Covenant posts 4Q net loss on lower revenue

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Covenant Transportation Group today, Feb. 3, announced financial and operating results for the quarter and year ended Dec. 31.

For the fourth quarter, total revenue decreased 11.4 percent to $171.0 million from $192.9 million in the same quarter of 2007. Freight revenue, excluding fuel surcharges, decreased 9.8 percent to $143.9 million from $159.5 million. Including impairment charges, the company reported a net loss of $39.8 million compared to net income of $176,000. On a non-GAAP basis, without impairment charges, the company’s net loss would have been $6.2 million compared to net income of $176,000.

“The impairment items announced today are accounting entries that do not affect our day-to-day operations, our customer service, our employee performance, our competitive position, or compliance with the financial covenant in our revolving credit agreement,” said David R. Parker, chairman, president and chief executive officer of Chattanooga, Tenn.-based Covenant. “We are disappointed to recognize the impairments, because they indicate a very weak economy that may continue for some time, as well as our failure to perform as well as we would like. However, these accounting charges do not change anything fundamental about our business operations or our future earnings potential.”

Parker said Covenant believes it has borrowing availability under its credit facilities to operate its business for the foreseeable future. “Based on extensive cost-reduction efforts under way throughout our organization, our objective is to return to profitability in 2009, even if the economy fails to improve,” he said.

For the year ended Dec. 31, total revenue increased 8.6 percent to $773.9 million in 2008 from $712.5 million for 2007. Freight revenue increased 2.2 percent to $615.8 million from $602.6 million. Including impairment charges, the company generated a net loss of $53.4 million compared to reported a net loss of $16.7 million. On a non-GAAP basis, without impairment charges, the company’s net loss would have been $19.0 million compared to a net loss of $15.7 million.

Parker said that aside from the impairment charges, the fourth quarter of 2008 was affected primarily by three factors: poor asset utilization due to a poor freight market; a significant benefit from declining net fuel expense; and superior safety performance that was marred by a small number of severe claims. The company said it reduced its fleet by about 160 trucks, or 5 percent, primarily in the Star Transportation and Covenant Transport operations; for the quarter, weighted average tractors driven by driver teams increased by about 21.4 percent, to 1,034 tractors, compared with the 2007 quarter.

Richard B. Cribbs, the company’s senior vice president and chief financial officer, said he believes CTG’s consolidated balance sheet remains solid. At Dec. 31, Covenant’s total balance sheet debt net of cash was $160.4 million, and its stockholders’ equity was $118.8 million, for a total debt-to-capitalization ratio of 57.5 percent, Cribbs said. The goodwill impairment charge involved a write-down of an intangible asset, he said; accordingly, Covenant’s tangible book value per share was not affected by that portion of the fourth-quarter results. “At December 31, our tangible book value was $104.6 million, and the discounted value of future obligations under off-balance sheet lease obligations was approximately $97 million, including the residual value guarantees under those leases,” he said.

Cribbs said on Dec. 31, Covenant had $39 million of available borrowing capacity under its revolving line of credit. “Based on our most recent borrowing base, available borrowing capacity remained at approximately the same level through January 2009,” he said. “We also had approximately $57 million remaining on our $220 million equipment financing commitment from Daimler Truck Finance, which is expected to be available for tractor purchases in 2009. Borrowing capacity fluctuates on the Daimler commitment as availability increases when we pay off notes as they mature.”

Covenant’s existing tractor fleet plan for 2009 includes the purchase of about 1,050 tractors and disposal of about 1,250 tractors, for expected net capital expenditures of about $45 million to $55 million, Cribbs said. “In light of first-quarter 2009 freight demand, we are currently re-evaluating our tractor purchase requirements and may reduce the number of tractors purchased,” he said. “We have the ability to cancel tractor orders within specified notice periods, although any cancellations would affect the availability of trade slots to dispose of used tractors, which could affect expected proceeds of disposition.”