Covenant Transportation Group, Inc. (Nasdaq:CVTI) announced today financial and operating results for the second quarter ended June 30, 2013, including a small rise in revenue, but a drop in net income.
Highlights for the quarter included the following:
- Total revenue of $172.5 million, an increase of 0.7% compared with the second quarter of 2012;
- Freight revenue of $136.9 million (excludes revenue from fuel surcharges), an increase of 2.0% compared with the second quarter of 2012;
- Operating income of $6.4 million and an operating ratio of 95.4%, compared with operating income of $11.1 million and an operating ratio of 91.8% in the second quarter of 2012 ($7.6 million and an operating ratio of 94.4% prior to a net $3.5 million insurance policy refund in the 2012 quarter (1)); and
- Net income of $1.9 million, or $0.13 per share, compared with net income of $4.3 million, or $0.29 per share in the second quarter of 2012.
Officials said, "In the second quarter of 2012, insurance and claims expense included a refund of $4 million pretax of previously expensed premium from our commutation of our primary auto liability insurance policy for the policy year ended March 31, 2012, partially offset by an approximately $0.5 million pretax increase in claims reserves adjustments to account for the claims previously covered by the policy becoming our responsibility when the policy was commuted. In the second quarter of 2013, we determined that we would not commute the policy year ended March 31, 2013 of our primary auto liability policy."
Chairman, President, and Chief Executive Officer David R. Parker, said, "Operating results were comparable to last year's second quarter, excluding the net $3.5 million gain (or $0.15 per diluted share) relating to a refund of insurance premiums in the 2012 quarter. Our recent re-allocation of assets to our team and refrigerated operations, reducing exposure to solo dry van operations, along with further improving on our drivers' employment experience resulted in improved asset productivity. These factors contributed to a 3.6% increase in average freight revenue per tractor compared with the second quarter of 2012. Our asset-based operating ratio was 95.3% compared with 93.9%, excluding the $3.5 million net favorable impact from the insurance policy release.
For the quarter, total revenue in our asset-based operations decreased to $161.9 million, a decrease of $1.9 million compared with the second quarter of 2012. This decrease consisted of lower freight revenue of $0.4 million and lower fuel surcharge revenue of $1.5 million. The $0.4 million decrease in freight revenue related to a 4.7% decrease in our average tractor fleet, partially offset by a 3.6% increase in average freight revenue per tractor per week.
"Average freight revenue per tractor per week increased to $3,456 during the 2013 quarter from $3,335 during the 2012 quarter. Average freight revenue per total mile increased by 1.5 cents per mile (or 1.0%) compared to the 2012 quarter and average miles per unit increased by 2.6%. The main factors impacting the improved utilization were a 140 basis point increase in the percentage of our fleet comprised of team-driven tractors and improved seated truck percentage. On average, approximately 4.3% of our fleet lacked drivers during the 2013 quarter, compared with approximately 6.1% during the 2012 quarter.
"We experienced cost pressure in several areas. Salaries, wages and related expenses increased approximately 2.7 cents per mile due to employee pay adjustments since the second quarter of 2012 and higher workers' compensation expense. These increases more than offset a decrease in the percentage of our miles generated by driver employees due to an increase in owner-operators.
"Owner-operator expense (reflected as purchased transportation) increased approximately 1.3 cents per mile compared with the 2012 quarter. This reflects an increase in compensation and fuel surcharge reimbursement levels, as well as an increase in owner-operator miles as a percentage of our total miles to 9.4% in the 2013 quarter from 8.7% in the 2012 quarter. We are continuing our objective of growing our owner-operator fleet as a percentage of our total fleet. Increasing owner-operator capacity has shifted (and assuming all other factors remain equal is expected to continue to shift) expenses to the purchased transportation line item with offsetting reductions in employee driver wages and related expenses, net fuel, maintenance, and capital costs.
"The increase in owner-operator miles as a percentage of total miles, together with the accounting for owner-operator settlements and fuel surcharges, affect our purchased transportation and net fuel expense. We generally compensate owner-operators on a per mile basis that includes a base rate plus additional amounts associated with activities and fuel surcharges. The total amount paid to our owner-operators is recorded in purchased transportation. We do not net the fuel surcharges we collect from customers against purchased transportation (even though a similar amount is passed through to owner-operators); instead these amounts are netted against fuel expense and reduce that line item when we calculate net fuel costs. Fuel surcharge recovery from miles operated by owner-operators was approximately $3.3 million in the 2013 quarter compared with approximately $3.1 million in the 2012 quarter. Overall net fuel expense was approximately 14.2 cents per company mile in the 2013 quarter compared with 14.0 cents per company mile in the 2012 quarter due to increased usage of fuel for refrigeration units associated with the growth of our refrigerated service offerings, lack of last year's favorable lag impact on fuel surcharge recovery as fuel prices decreased steeply over the course of the 2012 quarter, partially offset by improved fuel economy. 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 rising 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.
"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.
"Capital costs (combined depreciation and amortization, revenue equipment rentals and interest expense) decreased by approximately $1.0 million. The change was primarily attributable to greater use of owner-operators, offset partially by a $1.2 million increase to revenue equipment rentals in the 2013 quarter. Gains on sale included $0.2 million from revenue equipment in the 2013 quarter compared with $0.9 million from revenue equipment in the 2012 quarter. Gains on sale are reflected as a reduction of depreciation and amortization in our income statement.
"Insurance and claims per mile cost was 8.9 cents per mile in the second quarter of 2013 versus 7.0 cents per mile in the second quarter of 2012. Insurance and claims per mile cost would have been 11.0 cents per mile in the second quarter of 2012 excluding the $3.5 million net favorable impact from our policy release in the 2012 quarter. Our Department of Transportation ("DOT") accident rate or the second quarter of 2013 was the lowest for any quarter on record dating back to 2001."
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 41.3%, to $10.6 million from $7.5 million in the same quarter of 2012. Operating income was approximately $475,000 for an operating ratio of 95.5%, compared with an operating loss of $152,000 and an operating ratio of 102.0% in the second quarter of 2012. Solutions' gross margins expanded, as purchased transportation was 76.1% of total revenue in the current quarter, compared with 80.5% of total revenue in the prior year quarter. Solutions' other operating expenses as a percentage of revenue decreased to 19.4% of total revenue in the second quarter of 2013 from 21.6% of total revenue in the second quarter of 2012. In addition, our 49% equity investment in Transport Enterprise Leasing ("TEL") contributed approximately $0.6 million of pre-tax income in the second quarter."
Richard B. Cribbs, senior vice president and chief financial officer, said, "At June 30, 2013, our total balance sheet debt and capital lease obligations, net of cash, were $173.2 million, our stockholders' equity was $93.2 million, and our tangible book value was $92.8 million, or $6.25 per basic share. At June 30, 2013, our ratio of net debt to total balance sheet capitalization was 65.0%. Also at June 30, 2013, the discounted value of future obligations under off-balance sheet operating lease obligations was approximately $82.2 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 $5.1 million, while the present value of financing provided by operating leases increased by approximately $7.9 million. At June 30, 2013, we had approximately $40.8 million of borrowing availability under our revolving line of credit.
"Our current tractor fleet plan for 2013 includes the disposal of approximately 1,150 used tractors and, the delivery of approximately 1,050 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 2%-3% below the 2012 year. With a relatively young average company tractor fleet age of 2.1 years at June 30, 2013, 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."