Covenant Transportation Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The supplied filing identifies the registrant as Covenant Transportation Group, Inc. (the request metadata names Covenant Logistics Group, Inc.). Unless otherwise noted, amounts below are in U.S. dollars.
Business context
The company provides asset-based truckload transportation, including expedited, dedicated, regional and temperature-controlled services. Its Solutions subsidiary provides brokerage and factoring services. Truckload is the sole reportable segment; other operations are grouped as “Other.”
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $156.3 million | $167.2 million; down 6.5% |
| Freight revenue, excluding fuel surcharges | $144.7 million | $143.3 million; up 0.9% |
| Operating income | $7.4 million | $10.0 million |
| Operating ratio | 94.9% | 93.0%; calculated using freight revenue |
| Net income / diluted EPS | $3.8 million / $0.21 | $10.2 million / $0.56 |
| Operating cash flow | $51.5 million | $36.4 million |
| Cash and cash equivalents | $3.7 million at March 31 | $4.5 million at December 31, 2015 |
Net cash from investing was $11.2 million, including $28.6 million of equipment-sale proceeds and $17.4 million of property and equipment purchases. Financing activities used $63.5 million, primarily reflecting repayments of notes payable and net repayments under the revolving facility. Management attributed stronger operating cash flow principally to collections of receivables and other working-capital movements; it should not be read as a comparable increase in earnings.
At March 31, total debt was approximately $173.9 million, with $14.1 million of capital lease obligations. The $95 million revolving credit facility had $9.7 million drawn, $31.3 million in undrawn letters of credit, and $44.3 million of available borrowing capacity. Management reported aggregate lease-adjusted indebtedness, net of cash, of $203.7 million, down $60.5 million from year-end. Working capital was negative $2.1 million, versus positive $46.4 million at December 31, 2015; management said this had little impact on liquidity and expected resources to meet projected needs.
Material changes and management commentary
- Lower fuel surcharge revenue drove most of the decline in total revenue. Truckload revenue fell $14.5 million, while Other revenue rose $3.6 million to $13.6 million; Other operating income increased to $1.8 million from $0.3 million.
- Truckload operating income declined to $8.4 million from $14.1 million. Management cited weaker freight conditions, lower average tractor count and utilization, higher net fuel and capital costs, and increased empty miles and broker freight. Average rate per total mile improved 1.6%.
- Fuel expense declined 25.3% as diesel prices fell, but net fuel expense rose to $13.5 million from $10.0 million because surcharge recovery decreased and fuel-hedge losses were recognized. Insurance and claims expense fell 36.0%, with cost per mile down to 8.6 cents from 13.1 cents, which management attributed to safety and more favorable claims experience.
- Depreciation and amortization increased 17.4%, partly due to accelerated depreciation on tractors planned for sale in a weak used-equipment market, equipment purchases and the headquarters property. Management also cited higher operating costs per mile and deterioration in SRT profitability.
- Q1 2015 net income included a discrete federal income tax credit of approximately $4.7 million, or $0.26 per diluted share. This materially affects the year-over-year net income comparison.
Outlook, risks and contingencies
- Management described its Q2 outlook as cautious: freight was soft in April, and customers generally did not expect shipping levels to improve until the second half of 2016. Two significant new accounts were expected to commence late in Q2, with start-up costs and network changes delaying expected profit contribution until the second half. No full-year earnings or EPS guidance is provided in the supplied filing text.
- Expected 2016 capital expenditures were approximately $55 million to $65 million. Management planned to continue cost controls and noted that driver recruitment and retention, wage inflation and higher healthcare costs could pressure expenses.
- Fuel hedges covered approximately 24.5% of projected remaining 2016 fuel needs, 24.5% of 2017 needs and 15.3% of 2018 needs. The company expected about $9.5 million, net of tax, in fuel-hedge losses to be reclassified into earnings over the next 12 months, subject to settlement values. Management warned that low fuel prices could produce further hedge losses.
- A 2008 cargo-claim lawsuit against SRT was remanded for further proceedings after an appellate reversal in part; trial was scheduled for November 2016. The earlier district-court award was approximately $5.9 million plus interest and costs. The company also disclosed a California wage-and-hour class-action complaint; management believed pending matters, considering reserves, were not likely to materially adversely affect the financial statements.
- The company held an option through May 31, 2016 to acquire the remaining 51% of TEL, its equipment-leasing and used-equipment affiliate. TEL contributed $0.9 million of equity-method income in Q1, down from $1.4 million. The filing does not state whether the option would be exercised.
- Operating leases and residual-value guarantees remain relevant off-balance-sheet exposures: remaining lease payments were approximately $22.3 million, residual guarantees were $3.0 million undiscounted, and their combined discounted present value was approximately $19.3 million.
Important facts for investors to verify
- Whether new customer business ramps as planned in the second half of 2016 and improves Truckload utilization and profitability.
- Whether net fuel costs and expected hedge-loss recognition remain manageable as fuel prices and surcharge recovery change.
- The outcome and potential financial impact of the SRT cargo-claim proceedings and the California wage-and-hour action.
- Whether the company exercises its TEL purchase option and the resulting effect on debt, earnings and reported financials.
- Whether capital spending, used-equipment values and lease obligations affect liquidity and the stated debt-reduction trajectory.