Covenant Transportation Group, Inc. — Q2 2011 Form 10-Q
Filing identity: The supplied filing is for Covenant Transportation Group, Inc. (the name used in the 2011 filing), not Covenant Logistics Group, Inc. It covers the quarter and six months ended June 30, 2011. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and reporting period
The company operates asset-based truckload fleets and a freight brokerage business, Covenant Transport Solutions. Truckload services include expedited, dedicated, regional, and temperature-controlled transportation. Results for the quarter are compared with Q2 2010; year-to-date results are compared with the six months ended June 30, 2010.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $172.9 million | $169.0 million | $329.3 million | $321.0 million |
| Freight revenue, excluding fuel surcharge | $133.6 million | $141.4 million | $258.0 million | $270.7 million |
| Operating income | $7.2 million | $10.0 million | $7.5 million | $11.9 million |
| Net income (loss) | $1.7 million | $2.9 million | $(0.8) million | $0.7 million |
| Basic and diluted earnings (loss) per share | $0.11 | $0.20 | $(0.06) | $0.05 |
- Margins: Q2 operating ratio was 95.8% of total revenue, versus 94.1% a year earlier; on the company’s freight-revenue basis, it was 94.6% versus 92.9%. Year-to-date freight-basis operating ratio was 97.1%, versus 95.6%. Q2 net margin was approximately 1.0% of total revenue; the six-month period recorded a net loss.
- Cash flow: Operating cash flow for the first half was $12.8 million, down from $38.3 million. Investing cash outflow was $13.6 million and financing cash outflow was $6.2 million. Cash declined by $7.1 million to $2.3 million.
- Liquidity: Current assets were $92.5 million and current liabilities $123.5 million, a $31.0 million working-capital deficit. The company reported $30.2 million of available borrowing capacity under its revolving facility at June 30.
- Debt and leases: Balance-sheet debt was $202.5 million, with $14.1 million of capital lease obligations. Management reported total indebtedness net of cash and including the present value of off-balance-sheet leases of $265.8 million. Remaining operating-lease payments were approximately $77.2 million; their present value, including residual-value guarantees, was approximately $50.9 million.
- Segments: Q2 truckload revenue was $165.5 million and operating income $12.1 million; brokerage revenue was $7.4 million and operating income $0.3 million. Corporate overhead was $5.1 million.
Material changes versus prior comparable periods
- Q2 total revenue rose 2.3%, primarily because fuel-surcharge revenue increased to $39.2 million from $27.6 million. Freight revenue fell 5.5%; year-to-date it fell 4.7% despite higher total revenue.
- Q2 operating income fell about 28% and net income fell about 43%. The six-month result shifted from $0.7 million net income to an $0.8 million loss.
- Freight rates improved: average freight revenue per total mile increased 6.0% in Q2 and 5.6% year to date. However, lower miles per tractor and more unseated trucks reduced utilization; average Q2 freight revenue per tractor per week declined 1.9%.
- Costs rose from higher fuel prices, driver pay, workers’ compensation and insurance claims, tire and repair costs, and driver recruiting. Q2 insurance and claims cost increased to 12.2 cents per mile from 8.0 cents; first-half cost rose to approximately 11.0 cents per mile from 8.1 cents.
- Brokerage revenue declined 31.5% in Q2 and 34.0% year to date, mainly after the company exited certain lower-margin agent and customer relationships. Brokerage operating ratio nevertheless improved to 96.6% in Q2 from 97.3%, and to 94.0% year to date from 96.6%.
Outlook, commentary, risks, and unusual items
- Management said it believed its 2011 plan would produce higher profits than 2010, but was cautious because of a potentially slowing economy, high fuel prices, and a tight driver market. It expected continued cost pressure and said rates needed to rise to offset costs. No specific earnings or revenue guidance was provided.
- Management cited weaker-than-expected early-quarter freight, unseated trucks and lower utilization, and unfavorable development of prior-period insurance claims as key Q2 negatives. Improved freight rates, a better freight mix, and gains on used-equipment sales were positives.
- Gains on equipment disposals were $3.2 million in Q2 and $5.0 million in the first half. Management expected second-half gains to be lower than first-half gains and closer to the second half of 2010. Fuel-hedge gains of $1.3 million were reclassified into earnings in the first half; management expected a further $0.4 million over the next 12 months, subject to settlement values.
- In May, the company paid $1.5 million for a 49% interest in Transport Enterprise Leasing, LLC (TEL); TEL’s majority owners may receive an earn-out of up to $4.5 million. The company recorded $0.1 million of equity-method income through June 30 and holds an option to acquire the remaining interest during 2013–2016.
- The $85 million revolving credit facility matures in September 2014 and requires a fixed-charge coverage ratio of at least 1.0 to 1.0. The company reported compliance at quarter-end. It also disclosed $40.7 million of undrawn letters of credit and a 4.8% weighted-average rate on revolver borrowings.
- Fuel surcharges do not recover all fuel costs, including costs from empty or out-of-route miles, idling, and some brokered loads. Fuel-price exposure remains material: management estimated a $1-per-gallon change would affect fuel expense by approximately $5.4 million for the remainder of 2011, assuming no change in hedging or surcharge recovery.
- Other risks include volatile self-insured claims, driver availability and retention, potential safety and hours-of-service regulatory effects, and equipment and operating-lease obligations. Routine personal-injury and property-damage litigation was described as adequately provided for. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: this filing names Covenant Transportation Group, Inc.; verify that it is the intended filing for the requested company.
- Track freight revenue, miles per tractor, unseated trucks, and rate increases to assess whether pricing can offset utilization and cost pressures.
- Review subsequent insurance-claims development and self-insured exposure, given the quarter’s adverse prior-period claims adjustments.
- Monitor cash generation, available revolver capacity, covenant compliance, and the company’s planned second-half tractor purchases and financing.
- Assess fuel-surcharge recovery and hedge settlements, and distinguish recurring operating performance from used-equipment disposal and hedge gains.
- Follow TEL’s results, potential earn-out payments, and any future exercise of the company’s purchase option.