Covenant Transportation Group, Inc. announced Thursday financial and operating results for the first quarter ended March 31.
Highlights for the quarter included the following:
Total revenue of $167.2 million, an increase of 3.9 percent compared with the first quarter of 2014.
Freight revenue of $143.3 million (excludes revenue from fuel surcharges), an increase of 13.5 percent compared with the first quarter of 2014.
Operating income of $10.0 million and an operating ratio of 93.0 percent, compared with operating income of $0.4 million and an operating ratio of 99.7 percent in the first quarter of 2014.
Operating ratio is defined as: total operating expenses minus fuel surcharge revenue, divided by freight revenue.
Net income of $10.2 million, or $0.56 per diluted share, compared with net loss of $1.4 million, or ($0.09) per diluted share in the first quarter of 2014, on a 22.7 percent increase in weighted average diluted shares resulting primarily from the company's public offering of 3,036,000 common shares completed in November 2014.
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 recognized as a discrete item, that is not expected to continue in future periods.
Management Discussion—Asset-Based Truckload Operations
Chairman, President, and Chief Executive Officer, David R. Parker, said, "For the quarter, total revenue in our asset-based operations increased to $157.2 million, an increase of $7.0 million compared with the first quarter of 2014. This increase consisted of higher freight revenue of $17.7 million, partially offset by lower fuel surcharge revenue of $10.7 million. The $17.7 million increase in freight revenue related to a 12.1 percent increase in average freight revenue per tractor per week, a 55 truck (or 2.1 percent) increase in our average tractor fleet, and a $1.3 million increase of freight revenue contributed from our refrigerated intermodal service offering. The 2.1 percent average tractor fleet increase is especially gratifying as it marks the first time we have achieved any year-over-year increase since the fourth quarter of fiscal 2010. Team-driven trucks increased to an average of 928 teams in the first quarter of 2015, an increase of approximately 17.3 percent over the average of 791 in the first quarter of 2014, as well as a 1.8 percent sequential increase over the average of 912 teams in the fourth quarter of 2014.
"Average freight revenue per tractor per week increased to $3,743 during the 2015 quarter from $3,339 during the 2014 quarter. Average freight revenue per total mile increased by 8.8 cents per mile (or 5.9 percent) compared to the 2014 quarter on an approximately 7.4 percent increase in average length of haul. Average miles per unit increased by 5.9 percent. The main factors impacting the improved utilization were a 450 basis point increase in the percentage of our fleet comprised of team-driven trucks, a tighter overall freight network for our service offerings, less harsh weather and a higher seated truck percentage. On average, approximately 4.9 percent of our fleet lacked drivers during the 2015 quarter compared with approximately 5.6 percent during the 2014 quarter.
"Our operating cost per mile improved by 1.9 cents per mile compared with the 2014 quarter. Capital costs (consisting of depreciation and amortization (which includes gain or loss on disposition of assets), revenue equipment rentals and interest expense) decreased by approximately $2.3 million. Combined revenue equipment rentals and interest expense decreased $3.6 million primarily resulting from repayments of debt and leases from the approximately $63.0 million proceeds from our late November public offering. These cost improvements were partially offset by higher depreciation expense of $1.3 million for more expensive tractors and an updated trailer fleet, net of an approximately $0.6 million increase in gain on sale of assets. We continue to invest in new, more fuel-efficient equipment that offers dependability, lower operating costs, improved safety technology, and improved driver satisfaction. The younger fleet of tractors and trailers also contributed to an approximately 2.7 cent per mile reduction of our operations & maintenance expense for the 2015 quarter as compared to the 2014 quarter.
"Net fuel expense improved meaningfully as a result of our capital investments in new tractors and aerodynamic trailers, efficiency initiatives, improved fuel pricing, and favorable adjustments to fuel surcharge programs from customers, partially offset by unfavorable fuel hedging results. Net fuel expense was approximately 10.7 cents per company mile in the 2015 quarter compared with 12.2 cents per company mile in the 2014 quarter. Ultra low sulfur diesel prices as measured by the Department of Energy averaged approximately $1.04/gallon lower in the first quarter of 2015 compared with the 2014 quarter. Losses from fuel hedging transactions were $3.1 million in the 2015 quarter compared with gains of $0.3 million in the 2014 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.
"Salaries, wages and related expenses increased approximately 2.1 cents per mile due to a higher percentage of our fleet comprised of team-driven tractors, employee pay adjustments since the first quarter of 2014, and higher group health insurance expense, partially offset by lower workers' compensation expense.
"Insurance and claims per mile cost increased to 13.1 cents per mile in the first quarter of 2015 from 8.0 cents per mile in the first quarter of 2014. The increase primarily related to a greater severity of claims for accidents incurred during the first quarter of 2015."
Management Discussion—Non-Asset Based Brokerage and Other Operations
Mr. Parker offered the following comments concerning Covenant Transport Solutions, Inc., the company's non-asset based subsidiary: "For the quarter, Solutions' total revenue decreased 6.9 percent, to $10.0 million from $10.7 million in the same quarter of 2014. Operating income was approximately $337,000 for an operating ratio of 96.6 percent, compared with operating income of approximately $541,000 and an operating ratio of 94.9 percent in the first quarter of 2014. In addition, our 49 percent equity investment in Transport Enterprise Leasing ("TEL") contributed approximately $1.4 million of pre-tax income in the quarter compared with $0.8 million in the first quarter of 2014."
Cash Flow and Liquidity
Richard B. Cribbs, the company's senior vice president and chief financial officer, added the following comments: "At March 31, 2015, our total balance sheet debt and capital lease obligations, net of cash, were $154.1 million, our stockholders' equity was $180.8 million, and our tangible book value was $180.5 million, or $9.95 per basic share. At March 31, 2015, our ratio of net debt to total balance sheet capitalization was 46.0 percent. At March 31, 2015, the discounted value of future obligations under off-balance sheet operating lease obligations was approximately $43.4 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 2014, the company's balance sheet debt and capital lease obligations, net of cash, has decreased by $26.9 million, while the present value of financing provided by operating leases decreased by approximately $2.3 million. At March 31, 2015, we had approximately $43.8 million of borrowing availability under our revolving line of credit.
"In the first quarter of 2015, we took delivery of approximately 105 new company tractors and disposed of approximately 130 used tractors. Our current tractor fleet plan for full-year 2015 includes the delivery of approximately 700 new company tractors, and the disposal of approximately 745 used tractors as we reduce the number of out-of-service tractors from our fleet from the beginning of the year. With a relatively young average company tractor fleet age of 1.7 years at March 31, 2015, 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 2015."
Outlook
"Our outlook for 2015 remains positive," said Mr. Cribbs. "We expect our average fleet size to be approximately 3-5 percent above that of fiscal 2014. In addition, we expect to report earnings in the second quarter in a range of $0.38 to $0.48 per diluted share, on approximately 18.5 million weighted average diluted shares. We remain cautious of our ability to achieve meaningful year-over-year improvements in earnings per share in the second half of the year (taking into consideration expected weighted average diluted shares year-over-year increases of approximately 21 percent for the third quarter and 11 percent for the fourth quarter). Second half performance will depend to a significant extent on the level of involvement of our asset-based and Solutions subsidiaries in the supply chains of our LTL, parcel, and omni-channel shipping customers during the 2015 peak freight season and the associated pricing for our services."