Covenant Transportation Group, Inc. — Q1 2019 Form 10-Q
Business context and period. The unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018. The company operates Truckload and Managed Freight businesses. Results include Landair, acquired in July 2018. The filing describes a weaker freight environment during the quarter.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $219.2 million | $173.6 million |
| Freight revenue, excluding fuel surcharges | $195.8 million | $150.5 million |
| Operating income | $5.4 million | $6.4 million |
| Net income | $4.4 million | $4.4 million |
| Diluted EPS | $0.24 | $0.24 |
| Operating ratio | 97.5% | 96.3% |
| Adjusted operating ratio (non-GAAP) | 96.9% | 95.7% |
| Cash from operations | $9.2 million | $36.7 million |
| Capital expenditures for property and equipment | $37.9 million | $32.2 million |
Freight revenue rose 30.1%, while operating income declined about 15.5%; net income and EPS were essentially flat. The filing attributes the revenue growth to Landair and growth in Managed Freight and Dedicated operations, while lower utilization and higher operating costs weighed on Truckload results. Adjusted operating ratio is a company-defined non-GAAP measure.
Segments and material changes
- Truckload: Revenue was $172.7 million versus $154.5 million; operating income fell to $1.3 million from $5.4 million. Average freight revenue per tractor per week declined 6.7%, reflecting a 12.5% decrease in average miles per unit, partly offset by a 6.6% increase in rate per total mile. The company cited higher driver compensation, insurance and claims costs, and purchased transportation.
- Managed Freight: Revenue increased to $46.5 million from $19.0 million, and operating income to $4.2 million from $1.1 million. Landair contributed approximately $20.4 million of segment revenue and $2.1 million of operating income.
- TEL investment: Equity-method income increased to $3.0 million from $1.5 million, supporting reported pretax income.
- Cash conversion: Operating cash flow fell by $27.5 million year over year, with the company citing factoring-related receivables growth, payment timing, and insurance-claim payments.
Liquidity, debt and cash flow
At March 31, 2019, cash was $31.0 million and working capital was $92.8 million. Long-term debt was $198.1 million and current debt maturities were $31.8 million. The company reported total net indebtedness of $279.0 million, up $23.2 million from year-end 2018. It had $29.6 million drawn under its $95 million revolving credit facility, approximately $33.4 million in undrawn letters of credit, and $32.0 million of available borrowing capacity. The facility matures in September 2021; the reported rate on outstanding borrowings was 6.0%.
Net cash used in investing activities was $33.5 million. Financing activities provided $32.2 million, primarily reflecting net borrowing. The company reported approximately $310.0 million of debt and finance leases for interest-rate-risk purposes. Adoption of the new lease standard added approximately $40.2 million of operating lease liabilities to the balance sheet; operating lease obligations were $40.2 million at quarter-end.
Outlook, risks and unusual items
- Management expected Q2 2019 adjusted diluted EPS to be fairly consistent with Q2 2018, citing Landair’s contribution offset by the slower freight market. No numerical EPS guidance was provided.
- Management planned approximately 1,165 new company tractor deliveries and 1,200 used tractor disposals in 2019, with the fleet expected to be flat to down 2% from year-end 2018. It anticipated paying down approximately $40 million to $60 million of financing and lease liabilities during 2019, absent strategic investments.
- The company said liquidity should meet projected needs and that it did not expect to test its fixed-charge covenant in the foreseeable future, based on available borrowing capacity. This is management’s expectation, not a guarantee.
- Driver availability and wage inflation, freight demand and rates, third-party capacity costs, fuel-price exposure, used-equipment values, and self-insured claims could affect results. No fuel hedge contracts remained at quarter-end; management estimated a $1-per-gallon diesel increase would reduce net income by $4.7 million for the remainder of 2019, assuming stated fuel use and surcharge recovery.
- The company’s disclosure controls were deemed ineffective at March 31, 2019 because of a material weakness in internal control over financial reporting. Remediation was underway, with completion expected before year-end 2019, but the weakness would not be considered remediated until controls operated effectively for a sufficient period and testing confirmed this.
- Management said routine litigation and open claims, net of reserves, were not likely to have a material adverse effect. No potential policy-commutation refund was recorded at quarter-end.
Important facts for investors to verify
- Whether Landair integration and Managed Freight growth can offset weaker Truckload utilization and margins.
- Whether operating cash flow improves as factoring receivables, working-capital timing, and capital spending evolve.
- Debt and lease obligations, revolver availability, covenant headroom, and the planned 2019 debt reduction.
- Progress and testing of internal-control remediation, including whether the material weakness is resolved as expected.
- Developments in driver hiring and pay, insurance claims and reserves, diesel prices and surcharge recovery, and used-truck resale values.
- The filing reports the latest-practicable-date share count as of May 8, 2018, despite the 2019 reporting period; verify the correct current share count against the original filing or later disclosures.