Covenant Transportation Group, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. The company operates truckload transportation services, alongside brokerage, logistics, and factoring activities. Its truckload business represented about 89% of freight revenue.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $670.7 million | $724.2 million |
| Freight revenue, excluding fuel surcharges | $610.8 million | $640.1 million |
| Operating income | $32.4 million | $67.8 million |
| Net income | $16.8 million | $42.1 million |
| Diluted EPS | $0.92 | $2.30 |
| Operating ratio | 95.2% | 90.6% |
| Adjusted operating ratio (non-GAAP) | 94.7% | 89.4% |
For Q4 2016, revenue was $191.0 million, operating income $12.3 million, net income $6.0 million, and diluted EPS $0.33. Q4 2015 comparatives were $208.1 million, $24.3 million, $13.2 million, and $0.72, respectively.
- Cash flow: Operating cash flow was $102.4 million, versus $85.5 million in 2015. Investing activities used $47.3 million and financing activities used $51.9 million. Cash at year-end was $7.8 million.
- Liquidity: Working capital was $47.9 million. Under the $95 million revolving facility, $12.2 million was drawn, $27.2 million of letters of credit were outstanding, and $55.6 million of borrowing capacity remained.
- Debt and leases: Debt and capital lease obligations totaled approximately $215.8 million at year-end, including $27.4 million current and $188.4 million long-term. Management reported total indebtedness, net of cash and including the present value of off-balance-sheet lease obligations, of $226.7 million, down approximately $37.5 million year over year.
- Margins and operating measures: Average freight revenue per total mile fell to $1.67 from $1.69; average miles per tractor fell to 121,782 from 122,508; and average freight revenue per tractor per week fell to $3,881 from $3,967. Net fuel expense rose to $49.6 million from $45.8 million.
Material changes versus 2015
- Total revenue declined 7.4%; freight revenue declined 4.6%. Lower fuel surcharge revenue accounted for $24.3 million of the total revenue decrease.
- Truckload freight revenue fell $30.4 million, reflecting a 3.9% smaller average tractor fleet, lower rates and slightly lower miles per unit. Truckload operating income dropped to $37.0 million from $74.1 million.
- Depreciation and amortization increased to $72.5 million from $61.4 million. Lower used-tractor market values prompted a reduction in tractor salvage-value estimates effective July 1, 2016, adding about $2.0 million in quarterly depreciation in the second half.
- Other operations’ revenue rose $1.1 million and operating income rose $1.9 million, supported by brokerage growth and customer additions. Brokerage loads increased to 62,614 from 36,217, while average revenue per load fell about 41%.
- 2015 included nonrecurring benefits: a federal income tax credit of about $4.7 million after tax and a $3.6 million insurance-policy commutation benefit before tax. These items make year-over-year earnings comparisons less favorable to 2016.
Outlook, commentary, risks, and unusual items
- Management forecast sequential improvement in 2017, while not expecting first-half EPS to match first-half 2016. It cited potential second-half and full-year improvement from economic and freight-market conditions, e-commerce demand, lower expected net fuel costs, and SRT operational progress.
- SRT turnaround progress was described as the largest outlook variable; management estimated improved SRT results could contribute up to $10 million of pretax income versus 2016. The company also expected lower-than-normal net capital expenditures and further debt reduction, and planned to grow dedicated services.
- Key exposures include freight demand and pricing, driver availability and wage inflation, customer concentration, used-equipment values and depreciation, fuel prices and hedge performance, self-insured claims, regulatory changes, and compliance with debt covenants. The top five customers accounted for about 39% of revenue, up from 34%; Wal-Mart generated $69.4 million in 2016 revenue.
- Fuel hedges covered approximately 27% of projected 2017 fuel needs and 17% of 2018 needs. The filing reported a $3.6 million fuel-hedge liability at year-end; hedge-related losses reclassified to fuel expense were $16.7 million in 2016.
- Contingencies include a 2008 cargo-claim lawsuit with a prior $5.9 million judgment that was partly reversed on appeal and remanded; a $500,000 settlement of a driver wage-and-hour class action pending final court approval; and a separate SRT California wage-and-hour class action filed in December 2016. Management said pending matters, with reserves considered, were not expected to materially adversely affect consolidated financial statements.
Important facts for investors to verify
- Whether SRT achieves the operational turnaround and potential pretax improvement described by management.
- Whether freight rates, utilization, and tractor productivity recover, and how driver pay and retention affect margins.
- Whether used-equipment values stabilize or lead to further depreciation increases or disposal losses.
- How operating cash flow, equipment purchases, debt repayments, and lease obligations evolve; the filing lists $340.2 million of contractual cash obligations, including $86.5 million of cancellable equipment purchase commitments.
- Developments and reserve adequacy for the cargo claim, wage-and-hour cases, and the company’s substantial self-insured claims exposure.
- Customer concentration and the terms and durability of major customer relationships.