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Covenant Transportation Group Announces First Quarter Financial and Operating Results

Covenant Transportation Group, Inc. CVTI, -8.21% announced today financial and operating results for the first quarter ended March 31, 2016.

Highlights for the quarter included the following:

  • Total revenue of $156.3 million, a decrease of 6.5% compared with the first quarter of 2015.
  • Freight revenue of $144.7 million (excludes revenue from fuel surcharges), an increase of 0.9% compared with the first quarter of 2015.
  • Operating income of $7.4 million and an operating ratio of 94.9%, compared with operating income of $10.0 million and an operating ratio of 93.0% in the first quarter of 2015. Operating ratio is defined as: total operating expenses minus fuel surcharge revenue, divided by freight revenue.
  • Net income of $3.8 million, or $0.21 per diluted share, compared with net income of $10.2 million, or $0.56 per diluted share in the first quarter of 2015.
  • Net income and earnings per share for the first quarter of 2015 included a federal income tax credit of approximately $4.7 million, or $0.26 per diluted share.

Chairman, and Chief Executive Officer, David R. Parker, made the following comments: "Our team did a solid job executing in a difficult freight environment during the first quarter. We continued to provide excellent customer service, picking up awards from several large customers during the quarter. In addition, our safety record was the best for a first quarter in at least 15 years. Continuing to provide safe, high-quality service allowed us to land several new pieces of business that are expected to contribute during the second half of 2016 after ramping up during the second quarter. Late in fiscal 2015, we chose enterprise-wide cost-controls as CTG's 2016 annual "Wildly Important Goal" as part of our ongoing Four Disciplines of Execution agenda in which each department has been competing and is held accountable to amass and implement cost saving ideas to lower our cost per mile. Not only has this effort reduced our costs, it is expected to further reduce our controllable costs throughout the year, and it has energized our people around this core value.

"From a profitability perspective, operating income declined by approximately $2.6 million compared with the record first quarter of 2015. The main factors contributing to the decline were a $1.9 million increase in losses on fuel hedging contracts and an approximately $1.7 million negative impact on depreciation expense due to accelerating the depreciation on tractors scheduled for sale and lower gain on sale of tractors sold during the quarter. Otherwise, our asset-based truckload productivity was essentially flat on higher rates and lower utilization, we generated strong performance from our Solutions non-asset based brokerage business, and cost savings in certain areas offset increases in other areas. In addition, we paid down approximately $61.2 million of debt and capital lease obligations to end the quarter with a net debt to total capitalization ratio of 47.1%. Looking ahead, we remain cautious as the second quarter freight environment has started slowly. While we are hopeful that inventory levels are corrected sooner rather than later, it may be several additional quarters until freight demand increases and trucking capacity subsides to a point where supply and demand are more favorably balanced."

Management Discussion--Asset-Based Truckload Operations
Mr. Parker continued: "For the quarter, total revenue in our asset--based operations decreased to $142.8 million, a decrease of $14.5 million compared with the first quarter of 2015. This decrease consisted of a $2.3 million reduction of freight revenue, along with lower fuel surcharge revenue of $12.2 million. The $2.3 million decrease in freight revenue related to a 79 truck (or 2.9%) decrease in our average tractor fleet, partially offset by a 0.5% increase in average freight revenue per tractor and a $0.9 million increase of freight revenue contributed from our refrigerated intermodal service offering. Team-driven trucks increased to an average of 979 teams in the first quarter of 2016, an increase of approximately 5.5% over the average of 928 teams in the first quarter of 2015.

"Average freight revenue per tractor per week decreased to $3,721 during the 2016 quarter from $3,743 during the 2015 quarter. Average freight revenue per loaded mile increased by 5.1 cents per mile (or 2.9%) compared to the 2015 quarter. This increase was partially offset by a 120 basis point increase in empty miles percentage (miles for which we do not receive freight revenue or fuel surcharge revenue). In addition, average miles per tractor decreased by 1.0%. The main factor impacting the decreased utilization was a weaker overall freight environment, partially offset by a 300 basis point increase in the percentage of our fleet comprised of team-driven trucks, and a higher seated truck percentage. On average, approximately 4.2% of our fleet lacked drivers during the 2016 quarter compared with approximately 4.9% during the 2015 quarter.

"Salaries, wages and related expenses increased approximately 2.0 cents per mile due to a higher percentage of our fleet comprised of team-driven tractors, and employee pay adjustments since the first quarter of 2015.

"Net fuel expense increased by approximately 5.7 cents per total mile to 15.4 cents per mile in the 2016 quarter. Losses from fuel hedging transactions were $5.0 million in the 2016 quarter compared with losses of $3.1 million in the 2015 quarter. In addition, our fuel surcharge recovery was less effective during the 2016 quarter. These headwind items were partially offset by improved fuel pricing and improved fuel economy of our tractors. Ultra low sulfur diesel prices as measured by the Department of Energy averaged approximately $0.84/gallon lower in the first quarter of 2016 compared with the 2015 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.

"Capital costs (combined depreciation and amortization, revenue equipment rentals, building rent, and interest expense) increased by approximately $1.5 million. The main factor was the decline in the market for used tractors, which caused us to record an approximate $1.3 million acceleration of the depreciation of tractors scheduled for sale in 2016 and recognize a $0.4 million reduction in gain on sale of revenue equipment compared with gain on sale during the 2015 quarter. In addition, depreciation expense increased to reflect higher prices for new tractors as we continued to replace older tractors with new, more fuel efficient equipment that also...


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