Covenant Transportation Group, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. The registrant named in the filing is Covenant Transportation Group, Inc. (Nasdaq: CVTI). Its businesses include Highway Services, Dedicated truckload, Managed Freight, and Factoring.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $213.6 million | $219.2 million |
| Freight revenue, excluding fuel surcharge | $192.3 million | $195.8 million |
| Operating income | $0.7 million | $5.4 million |
| Net income (loss) | ($2.2) million | $4.4 million |
| Diluted EPS | ($0.12) | $0.24 |
| Operating ratio | 99.7% | 97.5% |
| Adjusted operating ratio | 99.3% | 96.9% |
| Operating cash flow | ($3.5) million | $9.2 million |
| Net investing cash flow | ($16.5) million | ($33.5) million |
| Cash at quarter-end | $39.7 million | $31.0 million |
Amounts are in U.S. dollars; financial statement figures are unaudited. Adjusted operating ratio is a company-defined non-GAAP measure.
Revenue, costs, and segments
- Total revenue fell 2.6% year over year; freight revenue declined 1.8%. Fuel-surcharge revenue decreased $2.2 million.
- Operating margin was approximately 0.3%, versus 2.5% a year earlier. Adjusted operating ratio worsened to 99.3% from 96.9%.
- Insurance and claims expense rose 39% to $15.6 million, reflecting higher claim costs and adverse development of prior-period claims. General supplies and expenses increased $1.8 million, including additional reserves for potentially uncollectible receivables.
- Lower fuel, maintenance, rentals and purchased transportation, and depreciation costs partly offset the pressure. The quarter included a $1.7 million gain on sale of the Orlando terminal.
- Highway Services revenue was $86.2 million; segment operating loss was $1.8 million. Dedicated revenue was $81.8 million and operating loss was $1.3 million, versus $2.1 million operating income a year earlier. Managed Freight revenue was $42.9 million and operating income was $1.6 million, down from $2.7 million. Factoring revenue rose to $2.7 million and operating income to $2.2 million.
- The equity-method investment in Transport Enterprise Leasing (TEL) contributed a $0.7 million loss, compared with $3.0 million of income in Q1 2019.
Cash, debt, and liquidity
- Cash was $39.7 million at March 31, down from $43.6 million at December 31, 2019. Working capital was $114.1 million, compared with $93.1 million at year-end.
- Total debt and lease obligations were reported as $376.4 million, up from $348.2 million at year-end; net indebtedness, net of cash, increased $32.1 million to $336.7 million.
- Credit Facility borrowings were $24.3 million; approximately $35.1 million of letters of credit were outstanding and available borrowing capacity was $35.6 million. The $95 million revolving facility matures in September 2021.
- Operating cash flow was negative, primarily due to receivables and driver advances associated with Factoring growth and the net loss. Net capital expenditures were $16.5 million. Financing cash flow was $16.1 million, including $17.5 million spent on share repurchases.
- Management said liquidity should be adequate for at least the next year and that it did not expect a fixed-charge covenant test in the foreseeable future, based on facility availability at quarter-end. It also described capital, cost, financing, and working-capital actions to preserve liquidity.
Material changes and management outlook
- Management said COVID-19 had no material overall impact on Q1 results, but two major dedicated automotive customers shut down in mid-March. Management reported production was only beginning to resume gradually in late May; the full effect of the pandemic remained uncertain.
- The prior 2020 outlook was withdrawn. The company said it would not provide earnings or similar expectations for the foreseeable future and anticipated month-to-month volatility. Management cited April’s challenging volume and pricing environment, partly offset by business-mix improvements and cost control.
- The company planned to reduce its operating tractor fleet by 12%–14% by year-end versus year-end 2019, and to prioritize higher-margin, less-volatile offerings. A lower used-equipment market could lead to impairment charges or losses on sales; Texarkana terminal impairment and other closure costs were possible, with amounts not estimable.
- On May 22, 2020, after quarter-end, the company sold its Dallas-area terminal for approximately $10.0 million net of fees and commissions and expected a pretax gain of approximately $6.5 million in Q2.
- Insurance renewal terms effective April 1, 2020 included about $0.5 million of additional fixed premium expense per quarter, higher self-insured retention, and lower aggregate limits, increasing potential claims-related earnings volatility.
- The $20 million share-repurchase authorization was suspended March 26, after 1.4 million shares had been repurchased for $17.5 million; approximately $2.5 million remained authorized.
Risks, contingencies, and unusual items
- COVID-19 could materially affect demand, operations, liquidity, cash flows, and financial results; the extent and duration were not clear. Management also identified potential impacts on receivable recoverability and asset impairment estimates.
- Insurance and claims expense is exposed to claim frequency, severity, and reserve development, with significant self-insured retentions.
- A proposed California driver wage-and-hour class action and a related Private Attorneys General Act action remained pending. The company said it could not reasonably estimate potential losses and had recorded no related accruals.
- Fuel hedges had a $0.7 million fair value liability at March 31; the contracts were expected to be reclassified to fuel expense beginning April 2020. Management estimated a $1 per gallon diesel-price change would affect net income by $0.7 million, subject to fuel-surcharge recovery and hedging.
- Management stated that controls and procedures were effective as of March 31, 2020 and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether post-quarter customer activity, especially automotive production, recovered as management anticipated and how COVID-19 affected subsequent volumes and pricing.
- Actual progress and costs of the planned fleet reduction, terminal closures, and overhead actions, including any impairment or disposal losses.
- Insurance claims development and the financial impact of the April 2020 renewal terms.
- Liquidity, facility availability, covenant status, and debt and lease balances as operating cash flows and capital requirements evolve.
- The realized Dallas-area terminal sale proceeds and gain, and any other costs associated with the company’s asset and restructuring actions.
- Developments and possible exposure in the wage-and-hour litigation, for which the filing provides no estimable loss range.