Covenant Transportation Group, Inc. (CVTI)

[makesumgravy]

Covenant Transportation Group Announces Third Quarter Financial and Operating Results





CHATTANOOGA, Tenn., Oct. 27 /PRNewswire-FirstCall/ -- Covenant Transportation Group, Inc. (NASDAQ:CVTI) announced today financial and operating results for the quarter ended September 30, 2008.

Financial and Operating Results

For the quarter, total revenue increased 20.9%, to $212.5 million from $175.8 million in the same quarter of 2007. Freight revenue, which excludes fuel surcharges, increased 9.7%, to $162.9 million in the 2008 quarter from $148.5 million in the 2007 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 a net loss of $3.4 million, or ($.24) per basic and diluted share, in the third quarter of 2008 compared to a net loss of $3.6 million, or ($.25) per basic and diluted share, for the third quarter of 2007.

Overview

David R. Parker, Chairman, President and Chief Executive Officer, offered the following comments regarding the Company's third quarter operations: "The third quarter was a time of great promise and great frustration for Covenant Transportation Group. From an operating perspective we improved several key metrics during the quarter, and we continued to bring down our truckload operating costs as a percentage of truckload revenue in most areas. The quarter was frustrating from a bottom line perspective, however, because of two specific items. Items where we made progress in operations included the following:

-- Average freight revenue per tractor per week, our main measure of asset productivity, improved 6.5% compared with the third quarter of 2007. This improvement resulted from a 4.9% increase in average miles per tractor and a 1.5% increase in average freight revenue per total mile. Tractors operated by driver teams increased approximately 25% compared with the third quarter of 2007. Despite these improvements during the third quarter, we reiterate our comment from September 29 that the freight environment remains weak and, if anything, seems to be deteriorating on a seasonally adjusted basis.

-- Revenue from Covenant Transport Solutions, our non-asset-based brokerage business, increased 264%, to $16.7 million for the quarter, and Covenant Transport Solutions generated $2.9 million of net revenues, after purchased transportation expenses, compared with $950,000 of net revenues for the third quarter of 2007.

-- Fuel expense, net of fuel surcharge recovery, was approximately $25 million in the 2008 and 2007 quarters. Our continued focus on improving fuel surcharge recovery, decreasing non-revenue miles, executing our initiatives to reduce fuel consumption, and improving bulk purchasing of fuel, along with a drop in diesel fuel prices during the third quarter, returned our cost per mile in the 2008 quarter to approximately the same level as the 2007 quarter.

-- DOT reportable accidents dropped to the lowest level per million miles since 2000.

"On the other hand, our operating progress was masked by two disappointing items during the quarter:

-- Despite the best overall safety performance in at least eight years (based on DOT reportable accidents per million miles), a small number of severe accidents resulted in a negative quarter-over-quarter impact of approximately $3.6 million pretax, or $.16 per share.

-- As a result of closing our amended and restated revolving credit facility, we recorded a non-cash write-down of $726,000, or $.03 per share, relating to partial extinguishment of the former credit facility.

"Our consolidated results include the operations of our four operating subsidiaries -- Covenant Transport, Southern Refrigerated Transport (SRT), Star Transportation, and Covenant Transport Solutions. For the quarter, we experienced the following trends in each subsidiary, compared to third quarter of 2007:

-- Covenant Transport. At Covenant, overall we reduced our fleet by approximately 100 trucks, however we added approximately 200 teams compared with the 2007 quarter, which improved the ratio of team tractors to solo tractors in our expedited operation and revenue per tractor per week. Our dedicated operations declined by approximately 36 trucks, as we did not renew contracts unless the terms generated an acceptable margin.

-- SRT. At SRT, profitability has improved compared with the third quarter of 2007, due to significant improvements in revenue per tractor per week and fuel expense as SRT reduced the percentage of its freight obtained from freight brokers and improved its utilization of the Covenant refrigerated trailers previously integrated into its operations.

-- Star Transportation. Star has remained relatively constant in terms of operating margin as compared with the second quarter of 2008, as results continued to be impacted by weak demand, particularly in the Southeast, in the automobile, housing, and manufacturing markets.

-- Covenant Transport Solutions. We have continued to see significant growth in our non-asset based brokerage subsidiary and we have increased staffing to accommodate growth. However, we expect our rate of growth will not continue at the current pace in the near term, as gross margin percentages are being reduced in the current difficult economic environment.

Operating Expenses

"Our operating ratio (operating expenses, net of fuel surcharge revenue, as a percentage of freight revenue) was 100.4% for the third quarter of 2008 compared with 101.5% for the third quarter of 2007. Our expense categories as a percentage of freight revenue were affected by the rapid growth of Covenant Transport Solutions. This tended to reduce most expenses as a percentage of freight revenue, while increasing purchased transportation expense.

"In addition, depreciation and amortization decreased primarily as a result of our efforts to eliminate excess equipment and terminals over the past year. We have reduced the fleet by approximately 150 tractors and 540 trailers, while increasing freight revenue from truckload operations. During the quarter, we recorded an approximately $1.2 million asset impairment charge to write down the carrying values of idle tractors and trailers held for sale in view of the soft market for used equipment. However, this was largely offset by a loss on sale of equipment of only $253,000 in the third quarter of 2008 compared with a loss on sale of equipment of $1.2 million in the third quarter of 2007."

Balance Sheet and Liquidity

Richard B. Cribbs, the Company's Senior Vice President and Chief Financial Officer, commented on the Company's balance sheet and liquidity: "At September 30, 2008, our total balance sheet debt, net of cash collateral, was $156.2 million and total stockholders' equity was $158.7 million, for a debt-to-capitalization ratio of 49.6%. Our tangible book value was $119.5 million, or $8.51 per share. At September 30, 2008, the present value of our off-balance sheet financing was $82 million, excluding the residual portion of tractor leases where we have trade-back arrangements.

"During the second and third quarters, we completed $285 million in long-term financing facilities. These facilities consisted of an approximately $200 million secured revenue equipment financing facility with Daimler Truck Finance and an approximately $85 million asset-based revolving credit facility provided by Bank of America, J.P. Morgan Chase, and Textron Financial. These new credit facilities replaced our former revolving line of credit and accounts receivable securitization facilities. At September 30, we had approximately $30 million of undrawn capacity under the revolving credit facility."

Other News

The American Trucking Associations recently recognized Doug Cook, our vice president of safety, as the 2008 National Safety Director of the Year. Mr. Cook also was recognized earlier in the year by the Truckload Carriers Association as its Safety Professional of the Year. The recognition that Mr. Cook has received reflects his outstanding capabilities in the safety arena and our desire to be a safety leader in our industry. We also have two drivers that were recently recognized for their skills and safety records -- Bobby Ray was selected as a Captain for the Tennessee Trucking Association's Road Team and Frank Silio was selected as a finalist for the 2009-2010 America's Road Team.

The Company will host a conference call tomorrow, October 28th 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 050011. An audio replay will be available for one week following the call at 877-919-4059, access code 41889183. For financial and statistical information regarding the Company that is expected to be discussed during the conference call, please visit our website at http://www.covenanttransport.com/ .

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 National Market under the symbol, "CVTI."