Covenant Transportation Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019. The filing is by Covenant Transportation Group, Inc. (NASDAQ: CVTI); the supplied company metadata uses “Covenant Logistics Group, Inc.”
Business context and results
The company operates Truckload and Managed Freight segments, including expedited, dedicated, refrigerated and over-the-road trucking, brokerage, transportation management, warehousing and factoring. Results include Landair, acquired in July 2018, for the 2019 periods.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $219.3m | $196.3m | $438.5m | $369.9m |
| Freight revenue, excluding fuel surcharge | $194.9m | $170.6m | $390.7m | $321.1m |
| Operating income | $8.8m | $14.1m | $14.3m | $20.5m |
| Net income | $6.1m | $10.0m | $10.5m | $14.4m |
| Diluted EPS | $0.33 | $0.54 | $0.57 | $0.78 |
| GAAP operating ratio | 96.0% | 92.8% | 96.7% | 94.5% |
Q2 revenue rose 11.7% and freight revenue rose 14.2%, while operating income fell 37% and net income fell 39%. The six-month figures show revenue growth of 18.5%, alongside lower operating income and net income. Q2 net margin was approximately 2.8%, versus 5.1% a year earlier. Adjusted operating ratio, a non-GAAP measure, was 95.1% in Q2 versus 91.8%; for the first half it was 93.6% in both years.
Drivers of change and segment performance
- Managed Freight revenue increased to $43.9m from $25.6m in Q2, and operating income rose to $3.7m from $2.3m. Landair was a major contributor to growth.
- Truckload revenue increased to $175.4m from $170.7m, but operating income declined to $5.2m from $11.7m. Management cited weaker expedited and solo refrigerated margins, excess capacity relative to demand and a late produce season.
- Across Truckload operations, excluding Landair, management reported an approximately 10.6% decline in average freight revenue per truck in Q2 year over year. The larger fleet, including Landair, supported revenue, but lower miles per unit and slightly lower average rate per total mile weighed on productivity.
- Higher wages and related costs, maintenance, purchased transportation and depreciation pressured results. Company fuel expense was nearly flat in Q2, but net fuel expense increased 16.5%, in part because favorable fuel hedging in 2018 did not recur; the company had no fuel hedges in place after December 2018.
- Income from the TEL equity-method investment increased to $2.4m in Q2 from $1.8m and to $5.4m for the first half from $3.3m.
Cash flow, debt and liquidity
For the first six months, operating cash flow was $23.6m, down from $62.6m. Investing activities used $65.3m, compared with $6.4m provided in the prior-year period; property and equipment acquisitions were $79.1m and disposition proceeds were $15.6m. Financing activities provided $47.4m. Cash ended at $28.8m, up from $23.1m at year-end 2018.
Working capital was $92.9m. At June 30, the company had $17.3m drawn on its $95m revolving credit facility, $34.8m of undrawn letters of credit and $42.9m of available borrowing capacity. The facility matures in September 2021; outstanding borrowings carried a 6.0% rate. Management said it did not expect to need to test the fixed-charge coverage covenant in the foreseeable future and believed liquidity would meet projected needs.
Debt was $246.6m, excluding lease obligations. Debt plus finance and operating lease liabilities totaled approximately $323.3m; after cash, net indebtedness including operating lease liabilities was $294.5m, up $39.9m from December 31, 2018. The company expected to pay down approximately $40m–$60m of financing and lease liabilities during 2019, absent strategic investments.
Outlook, risks and unusual matters
- For the second half of 2019, management planned to improve one-way truckload performance and add profitable, longer-term dedicated and contract logistics customers. It also expected to continue shifting toward dedicated, transportation management and other managed freight services.
- Management estimated a 27.6% effective tax rate for 2019. It noted that the rate can vary with earnings and the tax treatment of driver per diem.
- Risks discussed include driver availability and wage inflation, healthcare costs, freight demand and capacity, fuel prices and imperfect surcharge recovery, third-party carrier costs, insurance and claims severity, and used-equipment values. A $1-per-gallon diesel price increase was estimated to reduce net income by $2.8m, based on the company’s stated assumptions.
- The company disclosed putative California wage-and-hour class and related penalty litigation. As of June 30, it could not reasonably estimate the likelihood or amount of loss and had recorded no related accrual. The related penalty action was stayed on August 1, 2019. Management stated that pending matters, considering existing reserves, were not likely to materially adversely affect the financial statements.
- Disclosure controls and procedures were deemed ineffective at June 30 because of a previously reported material weakness in internal control over financial reporting. Management was implementing remediation and expected completion before fiscal year-end 2019; it would not consider the weakness remediated until controls had operated effectively for a sufficient period and testing supported that conclusion.
- The company adopted lease accounting Topic 842 on January 1, 2019, recognizing $40.1m of operating lease assets and $41.0m of operating lease liabilities at adoption. Comparative prior periods were not restated.
Important facts for investors to verify
- Whether Truckload productivity and margins recover, particularly in expedited and solo refrigerated operations.
- How much reported revenue growth reflects Landair and whether acquired operations sustain profitability and integration progress.
- Operating cash flow, capital spending, equipment financing, and progress toward the stated 2019 debt and lease-liability paydown.
- Available revolver capacity and covenant headroom as borrowing and letters of credit change.
- Developments in the wage-and-hour litigation, insurance claims and the material-weakness remediation, including management’s subsequent testing results.