Covenant Transportation Group, Inc. announced financial and operating results for the third quarter ended September 30, 2019, including a net loss of $3.2 million.
Highlights for the quarter included:
Total revenue of $222.9 million, a decrease of 8.4% compared with the third quarter of 2018. ?
Freight revenue of $199.8 million (excludes revenue from fuel surcharges), a decrease of 6.9 percent compared with the third quarter of 2018.
Operating loss of $1.9 million and an operating ratio of 100.9 percent. Adjusted operating loss(2) of $1.2 million and an adjusted operating ratio(2) of 100.6 percent. This compares with operating income of $16.2 million and an operating ratio of 93.3 percent and adjusted operating income(2) of $16.9 million and an adjusted operating ratio(2) of 92.1 percent in the third quarter of 2018.
Net loss of $3.2 million, or earnings (loss) per diluted share of ($0.17). This compares with net income of $11.6 million, or earnings per diluted share of $0.63 in the third quarter of 2018. Adjusted net loss(2) of $1.5 million, or adjusted earnings (loss) per diluted share(2) of ($0.08). This compares with adjusted net income(2) of $12.1 million, or adjusted earnings per diluted share(2) of $0.66 per diluted share in the third quarter of 2018.
Chairman and Chief Executive Officer, David R. Parker, commented: “The third quarter marked the first year-over-year period in which our July 2018 acquisition of Landair was included in both results. The freight environment was much weaker compared with the 2018 quarter, as excess industry-wide trucking capacity and weak shipping demand combined to pressure both freight rates and volumes.
"In addition, new and incumbent freight brokers placed additional pressure on the irregular route truckload market by competing for market share based on what we view as unsustainable pricing. In general, our dedicated Truckload and Managed Freight operations (approximately 59% of our consolidated freight revenue, a significant portion of which is attributable to the Landair acquisition) were profitable and exhibited moderate year- over-year market volatility.
"Our irregular route expedited and refrigerated truckload operations exhibited significant volatility and swung to being unprofitable for the quarter, with the largest factors being lower rate per mile and combined insurance and capital cost increases versus the prior year quarter. “In terms of sequential progression, we believe the freight environment touched a low point during the third quarter and remains muted but not worsening.
"Our average freight revenue per tractor per week, which excludes revenue from fuel surcharges, was approximately the same in the second and third quarters of 2019. However, previously announced cost items, primarily in health, workers’ compensation, and casualty insurance accruals, and incentive compensation, negatively impacted our financial results on a sequential basis. We expect sequential improvement in financial results for the fourth quarter. Based on falling new truck orders, reports of competitors exiting the industry, and a rapidly building inventory of used trucks on dealers’ lots, we believe the path toward supply and demand equilibrium has begun, assuming economic factors remain constant.
“For the quarter, total revenue in our truckload operations decreased to $175.0 million, a decrease of $22.1 million compared with the third quarter of 2018. This decrease consisted of $16.4 million lower freight revenue and $5.7 million lower fuel surcharge revenue. The $16.4 million decrease in freight revenue primarily related to 9.5% decrease in average freight revenue per truck.
“Average freight revenue per tractor per week decreased to $3,766 during the 2019 quarter from $4,159 during the 2018 quarter. Average freight revenue per total mile decreased by 10.9 cents per mile, or 5.5 percent, compared to the 2018 quarter and average miles per tractor decreased by 4.2 percent. The main factors impacting the decreased utilization was an approximate 160 basis point decrease in the percentage of our total fleet comprised of team-driven trucks and a lower freight demand in relation to industry-wide trucking capacity. Team-driven trucks decreased to an average of 829 teams (or 27 percent of the total fleet) in the third quarter of 2019 versus an average of 880 teams (or 28.6 percent of the total fleet) in the third quarter of 2018.
“Salaries, wages and related expenses were relatively consistent year-over-year on a cost per total mile basis. However, driver wages, workers compensation insurance and group health insurance increases were mostly offset by reduced non-driver wages related to lower variable incentive compensation in the current year quarter. On a sequential basis from the second quarter of 2019 to the third quarter of 2019, salaries, wages and related expenses increased 9.9 cents per total mile due primarily to the following items; a) a 4.5 cent per total mile increase in non-driver wages related to the second quarter of 2019 reversal of previously accrued variable incentive compensation expense as reduced earnings had made certain restricted stock and cash incentive programs not probable to be attained, b) a 2.7 cent per total mile increase in workers compensation expense due to increased claims accruals associated with the estimated cost of accidents during the quarter and, c) a 2.6 cent per mile increase in group health insurance costs.
“Net fuel expense increased by 1.7 cents per total mile in the 2019 quarter, primarily as a result of the lack of the favorable fuel hedging activity we experienced in the 2018 quarter totaling $0.6 million of fuel hedge gains. We have not had any fuel hedges in place since December 2018. “Capital costs (combined depreciation and amortization, leased revenue equipment expense, building rent and interest expense) increased by approximately $2.2 million versus the third quarter of 2018. The main factors were a $1.8 million year-over-year increase in combined depreciation and leased revenue equipment expense, primarily as a result of excessive tractors and trailers that were pulled out of operations but were not yet prepared for sale, and a $0.4 million increase in year-over-year interest expense due to an increase in our total indebtedness, net of cash. These factors related primarily to a large portion of our annual tractor capital deliveries occurring in the third quarter and difficulty processing all of the disposals.
“Insurance and claims expense increased to 16.7 cents per total mile in the third quarter of 2019 versus 14.5 cents per total mile in the third quarter of 2018 due to an increase in frequency of incidents and inflation in overall expected cost per claim.
“For the quarter, Managed Freight’s freight revenue increased 3.4 percent, to $47.8 million from $46.3 million in the same quarter of 2018. Operating income was $3.7 million for an operating ratio of 92.3 percent, compared with operating income of $4.2 million and an operating ratio of 90.9 percent in the third quarter of 2018. In addition, our 49% equity investment in Transport Enterprise Leasing contributed $2.1 million of pre-tax income in the quarter compared with $2.1 million in the third quarter of 2018.”
Richard B. Cribbs, executive vice president and chief financial officer, added the following comments: “At September 30, 2019, our total indebtedness, net of cash, was approximately $328.8 million, and our stockholders’ equity was $348.4 million, for a ratio of net indebtedness to capitalization of 48.5 percent compared to a 42.6 percent ratio as of December 31, 2018. In addition, our leverage ratio (defined as: net indebtedness divided by trailing four quarters’ earnings before interest, taxes, depreciation, amortization, and rental expense) has increased to 2.3x from 1.5x for the period ended December 31, 2018.
“Between December 31, 2018 and September 30, 2019, the company's total indebtedness, net of cash, increased by approximately $74.2 million when including the present value of operating leases that were not recorded on the balance sheet prior to the adoption of ASC Topic 842, Leases. The impact of the adoption of ASC Topic 842 on leverage ratio as used above was modest because rental expense associated with the right to use assets was included in the denominator of the calculation.
“Our net capital expenditures for the three months ended September 30, 2019, totaled $34.6 million compared to $1.6 million for the prior year period. In the first nine months of 2019, we took delivery of approximately 1,211 new company tractors and disposed of approximately 486 used tractors. Our current tractor fleet plan for full-year 2019 includes the delivery of approximately 1,340 new company tractors and the disposal of approximately 1,200 used tractors. Therefore, we expect to acquire only 129 new tractors, while disposing of 714 used tractors, during the fourth quarter of 2019. This should result in net proceeds from revenue equipment transactions to reduce our net indebtedness during the fourth quarter of 2019. By the end of 2019, the size of our tractor fleet is expected to be down four percent to five percent compared to the 3,154 tractors we operated as of December 31, 2018, depending on our ability to hire and retain professional drivers to seat our tractors.
“For the fourth quarter of 2019, we expect to remain an important provider in our customers’ peak season supply chains. However, given the current imbalance of capacity and demand, we expect pricing and volume levels to remain subdued compared with the last several holiday peak seasons. Our focus will be on identifying opportunities to improve the performance of our one-way truckload service offerings and adding more predictable long-term contracts in our dedicated truckload, transportation management and warehousing service offerings. Barring unforeseen circumstances, we expect our combined insurance and capital costs to decrease sequentially as compared to the third quarter of 2019 and anticipate our consolidated adjusted net income to improve sequentially to a profitable level in the fourth quarter of 2019.”