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CVTI > SEC Filings for CVTI > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for COVENANT TRANSPORTATION GROUP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COVENANT TRANSPORTATION GROUP INC


15-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The condensed consolidated financial statements include the accounts of Covenant Transportation Group, Inc., a Nevada holding company, and its wholly-owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Transportation Group, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. Such statements may be identified by the use of terms or phrases such as "believe," "may," "could," "expects," "estimates," "projects," "anticipates," "plans," "intends," and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2012. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2012, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

Executive Overview

Historically, the first quarter is the most challenging for most truckload carriers, especially those with a longer length of haul. In the first quarter of 2013, we experienced an uneven operating environment as January freight was strong, followed by average demand but difficult weather conditions in February, and a March that started off well, but finished weaker than expected. During the quarter, we continued to improve asset productivity by allocating assets to our refrigerated and team operations, reducing exposure to solo dry van operations, and improving our drivers' employment experience. These factors contributed to a 7.6% increase in average freight revenue per tractor compared with the first quarter of 2012, which nearly covered our year-over-year operating cost increases.

The main positives in the first quarter were a 4.2% increase in rates and a 3.3% increase in utilization versus last year, a year-over-year reduction in open trucks from 5.4% at March 31, 2012 to 4.1% at March 31, 2013, significant improvement in the revenue statistics at our Star Transportation subsidiary, and more efficient use of company-owned assets and owner-operators to reduce overall capital needs. The main negatives in the quarter were a lack of profitable results from our Solutions subsidiary, cost increases across most of the business, and accident costs that negatively impacted the progress we expected in workers' compensation and casualty insurance expense.

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Additional items of note for the first quarter of 2013 include the following:

? Freight revenue of $129.1 million (excluding revenue from fuel surcharges), an increase of 5.9% compared with the first quarter of 2012;

? Operating loss of $0.7 million and an operating ratio of 100.6%, compared with operating income of $2.4 million and an operating ratio of 98.1% in the first quarter of 2012. Operating income in 2012 included a $2.4 million gain on disposition of real estate;

? Net loss of $2.0 million, or ($0.13) per basic and diluted share, compared with net loss of $0.6 million, or ($0.04) per basic and diluted share in the first quarter of 2012;

? With available borrowing capacity of $48.9 million under our Credit Facility, we do not expect to be required to test our fixed charge covenant in the foreseeable future;

? Our equity investment in TEL provided $0.5 million of pre-tax earnings compared to $0.2 million in the first quarter of 2012;

? Since March 31, 2012, total indebtedness, net of cash and including the present value of off-balance sheet lease obligations decreased by approximately $15 million to $253 million. We increased net lease-adjusted indebtedness during the first quarter of 2013 by just over $9 million versus December 31, 2012.

We expect we will continue to utilize improved systems and processes to challenge our employees to improve profitability through yield management, better driver retention, and appropriate allocation of capital resources. While freight demand did not meet our expectations in the first quarter and has continued to be soft in April, we still expect our earnings per share for the full year of 2013 to increase over the full year of 2012, excluding the approximately 10.0 cents per share gain from the sale of real estate during the first quarter of 2012.

Revenue and Expenses

We focus on targeted markets where we believe our service standards can provide a competitive advantage. We are a major carrier for transportation companies such as freight forwarders, less-than-truckload carriers, and third-party logistics providers that require a high level of service to support their businesses, as well as for traditional truckload customers such as manufacturers, retailers, and food and beverage shippers. We also generate revenue through a subsidiary that provides other freight services, including brokerage, less-than-truckload consolidation services, and accounts receivable factoring.

We have two reportable segments: Truckload and Solutions.

The Truckload segment consists of three asset-based operating fleets that are aggregated because they have similar economic characteristics and meet the aggregation criteria. The three operating fleets that comprise our Truckload segment are as follows: (i) Covenant Transport, our historical flagship operation, which provides expedited long haul, dedicated, temperature-controlled, and regional solo-driver service; (ii) SRT, which provides primarily long-haul and regional temperature-controlled service; and
(iii) Star, which provides regional solo-driver and dedicated services, primarily in the southeastern United States.

In our Truckload segment, we primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that affect our Truckload revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of shipments and miles we generate. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

Our Truckload segment also derives revenue from fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services. We measure revenue before fuel surcharges, or "freight revenue," because we believe that fuel surcharges tend to be a volatile source of revenue. We believe the exclusion of fuel surcharges affords a more consistent basis for comparing the results of operations from period-to-period.

The main expenses that impact the profitability of our Truckload segment are the variable costs of transporting freight for our customers. These costs include fuel expenses, driver-related expenses, such as wages, benefits, training, and recruitment, and purchased transportation expenses, which primarily include compensating independent contractors. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, self-insured retention versus insurance premiums, fleet age, efficiency, and other factors. Our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities, and the compensation of non-driver personnel.

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Our main measure of profitability is operating ratio, which we define as operating expenses, net of fuel surcharge revenue, divided by total revenue, less fuel surcharge revenue.

We operate tractors driven by a single driver and also tractors assigned to two-person driver teams. Our single driver tractors generally operate in shorter lengths-of-haul, generate fewer miles per tractor, and experience more non-revenue miles, but the lower productive miles are expected to be offset by generally higher revenue per loaded mile and the reduced employee expense of compensating only one driver. In contrast, our two-person driver tractors generally operate in longer lengths-of-haul, generate greater miles per tractor, and experience fewer non-revenue miles, but we typically receive lower revenue per loaded mile and incur higher employee expenses of compensating both drivers. We expect operating statistics and expenses to shift with the mix of single and team operations.

The Solutions segment provides: (i) freight brokerage service directly and through freight brokerage agents who are paid a commission for the freight they provide; (ii) less-than-truckload consolidation services; and (iii) accounts receivable factoring.

Revenue Equipment

At March 31, 2013, we operated 2,802 tractors and 6,766 trailers. Of such tractors, 1,885 were owned, 656 were financed under operating leases, and 261 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 2,661 were owned, 3,661 were financed under operating leases, and 444 were financed under capital leases. We finance a portion of our tractor fleet and most of our trailer fleet with off-balance sheet operating leases. These leases generally run for a period of three to five years for tractors and five to seven years for trailers. At March 31, 2013, our fleet had an average tractor age of 2.1 years and an average trailer age of 5.8 years.

Independent contractors provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing or leasing the tractor. The payments to independent contractors and the financing of equipment under operating leases are recorded in revenue equipment rentals and purchased transportation. Expenses associated with owned equipment, such as interest and depreciation, are not incurred, and for independent contractors, driver compensation, fuel, and other expenses are not incurred. Obtaining equipment from independent contractors and under operating leases effectively shifts financing expenses from interest to "above the line" operating expenses, and as such, we evaluate our efficiency using net margin as well as operating ratio.

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