Covenant Logistics Group, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. The company provides truckload transportation, brokerage and transportation management, and warehousing services; it reorganized reporting into Expedited, Dedicated, Managed Freight, and Warehousing segments and discontinued its Factoring segment following the sale of substantially all TFS operations in July 2020.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $838.6 million | $885.4 million |
| Freight revenue, excluding fuel surcharges | $776.2 million | $791.3 million |
| Operating income (loss), continuing operations | $(14.0) million | $8.8 million |
| Net income (loss) | $(42.7) million; $(2.46) diluted EPS | $8.5 million; $0.45 diluted EPS |
| Cash provided by operating activities | $63.0 million | $64.0 million |
| Cash and cash equivalents at year-end | $8.4 million | $43.6 million |
| Working capital at year-end | $14.4 million | $93.1 million |
| Debt and lease obligations | $110.4 million | $348.2 million |
- Freight revenue fell 1.9%; total revenue declined 5.3%. Fuel surcharge revenue decreased to $62.3 million from $94.1 million.
- GAAP operating ratio was 101.7%, versus 99.0% in 2019. Management’s non-GAAP adjusted operating ratio was 96.5%, compared with 98.5%; adjusted operating income was $26.9 million versus $11.7 million. These adjusted measures exclude specified items and are not GAAP measures.
- Fuel expense fell to $77.4 million from $115.3 million; net fuel expense declined to $22.3 million from $32.9 million. Insurance and claims expense rose to $53.1 million from $47.7 million.
- Investing activities provided $138.0 million, principally reflecting the TFS sale and asset dispositions; financing activities used $236.3 million, reflecting substantial debt and lease repayments and $17.5 million of share repurchases.
- Net indebtedness, net of cash, fell by $202.1 million to $102.0 million. At year-end, the company had $15.0 million drawn and $65.3 million of available capacity under its $110 million revolving facility, plus a separate $45 million line restricted to potential TFS indemnification payments.
- Fourth-quarter unaudited results: revenue of $225.2 million, operating income of $9.6 million, continuing-operations income of $11.6 million, discontinued-operations loss of $33.1 million, and net loss of $25.7 million, or $1.50 per diluted share.
Material changes and business drivers
- The company reduced its fleet by approximately 600 tractors and 1,100 trailers, exited solo-driver refrigerated services, disposed of or closed facilities, reduced non-driver headcount, and discontinued Factoring. Results are consequently difficult to compare directly with prior periods.
- Expedited revenue declined to $320.2 million from $356.5 million, while Managed Freight grew to $177.6 million from $138.6 million and Warehousing rose to $52.1 million from $47.8 million. Dedicated revenue declined to $288.7 million from $342.5 million.
- Expedited and Dedicated reported operating losses of $7.0 million and $15.5 million, respectively; Managed Freight and Warehousing reported operating income of $4.5 million and $4.1 million.
- The company recorded $26.6 million of long-lived asset impairments and other restructuring-related costs, including facility, equipment, severance, and technology charges. The sale of TFS resulted in a separate $44.2 million contingent loss accrual, nearly all of the stated $45 million maximum indemnification exposure.
- Top ten customers represented approximately 48% of revenue, up from 45% in 2019; one customer exceeded 10% of revenue in both years.
Outlook, risks, and unusual items
- Management described freight conditions and its new-business pipeline as robust and expected sequential progress during 2021. It expected first-half 2021 results to significantly exceed prior-year adjusted results for the comparable period, but gave no quantified earnings or revenue guidance. Second-half and full-year results were said to depend on driver retention, auto-liability claims, and customer contract negotiations.
- Management’s priorities include seating more tractors, controlling costs, improving less-profitable Dedicated contracts, and growing Dedicated, Managed Freight, and Warehousing. The company implemented a historically large Expedited driver pay increase in January 2021 and anticipated higher wages, insurance, and claims costs.
- Insurance remains a significant exposure: the $9 million layer excess of $1 million for the 2018–2021 policy period was estimated fully eroded. A replacement policy provides $7 million excess of $3 million through April 2024; claims development from the prior period could still cause additional expense. Auto-liability self-insurance reserves were identified as a critical audit matter.
- Other principal risks include driver shortages and turnover, customer concentration and rate pressure, changing freight demand, fuel-price exposure, third-party carrier capacity, regulatory and worker-classification changes, litigation, and COVID-19-related disruption. The company noted certain subsidiaries exceeded intervention thresholds in one or more CSA safety categories, although all operating subsidiaries retained satisfactory DOT safety ratings.
- The TFS purchaser had made no indemnification claim by the filing date, but management considered a claim probable and recorded a $44.2 million liability. A $45 million dedicated credit line is available for such payments. The company also disclosed pending California wage-and-hour and driver-hiring-related class-action matters for which it could not reasonably estimate potential losses.
- Management said liquidity was adequate for projected needs. It reported an earlier covenant waiver for a real-estate note, subsequent covenant amendment and compliance, and expected compliance over the next 12 months. The independent auditor issued unqualified opinions on the financial statements and internal controls; management reported controls effective at year-end.
Important facts for investors to verify
- Track actual TFS indemnification claims, recoveries, timing, and cash impact against the $44.2 million accrual and $45 million maximum exposure.
- Assess whether the company can improve profitability in Expedited and Dedicated while implementing driver pay increases and managing higher insurance costs and potential adverse claims development.
- Compare 2021 performance with management’s qualitative first-half outlook, and examine the timing and economics of Dedicated contract renewals and replacement business.
- Review liquidity and covenant headroom, including the distinction between the general revolving facility and the TFS-restricted credit line, as well as debt and lease obligations.
- Monitor customer concentration, driver availability and turnover, CSA safety measures, and unresolved litigation; the filing does not provide a clear estimate of potential losses for the identified lawsuits.
- Consider the non-GAAP adjusted operating ratio alongside GAAP results and confirm the company’s exclusions when making period-to-period comparisons.