Roadrunner’s truckload cuts send shipper warning

Roadrunner’s truckload cuts send shipper warning

Roadrunner is shifting focus to its core LTL business and logistics, the company said. Photo credit: Roadrunner Transportation Systems.

The cutbacks at Roadrunner Transportation Systems’ dry-van truckload business are a reminder to shippers that they must monitor trucking financials, particularly as the current soft truckload market exposes operating weaknesses. In the case of Roadrunner, a publicly owned company, those weaknesses are well known and have been on display for some time.

Some may attribute Roadrunner’s woes to the current soft truckload market, but the trucking company’s financial ills have been building for years, following the revelation in 2017 of an accounting scandal that led to a complete change of management, shareholder lawsuits against the company and its leaders, and criminal charges against former Roadrunner officials.

On their own, Roadrunner’s cuts won’t have a big impact on the truckload market, but the tighter margins of many truckload operators — especially smaller carriers — could lead to more significant pruning of capacity in the months ahead, and that could force a change in pricing faster than shippers expect.

The changes at Roadrunner are more likely to directly benefit less-than-truckload (LTL) shippers, said Satish Jindel, president of SJ Consulting Group.

“The businesses that Roadrunner is retaining, like the LTL business, should benefit from these cuts,” Jindel said. “Shippers should see this as a sign of Roadrunner being right-sized, refocused to be in business segments that make sense. Seeing these changes will benefit the LTL division should be a positive for shippers.

"The new owners [Elliott Management] are doing the right thing to refocus," he said.

Roadrunner, once the fastest-growing United States trucking company and still a large one, is taking an axe to its unprofitable dry-van truckload business, cutting its fleet of tractors and trailers by half, closing five terminals, and laying off approximately 450 employees by the end of the year.

“We believe downsizing the dry-van business will improve operating margins and cash flow, reduce lease obligations and debt, improve internal controls, and allow greater focus on the significant value-creation opportunities within our other businesses,” Curt Stoelting, Roadrunner's CEO, said.

The company said in a statement it would shift attention to its LTL and logistics businesses. LTL represented about 22.2 percent of Roadrunner’s $987.8 million in revenue in the first half of 2019; truckload accounted for 28.2 percent. Logistics represented 26.5 percent of revenue and expedited accounted for the rest.

Ten years ago, before the recession, LTL represented 70 to 80 percent of Roadrunner's business, Jindel said. "They got distracted and got into everything under the sun."

Acquisitions not easy

Roadrunner’s truckload cutbacks underscore how daunting transportation mergers and acquisitions can be. Integrating just two large transportation companies with different operating and accounting methods, physical networks, and customer bases is difficult — take the 2008 merger of Yellow Transportation and Roadway, now combined as YRC Freight, as an example.

More recently, specialized hauler Daseke Inc., which starting in 2009 grew through waves of mergers to become a $1.6 billion company in 2018, announced a restructuring of several divisions and the retirement of founder, chairman, and CEO Don Daseke. Daseke remains on the board, but Brian Bonner was named executive chairman and Chris Easter interim CEO. 

Daseke said early this year it would take a “pause” from acquisitions and mergers in 2019 to focus on the platform that connects its 17 companies to provide more integrated  services to customers. “We’re really going to focus on integration, efficiency,” Don Daseke told JOC.com in an interview.

Similar to Roadrunner, Celadon Group has gone through a reorganization following a settlement of federal charges of investor fraud, selling off its logistics and intermodal business and replacing top management. Celadon also grew rapidly through acquisition over several years.

When things went awry

The job cuts and terminal closures at Roadrunner are the culmination of an acquisition strategy that transformed the company from an LTL carrier into a predominantly truckload operation with more than $1.8 billion in revenue, the 15th-largest trucking company in the US, according to SJ Consulting Group.

Roadrunner acquired more than 25 trucking, intermodal, air express, and logistics operators in a spate of acquisitions starting in 2010, pushing revenue to $2.1 billion in 2017. The company did so, Stoelting said in January 2017, “without some basic tools,” including common financial reporting standards.

With a lack of standards and accounting, things went awry. Roadrunner eventually was forced to restate several years and quarters of results when it was revealed earnings had been inflated dramatically. Eventually, former CFO Peter Armbruster and two former controllers were charged in a $245 million scheme to defraud shareholders.

Patrick J. Unzicker, formerly CFO of Adtalem Global Education, joined the company as executive vice president and CFO in September.

Stoelting, who joined Roadrunner in 2016, has spent three years pursuing a top-to-bottom reorganization of the company. Several subsidiaries were consolidated and integrated into new operating groups and other divisions were rebranded, including LTL carrier Roadrunner Freight, Ascent Global Logistics, and air freight and expedited division Active On-Demand.

In February, Roadrunner completed a stock offering and recapitalization plan that gave 90.4 percent of its publicly owned shares to Elliott Management, an activist investor group with about $34 billion in assets under management and a history of investing in distressed companies and turning them around, often through reorganization. That accelerated change at Roadrunner.

Stoelting foreshadowed Monday’s announcement in August when he told investment analysts that Roadrunner would be divesting from its truckload unit in favor of its Ascent Global Logistics division and the LTL business. Roadrunner’s dry van, refrigerated, and flatbed truckload revenue fell 1.2 percent from a year ago to $110.6 million in the second quarter.

Downers Grove, Illinois-based Roadrunner reported a $141.9 million loss in the quarter, including a $108.3 million goodwill impairment charge related to its financial and legal troubles. 

The LTL business, which will receive more attention in the reorganized company, has its own troubles. Roadrunner Freight lost $27 million on $452.3 million in revenue in 2018, compared with a $26.6 million net loss in 2017. “Our strategy at Roadrunner Freight is to focus on our core competency as a metro-to-metro long-haul carrier,” Mike Gettle, president and chief operating officer at Roadrunner, said earlier this year.

Roadrunner Freight has focused on reducing its pickup and delivery footprint to eliminate unprofitable areas, building density in strategic lanes, and shipment reliability. In the first six months of 2019, the LTL division reported a $10.4 million operating loss on $219.9 million in revenue. That compares with a $12.5 million LTL operating loss in the same period of 2018. 

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.