Covenant Transportation Group, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 18, 2014. The filing identifies the registrant as Covenant Transportation Group, Inc. (NASDAQ: CVTI). Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
The company provides truckload transportation across the continental United States and to or from portions of Canada and Mexico, alongside freight brokerage, less-than-truckload consolidation, and receivables factoring. Its reportable segment is asset-based Truckload; ancillary services are grouped as “Other.” Truckload generated about 93% of 2013 freight revenue. Management’s strategy emphasizes higher-return services, more owner-operators, improved driver retention, and lower leverage.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Total revenue | $684.5 | $674.3 | Up 1.5% |
| Freight revenue, excluding fuel surcharges | $538.9 | $527.4 | Up 2.2% |
| Operating income | $20.4 | $23.2 | Operating margin about 3.0%, versus 3.4% |
| Net income | $5.2 | $6.1 | Net margin about 0.8%, versus 0.9% |
| Diluted earnings per share | $0.35 | $0.41 | Down year over year |
| Cash from operating activities | $40.4 | $55.1 | Down $14.7 |
| Cash and cash equivalents, year end | $9.3 | $6.8 | Up $2.4 |
| Working capital, year end | $14.1 | $(20.0) | Improved by $34.1 |
| Total assets, year end | $466.4 | $400.2 | Up $66.2 |
| Stockholders’ equity, year end | $100.4 | $94.7 | Up $5.7 |
Fuel expense was $186.0 million, down from $194.8 million; net fuel expense after company fuel surcharges fell to $53.2 million from $60.2 million. Insurance and claims expense declined to $30.3 million from $33.1 million. These favorable movements were partly offset by higher operations and maintenance costs ($50.0 million versus $45.8 million) and higher equipment rentals and purchased transportation ($103.0 million versus $85.0 million).
Debt and capital lease obligations totaled about $235.5 million at year end, compared with $174.9 million in 2012. Management also reported aggregate lease-adjusted indebtedness, net of cash, of $305.2 million, up approximately $62.8 million year over year. Net capital expenditures, including capital leases, were $92.0 million. Investing activities used $84.4 million of cash; financing activities provided $46.4 million.
Material changes versus 2012
- Net income declined despite higher revenue. 2012 operating income included a $2.4 million real-estate sale gain and a $4.0 million insurance-policy commutation benefit; 2013 did not include those items.
- Truckload revenue fell $3.6 million and Truckload operating income declined $6.4 million, to $27.7 million. A 4.1% smaller average tractor fleet and lower total miles offset improved rates and utilization.
- “Other” revenue rose to $40.1 million from $26.3 million, largely from growth in less-than-truckload consolidation, factoring, and overflow freight. Solutions revenue increased 52.8%; its operating income improved by $2.0 million.
- Average freight revenue per total mile, excluding fuel surcharges, increased to $1.49 from $1.47; average freight revenue per tractor per week increased to $3,411 from $3,320.
- Operating cash flow decreased, while capital spending and borrowing rose as the company bought approximately 1,054 tractors and disposed of about 800, compared with approximately 425 purchases and 650 disposals in 2012.
Outlook, commentary, and risks
- Management expected 2014 year-over-year improvement in profitability, citing company initiatives and anticipated gradual economic and freight-market improvement. It cautioned that the exceptionally strong 2013 fourth-quarter peak-season demand was not expected to repeat in 2014.
- Management planned to purchase about 950 tractors and dispose of about 1,250 in 2014, with truck count expected to remain roughly level and net capital expenditures expected to be significantly below 2013.
- Driver availability was identified as the largest concern. Driver recruiting remained difficult, and open trucks, including wrecked units, averaged about 4.8% in 2013. Management aimed to reduce unseated trucks and increase owner-operator use.
- New hours-of-service rules effective July 2013 were estimated to reduce utilization and efficiency by about 3%–5%. The company cited driver scarcity, driver compensation, safety regulation, fuel-price and surcharge recovery, customer demand, used-equipment values, and intense competition as material risks.
- The new operating system was implemented at SRT on February 1, 2014. Early conversion inefficiencies reduced average miles per tractor; management expected lower year-over-year SRT profitability in first-quarter 2014, while stating the disruption had so far been less severe than Covenant Transport’s 2011 conversion.
- At year end, the company had $7.0 million drawn on its $95.0 million revolving facility, about $39.0 million of undrawn letters of credit, and $44.1 million of available capacity. The facility matures in September 2017; based on year-end availability, no fixed-charge coverage test applied. Management said liquidity should be adequate, but debt, lease commitments, covenants, and cross-default provisions remain relevant.
- Fuel hedges covered about 25% of projected 2014 diesel needs and 10% of projected 2015 needs. Ordinary-course personal-injury and property-damage litigation was disclosed; management considered exposure adequately provided for. Self-insurance and claims estimates remain significant uncertainties.
Important facts for investors to verify
- Whether Truckload rates and productivity gains can offset driver shortages, regulatory constraints, and rising operating costs.
- Whether Solutions’ rapid revenue growth translates into durable operating income and cash generation.
- How 2014 tractor purchases, disposals, financing mix, and lower planned capital spending affect total debt and lease-adjusted leverage.
- Whether SRT’s system conversion causes the expected first-quarter earnings decline and how quickly operations normalize.
- Fuel surcharge recovery and hedge outcomes, used-equipment resale values, and the adequacy of self-insurance and claims reserves.
- The filing reports effective disclosure controls and internal control over financial reporting; the independent auditor’s report covers the consolidated financial statements.