Michael Ward, Chad Utrup, Ivor Evans, Peter Armbruster, and Brian van Helden. Count I of the Complaint alleges the Director Defendants breached their fiduciary duties by “knowingly failing to ensure that the Company implemented and maintained adequate internal controls over its accounting and financial reporting functions,” and seeks unspecified damages. Count II of the Complaint alleges the Officer Defendants DiBlasi, Armbruster, and van Helden received substantial performance-based compensation and bonuses for fiscal year 2014 that should be disgorged. The action has been stayed by agreement pending a decision on an anticipated motion to dismiss the Amended Complaint to be filed in the securities class action described above.
On June 28, 2017, Jesse Kent filed a complaint alleging derivative claims on the Company's behalf and class action claims in the United States District Court for the Eastern District of Wisconsin (Case No. 17-cv-00893-PP) against Scott Rued, Mark
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DiBlasi, Christopher Doerr, John Kennedy, III, Brian Murray, James Staley, Curtis Stoelting, William Urkiel, Judith Vijums, Michael Ward, Chad Utrup, Ivor Evans, Peter Armbruster, Brian van Helden, Scott Dobak, and Ralph Kittle. Count I of the complaint alleges the Individual Defendants other than Armbruster, Dobak, Evans, Kittle, and van Helden, violated Section 14(a) of the Exchange Act by making false and misleading statements in proxies concerning the Company's financial statements and internal controls. Count II of the Complaint alleges: (i) all the Individual Defendants breached their fiduciary duties of good faith, candor, and loyalty by creating a culture of lawlessness; (ii) the Officer Defendants knew, were reckless, or were grossly negligent in not knowing that the Company lacked effective internal controls and the financial statements were inaccurate; (iii) the Director Defendants other than Dobak and Kittle breached their duty of loyalty by recklessly permitting the improper statements concerning the Company's internal controls and financial statements; (iv) the Director Defendants other than Dobak and Kittle breached their fiduciary duty and committed the ultra vires act of appointing the interlocking director defendant Dobak to the Company's Board of Directors in violation of Section 8 of the Clayton Act; and (v) the Audit Committee Defendants breached their fiduciary duty of loyalty by approving the statements concerning the Company's internal controls and financial statements. Count III of the Complaint alleges all the Individual Defendants wasted corporate assets by: (i) spending hundreds of millions of dollars to purchase various companies in connection with its alleged reckless growth-through-acquisition strategy; (ii) forcing the Company to have to defend itself in the securities fraud lawsuits; and (iii) paying improper compensation and bonuses to certain of the executive officers and directors who breached their fiduciary duty. Count IV of the Complaint alleges all the Individual Defendants were unjustly enriched as a result of the compensation and director remuneration they received while breaching their fiduciary duties. Count V of the Complaint alleges a direct claim against the current directors based on the Company's failure to hold an annual meeting of stockholders by June 18, 2017 (13 months after its previous annual meeting of stockholders). The Complaint seeks judgment awarding unspecified damages, directing the Company to make certain corporate governance changes, awarding restitution, ordering disgorgement, directing the Company to hold its annual meeting of stockholders, and directing the Board of Directors to remove Dobak from the Board. On September 29, 2017, all the Defendants filed a motion to dismiss the complaint. The motion is being held in abeyance pending the Company filing its restated consolidated financial statements.
On December 22, 2017, Chester County Employees Retirement Fund filed a Complaint alleging derivative claims on the Company's behalf in the United States District Court for the Eastern District of Wisconsin (Case No. 2:17-cv-01788-NJ) against the same defendants as those named in the Kent action. The allegations are substantially the same as those in the Kent Complaint.
In addition, subsequent to the announcement that certain previously filed financial statements should not be relied upon, the Company was contacted by the SEC, FINRA, and the Department of Justice. The Department of Justice and Division of Enforcement of the SEC have commenced investigations into the events giving rise to the restatement. The Company has received formal requests for documents and other information. The Company is cooperating fully with all of these agencies.
The Company is unable to estimate the costs associated with the above matters at this time.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Management's Discussion and Analysis has been revised for the effects of the restatement disclosed in Note 13 “Restatement of Previously Issued Financial Statements” of this Form 10-Q/A. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q/A. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q/A and our Annual Report on Form 10-K/A for the year ended December 31, 2015. This discussion and analysis should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” relating to our results for the year ended December 31, 2015, set forth in our Annual Report on Form 10-K/A for the year ended December 31, 2015.
Overview
We are a leading asset-light transportation and logistics service provider offering a comprehensive suite of global supply chain solutions, including truckload logistics, customized and expedited less-than-truckload, intermodal solutions (transporting a shipment by more than one mode, primarily via rail and truck), freight consolidation, inventory management, expedited services, air freight, international freight forwarding, customs brokerage, and transportation management solutions. We utilize a broad third-party network of transportation providers, comprised of ICs and purchased power providers, to serve a diverse customer base in terms of end-market focus and annual freight expenditures.
We have three segments:
Truckload Logistics. Within our TL business, we arrange the pickup and delivery of truckload, intermodal and ground and air expedited freight through our network of 46 TL service centers, 20 company dispatch offices, and over 100 independent brokerage agents located throughout the United States, Mexico, and Canada. We offer temperature-controlled, dry van, intermodal drayage, and flatbed services and specialize in the transport of automotive parts, refrigerated and frozen foods, and beverages. Our on-demand ground and air expedited services feature proprietary bid technology supported by our fleets of ground and air assets. We believe this array of services and specialization provides our customers with full-service options and provides us with more consistent shipping volumes in any given year.
Less-than-Truckload. Our LTL business involves the pickup, consolidation, linehaul, deconsolidation, and delivery of LTL shipments throughout the United States and into Mexico, Puerto Rico, and Canada. With a network of 45 LTL service centers and over 150 third-party delivery agents, we employ a point-to-point LTL model that we believe serves as a competitive advantage over the traditional hub and spoke LTL model in terms of a balance of competitive pricing and transit times, lower incidence of damage, and reduced fuel consumption.
Global Solutions. Within our Global Solutions business, we offer a full portfolio of domestic and international transportation and logistics solution, including access to cost-effective and time-sensitive modes of transportation within our broad network. Specifically, our Global Solutions offering includes pricing, contract management, transportation mode and carrier selection, freight tracking, freight bill payment and audit, cost reporting and analysis, dispatch, and freight consolidation and warehousing. Our customized Global Solutions offering is designed to allow our customers to reduce operating costs, redirect resources to core competencies, improve supply chain efficiency, and enhance customer service. Our Global Solutions business also includes domestic and international air and ocean transportation services and customs brokerage.
Our success principally depends on our ability to generate revenues through our network of sales personnel, proprietary bid technology, and independent brokerage agents and to deliver freight in all modes safely, on time, and cost-effectively through a suite of solutions tailored to the needs of each customer. Customer shipping demand, over-the-road freight tonnage levels, events leading to expedited shipping requirements, and equipment capacity ultimately drive increases or decreases in our revenues. Our ability to operate profitably and generate cash is also impacted by purchased transportation costs, fuel costs, pricing dynamics, customer mix, and our ability to manage costs effectively. Within our TL business, we typically charge a flat rate negotiated on each load hauled. Within our LTL business, we typically generate revenues by charging our customers a rate based on shipment weight, distance hauled, and commodity type. This amount is typically comprised of a base rate, a fuel surcharge, and any applicable service fees. Within our Global Solutions business, we typically charge a variable rate on each shipment, in addition to transaction or service fees appropriate for the solution we have provided to meet a specific customer’s needs.
We incur costs that are directly related to the transportation of freight, including purchased transportation costs. We also incur indirect costs associated with the transportation of freight that include other operating costs, such as insurance, claims, and commission expenses. In addition, we incur personnel–related costs and other operating expenses, collectively discussed herein
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as other operating expenses, essential to administering our operations. We continually monitor all components of our cost structure and establish annual budgets, which are generally used to benchmark costs incurred on a monthly basis.
Purchased transportation costs within our TL business are generally based on negotiated rates for each load hauled. Purchased transportation costs within our LTL business represent amounts we pay to ICs or purchased power providers and are generally contractually agreed-upon rates. Within our Global Solutions business, purchased transportation costs include payments made to our purchased power providers, which are generally contractually agreed-upon rates. Purchased transportation costs are the largest component of our cost structure. Our purchased transportation costs typically increase or decrease in proportion to revenues.
Our ability to maintain or grow existing tonnage levels is impacted by overall economic conditions, shipping demand, and over-the-road freight capacity in North America, as well as by our ability to compete effectively in terms of pricing, safety, and on-time delivery.
The pricing environment in the transportation industry also impacts our operating performance. Pricing within our TL business is typically driven by shipment frequency and consistency, length of haul, and customer and geographic mix, but generally has fewer influential factors than pricing within our LTL business. Within our LTL business, we typically generate revenues by charging our customers a rate based on shipment weight, distance hauled, and commodity type. This amount is comprised of a base rate, a fuel surcharge, and any applicable service fees. Our LTL pricing is typically measured by billed revenue per hundredweight, which is often referred to as “yield.” Our LTL pricing is dictated primarily by factors such as shipment size, shipment frequency and consistency, length of haul, freight density, and customer and geographic mix. Within our Global Solutions business, we typically charge a variable rate on each shipment in addition to transaction or service fees appropriate for the solution we have provided to meet a specific customer’s needs. Since we offer both LTL and TL shipping as part of our Global Solutions offering, pricing within our Global Solutions segment is impacted by similar factors. The pricing environment for all of our operations generally becomes more competitive during periods of lower industry tonnage levels and increased capacity within the over-the-road freight sector. In addition, when we provide international freight forwarding services in our Global Solutions business, we also contract with airlines, ocean carriers, and agents as needed. The international markets are very dynamic and we must therefore adjust rates regularly based on market conditions.
The transportation industry is dependent upon the availability of adequate fuel supplies and the price of fuel. Fuel prices have fluctuated dramatically over recent years. Within our TL and Global Solutions businesses, we pass fuel costs through to our customers. As a result, our operating income in these businesses is less impacted by changes in fuel prices. Within our LTL business, our ICs and purchased power providers pass along the cost of diesel fuel to us, and we in turn attempt to pass along some or all of these costs to our customers through fuel surcharge revenue programs. Although revenues from fuel surcharges generally offset increases in fuel costs, other operating costs have been, and may continue to be, impacted by fluctuating fuel prices. The total impact of higher energy prices on other nonfuel-related expenses is difficult to ascertain. We cannot predict future fuel price fluctuations, the impact of higher energy prices on other cost elements, recoverability of higher fuel costs through fuel surcharges, and the effect of fuel surcharges on our overall rate structure or the total price that we will receive from our customers. Depending on the changes in the fuel rates and the impact on costs in other fuel- and energy-related areas, our operating margins could be impacted.
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Results of Operations
The following table sets forth, for the periods indicated, summary TL, LTL, Global Solutions, corporate, and consolidated statement of operations data. Such revenue data for our TL, LTL, and Global Solutions segments are expressed as a percentage of consolidated revenues. Other statement of operations data for our TL, LTL, and Global Solutions segments are expressed as a percentage of segment revenues. Corporate and total statement of operations data are expressed as a percentage of consolidated revenues. In 2016, we realigned two of our operating companies into different segments. The change in segments did not have any impact on the consolidated financial statements. Segment data for the three and nine months ended September 30, 2015 has been retrospectively revised to reflect the change in segments.
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Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||||||||
2016 (1) | 2015 (1) | 2016 (1) | 2015 (1) | ||||||||||||||||||||||||
(In thousands, except for %’s) | |||||||||||||||||||||||||||
$ | % of Revenues | $ | % of Revenues | $ | % of Revenues | $ | % of Revenues | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||
TL | $ | 335,183 | 63.0 | % | $ | 281,003 | 56.6 | % | $ | 890,752 | 60.1 | % | $ | 838,455 | 55.8 | % | |||||||||||
LTL | 118,918 | 22.4 | % | 127,284 | 25.6 | % | 355,617 | 23.9 | % | 397,872 | 26.4 | % | |||||||||||||||
Global Solutions | 83,294 | 15.7 | % | 94,198 | 19.0 | % | 250,299 | 16.9 | % | 286,896 | 19.1 | % | |||||||||||||||
Eliminations | (5,386 | ) | (1.0 | )% | (5,721 | ) | (1.1 | )% | (14,696 | ) | (1.0 | )% | (20,002 | ) | (1.3 | )% | |||||||||||
Total | 532,009 | 100.0 | % | 496,764 | 100.0 | % | 1,481,972 | 100.0 | % | 1,503,221 | 100.0 | % | |||||||||||||||
Purchased transportation costs: | |||||||||||||||||||||||||||
TL | 225,515 | 67.3 | % | 175,846 | 62.6 | % | 580,914 | 65.2 | % | 538,775 | 64.3 | % | |||||||||||||||
LTL | 81,841 | 68.8 | % | 88,879 | 69.8 | % | 246,572 | 69.3 | % | 275,556 | 69.3 | % | |||||||||||||||
Global Solutions | 56,301 | 67.6 | % | 65,808 | 69.9 | % | 169,181 | 67.6 | % | 203,285 | 70.9 | % | |||||||||||||||
Eliminations | (5,386 | ) | (1.0 | )% | (5,721 | ) | (1.2 | )% | (14,696 | ) | (1.0 | )% | (20,002 | ) | (1.3 | )% | |||||||||||
Total | 358,271 | 67.3 | % | 324,812 | 65.4 | % | 981,971 | 66.3 | % | 997,614 | 66.4 | % | |||||||||||||||
Other operating expenses (2): | |||||||||||||||||||||||||||
TL | 92,589 | 27.6 | % | 91,817 | 32.7 | % | 275,629 | 30.9 | % | 248,626 | 29.7 | % | |||||||||||||||
LTL | 35,401 | 29.8 | % | 35,854 | 28.2 | % | 103,109 | 29.0 | % | 104,173 | 26.2 | % | |||||||||||||||
Global Solutions | 19,709 | 23.7 | % | 18,986 | 20.2 | % | 57,187 | 22.8 | % | 59,470 | 20.7 | % | |||||||||||||||
Corporate | 5,501 | 1.0 | % | 9,395 | 1.9 | % | 16,848 | 1.1 | % | 21,072 | 1.4 | % | |||||||||||||||
Total | 153,200 | 28.8 | % | 156,052 | 31.4 | % | 452,773 | 30.6 | % | 433,341 | 28.8 | % | |||||||||||||||
Depreciation and amortization: | |||||||||||||||||||||||||||
TL | 6,632 | 2.0 | % | 5,994 | 2.1 | % | 20,074 | 2.3 | % | 15,728 | 1.9 | % | |||||||||||||||
LTL | 999 | 0.8 | % | 686 | 0.5 | % | 2,733 | 0.8 | % | 2,027 | 0.5 | % | |||||||||||||||
Global Solutions | 1,229 | 1.5 | % | 1,183 | 1.3 | % | 3,684 | 1.5 | % | 3,720 | 1.3 | % | |||||||||||||||
Corporate | 388 | 0.1 | % | 343 | 0.1 | % | 1,145 | 0.1 | % | 972 | 0.1 | % | |||||||||||||||
Total | 9,248 | 1.7 | % | 8,206 | 1.7 | % | 27,636 | 1.9 | % | 22,447 | 1.5 | % | |||||||||||||||
Impairment charges: | |||||||||||||||||||||||||||
TL | 157,538 | 47.0 | % | — | — | % | 157,538 | 17.7 | % | — | — | % | |||||||||||||||
LTL | 197,312 | 165.9 | % | — | — | % | 197,312 | 55.5 | % | — | — | % | |||||||||||||||
Global Solutions | 17,231 | 20.7 | % | — | — | % | 17,231 | 6.9 | % | — | — | % | |||||||||||||||
Corporate | — | — | % | — | — | % | — | — | % | — | — | % | |||||||||||||||
Total | 372,081 | 69.9 | % | — | — | % | 372,081 | 25.1 | % | — | — | % | |||||||||||||||
Operating (loss) income: | |||||||||||||||||||||||||||
TL | (147,091 | ) | (43.9 | )% | 7,346 | 2.6 | % | (143,403 | ) | (16.1 | )% | 35,326 | 4.2 | % | |||||||||||||
LTL | (196,635 | ) | (165.4 | )% | 1,865 | 1.5 | % | (194,109 | ) | (54.6 | )% | 16,116 | 4.1 | % | |||||||||||||
Global Solutions | (11,176 | ) | (13.4 | )% | 8,221 | 8.7 | % | 3,016 | 1.2 | % | 20,421 | 7.1 | % | ||||||||||||||
Corporate | (5,889 | ) | (1.1 | )% | (9,738 | ) | (2.0 | )% | (17,993 | ) | (1.2 | )% | (22,044 | ) | (1.5 | )% | |||||||||||
Total | (360,791 | ) | (67.8 | )% | 7,694 | 1.5 | % | (352,489 | ) | (23.8 | )% | 49,819 | 3.3 | % | |||||||||||||
Interest expense | 5,757 | 1.1 | % | 4,913 | 1.0 | % | 17,060 | 1.2 | % | 13,895 | 0.9 | % | |||||||||||||||
(Loss) income before provision for income taxes | (366,548 | ) | (68.9 | )% | 2,781 | 0.6 | % | (369,549 | ) | (24.9 | )% | 35,924 | 2.4 | % | |||||||||||||
(Benefit from) provision for income taxes | (46,930 | ) | (8.8 | )% | 1,076 | 0.2 | % | (48,092 | ) | (3.2 | )% | 13,828 | 0.9 | % | |||||||||||||
Net (loss) income | $ | (319,618 | ) | (60.1 | )% | $ | 1,705 | 0.3 | % | $ | (321,457 | ) | (21.7 | )% | $ | 22,096 | 1.5 | % |
(1) | See Note 13 “Restatement of Previously Issued Financial Statements.” |
(2) | Reflects the sum of personnel and related benefits, other operating expenses, and acquisition transaction expenses. |
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Summary LTL operating statistics for the three and nine months ended September 30 is shown below:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||
2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||||||||||||
Operating ratio, excluding impairment | 99.4 | 98.5 | 99.1 | 95.9 | |||||||||||||||||
Tonnage (in thousands of tons) | 302.0 | 336.1 | (10.1 | %) | 917.6 | 1,045.7 | (12.3 | %) | |||||||||||||
Shipments (in thousands) | 555.4 | 574.6 | (3.3 | %) | 1,668.2 | 1,777.7 | (6.2 | %) | |||||||||||||
Revenue per hundredweight (incl. fuel) | $ | 19.72 | $ | 19.09 | 3.3 | % | $ | 19.38 | $ | 19.14 | 1.3 | % | |||||||||
Revenue per hundredweight (excl. fuel) | $ | 17.60 | $ | 16.77 | 4.9 | % | $ | 17.39 | $ | 16.70 | 4.2 | % | |||||||||
Weight per shipment (lbs.) | 1,088 | 1,170 | (7.0 | %) | 1,100 | 1,176 | (6.5 | %) | |||||||||||||
Linehaul cost per mile (excl. fuel) | $ | 1.25 | $ | 1.24 | (0.8 | %) | $ | 1.25 | $ | 1.25 | — | % | |||||||||
Note: Other than operating ratio, the statistics above do not include (i) adjustments for undelivered freight required for financial statement purposes in accordance with Roadrunner's revenue recognition policy; and (ii) non-LTL related business captured within the LTL segment. |
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Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015
Revenues
Consolidated revenues increased by $35.2 million, or 7.1%, to $532.0 million during the third quarter of 2016 from $496.8 million during the third quarter of 2015, primarily related to our ground expedite business in which we receive a management fee versus transportation or brokerage margins. Our remaining transportation businesses, when compared to the prior year, continued to experience declines in freight rates and volumes across most end markets and lower fuel surcharge revenue.
TL revenues increased by $54.2 million, or 19.3%, to $335.2 million during the third quarter of 2016 from $281.0 million during the third quarter of 2015, primarily related to an increase of $72.5 million from our air and ground expedite business. These increases were offset by declines in volumes, continued softness in the spot market, and decreases in fuel surcharge revenue.
LTL revenues decreased by $8.4 million, or 6.6%, to $118.9 million during the third quarter of 2016 from $127.3 million during the third quarter of 2015. LTL revenues were impacted by continued weak freight demand in the general industrial markets we serve, a drop in fuel prices that resulted in a $2.9 million, or 18.6%, decrease in fuel surcharge revenue, and a 10.1% reduction in tonnage primarily due to changes in freight mix. These decreases were partially offset by a 4.9% increase in revenue per hundredweight excluding fuel from the prior year third quarter due to improved pricing and positive freight mix changes resulting from our pricing initiatives.
Global Solutions revenues decreased by $10.9 million, or 11.6%, to $83.3 million during the third quarter of 2016 from $94.2 million during the third quarter of 2015, primarily due to decreased volumes due to overall economic conditions and decreased rates driven by excess capacity. These decreases were partially offset by increases of $1.5 million in our warehousing and consolidation business, which improved due to pricing and volume.
Purchased Transportation Costs
Consolidated purchased transportation costs increased by $33.5 million, or 10.3%, to $358.3 million during the third quarter of 2016 from $324.8 million during the third quarter of 2015.
TL purchased transportation costs increased $49.7 million, or 28.2%, to $225.5 million during the third quarter of 2016 from $175.8 million during the third quarter of 2015, primarily due to increased volumes in our ground expedite business. These increases were offset by continued declines in volumes and weakened demand at our other TL businesses due to excess capacity, as well as higher use of employee drivers at recently acquired companies, which are reported in other operating expenses.
LTL purchased transportation costs decreased by $7.1 million, or 7.9%, to $81.8 million during the third quarter of 2016 from $88.9 million during the third quarter of 2015. The decreases were consistent with the decreases in revenue, excluding fuel surcharge, and primarily the result of weakened freight demand. Excluding fuel surcharges, our average linehaul cost per mile increased slightly at $1.25 during the third quarter of 2016 from $1.24 during the third quarter of 2015.
Global Solutions purchased transportation costs decreased by $9.5 million, or 14.4%, to $56.3 million during the third quarter of 2016 from $65.8 million during the third quarter of 2015. The decreases were primarily due to the lower volumes and market rates in our international freight forwarding and domestic freight management business.
Other Operating Expenses
Consolidated other operating expenses, which reflect the sum of personnel and related benefits, other operating expenses, and acquisition transaction expenses shown in our unaudited condensed consolidated statements of operations, decreased by $2.9 million, or 1.8%, to $153.2 million during the third quarter of 2016 from $156.1 million during the third quarter of 2015.
Within our TL business, other operating expenses increased by $0.8 million, or 0.8%, to $92.6 million during the third quarter of 2016 from $91.8 million during the third quarter of 2015.
Within our LTL business, other operating expenses decreased by $0.5 million, or 1.3%, to $35.4 million during the third quarter of 2016 from $35.9 million during the third quarter of 2015.
Within our Global Solutions business, other operating expenses increased $0.7 million, or 3.8%, to $19.7 million during the third quarter of 2016 from $19.0 million during the third quarter of 2015.
Other operating expenses that were not allocated to our TL, LTL, or Global Solutions businesses decreased to $5.5 million during the third quarter of 2016 from $9.4 million during the third quarter of 2015, primarily due to the $5.0 million charge that we recorded in the third quarter of 2015 in connection with the termination of certain IC lease purchase guarantee programs.
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Depreciation and Amortization
Consolidated depreciation and amortization increased to $9.2 million during the third quarter of 2016 from $8.2 million during the third quarter of 2015, reflecting increases in property and equipment attributable to our acquisitions and our growth and productivity initiatives.
Goodwill Impairment
During the third quarter of 2016, we recorded total impairment charges of $372.1 million resulting from a combination of weakened environment, the inability to meet forecast results, and the lower share price. No impairment charges were recorded during the third quarter of 2015.
As a result of goodwill impairment analysis performed during third quarter of 2016, non-cash goodwill impairment charges of $157.5 million, $197.3 million, and $17.2 million were recognized for our TL, LTL, and Warehousing & Consolidation reporting units, respectively.
Operating (Loss) Income
Consolidated operating results decreased to an operating loss of $360.8 million during the third quarter of 2016 from operating income of $7.7 million during the third quarter of 2015. Operating loss in the third quarter of 2016 included impairment charges of $372.1 million. Excluding the impairment charges, operating income was $11.3 million during the third quarter of 2016, which was an increase of $3.6 million, or 46.7%, from $7.7 million during the third quarter of 2015. Operating income, excluding impairment charges, as a percentage of revenues was 2.1% during the third quarter of 2016, compared to 1.5% during the third quarter of 2015.
Within our TL business, operating results decreased to an operating loss of $147.1 million during the third quarter of 2016 from operating income of $7.3 million during the third quarter of 2015. TL operating loss in the third quarter of 2016 included impairment charges of $157.5 million. Excluding the impairment charges, operating income was $10.4 million, which was an increase of $3.1 million, or 42.2%, from $7.3 million during the third quarter of 2015. TL operating income, excluding impairment charges, as a percentage of TL revenues was 3.1% during the third quarter of 2016, compared to 2.6% during the third quarter of 2015.
Within our LTL business, operating results decreased to an operating loss of $196.6 million during the third quarter of 2016 from operating income of $1.9 million during the third quarter of 2015. LTL operating loss in the third quarter of 2016 included impairment charges of $197.3 million. Excluding the impairment charges, operating income was $0.7 million, which was a decrease of $1.2 million, or 63.7% from $1.9 million during the third quarter of 2015. LTL operating income, excluding impairment charges, as a percentage of LTL revenues was 0.6% during the third quarter of 2016, compared to 1.5% during the third quarter of 2015.
Within our Global Solutions business, operating results decreased to an operating loss of $11.2 million during the third quarter of 2016 from operating income of $8.2 million during the third quarter of 2015. Global Solutions operating loss in the third quarter of 2016 included impairment charges of $17.2 million. Excluding the impairment charges, operating income was $6.1 million, which was a decrease of $2.1 million, or 26.3%, from $8.2 million during the third quarter of 2015. Global Solutions operating income, excluding impairment charges, as a percentage of Global Solutions revenues was 7.3% during the third quarter of 2016, compared to 8.7% during the third quarter of 2015.
Interest Expense
Interest expense increased to $5.8 million during the third quarter of 2016 from $4.9 million during the third quarter of 2015, primarily as a result of the increased rates.
Income Tax
Income tax benefit was $46.9 million during the third quarter of 2016 compared to income tax expense of $1.1 million during the third quarter of 2015. The effective tax rate was 12.8% during the third quarter of 2016 compared to 38.7% third quarter of 2015. The non-deductible goodwill impairment charges incurred during the third quarter of 2016 decreased the overall benefit we received during the third quarter of 2016, which lowered our effective tax rate. The effective income tax rate varies from the federal statutory rate of 35.0% primarily due to state income taxes as well as the impact of items causing permanent differences.
Net (Loss) Income
Net loss was $319.6 million during the third quarter of 2016 compared to net income of $1.7 million during the third quarter of 2015.
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Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
Revenues
Consolidated revenues decreased by $21.2 million, or 1.4%, to $1,482.0 million during the first nine months of 2016 from $1,503.2 million during the first nine months of 2015, primarily due to continuing declines in freight rates and volumes across most end markets and lower fuel surcharge revenue. These declines were offset by the increases in ground and air expedited freight.
TL revenues increased $52.3 million, or 6.2%, to $890.8 million during the first nine months of 2016 from $838.5 million during the first nine months of 2015, primarily due to an increase of $166.1 million in ground and air expedited freight and the acquisition of Stagecoach which accounted for $20.8 million of the increase. These increases were offset by decreases in volumes, continued softness in the spot market, and lower fuel surcharge revenue.
LTL revenues decreased by $42.3 million, or 10.6%, to $355.6 million during the first nine months of 2016 from $397.9 million during the first nine months of 2015. LTL revenues were impacted by a drop in fuel prices that resulted in a $14.9 million, or 29.2%, decrease in fuel surcharge revenue and a 12.3% reduction in tonnage primarily due to changes in freight mix. These decreases were partially offset by a 4.2% increase in revenue per hundredweight excluding fuel from the prior year due to improved pricing and positive freight mix changes resulting from our pricing initiatives.
Global Solutions revenues decreased by $36.6 million, or 12.8%, to $250.3 million during the first nine months of 2016 from $286.9 million during the first nine months of 2015, primarily due to a decrease in domestic freight management business and lower volumes and rates in international freight forwarding, partially offset by an increase of $3.0 million in our warehousing and consolidation business.
Purchased Transportation Costs
Consolidated purchased transportation costs decreased by $15.6 million, or 1.6%, to $982.0 million during the first nine months of 2016 from $997.6 million during the first nine months of 2015.
TL purchased transportation costs increased by $42.1 million, or 7.8%, to $580.9 million during the first nine months of 2016 from $538.8 million during the first nine months of 2015, primarily due to an increase of $108.6 million in ground and air expedited freight costs. These increases were offset by decreases in volumes and weakened demand, as well as higher use of employee drivers at recently acquired companies, which are reported in other operating expenses.
LTL purchased transportation costs decreased by $29.0 million, or 10.5%, to $246.6 million during the first nine months of 2016 from $275.6 million during the first nine months of 2015. The decreases were consistent with the decreases in revenue, excluding fuel surcharge, and primarily the result of weakened freight demand. Excluding fuel surcharges, our average linehaul cost per mile remained steady at $1.25 during both the first nine months of 2016 and 2015.
Global Solutions purchased transportation costs decreased by $34.1 million, or 16.8%, to $169.2 million during the first nine months of 2016 from $203.3 million during the first nine months of 2015. The decreases were primarily due to the lower volumes and market rates in our international freight forwarding and domestic freight management business.
Other Operating Expenses
Consolidated other operating expenses, which reflect the sum of personnel and related benefits, other operating expenses, and acquisition transaction expenses shown in our unaudited condensed consolidated statements of operations, increased by $19.5 million, or 4.5%, to $452.8 million during the first nine months of 2016 from $433.3 million during the first nine months of 2015.
Within our TL business, other operating expenses increased by $27.0 million, or 10.9%, to $275.6 million during the first nine months of 2016 from $248.6 million during the first nine months of 2015, primarily as a result of increased administrative wages and benefits of $7.4 million, increase insurance and claims expense of $7.2 million, increase maintenance costs of $6.0 million, and increased equipment lease costs of $4.1 million.
Within our LTL business, other operating expenses decreased by $1.1 million, or 1.0%, to $103.1 million during the first nine months of 2016 from $104.2 million during the first nine months of 2015, primarily due to decreased equipment lease and maintenance costs of $1.8 million and decreased employee compensation costs of $1.1 million, which were primarily offset by increased building maintenance and rent expense of $1.4 million and increased professional and outside services expense of $0.4 million.
Within our Global Solutions business, other operating expenses decreased $2.3 million, or 3.8%, to $57.2 million during the first nine months of 2016 from $59.5 million during the first nine months of 2015, primarily due to reduction in general and
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administrative costs and a loss of $1.4 million for decommissioned equipment and software for our warehousing and consolidation business in the first nine months of 2015.
Other operating expenses that were not allocated to our TL, LTL, or Global Solutions businesses decreased to $16.8 million during the first nine months of 2016 from $21.1 million during the first nine months of 2015, primarily due to the $5.0 million charge that we recorded in connection with the termination of certain IC lease purchase guarantee programs in 2015.
Depreciation and Amortization
Consolidated depreciation and amortization increased to $27.6 million during the first nine months of 2016 from $22.4 million during the first nine months of 2015, reflecting increases in property and equipment attributable to increased capital expenditures in prior years associated with growth and productivity.
Goodwill
During the first nine months of 2016, we recorded total impairment charges of $372.1 million resulting from a combination of weakened environment, the inability to meet forecast results, and the lower share price. No impairment charges were recorded during the first nine months of 2015. During the first nine months of 2016, non-cash goodwill impairment charges of $157.5 million, $197.3 million, and $17.2 million were recognized for our TL, LTL, and Warehousing & Consolidation reporting units, respectively.
Operating (Loss) Income
Consolidated operating results decreased to an operating loss of $352.5 million during the first nine months of 2016 from operating income of $49.8 million during the first nine months of 2015. Operating loss in the first nine months of 2016 included impairment charges of $372.1 million. Excluding the impairment charges, operating income was $19.6 million during the first nine months of 2016, which was a decrease of $30.2 million, or 60.7%, from $49.8 million during the first nine months of 2015. Operating income, excluding impairment charges, as a percentage of revenues was 1.3% during the first nine months of 2016, compared to 3.3% during the first nine months of 2015.
Within our TL business, operating results decreased to an operating loss of $143.4 million during the first nine months of 2016 from operating income of $35.3 million during the first nine months of 2015. TL operating loss in the first nine months of 2016 included impairment charges of $157.5 million. Excluding the impairment charges, operating income was $14.1 million, which was a decrease of $21.2 million, or 60.0%, from $35.3 million during the first nine months of 2015. TL operating income, excluding impairment charges, as a percentage of TL revenues was 1.6% during the first nine months of 2016, compared to 4.2% during the first nine months of 2015.
Within our LTL business, operating results decreased to an operating loss of $194.1 million during the first nine months of 2016 from operating income of $16.1 million during the first nine months of 2015. LTL operating loss in the first nine months of 2016 included impairment charges of $197.3 million. Excluding the impairment charges, operating income was $3.2 million, which was a decrease of $12.9 million, or 80.1%, from $16.1 million during the first nine months of 2015. LTL operating income, excluding impairment charges, as a percentage of LTL revenues was 0.9% during the first nine months of 2016, compared to 4.1% during the first nine months of 2015.
Within our Global Solutions business, operating income decreased to $3.0 million during the first nine months of 2016 from operating income of $20.4 million during the first nine months of 2015. Global Solutions operating income in the first nine months of 2016 included impairment charges of $17.2 million. Excluding the impairment charges, operating income was $20.2 million, which was a decrease of $0.2 million from $20.4 million during the first nine months of 2015. Global Solutions operating income, excluding impairment charges, as a percentage of Global Solutions revenues was 8.1% during the first nine months of 2016, compared to 7.1% during the first nine months of 2015.
Interest Expense
Interest expense increased to $17.1 million during the first nine months of 2016 from $13.9 million during the first nine months of 2015, primarily as a result of the higher rates.
Income Tax
Income tax benefit was $48.1 million during the first nine months of 2016 compared to income tax expense of $13.8 million during the first nine months of 2015. The effective tax rate was 13.0% during the first nine months of 2016 and 38.5% during the first nine months of 2015. The non-deductible goodwill impairment charges incurred during the first nine months of 2016 decreased the overall benefit we received during the first nine months of 2016, which lowered our effective tax rate. The effective income tax rate varies from the federal statutory rate of 35.0% primarily due to state income taxes as well as the impact of items causing
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permanent differences.
Net (Loss) Income
Net loss was $321.5 million during the first nine months of 2016 compared to net income of $22.1 million during the first nine months of 2015.
Liquidity and Capital Resources
Our primary sources of cash have been borrowings under our revolving credit facility, cash flows from operations, and proceeds from the sale of our common stock. Our primary cash needs are and have been to fund normal working capital requirements, repay our indebtedness, finance capital expenditures, and execute our acquisition strategy. As of September 30, 2016, we had $3.1 million in cash and cash equivalents and $99.3 million of availability under our credit facility.
Although we can provide no assurances, we believe that amounts available under our revolving credit facility, available cash and cash equivalents, and cash flow from operations should be adequate to finance working capital, planned capital expenditures and loan repayment obligations for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing as we continue to execute our business strategy.
Our credit facility consists of a $300.0 million term loan and a revolving credit facility up to a maximum aggregate amount of $250.0 million (as reduced from $300.0 million pursuant to the Waiver discussed below), of which up to $10.0 million may be used for Swing Line Loans (as defined in the credit agreement) and up to $40.0 million may be used for letters of credit. The credit facility matures on July 9, 2019.
Advances under our credit facility bear interest at either (a) the Eurocurrency Rate (as defined in the credit agreement), plus an applicable margin in the range of 2.0% to 3.50%, or (b) the Base Rate (as defined in the credit agreement), plus an applicable margin in the range of 1.0% to 2.50%.
Our credit agreement contains certain financial covenants, including a maximum cash flow leverage ratio and a minimum fixed charge coverage ratio. On June 17, 2016, we entered into a Consent, Waiver, and First Amendment (the “Amendment”) to the credit agreement. Pursuant to the Amendment, the maximum cash flow leverage ratio and minimum fixed charge coverage ratio were modified for certain future periods. As modified by the Amendment, the required maximum cash flow leverage ratio was 4.00 to 1.0 for the four quarters ended September 30, 2016, and then decreases to 3.75 to 1.0 for the four quarters ending December 31, 2016, 3.50 to 1.0 for the four quarters ending March 31, 2017, 3.25 to 1.0 for the four quarters ending June 30, 2017, and finally to 3.00 to 1.0 for all periods thereafter. As modified by the Amendment, the minimum fixed charge coverage ratio was 1.15 to 1.0 for the four quarters ended September 30, 2016 and December 31, 2016 and increases to 1.25 to 1.0 for all periods thereafter.
In addition, our credit agreement contains negative covenants limiting, among other things, additional indebtedness, capital expenditures, transactions with affiliates, additional liens, sales of assets, dividends, investments, advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements. Our credit agreement also contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the credit agreement to be in full force and effect, and a change of control of our business.
As described in Note 5, we were not in compliance with our cash flow leverage ratio as of September 30, 2016 and obtained a waiver from U.S. Bank and the other lenders. However, as a result of the restatement adjustments, we were also not in compliance with our fixed charge coverage ratio. As a result, we have classified our debt as current in the accompanying condensed consolidated balance sheets. We believe that although the debt under the credit agreement is classified as current in the accompanying condensed consolidated balance sheet as of September 30, 2016, timely repayments will be made under the existing amortization schedule and the debt maturity reclassification will have little immediate effect on our liquidity.
As described above, we believe it is probable that we will not be in compliance with our cash flow leverage ratio as of December 31, 2016. Although we can provide no assurance, management expects to work with our lenders to modify the current financial covenants. If we default under the terms of our credit agreement and fail to obtain appropriate amendments to or waivers under the credit agreement, our borrowings against the credit agreement could be immediately declared due and payable. If we fail to pay the amount due, the lenders could proceed against the collateral by which our loans are secured, our borrowing capacity may be limited, or the credit agreement could be terminated. If acceleration of outstanding borrowings occurs or if the credit agreement is terminated, we may have difficulty borrowing additional funds sufficient to refinance the accelerated debt or entering into new credit or debt arrangements, and, if available, the terms of the financing may not be acceptable. A default under our credit agreement could have a material adverse effect on our liquidity and financial condition. See the section titled “Risk Factors - Our senior credit facility contains financial and other restrictive covenants with which we may be unable to comply. A default under
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these financing arrangements could cause a material adverse effect on our liquidity, financial condition, and results of operations” included in our Form 10-K/A for the year ended December 31, 2015.
Cash Flows
A summary of operating, investing, and financing activities are shown in the following table (in thousands):
Nine Months Ended | |||||||
September 30, | |||||||
2016 | 2015 | ||||||
Net cash provided by (used in): | |||||||
Operating activities | $ | 40,820 | $ | 38,925 | |||
Investing activities | (9,142 | ) | (66,487 | ) | |||
Financing activities | (36,544 | ) | 25,129 | ||||
Net change in cash and cash equivalents | $ | (4,866 | ) | $ | (2,433 | ) |
Cash Flows from Operating Activities
Cash provided by operating activities primarily consists of net (loss) income adjusted for certain non-cash items, including depreciation and amortization, share-based compensation, provision for bad debts, deferred taxes, and the effect of changes in working capital and other activities.
The difference between our $321.5 million of net loss and the $40.8 million cash provided by operating activities during the nine months ended September 30, 2016 was primarily attributable to the non-cash portion of the impairment charges of $372.1 million and $29.7 million of depreciation and amortization expense, offset by a deferred tax benefit of $46.9 million. The remainder is primarily attributable to changes in working capital accounts.
Cash Flows from Investing Activities
Cash used in investing activities was $9.1 million during the nine months ended September 30, 2016, which reflects $16.2 million of capital expenditures used to support our operations. These capital expenditures were offset by the proceeds from the sale of property and equipment of $6.0 million and the proceeds of the sale of a non-core business of $1.0 million.
Cash Flows from Financing Activities
Cash used in financing activities was $36.5 million during the nine months ended September 30, 2016, which primarily reflects a net reduction of borrowings of $30.0 million, the reduction of a capital lease obligation of $4.3 million, debt issuance costs of $0.7 million, $0.8 million of payments of contingent purchase obligations, and $0.7 million of other miscellaneous cash outflows.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements, we applied the same critical accounting policies as described in our Annual Report on Form 10-K/A for the year ended December 31, 2015 that affect judgments and estimates of amounts recorded for certain assets, liabilities, revenues, and expenses.
We evaluate goodwill and intangible assets for impairment at least annually or more frequently whenever events or changes in circumstances indicate that the asset may be impaired, or in the case of goodwill, the fair value of the reporting unit is below its carrying amount. The analysis of potential impairment of goodwill requires a two-step approach, the first of which is to compare the estimated fair value at each of the reporting units to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. The second step includes valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, a non-cash goodwill impairment loss is recognized in an amount equal to the excess, not to exceed the carrying amount.
For purposes of the impairment analysis, the fair value of our reporting units is estimated based upon an average of the market approach and the income approach, both of which incorporate numerous assumptions and estimates such as company forecasts, discount rates, and growth rates, among others. The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group
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companies; control premiums appropriate for acquisitions in the industries in which we compete; the discount rate; terminal growth rates; and forecasts of revenue, operating income, and capital expenditures. The allocation requires several analyses to determine fair value of assets and liabilities including, among others, customer relationships, and property and equipment. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. Future declines in the overall market value of our stock may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.
We have four reporting units for our three segments: TL, LTL, Global Solutions, and Warehousing & Consolidation, which is consolidated into our Global Solutions segment. We conduct our annual goodwill impairment analysis for each of our four reporting units as of July 1 of each year. As a result of the first step of our goodwill impairment analysis, we determined that the fair value of the Global Solutions reporting unit exceeded its carrying value by 8.4%; thus no impairment was indicated for this reporting unit. However, resulting from a combination of weakened environment, the inability to meet forecast results, and the lower share price, we determined that the fair value of the TL, LTL, and Warehousing & Consolidation reporting units were less than their respective carrying values, requiring us to perform the second step of the goodwill impairment analysis for the TL, LTL, and Warehousing & Consolidation reporting units. We completed the second step of the goodwill impairment analysis and recorded non-cash goodwill impairment charge of $157.5 million, $197.3 million, and $17.2 million in the third quarter of 2016 for the TL, LTL, and Warehousing & Consolidation reporting units, respectively.
The fair value of the Global Solutions reporting unit exceeded book value by 8.4%, or approximately $14.0 million. Relatively small changes in certain key assumptions could have resulted in this reporting unit failing step one. Using the income approach, holding other assumptions constant, a relatively small decrease in the operating margin assumption could decrease the reporting unit's fair value such that an impairment may have been present. Applying the market approach, a decrease in the assumed earnings multiple could have also caused the Global Solutions reporting unit to fail the first step.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Commodity Risk
Our primary market risk centers on fluctuations in fuel prices, which can affect our profitability. Diesel fuel prices fluctuate significantly due to economic, political, and other factors beyond our control. Our ICs and purchased power providers pass along the cost of diesel fuel to us, and we in turn attempt to pass along some or all of these costs to our customers through fuel surcharge revenue programs. There can be no assurance that our fuel surcharge revenue programs will be effective in the future. Market pressures may limit our ability to pass along our fuel surcharges.
Interest Rate Risk
We have exposure to changes in interest rates on our revolving credit facility and term loan. The interest rate on our revolving credit facility and term loan fluctuate based on the prime rate or LIBOR plus an applicable margin. Assuming our $250.0 million revolving credit facility was fully drawn and taking into consideration the outstanding term loan of $281.5 million as of September 30, 2016, a 1.0% increase in the borrowing rate would increase our annual interest expense by $5.3 million. We do not use derivative financial instruments for speculative trading purposes and are not engaged in any interest rate swap agreements.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
In connection with the November 14, 2016 filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, our prior Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016 (the “Evaluation Date”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) were effective. In connection with the Audit Committee Investigation and management's review of financial records, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision and with the participation of our management, including our current CEO (who is also currently serving as the Principal Financial Officer and Principal Accounting Officer). As a result of this evaluation, our current CEO concluded that our disclosure controls and procedures were not effective as of the Evaluation Date because of the material weaknesses in internal control, as identified in Amendment No. 1 on Form 10-K/A for the year ended December 31, 2015, as filed concurrently with this Form 10-Q/A.
Changes in Internal Control Over Financial Reporting
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Except for the identification of the material weaknesses, there were no changes during the quarter ended September 30, 2016 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Management, including our current CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our organization have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
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PART II – OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
In the ordinary course of business, we are a defendant in several legal proceedings arising out of the conduct of our business. These proceedings include claims for property damage or personal injury incurred in connection with our services. Although there can be no assurance as to the ultimate disposition of these proceedings, we do not believe, based upon the information available at this time, that these property damage or personal injury claims, in the aggregate, will have a material impact on our consolidated financial statements. We maintain liability insurance coverage for claims in excess of $1,000,000 per occurrence and cargo coverage for claims in excess of $100,000 per occurrence. We believe we have adequate insurance to cover losses in excess of the deductible amount. As of September 30, 2016 and December 31, 2015, we had reserves for estimated uninsured losses of $23.3 million and $25.9 million, respectively.
In addition to the legal proceedings described above, like many others in the transportation services industry, we are a defendant in six purported class-action lawsuits in California alleging violations of various California labor laws and one purported class-action lawsuit in Illinois alleging violations of the Illinois Wage Payment and Collection Act. The plaintiffs in each of these lawsuits seek to recover unspecified monetary damages and other items. In addition, the California Division of Labor Standards and Enforcement has brought administrative actions against us on behalf of twelve individuals alleging that we violated California labor laws. Given the early stage of all of the proceedings described in this paragraph, we are not able to assess with certainty the outcome of these proceedings or the amount or range of potential damages or future payments associated with these proceedings at this time. We believe we have meritorious defenses to these actions and intend to defend these proceedings vigorously. However, any legal proceeding is subject to inherent uncertainties, and we cannot assure that the expenses associated with defending these actions or their resolution will not have a material adverse effect on our business, operating results, or financial condition.
Following our press release on January 30, 2017, three putative class actions were filed in the United States District Court for the Eastern District of Wisconsin on behalf of a class of persons who acquired our common stock between May 8, 2014 and January 30, 2017, inclusive. The Complaints allege that we, Mark A. DiBlasi, and Peter R. Armbruster violated Section 10(b) of the Exchange Act, and Messrs. DiBlasi and Armbruster violated Section 20(a) of the Exchange Act, by making materially false or misleading statements, or failing to disclose material facts, regarding our internal control over financial reporting and our financial statements. The complaints seek certification as a class action, compensatory damages, and attorney’s fees and costs. On May 19, 2017, the Court consolidated the actions under the caption In re Roadrunner Transportation Systems, Inc. Securities Litigation, and appointed Public Employees’ Retirement System as lead plaintiff. Counsel for lead plaintiff has advised us of their intent to file a consolidated Amended Complaint after we issue our restated financial statements.
On May 25, 2017, Richard Flanagan filed a complaint alleging derivative claims on our behalf in the Circuit Court of Milwaukee County, State of Wisconsin (Case No. 17-cv-004401) against Scott Rued, Mark DiBlasi, Christopher Doerr, John Kennedy, III, Brian Murray, James Staley, Curtis Stoelting, William Urkiel, Judith Vijums, Michael Ward, Chad Utrup, Ivor Evans, Peter Armbruster, and Brian van Helden. Count I of the Complaint alleges the Director Defendants breached their fiduciary duties by “knowingly failing to ensure that the Company implemented and maintained adequate internal controls over its accounting and financial reporting functions,” and seeks unspecified damages. Count II of the Complaint alleges the Officer Defendants DiBlasi, Armbruster, and van Helden received substantial performance-based compensation and bonuses for fiscal year 2014 that should be disgorged. The action has been stayed by agreement pending a decision on an anticipated motion to dismiss the Amended Complaint to be filed in the securities class action described above.
On June 28, 2017, Jesse Kent filed a complaint alleging derivative claims on our behalf and class action claims in the United States District Court for the Eastern District of Wisconsin (Case No. 17-cv-00893-PP) against Scott Rued, Mark DiBlasi, Christopher Doerr, John Kennedy, III, Brian Murray, James Staley, Curtis Stoelting, William Urkiel, Judith Vijums, Michael Ward, Chad Utrup, Ivor Evans, Peter Armbruster, Brian van Helden, Scott Dobak, and Ralph Kittle. Count I of the Complaint alleges the Individual Defendants other than Armbruster, Dobak, Evans, Kittle, and van Helden, violated Section 14(a) of the Exchange Act by making false and misleading statements in proxies concerning the Company's financial statements and internal controls. Count II of the Complaint alleges: (i) all the Individual Defendants breached their fiduciary duties of good faith, candor, and loyalty by creating a culture of lawlessness; (ii) the Officer Defendants knew, were reckless, or were grossly negligent in not knowing that the Company lacked effective internal controls and its financial statements were inaccurate; (iii) the Director Defendants other than Dobak and Kittle breached their duty of loyalty by recklessly permitting the improper statements concerning the Company's internal controls and financial statements; (iv) the Director Defendants other than Dobak and Kittle breached their fiduciary duty and committed the ultra vires act of appointing the interlocking director defendant Dobak to the Board in violation of Section 8 of the Clayton Act; and (v) the Audit Committee Defendants breached their fiduciary duty of loyalty by approving the statements concerning the Company's internal controls and financial statements. Count III of the Complaint alleges all the Individual Defendants wasted corporate assets by: (i) spending hundreds of millions of dollars to purchase various companies in connection with its alleged reckless growth-through-acquisition strategy; (ii) forcing the Company to have to defend itself in the
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securities fraud lawsuits; and (iii) paying improper compensation and bonuses to certain of the Company's executive officers and directors who breached their fiduciary duty. Count IV of the Complaint alleges all the Individual Defendants were unjustly enriched as a result of the compensation and director remuneration they received while breaching their fiduciary duties. Count V of the Complaint alleges a direct claim against the current directors based on the Company's failure to hold an annual meeting of stockholders by June 18, 2017 (13 months after its previous annual meeting of stockholders). The Complaint seeks judgment awarding unspecified damages, directing the Company to make certain corporate governance changes, awarding restitution, ordering disgorgement, directing the Company to hold its annual meeting of stockholders, and directing the Board to remove Dobak from the Board. On September 29, 2017, all the Defendants filed a motion to dismiss the complaint. The motion is being held in abeyance pending the filing of our restated consolidated financial statements.
On December 22, 2017, Chester County Employees Retirement Fund filed a Complaint alleging derivative claims on our behalf in the United States District Court for the Eastern District of Wisconsin (Case No. 2:17-cv-01788-NJ) against the same defendants as those named in the Kent action. The allegations are substantially the same as those in the Kent Complaint.
In addition, subsequent to our announcement that certain previously filed financial statements should not be relied upon, we were contacted by the SEC, FINRA, and the Department of Justice. The Department of Justice and Division of Enforcement of the SEC have commenced investigations into the events giving rise to the restatement. We have received formal requests for documents and other information. We are cooperating fully with all of these agencies.
ITEM 1A. | RISK FACTORS. |
An investment in our common stock involves a high degree of risk. You should carefully consider the factors described in our Annual Report on Form 10-K/A for the year ended December 31, 2015 in analyzing an investment in our common stock. If any such risks occur, our business, financial condition, and results of operations would likely suffer, the trading price of our common stock would decline, and you could lose all or part of the money you paid for our common stock. In addition, the risk factors and uncertainties could cause our actual results to differ materially from those projected in our forward-looking statements, whether made in this report or other documents we file with the SEC, or our annual report to stockholders, future press releases, or orally, whether in presentations, responses to questions, or otherwise.
There have been no material changes to the Risk Factors described under “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2015, other than the risk factor titled “Our total assets include goodwill and intangibles. If we determine that these items have become impaired in the future, our earnings could be adversely affected,” which is amended and restated in its entirety below.
Our total assets include goodwill and intangibles. If we determine that our goodwill and intangible assets in any reporting unit has become further impaired in the future, our results of operations could be adversely affected.
As of September 30, 2016, we had recorded goodwill of $312.5 million and other intangible assets, net of accumulated amortization, of $69.3 million. Goodwill represents the excess of purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill and other intangible assets are evaluated for impairment annually or more frequently, if indicators of impairment exist. If the impairment evaluations for goodwill and intangible assets indicate the carrying amount exceeds the estimated fair value, an impairment loss is recognized in an amount equal to that excess. Our annual impairment evaluations of goodwill are performed as of July 1.
As a result of the first step of our goodwill impairment analysis, we determined that the fair value of the Global Solutions reporting unit exceeded its carrying value by 8.4%; thus no impairment was indicated for this reporting unit. However, resulting from a combination of weakened environment, the inability to meet forecast results, and the lower share price, we determined that the fair value of the TL, LTL, and Warehousing & Consolidation reporting units were less than their respective carrying values, requiring us to perform the second step of the goodwill impairment analysis for the TL, LTL, and Warehousing & Consolidation reporting units. We completed the second step of the goodwill impairment analysis and recorded non-cash goodwill impairment charges of $157.5 million, $197.3 million, and $17.2 million in the third quarter of 2016 for the TL, LTL, and Warehousing & Consolidation reporting units, respectively.
Changes to our forecasts, including growth rate assumptions or the discount rate based on current market conditions could affect the fair value of the reporting units and result in an indication of impairment for one or more of our reporting units. If we determine that our goodwill and intangible assets in any reporting units have become impaired in the future, our results of operations could be adversely affected.
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ITEM 6. | EXHIBITS |
Exhibit Number | Exhibit | |
31.1 | ||
32.1 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROADRUNNER TRANSPORTATION SYSTEMS, INC. | |||
Date: January 30, 2018 | By: | /s/ Curtis W. Stoelting | |
Curtis W. Stoelting | |||
Chief Executive Officer (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer ) |
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