Covenant Logistics Group, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. The company provides truckload transportation, brokerage and transportation management, and warehousing services through Expedited, Dedicated, Managed Freight, and Warehousing segments.
Financial performance
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Total revenue | $1,046.0 million | $838.6 million | Up 24.7% |
| Freight revenue, excluding fuel surcharges | $949.9 million | $776.2 million | Up 22.4% |
| Operating income (loss) | $67.2 million | $(14.0) million | Operating margin 6.4%, versus (1.7%) |
| Net income (loss) | $60.7 million | $(42.7) million | Diluted EPS: $3.57 versus $(2.46) |
| Cash from operating activities | $73.2 million | $63.0 million | Up $10.2 million |
| Cash and cash equivalents | $8.4 million | $8.4 million | At year-end |
| Working capital | $45.8 million | $14.4 million | Improved $31.4 million |
| Debt and lease obligations | $74.3 million | $110.4 million | Net of cash, indebtedness was $65.8 million, down $36.1 million year over year |
Freight revenue was approximately 90.8% of total revenue. The company reported a 2021 GAAP operating ratio of 93.6%; its non-GAAP adjusted operating ratio was 92.5%, compared with 96.5% in 2020. The adjusted measure excludes fuel surcharge revenue and specified amortization or other adjustments and is not a substitute for GAAP results.
Segment operating income (loss) was: Expedited $33.1 million, Dedicated $(1.4) million, Managed Freight $32.5 million, and Warehousing $3.0 million. Managed Freight recorded especially strong growth, with revenue rising to $321.2 million from $177.6 million. The company’s 49%-owned TEL investment contributed $14.8 million of pre-tax earnings, versus $3.9 million in 2020.
Net cash used in financing activities was $83.6 million, including repayment of debt and lease obligations and $10.3 million of share repurchases. Investing activities provided $10.3 million, compared with $138.0 million in 2020, which included proceeds from the TFS sale and property dispositions. Net capital expenditures in 2021 were $8.9 million; management’s 2022 baseline range was $50 million to $70 million.
Material changes versus 2020
- Revenue growth and a turnaround in continuing operations followed the 2020 restructuring, which reduced fleet and overhead, exited less profitable operations, and discontinued the Factoring segment.
- 2020 included substantial unusual items, including a $26.6 million long-lived asset impairment and a $44.2 million TFS-related contingent loss charge. No restructuring charges or long-lived asset impairments were recorded in 2021.
- Insurance and claims expense fell to $38.8 million from $53.1 million, partly reflecting 2020 large-claim developments and insurance-layer erosion. Salaries and wages, fuel, maintenance, and purchased transportation costs increased.
- Debt and lease obligations declined, and the company ended 2021 with no borrowings under its $110 million revolving Credit Facility. Available borrowing capacity was $83.6 million, after $26.4 million of outstanding letters of credit.
Outlook, risks, and unusual items
- Management expected a strong freight market and constrained driver and equipment capacity during at least the first few months of 2022, followed potentially by more balanced demand later in the year. It expected cost inflation to persist and, absent a substantial near-term market deterioration, expected 2022 operating results similar to 2021. This is not a quantified earnings forecast.
- Longer-term segment margin aims were high-single-digit to low-double-digit operating margins for Expedited and Dedicated, and mid-to-high-single-digit margins for Managed Freight and Warehousing. These are targets, not assurances.
- Key operating risks include driver recruitment and retention, wage and insurance inflation, fuel-price and surcharge timing, equipment shortages and higher prices, third-party capacity costs, seasonal demand, customer concentration, and exposure to self-insured accident claims. The top ten customers represented about 53% of 2021 revenue; no single customer exceeded 10%.
- The company’s auto-liability insurance layer of $9 million excess of $1 million for April 2018–March 2021 was estimated fully eroded. The replacement policy provides $7 million excess of $3 million through April 2024; adverse development of older claims could cause further expense.
- The TFS sale indemnity was capped at $45 million. Following a $35.6 million indemnification call and repayments of the related Draw Note during 2021, a $5.1 million contingent liability remained at year-end; no Draw Note borrowings remained.
- Subsequent events: the board approved a quarterly dividend of $0.0625 per share in January 2022 and a February 2022 share repurchase plan of up to $30 million under the existing authorization. The company also acquired AAT Carriers for an expected total purchase price of $35 million to $55 million, including an earnout; AAT reported approximately $25 million of 2021 revenue.
Most important facts for investors to verify
- Net income presentation: The audited statements report $58.2 million of after-tax income from continuing operations and $2.5 million from discontinued operations, totaling $60.7 million. One MD&A passage instead states $79.2 million for continuing operations; check the audited statements and reconciliation when using this figure.
- Quality and durability of earnings: Assess the contribution of TEL earnings, strong Managed Freight conditions, fuel surcharges, and lower 2021 insurance expense, and whether Dedicated can reach profitability.
- Claims and contingent exposure: Track self-insurance reserve development, erosion of insurance limits, and settlement of the remaining TFS indemnity liability.
- Capital needs and liquidity: Compare planned 2022 net capital expenditures of $50–$70 million and $73.8 million of equipment commitments with operating cash flow, lease transition plans, and available credit.
- Guidance and capital returns: Monitor whether 2022 results support management’s outlook, and whether dividends or repurchases remain consistent with debt covenants and capital requirements.
The independent auditor gave an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also reported effective controls as of December 31, 2021.