Covenant Transportation Group, Inc. — FY 2017 Form 10-K
Period and business: Fiscal year ended December 31, 2017; comparisons are primarily with FY 2016. The filing identifies the registrant as Covenant Transportation Group, Inc. (ticker CVTI), not Covenant Logistics Group, Inc. The company provides truckload transportation, freight brokerage and logistics, and receivables factoring services. Its reportable segments are Truckload and Managed Freight.
Financial and operating performance
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Total revenue | $705.0 million | $670.7 million | Up 5.1%; higher fuel-surcharge revenue and Managed Freight growth. |
| Freight revenue, excluding fuel surcharges | $626.8 million | $610.8 million | Up 2.6%. |
| Operating income | $28.2 million | $32.4 million | Down $4.3 million. |
| Operating ratio | 96.0% | 95.2% | Weakened 80 basis points. Adjusted operating ratio, a non-GAAP measure, was 95.5%, also up 80 basis points. |
| Income before taxes | $23.3 million | $27.2 million | Down $3.9 million. |
| Net income / diluted EPS | $55.4 million / $3.02 | $16.8 million / $0.92 | FY 2017 included a $40.1 million tax benefit from tax-law changes; reported earnings growth therefore does not reflect improved pretax performance. |
| Cash from operations | $82.9 million | $102.4 million | Down $19.6 million, partly due to working-capital timing. |
| Cash / working capital | $15.4 million / $81.1 million | $7.8 million / $47.9 million | Both increased year over year. |
| Debt and capital leases | $213.8 million | — | Debt and lease obligations combined; the company reported a $6.6 million reduction in net debt including the present value of off-balance-sheet leases. |
| Credit facility availability | $53.1 million | — | $9.0 million drawn and $32.9 million of undrawn letters of credit under a $95.0 million revolving facility. |
Capital expenditures, net of proceeds, were reported as $72.0 million. Investing activities used $62.1 million of cash, including $110.8 million of equipment purchases and $48.7 million of disposal proceeds. The filing reports total assets of $649.7 million and stockholders’ equity of $295.2 million at year-end.
Changes and segment trends
- Managed Freight revenue increased $22.8 million, benefiting from hurricane-related spot-market demand and existing-customer growth; segment operating income rose to $8.6 million from $7.6 million.
- Truckload freight revenue declined $6.8 million, partly because of the reduced temperature-controlled intermodal business. Truckload operating income nevertheless increased to $38.8 million from $37.0 million, helped by lower net fuel expense.
- Third-party capacity costs, depreciation, maintenance, wages, and corporate overhead weighed on results. Purchased transportation and equipment-rental expense rose 20.8% to $142.0 million.
- Net fuel expense fell to $32.9 million from $49.6 million, primarily because of improved surcharge recovery and lower realized hedge losses. Fuel hedge losses reclassified to expense were $4.1 million, compared with $16.7 million in 2016.
- Depreciation and amortization increased to $76.4 million, including $4.0 million of losses on equipment disposals versus $0.8 million in 2016, reflecting a soft used-truck market.
- SRT’s operating margin improved by more than 400 basis points year over year, but management said its turnaround remained a priority. The company discontinued SRT’s temperature-controlled intermodal service in Q4.
Fourth-quarter 2017 revenue was $203.3 million, operating income $14.8 million, and net income $49.3 million. Q4 net income included the $40.1 million one-time tax benefit.
Outlook, risks, and unusual items
- For 2018, management forecast sequential operating-income improvement, positive year-over-year pretax income, and mid-to-high-single-digit growth in average freight revenue per truck. It estimated a 24%–27% effective tax rate and expected higher wages to offset part of the benefit from improving freight conditions.
- Management expected to reduce combined on- and off-balance-sheet financing and lease liabilities by approximately $40 million–$60 million in 2018, absent strategic investments. It planned to receive about 510 new company tractors and dispose of about 500 used tractors.
- The company cited improving freight pricing and tightening capacity, including possible effects of ELD enforcement, while noting risks from driver shortages, wage inflation, expensive third-party capacity, fuel-price volatility, and weaker-than-expected used-equipment values.
- Material exposures include substantial self-insured claims, customer concentration, debt and lease obligations, credit-facility covenants and cross-default provisions, and regulatory and litigation risks. Two customers each accounted for more than 10% of FY 2017 revenue; the top five accounted for about 34%.
- Pending matters include an appeal of a judgment related to a 2008 SRT cargo claim, for which the company added $0.9 million to reserves in 2017, and a former-driver wage-and-hour suit seeking class certification. Management said, based on current information and existing reserves, pending claims were not likely to materially adversely affect the consolidated financial statements.
- The $40.1 million tax benefit was a provisional estimate under the Tax Cuts and Jobs Act; the filing cautioned that further analysis and guidance could change tax estimates. The company also expected about $0.6 million, net of tax, in retained-earnings benefit from adopting the new revenue-recognition standard in Q1 2018.
KPMG issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2017.
Key facts for investors to verify
- How much of reported 2017 net income and EPS is attributable to the one-time tax remeasurement, and whether the provisional tax accounting changed subsequently.
- Whether forecast freight-revenue-per-truck growth, sequential operating-income improvement, and the 2018 liability-reduction target were achieved.
- Whether SRT’s operating improvement persisted after exiting temperature-controlled intermodal service, and how that exit affected revenue and margins.
- Developments in the 2008 cargo-claim appeal and the SRT wage-and-hour case, including changes to reserves or insurance recoveries.
- Actual borrowing availability, covenant compliance, total debt and lease obligations, and cash generated after fleet replacement spending.
- Used-truck resale values, depreciation assumptions, and the realized cost of third-party capacity, driver compensation, fuel, and insurance claims.