Covenant Transportation Group, Inc. — FY 2011 Form 10-K
Entity note: The supplied filing identifies the registrant as Covenant Transportation Group, Inc.; the request metadata names Covenant Logistics Group, Inc. The filing covers the fiscal year ended December 31, 2011, and was signed March 9, 2012.
Business context and reporting period
The company provides asset-based truckload transportation through Covenant Transport, Southern Refrigerated Transport and Star, plus freight brokerage through Covenant Transport Solutions. Truckload generated approximately 95% of freight revenue in 2011. The fourth quarter was part of a challenging year marked by lower fleet utilization, driver availability constraints and disruption from an operating-system conversion.
Key financial and operating metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $652.6 million | $649.7 million |
| Freight revenue, excluding fuel surcharges | $512.0 million | $546.3 million |
| Operating income (loss) | $(1.1) million | $26.0 million |
| Operating ratio | 100.2% | 95.2% |
| Net income (loss) | $(14.3) million | $3.3 million |
| Diluted loss (earnings) per share | $(0.97) | $0.23 |
| Cash from operating activities | $32.1 million | $70.8 million |
| Cash and cash equivalents at year-end | $3.9 million | $9.4 million |
| Total debt and capital lease obligations | $242.5 million | $225.2 million |
| Working capital | $(42.1) million | $(30.8) million |
Total revenue rose 0.4% as fuel surcharge revenue increased to $140.6 million from $103.4 million, while freight revenue declined 6.3%. Average freight revenue per total mile increased 5.7% to $1.382, but average miles per tractor fell 7.5% to 115,775 and average freight revenue per tractor per week decreased to $3,069 from $3,137.
The $11.5 million non-cash goodwill impairment charge contributed to the reported loss; the charge was $9.4 million net of a $2.1 million tax benefit. Management stated that, excluding the impairment and its tax effect, the net loss was approximately $4.9 million. The company reported a $2.2 million income-tax benefit, compared with $6.2 million of tax expense in 2010.
Operating cash flow declined by $38.8 million year over year. Net cash used in investing activities was $50.7 million, including $114.8 million of property and equipment purchases, $65.3 million of equipment-sale proceeds and a $1.5 million investment in TEL. Financing activities provided $13.2 million. At year-end, the company had $15.9 million drawn on its $85.0 million revolving facility, $38.9 million of undrawn letters of credit and $27.6 million of stated available borrowing capacity.
At December 31, 2011, total assets were $439.8 million and stockholders’ equity was $87.1 million. The company’s broader measure of indebtedness, net of cash and including the present value of off-balance-sheet lease obligations, was $296.9 million, up approximately $32.4 million from year-end 2010.
Material changes versus the prior comparable period
- Freight revenue declined $34.3 million, while total revenue edged higher because fuel surcharge revenue increased $37.2 million.
- Operating results deteriorated from $26.0 million of operating income to a $1.1 million operating loss; net results moved from $3.3 million income to a $14.3 million loss.
- Management attributed weaker truckload results to lower utilization, fewer average tractors, unseated trucks, fuel and labor inflation, higher insurance and claims costs, and inefficiencies from the Covenant Transport system conversion and EOBR implementation. Pricing gains partly offset these pressures.
- Truckload segment operating income fell to $10.4 million from $35.4 million, including the 2011 goodwill impairment. Brokerage operating income improved to $1.7 million from $1.5 million despite lower revenue.
- Cash from operations fell to $32.1 million from $70.8 million, and total debt and capital lease obligations increased to $242.5 million from $225.2 million.
- The company acquired a 49% interest in Transport Enterprise Leasing, LLC (TEL) for $1.5 million in May 2011. Its share of TEL income was $0.7 million for the seven months after acquisition.
In the fourth quarter of 2011, freight revenue was $127.5 million, operating income was $1.2 million and net loss was $2.2 million, or $0.15 per share. The third quarter included the goodwill impairment and a net loss of $11.2 million.
Outlook, management commentary, risks and unusual items
- Management said 2011 performance was disappointing and began reassessing operations in the fourth quarter, aiming to improve asset productivity, reduce costs and direct investment toward operations expected to earn adequate returns. It said the fleet could be reduced further if margins and results do not improve.
- For 2012, management expected net capital expenditures to be significantly lower than in 2011 or 2010, with approximately 300 tractors planned for addition and disposal, alongside trailer purchases and replacements. Management also expected a higher independent-contractor share of the fleet. These are plans and expectations, not guaranteed outcomes.
- Management identified economic conditions, fuel and driver-pay inflation, and the tightening driver market as primary concerns. It expected operations and maintenance costs to rise in 2012 and used-equipment sale gains to be lower than in 2011.
- The $85.0 million revolving credit facility matures in September 2014. Amendments in 2011 adjusted the fixed-charge covenant and added a maximum quarterly leverage ratio of 4.35 to 1.0. The company reported compliance with amended covenants at year-end, but had obtained amendments after difficulty meeting prior covenant requirements; noncompliance could trigger default, acceleration or cross-defaults.
- Fuel remains a significant cost exposure. Fuel surcharges do not fully recover fuel costs, and at year-end hedges covered approximately 21.4% of projected 2012 fuel needs. Management estimated that a $1-per-gallon change in diesel or heating-oil prices would change annual net fuel expense by approximately $5.1 million, assuming no change in hedging or surcharge recovery.
- Other key risks include driver shortages and turnover; self-insured claims and reserve estimates; safety ratings and CSA interventions; new hours-of-service rules scheduled to take effect in 2013; emissions regulations; customer concentration; and operating-system implementation risk. The company said significant problems associated with the Covenant Transport system conversion had been addressed, after the conversion disrupted operations and customer service.
- The goodwill impairment followed a decline in market capitalization, weaker earnings expectations and the need to amend the credit facility. No goodwill remained on the balance sheet after the charge. The filing also notes routine personal-injury and property-damage litigation, for which management considered its financial-statement provisions adequate.
Most important facts for investors to verify
- Whether utilization, seated-truck levels and revenue per tractor improved after the system conversion and EOBR-related disruption.
- Whether the company sustained compliance with credit-facility covenants and maintained meaningful borrowing availability.
- Whether operating cash flow and capital spending supported debt reduction and equipment commitments without further pressure on liquidity.
- Whether fuel, driver compensation, insurance and maintenance costs were offset by pricing and productivity gains.
- Whether self-insurance reserves, used-equipment values and the TEL investment or earn-out obligations changed materially.
- Whether the 2012 fleet, capital expenditure and margin-improvement plans were achieved; the filing provides no earnings guidance with a clear numerical target.
KPMG LLP gave an unmodified opinion on the consolidated financial statements. Management stated that internal control over financial reporting was effective; the filing did not include an auditor attestation on internal control because the company was a non-accelerated filer.