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Covenant Transportation sees ‘difficult operating environment’ in fourth quarter

Truckload carrier to pursue capital allocation in operations with better returns

Image: Jim Allen/FreightWaves

Covenant Transportation Group Inc. (NASDAQ: CVTI) reported fourth-quarter 2019 adjusted earnings per share (EPS) of 10 cents compared to 92 cents in the fourth quarter of 2018. The fourth quarter 2019 consensus estimate was 27 cents.

The result included a 2-cent-per-share loss associated with a customer bankruptcy at fleet leasing outfit Transport Enterprise Leasing (TEL) in which it holds a 49% interest.

“We are relatively pleased to return to profitability for the fourth quarter based on higher revenue per tractor and lower costs per mile sequentially versus the third quarter of 2019. However, by no means are we satisfied with the result,” said Covenant Transportation Chairman and CEO David R. Parker.

The Chattanooga, Tennessee-based truckload (TL) carrier reported a 14% year-over-year decline in consolidated revenue to $233 million. The company’s asset-based TL revenue declined 13% year-over-year excluding fuel surcharge revenue as the average tractor count was down 105 units in the period and average revenue per tractor per week dipped more than 10% to $3,857.

Average revenue per total mile declined 11% year-over-year to $1.89, but tractor utilization increased by 281 miles on average for the quarter, up 1% year-over-year.

Covenant Transportation’s Key Performance Indicators

The earnings press release stated that part of the decline in per-mile rates was due to the company’s move to allocate more equipment to its dedicated service. The release also cited excess truck capacity in the market as well as some customers reducing their peak season needs as reasons for the decline.

“For the fourth quarter and all of 2019, we battled a difficult operating environment, marked by excess industry capacity, lackluster freight volumes, intense competition from freight brokerage competitors, and higher operating costs,” Parker stated.

Covenant’s managed freight segment reported a 15.5% year-over-year decline in revenue to $57 million. The release stated that the bulk of the decline in revenue was again due to lower peak season capacity needs from its customers. The division reported operating income of $4.6 million in the quarter compared to $6 million in the year-ago period.

The company’s non-asset-based managed freight segment consists of its freight brokerage, transportation management services, warehousing and other offerings.


Management expects the company’s operating cash flow and leverage ratio to improve year-over-year in 2020. The bulk of the improvements are expected to be realized in the second half of 2020 “as year-over-year comparisons in consolidated average freight revenue per total mile and margin performance in certain irregular route Truckload operations are expected to be negative for at least the next several months,” said Covenant Chief Financial Officer Richard B. Cribbs.

The release stated that the carrier is focused on swapping out solo-driven refrigerated business for more “profitable dedicated and dry-van opportunities.” This is expected to reduce capital costs like real estate and equipment as well as other operating expenses. Along those lines, management said the company recently won a new “significant” dedicated contract that commences in the second quarter of 2020.

Covenant reported that its leverage ratio (net lease-adjusted indebtedness divided by trailing four quarters’ earnings before interest, taxes, depreciation, amortization and rental expense) increased to 2.4x at the end of 2019 compared to 1.5x at the end of 2018. However, the company expects to further lower its capital requirements for both real estate and equipment as the tractor count has been guided to a range of flat to down 2% in 2020.

“From a balance sheet perspective, with net capital expenditures scheduled well below normal replacement cycle, along with positive operating cash flows, we expect to reduce net lease-adjusted indebtedness over the course of fiscal 2020,” Cribbs concluded.

CVTI Stock Price Chart – SONAR: STOCK.CVTI


  1. Mike

    It is difficult for everyone out here. Covenant expanded into other markets too, like expediting when they acquired Landair, which is in the tank, along with a couple of other outfits. They are paying their drivers less than when they opened their doors when inflation is figured in, and run primarily teams. Also very big in the driver lease scam and are still having difficulties.

    It is a different time, all of the old models are now out the window when it comes to the normal boom and bust cycles in this industry. Those days are long gone, especially the predictability of what will happen next. We are still over saturated with trucks and drivers, and the flood is not subsiding, they keep coming, which is a first in this industry as the visa holders pour into the USA and Canada. Even with all of the bankruptcies last year, the capacity still grows. This isn’t going to end well, especially with the Mega Carriers, as they are now in uncharted waters. The competition is fierce, as the medium sized carriers struggle, I can see rates being cut even further as they start encroaching into the Mega Carrier’s back yards.

    Look at XPO, they are getting out, which says a lot. I was speaking to one of their outside salesman a few weeks ago in a local bar in an unnamed city. He stated it is not well, the rates are killing them and then the capital costs, which are surpassing their normal operating costs. The equipment is the issue, it is unreliable and expensive to maintain, very expensive. He stated those costs have surpassed their fuel costs. I don’t know if he was feeding me a line of BS, but he brought it up, so your guess is as good as mine, and then they announced they are breaking up. May be something to his words.

    My thinking, deregulation has gone too far, the industry is simply cannibalizing itself as the pendulum continues its swing in the wrong direction with no relief in sight.

    In my opinion….

    1. Noble1

      Hey Mike !

      I found one just for you .

      The other day you mentioned how bad driver employee misclassifications are in Canada that they gave it a name , Driver inc.

      Look at this guy’s ad . He wants to “expand” !!!

      Copy & pasted from its origin without modification :

      Looking for new or experienced AZ/ Class 1 team drivers CAN/USA

      “Company: Hello everyone, i’m an owner operator/broker for a trucking company. The company name is Old Iron Truck Lines and they are specialised in flat bed and dryvan operation. They are a good size carrier and are very busy. You can expect a lot of miles and good freight to carry.

      Home terminal will be based in Laval,Quebec.
      Work: Im looking for new or experienced driver for Canada/USA work. It is going to be for team operation ( company requirement).

      I already have a few truck running in the company and im looking to grow as an owner operator.

      It is going to be flat bed work or dryvan work and you can expect a lot of miles mostly long haul work.

      I pay very well depending on experience and also treat my employee very well. Im also only looking for incorporated driver only”

      End quote .

      This clearly shows you how and where from excess capacity in the industry comes from and how they manage to cut rates . You have these so called “lease on O/O Brokers” admitting to employee misclassifying while demanding that the driver must accept to be incorporated/misclassified in order to obtain the “job” in an employee/employer relationship, Then these types cry when laws like AB5 are created .

      This ad certainly takes the cake and demonstrates how ignorant some in the industry really are .

      Below I’ll post info from the carrier’s website :

      “We are currently looking for Owner Operators to join our fleet.

      Old Iron Truck lines is a locally Owned and Operated company with a home base in Warren Mb. At Old Iron we strive to deliver a top-shelf experience for both our customers and employees. Old Iron is a newly established independently owned and operated company based on old school values. Our management team employs a positive and professional attitude which is responsible for our great working relationships. All of us here at Old Iron promote integrity, honesty and fairness throughout all of our interactions. Old iron currently has a growing number of Owner Operators running both flatbed and dry vans throughout Canada and the US.”

      1. Noble1

        In the case I wrote about above “NEW” drivers who are unaware of such shenanigans get fleeced .

        One example is : Let’s assume the new driver just got out of trucking school and is looking for his first truck driver job . He/she sees this ad and says wow he/she has a chance to get in without experience and be an “independent contractor” with tax advantages .

        This new driver is now mislead from the start . Due to the new driver’s ignorance , not only are they misclassified and cheated out of labour protection laws and certain benefits such as holiday and vacation pay , they get duped furthermore if they cause damage on the equipment .

        Often what these so called O/O brokers do is tell the new driver that they have to pay for the damage(s) they caused and that the amount will be deducted from their wages on their pay check . Sometimes they threaten the driver to pay or they will report it to their insurance if the damage(s) are high in price . By doing so it will be inscribed on the driver’s driving record as a collision and prevent the driver from getting another truck driving job if they quit on the “company” due to insurance co’s being reluctant to insure the driver in the future . New driver gets duped big time .

        Laws like AB5 attempts to prevent such shenanigans . As far as I’m concerned , the O/O in the story above is a misclassified employee himself under the guise as a lease on O/O aka IC . If he was properly classified as an employee he wouldn’t be capable of hiring another “employee” himself nor misclassify that employee in the process .

        Without laws like AB5 to prevent such shenanigans from the start , it facilitates abuse . Once one realizes that they’ve been abused and or fleeced, they need to go through a long process in an attempt to rectify the wrongs against them . It ties up the courts , costs tax payers , and puts the driver(s)/employee through stressful situations that can be prevented . New drivers are the most vulnerable to becoming victims of fraud or being wronged .

        However , there’s still a loophole . Nothing prevents a true independent O/O from going directly to a shipper , obtaining a direct contract , then turn around and hire a driver to drive his/her truck as a misclassified employee and do the same as in the example above . Laws need to be stringent in an attempt to prevent and dissuade such shenanigans .

        Shippers should include a clause in their contract with an O/O that should stipulate that if the O/O engages in hiring a driver or plural , the O/O must abide by labour laws otherwise it would be viewed and interpreted as a breach of contract . A shipper shall not encourage contractor employee misclassification nor contractor employee abuse .

        In my opinion ………..

        1. Mike

          Noble, I know. This scam has been running out of Chicago for a few years now, the Russians and Eastern Europeans started all of the BS. It really took off when they figured out that they could run these operations off shore and cash in. And they have.

          I know more than a few drivers that have gotten sucked in by these guys, and it is just as you stated, they hold these guys hostage and charge them for EVERYTHING, sometimes even the fuel if you can believe that. Then come tax time, they are screwed, those 1099’s are not cheap, and as a driver, they have no real write offs, not like I did as a real owner operator.

          We cannot compete with this, and Canada is discovering that in spades, as this Driver Inc. has hit their treasury department in a hard way in regards to uncollected taxes.

          It is criminal, and they are continuing to come to both countries, this is easy pickings for them and requires little investment in the big scheme of things. And they keep coming unabated. We are feeling it right now in lower rates and a capacity that should be shaking out, except it is not, and will not until something is done about Driver Inc and the 1099 gangs here in the US.

          In my opinion…

  2. Noble1

    I was just looking at their stock chart going back to 2008 . I’d remain cautious . The correction that began in 2015 doesn’t appear to have terminated , yet . However , it appears to be close to doing so . That being said , the uptrend cycle that began in 2008 doesn’t appear to have completed either . Therefore , when this final corrective leg terminates that began in mid 2018 , price should resume upwards to complete an uptrend cycle that began in 2008 surpassing the 2015 high . Then the next correction will be a lot steeper than the one that began in 2015 till now due to correcting the complete cycle that began in 2008 . In conclusion : once this regressive leg terminates , there will be another leg upwards before the multi year cycle that began in 2008 terminates and corrects .

    In my opinion …….

    1. Noble1

      My primary count suggests that today’s move is a proregressive move that completes wave c in w4 which was a swift move and has been blown off(blow off wave C top) . W5 down to follow which should complete Wave C on a higher time frame which began in mid 2018 . So the final leg within the final leg should ensue . Therefore W5 down has commenced until proven otherwise , in my opinion .

      1. Noble1

        Precisely wave 5 of 5 in wave C, LOL ! Regressive wave 5 in regressive wave C commenced in September 2019 . Proregressive wave 4 in wave 5 is what I am suggesting has peaked today . 1 minor regressive leg left to validate the count . We shall see .

        1. Noble1

          If proven to be correct , Wave 5 of 5 in wave C will have completed corrective wave 4 which commenced in 2015 in a higher degree within approx. 8 weeks max . Then a reversal shall occur and commence progressive Wave 5 in a higher degree too complete the full cycle that commenced in 2008 .

          Then a bigger correction at a higher degree should transpire which will correct the full cycle . That full cycle shall be labeled as Wave 1 in a higher degree , and the bigger correction at a higher degree shall be labeled as Wave 2 in a higher degree , LOL !

          Voila , that’s my call on this one .

Comments are closed.

Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.