Covenant Transportation Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The registrant named in the filing is Covenant Transportation Group, Inc.
Business context and financial performance
The company provides asset-based truckload transportation through Covenant Transport, Southern Refrigerated Transport (SRT), and Star Transportation; its Solutions subsidiary provides brokerage, less-than-truckload consolidation, and factoring services. Amounts below are in millions except per-share data.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $170.8 | $168.4 | $508.1 | $496.8 |
| Freight revenue, excluding fuel surcharge | $135.2 | $133.0 | $401.3 | $389.1 |
| Operating income | $5.9 | $4.6 | $11.5 | $18.1 |
| Net income | $2.0 | $1.0 | $1.9 | $4.6 |
| Diluted EPS | $0.13 | $0.07 | $0.13 | $0.31 |
| Operating ratio, asset-based operations | 95.6% | 96.1% | Not stated | Not stated |
| Operating cash flow | Not stated | Not stated | $30.0 | $40.8 |
- Q3 total revenue rose 1.4% and freight revenue rose 1.7% year over year. Operating income increased to $5.9 million and net income to $2.0 million.
- For the first nine months, revenue increased 2.3%, but operating income fell 36% and net income fell 59% year over year.
- Q3 fuel expense and insurance and claims costs declined, while maintenance and equipment rentals/purchased transportation increased. The latter rose to 19.4% of freight revenue from 17.0%.
Balance sheet, debt and liquidity
- At September 30, cash was $10.5 million, total assets $424.9 million, and stockholders’ equity $96.0 million. Working capital was positive $9.2 million, versus a $20.0 million deficit at December 31, 2012.
- Debt was $181.0 million and capital lease obligations were $16.1 million, or approximately $197.1 million combined. Total debt and leases increased from $174.9 million at year-end 2012.
- The $95 million revolving credit facility matures in September 2017. Borrowings were $8.9 million, undrawn letters of credit were approximately $39.0 million, and available borrowing capacity was $40.0 million. Management reported no fixed-charge covenant testing requirement at period-end and said it expected liquidity to be adequate for at least 12 months.
- Nine-month investing cash flow was a $43.4 million use, including $82.3 million in equipment purchases and $39.4 million in equipment-sale proceeds. Financing cash flow was $17.1 million provided; cash increased $3.7 million to $10.5 million.
Material changes, outlook and risks
- Q3 results benefited from improved Star and Solutions profitability, higher income from the 49% Transport Enterprise Leasing (TEL) investment, and lower interest expense. TEL contributed $1.2 million of Q3 pre-tax earnings versus $0.6 million a year earlier; its nine-month contribution was $2.2 million versus $1.2 million.
- Truckload operating income declined in both comparison periods. Management cited costs rising faster than rates, lower truck counts and fixed-cost absorption, higher driver pay and maintenance, and greater reliance on third-party providers and independent contractors. SRT profitability weakened; driver availability and utilization also weighed on Q3 performance.
- Management said new hours-of-service rules effective July 1, 2013 had reduced utilization and efficiency by approximately 3%–5%. Average trucks without drivers were 5.7% in Q3 versus 3.5% a year earlier. Management expected sequential rate increases in Q4 due to seasonality and customer mix, and year-over-year rate increases in fiscal 2014 if economic activity improved and capacity tightened; these are conditional expectations, not formal earnings guidance.
- Comparability is affected by prior-year items: Q2 2012 included a $4.0 million insurance premium credit, and first-quarter 2012 included a $2.4 million terminal-sale gain. The nine-month 2013 period also included a $0.4 million reversal of previously recognized stock compensation.
- Risks include driver shortages and labor costs, regulatory effects on productivity, fuel-price and surcharge mismatch, variable insurance claims and self-insured exposure, equipment and lease commitments, and compliance with debt covenants. Routine personal-injury and property-damage litigation is reported; management says exposure is adequately provided for. Operating leases had a present value of remaining payments of approximately $81.6 million and residual-value guarantees of approximately $8.9 million.
Important facts for investors to verify
- Whether freight rates and driver availability improved enough to offset lower utilization and higher operating costs after Q3.
- Whether Q3 gains in Star, Solutions, and TEL are sustainable, and how much earnings depend on TEL and used-equipment market conditions.
- Debt, lease obligations, borrowing-base availability, and covenant headroom as equipment purchases and financing needs evolve.
- Insurance and claims development, including self-insured exposures and the effects of the new three-year auto liability policy.
- Fuel-hedge coverage and surcharge recovery: hedges covered approximately 23% of remaining 2013 fuel needs, 20% of 2014 needs, and 4.7% of 2015 needs at quarter-end.