Covenant Transportation Group, Inc. announced Thursday the appointment of industry veteran, Herbert J. Schmidt to its Board of Directors. The company also announced financial and operating results for the third quarter ended Sept. 30.
Mr. Schmidt, 57, served as the executive vice president of Con-way Inc. and president of Con-way Truckload from 2007-2012. Prior to the merger of Contract Freighters, Inc. with Con-way Inc. in 2007, Mr. Schmidt held positions at CFI as president and CEO from 2005-2007 and president from 2000-2005. Prior to his becoming president and CEO in 2005, he was employed in a series of progressively more responsible positions at CFI where he gained knowledge in risk management, as well as leading the sales and operations functions as senior vice president of Operations. Mr. Schmidt also serves as a member of the Board of Directors of Empire District Electric Company.
Highlights for the quarter included the following:
Total revenue of $170.8 million, an increase of 1.4 percent compared with the third quarter of 2012;
Freight revenue of $135.2 million (excludes revenue from fuel surcharges), an increase of 1.7 percent compared with the third quarter of 2012;
Operating income of $5.9 million and an operating ratio of 95.6 percent compared with operating income of $4.6 million and an operating ratio of 96.5 percent in the third quarter of 2012; and
Net income of $2.0 million, or $0.13 per share, compared with net income of $1.0 million, or $0.07 per share in the third quarter of 2012.
Management Discussion—Asset-Based Operations
Chairman, President, and Chief Executive Officer, David R. Parker, made the following comments: "Operating results were favorable as our asset-based operating ratio improved to 95.6 percent compared with 96.1 percent in last year's third quarter.
"For the quarter, total revenue in our asset-based operations decreased to $160.1 million, a decrease of $1.5 million compared with the third quarter of 2012. This decrease consisted of lower freight revenue of $1.7 million, partially offset by higher fuel surcharge revenue of $0.2 million. The $1.7 million decrease in freight revenue related to a 1.7 percent decrease in our average tractor fleet and a 0.6 percent decrease in average freight revenue per tractor per week, partially offset by an increase of freight revenue contributed from our refrigerated intermodal service offering.
"Average freight revenue per tractor per week decreased to $3,387 during the 2013 quarter from $3,408 during the 2012 quarter. Average freight revenue per total mile increased by 1.1 cents per mile (or 0.8 percent) compared to the 2012 quarter, but average miles per unit decreased by 1.3 percent. The main factors impacting the lower utilization were a higher unseated truck percentage and new hours of service regulations. On average, approximately 5.7 percent of our fleet lacked drivers during the 2013 quarter, compared with approximately 3.5 percent during the 2012 quarter.
"We experienced cost pressure in several areas. Salaries, wages and related expenses increased approximately 1.4 cents per mile due to employee pay adjustments since the third quarter of 2012 and higher workers' compensation expense.
"Operations and maintenance expenses increased approximately 1.6 cents per mile due primarily to higher driver recruiting expenses and additional repair expense for replacing DEF particulate filters on our earlier group of owned tractors.
"Higher costs were partially offset by an overall reduction in fuel and insurance costs. Net fuel expense was approximately 14.6 cents per company mile in the 2013 quarter compared with 17.0 cents per company mile in the 2012 quarter due primarily to improved fuel economy and more stable fuel prices in the 2013 quarter (which avoided last year's unfavorable lag impact on fuel surcharge recovery when fuel prices increased steeply over the course of the 2012 quarter). These improvements were partially offset by increased usage of fuel for refrigeration units associated with the growth of our refrigerated service offerings. We expect to continue investing in more fuel-efficient tractors, and partnering with customers to adjust fuel surcharge programs which are inadequate to recover a fair portion of fuel costs. In addition, we expect to continue using fuel price hedges periodically to mitigate the potential volatility in fuel prices relating to the portion of our fuel usage that is not covered by fuel surcharges, which may result in positive or negative results in any given quarter.
"Insurance and claims per mile cost was 8.3 cents per mile in the third quarter of 2013 versus 9.7 cents per mile in the third quarter of 2012. Improved safety performance, measured by accidents per million miles, and good claims experience, contributed to the cost savings in this area."
Management Discussion—Non-Asset Based Brokerage and Other Operations
Mr. Parker offered the following comments concerning Covenant Transport Solutions, Inc., the company's non-asset based subsidiary: "For the quarter, Solutions' total revenue increased 57.8 percent, to $10.7 million from $6.8 million in the same quarter of 2012. Operating income was approximately $366,000 for an operating ratio of 96.6 percent, compared with an operating loss of $221,000 and an operating ratio of 103.2 percent in the third quarter of 2012. Solutions' gross margins expanded, as purchased transportation was 74.9 percent of total revenue in the current quarter, compared with 80.6 percent of total revenue in the prior year quarter. Solutions' other operating expenses as a percentage of revenue decreased to 21.7 percent of total revenue in the third quarter of 2013 from 22.7 percent of total revenue in the third quarter of 2012. In addition, our 49 percent equity investment in Transport Enterprise Leasing contributed approximately $1.2 million of pre-tax income in the third quarter."
Cash Flow and Liquidity
Richard B. Cribbs, the company's senior vice president and chief financial officer, added the following comments: "At Sept. 30, our total balance sheet debt and capital lease obligations, net of cash, were $186.6 million, our stockholders' equity was $96.0 million, and our tangible book value was $95.6 million, or $6.43 per basic share. At Sept. 30, our ratio of net debt to total balance sheet capitalization was 66.0 percent. Also at Sept. 30, the discounted value of future obligations under off-balance sheet operating lease obligations was approximately $81.6 million, including the residual value guarantees under those leases, and we believe the value of the leased equipment was approximately equal to the present value of such lease obligations. Since the end of 2012, the company's balance sheet debt and capital lease obligations, net of cash, has increased by $18.5 million, while the present value of financing provided by operating leases increased by approximately $7.3 million. At Sept. 30, we had approximately $40.0 million of borrowing availability under our revolving line of credit.
"Our current tractor fleet plan for 2013 includes the disposal of approximately 1,100 used tractors and, the delivery of approximately 1,000 new company tractors. As the pace at which we have been able to on-board additional owner-operators has slowed, we now expect the average fleet size for the 2013 year to be approximately 3 percent-4 percent below the 2012 year. With a relatively young average company tractor fleet age of 2.1 years at Sept. 30, we believe there is significant flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle and new tractor purchase requirements. In addition, we believe we have sufficient financing available from the captive finance subsidiaries of our main tractor suppliers, our revolving credit facility, and other sources to fund our expected revenue equipment purchases in 2013."