Covenant Logistics Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company provides expedited and dedicated truckload, managed freight and warehousing services. Its former factoring segment is reported as discontinued operations following its 2020 sale.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $220.9 million | $210.8 million |
| Freight revenue, excluding fuel surcharge | $200.7 million | $189.6 million |
| Operating income (loss) | $10.5 million | $(1.5) million |
| GAAP operating ratio | 95.2% | 100.7% |
| Adjusted operating ratio | 94.2% | 100.4% |
| Continuing-operations income (loss), net of tax | $8.6 million | $(3.1) million |
| Net income (loss), including discontinued operations | $11.1 million | $(2.2) million |
| Diluted earnings (loss) per share | $0.65 | $(0.12) |
| Operating cash flow | $9.6 million | $(3.5) million |
Total revenue increased 4.8% year over year, while freight revenue grew 5.9%. Net income included $2.6 million from discontinued operations, principally reflecting a $3.4 million pre-tax reversal of a TFS-sale indemnification accrual. The company reported a $3.0 million pre-tax contribution from its 49% equity-method investment in Transport Enterprise Leasing (TEL), versus a $0.7 million loss in Q1 2020.
Segments and material changes
- Expedited: Revenue was $78.5 million, down from $86.2 million; operating income was $6.2 million versus a $1.8 million loss. Revenue reflected a smaller fleet after exiting most solo-refrigerated operations, partly offset by higher revenue per tractor.
- Dedicated: Revenue was $75.4 million, down from $81.8 million; the segment recorded a $1.8 million operating loss, compared with a $1.3 million loss. Management cited contract exits and lower miles per tractor, partly offset by higher rates.
- Managed Freight: Revenue rose to $51.4 million from $30.7 million; operating income increased to $4.9 million from $0.7 million. Growth reflected a strong freight market, spot opportunities and overflow freight.
- Warehousing: Revenue increased to $15.6 million from $12.1 million; operating income was $1.2 million versus $1.0 million, aided by new customer business.
Operating improvement also reflected substantially lower insurance and claims expense ($7.8 million versus $15.6 million) and lower depreciation and amortization ($14.1 million versus $18.2 million). Purchased transportation and equipment rentals increased to $57.2 million from $46.1 million, reflecting Managed Freight growth and tighter third-party capacity. Net fuel expense fell to $4.3 million from $6.8 million.
Cash, debt and liquidity
- Cash was $4.8 million at March 31, 2021, down from $8.4 million at year-end 2020. Working capital was $20.3 million, compared with $14.4 million at year-end.
- Investing activities provided $9.9 million, principally reflecting equipment-sale proceeds; financing activities used $23.2 million. Net cash decreased $3.6 million during the quarter.
- Total debt and lease obligations were $128.1 million, versus $110.4 million at December 31, 2020. The increase was primarily related to borrowing $35.6 million under the Triumph Draw Note to fund a TFS-related indemnification call. Management reported net indebtedness (debt less cash) of $123.3 million, up $21.3 million from year-end.
- The $110 million revolving credit facility had $10.5 million drawn, $29.7 million of undrawn letters of credit and $69.8 million of available capacity. The Triumph Draw Note had $9.6 million of remaining availability. The revolver matures in October 2025.
- The company repurchased approximately 458,000 Class A shares for $8.1 million in the quarter; $31.9 million remained authorized under the $40 million program.
Management said liquidity should be adequate for current and projected needs for at least the next year and did not expect material liquidity constraints in the foreseeable future. It expected not to need to test the revolver’s fixed-charge coverage covenant in the foreseeable future, based on availability at quarter-end.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance was provided. Management expected steady, incremental improvement in Dedicated margins over the rest of 2021 and described the freight environment and new-business pipeline as robust. Longer term, it expects Managed Freight margins to gravitate toward the mid-single digits and Dedicated margins toward mid- to high-single digits, ultimately double digits.
- Management’s strategy is to grow Dedicated, Managed Freight and Warehousing, improve underperforming contracts, reduce unnecessary overhead, and improve safety, service and productivity. It expected the average operational fleet to remain near 2,550 tractors for the rest of 2021, with 284 additional company replacement tractors planned for delivery and no additional new trailers.
- Risks cited include driver availability and compensation, third-party capacity costs, accident experience and claims volatility, inflation, contract transitions, customer and industry supply-demand conditions, and uncertainty surrounding COVID-19 effects. Management expected higher wages and certain general expenses later in 2021; it estimated a 28.7% effective tax rate for 2021.
- The TFS settlement allows indemnification exposure of up to $45 million. Triumph called $35.6 million in Q1, funded by the Draw Note; the company reversed $3.4 million of its prior accrual after collections on covered receivables. Further indemnification obligations could affect earnings, cash flow, liquidity and indebtedness.
- Insurance exposure remains notable: the company estimated that the $9 million excess-of-$1 million aggregate coverage layer for April 2018–March 2021 was fully eroded. A replacement $7 million excess-of-$3 million policy began in January 2021. Adverse development of older claims could require additional expense.
- Several California driver wage-and-hour or competition-related lawsuits were pending, with no loss estimate or accrual for certain claims. A previously disclosed wage-and-hour case was settled after quarter-end for an immaterial amount, pending court approval; existing accruals were sufficient for that settlement.
Important facts for investors to verify
- Whether Dedicated can deliver the promised margin improvement despite driver-cost pressure, contract changes and its Q1 operating loss.
- Future TFS indemnification calls, collections on covered receivables, and the company’s remaining Draw Note availability and related debt burden.
- Whether insurance claims development, including erosion of the prior coverage layer, leads to additional accruals or greater expense volatility.
- Whether Managed Freight growth can sustain margins as third-party capacity costs and freight-market conditions change.
- Cash generation, capital spending, share repurchases and compliance with debt covenants as fleet investment and financing needs evolve.
Adjusted operating ratio is a company-defined non-GAAP measure; the filing cautions that it has limitations and should be considered alongside GAAP results.