Covenant Transportation swings to Q4 earnings of US$0.7M versus year-ago loss of US$2.7M as revenue increased 3.9% to US$163.9M, with freight revenue up 0.6% to US$136.6M
January 26, 2011
Covenant Transportation Group, Inc. (Nasdaq:CVTI - News) announced today financial and operating results for the fourth quarter and year ended December 31, 2010. Highlights for the fourth quarter included the following:
* Freight revenue of $136.6 million, an increase of 0.6% compared with the fourth quarter of 2009;
* Operating income of $6.0 million and an operating ratio of 95.6%, compared with an operating loss of $0.8 million and an operating ratio of 100.6% in the fourth quarter of 2009;
* Net income of $0.7 million, or $0.05 per share, compared with a net loss of $2.7 million, or ($0.19) per share in the fourth quarter of 2009.
Financial and Operating Results
Chairman, President, and Chief Executive Officer, David R. Parker, made the following comments: "I am pleased to report a profitable fourth quarter and full year for 2010. This performance marks the mid-point of a dramatic turnaround in Covenant's performance over the past several years. I use the word midpoint to emphasize that much work remains to be done to achieve acceptable margins and returns on our investment. Nevertheless, I would like to thank our customers, our drivers, the rest of our personnel, and the suppliers who have assisted and encouraged our efforts. We intend to continue our intense focus on profitability to ensure that Covenant remains strong for all stakeholders.
"For the fourth quarter of 2010, total revenue increased 3.9%, to $163.9 million from $157.8 million in the same quarter of 2009. Freight revenue, which for these purposes excludes fuel surcharges, increased 0.6%, to $136.6 million in the 2010 quarter from $135.8 million in the 2009 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 reported net income of $0.7 million, or $0.05 per share, in the fourth quarter of 2010 compared to a net loss of $2.7 million, or ($0.19) per share, for the fourth quarter of 2009.
"For the year ended December 31, 2010, total revenue increased 10.4%, to $649.7 million from $588.7 million for 2009. Freight revenue increased 5.0%, to $546.3 million in 2010 from $520.5 million in 2009. The Company reported net income of $3.3 million, or $0.23 per share, for 2010 compared to a net loss, including impairment charges, of $25.0 million, or ($1.77) per share in 2009. On a non-GAAP basis, without impairment charges, the Company's net loss would have been $13.5 million, or ($0.96) per basic and diluted share for 2009. Reflecting on the year, we must recognize our team's diligence in improving our operating and financial results by $1.19 per share, excluding the impairment charge in 2009. We continue to make decisions and take steps to position the Company for the long-term results that we desire and our stakeholders expect."
Management Discussion—Asset Based Operations
Mr. Parker continued, "For the quarter, total revenue in our assetbased operations increased $9.6 million, or 6.6%, compared with the fourth quarter of 2009. Of this increase, $5.3 million related to higher fuel surcharge revenue. The remaining $4.3 million related to a 3.0% increase in average freight revenue per tractor per week and a minor 14 truck (or 0.5%) increase in our average tractor fleet. Average freight revenue per tractor per week improved to $3,113 during the 2010 quarter from $3,023 during the 2009 quarter due to an improved rate environment, partially offset by an approximately 2.1% decrease in miles per tractor. Our average freight revenue per total mile increased 6.6 cents per mile (or 5.2%) compared with the fourth quarter of 2009, which was especially favorable given a 6.3% increase in our average length of haul from 846 miles to 899 miles. Sequentially, our average freight revenue per total mile increased 1.1 cents per mile (or 0.8%) compared with the third quarter of 2010. We were able to reduce our non-revenue miles by more than 30 basis points as compared to the fourth quarter of 2009 as we further tightened acceptable lanes within our freight network during the quarter.
"Our focus on cost control and efficiency continued to provide positive results in certain controllable cost items. Our asset-based operating ratio (operating expenses, net of fuel surcharge revenue, as a percentage of freight revenue) improved approximately 530 basis points to 95.7%.
"Fixed costs decreased for the quarter. During the quarter, our capital costs (combined depreciation and amortization, revenue equipment rentals and interest expense) decreased by more than $3.4 million. This was assisted by a reduction of our leased trailers from our fleet related to operational efficiency, improved terms on a large portion of our remaining dry van trailers under a revised lease agreement, as well as an improving market for used tractors in fourth quarter of 2010 that contributed $1.3 million of gain on disposition of property and equipment. In addition, we obtained a full quarter benefit from reductions in the interest rate grids on our revolving credit facility effective August 1, 2010. We continued to effectively manage overhead costs related to several reduced general expense items.
"We experienced higher salaries, wages and related expenses compared to the third quarter of 2010 on a cost per mile basis. Driver wages increased as various incentive pay items were improved. Non-driver pay increased as a result of corporate bonus accruals earned based on achievement of bonus targets. Health insurance costs increased as a result of increased claims expense.
"Fuel prices as measured by the Department of Energy averaged approximately $0.41/gallon (or 15%) higher in the fourth quarter of 2010 compared with the 2009 quarter and approximately $0.21/gallon (or 7%) sequentially higher than the third quarter of 2010. The fuel cost savings initiatives implemented throughout 2010 balanced the higher prices at the pump so that our per mile cost of fuel, net of fuel surcharge revenue, was approximately even with the fourth quarter of 2009. However, the higher prices and the negative effect that escalating fuel prices has on fuel surcharge recovery from customers resulted in a sequential 1.0 cent per company mile increase in our per mile cost of fuel, net of fuel surcharge revenue compared with the third quarter of 2010.
"Insurance and claims per mile cost increased to 10.2 cents per mile in the fourth quarter of 2010 from 9.3 cents per mile in the fourth quarter of 2009. The increase primarily related to an increase in physical damage expense related to accelerating the disposal or trade-in of tractors and leased trailers during the quarter. These repairs are minor in nature but are required to obtain full value upon disposal or trade-in."
Management Discussion—Non-Asset Based Brokerage Operations
Mr. Parker offered the following comments concerning Covenant Transport Solutions, Inc. ("Solutions"), the Company's freight brokerage subsidiary: "Our brokerage subsidiary improved its profitability over the 2009 quarter. For the quarter, Solutions' total revenue decreased 27.5%, to $9.1 million from $12.6 million in the same quarter of 2009. This decrease in revenue related primarily to a decision to eliminate unprofitable freight and agents. Solutions' net revenue (total revenue less purchased transportation) for the quarter decreased 20.1% compared to the 2009 quarter. Our gross margins improved as purchased transportation was 80.9% of total revenue in the current quarter, down from 82.7% of total revenue in the prior year quarter. Solutions' other operating expenses as a percentage of revenue decreased to 13.1% of total revenue in the fourth quarter of 2010 from 14.0% of total revenue in the fourth quarter of 2009, as we continued to improve our overhead costs."
Cash Flow and Liquidity
Richard B. Cribbs, the Company's Senior Vice President and Chief Financial Officer, added the following comments: "At December 31, 2010, our total balance sheet debt and capital lease obligations, net of cash, were $215.8 million, and the discounted value of future obligations under off-balance sheet operating lease obligations was approximately $44.5 million, including the residual value guarantees under those leases. At December 31, 2010, our stockholders' equity was $100.7 million, and our tangible book value was $87.9 million, or $6.05 per basic share. Since the end of 2009, the Company's balance sheet debt and capital lease obligations, net of cash, have increased by $13.0 million, while the present value of financing provided by operating leases has decreased by approximately $28.6 million. At December 31, 2010, our ratio of net debt to total balance sheet capitalization was 68.2%.
"Our existing annual tractor fleet plan for 2011 includes the purchase and disposal of approximately 850 tractors. With a relatively young average fleet age of 19 months at December 31, 2010, 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 had $37.8 million of available borrowing capacity under our revolving credit facility at December 31, 2010. We were in compliance with our financial covenant at December 31, 2010. In addition, we believe we have sufficient financing available from the captive finance subsidiaries of our main tractor suppliers to fund most of our expected tractor purchases in 2011."
The Company will host a live conference call tomorrow, January 27, 2011, at 10:00 a.m. Eastern Time to discuss the quarter. Individuals may access the call by dialing 800-311-9404 (U.S./Canada) and 334-323-7224 (International), access code CTG4. An audio replay will be available for one week following the call at 877-919-4059, access code 63835608. In addition, you will be able to listen to the audio replay for an extended period of time on our investor website, under the icon "Audio Archives". For additional financial and statistical information regarding the Company that is expected to be discussed during the conference call, please visit our website at www.ctginvestor.com under the icon "News Releases."
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, Tennessee; 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".