Covenant Logistics Group, Inc. — Q2 2022 Form 10-Q
Business context and period. The unaudited report covers the three and six months ended June 30, 2022, compared with the same periods in 2021. Covenant operates Expedited, Dedicated, Managed Freight, and Warehousing segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $317.4 (+23.8%) | $256.3 | $609.0 | $477.2 |
| Freight revenue, excluding fuel surcharge | $266.9 (+15.0%) | $231.9 | $524.5 | $432.6 |
| Operating income | $26.9 | $18.3 | $50.7 | $28.8 |
| Net income | $24.5 | $15.4 | $46.7 | $26.6 |
| Diluted EPS | $1.56 | $0.91 | $2.86 | $1.56 |
| GAAP operating ratio | 91.5% | 92.8% | 91.7% | 94.0% |
| Adjusted operating ratio (non-GAAP) | 89.4% | 91.6% | 89.9% | 92.8% |
Q2 adjusted diluted EPS was $1.63, which management described as a company quarterly record. Adjusted EPS is a non-GAAP measure. Q2 income from the 49% equity-method investment in Transport Enterprise Leasing (TEL) was $7.1 million, versus $3.4 million a year earlier; six-month income was $13.9 million versus $6.3 million.
Cash flow, balance sheet, debt, and liquidity
- First-half operating cash flow was $76.9 million, versus $34.1 million in 2021. Investing cash flow was an outflow of $63.0 million, including the AAT acquisition and equipment purchases; financing cash flow was an outflow of $17.9 million. Cash ended June at $4.5 million, down from $8.4 million at year-end.
- Working capital was $22.5 million, down from $45.8 million at December 31, 2021. Total assets were $701.0 million and stockholders’ equity was $356.0 million.
- At June 30, debt was $58.5 million, finance lease obligations $7.0 million, and operating lease obligations $44.9 million. The company reported net indebtedness, defined as debt and finance leases less cash, of $61.0 million, up $32.5 million since year-end.
- No borrowings were outstanding under the $110 million revolving credit facility; availability was $85.7 million after $24.3 million of undrawn letters of credit. A separate $45 million Draw Note facility is available solely for potential TFS-related indemnification.
- First-half share repurchases totaled $43.4 million; dividends totaled $2.0 million. A new $75 million repurchase authorization was approved in May. The company repurchased a further $12.2 million of shares through August 3.
Material changes and segment results
- All four segments reported higher Q2 revenue. Expedited revenue was $121.6 million and operating income $14.6 million; Dedicated revenue was $96.8 million and operating income $2.9 million, compared with a prior-year operating loss. Managed Freight revenue was $80.3 million and operating income $8.6 million. Warehousing revenue was $18.7 million and operating income $0.8 million, down from $1.0 million.
- Freight pricing and fuel surcharges increased, while average miles per unit generally declined in the asset-based segments. Expedited included AAT, acquired February 9, 2022. Management attributed Dedicated’s improvement partly to higher rates and exiting underperforming contracts.
- Fuel expense rose to $48.5 million in Q2 from $26.4 million, but company net fuel expense fell to $1.3 million from $4.1 million as surcharge recovery increased. DOE diesel prices were 69% higher year over year; no fuel hedges remained at June 30.
- Insurance and claims expense rose to $13.6 million from $9.6 million; management cited unfavorable development in certain prior-period claims and current-quarter claims. Operations and maintenance expense also increased, reflecting older equipment, parts and labor inflation, and supply-chain disruption.
- AAT’s preliminary acquisition-date consideration was approximately $54.7 million, including $16.2 million of estimated contingent consideration; earnout payments may reach $20 million. AAT contributed $8.4 million revenue and $2.9 million net income in Q2. Purchase accounting remains preliminary.
Outlook, commentary, and risks
- Management expected softer freight demand, greater driver availability, and continued cost inflation in the second half of 2022. Absent substantial near-term deterioration in market conditions, it expected second-half adjusted diluted EPS to exceed the same period in 2021 and full-year EPS to be at least $5.00 per share. This is management guidance, not a guarantee.
- Management said liquidity should be adequate and did not expect material liquidity constraints or to need to test the Credit Facility fixed-charge covenant in the foreseeable future. It estimated remaining-2022 fleet net capital expenditures of $10–$20 million, assuming scheduled deliveries, strong but moderating used-equipment prices, and a California terminal sale that remained under negotiation.
- Insurance limits for a prior policy layer were estimated fully eroded; further adverse claim development could increase expense and volatility. The filing reports a remaining $5.1 million contingent liability related to the former factoring business (TFS) sale, while potential indemnification exposure under the settlement is up to $45 million. The separate $45 million Draw Note is available to fund such obligations.
- A California wage-and-hour putative class action remained pending; the company said it could not reasonably estimate potential loss and recorded no accrual for that claim. Management stated that other discussed litigation, taking reserves into account, was not expected to materially adversely affect the financial statements.
- Warehousing margins faced temporary startup costs and labor-market constraints. Other cited risks include inflation, driver availability and compensation, equipment supply and pricing, third-party capacity costs, freight-market softening, and potentially volatile insurance claims.
Important facts for investors to verify
- Whether the $5.00 full-year EPS outlook is on the same adjusted or GAAP basis as the filing’s wording; the outlook specifies adjusted diluted EPS, while reported GAAP diluted EPS was $2.86 for the first half.
- How freight demand, pricing, miles, and surcharge recovery evolve as the market softens, and whether cost inflation is offset by revenue and productivity.
- The development of insurance claims and the remaining coverage available under eroded policy limits, as well as the TFS indemnification exposure and $5.1 million recorded liability.
- Final AAT purchase accounting, acquisition earnout performance, and the extent to which AAT contributes earnings and synergies.
- Execution of planned capital spending and the California terminal sale, liquidity after ongoing buybacks, and the effect of increased equipment debt and lease obligations.
- Managed Freight and Warehousing margins, and the outcome or potential financial exposure of the pending California wage-and-hour litigation.