Covenant Transportation Group, Inc. announced Wednesday financial and operating results for the second quarter ended June 30.
Highlights for the quarter included the following:
Total revenue of $175.5 million, an increase of 1.0 percent compared with the second quarter of 2014.
Freight revenue of $152.1 million (excludes revenue from fuel surcharges), an increase of 10.6 percent compared with the second quarter of 2014.
Operating income of $18.8 million and an operating ratio of 87.7 percent, compared with operating income of $9.1 million and an operating ratio of 93.4 percent in the second quarter of 2014. Operating ratio is defined as: total operating expenses minus fuel surcharge revenue, divided by freight revenue.
Net income of $11.0 million, or $0.60 per diluted share, compared with net income of $3.8 million, or $0.25 per diluted share in the second quarter of 2014, on a 21.3 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.
Insurance and claims expense for the second quarter of 2015 includes the favorable impact totaling approximately $3.5 million pretax (or $0.12 per diluted share) of previously expensed casualty insurance premium from our commutation of the April 1, 2013 through Sept. 30, 2014 policy period of our primary auto liability insurance policy.
Chairman, President and Chief Executive Officer David R. Parker, made the following comments: “The financial results of the second quarter of 2015 marked the best second quarter in our history. While the pace of domestic economic growth remains uncertain, we believe the trucking economy’s freight demand and capacity remain closely in balance as the driver market remains tight. Overall, our asset-based operating ratio improved approximately 620 basis points from the year ago quarter to 87.0 percent. Excluding the approximately $3.5 million net favorable impact from our policy release on insurance and claims expense, our asset-based operating ratio improved approximately 370 basis points. For the quarter, total revenue in our asset-based operations increased to $162.8 million, an increase of $2.5 million compared with the second quarter of 2014. This increase consisted of higher freight revenue of $15.2 million, partially offset by lower fuel surcharge revenue of $12.8 million. The $15.2 million increase in freight revenue related to a 6.1 percent increase in average freight revenue per tractor per week, a 129 truck (or 5.0 percent) increase in our average tractor fleet, and a $1.2 million increase of freight revenue contributed from our refrigerated intermodal service offering. Team-driven trucks increased to an average of 951 teams in the second quarter of 2015, an increase of approximately 18.9 percent over the average of 800 teams in the second quarter of 2014, as well as a 2.5 percent sequential increase over the average of 928 teams in the first quarter of 2015.
“Average freight revenue per tractor per week increased to $3,886 during the 2015 quarter from $3,664 during the 2014 quarter. Average freight revenue per loaded mile increased by 8.6 cents per mile (or 5.0 percent) compared to the 2014 quarter on an approximately 6.5 percent increase in average length of haul. Average miles per unit increased by 1.2 percent. The main factors impacting the improved utilization were a 410 basis point increase in the percentage of our fleet comprised of team-driven trucks and a higher seated truck percentage, partially offset by a more balanced overall freight network as compared to the tightness of the prior year quarter. On average, approximately 4.0 percent of our fleet lacked drivers during the 2015 quarter compared with approximately 4.7 percent during the 2014 quarter.
“Net fuel expense became worse by approximately 3.6 cents per total mile to 10.9 cents per mile in the 2015 quarter. The 2014 quarter included a $0.9 million (or approximately 1.2 cent per total mile) fuel tax credit related to amended fuel tax returns for the fiscal years of 2010 through 2013. In addition, losses from fuel hedging transactions were $2.5 million in the 2015 quarter compared with gains of $0.3 million in the 2014 quarter. These two 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 $1.09/gallon lower in the second quarter of 2015 compared with 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.
“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 $0.7 million. Combined revenue equipment rentals and interest expense decreased $3.7 million primarily resulting from repayments of debt and leases from the approximately $63.0 million proceeds from our late November 2014 public offering. These cost improvements were partially offset by higher depreciation expense of $2.1 million for more expensive tractors and an updated trailer fleet, and an approximately $0.9 million decrease 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.
“Other than the changes discussed above relating to the insurance policy release (4.1 cents per mile benefit), net fuel expense (3.6 cent per mile headwind), and capital costs excluding interest expense (0.1 cents per mile headwind), all other operating costs combined increased by 0.4 cents per mile compared with the 2014 quarter. No single line item changed materially on a cents per mile basis. ”
Mr. Parker offered the following comments concerning Covenant Transport Solutions, Inc. (“Solutions”), the company’s non-asset based subsidiary: “For the quarter, Solutions’ total revenue decreased 5.0 percent, to $12.7 million from $13.3 million in the same quarter of 2014. Operating income was approximately $581,000 for an operating ratio of 95.4 percent, compared with operating income of approximately $565,000 and an operating ratio of 95.8 percent in the second quarter of 2014. In addition, our 49 percent equity investment in Transport Enterprise Leasing (“TEL”) contributed approximately $1.3 million of pre-tax income in the quarter compared with $0.9 million in the second quarter of 2014.”
Richard B. Cribbs, the company's senior vice president and chief financial officer, added the following comments: “At June 30, 2015, our total balance sheet debt and capital lease obligations, net of cash, were $139.9 million, and our stockholders’ equity was $196.0 million. At June 30, 2015, our ratio of net debt to total balance sheet capitalization was 41.6 percent. At June 30, 2015, the discounted value of future obligations under off-balance sheet operating lease obligations was approximately $41.1 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 $41.1 million, while the present value of financing provided by operating leases decreased by approximately $4.6 million. At June 30, 2015, we had approximately $50.0 million of borrowing availability under our revolving line of credit.
“In the first half of 2015, we took delivery of approximately 332 new company tractors and disposed of approximately 282 used tractors. Our current tractor fleet plan for full-year 2015 includes the delivery of approximately 735 new company tractors, and the disposal of approximately 780 used tractors as we reduce the number of out-of-service tractors from our fleet from the beginning of the year that were recorded as “Assets held for sale” on our consolidated balance sheet. With a relatively young average company tractor fleet age of 1.8 years at June 30, 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.
“We expect our average fleet size for fiscal 2015 to be approximately 3-5 percent above that of fiscal 2014. 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. Discussions thus far with major peak season shippers make us optimistic regarding the demand for our service offerings for the remainder of this fiscal year, although pricing and volume negotiations for peak shipments are not yet complete.
“The company also announced today that its Board of Directors has approved a stock repurchase program authorizing the purchase of up to $5 million of the company's Class A common stock from time-to-time based upon market conditions and other factors. Such repurchases may commence as early as the third trading day following release of second quarter 2015 earnings. The stock may be repurchased on the open market or in privately negotiated transactions. The repurchased shares will be held as treasury stock and may be used for general corporate purposes as the Board may determine. The company did not place a limit on the duration of the repurchase program. The repurchases are currently permitted under the company's primary credit facility and other contractual arrangements. The stock repurchase program does not obligate the company to repurchase any specific number of shares and the company may suspend or terminate the program at any time without prior notice.”