Covenant Transportation Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The filing is by Covenant Transportation Group, Inc. (the company identified in the request as Covenant Logistics Group).
Business context
The company provides asset-based truckload transportation through Covenant Transport, SRT and Star, plus brokerage, less-than-truckload consolidation and factoring services through Solutions. It reports one Truckload segment; ancillary services are grouped as “Other.”
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $172.5 million | $171.3 million | $337.2 million | $328.3 million |
| Freight revenue, excluding fuel surcharge | $136.9 million | $134.2 million | $266.0 million | $256.1 million |
| Operating income | $6.4 million | $11.1 million | $5.6 million | $13.4 million |
| Net income (loss) | $1.9 million | $4.3 million | $(0.1) million | $3.6 million |
| Diluted EPS | $0.13 | $0.29 | $(0.00) | $0.24 |
Q2 operating ratio was 96.3% on total revenue, or 95.3% using freight revenue as the denominator, versus 93.5% and 91.8%, respectively, a year earlier. For the first half, those ratios were 98.3% and 97.8%, versus 95.9% and 94.8%. The filing’s operating ratio measure excludes fuel surcharge revenue.
Q2 interest expense was $2.6 million, down from $3.4 million. First-half interest expense was $5.3 million, down from $6.9 million. Equity income from TEL was $0.6 million in Q2 and $1.0 million in the first half.
Cash, liquidity and debt
- Cash was $9.1 million at June 30, 2013, up from $6.8 million at year-end. First-half operating cash flow was $14.0 million, compared with $26.3 million in the prior-year period.
- Investing activities used $18.2 million, including $44.6 million of property and equipment purchases and $26.9 million of disposal proceeds. Financing activities provided $6.4 million.
- Working capital was $7.9 million, compared with a $20.0 million deficit at December 31, 2012. Management said liquidity should be adequate for projected needs over at least the next 12 months.
- Balance-sheet debt was $167.2 million, and capital lease obligations were $15.1 million. The company also reported $12.6 million drawn on its $95 million revolving facility, $39.2 million of undrawn letters of credit, and $40.8 million of available borrowing capacity.
- Operating leases remain an important financing source: remaining payments had a present value of approximately $82.2 million; residual value guarantees were approximately $6.9 million undiscounted. Management reported net indebtedness, including the present value of off-balance-sheet lease obligations and net of cash, of $255.4 million, down $7.7 million year over year.
Changes, outlook and risks
- Q2 freight revenue rose 2.0%, but operating income and net income fell. The prior-year quarter included a net $3.5 million benefit from an auto insurance policy commutation (approximately $0.15 per diluted share); results excluding that benefit were described by management as comparable.
- Management cited improved utilization, higher freight revenue per tractor, fewer unseated trucks and stronger Solutions results. These gains were offset by higher driver pay, maintenance and insurance costs, greater purchased transportation and rental expense, and weaker SRT profitability. Q2 average open trucks fell to 4.3% from 6.1%; the DOT accident rate was the lowest for any quarter since 2001.
- Solutions revenue increased 41.3% in Q2 to $10.6 million, and the segment returned to operating profitability. Truckload operating income declined; total corporate overhead also increased.
- The January 2013 credit-facility amendment increased the revolver commitment to $95 million, extended maturity to September 2017, improved pricing and removed the leverage-ratio covenant. Fixed-charge coverage testing applies only when availability falls to a specified threshold. Management said no such test was required at June 30.
- New hours-of-service rules took effect July 1, 2013. Management expected initial productivity and efficiency losses, potentially requiring additional drivers or equipment and reducing revenue per tractor until customer compensation adjusts. Driver availability, pay pressure, fuel recovery, claims severity and operating costs are ongoing risks.
- Fuel hedges covered approximately 22% of projected remaining 2013 fuel needs and 19% of projected 2014 needs. Management expected $0.4 million of hedge losses to be reclassified to earnings over the following 12 months. A $1-per-gallon fuel-price change was estimated to affect remaining-2013 fuel expense by approximately $1.2 million, assuming no changes in hedging or surcharge recovery.
- No formal earnings or revenue guidance was provided. Management expected adequate liquidity and anticipated continued focus on pricing, driver retention, asset allocation and profitability. Routine personal-injury and property-damage litigation was described as adequately provided for; the company has significant self-insured retention exposure.
Important facts to verify
- Reconcile reported results against the prior-year $3.5 million net insurance-policy benefit and assess underlying operating trends.
- Monitor whether higher freight yields and improved utilization can offset driver, maintenance, insurance and purchased-transportation cost pressures.
- Track liquidity, revolver availability, equipment spending and total obligations including operating leases and residual guarantees.
- Assess the operational and financial effect of the July 2013 hours-of-service rule changes, including driver availability and customer pricing recovery.
- Review fuel surcharge coverage and hedge positions, as well as claims development and the company’s self-insured exposures.