Covenant Transportation Group, Inc. (CVTI) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019, with 2018 comparisons. The filing also reports quarterly results; this is an annual report, not a standalone Q4 filing.
Business context and performance
The company provides truckload transportation and logistics services through Highway Services, Dedicated, Managed Freight and Factoring. Its 2018 Landair acquisition contributed to growth in Dedicated and Managed Freight. Management continued shifting capital toward these businesses and away from Highway Services.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $894.5 million | $885.5 million | +1.0% |
| Freight revenue, excluding fuel surcharges | $800.4 million | $779.7 million | +2.7% |
| Operating income | $16.0 million | $59.0 million | Down $43.0 million |
| Net income | $8.5 million | $42.5 million | Down $34.0 million |
| Diluted EPS | $0.45 | $2.30 | Down $1.85 |
| Operating cash flow | $64.0 million | $124.8 million | Down $60.8 million |
GAAP operating margin was approximately 1.8%, versus 6.7% in 2018. The company’s non-GAAP adjusted operating ratio increased to 97.6% from 92.2%, indicating weaker adjusted operating performance. The filing cautions that freight revenue and adjusted operating ratio are non-GAAP measures.
For Q4 2019, revenue was $233.1 million, operating income $3.7 million and net income $1.2 million. In Q4 2018, the corresponding figures were $272.3 million, $22.3 million and $16.5 million.
Segments and material changes
- Highway Services: Revenue fell to $356.5 million from $469.3 million; operating loss was $1.1 million, versus $32.7 million operating income. OTR was particularly weak, with an $11.7 million operating loss, primarily associated with solo-driver refrigerated operations. Expedited remained profitable but below expectations.
- Dedicated: Revenue rose to $342.5 million from $257.7 million, largely reflecting a full year of Landair and tractor reallocations. Operating income declined to $1.0 million from $12.7 million; management cited under-target pricing in legacy contracts and higher insurance and claims costs.
- Managed Freight: Revenue increased to $186.4 million from $153.3 million, but operating income declined to $8.8 million from $10.1 million, with brokerage margins pressured by lower revenue per load.
- Factoring: Revenue increased to $9.1 million from $5.1 million and operating income to $7.3 million from $3.5 million, benefiting from customer growth.
Freight revenue growth from Dedicated, Managed Freight and Factoring was more than offset within the Highway segment by lower revenue. Total fuel-surcharge revenue declined to $94.1 million from $105.7 million. Lower diesel prices reduced fuel expense, but net fuel expense rose to $32.9 million from $28.2 million because of lower surcharge recovery and the absence of 2018 fuel-hedge gains.
Liquidity, debt and cash flow
- Cash was $43.6 million at year-end, versus $23.1 million in 2018; working capital was $93.1 million, versus $84.3 million.
- No borrowings were outstanding under the $95 million revolving credit facility at year-end. Undrawn letters of credit were approximately $35.2 million, leaving $59.8 million of available borrowing capacity.
- Debt and lease obligations totaled approximately $348.2 million, including operating and finance leases; net indebtedness after cash was $304.6 million. Management said the year-over-year $112.3 million increase in net indebtedness included $60.3 million of operating-lease liabilities recognized under the new lease standard.
- Cash from operations was $64.0 million. Investing activities used $93.0 million, including $91.7 million of net fleet investment excluding the 2018 Landair acquisition; financing activities provided $49.5 million.
- Year-end contractual cash obligations totaled $446.8 million, including $279.6 million of equipment/property installment notes, $66.0 million of operating leases, $35.6 million of finance leases and $68.4 million of equipment purchase commitments. The purchase commitments were described as cancelable subject to specified terms.
Adoption of lease accounting in 2019 added $40.1 million of operating-lease assets and $41.0 million of liabilities at adoption. This changed reported balance-sheet obligations and complicates direct comparison with 2018.
Outlook, risks and unusual items
- Management expected 2020 operating cash flow and the debt-to-total-capitalization ratio to improve versus 2019, with improvement weighted toward the second half. It expected negative year-over-year comparisons in consolidated freight revenue per total mile and margins in certain operations for at least two quarters.
- The outlook assumed continued U.S. economic expansion, declining trucking capacity, successful sales of excess real estate and equipment, and reallocating assets to more profitable operations. Management expected net capital expenditures to decline; it planned approximately 550 tractor purchases and 750 disposals in 2020, including 625 tractors held for sale at year-end.
- Management cited excess industry capacity, weak freight volumes, brokerage competition, driver scarcity and inflationary costs. Insurance and claims expense increased to $47.7 million from $43.3 million; the company retains significant self-insured exposure. Used-equipment values were depressed, creating potential for disposal losses or higher depreciation.
- Walmart exceeded 10% of consolidated revenue in both 2019 and 2018; the top ten customers represented about 45% of 2019 revenue. The company generally does not have contracts guaranteeing minimum customer volumes.
- The company’s 49%-owned TEL investment contributed $7.0 million of pretax earnings, down from $7.7 million. TEL’s results were affected by a customer bankruptcy and receivable write-offs; management expected lower contribution in the first half of 2020.
- Two California wage-and-hour-related cases were pending. The company said it could not reasonably estimate potential losses and recorded no related accrual at December 31, 2019. Management stated that other pending claims, considering existing reserves, were not expected to materially adversely affect consolidated financial statements.
- The 2018 material weakness in IT change-management controls was reported as remediated in 2019. Management and the auditor reported effective internal control at year-end; the financial statement audit opinion was unqualified. The filing’s risk-factor discussion also contains language describing a material weakness as of year-end, so investors should reconcile that wording with the remediation disclosure and audit report.
- The board authorized up to $20 million of Class A share repurchases on February 10, 2020; the timing and amount were discretionary. The company had never paid a cash dividend and said it intended to retain earnings and reduce indebtedness.
Most important facts for investors to verify
- Whether the 2020 turnaround assumptions—especially second-half improvement, fleet reallocation and equipment sales—were achieved.
- Whether Highway Services, particularly OTR and refrigerated operations, returned to profitability and whether Dedicated contract margins improved.
- Cash conversion, net debt and lease obligations, capital spending, and remaining borrowing capacity; distinguish operating-lease liabilities from funded debt.
- Trends in insurance and claims reserves, self-insured losses, the California wage-and-hour cases, and any policy commutation decisions.
- Customer concentration and Walmart volumes, TEL’s recovery after its customer bankruptcy, and the effect of used-truck resale values.
- The consistency of the internal-control disclosures concerning remediation of the 2018 material weakness.