Business context and reporting period
Covenant Transportation Group, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2012. It operates asset-based truckload services and a Solutions segment providing brokerage, less-than-truckload consolidation, and factoring.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $168.4 | $161.4 | $496.8 | $490.7 |
| Operating income (loss) | $4.6 | $(9.8) | $18.1 | $(2.2) |
| Net income (loss) | $1.0 | $(11.2) | $4.6 | $(12.0) |
| Diluted EPS | $0.07 | $(0.76) | $0.31 | $(0.82) |
- Freight revenue, excluding fuel surcharges, was $133.0 million in Q3, up 5.1%; for the nine months it was $389.1 million, up 1.2%.
- Operating margin on total revenue was 2.8% in Q3 and 3.6% for the nine months; net margin was 0.6% and 0.9%, respectively. The Q3 2011 comparison included an $11.5 million non-cash goodwill impairment charge.
- Operating cash flow was $40.8 million for the first nine months, versus $25.9 million a year earlier. Investing activities provided $31.2 million, largely reflecting equipment-sale proceeds; financing used $68.2 million. Cash ended at $7.7 million, up from $3.9 million at year-end 2011.
- At September 30, current assets were $112.5 million and current liabilities $132.2 million, a $19.7 million working-capital deficit (versus $42.1 million at December 31, 2011). Management said it expected liquidity to meet needs for at least 12 months.
- Balance-sheet debt was $155.5 million and capital leases $16.6 million. Credit-facility borrowings were $2.6 million; with $42.4 million of undrawn letters of credit, stated available capacity was $34.3 million. Management reported net indebtedness including the present value of off-balance-sheet leases of $233.3 million, down $63.6 million since year-end 2011.
Material changes versus the prior comparable period
- Profitability improved substantially year over year, reflecting the prior-year goodwill impairment and disruption from a new enterprise software conversion, as well as better truckload operating performance and lower interest expense.
- Q3 truckload freight revenue per tractor per week rose 12.9% year over year, but management cautioned the comparison was distorted by the 2011 software disruption. The more comparable sequential increase from Q2 2012 was 2.2%. Average tractor fleet size was down 6.6% year over year.
- Higher use of leased equipment and independent contractors increased rentals and purchased transportation expense. Independent contractors accounted for 9.4% of company miles in Q3, compared with 5.4% a year earlier.
- Solutions revenue was nearly flat in Q3 and down for the nine months, with lower nine-month revenue attributed partly to the prior-year Allegra launch project and the loss of a large agent.
- Total debt and capital lease obligations on the balance sheet fell from $242.5 million at December 31, 2011 to $172.1 million at September 30, 2012. Off-balance-sheet lease commitments remain material.
Outlook, commentary, risks, and unusual items
- Management said the freight market was seasonally weak and underperformed expectations early in Q3, with some improvement in September. It expected to be profitable for full-year 2012, but provided no earnings or revenue guidance figures.
- Rising diesel prices and the lag in fuel-surcharge recovery reduced Q3 earnings per share by approximately $0.16 versus Q2. Fuel hedges covered about 10% of remaining 2012 fuel needs, 20% of projected 2013 needs, and 2% of projected 2014 needs.
- Management cited driver availability and potential driver-pay increases, fuel-cost volatility, capacity constraints, and possible increases in payments to contractors and third-party carriers as operating pressures. It also expected equipment-sale gains in the remainder of 2012 and 2013 to be lower than comparable 2011 periods.
- The revolving credit facility requires a monthly fixed-charge coverage ratio of at least 1.0 and a quarterly leverage ratio no greater than 4.35. The company reported covenant compliance at quarter-end, but disclosed prior difficulty meeting the fixed-charge covenant and warned that a default could accelerate debt and constrain liquidity.
- Operating leases had approximately $89.3 million of remaining payments and $6.9 million of residual-value guarantees; their present value, including guarantees, was approximately $68.9 million. The company relies on these leases to finance equipment.
- A 2012 commutation of an auto-liability insurance policy produced a $4.0 million expense credit in Q2, but increased the company’s responsibility for claims in that policy year. A $2.4 million gain from a terminal sale was included in nine-month equipment-disposition gains.
- A jury awarded plaintiffs approximately $13.2 million in a trucking accident case. Plaintiffs rejected a $1.6 million remittitur and a new trial was set for April 2013. The company had previously recorded its $4.0 million self-insured retention; it recorded a $1.6 million insurer receivable and corresponding claims accrual. The award did not affect Q3 or nine-month 2012 operating results.
- Management stated that disclosure controls were effective at September 30, 2012, and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether full-year 2012 profitability was achieved and how subsequent freight demand, rates, and driver availability developed.
- Liquidity headroom under the borrowing base and continued compliance with both credit-facility covenants, including the impact of letters of credit and operating leases.
- Actual fuel-surcharge recovery and hedge settlements relative to fuel-price movements.
- Insurance exposure and outcome of the scheduled retrial, including the adequacy and collectability of the insurer receivable.
- The cash-flow, cost, and balance-sheet effects of continued equipment leasing, contractor growth, and lower equipment-sale gains.