Covenant Logistics Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results; comparisons are with Q1 2021 unless stated otherwise. Amounts are in millions of dollars except per-share data and percentages.
Business context
Covenant operates Expedited and Dedicated truckload businesses, Managed Freight brokerage and transportation-management services, and Warehousing. In February 2022, it acquired AAT Carriers, a provider of time-sensitive U.S. government freight, and included AAT in Expedited. Management described freight demand as strong, with constrained driver and equipment capacity, while noting signs of a potentially slowing freight economy.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $291.6 | $220.9 |
| Freight revenue, excluding fuel surcharge | $257.6 | $200.7 |
| Operating income | $23.8 | $10.5 |
| Income from continuing operations | $22.2 | $8.6 |
| Net income | $22.2 | $11.1 |
| Diluted EPS | $1.32 | $0.65 |
| Operating cash flow | $39.4 | $9.6 |
| Investing cash flow | $(45.0) | $9.9 |
| Financing cash flow | $4.3 | $(23.2) |
- Revenue increased 32.0%; freight revenue increased 28.4%. Operating income more than doubled, and diluted EPS was a company quarterly record.
- GAAP operating ratio improved to 91.8% from 95.2%. Adjusted operating ratio was 90.5% versus 94.2% (equivalent to adjusted operating margins of 9.5% and 5.8% on freight revenue, respectively).
- Net fuel expense declined to $3.8 million from $4.3 million, or 1.5% versus 2.1% of freight revenue, despite sharply higher fuel prices, as surcharge recovery increased. No fuel hedges remained at quarter-end.
- TEL equity-method income was $6.8 million, compared with $3.0 million, materially contributing to pretax earnings growth.
- By segment, revenue and operating income were: Expedited $98.8 million and $9.3 million; Dedicated $88.9 million and $2.6 million; Managed Freight $86.2 million and $10.8 million; Warehousing $17.7 million and $1.0 million. Dedicated moved from a $1.8 million operating loss to profit; Warehousing operating income declined from $1.2 million.
- Cash and cash equivalents were $7.1 million at March 31, versus $8.4 million at year-end. Working capital was $38.9 million, down from $45.8 million; current assets were $169.0 million and current liabilities $130.0 million.
- Debt was $47.8 million and finance-lease obligations $10.0 million at quarter-end. Including cash, management reported net total indebtedness of $50.6 million and a 0.39 leverage ratio. Total debt and lease obligations, including operating leases, were $90.3 million.
- The revolving facility had $23.1 million drawn, $25.2 million of undrawn letters of credit, and $61.7 million of available borrowing capacity. The separate $45.0 million Triumph Draw Note remained undrawn and was restricted to TFS-related indemnification.
Material changes and unusual items
- AAT was acquired for $38.8 million cash consideration at closing, less $1.8 million cash acquired. The agreement includes up to $20.0 million of earnout consideration tied to performance in the first two years; expected total purchase price is $35.0–$57.0 million. Preliminary purchase accounting recorded $29.5 million of goodwill. AAT contributed $4.2 million revenue and $2.0 million net income from acquisition through quarter-end.
- Investing cash use primarily reflected the $37.0 million net cash acquisition cost of AAT and equipment purchases. Operating cash flow benefited from collection timing and higher net income.
- The company repurchased $14.8 million of shares in the quarter and paid $1.0 million in dividends. It repurchased a further $11.9 million of shares through May 4, 2022.
- The remaining contingent liability associated with the 2020 sale of its factoring business was $5.1 million. The filing states that future indemnification payments could affect cash flow, liquidity, and indebtedness.
- In May 2022, the company amended its revolving credit facility, extending maturity to May 2027, changing the LIBOR reference to SOFR, expanding the accordion feature, and revising borrowing-base and covenant flexibility.
Outlook, commentary, and risks
- Management anticipated a strong freight market and constrained capacity through at least the first half of 2022, with substantial pricing and operating-cost increases. It expected demand to become more balanced later in the year as supply chains improved and economic growth potentially slowed.
- Absent a substantial near-term deterioration in market conditions, management expected 2022 operating results to exceed 2021, while emphasizing uncertainty around market timing and execution. No specific earnings or revenue guidance range was provided.
- Management planned $50–$60 million of fleet net capital expenditures for the remainder of 2022 and expected a sizable increase as equipment replacement normalized. Its stated 2022 fleet plan included 529 additional company replacement tractors.
- Key pressures include driver and wage inflation, fuel and interest costs, parts and equipment supply constraints, third-party capacity costs, and insurance expense. Management highlighted potential volatility from adverse development of older claims and erosion of insurance limits.
- A California wage-and-hour class action remained pending with no accrual because the company could not reasonably estimate the likelihood or amount of loss. Management said existing reserves for other discussed claims were sufficient and did not expect their resolution to materially harm the financial statements.
- Management said it expected to remain in compliance with debt covenants and did not expect to test the fixed-charge coverage covenant in the foreseeable future. It also stated that liquidity was adequate for projected needs.
Most important facts for investors to verify
- How much of earnings growth is repeatable from core operations versus TEL’s $6.8 million equity income and the acquired AAT contribution.
- AAT’s results against earnout targets and final purchase accounting, including goodwill and intangible-asset valuations.
- Actual freight demand, pricing, driver availability, fuel surcharge recovery, and cost inflation relative to management’s conditional outlook.
- Equipment delivery timing, used-equipment values, planned capital expenditures, and the resulting debt and lease burden.
- Credit-facility availability and covenant headroom after the May amendment, and the remaining TFS indemnification exposure.
- Developments in insurance-claim reserves and the California litigation, including any changes to estimated exposure.