Covenant Transportation Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless otherwise stated, financial amounts below are in millions. The company operates Truckload and Managed Freight businesses. Results are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $222.9 | $243.3 | $661.4 | $613.2 |
| Operating income (loss) | ($1.9) | $16.2 | $12.3 | $36.7 |
| Net income (loss) | ($3.2) | $11.6 | $7.3 | $26.0 |
| Diluted EPS | ($0.17) | $0.63 | $0.39 | $1.41 |
| GAAP operating ratio | 100.9% | 93.3% | 98.1% | 94.0% |
| Adjusted operating ratio | 100.6% | 92.1% | 97.5% | 93.0% |
Q3 freight revenue, excluding fuel surcharges, was $199.8 million, down 6.9%. Nine-month freight revenue rose 10.2% to $590.5 million, largely reflecting Landair-related Managed Freight growth. Income from the TEL equity-method investment was $2.1 million in Q3 and $7.5 million year to date.
Q3 Truckload revenue was $175.0 million and the segment recorded a $5.6 million operating loss, versus $12.0 million operating income a year earlier. Managed Freight revenue was $48.0 million and operating income was $3.7 million, compared with $46.3 million and $4.2 million, respectively. For the first nine months, Truckload operating income was $0.8 million versus $29.1 million; Managed Freight operating income was $11.5 million versus $7.6 million.
Cash flow, liquidity, and debt
Operating cash flow for the first nine months was $39.8 million, down from $101.6 million. Investing cash outflow was $99.5 million, including $129.4 million of property and equipment purchases and $31.2 million of disposal proceeds. Financing cash inflow was $76.4 million. Cash increased to $39.8 million from $23.1 million at year-end 2018.
Working capital was $93.2 million at September 30, 2019. Debt and lease obligations totaled approximately $368.6 million, including $54.8 million of operating lease liabilities; the company reported net indebtedness, including operating leases and net of cash, of $328.8 million. The $95 million revolving credit facility had $13.7 million drawn, $35.2 million of undrawn letters of credit, and $46.0 million of available capacity. Management said it expected liquidity to meet projected needs and did not expect to test the fixed-charge covenant in the foreseeable future.
Changes, outlook, and risks
- Management described Q3 freight conditions as substantially weaker than in 2018, with excess trucking capacity and weak demand pressuring rates and volumes. Truckload average freight revenue per tractor per week fell 9.5%; average rate per total mile fell 5.5% and miles per unit fell 4.2% year over year.
- Q3 Truckload results were also pressured by higher insurance and claims, health and workers’ compensation costs, net fuel costs, and capital costs. Insurance and claims expense rose 10.9% in the quarter; cost per mile increased to 16.7 cents from 14.5 cents.
- For Q4 2019, management expected subdued pricing and volume compared with recent holiday peak seasons. Priorities included improving one-way Truckload performance and expanding longer-term dedicated, transportation management, and warehousing contracts. No numerical earnings or revenue guidance was provided.
- Capital spending and borrowing increased as the company took delivery of about 1,211 new company tractors in the first nine months, while disposing of about 486 used tractors. Management cited delayed used-equipment sale proceeds as a factor in higher quarterly net indebtedness.
- Risks include continued weak freight markets, driver availability and wage inflation, third-party capacity costs, fuel-price exposure, and volatility in self-insured claims. The company had no fuel hedges outstanding at September 30; it estimated a $1-per-gallon diesel increase would reduce net income by $1.5 million for the remainder of 2019, based on stated assumptions.
- Two California wage-and-hour-related lawsuits were unresolved. The company could not reasonably estimate potential losses and recorded no related accruals. Management stated that ordinary-course claims and litigation, considering existing reserves, were not expected to materially adversely affect the financial statements.
- Disclosure controls and procedures were deemed ineffective due to a previously identified material weakness in internal control over financial reporting. Remediation actions were underway and testing continued; management said the weakness would not be considered remediated until controls operated effectively for a sufficient period.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing initial operating lease assets of $40.1 million and liabilities of approximately $41.0 million. This increased reported balance-sheet obligations.
Key facts for investors to verify
- Whether freight demand, pricing, and Truckload utilization improved after Q3, and whether segment profitability recovered.
- Whether insurance and claims costs, driver costs, and purchased transportation continued to pressure margins.
- Capital expenditure and used-equipment sale timing, debt and lease balances, and availability under the credit facility.
- Progress and independent testing of the internal-control remediation plan.
- Developments in the wage-and-hour litigation and any changes to the company’s loss estimates or accruals.