Covenant Transportation Group, Inc. — Q1 2014 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2014, compared with Q1 2013. The company operates asset-based truckload fleets and ancillary freight services, including brokerage, less-than-truckload consolidation, and factoring. The filing reports one operating segment, Truckload. (The company name in this 2014 filing is Covenant Transportation Group, Inc.)
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $161.0 million | $164.7 million |
| Freight revenue, excluding fuel surcharges | $126.3 million | $128.2 million |
| Operating income (loss) | $0.4 million | $(0.7) million |
| Net income (loss) | $(1.4) million | $(2.0) million |
| Diluted loss per share | $(0.09) | $(0.13) |
| Cash from operations | $11.2 million | $7.3 million |
The company’s reported operating ratio was 99.7%, versus 100.6% a year earlier, using its measure that excludes fuel surcharge revenue. Management separately said asset-based operations’ operating ratio was 100.2%, versus 100.4%. Net fuel expense fell to $11.3 million from $15.2 million, or 9.0% of freight revenue versus 11.8%. Insurance and claims expense declined to $6.1 million from $8.3 million; depreciation and amortization rose to $13.1 million from $10.9 million.
At March 31, cash was $19.9 million and working capital was $17.6 million. Current assets were $128.8 million and current liabilities $111.2 million. Total debt was $210.9 million; capital lease obligations added $21.2 million, for total on-balance-sheet debt and leases of $232.1 million. The company also reported $76.2 million present value of operating lease payments. Revolver borrowings were $19.3 million, with $29.9 million available capacity after $38.2 million of undrawn letters of credit. Management said liquidity should meet projected needs for at least 12 months.
Investing activities provided $2.2 million, including $19.9 million of equipment-sale proceeds against $17.7 million of equipment purchases. Cash increased by $10.7 million during the quarter.
Changes and management commentary
- Revenue declined 2.3%; freight revenue decreased 1.5%. Truckload revenue fell as the average tractor fleet was 6.8% smaller, with additional effects from severe winter weather and the SRT enterprise-system implementation. Higher freight revenue per tractor per week and growth in refrigerated intermodal partially offset the decline.
- Average freight revenue per total mile increased 3.2%, and management cited a favorable rate environment. It expected positive rate trends to continue, but gave no quantified revenue or earnings guidance.
- Solutions revenue grew 48.5% to $10.7 million and moved from a $0.3 million operating loss to $0.5 million operating income. Truckload operating income fell $2.7 million to $0.5 million.
- The company’s 49% TEL investment contributed $0.8 million of equity income, up from $0.5 million. Management expected TEL’s earnings contribution to become more significant, while noting volatility in used-equipment and leasing markets.
- Management identified driver scarcity, unseated trucks, hours-of-service-related utilization losses, and capacity constraints as ongoing challenges. It cited a higher average open-truck rate (5.6% versus 4.4%) and said driver compensation and recruiting costs could rise.
- Fuel hedges covered approximately 24.8% of projected remaining 2014 fuel needs and 17.3% of projected 2015 needs. These contracts reduce, but do not eliminate, fuel-price exposure.
Risks, contingencies, and unusual items
Key exposures include weather and seasonality, driver availability and pay, fuel and interest-rate changes, insurance claims, utilization, and execution of operating-system changes. A 1% increase in applicable variable interest rates was estimated to reduce annual pretax earnings by approximately $0.2 million. The company’s $95 million revolving facility has covenants and default provisions; certain equipment notes totaling $178.3 million are cross-defaulted with it. Management reported no fixed-charge covenant testing requirement at quarter-end based on availability.
Routine personal-injury and property-damage litigation was described as adequately provided for. Letters of credit, maintained primarily for insurance programs, totaled $38.2 million. Operating-lease residual-value guarantees were approximately $10.9 million undiscounted. Notable quarterly items included unfavorable equipment-sale results relative to the prior year, favorable claims development, and a $0.1 million reversal of previously recorded performance-based stock compensation because vesting was considered improbable.
Important facts for investors to verify
- Whether truckload profitability and utilization recovered after winter disruption, fleet contraction, and the SRT system implementation.
- Whether rate increases and Solutions growth offset driver shortages, higher third-party transportation costs, and compensation pressure.
- Cash generation, equipment spending and disposals, revolver availability, and compliance with debt covenants and cross-default terms.
- How operating leases and residual guarantees affect leverage and future cash requirements beyond the balance sheet.
- TEL’s contribution and the potential volatility of its used-equipment and leasing businesses.
- Whether favorable insurance-claims experience persists, given the company’s self-insured retention and exposure to claim severity.