Covenant Transportation Group, Inc. (Nasdaq:CVTI) announced today financial and operating results for the second quarter ended June 30, including a rise in revenue and operating income.
Highlights for the quarter included the following:
- Total revenue of $173.7 million, an increase of 0.7% compared with the second quarter of 2013;
- Freight revenue of $137.7 million (excludes revenue from fuel surcharges), an increase of 1.2% compared with the second quarter of 2013;
- Operating income of $9.1 million and an operating ratio of 93.4%, compared with operating income of $6.4 million and an operating ratio of 95.4% in the second quarter of 2013; and
- Net income of $3.8 million, or $0.25 per share, compared with net income of $1.9 million, or $0.13 per share in the second quarter of 2013.
Chairman, President, and Chief Executive Officer David R. Parker said, "Operating results for our asset-based operations improved meaningfully as our operating ratio was 93.2% compared with 95.3% in last year's second quarter. The quarter was characterized by robust freight volumes, customers seeking a high level of service, an ability to improve yields through lane engineering and higher rates, and strong competition for an increasingly short supply of qualified professional drivers.
"For the quarter, total revenue in our asset-based operations decreased to $160.3 million, a decrease of $1.5 million compared with the second quarter of 2013. This decrease consisted of lower freight revenue of $1.0 million, along with lower fuel surcharge revenue of $0.5 million. The $1.0 million decrease in freight revenue related to a 7.8% decrease in our average tractor fleet, partially offset by a 6.8% increase in average freight revenue per tractor per week and a $0.9 million increase of freight revenue contributed from our refrigerated intermodal service offering. During this quarter, we experienced stabilization of our average tractor fleet with 2,569 trucks in April, 2,561 trucks in May and 2,570 trucks in June.
"Average freight revenue per tractor per week increased to $3,664 during the 2014 quarter from $3,431 during the 2013 quarter. Average freight revenue per total mile increased by 7.6 cents per mile (or 5.2%) compared to the 2013 quarter on an approximately 8.5% increase in average length of haul. Average miles per unit increased by 1.5%. The main factors impacting the improved utilization were a 220 basis point increase in the percentage of our fleet comprised of team-driven tractors and a tighter overall freight network, partially offset by the more stringent hours of service regulations imposed in July 2013 and a slightly lower seated truck percentage. On average, approximately 4.7% of our fleet lacked drivers during the 2014 quarter compared with approximately 4.3% during the 2013 quarter.
"Operating costs continue to be pressured in several areas. Salaries, wages and related expenses increased approximately 5.3 cents per mile due to employee pay adjustments since the second quarter of 2013 and higher workers compensation expense.
"Capital costs (combined depreciation and amortization, revenue equipment rentals and interest expense) increased by approximately $1.6 million. The main factors were higher depreciation expense for more expensive tractors as we continued to invest in new, more fuel efficient equipment that also offers dependability, lower operating costs, improved safety technology, and improved driver satisfaction. These increased capital costs were partially offset by an approximately $0.8 million increase in gains on sale of revenue equipment.
"Net fuel expense improved meaningfully as a result of our capital investments, efficiency initiatives, improved fuel pricing, and favorable adjustments to fuel surcharge programs from customers. Net fuel expense was approximately 8.1 cents per company mile in the 2014 quarter compared with 13.0 cents per company mile in the 2013 quarter. Of the approximately 4.9 cents per mile improvement, approximately 2.0 cents per mile related to a combination of an approximately $0.9 million fuel tax credit related to amended fuel tax returns for the fiscal years of 2010 through 2013 and approximately $0.3 million in gains from fuel hedging transactions compared with losses of $0.3 million in the 2013 quarter. 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 favorable or unfavorable results in any given quarter."
Mr. Parker offered the following comments concerning Covenant Transport Solutions, Inc. (Solutions), the company's non-asset based subsidiary: "For the quarter, Solutions' total revenue increased 25.6%, to $13.3 million from $10.6 million in the same quarter of 2013. Operating income was approximately $565,000 for an operating ratio of 95.8%, compared with operating income of approximately $475,000 and an operating ratio of 95.5% in the second quarter of 2013. Solutions' gross margins expanded, offset by other operating expenses increasing as a percentage of revenue. In June of 2014, we discontinued an underperforming location which is expected to reduce revenue by $2-$3 million per quarter reducing Solutions' ability to cover its fixed overhead costs that could pressure margins in the near term. In addition, our 49% equity investment in Transport Enterprise Leasing ("TEL") contributed approximately $0.9 million of pre-tax income in the quarter compared with $0.6 million in the second quarter of 2013."
Richard B. Cribbs, the company's senior vice president and chief financial officer, added, "At June 30, 2014, our total balance sheet debt and capital lease obligations, net of cash, were $212.2 million, our stockholders' equity was $103.0 million, and our tangible book value was $102.8 million, or $6.88 per basic share. At June 30, 2014, our ratio of net debt to total balance sheet capitalization was 67.3%. At June 30, 2014, the discounted value of future obligations under off-balance sheet operating lease obligations was approximately $71.4 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 2013, the company's balance sheet debt and capital lease obligations, net of cash, has decreased by $14.1 million, while the present value of financing provided by operating leases decreased by approximately $7.5 million. At June 30, 2014, we had approximately $35.7 million of borrowing availability under our revolving line of credit.
"In the first half of 2014, we took delivery of approximately 380 new company tractors and disposed of approximately 750 used tractors. Our current tractor fleet plan for fiscal 2014 includes the delivery of approximately 800 new company tractors and the disposal of approximately 1,250 used tractors as we reduce the number of out-of-service tractors from our fleet from the beginning of the year. We now expect the average fleet size for the 2014 year to be approximately 4%-6% below that of fiscal 2013. With a relatively young average company tractor fleet age of 1.8 years at June 30, 2014, 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. 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 2014."