Covenant Transport (NASDAQ: CVTI) reported record revenue in the fourth quarter, beating analyst projections by $10.72 million. The company announced $272.3 million in total revenue, a 33.9% increase compared to the fourth quarter of 2017.
Covenant posted an operating income of $22.3 million and an operating ratio of 91.8%. The company’s adjusted operating income came in at $23.0 million, making it adjusted operating ratio 90.6%.
The company’s fourth quarter 2018 adjusted operating income and ratio compares to a fourth quarter 2017 adjusted operating income of $14.8 million and adjusted operating ratio of 91.8%.
Freight revenue, excluding fuel surcharge, came in at $244 million, a 34.4% increase over the fourth quarter of 2017. The company reported net income of $16.5 million, or earnings per diluted share of $0.89, and an adjusted net income of $17 million, or adjusted earnings per diluted share of $0.92.
Covenant reported net income of $49.3 million, or $2.68 per diluted share and adjusted net income of $9.2 million, or adjusted earnings per diluted share of $0.50 per diluted share in the fourth quarter of 2017.
“In the fourth quarter of 2017, net income included $40.1 million, or $2.18 per diluted share, of income tax benefit resulting primarily from our reasonable estimate of the revaluation of our net deferred tax balances at December 31, 2017 as a result of the enactment of the Tax Cuts and Jobs Act, signed into law on December 22, 2017,” the Covenant earnings report states.
Total truckload revenues came in at $204.7 million, an increase of $34.2 million since the fourth quarter of 2017.
“This increase consisted of $31.7 million higher freight revenue and $6.5 million higher fuel surcharge revenue,” Chairman and Chief Executive Officer David R. Parker said. “The $31.7 million increase in freight revenue related to a 562 (or 22.0%) average truck increase and a 1.7% increase in average freight revenue per truck in the 2018 period as compared to the 2017 period, partially offset by a $1.7 million year-over-year reduction in intermodal revenues as we effectively discontinued this consistently unprofitable service offering within our solo-driver refrigerated truckload unit during December 2017.”
The Landair acquisition contributed 430 of the 562 increased average trucks as Landair contributed $19.2 million of freight revenue to consolidated truckload operations in the fourth quarter of 2018.
Revenue per truck per week improved $4,304 during the 2018 quarter from $4,234 during the 2017 quarter. Freight revenue per total mile increased by 25.2 cents per mile, or 13.4%, compared to the 2017 quarter and average miles per tractor decreased by 10.4%.
Parker said the primary factor influencing that productivity was the impact of Landair operations on the combined truckload division.
“Landair’s shorter average length of haul and dedicated contract, solo-driven truck operations generally produce higher revenue per total mile and fewer miles per tractor than our other truckload business units,” he said.
Team-driven trucks decreased to an average of 866 teams, or 27.8% of the total fleet, in the fourth quarter of 2018 versus an average of 912 teams ,or 35.7% of the total fleet, in the fourth quarter of 2017. The company’s average seated truck percentage improved, with only 3.0% of the fleet lacking drivers during the 2018 quarter compared with 5.2% during the 2017 quarter.
Salaries, wages and related expenses increased 18.8 cents per total mile, which Parker attributed to the Landair acquisition.
“Insurance and claims expense increased to 14.2 cents per total mile in the fourth quarter of 2018 versus 11.6 cents per total mile in the fourth quarter of 2017 due to increased frequency and severity of accidents,” Parker said. “In addition to the items mentioned above, primarily in connection with our July acquisition of Landair, we experienced increases to operations and maintenance, revenue equipment rentals and purchased transportation, as well as general supplies and expenses.”
Net fuel expense decreased by 3.2 cents per total mile in the 2018 quarter. Parker said this was due to improved fuel hedging activity, with $0.3 million of fuel hedge gains in the 2018 quarter compared with $0.4 million of fuel hedge losses in the 2017 quarter.
“In addition, our fuel surcharge recovery was more effective during the 2018 quarter and we expect to continue to experience improved fuel economy as we upgrade our tractor fleet. These favorable items were partially offset by increased fuel pricing,” Parker said. “Ultra-low sulfur diesel prices as measured by the Department of Energy averaged $0.39/gallon higher in the fourth quarter of 2018 compared with the 2017 quarter.”
Parker also addressed the company’s non-asset based managed freight, including freight brokerage and warehousing.
“For the quarter, Managed Freight’s total revenue increased 83.6%, to $67.5 million from $36.8 million in the same quarter of 2017,” he said. “Operating income was $6.0 million for an operating ratio of 91.1%, compared with operating income of $3.1 million and an operating ratio of 91.6% in the fourth quarter of 2017. Of the $30.7 million of increased total revenue, Landair contributed $21.4 million of revenue to combined Managed Freight operations in the fourth quarter of 2018. In addition, our 49% equity investment in Transport Enterprise Leasing contributed $2.3 million of pre-tax income in the quarter compared with $0.8 million in the fourth quarter of 2017.”
Covenant Executive Vice President and Chief Financial Officer Richard B. Cribbs said the company’s earnings outlook for 2019 is positive.
“For the full year, we expect adjusted earnings per diluted share to increase modestly over 2018, based on the favorable impact of a full year of earnings contribution from Landair’s service offerings, partially offset by investment in growing the Managed Freight segment,” he said. “From a balance sheet perspective, with net capital expenditures scheduled at normal replacement cycle, along with positive operating cash flows, we expect to reduce combined balance sheet and off-balance sheet debt over the course of fiscal 2019.”
Cribbs said this outlook was based on a relatively balanced freight environment in 2019.
SeekingAlpha reported that Covenant’s Non-GAAP EPS of $0.92 beats by $0.15, while its GAAP EPS of $0.89 beats by $0.12.
Covenant’s stock was up 0.67% to $22.38 at market close Wednesday.