Covenant Logistics Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unless otherwise noted, amounts below are in millions. The company operates Expedited, Dedicated, Managed Freight, and Warehousing businesses; its former Factoring segment is reported as discontinued operations following the 2020 sale of substantially all TFS operations.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $256.3 | $191.7 | $477.2 | $402.5 |
| Freight revenue, excluding fuel surcharges | $231.9 | $179.6 | $432.6 | $369.1 |
| Operating income (loss) | $18.3 | $(29.0) | $28.8 | $(30.4) |
| Net income (loss) | $15.4 | $(22.3) | $26.6 | $(24.6) |
| Diluted EPS | $0.91 | $(1.31) | $1.56 | $(1.40) |
| GAAP operating ratio | 92.8% | 115.1% | 94.0% | 107.6% |
| Adjusted operating ratio | 91.6% | 99.5% | 92.8% | 99.9% |
Adjusted operating ratio is a non-GAAP measure excluding fuel surcharge revenue, intangible amortization, and specified unusual items. Q2 equity-method income from TEL was $3.4 million; six-month income was $6.3 million.
- Cash flow: First-half cash from operations was $34.1 million, investing cash flow provided $19.8 million, and financing cash flow used $57.3 million. Cash declined $3.4 million to $5.0 million. Investing cash flow included $33.8 million of equipment-disposition proceeds and $14.0 million of equipment purchases.
- Liquidity: Working capital was $21.5 million at June 30, versus $14.4 million at year-end 2020. The $110 million revolving facility had $10.0 million drawn, approximately $29.5 million of letters of credit, and $70.5 million of available capacity. Management said liquidity should be adequate for at least the next year.
- Debt and leases: Debt and lease obligations totaled approximately $93.0 million, down from $110.4 million at December 31, 2020. The company reported $88.1 million of indebtedness net of cash, a $13.9 million decline since year-end. The TFS-related Draw Note had $4.6 million outstanding; $40.4 million of its capacity remained available solely for possible TFS indemnification.
- Balance sheet: Total assets were $663.7 million, total liabilities $350.2 million, and stockholders’ equity $313.5 million. Cash was $5.0 million.
Material changes and business drivers
- Q2 total revenue increased 33.7% year over year; freight revenue rose 29.2%, despite a smaller tractor fleet. Management attributed the results to strong freight demand, low inventories, supply-chain disruption, constrained trucking capacity, and the driver shortage.
- Managed Freight revenue more than doubled to $71.6 million and operating income improved to $7.3 million from a $3.6 million loss. Warehousing revenue rose to $15.5 million. Dedicated generated $81.9 million of revenue but remained slightly loss-making at $0.2 million. Expedited operating income was $10.2 million, versus a $12.8 million loss.
- Prior-year results included $26.6 million of long-lived asset impairment and other restructuring effects, including a terminal gain. The company had also exited most solo-refrigerated operations in 2020, affecting year-over-year comparisons. Factoring results are presented as discontinued operations.
- Insurance and claims expense fell to $9.6 million in Q2 from $11.6 million. Depreciation and amortization also declined, while purchased transportation and equipment rental expense rose with Managed Freight growth and tighter third-party capacity.
Outlook, risks, and unusual items
- Management reported a robust freight environment and pipeline, and expected continued gradual, incremental Dedicated margin improvement during the rest of 2021. It gave longer-term directional margin expectations of mid-single digits for Managed Freight and mid-to-high single digits, ultimately double digits, for Dedicated. These are expectations, not formal earnings guidance.
- Near-term priorities include improving Dedicated contract profitability and securing longer-term agreements with key Expedited and brokerage customers. Longer term, management plans to grow Dedicated, Managed Freight, and Warehousing, reduce unnecessary overhead, and improve safety, service, and productivity.
- Identified headwinds include driver availability and costs, contract transitions, accident experience and claims volatility, inflation, and freight supply-and-demand conditions. The company also noted uncertainty around COVID-19 impacts.
- The TFS sale settlement remains a material contingency: the company had recorded a $44.2 million liability at year-end 2020, received a $35.6 million indemnification call, and repaid $31.0 million of related Draw Note borrowings in Q2. The remaining contingent liability was $5.1 million at June 30; future payments could affect earnings, cash flow, liquidity, and indebtedness.
- Insurance exposure warrants attention. The prior $9 million excess-of-$1 million policy layer was estimated to be fully eroded; adverse development in older claims could require additional accruals. The filing also describes unresolved putative class actions involving alleged driver wage-and-hour violations and an alleged no-poaching conspiracy; the company had not accrued amounts for claims whose potential losses it could not reasonably estimate.
- All owned motor carriers had satisfactory DOT safety ratings, but the company said one carrier operating over half its tractors was at greater risk of a DOT review; an adverse rating could affect customer relationships, insurance, and operations.
Important facts for investors to verify
- Whether Managed Freight growth is converting into sustainable margins after higher purchased-transportation costs, and whether Dedicated returns improve as management expects.
- How much of earnings and future results depend on TEL’s equipment-market-driven contribution, which management expected to remain consistent with first-half 2021.
- Final TFS indemnification exposure, remaining Draw Note availability, and the cash-flow effects of any further settlement payments.
- Development of insurance claims and policy-limit erosion, as well as outcomes and potential costs of the disclosed driver litigation.
- Whether driver availability, capacity costs, inflation, and any DOT safety-rating developments alter the company’s operating and liquidity outlook.
- Execution of the company’s fleet plan and capital allocation, including debt reduction, equipment replacement, and any further share repurchases.