Covenant Transportation Group, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the same 2011 periods. The filing identifies the registrant as Covenant Transportation Group, Inc. (not Covenant Logistics Group, Inc.). Unless noted otherwise, amounts below are in millions of dollars.
Business context and financial performance
The company operates asset-based truckload services and Covenant Transport Solutions, which provides brokerage, less-than-truckload consolidation, and factoring. Management described Q2 as its best financial performance in several years, while noting uncertain economic growth and a tight driver market.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $171.3 | $172.9 | $328.3 | $329.3 |
| Freight revenue | $134.2 | $133.6 | $256.1 | $258.0 |
| Operating income | $11.1 | $7.2 | $13.4 | $7.5 |
| Net income (loss) | $4.3 | $1.7 | $3.6 | $(0.8) |
| Diluted EPS | $0.29 | $0.11 | $0.24 | $(0.06) |
| Cash from operating activities | — | $26.3 | $12.8 |
Q2 operating margin was 6.5% of total revenue versus 4.2%; net margin was 2.5% versus 1.0%. For the first half, operating margin was 4.1% versus 2.3%. Management reported the asset-based operating ratio at 91.2% for Q2, an improvement of about 330 basis points year over year; excluding equipment-sale gains and the net insurance-policy credit, it improved about 240 basis points.
Changes, liquidity, and debt
- Q2 revenue declined 0.9%, although freight revenue rose 0.4%. Truckload freight revenue per tractor per week increased 4.3%, partly offset by a 3.7% smaller average tractor fleet. Freight revenue per total mile rose 5.4%.
- Lower fuel costs and improved insurance results supported Q2 earnings. Fuel expense net of surcharges improved about 5.5 cents per company mile year over year. Insurance and claims cost fell to 7.0 cents per mile from 12.2 cents, primarily reflecting a one-time insurance policy commutation credit.
- Operating cash flow was $26.3 million. Investing activities provided $25.9 million, including $37.7 million in equipment-sale proceeds, against $10.9 million of equipment acquisitions. Financing activities used $51.7 million, primarily for debt repayments. Cash ended at $4.4 million.
- Working capital was negative $24.8 million, improved from negative $42.1 million at year-end 2011. Management said liquidity was adequate for projected needs for at least 12 months.
- At June 30, debt was $171.7 million and capital lease obligations were $17.1 million. The company reported $6.0 million drawn on its $85 million revolving facility, $37.2 million of outstanding letters of credit, and $38.2 million of available capacity. Management’s broader net-indebtedness measure, including the present value of off-balance-sheet leases and net of cash, was $247.7 million, down about $49.2 million since year-end 2011.
Outlook, risks, and unusual items
- Management expected the company to be profitable in the second half of 2012, but gave no specific full-year revenue or earnings guidance. It anticipated continued rate increases, higher driver-pay pressure, and lower equipment-sale gains for the rest of 2012; it expected net equipment-sale proceeds of approximately $10–15 million for the full year and a net use of cash for equipment purchases in the second half.
- The $4.0 million Q2 insurance-policy commutation credit, net of approximately $0.5 million in additional reserves, improved reported results by about $3.5 million. The credit was applied to future premiums and did not generate cash in the first half; management said the cash-flow benefit would occur in the second half. Commuting the policy leaves the company responsible for additional claims risk.
- A jury had awarded approximately $13.2 million in a 2008 accident case. The court offered a $1.6 million remittitur or new trial; plaintiffs rejected the remittitur and requested a retrial. The company had previously recorded its $4.0 million self-insured retention and recorded a $1.6 million insurance receivable and matching claims accrual; the retrial outcome was uncertain.
- The credit facility requires a monthly fixed-charge coverage ratio of at least 1.0:1.0 and a quarterly leverage ratio no greater than 4.35:1.0. The company reported compliance at June 30, 2012, but disclosed prior covenant difficulty and amendments; a breach could accelerate debt and constrain liquidity.
- Fuel hedges covered about 20% of projected remaining 2012 requirements and 22% of 2013 requirements. Their fair value was a $3.3 million liability; $1.3 million of hedge losses was expected to be reclassified into earnings over the next 12 months. Fuel-price volatility, insurance claims, tight driver availability, and increased leased/contracted transportation costs remain risks.
Key investor verification points
- Assess earnings quality by separating recurring operating performance from the $3.5 million net insurance benefit and equipment-sale gains.
- Track truckload pricing, fleet size, utilization, driver availability and compensation, and the operating costs of Solutions.
- Monitor cash conversion, equipment spending and sale proceeds, revolving-facility availability, and covenant headroom, including operating-lease obligations.
- Follow the insurance commutation claims exposure, the accident-case retrial and insurance recovery, and the effect of fuel prices and hedge settlements.
- Compare management’s second-half profitability expectation with subsequent results; the filing does not provide a quantified earnings forecast.