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 or current 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. In this Form 10-Q, statements relating to future reclassification of losses arising from derivative instruments and the performance of counterparties to such instruments, future impact of new accounting standards, future results of SRT and Solutions, future third-party transportation provider expenses, future tax expenses, potential results of a default and testing of our fixed charge covenant under the Credit Facility, expected sources of working capital and liquidity (including our mix of debt, capital leases, and operating leases as means of financing revenue equipment), expected capital expenditures, expected debt reduction, expected cash flows, future trucking capacity, future rates and prices, future utilization, the impact of regulations, including those related to electronic logging devices, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation and management bonuses, expected net fuel costs, strategies for managing fuel costs, the effectiveness and impact of, and cash flows relating to, our fuel hedging contracts and fuel surcharge programs, future fluctuations in operations and maintenance expenses, future fleet size, age, and management, the market value of used equipment, including equipment subject to operating or capital leases relative to our payment obligations under such operating leases (including residual value guarantees and the proceeds from the sale thereof), the anticipated impact of our investment in Transport Enterprise Leasing, LLC, and anticipated levels of and fluctuations relating to insurance, claims, and litigation expenses, including with respect to the 2008 cargo claim and the California wage and hour claim, among others, are forward-looking statements. Forward-looking 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. Such 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, 2016. 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, 2016 and our Form 10-Q for the quarter ended June 30, 2017, and 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
The third quarter was characterized by strong freight demand and tight trucking capacity. The market, and consequently, our utilization measured by miles per tractor improved in July and August. However, significant disruption of freight activity from the two hurricanes depressed September utilization. The main positives in the third quarter were 1) a 4.1% increase in average freight revenue per truck versus the same quarter of 2016, 2) year-over-year revenue and operating income growth from our Solutions subsidiary, and 3) our tangible book value per basic share increased 7.9% to $13.36 from $12.38 a year ago. The main negatives in the quarter were increased operating costs on a per mile basis, including unfavorable employee wages, and maintenance expense, partially offset by lower net fuel expense and capital costs. The increases in employee wages and maintenance expense were consistent with our expectations based on the labor market and our targeted fleet age.
Additional items of note for the third quarter of 2017 include the following:
●
|
Total revenue of $178.6 million, an increase of 8.6% compared with the third quarter of 2016 and freight revenue (which excludes revenue from fuel surcharges) of $159.5 million, an increase of 7.6% compared with the third quarter of 2016;
|
|
|
●
|
Operating income of $9.0 million, an operating ratio of 94.9%, and an adjusted operating ratio of 94.3%, compared with operating income of $5.4 million, an operating ratio of 96.7%, and an adjusted operating ratio of 96.3% in the third quarter of 2016;
|
|
|
●
|
Net income of $4.6 million, or $0.25 per diluted share, compared with net income of $2.9 million, or $0.16 per diluted share, in the third quarter of 2016;
|
|
|
●
|
With available borrowing capacity of $55.6 million under our Third Amended and Restated Credit Facility (the "Credit Facility") as of September 30, 2017, we do not expect to be required to test our fixed charge covenant in the foreseeable future;
|
|
|
●
|
Our Covenant Transport Solutions, Inc.’s ("Solutions") total revenue increased by 60.8% to $25.6 million, compared to $15.9 million for the third quarter of 2016, and Solutions’ operating income increased to $2.5 million compared to the 2016 quarter at $1.8 million;
|
|
|
●
|
Our equity investment in TEL provided $0.8 million of pre-tax earnings compared to $0.5 million in the third quarter of 2016;
|
|
|
●
|
Since December 31, 2016, total indebtedness, net of cash and including the present value of off-balance sheet lease obligations, has decreased by $0.8 million to $225.9 million; and
|
|
|
●
|
Stockholders’ equity and tangible book value at September 30, 2017, were $244.4 million, or $13.36 per basic share.
|
As the date of the mandatory electronic logging devices ("ELDs") implementation approaches, we expect the supply-demand environment to continue to improve in the fourth quarter of 2017 and into 2018 as a result of newly compliant carriers removing industry-wide freight transportation capacity—through lower truck numbers or decreased daily driving time—as well as increased volumes from economic growth. While the timing and magnitude of these changes are difficult to predict and may be different in each of our markets, these upcoming changes make attracting and retaining safe, service-oriented professional truck drivers even more critical for our industry and for us.
Our outlook for the fourth quarter of 2017 is positive and our goal remains to deliver earnings improvement as compared to the fourth quarter of 2016. We expect year-over-year net fuel expense savings, and a flattening of the year-over-year impact of the changes to our depreciation policy adopted in the third quarter of 2016, somewhat offset by higher maintenance expense and professional driver wages. At SRT, we expect additional progress in the remaining quarter of 2017 versus 2016.
In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue, expressed as a percentage of revenue, excluding fuel surcharge revenue. We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices. Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
Operating Ratio
Operating Ratio ("OR") and Adjusted Operating Ratio For Three and Nine Months Ended September 30, 2017 and 2016, respectively
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
GAAP Operating Ratio:
|
|
2017
|
|
|
OR %
|
|
|
2016
|
|
|
OR %
|
|
|
2017
|
|
|
OR %
|
|
|
2016
|
|
|
OR %
|
|
Total revenue
|
|
$
|
178,631
|
|
|
|
|
|
$
|
164,500
|
|
|
|
|
|
$
|
501,701
|
|
|
|
|
|
$
|
479,673
|
|
|
|
|
Total operating expenses
|
|
|
169,590
|
|
|
|
94.9
|
%
|
|
|
159,054
|
|
|
|
96.7
|
%
|
|
|
488,389
|
|
|
|
97.3
|
%
|
|
|
459,492
|
|
|
|
95.8
|
%
|
Operating income
|
|
$
|
9,041
|
|
|
|
|
|
|
$
|
5,446
|
|
|
|
|
|
|
$
|
13,312
|
|
|
|
|
|
|
$
|
20,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Ratio:
|
|
|
2017
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
2016
|
|
|
|
|
Total revenue
|
|
$
|
178,631
|
|
|
|
|
|
|
$
|
164,500
|
|
|
|
|
|
|
$
|
501,701
|
|
|
|
|
|
|
$
|
479,673
|
|
|
|
|
|
Less: Fuel surcharge revenue:
|
|
|
19,131
|
|
|
|
|
|
|
|
16,271
|
|
|
|
|
|
|
|
56,489
|
|
|
|
|
|
|
|
42,329
|
|
|
|
|
|
Revenue (excluding fuel surcharge revenue)
|
|
|
159,500
|
|
|
|
|
|
|
|
148,229
|
|
|
|
|
|
|
|
445,212
|
|
|
|
|
|
|
|
437,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
169,590
|
|
|
|
|
|
|
|
159,054
|
|
|
|
|
|
|
|
488,389
|
|
|
|
|
|
|
|
459,492
|
|
|
|
|
|
Less: Fuel surcharge revenue
|
|
|
19,131
|
|
|
|
|
|
|
|
16,271
|
|
|
|
|
|
|
|
56,489
|
|
|
|
|
|
|
|
42,329
|
|
|
|
|
|
Total operating expenses (net of fuel surcharge revenue)
|
|
|
150,459
|
|
|
|
94.3
|
%
|
|
|
142,783
|
|
|
|
96.3
|
%
|
|
|
431,900
|
|
|
|
97.0
|
%
|
|
|
417,163
|
|
|
|
95.4
|
%
|
Operating income
|
|
$
|
9,041
|
|
|
|
|
|
|
$
|
5,446
|
|
|
|
|
|
|
$
|
13,312
|
|
|
|
|
|
|
$
|
20,181
|
|
|
|
|
|
Revenue and Expenses
We focus on targeted markets throughout the United States 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 and accounts receivable factoring.
We have one reportable segment, Truckload, which is comprised of our truckload services.
The Truckload segment consists of three 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, regional, dedicated, and intermodal temperature-controlled service; and (iii) Star Transportation, Inc., 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. Nonetheless, freight revenue represents a non-GAAP financial measure. Accordingly, undue reliance should not be placed on the discussion of freight revenue, and discussions of freight revenue should be considered in combination with discussions of total revenue. For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentage of total revenue, and then as a percentage of freight revenue.
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.
Our main measure of profitability is adjusted operating ratio, which we define as operating expenses, net of fuel surcharge revenue, divided by total revenue, less fuel surcharge revenue, or freight revenue. See page 22 for the uses and limitations associated with adjusted operating ratio
.
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.
In addition, our Solutions subsidiary has service offerings ancillary to our Truckload operations, including freight brokerage service directly and through freight brokerage agents, who are paid a commission for the freight they provide, and accounts receivable factoring. These operations consist of several operating segments, which neither individually nor in the aggregate meet the quantitative or qualitative reporting thresholds.
Revenue Equipment
At September 30, 2017, we operated 2,550 tractors and 7,114 trailers. Of such tractors, 2,168 were owned, 135 were financed under operating leases, and 247 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 4,850 were owned, 1,101 were financed under operating leases, and 1,163 were financed under capital leases. We finance a small portion of our tractor fleet and larger portion 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 September 30, 2017, our fleet had an average tractor age of 2.2 years and an average trailer age of 3.6 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, and expenses associated with employee drivers, including driver compensation, fuel, and other expenses
,
are not incurred with respect to independent contractors. 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.
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016
The following tables set forth the percentage relationship of certain items to total revenue and freight revenue, where applicable (dollars in thousands):
Revenue
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight revenue
|
|
$
|
159,500
|
|
|
$
|
148,229
|
|
|
$
|
445,212
|
|
|
$
|
437,344
|
|
Fuel surcharge revenue
|
|
|
19,131
|
|
|
|
16,271
|
|
|
|
56,489
|
|
|
|
42,329
|
|
Total revenue
|
|
$
|
178,631
|
|
|
$
|
164,500
|
|
|
$
|
501,701
|
|
|
$
|
479,673
|
|
For the quarter ended September 30, 2017, total revenue increased $14.1 million, or 8.6%, to $178.6 million from $164.5 million in the 2016 quarter. Freight revenue increased $11.3 million, or 7.6%, to $159.5 million for the quarter ended September 30, 2017, from $148.2 million in the 2016 quarter, while fuel surcharge revenue increased $2.9 million quarter-over-quarter. The increase in freight revenue resulted from a $9.7 million increase in revenues from Solutions and a $1.6 million increase in freight revenues from our Truckload segment
.
The $1.6 million increase in Truckload freight revenue relates to a 4.1% increase in average freight revenue per tractor in the 2017 quarter as compared to the 2016 quarter, partially offset by a 2.6% decrease in our average tractor fleet. Average freight revenue per total mile increased 7.0 cents per mile compared to the 2016 quarter as a result of the favorable balance of supply and demand, and average miles per tractor decreased by 0.3%. The decline in our utilization is primarily related to the disruption of the two hurricanes during the 2017 quarter, partially offset by the tighter freight market and a higher average seated truck percentage.
For the nine-month period ended September 30, 2017, total revenue increased $22.0 million, or 4.6%, to $501.7 million from $479.7 million in the 2016 period. Freight revenue increased $7.9 million, or 1.8%, to $445.2 million for the nine months ended September 30, 2017, from $437.3 million in the 2016 period, while fuel surcharge revenue increased $14.2 million period-over-period. The increase in freight revenue resulted from an $11.8 million increase in revenue from Solutions
,
partially offset by a $3.9 million decrease in freight revenues from our Truckload segment.
The $3.9 million decrease in Truckload freight revenue relates to a 1.8% decrease in our average tractor fleet and a $1.6 million decrease in freight revenue from our refrigerated intermodal service offering, partially offset by an increase in average freight revenue per total mile of 2.8 cents compared to the same 2016 period.
Solutions' revenue increased $9.7 million quarter-over-quarter and $11.8 million period-over-period, primarily as a result of spot market opportunities related to the hurricane-affected regions and growth with existing customers compared with the same 2016 periods.
For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. As it relates to the comparison of expenses to freight revenue, we believe removing fuel surcharge revenue, which is sometimes a volatile source of revenue, affords a more consistent basis for comparing the results of operations from period-to-period. Nonetheless, freight revenue represents a non-GAAP financial measure. Accordingly, undue reliance should not be placed on the discussion of freight revenue, and discussions of freight revenue should be considered in combination with discussions of total revenue. For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentage of total revenue, and then as a percentage of freight revenue.
Salaries, wages, and related expenses
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Salaries, wages, and related expenses
|
|
$
|
60,732
|
|
|
$
|
57,972
|
|
|
$
|
178,639
|
|
|
$
|
171,666
|
|
% of total revenue
|
|
|
34.0
|
%
|
|
|
35.2
|
%
|
|
|
35.6
|
%
|
|
|
35.8
|
%
|
% of freight revenue
|
|
|
38.1
|
%
|
|
|
39.1
|
%
|
|
|
40.1
|
%
|
|
|
39.3
|
%
|
Salaries, wages, and related expenses increased approximately $2.8 million, or 4.8%, for the three months ended September 30, 2017, compared with the same quarter in 2016. As a percentage of total revenue, salaries, wages, and related expenses decreased to 34.0% of total revenue for the three months ended September 30, 2017, from 35.2% in the same quarter in 2016. As a percentage of freight revenue, salaries, wages, and related expenses decreased to 38.1% of freight revenue for the three months ended September 30, 2017, from 39.1% in the same quarter in 2016.
For the nine months ended September 30, 2017, salaries, wages, and related expenses increased approximately $7.0 million, or 4.1%, compared with the same period in 2016. As a percentage of total revenue, salaries, wages, and related expenses decreased to 35.6% of total revenue for the nine months ended September 30, 2017, from 35.8% for the nine months ended September 30, 2016. As a percentage of freight revenue, salaries, wages, and related expenses increased to 40.1% of freight revenue for the nine months ended September 30, 2017, from 39.3% in the same period in 2016.
The increases in salaries, wages, and related expenses for both the quarter and nine-month period are primarily due to employee pay adjustments since the second quarter of 2016. Additionally, workers’ compensation increased 0.3 cents per mile and 0.5 cents per mile, respectively, compared to the historic lows of the same 2016 periods. The changes in salaries, wages, and related expenses as a percentage of total revenue and freight revenue for the quarter and nine-month period ended September 30, 2017 are primarily the result of the aforementioned increased revenue generated by our Solutions business for which payments are reflected in the purchased transportation line item.
Going forward, we believe salaries, wages, and related expenses will increase as a result of a tight driver market, wage inflation, higher healthcare costs, and, in certain periods, increased incentive compensation due to better performance. In particular, we expect driver pay to increase as we look to reduce the number of unseated trucks in our fleet in a tight market for drivers. Additionally, when the freight market allows for an increase in rates we would expect to, as we have historically, pass a portion of those rate increases on to our professional drivers. Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Solutions business, for which payments are reflected in the purchased transportation line item.
Fuel expense
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Total fuel expense
|
|
$
|
25,998
|
|
|
$
|
26,436
|
|
|
$
|
76,310
|
|
|
$
|
75,989
|
|
% of total revenue
|
|
|
14.6
|
%
|
|
|
16.1
|
%
|
|
|
15.2
|
%
|
|
|
15.8
|
%
|
We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire increase in fuel prices for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.
The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the Department of Energy ("DOE") for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Ultra-low-sulfur diesel prices as measured by the DOE averaged approximately $0.24 per gallon and $0.33 per gallon higher, respectively, for the quarter and nine-month period ended September 30, 2017 compared with the same 2016 quarter and period.
Additionally, $1.0 million and $3.7 million, respectively, were reclassified from accumulated other comprehensive loss into our results of operations as additional fuel expense for the three and nine months ended September 30, 2017, related to losses on contracts that expired. At September 30, 2017, there was no material ineffectiveness on existing contracts. The ineffectiveness was calculated using the cumulative dollar offset method as an estimate of the difference in the expected cash flows of the respective fuel hedge contracts compared to the changes in the all-in cash outflows required for the diesel fuel purchases.
To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles driven by company trucks, our fuel economy, our percentage of deadhead miles, for which we do not receive fuel surcharge revenues, and the net impact of fuel hedging gains and losses. Net fuel expense is shown below:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Total fuel surcharge
|
|
$
|
19,131
|
|
|
$
|
16,271
|
|
|
$
|
56,489
|
|
|
$
|
42,329
|
|
Less: Fuel surcharge revenue reimbursed to independent contractors and other third parties
|
|
|
2,002
|
|
|
|
1,687
|
|
|
|
5,586
|
|
|
|
4,536
|
|
Company fuel surcharge revenue
|
|
$
|
17,129
|
|
|
$
|
14,584
|
|
|
$
|
50,903
|
|
|
$
|
37,793
|
|
Total fuel expense
|
|
$
|
25,998
|
|
|
$
|
26,436
|
|
|
$
|
76,310
|
|
|
$
|
75,989
|
|
Less: Company fuel surcharge revenue
|
|
|
17,129
|
|
|
|
14,584
|
|
|
|
50,903
|
|
|
|
37,793
|
|
Net fuel expense
|
|
$
|
8,869
|
|
|
$
|
11,852
|
|
|
$
|
25,407
|
|
|
$
|
38,196
|
|
% of freight revenue
|
|
|
5.6
|
%
|
|
|
8.0
|
%
|
|
|
5.7
|
%
|
|
|
8.7
|
%
|
Total fuel expense decreased approximately $0.4 million, or 1.7%, for the three months ended September 30, 2017, compared with the same quarter in 2016. As a percentage of total revenue, total fuel expense decreased to 14.6% of total revenue for the three months ended September 30, 2017, from 16.1% in the same quarter in 2016. As a percentage of freight revenue, total fuel expense decreased to 16.3% of freight revenue for the three months ended September 30, 2017, from 17.8% in the same quarter in 2016.
For the nine months ended September 30, 2017, total fuel expense increased approximately $0.3 million, or 0.4%, compared with the same period in 2016. As a percentage of total revenue, total fuel expense decreased to 15.2% of total revenue for the nine months ended September 30, 2017, from 15.8% in the 2016 period. As a percentage of freight revenue, total fuel expense decreased to 17.1% of freight revenue for the nine months ended September 30, 2017, from 17.4% in the 2016 period.
These changes in total fuel expense for the quarter and nine-month period ended September 30, 2017 are primarily due to the changes in the average price per gallon of ultra-low-sulfur diesel as measured by the DOE compared with the same periods in 2016.
Net fuel expense decreased $3.0 million, or 25.2%, and $12.8 million, or 33.5%, respectively, for the quarter and nine months ended September 30, 2017, as compared to the same 2016 quarter and period. As a percentage of freight revenue, net fuel expense decreased to 5.6% and 5.7%, respectively, for the quarter and nine months ended September 30, 2017, compared to 8.0% and 8.7% for the same 2016 quarter and period, respectively. The decrease in net fuel expense is primarily due to a decreased loss from fuel hedging transactions to $1.0 million and $4.0 million from $4.0 million and $13.1 million, respectively, and increased fuel surcharge recovery percentage for the periods ended September 30, 2017 compared to the same 2016 periods.
We expect to continue managing our idle time and truck speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by temperature-controlled operation (which uses diesel fuel for refrigeration, but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, the success of fuel efficiency initiatives, and gains and losses on fuel hedging contracts. Due to a combination of these factors, we expect year-over-year net fuel expense savings. We are continuing our efforts on increasing our ability to recover fuel surcharges under our customer contracts for fuel used in refrigeration units. If these efforts are successful, it could give rise to an increase in fuel surcharges recovered and a corresponding decrease in net fuel expense.
Operations and maintenance
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Operations and maintenance
|
|
$
|
13,046
|
|
|
$
|
11,359
|
|
|
$
|
37,504
|
|
|
$
|
34,227
|
|
% of total revenue
|
|
|
7.3
|
%
|
|
|
6.9
|
%
|
|
|
7.5
|
%
|
|
|
7.1
|
%
|
% of freight revenue
|
|
|
8.2
|
%
|
|
|
7.7
|
%
|
|
|
8.4
|
%
|
|
|
7.8
|
%
|
Operations and maintenance increased approximately $1.7 million, or 14.9%, for the three months ended September 30, 2017, compared with the same quarter in 2016. As a percentage of total revenue, operations and maintenance increased to 7.3% of total revenue for the three months ended September 30, 2017, from 6.9% in the same quarter in 2016. As a percentage of freight revenue, operations and maintenance increased to 8.2% of freight revenue for the three months ended September 30, 2017, from 7.7% in the same quarter in 2016.
For the nine months ended September 30, 2017, operations and maintenance increased $3.3 million, or 9.6%, compared with the same period in 2016. As a percentage of total revenue, operations and maintenance increased to 7.5% of total revenue for the nine months ended September 30, 2017, from 7.1% in the same period in 2016. As a percentage of freight revenue, operations and maintenance increased to 8.4% of freight revenue for the nine months ended September 30, 2017, from 7.8% in the same period in 2016. The changes for the quarter and nine-month period were primarily the result of extending the trade cycle of our tractors in the second half of 2016, as well as unloading and other operational costs associated with our increase in dedicated freight that was added since the first quarter of 2016.
Going forward, we believe this category will fluctuate based on several factors, including our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models, but is expected to increase in the near term.
Revenue equipment rentals and purchased transportation
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue equipment rentals and purchased transportation
|
|
$
|
36,361
|
|
|
$
|
27,831
|
|
|
$
|
90,719
|
|
|
$
|
80,308
|
|
% of total revenue
|
|
|
20.4
|
%
|
|
|
16.9
|
%
|
|
|
18.1
|
%
|
|
|
16.7
|
%
|
% of freight revenue
|
|
|
22.8
|
%
|
|
|
18.8
|
%
|
|
|
20.4
|
%
|
|
|
18.4
|
%
|
Revenue equipment rentals and purchased transportation increased approximately $8.5 million, or 30.6%, for the three months ended September 30, 2017, compared with the same quarter in 2016. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 20.4% of total revenue for the three months ended September 30, 2017, from 16.9% in the same quarter in 2016. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 22.8% of freight revenue for the three months ended September 30, 2017, from 18.8% in the same quarter in 2016.
For the nine months ended September 30, 2017, revenue equipment rentals and purchased transportation increased approximately $10.4 million, or 13.0%, compared with the same period in 2016. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 18.1% of total revenue for the nine months ended September 30, 2017, from 16.7% in the same period in 2016. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 20.4% of freight revenue for the nine months ended September 30, 2017, from 18.4% in the same period in 2016.
These increases for the three and nine months ended September 30, 2017 were primarily the result of the increased costs related to the spot market opportunities related to the hurricane-affected regions and growth of Solutions, partially offset by a decrease in our refrigerated intermodal service offering. We expect revenue equipment rentals to decrease going forward as a result of our increase in acquisition of revenue equipment through financed purchases or capital leases rather than operating leases. As discussed below, this expected decrease may be partially or fully offset by an increase in purchased transportation as we expect to continue to grow Solutions.
This expense category will fluctuate with the number and percentage of loads hauled by independent contractors and handled by Solutions, the percentage of our fleet financed with operating leases, the cost to obtain third party transportation services, the size of our intermodal service offering, as well as the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors. In times of tighter capacity we may need to increase the amounts we pay to third-party transportation providers, independent contractors, and intermodal transportation providers, which would increase this expense category as a percentage of freight revenue absent an offsetting increase in revenue. We continue to actively recruit independent contractors and, if we are successful, we would expect this line item to increase as a percentage of revenue.
Operating taxes and licenses
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Operating taxes and licenses
|
|
$
|
2,364
|
|
|
$
|
2,815
|
|
|
$
|
7,197
|
|
|
$
|
8,404
|
|
% of total revenue
|
|
|
1.3
|
%
|
|
|
1.7
|
%
|
|
|
1.4
|
%
|
|
|
1.8
|
%
|
% of freight revenue
|
|
|
1.5
|
%
|
|
|
1.9
|
%
|
|
|
1.6
|
%
|
|
|
1.9
|
%
|
Operating taxes and licenses decreased approximately $0.5 million, or 16.0%, for the three months ended September 30, 2017, compared with the same quarter in 2016. As a percentage of total revenue, operating taxes and licenses decreased to 1.3% of total revenue for the three months ended September 30, 2017, from 1.7% in the same quarter of 2016. As a percentage of freight revenue, operating taxes and licenses decreased to 1.5% of freight revenue for the three months ended September 30, 2017, from 1.9% in the same quarter in 2016.
For the nine months ended September 30, 2017, operating taxes and licenses decreased approximately $1.2 million, or 14.4%, compared with the same period in 2016. As a percentage of total revenue, operating taxes and licenses decreased to 1.4% of total revenue for the nine months ended September 30, 2017, from 1.8% in the same period in 2016. As a percentage of freight revenue, operating claims and licenses decreased to 1.6% of freight revenue for the nine months ended September 30, 2017, from 1.9% in the same period in 2016.
The decrease in operating taxes and licenses, including as a percentage of total revenue and freight revenue, is primarily due to the settlement of a property tax matter that resulted in a decrease of a prior year’s assessment and related refund, as well as a lower truck count.
Insurance and claims
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Insurance and claims
|
|
$
|
7,681
|
|
|
$
|
8,362
|
|
|
$
|
24,313
|
|
|
$
|
21,985
|
|
% of total revenue
|
|
|
4.3
|
%
|
|
|
5.1
|
%
|
|
|
4.8
|
%
|
|
|
4.6
|
%
|
% of freight revenue
|
|
|
4.8
|
%
|
|
|
5.6
|
%
|
|
|
5.5
|
%
|
|
|
5.0
|
%
|
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims decreased approximately $0.7 million, or 8.1%, for the three months ended September 30, 2017, compared with the same quarter in 2016. As a percentage of total revenue, insurance and claims decreased to 4.3% of total revenue for the three months ended September 30, 2017, from 5.1% in the same quarter of 2016. As a percentage of freight revenue, insurance and claims decreased to 4.8% of freight revenue for the three months ended September 30, 2017, from 5.6% in the same quarter in 2016. Insurance and claims per mile cost decreased to 9.9 cents per mile in the third quarter of 2017 from 10.5 cents per mile in the third quarter of 2016. This decrease is primarily related to a 10% decrease in our third quarter 2017 rate of chargeable accidents per million miles as measured by the U.S. Department of Transportation as compared to the same 2016 period.
For the nine months ended September 30, 2017, insurance and claims increased approximately $2.3 million, or 10.6%, compared with the same period in 2016. As a percentage of total revenue, insurance and claims increased to 4.8% of total revenue for the nine months ended September 30, 2017, from 4.6% in the same period in 2016. As a percentage of freight revenue, insurance and claims increased to 5.5% of freight revenue for the nine months ended September 30, 2017, from 5.0% in the same period in 2016. Insurance and claims per mile cost increased to 10.5 cents per mile in the nine months ended September 30, 2017 from 9.3 cents per mile in the same 2016 period, primarily related to an increase in severity of accidents during the first quarter of 2017 as compared to the same 2016 period.
Our auto liability (personal injury and property damage), cargo, and general liability insurance programs include significant self-insured retention amounts. The auto liability policy contains a feature whereby we are able to retroactively obtain a partial refund of the premium in exchange for taking on the liability for incidents that occurred during the period and releasing the insurers. This is referred to as "commuting" the policy or "policy commutation." In several past periods, including the policy period from April 1, 2013, through September 30, 2014, we have commuted the policy, which has lowered our insurance and claims expense. We are also self-insured for physical damage to our equipment. Because of these significant self-insured exposures, insurance and claims expense may fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-existing reserves, could adversely affect our financial condition and results of operations. We have accrued a reserve in connection with a judgment that was rendered against us based on a 2008 cargo claim. We recorded an additional $0.9 million of expense in the first quarter of 2017 related to a pre-trial decision issued by the court, but are reviewing our options regarding further appeals. If these further proceedings are resolved favorably to us, any reduction of the accrual could reduce insurance and claims expense in the period in which the claim is resolved. On the other hand, if we are not successful in such a finding or mediation, insurance and claims expense may increase as a result of continuing litigation expenses, including pre and post judgment interest. We periodically evaluate strategies to efficiently reduce our insurance and claims expense, which in the past has included the commutation of our auto liability insurance policy. We intend to evaluate our ability to commute the current policy and any such commutation could significantly impact insurance and claims expense.
Communications and utilities
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Communications and utilities
|
|
$
|
1,747
|
|
|
$
|
1,546
|
|
|
$
|
5,081
|
|
|
$
|
4,488
|
|
% of total revenue
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
% of freight revenue
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
For the periods presented, the change in communications and utilities was not significant as either a percentage of total revenue or freight revenue.
General supplies and expenses
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
General supplies and expenses
|
|
$
|
3,729
|
|
|
$
|
3,405
|
|
|
$
|
10,919
|
|
|
$
|
10,193
|
|
% of total revenue
|
|
|
2.1
|
%
|
|
|
2.1
|
%
|
|
|
2.2
|
%
|
|
|
2.1
|
%
|
% of freight revenue
|
|
|
2.3
|
%
|
|
|
2.3
|
%
|
|
|
2.5
|
%
|
|
|
2.3
|
%
|
For the periods presented, the change in general supplies and expenses was not significant as either a percentage of total revenue or freight revenue.
Depreciation and amortization
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Depreciation and amortization
|
|
$
|
17,932
|
|
|
$
|
19,328
|
|
|
$
|
57,707
|
|
|
$
|
52,232
|
|
% of total revenue
|
|
|
10.0
|
%
|
|
|
11.7
|
%
|
|
|
11.5
|
%
|
|
|
10.9
|
%
|
% of freight revenue
|
|
|
11.2
|
%
|
|
|
13.0
|
%
|
|
|
13.0
|
%
|
|
|
11.9
|
%
|
Depreciation and amortization consists primarily of depreciation of owned revenue equipment, net of gains and losses on disposition of capital assets. Depreciation and amortization decreased approximately $1.4 million, or 7.2%, for the three months ended September 30, 2017, compared with the same quarter in 2016. As a percentage of total revenue, depreciation and amortization decreased to 10.0% of total revenue for the three months ended September 30, 2017, from 11.7% in the same quarter in 2016. As a percentage of freight revenue, depreciation and amortization decreased to 11.2% of freight revenue for the three months ended September 30, 2017, from 13.0% in the same quarter in 2016. Excluding gains and losses, depreciation decreased $1.7 million for the quarter ended September 30, 2017 resulting from the disposal of tractors during the second quarter, which we anticipate replacing during the fourth quarter of 2017.
For the nine months ended September 30, 2017, depreciation and amortization increased approximately $5.5 million, or 10.5%, compared with the same period in 2016. As a percentage of total revenue, depreciation and amortization increased to 11.5% of total revenue for the nine months ended September 30, 2017, from 10.9% in the same period in 2016. As a percentage of freight revenue, depreciation and amortization increased to 13.0% of freight revenue for the nine months ended September 30, 2017, from 11.9% in the same period in 2016. Excluding gains and losses, depreciation increased $2.3 million for the nine-month period ended September 30, 2017, primarily due to a soft used tractor market that resulted in a significant reduction on the salvage value of used tractors resulting in us reducing residual values in the third quarter of 2016. Additionally, the soft used truck market contributed to losses on the sale of property and equipment of $3.2 million in the 2017 period compared to losses of $0.1 million in the same 2016 period. We expect depreciation and amortization to continue to moderate as the impact of the significant 2016 reductions in residual values will flatten on a comparative basis going forward. However, if the used tractor market were to decline further, we could have to adjust residual values again and increase depreciation or experience increased losses on sale.
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest expense, net
|
|
$
|
2,174
|
|
|
$
|
1,959
|
|
|
$
|
6,216
|
|
|
$
|
6,210
|
|
% of total revenue
|
|
|
1.2
|
%
|
|
|
1.2
|
%
|
|
|
1.2
|
%
|
|
|
1.3
|
%
|
% of freight revenue
|
|
|
1.4
|
%
|
|
|
1.3
|
%
|
|
|
1.4
|
%
|
|
|
1.4
|
%
|
For the periods presented, the change in interest expense, net was not significant as either a percentage of total revenue or freight revenue.
This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage.
Income from equity method investment
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income from equity method investment
|
|
$
|
750
|
|
|
$
|
450
|
|
|
$
|
2,575
|
|
|
$
|
2,450
|
|
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL’s net income for the three and nine months ended September 30, 2017. The increase in TEL’s contributions to our results is primarily due to an improvement in leased equipment as compared to the same 2016 periods.
Income tax expense
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income tax expense
|
|
$
|
2,985
|
|
|
$
|
1,068
|
|
|
$
|
3,530
|
|
|
$
|
5,568
|
|
% of total revenue
|
|
|
1.7
|
%
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
1.2
|
%
|
% of freight revenue
|
|
|
1.9
|
%
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
1.3
|
%
|
Income tax expense increased approximately $1.9 million, or 179.5%, for the three months ended September 30, 2017, compared with the same quarter in 2016. As a percentage of total revenue, income tax expense increased to 1.7% of total revenue for the three months ended September 30, 2017, from 0.6% in the same quarter in 2016. As a percentage of freight revenue, income tax expense increased to 1.9% of freight revenue for the three months ended September 30, 2017, from 0.7% in the same quarter in 2016.
For the nine months ended September 30, 2017, income tax expense decreased approximately $2.0 million, or 36.6%, compared with the same period in 2016. As a percentage of total revenue, income tax expense decreased to 0.7% of total revenue for the nine months ended September 30, 2017, from 1.2% in the same period in 2016. As a percentage of freight revenue, income tax expense decreased to 0.8% of freight revenue for the nine months ended September 30, 2017, from 1.3% in the same period in 2016.
These changes were primarily related to the $3.7 million increase and $6.7 million decrease in the pre-tax income in the three- and nine-month periods ended September 30, 2017, respectively, compared to the same 2016 periods, resulting from the changes in operating income noted above and the increase in the contribution from TEL’s earnings.
The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related to our per diem pay structure for drivers. Due to the partial nondeductible effect of the per diem payments, our tax rate fluctuates as income fluctuates and is more volatile as results are closer to break-even.
RESULTS OF SEGMENT OPERATIONS
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016
The following table summarizes financial and operating data by reportable segment:
(in thousands)
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Total Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Truckload
|
|
$
|
153,066
|
|
|
$
|
148,603
|
|
|
$
|
446,322
|
|
|
$
|
436,055
|
|
Other
|
|
|
25,565
|
|
|
|
15,897
|
|
|
|
55,379
|
|
|
|
43,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
178,631
|
|
|
$
|
164,500
|
|
|
$
|
501,701
|
|
|
$
|
479,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truckload
|
|
$
|
11,165
|
|
|
$
|
5,508
|
|
|
$
|
20,054
|
|
|
$
|
22,558
|
|
Other
|
|
|
2,468
|
|
|
|
1,829
|
|
|
|
5,500
|
|
|
|
5,144
|
|
Unallocated Corporate Overhead
|
|
|
(4,592
|
)
|
|
|
(1,891
|
)
|
|
|
(12,242
|
)
|
|
|
(7,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,041
|
|
|
$
|
5,446
|
|
|
$
|
13,312
|
|
|
$
|
20,181
|
|
For the 2017 quarter, Truckload total revenue increased $4.5 million due to a $2.9 million increase in fuel surcharge revenue and a $1.6 million increase in Truckload freight revenue. The increase in Truckload freight revenue relates to a 4.1% increase in average freight revenue per tractor in the 2017 quarter as compared to the 2016 quarter, partially offset by a 2.6% decrease in our average tractor fleet. Average freight revenue per total mile increased 7.0 cents per mile compared to the 2016 quarter and average miles per tractor decreased by 0.3%. The decline in our utilization is primarily related to the disruption of the two hurricanes during the 2017 quarter, partially offset by the tighter freight market and a higher average seated truck percentage.
For the nine-month period ended September 30, 2017, total revenue increased $10.3 million due to a $14.2 million increase in fuel surcharge revenue partially offset by a $3.9 million decrease in freight revenue. The $3.9 million decrease in Truckload freight revenue relates to a 1.8% decrease in our average tractor fleet and a $1.6 million decrease in freight revenue from our refrigerated intermodal service offering, partially offset by an increase in average freight revenue per total mile of 2.8 cents compared to the same 2016 period.
Our Truckload operating income for the three and nine months ended September 30, 2017 was $5.7 million higher and $2.5 million lower than the same 2016 periods, respectively, due to the abovementioned revenue metrics and increases in capital and other operating costs.
Other total revenue and operating income increased $9.7 million and $0.6 million quarter-over-quarter, respectively, and increased $11.8 million and $0.4 million period-over-period, respectively. These changes are primarily the result of spot market opportunities related to the hurricane-affected regions and growth with existing customers compared with the same 2016 periods.
The change in unallocated corporate overhead for the three and nine months ended September 30, 2017 is primarily related to an increase in salaries, including workers' compensation, compared to historic lows for workers’ compensation in 2016.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, capital leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. Our primary sources of liquidity at September 30, 2017, were funds provided by operations, borrowings under our Credit Facility, borrowings from secured installment notes, capital leases, operating leases of revenue equipment, and cash and cash equivalents. We had working capital (total current assets less total current liabilities) of $59.3 million and $47.9 million at September 30, 2017 and December 31, 2016, respectively. Based on our expected financial condition, results of operations, net capital expenditures, sources of financing, and net cash flows during the next twelve months, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs for at least the next twelve months.
We expect borrowings from the financial affiliates of our primary revenue equipment suppliers to be available to fund new tractors expected to be delivered in 2017, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of notes, operating leases, capital leases, and/or from the Credit Facility. Going forward, we expect revenue equipment acquisitions through purchases and capital leases to increase as a percentage of our fleet as we decrease our use of operating leases. With a relatively young average fleet age at September 30, 2017, 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. If we are successful in our attempts to grow our independent contractor fleet, our capital requirements would be reduced. As of September 30, 2017, we had $3.7 million of borrowings outstanding under the Credit Facility, undrawn letters of credit outstanding of approximately $32.9 million, and available borrowing capacity of $55.6 million. Our intra-period borrowings on the Credit Facility ranged from zero to approximately $22.1 million during the first nine months of 2017. Fluctuations in the outstanding balance and related availability on the Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of receipt of proceeds from disposals of property and equipment.
Cash Flows
Net cash flows provided by operating activities were lower in the nine-month period ended September 30, 2017 than in the 2016 period, primarily due to the timing of revenue and the related collections at the beginning of each period and a $4.7 million decrease in net income. These decreases were partially offset by fluctuations in tax (benefit) expense due to depreciation of revenue equipment as compared to the 2016 period, and an increase in insurance and claims expense as a result of increased severity and frequency of accidents during 2017 compared to same 2016 period. The fluctuations in cash flows from accounts payable and accrued expenses primarily related to the timing of payments on our trade accounts in the 2017 period compared to the 2016 period
.
Net cash flows used in investing activities was $57.2 million in the 2017 period, compared to net cash flows used in investing activities of $46.0 million in the 2016 period. The change in net cash flows used in investing activities was primarily the result of the timing and dispositions of assets held for sale as well as our decision to extend the trade cycle of our current equipment. During the 2017 period we took delivery of approximately 605 new company tractors and disposed of approximately 343 used tractors, resulting in an average of 2,557 tractors for the 2017 period compared to an average of 2,605 tractors for the 2016 period
.
Net cash flows used in financing activities decreased $30.5 million in the 2017 period compared to the 2016 period, primarily as a function of net repayments
,
in the 2016 period, of notes payable facilitated by cash flows primarily related to the trade cycle of our revenue equipment
.
In particular, this decrease reflects the sale of 343 tractors in the 2017 period compared to 909 tractors in the same 2016 period.
Going forward, our cash flow may fluctuate depending on the resolution of the 2008 cargo claim and the extent of future income tax obligations. See Note 10 for further information regarding the 2008 cargo claim.
Material Debt Agreements
We and substantially all of our subsidiaries are parties to a Third Amended and Restated Credit Facility with Bank of America, N.A., as agent and JPMorgan Chase Bank, N.A.
The Credit Facility is a $95.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million subject to Lender acceptance of the additional funding commitment. The Credit Facility includes, within our $95.0 million revolving credit facility, a letter of credit sub facility in an aggregate amount of $95.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time. The Credit Facility matures in September 2018.
Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent's prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.5% to 1.0%; while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.5% to 2.0%. The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate or revenue equipment pledged under other financing agreements, including revenue equipment installment notes and capital leases.
Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $95.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the appraised fair market value of eligible real estate.
We had $3.7 million outstanding under the Credit Facility as of September 30, 2017, undrawn letters of credit outstanding of approximately $32.9 million, and available borrowing capacity of $55.6 million. The interest rate on outstanding borrowings as of September 30, 2017, was 4.8% on $0.7 million of base rate loans, and 2.8% on $3.0 million of LIBOR loans. Based on availability as of September 30, 2017 and December 31, 2016, there was no fixed charge coverage requirement.
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated. If an event of default occurs under the Credit Facility and the Lenders cause or have the ability to cause all of the outstanding debt obligations under the Credit Facility to become due and payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions. The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply with the covenants and restrictions set forth in the Credit Facility could result in an event of default.
Capital lease obligations are utilized to finance a portion of our revenue equipment and are entered into with certain finance companies who are not parties to our Credit Facility. The capital leases in effect at September 30, 2017 terminate in October 2017 through September 2023 and contain guarantees of the residual value of the related equipment by us. As such, the residual guarantees are included in the related debt balance as a balloon payment at the end of the related term as well as included in the future minimum capital lease payments. These capital lease agreements require us to pay personal property taxes, maintenance, and operating expenses.
Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from October 2017 to July 2023. The notes contain certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or other material covenants or events of default
,
except certain notes totaling $130.0 million are cross-defaulted with the Credit Facility. Additionally, the abovementioned fuel hedge contracts totaling $1.6 million at September 30, 2017, are cross-defaulted with the Credit Facility. Concurrent with entering into certain of our revenue equipment installment notes, we entered into interest rate swaps to effectively fix the interest rates. See Note 6 for further information. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered for the remainder of 2017, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, capital leases, and/or from the Credit Facility.
In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third party lender. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%. See Note 6 for further information about the interest rate swap.
OFF-BALANCE SHEET ARRANGEMENTS
Operating leases have been an important source of financing for our revenue equipment and certain real estate. At September 30, 2017, we had financed 135 tractors and 1,101 trailers under operating leases. Vehicles held under operating leases are not carried on our condensed consolidated balance sheets, and operating lease payments in respect of such vehicles are reflected in our condensed consolidated statements of operations in the line item "Revenue equipment rentals and purchased transportation." Our revenue equipment rental expense was $2.7 million for the third quarters of both 2017 and 2016. The total value of remaining payments under operating leases as of September 30, 2017 was approximately $12.0 million. In connection with various operating leases, we issued residual value guarantees, which provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. The undiscounted value of the residual guarantees was approximately $4.0 million at September 30, 2017. The residual guarantees at September 30, 2017 expire between August 2018 and February 2019. The discounted present value of the total remaining lease payments and residual value guarantees were approximately $14.4 million as of September 30, 2017
.
We expect our residual guarantees to approximate the market value at the end of the lease term. We believe that proceeds from the sale of equipment under operating leases would exceed the payment obligation on substantially all operating leases.
CONTRACTUAL OBLIGATIONS
During the three and nine months ended September 30, 2017, there were no material changes in our commitments or contractual liabilities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. There have been no material changes to our most critical accounting policies and estimates during the three months ended September 30, 2017, compared to those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our 2016 Annual Report on Form 10-K.