Covenant Transportation Group, Inc. announced Monday financial and operating results for the second quarter ended June 30, including a drop in revenue. Officials said it does not appear the company will reach a profit this year.
For the quarter, total revenue decreased 31%, to $144.1 million from $208.7 million in the same quarter of 2008. Freight revenue, which for these purposes excludes fuel surcharges, decreased 19.4%, to $129.2 million in the 2009 quarter from $160.5 million in the 2008 quarter.
The company measures freight revenue because management believes that fuel surcharges tend to be a volatile source of revenue and the removal of such surcharges affords a more consistent basis for comparing results of operations from period to period.
The company a reported net loss of $3.1 million, or ($0.22) per basic and diluted share, in the second quarter of 2009 compared to a net loss of $2.3 million, or ($0.17) per basic and diluted share, for the second quarter of 2008.
Chairman, President, and Chief Executive Officer, David R. Parker, said, “Our results for the quarter reflected continued weak freight demand, excess tractor and trailer capacity in the truckload industry, and significant rate pressure from customers. These factors led to an approximate 9.9% reduction in average freight revenue per tractor per week. This reduction in asset utilization was partially offset by lower fuel expense and continued cost-control efforts across all of our companies. For the quarter, our operating ratio (operating expenses, net of fuel surcharge revenue, as a percentage of freight revenue) deteriorated by only 30 basis points. Our team is managing the company in this environment by implementing efficiencies in every aspect of our business, making tough cost-cutting decisions, and prudently managing our tractor and trailer capital expenditures while maintaining a relatively young fleet.
“On the revenue side of our business, total revenue decreased $64.6 million, or 31.0%. Of this decrease, $33.4 million related to lower fuel surcharge revenue. The balance of $31.2 million related to lower freight revenue. In anticipation of lower freight volumes, we proactively reduced our average tractor fleet by approximately 388 trucks (11.2%) versus the second quarter of 2008. Despite the fleet reduction, we experienced an approximate 2.0% decrease in average miles per tractor compared with the second quarter of 2008, which was our highest 2008 quarter for average miles per tractor. Average freight revenue per total mile decreased approximately 8.1%, compared with the same quarter of 2008, and reflected a 2.3% sequential reduction in rates from the first quarter of 2009.
“On the expense side of our business, a favorable year-over-year comparison in net fuel cost contributed significantly to offsetting some of the negative effects of the revenue decline. Fuel expense, net of fuel surcharge revenue, declined $11.1 million compared with the second quarter of 2008, primarily as a result of lower diesel fuel prices, a reduction of 13.0 million company-truck miles, and multiple operational improvements that have improved our fuel efficiency and are expected to continue to provide benefits in the future. On a cost per company mile basis, net fuel expense was approximately 8.0 cents per mile less than the same quarter last year.
“Insurance and claims had a negative impact on our financial results. Insurance and claims expense was approximately 4 cents per mile worse at 9.6 cents per mile in the current quarter compared to the second quarter of 2008’s exceptional 5.6 cents per mile, which included the benefit of a policy release premium refund equal to approximately 0.4 cents per mile. The remaining negative impact was the result of additional severity of accidents in the current quarter compared to the second quarter of 2008. While we believe our high self-insured retention limits provide us with a cost-effective means of covering our insurance and claims costs, having this high deductible program can result in greater volatility of our insurance and claims expense on a quarter-to quarter basis.
“Salaries, wages, and benefits expense continues to be an area of cost containment. Our cost per mile decreased approximately 4.7 cents per mile reducing this line item to 41.4% of freight revenue in the 2009 quarter from 41.7% in the 2008 quarter. With freight revenue continuing its significant decline, we believe being able to reduce these expenses as a percentage of freight revenue is a significant accomplishment for the second quarter of 2009. Our entire company shared in the sacrifices to manage these expenses through a combination of pay reductions, staffing reductions, and benefits management.
“We were able to reduce our largest fixed cost – the capital cost of our revenue equipment and terminals by approximately $1.8 million quarter over quarter by reducing the size of the fleet. However, our lower average freight revenue per truck combined with higher equipment costs, lower salvage values, and higher interest rates, increased our costs of depreciation, lease expense, and interest expense as a percentage of freight revenue to 18.2% compared with 15.8% in the 2008 quarter."
Mr. Parker offered the following comments concerning Covenant Transport Solutions, the company’s brokerage subsidiary: “For the quarter, our freight brokerage division, Solutions’ total revenue decreased 14%, to $11.7 million from $13.5 million in the same quarter of 2008. Load volumes were up 11% over the same period in 2008, however the decreased fuel prices resulted in lower fuel surcharge revenue for this division. Solutions’ net revenue (total revenue less purchased transportation) for the quarter decreased 16% as purchased transportation was 82.2% of total revenue in the current quarter, up from 81.8% of total revenue in the prior year quarter. Solutions’ operating expenses as a percentage of net revenue decreased to 14.2% of net revenue in the second quarter from 16.5% of net revenue in the second quarter of 2008.
Richard B. Cribbs, senior vice president and chief financial officer, said, "We believe our overall capital position remains secure. At June 30, 2009, our total balance sheet debt, net of cash was $163.9 million and our stockholders’ equity was $110.4 million, for a total net debt to capitalization ratio of 59.7%. At June 30, 2009, our tangible book value was $96.5 million, or $6.86 per share. At June 30, 2009, the discounted value of future obligations under off-balance sheet lease obligations was approximately $85.7 million, including the residual value guarantees under those leases. Since the end of 2008, the company's balance sheet debt, net of cash has increased by only $2 million, while the present value of financing provided by operating leases has decreased by approximately $11.1 million.
“At June 30, 2009, we had $25.9 million of available borrowing capacity under our revolving credit facility and were in compliance with our financial covenant. In addition, we have financing available from the captive financial subsidiaries of our main tractor suppliers to fund all of our remaining expected tractor purchases in 2009.
“Based on our perception that sequential freight demand decreases have flattened, we have no current plans to further reduce our expected 2009 new tractor purchases. Our annual tractor fleet plan for 2009 now includes the purchase of approximately 950 tractors and disposal of approximately 1,250 tractors, for expected full-year net capital expenditures of approximately $50 million to $60 million. In this depressed freight economy, we are continuously evaluating our tractor replacement cycle and new tractor purchase requirements. With an average fleet age of only 25 months, we have significant flexibility to manage our fleet. We have the ability to cancel tractor orders within specified notice periods, although any cancellations would affect the availability of trade slots to dispose of used tractors, which could affect expected proceeds of disposition.”
Mr. Parker addressed the Company’s outlook for the rest of the year: “Our goal of profitability for the year has not changed. However, because of the magnitude of year-over-year reductions in freight rates and our results for the first six months of 2009, we acknowledge the reduced probability of achieving our goal, but continue our expectation of recording a profit for the final six months of 2009. Based on our second quarter results, to attain profitability for the second half of 2009 will require us to implement additional identified cost savings, avoid multiple large casualty claims, maintain net fuel costs at current levels, hold rates steady, and slightly improve utilization of our remaining fleet of trucks for the rest of the fiscal year. To achieve profitability for the entire fiscal year would require success on the cost items, no large casualty claims, plus a near-term change in the freight environment that allows moderately higher freight rates and miles per truck.”
Covenant Transportation Group, Inc. is the holding company for several transportation providers that offer premium transportation services for customers throughout the United States. The consolidated group includes operations from Covenant Transport and Covenant Transport Solutions of Chattanooga; Southern Refrigerated Transport of Texarkana, Arkansas; and Star Transportation of Nashville, Tennessee. The company's Class A common stock is traded on the Nasdaq Global Select under the symbol, “CVTI”.