Covenant Transportation Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as Covenant Transportation Group, Inc.
Business and financial performance
The company operates asset-based truckload services and freight brokerage services. Amounts below are in millions except per-share data.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $161.4 | $164.8 | $490.7 | $485.8 |
| Freight revenue, excluding fuel surcharges | $126.5 | $139.0 | $384.5 | $409.7 |
| Operating income (loss) | $(9.8) | $8.2 | $(2.2) | $20.0 |
| Net income (loss) | $(11.2) | $1.9 | $(12.0) | $2.6 |
| Diluted earnings (loss) per share | $(0.76) | $0.13 | $(0.82) | $0.18 |
| Operating ratio, freight-revenue basis | 107.7% | 94.1% | 100.6% | 95.1% |
- Fuel surcharge revenue rose to $34.9 million in Q3 from $25.8 million, and to $106.1 million for nine months from $76.1 million. Excluding surcharges, freight revenue fell 9.0% in Q3 and 6.1% year to date.
- Q3 Truckload operating loss was $9.0 million, including the $11.5 million goodwill impairment; Brokerage operating income improved to $0.5 million from $0.2 million. For nine months, Truckload operating income declined to $6.3 million from $28.6 million, while Brokerage operating income rose to $1.3 million from $0.9 million.
- Net cash provided by operations was $25.9 million for nine months, versus $48.3 million. Investing used $36.6 million, versus $77.9 million; financing provided $4.7 million, versus $23.9 million. Cash declined to $3.4 million from $9.4 million at year-end 2010.
- At September 30, cash was $3.4 million, working capital deficit was $33.4 million, and total current liabilities were $127.2 million. Total debt was $214.0 million; debt plus capital leases was $232.6 million. The company reported $14.1 million drawn on its $85 million revolving facility, $44.3 million of undrawn letters of credit, and $23.1 million of available borrowing capacity.
Changes, outlook and risks
- Freight revenue and truck utilization weakened. Truckload utilization declined 9.7% in Q3 and 7.6% year to date; higher average freight revenue per total mile partly offset lower miles per tractor. Management cited softer freight demand, driver shortages and unseated trucks, and operating disruption from new enterprise software at Covenant Transport and electronic logging equipment implementation.
- Management reported that software-related dispatch, customer and driver issues had stabilized, but said it would not have full visibility into implementation effectiveness until after the first quarter of 2012. It expected net losses in Q4 2011 and Q1 2012, citing moderate demand and seasonality; no quantified earnings or revenue guidance was provided.
- The $11.5 million non-cash goodwill impairment followed lower market capitalization, weaker earnings outlook, and covenant pressures. It eliminated remaining balance-sheet goodwill; the impairment analysis was still being completed, and any adjustment was to be recorded in Q4. Management said the charge did not affect cash flow or liquidity.
- The company had amended its credit facility after prior covenant difficulties. It reported compliance at quarter-end under the amended terms. The amended facility includes a fixed-charge coverage covenant and a leverage limit of 4.35-to-1; failure could accelerate debt and trigger cross-defaults. Management said it expected liquidity to be adequate for at least twelve months, subject to operating results and covenant compliance.
- Other pressures include fuel-price exposure, driver pay and recruitment costs, inflation in tires and repairs, self-insured claims volatility, and operating-lease commitments. Remaining operating-lease payments were approximately $74.0 million; their present value, including residual guarantees, was approximately $49.5 million. Fuel hedges covered about 15.3% of projected remaining 2011 needs and 17.7% of 2012 needs.
- Management attributed higher year-to-date cash generation comparisons in 2010 partly to an $8.7 million federal tax refund, versus a $0.9 million refund in 2011. The filing says routine litigation exposure was adequately provided for; disclosure controls were assessed as effective.
Investor verification priorities
- Check completion and any fourth-quarter adjustment to the goodwill impairment analysis.
- Track covenant compliance, revised facility terms, borrowing availability, and liquidity against the stated loss outlook.
- Monitor freight demand, utilization, unseated trucks, and the effectiveness of the software conversion.
- Assess whether fuel surcharges and hedges offset fuel costs, and whether driver, maintenance, and insurance costs continue to rise.
- Reconcile cash flow, equipment investment and sales, debt and lease obligations, and the timing of tax refunds.