This story appears in the May 8 print edition of Transport Topics.
Financial auditors at accounting firm BKD have withdrawn their support of Celadon Group Inc.’s financial statements for the past three fiscal quarters due to a disagreement on the value of used trucks, according to the truckload carrier.
Celadon hired one of the accounting industry’s largest firms to conduct an outside audit to resolve the discrepancy, it said on a call with industry analysts.
The company’s internal audit committee asked BKD to take a second look at the market value of trucks transferred to 19th Capital Group, a joint venture between Celadon and Element Fleet Management. 19th Capital holds more than 10,000 tractors, leasing them to trucking fleets. On the balance sheet, Celadon records the transfer as a shift from “revenue equipment held for sale” to “investment in unconsolidated companies.”
Celadon must record the lower amount between the depreciated value and the market value of the trucks, known as the “lower of cost or market” accounting rule. The disagreement is whether the market value assigned to hundreds of trucks — $45 million and $29 million in recent quarters — was too high. BKD wrote that it was “unable to obtain sufficient appropriate audit evidence” to resolve the issue and the financial reports from June 30 to Dec. 31, 2016, should no longer be relied upon until an outside review is completed.
“We provided a significant amount of information concerning the transactions and the carrying value of the equipment to our auditor,” said Bobby Peavler, Celadon’s chief financial officer.
The request for a third-party review might be related to dire warnings from Prescience Point Research Group, a short seller. Prescience Point alleges that Celadon defrauds investors when it significantly overvalues trucks to artificially inflate its book value. The group also claims that Celadon is “fabricating its SEC financial statements” and that the carrier is on the “precipice of bankruptcy.” However, the short seller has a financial motive to generate negative news to drive down the carrier’s stock price, industry analysts tell Transport Topics.
“In my opinion, the auditor is not questioning the firm’s financial accounting in any major way. It’s really about a small amount of assets in a transaction that’s no longer on the company’s books,” said Aegis Capital Corp. analyst Jeffrey Kauffman. “The question is not whether $29 million in assets is worth zero but whether the $29 million should be adjusted down to $23 million to $25 million because of the weak used truck market in 2016. We’re talking about a small noncash adjustment.”
Despite BKD’s letter, Bank of America, Wells Fargo and Citizens Bank signed a term sheet on a new $225 million credit line for Celadon and agreed to waive defaults after being informed about the situation, the company said.
The Indianapolis-based carrier also announced a $10 million operating loss in the most recent fiscal quarter due primarily to its irregular route business, although it hasn’t released a full earnings statement yet.
“The core truckload business is not performing up to our standards,” Chairman and CEO Paul Will acknowledged. “During the March quarter, we determined that [a management] change had to happen.”
Celadon appointed Jon Russell, son of founder Steve Russell, as chief operating officer and promoted Douglas Schmidt to president of Celadon Trucking.
Russell blamed higher driver turnover and lower equipment utilization for the poor results over the past year. He added that Celadon will refocus efforts toward recruiting company drivers rather than owner-operators.
“We’ve failed to meet internal expectations regarding the percentage of our fleet under dispatch daily,” Russell said. “We are focused on attracting high-quality experienced drivers to our company fleet by raising pay within markets where we have freight density.”