Covenant Transportation Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 5, 2015. Unless noted, dollar amounts are in millions. The filing notes that quarterly results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $175.5 | $173.7 | $342.7 | $334.6 |
| Freight revenue, excluding fuel surcharges | $152.1 | $137.6 | $295.5 | $263.8 |
| Operating income | $18.8 | $9.1 | $28.8 | $9.4 |
| Net income | $11.0 | $3.8 | $21.2 | $2.4 |
| Diluted earnings per share | $0.60 | $0.25 | $1.16 | $0.16 |
| Operating ratio, consolidated | 87.7% | 93.4% | Not clearly stated | Not clearly stated |
Q2 freight revenue increased 10.6%, while total revenue grew 1.0%, reflecting lower fuel surcharge revenue. Truckload segment operating income rose to $16.7 million from $12.1 million; its operating ratio improved about 620 basis points to 87.0%. Management cited higher rates and utilization, improved operating costs per mile, and better profitability at each asset-based subsidiary.
For the first half, freight revenue grew 12.0% and operating income more than tripled. Fuel expense fell year over year, but net fuel expense was $10.6 million in Q2, up from $8.7 million, and was 7.0% of freight revenue versus 6.3%. Fuel surcharge lag, fuel-hedge losses, and the prior-year fuel tax credit affected the comparison.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $56.9 million, versus $25.1 million in 2014. Investing cash outflow was $15.5 million; financing cash outflow was $39.0 million. Cash increased $2.4 million to $23.8 million.
- At June 30, cash was $23.8 million, working capital was $37.9 million (versus $52.7 million at year-end 2014), and stockholders’ equity was $196.0 million.
- Balance-sheet debt was $148.2 million, plus $15.4 million of capital lease obligations. The company reported no Credit Facility borrowings, $33.4 million of undrawn letters of credit, and $50.0 million of available borrowing capacity under its $95 million facility, which matures in September 2017.
- Management said total indebtedness, net of cash and including the present value of off-balance-sheet lease obligations, declined $45.7 million since year-end to $180.9 million. It believed liquidity would be adequate for at least the next 12 months.
- First-half property and equipment purchases were $37.1 million and sale proceeds were $21.6 million. The company expected 2015 capital expenditures of $55–$65 million, excluding the headquarters purchase.
Changes, outlook, and management commentary
- Management called Q2 the company’s best second quarter to date. Average freight revenue per loaded mile rose 5.0% year over year in Q2; average miles per tractor increased 1.2%. The team-driven fleet averaged 951 units, up from 800 a year earlier.
- Management expected second-half 2015 year-over-year rate-per-loaded-mile increases of 3%–5% and Q3 tractor utilization approximately equal to Q2. It described freight demand and capacity as closely balanced, while identifying the tight driver market as a significant challenge.
- The company recorded a $3.6 million pretax insurance-premium credit in Q2 from commuting two prior auto-liability policies. This improved reported results, but the insurer applied the credit to future premiums rather than paying cash; the company also assumed responsibility for claims from the commuted period up to $20 million per occurrence.
- Fuel hedges covered 23.0% of projected remaining 2015 fuel needs. Their fair value was a $15.7 million liability; management expected about $6.8 million of net-of-tax hedge losses to be reclassified to earnings over the next 12 months. Lower fuel prices could make the established hedges costly relative to spot-market purchasing.
- A subsidiary’s appeal of a cargo-claim judgment relating to a 2008 event was pending. The court had awarded approximately $5.9 million plus interest and costs; the company had recorded an approximately $8.1 million reserve. Oral argument was scheduled for August 6, 2015.
- Subsequent events: the board approved a $5 million share repurchase program on July 23, and the filing says the program was completed. On July 30, the company agreed to purchase its Chattanooga headquarters and related property, with third-party financing and an interest-rate swap planned; the purchase price is not stated in the provided filing text.
Important facts for investors to verify
- Reconcile fuel-surcharge revenue: the financial statements report Q2 2014 fuel-surcharge revenue of $35.066 million, while portions of MD&A cite $36.066 million or $35.976 million.
- Track the appeal, reserve adequacy, and potential exposure from the 2008 cargo claim, as well as claims risk under the commuted auto-liability policies.
- Assess fuel-hedge settlement costs and the expected $6.8 million loss reclassification against actual fuel prices, surcharge recovery, and operating performance.
- Confirm the cost, financing, and cash-flow impact of the headquarters purchase, and the number and price of shares actually repurchased; the filing does not provide clear transaction amounts for either.
- Monitor driver availability and compensation, insurance claims severity, capital spending, and whether freight-rate and utilization expectations are achieved.