Covenant Transport Has Over $1 Billion In 2022 Freight Revenue

  • Friday, January 27, 2023

Covenant Logistics Group, Inc. announced financial and operating results for the fourth quarter ended Dec. 31.

Chairman and Chief Executive Officer, David R. Parker, commented: “Fourth quarter earnings were $0.81 per diluted share and non-GAAP adjusted earnings were $1.37 per diluted share. The primary difference between the two relates to an early lease abandonment and disposal charge and excess equipment expense discussed in further detail below (the “Equipment Adjustment”).  

“For 2022, we generated over $1.0 billion in freight revenue, the highest annual earnings per share in our history, and a 15.3 percent return on average invested capital. We were also successful in acquiring AAT, repurchasing 3.4 million or approximately 20 percent of outstanding common stock, and for the first time in company history distributing four quarterly dividend payments, all while maintaining moderately low debt.

“Despite these unprecedented achievements, our fourth quarter results undoubtedly reflect sequential softening in the freight market, continued inflationary pressure and the cost of significant excess equipment. While we anticipate improved equipment related costs in 2023, we believe the freight market, as a combination of freight rates and volumes, will remain unfavorable compared to the prior year for the next several quarters.

“Our asset-based segments, Expedited and Dedicated, contributed approximately 67 percent of total revenue, 19 percent of operating income, 62 percent of total freight revenue, and 59 percent of adjusted operating income in the quarter. Our Expedited segment grew revenue and improved adjusted margins compared to the fourth quarter last year. Our Dedicated segment produced comparable revenue and improved adjusted margins year over year. We continue to work to improve the durability of contracts in these segments to lower volatility across economic and freight cycles.

“Our asset-light segments, Managed Freight and Warehousing, contributed approximately 33 percent of total revenue, 81 percent of operating income, 38 percent of total freight revenue, and 41 percent of adjusted operating income in the quarter and combined to generate comparable margins and returns.  Managed Freight continued to exceed our expectations through strong execution and effective coordination with our Expedited and Dedicated segments. Warehousing was able to grow revenue through new customer startups but had diminished margins primarily due to incremental cost headwinds associated with new customer startups and investments in capacity for future growth in this segment.  

“Our 49 percent equity method investment with Transport Enterprise Leasing contributed pre-tax net income of $3.9 million, or $0.21 per share, compared to $5.2 million, or $0.23 per share, in the 2021 quarter. The reduced contribution from TEL experienced in the quarter was a result of a increased depreciation taken on certain used high-mileage tractors. This adjustment at TEL is related to similar make and model year equipment but is separate from the Equipment Adjustment. We anticipate sequential improvement to TEL’s results in the first quarter of 2023.”

Equipment Adjustment
In an effort to improve our driver experience, service and operating cost, we made the decision earlier in the year to aggressively reduce the average age of our equipment. We did this through the combination of acquiring additional unbudgeted trucks in the fourth quarter and increasing our original tractor order for 2023. During the fourth quarter we made significant progress on the plan but incurred unusual expense from two items: (i) an early lease abandonment and disposal charge and (ii) excess equipment due to delivery of a large number of new tractors combined with delays in removing existing leased tractors from operations. Overall, we are pleased to be taking delivery of new units and exiting older, less efficient units, which will reduce our average fleet age and improve operating efficiency.  Nevertheless, the fourth quarter cost was significant. The excess equipment is excluded from our operating statistics. The early lease abandonment and disposal charge relates to tractors pulled from operations during the fourth quarter, which have been the source of significant operational headwinds throughout the year due to poor fuel economy, unusually high maintenance costs and elevated down time. Because we have no intended future use for these units, we have abandoned the right of use asset associated with the leases, which extend through the fourth quarter of 2023. The charge reflects the current period costs, the write down of the remaining right of use asset, plus the estimated cost of refurbishment and turn-in. The combination of these two factors resulted in the following incremental expense in the period:

Lease abandonment and disposal expense               $7.5 million
Excess equipment expense                                         $2.5 million
The pre-tax financial impact of the items outlined above negatively impacted our fourth quarter results. However, we believe the future benefits of improved fuel economy, utilization and maintenance costs will outweigh this cost.

Combined Truckload Revenue
Paul Bunn, the company’s president and chief operating officer commented on truckload operations, “For the quarter, total revenue in our truckload operations increased 16.9 percent, to $198.3 million, while averaging 76 fewer tractors, compared to 2021. The revenue increase consisted of $15.2 million higher freight revenue and $13.4 million higher fuel surcharge revenue. The increase in freight revenue primarily related to a 14.5 percent increase in average freight revenue per tractor, offset by a 3.3 percent decrease in the average operating fleet size.  The fleet reduction is largely attributable to exiting unprofitable business within our Dedicated fleet.”

Expedited Truckload Revenue
Mr. Bunn added, “Freight revenue in our Expedited segment increased $18.6 million, or 25.9 percent. Average total tractors increased by 67 units or 8.0 percent to 900, compared to 833 in the prior year quarter. The increase in tractors was attributable to the acquisition of AAT in the first quarter of the year and the increased ability to recruit and onboard qualified drivers. Average freight revenue per tractor per week increased 16.5 percent as a result of significant FEMA freight hauled in October related to hurricane Ian and the addition of AAT during the first quarter of 2022.”

Dedicated Truckload Revenue
“For the quarter, freight revenue in our Dedicated segment decreased $3.3 million, or 4.7 percent. Average total tractors decreased by 143 units or 9.8 percent to 1,318, compared to 1,461 in the prior year quarter. The decrease in tractors was attributable to the exit of unprofitable business during the year.  Average freight revenue per tractor per week increased 5.6 percent.”

Combined Truckload Operating Expenses
Mr. Bunn continued, “Our truckload operating cost per total mile increased 59 cents or 23.1 percent. Of this amount, approximately 16 cents related to the Equipment Adjustment and 19 cents is related to increased fuel costs (before netting increased fuel surcharge recovery revenue, which is reflected in adjusted cost per mile). The remainder was largely due to increases in salaries and wages, operations and maintenance, and insurance expense. On a non-GAAP or adjusted basis, our truckload operating cost per total mile increased approximately 20 cents or 9.2 percent.

“Salaries, wages and related expense increased year-over-year $6.6 million on an absolute basis and 13 cents on a per total mile basis. Driver pay and related benefits comprised approximately 70 percent of the increase, while non-driver pay and related benefits comprised the remaining 30 percent.

“Operations and maintenance related expense increased year-over-year by $3.0 million, or 5 cents per total mile, compared to the 2021 quarter. The combination of the increased average age of our equipment, combined with general inflationary costs of tires, parts and maintenance activities and increased overage, shortage, and damage expense all contributed to the increase.  Going forward, as we execute our equipment replacement plan and the average age of our fleet is reduced, we anticipate improvements to these results.

“Insurance related expense increased year-over-year by $3.7 million, or 6 cents per total mile, compared to the 2021 quarter primarily due to the unfavorable development of a small number of prior period claims, as well as claims experience during the current quarter.

“Gain on sale of equipment increased to $1.0 million in the quarter, compared to $0.1 million in the prior year.

“For the quarter, Warehousing’s freight revenue increased 31.0 percent versus the prior year quarter. The increase in revenue was primarily driven by the year-over-year impact of new customer business added during the current year. Operating income and adjusted operating income for the Warehousing segment decreased $0.4 million compared to the fourth quarter of 2021. The year-over-year decline in profitability with this segment is largely attributable to temporary incremental costs associated with new startup business and the costs of securing additional unoccupied leased space in key locations, which is consistent with our longer-term growth strategy. Over time, we anticipate margins in this segment to normalize in the mid to high single digits.”

Capitalization, Liquidity and Capital Expenditures
Tripp Grant, the company’s chief financial officer, added the following comments: “At Dec. 31, 2022, our total indebtedness, composed of total debt and finance lease obligations, net of cash (“net indebtedness”), increased by $17.9 million to approximately $46.4 million as compared to December 31, 2021. In addition, our net indebtedness to total capitalization increased to 10.9 percent at Dec. 31, 2022 from 7.5 percent at Dec. 31, 2021.

The increase in net indebtedness is primarily attributable to the base purchase price paid for the acquisition of AAT in the amount of $38.5 million, the repurchase of approximately 3.4 million shares under our stock repurchase programs for $84.8 million, net capital expenditures of $47.5 million and dividend payments of $4.3 million, offset by cash flows from operations.

“At Dec. 31, 2022, we had cash and cash equivalents totaling $68.7 million. Under our ABL credit facility, we had no borrowings outstanding, undrawn letters of credit outstanding of $23.9 million, and available borrowing capacity of $86.1 million. The sole financial covenant under our ABL facility is a fixed charge coverage ratio covenant that is tested only when available borrowing capacity is below a certain threshold. Based on availability as of Dec. 31, 2022, no testing was required, and we do not expect testing to be required in the foreseeable future.

“Our net capital investment through Dec. 31, 2022, used $47.5 million as compared to proceeds of $8.8 million for the prior year period. At the end of the quarter, we had $6.0 million in assets held for sale that we anticipate disposing within twelve months. The average age of our tractors has sequentially declined from the third quarter by three months to 26 months and is expected to continue to decline throughout 2023 as we normalize the average age of our fleet.

“Our baseline expectation for net capital expenditures in 2023 is $75 million to $85 million, which includes a range of $87 million to $97 million for revenue generating equipment offset by cash proceeds on the sale of a terminal of approximately $12 million, net of transaction costs. Our capital investment plan reflects our priorities of improving operational uptime, lowering operating costs, and maintaining a driver-friendly fleet. We expect the benefits of improved utilization, fuel economy and maintenance costs to produce acceptable returns despite increased prices of new equipment and potentially lower values of used equipment.

“Based on our current capital structure and expected 2023 net capital expenditures, we believe we have substantial flexibility to continue to repurchase stock, declare quarterly dividends and evaluate other capital allocation alternatives.”

Subsequent Event: Real Estate Sale
On Jan. 13, 2023, the company sold a Tennessee based terminal property for approximately $12 million in cash net of transaction costs and expects to record a pretax gain on sale of property of approximately $8 million in the first quarter of 2023.

Outlook
Mr. Parker concluded, “2022 was a remarkable year for Covenant, and I’m very proud of what our team has accomplished. Our results were in part the product of an exceptional freight market in the first half of the year and in part the result of an intentional, multi-year effort to evolve toward a less cyclical business model. We cannot eliminate the impact of economic and freight market cycles, but we view our 2022 results as incremental progress toward delivering solid, more consistent returns for our stockholders.

“As we look toward 2023, we anticipate a very difficult freight environment for at least the first half of the year which could compress rates and margins when compared to 2022.  However, we believe our more resilient operating model, together with the steps we are taking to reduce costs and inefficiencies, will mitigate a portion of our historical volatility throughout economic and freight market cycles.  Overall, I am pleased with our current position, which features a de-leveraged balance sheet, strong liquidity and a reduction of approximately 20 percent of the shares outstanding compared to a year ago. We will remain focused on growing our market share, continuing to improve our operations, and becoming a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.”

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