Covenant Logistics Group, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 28, 2023. The company provides U.S. truckload transportation and logistics through Expedited, Dedicated, Managed Freight, and Warehousing segments. Comparisons below are with fiscal 2021.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $1,216.9 million | $1,046.0 million |
| Freight revenue, excluding fuel surcharges | $1,046.4 million | $949.9 million |
| Operating income | $120.7 million | $67.2 million |
| Operating margin | 9.9% | 6.4% |
| Net income | $108.7 million | $60.7 million |
| Diluted earnings per share | $7.00 | $3.57 |
| Operating cash flow | $159.2 million | $73.2 million |
| Cash and cash equivalents | $68.7 million | $8.4 million |
| Working capital | $66.5 million | $45.8 million |
- GAAP operating ratio improved to 90.1% from 93.6%. Adjusted operating ratio, a company-defined non-GAAP measure, was 90.7% versus 92.5%; it excludes fuel surcharges and specified items.
- At year-end, the company had $179.6 million of total debt and lease obligations, including operating leases, and no Credit Facility borrowings. Available Credit Facility capacity was $86.1 million, after $23.9 million of undrawn letters of credit. Debt and finance leases, net of cash, were reported at $46.4 million.
- Net cash used in investing activities was $86.2 million; net cash used in financing activities was $12.8 million. Net capital expenditures were $47.5 million.
Material changes and notable items
- Revenue increased 16.3%; freight revenue rose 10.2%. Fuel surcharge revenue increased to $170.5 million from $96.1 million, reflecting higher fuel prices.
- Expedited revenue grew to $452.7 million from $337.1 million, with operating income rising to $60.6 million from $33.1 million. Dedicated operating income improved to $21.1 million from a $1.4 million loss. Managed Freight revenue was nearly flat, while operating income increased to $36.9 million from $32.5 million. Warehousing revenue grew, but operating income declined to $2.2 million from $3.0 million.
- Reported operating income included a $38.5 million gain on the sale of a California terminal. The company also recorded $7.5 million of early lease-abandonment and disposal expense and disclosed $10.0 million of equipment-abandonment charges in its adjusted operating ratio reconciliation. These items make reported and adjusted comparisons materially different.
- The February 2022 acquisition of AAT Carriers contributed $33.1 million of revenue and $13.3 million of net income after acquisition. The company recorded $17.0 million of contingent consideration at year-end; additional payment may be up to $20.0 million, based on AAT results.
- The 49%-owned TEL investment contributed $25.2 million of equity-method income, up from $14.8 million, reflecting growth and strong used-equipment sale gains.
- The company repurchased 3.4 million shares for $84.7 million and paid $4.3 million in dividends during 2022. It reported approximately 20% fewer shares outstanding than a year earlier. A quarterly dividend was increased to $0.11 per share in February 2023, subject to Board approval.
Outlook, risks, and contingencies
- Management expected a difficult freight market through at least the first half of 2023, with pressure on rates and margins, alongside ongoing inflation. It cited fleet replacement, safety improvements, and cost initiatives as potential offsets, but provided no specific earnings or revenue guidance.
- Management forecast 2023 fleet net capital expenditures of $75 million to $85 million, assuming scheduled equipment deliveries and strong but moderating used-equipment sale prices. Equipment purchase commitments totaled approximately $156.6 million at year-end and were cancelable subject to stated conditions.
- Insurance and claims expense rose to $50.5 million from $38.8 million. The company self-insures significant exposure; estimates for auto-liability claims are a critical audit matter. A prior insurance layer was estimated to be fully eroded, and adverse claim developments could result in further expense.
- A California driver class-action wage-and-hour lawsuit remained pending. The company said it could not reasonably estimate the likelihood or amount of loss and had recorded no accrual for that claim. The TFS sale indemnification liability was $4.1 million at year-end, with a separate $45 million line available solely for potential indemnification funding.
- Key risks include freight-market cyclicality, driver recruitment and retention, fuel and equipment costs and availability, customer concentration, safety and insurance claims, regulatory changes, and the possibility of reclassifying independent contractors as employees. The top ten customers represented 43% of revenue; no individual customer exceeded 10%.
- The company and its auditor reported effective internal control over financial reporting, but AAT was excluded from the 2022 internal-control assessment and audit scope. The auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- How much 2022 profitability depended on the terminal gain, TEL earnings, and unusually strong first-half freight conditions; compare reported results with adjusted measures and their stated exclusions.
- Whether 2023 freight rates, volumes, and margins withstand the anticipated market weakness, and whether cost reductions and fleet renewal deliver the expected benefits.
- Actual capital spending, equipment deliveries, used-vehicle resale values, and the financing mix relative to the $75 million–$85 million net-capex forecast and $156.6 million commitments.
- Developments in self-insured claims, insurance-layer erosion, the California lawsuit, and the remaining TFS indemnification exposure.
- AAT’s performance against earnout terms, integration progress, and the final allocation of acquisition goodwill and intangible assets.
- Ability to sustain dividends and share repurchases while meeting debt, lease, liquidity, and investment needs; dividend payments remain subject to Board approval and financing restrictions.