Covenant Transportation Group, Inc. — Q1 2013 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2013. The company operates asset-based truckload fleets and a Solutions segment offering brokerage, less-than-truckload consolidation, and factoring. Financial amounts below are in millions except per-share data.
Financial performance and liquidity
- Revenue: Total revenue rose 4.9% to $164.7, while freight revenue excluding fuel surcharges increased 5.9% to $129.1. Truckload revenue was $157.5; Solutions revenue was $7.2.
- Profitability: Operating loss was $0.7, versus operating income of $2.4 in Q1 2012. Operating ratio, measured against freight revenue, worsened to 100.6% from 98.1%. Net loss increased to $2.0, or $0.13 per diluted share, from $0.6, or $0.04 per share.
- Segments: Truckload operating income was $3.2, down from $6.2; Solutions recorded a $0.3 operating loss versus approximately breakeven a year earlier. Unallocated corporate overhead was $3.6.
- Cash flow: Operating cash flow was $7.1, down from $11.6. Equipment purchases were $15.4 and equipment-sale proceeds were $11.7; investing cash flow was a $4.2 outflow. Cash increased by $1.7 to $8.5.
- Balance sheet and liquidity: At March 31, cash was $8.5, total assets $397.6, and stockholders’ equity $92.7. Working capital was negative $6.3, improved from negative $20.0 at year-end 2012. Management said liquidity should be adequate for projected needs over the next 12 months.
- Debt and leases: Debt was $159.5, and capital lease obligations were $15.6, for total debt and capital leases of $175.1. The company also reported $86.1 of present-value operating lease payments. Revolver borrowings were $4.0, with $48.9 of available capacity and $40.2 of undrawn letters of credit.
- Margins and operating indicators: Average freight revenue per total mile increased 4.2%, and average miles per unit increased 3.3%. Average freight revenue per tractor per week rose 8.8% to $3,311. Fuel expense per company mile, net of surcharge recovery, was 17.3 cents versus 17.1 cents.
Material changes versus Q1 2012
- Revenue increased, supported by better rates and utilization, but operating results deteriorated. Q1 2012 included a $2.4 gain on sale of a terminal, which materially benefited the prior-year comparison.
- Truckload revenue rose, but operating income declined by about $3.0. The company cited higher operating costs and the absence of the prior-year terminal-sale gain.
- Solutions revenue increased 54.9%, reflecting new services and growth in overflow freight, but the segment moved to an operating loss as purchased-transportation costs and expansion expenses increased.
- Interest expense fell by $0.9 to $2.6. Equity income from TEL increased to $0.5 from $0.2.
- Operating cash flow declined, while equipment purchases increased. Q1 2013 investing cash flow also lacked the prior-year benefit from larger equipment-sale proceeds and the terminal sale.
Outlook, management commentary, and risks
- Management expected full-year 2013 earnings per share to increase over 2012, excluding the approximately $0.10-per-share real estate-sale gain in Q1 2012. It noted freight demand was below expectations in Q1 and remained soft in April.
- Management described uneven demand and difficult February weather. Positives included higher rates and utilization, fewer open trucks, and improved Star Transportation results; negatives included cost increases, accident costs, and Solutions’ lack of profitability.
- The January 2013 credit-facility amendment increased the revolver to $95.0, extended maturity to September 2017, improved certain pricing and availability terms, and eliminated the consolidated leverage covenant. No fixed-charge coverage test was required based on reported availability at quarter-end.
- The company anticipated operational disruption and lower productivity from hours-of-service rule changes scheduled for July 1, 2013, potentially requiring additional drivers, equipment, lane changes, and compensation adjustments.
- Q1 finalized equipment plans called for approximately 900 new tractors and 975 used-tractor disposals in 2013. Revenue-equipment purchase commitments for the remainder of 2013 were $83.6; they were cancelable subject to specified adjustments.
- Fuel-price exposure remains material: a $1-per-gallon change in fuel prices was estimated to change remaining-2013 net fuel expense by approximately $4.0, assuming no changes to hedging or surcharge recovery. Hedges covered about 19% of projected remaining-2013 fuel needs and 11% of 2014 needs.
- Other risks include driver availability and pay, fuel-surcharge recovery, insurance and self-insured claims volatility, debt covenant compliance, and ordinary-course personal-injury and property-damage litigation. Management said pending litigation exposure was adequately provided for.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether freight demand, rates, and utilization improved after the weak Q1 and soft April conditions—and whether full-year EPS guidance was achieved.
- Whether Truckload margins recovered and Solutions’ cost changes delivered the expected improvement.
- How the July 2013 hours-of-service changes affected productivity, driver costs, and revenue per tractor.
- Cash generation and financing of the $83.6 equipment commitments, including the effect of operating leases and residual-value guarantees.
- Available revolver capacity, covenant headroom, and total obligations when operating leases are considered alongside reported debt.
- Subsequent insurance-claim development, fuel prices and surcharge recovery, and realized hedge gains.