COVENANT LOGISTICS GROUP, INC. quarterly report, Q3 FY2017

Business context and reporting period

This Form 10-Q covers the quarter and nine months ended September 30, 2017, with comparisons to the same 2016 periods. The filing identifies the registrant as Covenant Transportation Group, Inc., a truckload carrier with additional freight brokerage and factoring operations. The filing notes seasonal variability, so interim results may not indicate full-year performance.

Key financial metrics

Amounts below are in millions of dollars except per-share data and ratios.

At September 30, cash was $8.3 million; working capital was $59.3 million. Total assets were $650.3 million and stockholders’ equity was $244.4 million. Debt was $194.4 million, with capital lease obligations of $25.5 million; total debt and capital leases were $219.8 million. The company separately reported net indebtedness including the present value of off-balance-sheet lease obligations of $225.9 million, down $0.8 million since year-end 2016.

For the first nine months, operating cash flow was $62.8 million, versus $82.1 million in 2016; investing cash outflow was $57.2 million, versus $46.0 million; and financing cash outflow was $5.1 million, versus $35.6 million. Property and equipment acquisitions were $89.9 million, partly offset by $32.7 million in disposal proceeds.

Material changes versus comparable periods

• Q3 revenue grew 8.6% and net income rose to $4.6 million from $2.9 million. Freight revenue increased 7.6%; Solutions revenue grew 60.8%, while Truckload freight revenue increased modestly.
• Q3 operating income improved to $9.0 million from $5.4 million, with the GAAP operating ratio improving 1.8 percentage points. Management cited stronger freight demand, higher revenue per tractor, and lower net fuel expense; hurricane-related disruption hurt September utilization.
• Nine-month revenue increased 4.6%, but operating income fell 34.0% and net income fell 43.4%. Truckload operating income declined, and corporate overhead increased; Solutions revenue and income grew.
• Nine-month net fuel expense declined to $25.4 million from $38.2 million, but maintenance expense rose to $37.5 million from $34.2 million, and revenue equipment rentals and purchased transportation increased to $90.7 million from $80.3 million.
• Cash from operations decreased year over year, which management attributed principally to timing of revenue collections and lower net income.

Outlook, risks and unusual items

• Management described its Q4 2017 outlook as positive and aimed for earnings improvement versus Q4 2016. It expected year-over-year net fuel expense savings and a flattening impact from the prior-year depreciation-policy change, partly offset by higher maintenance and driver wages. No specific earnings or revenue forecast was provided.
• Management anticipated tighter industry capacity and stronger supply-demand conditions into Q4 2017 and 2018, potentially influenced by electronic logging device implementation and economic growth; timing and effects were uncertain. Recruiting and retaining qualified drivers remained important.
• A weak used-truck market could cause further reductions in equipment salvage values, higher depreciation, or losses on equipment sales. Nine-month equipment-sale losses were $3.2 million, compared with $0.1 million in 2016.
• Fuel-price exposure is partly managed through customer surcharges and hedges. Hedges covered about 25.1% of remaining 2017 projected fuel needs and 15.7% of 2018 needs. Management estimated that a $1-per-gallon price change would affect net income by approximately $0.2 million, based on its stated assumptions.
• The $95 million revolving credit facility matures in September 2018. At quarter-end, $3.7 million was drawn, $32.9 million of letters of credit were outstanding, and reported availability was $55.6 million. Management said it did not expect to need to test the fixed-charge coverage covenant in the foreseeable future. The company believed liquidity would be adequate for at least 12 months.
• The company increased its reserve for a 2008 cargo claim by $0.9 million in Q1 2017, bringing the reserve to $7.2 million, and is appealing the damages decision. A separate former-driver lawsuit seeks class-action status and alleges California wage-and-hour violations; management said pending matters, after reserves, were not likely to materially adversely affect the financial statements.
• Revenue recognition guidance was expected to take effect January 1, 2018; the company anticipated a positive retained-earnings adjustment of less than $1.0 million, net of tax. Lease accounting changes effective in 2019 were still under evaluation.

Important facts for investors to verify

• Whether improved Q3 operating performance persists, particularly given the weaker nine-month operating income and the Q4 earnings-improvement goal.
• Solutions’ contribution to growth and profitability, and the costs of purchased transportation in a tight-capacity market.
• Driver wage, maintenance, insurance and claims trends, including developments in the cargo-claim appeal and former-driver litigation.
• Used-equipment values, fleet replacement plans, capital needs, and the distinction between reported debt and lease-adjusted indebtedness.
• Credit-facility renewal or refinancing before its September 2018 maturity, and continued borrowing availability and covenant compliance.
• The eventual effects of fuel prices, surcharge recovery and hedge settlements, as well as adoption impacts from revenue and lease accounting standards.
• The filing entity name: the supplied metadata says Covenant Logistics Group, Inc., while this filing’s cover and financial statements identify Covenant Transportation Group, Inc.