Covenant Transportation Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. The filing identifies the registrant as Covenant Transportation Group, Inc. (the request metadata names Covenant Logistics Group, Inc.). Amounts below are in U.S. dollars.
Business context and financial performance
The company operates Truckload services and Managed Freight, which includes freight brokerage and logistics. Total revenue rose 9.3% to $173.6 million; freight revenue, excluding fuel surcharges, increased 7.4% to $150.5 million. Net income was $4.4 million, or $0.24 per diluted share, versus a net loss of $39,000, or approximately break-even per share.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating income | $6.4 million | $0.3 million |
| Operating ratio (GAAP) | 96.3% | 99.8% |
| Adjusted operating ratio (non-GAAP) | 95.7% | 99.8% |
| Operating cash flow | $36.7 million | $30.7 million |
| Net cash used in investing | $13.7 million | $15.9 million |
Truckload revenue was $154.5 million, with operating income of $5.4 million versus a $1.1 million loss. Managed Freight revenue grew to $19.0 million from $13.1 million, while segment operating income declined to $1.1 million from $1.4 million.
Material changes and operating drivers
- Truckload freight revenue increased $4.4 million. Average freight revenue per tractor per week rose 6.3%, supported by a 15.4-cent-per-mile increase in average freight revenue per total mile; average miles per tractor per week fell 2.9%.
- Managed Freight revenue increased $5.9 million, driven by existing customers and overflow freight, but higher third-party capacity costs reduced segment operating income.
- Net fuel expense declined 21.9% to $6.7 million, or 4.4% of freight revenue, from $8.5 million, or 6.1%. Higher fuel prices increased reported fuel expense, partly offset by greater surcharge revenue and hedge gains.
- Revenue equipment rentals and purchased transportation increased 21.0% to $30.7 million, reflecting a more competitive market for third-party capacity and more independent contractors. The company discontinued its temperature-controlled intermodal service in December 2017.
Cash, debt, and liquidity
Cash was $38.4 million at March 31, 2018, compared with $15.4 million at year-end 2017. Working capital was $92.9 million, up from $81.1 million. Total debt was approximately $190.0 million, and capital lease obligations were $23.9 million. The company reported aggregate lease-adjusted indebtedness, net of cash, of $195.1 million, down $24.9 million since December 31, 2017.
The $95 million revolving credit facility matures in September 2021. At quarter-end, borrowings were $4.0 million, outstanding undrawn letters of credit were approximately $32.8 million, and available borrowing capacity was $57.9 million. Management said it expected liquidity to meet projected needs and did not expect material liquidity constraints. Based on availability, no fixed-charge coverage test was required at quarter-end.
Operating cash flow increased by $6.0 million year over year, primarily reflecting improved earnings and working-capital timing. Investing cash flow included $32.2 million of property and equipment purchases and $18.4 million of disposal proceeds. Management anticipated paying down approximately $40–$60 million of financing and lease liabilities during 2018, absent strategic investments.
Outlook, risks, and unusual items
- Management forecast sequential operating-income improvement through the remaining quarters of 2018 and meaningful year-over-year EPS improvement in each quarter. It expected positive year-over-year average freight revenue per total mile, potentially strongest in Q2. These are management expectations, not formal numerical earnings guidance.
- Expected offsets to rate improvement included wage inflation, potentially lower miles per tractor, and other inflationary costs. Management cited tight driver availability and trucking capacity as continuing constraints.
- Fuel prices, surcharge recovery, third-party transportation costs, accident and claims experience, and used-equipment values could affect results. The company had fuel hedges covering approximately 16.1% of projected remaining 2018 fuel needs and no disclosed fuel hedges beyond 2018.
- Contingencies include an appeal concerning a 2008 cargo claim and a proposed California wage-and-hour class action. Management considered existing reserves adequate and did not expect pending claims to have a material adverse effect, but outcomes remain uncertain.
- The company adopted revenue recognition guidance using the modified retrospective method. Adoption added $0.6 million, net of tax, to opening retained earnings; Q1 2018 revenue was $0.3 million lower and net income $0.2 million lower than it would have been without adoption.
- Accounting for the Tax Cuts and Jobs Act remained provisional. The company had recorded a $40.1 million deferred-tax remeasurement benefit in 2017 and reported no Q1 2018 adjustment to that estimate.
- Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether freight-rate gains and the projected earnings improvement persist, especially as wages, driver availability, and capacity costs evolve.
- Whether Managed Freight can convert revenue growth into improved segment profitability despite higher third-party transportation costs.
- Liquidity, debt repayments, and capital spending plans, including the company’s lease obligations and the availability of borrowing capacity.
- Resolution and reserve adequacy for the 2008 cargo claim and California wage-and-hour lawsuit.
- Final tax effects of the Tax Cuts and Jobs Act and the realized impact of fuel and interest-rate hedges.