Covenant Transportation Group, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014, with fourth-quarter results included. The filing identifies the registrant as Covenant Transportation Group, Inc.; this differs from the company name in the request metadata.
Business context
The company provides asset-based truckload transportation, including expedited, temperature-controlled and dedicated services, and ancillary freight brokerage and receivables factoring. Truckload is its sole reportable segment; brokerage and related activities are grouped as “Other.”
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $719.0 million | $684.5 million |
| Freight revenue, excluding fuel surcharges | $578.6 million | $538.9 million |
| Operating income | $39.6 million | $20.4 million |
| Net income | $17.8 million | $5.2 million |
| Diluted earnings per share | $1.15 | $0.35 |
| Cash provided by operating activities | $73.7 million | $40.4 million |
- Total revenue grew 5.0%; freight revenue rose 7.4%. Operating income more than doubled, and net income increased substantially. Calculated from reported figures, operating margin rose to approximately 5.5% from 3.0%, and net margin to approximately 2.5% from 0.8%.
- Truckload average freight revenue per total mile increased 7.2%, average miles per tractor rose 3.3%, and freight revenue per tractor per week increased 10.7%. The average tractor fleet declined 6.1%.
- Net fuel expense fell to $39.3 million from $53.2 million, aided by lower fuel prices, improved fuel economy and surcharge recovery. Fuel expense figures remain exposed to hedging and surcharge timing.
- Insurance and claims expense increased to $39.6 million from $30.3 million, including a $7.5 million reserve increase for a 2008 cargo claim. Management estimated the claim reduced 2014 net income by about $4.6 million after tax, or $0.30 per diluted share.
- Solutions revenue rose 39.4% to $56.0 million. TEL, a 49%-owned equipment leasing and resale affiliate, contributed $3.7 million of equity income, up from $2.8 million.
Liquidity, debt and capital
- At year-end, cash was $21.3 million and working capital was $52.7 million, compared with $9.3 million and $14.1 million, respectively, a year earlier.
- The company reported no borrowings under its $95 million revolving credit facility, $34.3 million of undrawn letters of credit and $60.7 million of available borrowing capacity. The facility matures in September 2017.
- Total debt and capital lease obligations were approximately $202.3 million, versus $235.5 million at year-end 2013. Management reported aggregate lease-adjusted indebtedness, net of cash, of $226.7 million, down $78.5 million year over year. Remaining operating lease payments had a present value of approximately $45.7 million.
- A November 2014 follow-on stock offering generated $63.0 million net proceeds and helped reduce indebtedness; it also increased shares outstanding. Net cash used in investing activities was $84.6 million, reflecting substantial equipment purchases partly offset by equipment-sale proceeds.
Changes, outlook and risks
- Management described 2014 as the company’s best annual performance since 1999 and its third consecutive profitable year. Freight demand exceeded capacity in much of the year, particularly in expedited/team and temperature-controlled markets. The first quarter was affected by severe winter weather and the SRT operating-system conversion; management said conversion-related inefficiencies were largely resolved by the second quarter.
- Management expected 2015 average truck count to grow, anticipated positive first-quarter earnings for the first time since 2004, and forecast a modest increase in full-year diluted EPS versus 2014, even excluding the cargo-claim charge and considering an estimated 19% increase in weighted-average diluted shares. It cautioned that second-half comparisons could be harder and depend partly on peak-season customer volumes.
- Key risks include driver recruitment, retention and compensation; increased accident frequency; self-insured claims volatility; customer concentration (UPS generated $82.5 million, and the top five customers represented about 29% of revenue); freight cyclicality; regulatory constraints; and reliance on third-party carriers in brokerage.
- Fuel hedges covered about 23% of projected 2015 fuel needs, 22% of 2016 needs and 5% of 2017 needs. Their year-end fair value was a $22.7 million liability, and the company had posted $5.0 million of cash collateral. Management expected approximately $8.0 million, net of tax, in hedge losses to be reclassified into earnings over the next year as hedged fuel was purchased.
- SRT’s appeal of the cargo-claim judgment was pending. Other material watch items include $116.8 million of cancelable 2015 equipment purchase commitments and the company’s ability to meet financing terms and manage claims and equipment costs. Management said liquidity was adequate; it did not expect to test the facility’s fixed-charge covenant in the foreseeable future.
Investor verification priorities
- Review the cargo-claim appeal outcome and whether the recorded reserve proves sufficient.
- Check whether forecast 2015 truck growth and EPS improvement materialized, including the effects of share dilution and peak-season freight demand.
- Track driver availability, unseated trucks, accident frequency and insurance/claims costs.
- Monitor fuel-hedge settlements, cash collateral needs and surcharge recovery as fuel prices change.
- Reconcile reported debt with lease-adjusted obligations, equipment commitments, capital spending and available revolver capacity.
- Assess customer concentration and the durability of Solutions and TEL contributions. The filing states that management considered disclosure controls and internal control over financial reporting effective; KPMG reported fairly presented financial statements and effective internal control.