Covenant Logistics Group, Inc. — Q3 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2023, compared with the same 2022 periods. Covenant operates Expedited, Dedicated, Managed Freight, and Warehousing businesses. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $288.7 | $311.8 | $829.6 | $920.8 |
| Freight revenue, excluding fuel surcharges | $253.4 | $266.6 | $730.5 | $791.1 |
| Operating income | $15.1 | $59.1 | $44.6 | $109.8 |
| Net income | $13.5 | $50.5 | $42.4 | $97.2 |
| Diluted earnings per share | $0.99 | $3.39 | $3.09 | $6.12 |
| GAAP operating ratio | 94.8% | 81.1% | 94.6% | 88.1% |
| Adjusted operating ratio | 93.0% | 91.6% | 93.6% | 90.5% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $53.0 | $121.1 |
Q3 adjusted operating income was $17.9 million versus $22.5 million a year earlier. The adjusted operating ratio is a company-defined non-GAAP measure; the filing cautions it should be considered supplemental to GAAP results.
Balance sheet and liquidity at September 30, 2023: Cash was $7.4 million; working capital was $31.2 million, down from $66.5 million at year-end 2022. Debt was $184.6 million, including $165.2 million of revenue-equipment installment notes and $19.4 million of real-estate notes. Finance lease obligations were $6.3 million and operating lease obligations were $50.1 million. The company reported total debt and lease obligations of $240.9 million. Its stated net indebtedness—debt and finance leases, less cash—was $183.5 million, up $137.1 million since year-end 2022.
The $110 million revolving credit facility had no borrowings outstanding, $21.8 million of undrawn letters of credit, and $88.2 million of available capacity. A separate $45 million Draw Note is available only for potential TFS-sale indemnification obligations. Management said it expects liquidity to meet projected needs and expects to remain in compliance with debt covenants over the next 12 months.
Changes versus the prior comparable period
- Q3 total revenue declined 7.4% and freight revenue declined 5.0%; nine-month total revenue fell 9.9%. Management cited a challenging freight market, lower fuel-surcharge revenue, reduced tractor counts, and lower Managed Freight volumes.
- Q3 operating income fell sharply from $59.1 million. The prior-year quarter included a $38.5 million gain on sale of a California terminal; Q3 2023 included only a $0.6 million net gain on property and equipment disposition. Nine-month 2023 results included a $7.6 million gain on sale of a Tennessee terminal.
- Adjusted operating ratio worsened 1.4 percentage points in Q3 and 3.1 points for the nine-month period. Higher depreciation and amortization, lower revenue, and increased general supplies and expenses contributed; lower fuel, maintenance, and purchased-transportation costs provided offsets.
- Operating cash flow for the first nine months fell to $53.0 million, primarily due to lower net income and a $24.6 million cash use from receivables and advances, versus a cash source in the prior-year period. Investing cash outflow increased to $144.6 million, reflecting acquisitions and fleet investment.
- Revenue-equipment installment notes increased to $165.2 million from $88.9 million at year-end 2022. Q3 cash and cash equivalents decreased to $7.4 million from $68.7 million at year-end.
Segments, acquisitions, and capital allocation
- Q3 segment revenue and operating income were: Expedited $113.4 million and $7.5 million; Dedicated $80.2 million and $3.0 million; Managed Freight $69.7 million and $3.7 million; Warehousing $25.3 million and $0.9 million. Managed Freight revenue and operating income declined year over year; Warehousing revenue and operating income improved.
- LTST, a dedicated contract carrier, was acquired in April 2023 for preliminary consideration of $109.9 million, including contingent consideration; its Q3 revenue and net income included in Covenant’s results were $15.0 million and $1.5 million. Sims, a specialized brokerage business, was acquired in August for preliminary consideration of $9.8 million, with up to $12.0 million of additional earnout consideration. Purchase accounting remains preliminary.
- Net capital expenditures for the first nine months were $143.0 million. Management expected $35–$40 million of net capital expenditures for the remainder of 2023 and planned additional tractor and trailer deliveries.
- The company paid $4.3 million in dividends during the first nine months, at $0.11 per share for each 2023 quarterly dividend. It repurchased $25.5 million of shares in the period, but reported no repurchases in Q3 or through November 8, 2023; $32.6 million remained available under the program.
Outlook, risks, and unusual items
- Management expected a modest sequential decline in Q4 revenue and earnings, citing a cyberattack on a major Expedited customer and the United Auto Workers strike, which temporarily reduced Dedicated load volumes and revenue per truck. The filing gives no numerical earnings or revenue guidance.
- Management described the freight market as weak but said its strategic shift toward steadier businesses had supported more resilient earnings and returns. It expects to continue cost and efficiency initiatives. It also expected lower TEL earnings than in 2022 because of softer used-equipment markets.
- Fuel-surcharge recoveries may not cover all fuel costs, and insurance and claims expense may remain volatile. The filing says a prior insurance layer was fully eroded; adverse development of claims from that period could increase expenses. A $1.8 million contingent liability remained related to the former TFS business, alongside the dedicated $45 million Draw Note availability.
- Contingent consideration liabilities for acquisitions were $21.3 million at September 30, 2023. Changes in fair value, including acquisition earnout estimates, increased general supplies and expenses. The company also reported $150,000 of Q3 income from discontinued operations from a reversal of part of the TFS indemnification liability.
- Disclosure controls and procedures were deemed ineffective at quarter-end because a review used an incorrect input in determining the significance of the LTST acquisition. The error led the company not to identify the need to provide certain audited financial statements and pro forma information on Form 8-K. The filing says this did not affect current or historical financial statements; an amendment was to be filed when the required statements became available.
- The company highlighted dependence on information technology systems and service providers, including cybersecurity and outage risks, and amended its risk-factor disclosure. It also disclosed ordinary-course litigation, principally transportation-related personal injury and property-damage claims.
Important facts for investors to verify
- Whether freight demand, customer volumes, rates, and Q4 customer disruptions developed as management expected.
- How LTST and Sims perform, whether earnouts are payable, and how final purchase accounting affects goodwill, intangible amortization, and results.
- Whether operating cash flow, receivable collections, capital spending, and fleet financing support liquidity while debt and interest costs rise.
- Developments in insurance-layer erosion and TFS indemnification exposure, as well as compliance with credit-facility and other debt covenants.
- Remediation of the LTST acquisition disclosure-control deficiency and filing of any required audited statements and pro forma information.