Covenant Logistics Group, Inc. announced financial and operating results for the quarter ended March 31, 2023 and the acquisition of Lew Thompson & Son Trucking, Inc. and related entities effective April 26, 2023.
Chairman and Chief Executive Officer David R. Parker said, “We are pleased to report first quarter earnings of $1.20 per diluted share and non-GAAP adjusted earnings of $0.93 per diluted share. The primary EPS adjustment excludes approximately $7.6 million in pre-tax gain on sale of a Tennessee-based terminal property in the 2023 quarter.
"We are also pleased to report the completion of the acquisition of Lew Thompson & Son, a dedicated contract carrier specializing in poultry feed and live haul transportation in Northwest Arkansas and surrounding areas. We believe the acquisition is another strong step toward building a more diversified and resilient operating model.
“The first quarter’s freight market, consisting of a combination of freight rates and volumes, has materially softened compared to a year ago and has remained soft throughout April. Despite these market headwinds, we are pleased with the resiliency in the first quarter’s profitability of our assetbased segments, consisting of Expedited and Dedicated. Our asset-light segments, consisting of Managed Freight and Warehousing, experienced significant deterioration in margin compared to the prior year quarter as a result of reductions in brokerage volumes and rates associated with overflow freight from our asset-based segments.
“Our asset-based segments contributed approximately 68% of total revenue, 93% of operating income, 63% of total freight revenue, and 88% of adjusted operating income in the quarter. Our Expedited segment grew revenue modestly, but experienced diminished margins compared to the first quarter last year. Our Dedicated segment experienced reduced revenue with approximately 14% fewer tractors and improved margins year over year. “Our asset-light segments contributed approximately 32% of total revenue, 7% of operating income, 37% of total freight revenue, and 12% of adjusted operating income in the quarter. Compared to a year ago, Managed Freight experienced significant reductions in both revenue and profitability with little to no project related freight in the current quarter. Warehousing was able to grow revenue through new customer startups but had diminished margins primarily due to incremental cost headwinds associated with investments in capacity for future growth in this segment as well as inflationary cost headwinds with existing customers. We are working to increase the operating income and related margins in each of these segments through focused sales efforts within managed freight and proposed customer rate increases with existing customers within Warehousing.
“Our 49% equity method investment with Transport Enterprise Leasing (“TEL”) contributed pretax net income of $5.9 million, or $0.31 per share, compared to $6.8 million, or $0.30 per share, in the 2022 quarter. The decline in pre-tax net income for TEL was primarily a result of a reduction on gain on sale of revenue equipment in the amount of $0.9 million.” “For the quarter, total revenue in our truckload operations decreased 3.5%, to $181.1 million, while averaging 207 fewer tractors, compared to 2022. The revenue decrease consisted of $6.0 million lower freight revenue and $0.6 million lower fuel surcharge revenue. The decrease in freight revenue primarily related to the reduction of the fleet in our Dedicated segment, which aligns with our strategy to replace under-performing business with business that meets our profitability requirements.
“Freight revenue in our Expedited segment increased $1.0 million, or 1.3%. Average total tractors decreased by 13 units or 1.5% to 856, compared to 869 in the prior year quarter. The reduction in tractors was an intentional effort by management to adjust the fleet size down in response to the reduced volumes of available freight with expedited service requirements. Average freight revenue per tractor per week increased 2.8%.
“For the quarter, freight revenue in our Dedicated segment decreased $7.0 million, or 9.6%. Average total tractors decreased by 194 units or 13.5% to 1,239, compared to 1,433 in the prior year quarter. The decrease in tractors was attributable to the exit of under-performing business. Average freight revenue per tractor per week increased 4.6%.
“Our truckload operating cost per total mile decreased 4 cents or 1.5%. Of this amount, approximately 12 cents related to the gain on disposition of our Tennessee based terminal, offset by approximately 3 cents attributable to a change in fair value of the future earnout liability and increased non-cash intangible asset amortization associated with the AAT acquisition, both of which are excluded from our adjusted results. On a non-GAAP or adjusted basis, our truckload operating cost per total mile increased approximately 4 cents or 1.5%, primarily due to increased salaries, wages and related expenses and insurance and claims related costs, offset by improvements in operations and maintenance and purchased transportation related costs.
“Salaries, wages and related expense increased year-over-year $648 thousand on an absolute basis and 7 cents on a per total mile basis, compared to the 2022 quarter primarily due to non-driver compensation and related benefits as driver pay remained flat on a per total mile basis.
“Insurance and claims related expense increased year-over-year by $1.3 million, or 3 cents per total mile, compared to the 2022 quarter primarily due to the unfavorable claims experience during the current quarter. “Operations and maintenance related expense decreased year-over-year by $1.8 million, or 2 cents per total mile, compared to the 2022 quarter, primarily due to replacing older tractors that experienced higher operating costs.
“Purchased transportation decreased year-over-year by $2.8 million, or 4 cents per total mile, compared to the 2022 quarter primarily due to the reduction of leased tractors in the fleet. “Depreciation and amortization related costs increased $1.0 million to $14.0 million, but was offset by a $0.9 million increase in gain on sale of revenue equipment to $1.1 million in the quarter compared to the prior year quarter.
“For the quarter, Warehousing’s freight revenue increased 40.7% 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 $1.1 million compared to the first quarter of 2022. The year-over-year decline in profitability with this segment is largely attributable to incremental costs of securing additional unoccupied leased space in key locations, which is consistent with our longer-term growth strategy, and inflationary cost headwinds with existing customers. Over time, we anticipate margins in this segment to normalize in the mid single digits."
Tripp Grant, the company’s Chief Financial Officer, said, “At March 31, 2023, our total indebtedness, composed of total debt and finance lease obligations, net of cash (“net indebtedness”), increased by $18.6 million to approximately $65 million as compared to December 31, 2022. In addition, our net indebtedness to total capitalization increased to 14.9% at March 31, 2023 from 10.9% at December 31, 2022.
“The increase in net indebtedness in the quarter is primarily attributable to repurchasing approximately 0.6 million shares under our stock repurchase programs for $20.8 million, a postacquisition earnout payment of $10.0 million related to AAT’s operational performance, and net capital expenditures for revenue equipment of $4.2 million, offset by cash proceeds of $12.4 million from the sale of our Tennessee based terminal and cash flows from operations.
“At March 31, 2023, we had cash and cash equivalents totaling $54.6 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 March 31, 2023, no testing was required, and we do not expect testing to be required in the foreseeable future.
“Our net capital investment through March 31, 2023, provided $8.2 million of proceeds, which includes the terminal proceeds discussed above. At the end of the quarter, we had $7.7 million in assets held for sale that we anticipate disposing of within twelve months. The average age of our tractors has remained flat sequentially compared to the fourth quarter at 26 months, primarily due to not receiving as many new tractors as originally expected in the first quarter of 2023. We are now seeing deliveries catching up to our plan and anticipate the average age of our fleet to decline sequentially throughout the remainder of the year.
“For the balance of 2023, our baseline expectation for net capital equipment expenditures is $60 million to $70 million. 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.”
On April 26, 2023, the company completed the acquisition of Lew Thompson & Son, of Huntsville, Arkansas. Under the terms of the agreement, Covenant purchased 100% of the outstanding stock of Lew Thompson & Son in exchange for a closing enterprise value of approximately $100 million plus an earnout of up to $30 million depending on the results achieved by the business over the three following calendar years. The closing price represented approximately 5.2 times estimated adjusted EBITDA of the acquired companies and was funded by cash on hand of approximately $45 million and approximately $55 million of borrowing’s from the company’s ABL credit facility. Following the transaction, Covenant’s pro-forma net indebtedness is expected to be approximately $165 million. Lew Thompson & Son specializes in poultry related feed and live haul freight and will be consolidated within the Company’s Dedicated truckload results. For 2022, the acquired business generated approximately $64 million in revenue.
The transaction includes the option for the company to elect a Code Section 338(h)(10) election subject to a purchase price adjustment. The addition of Lew Thompson & Son is expected to be immediately accretive to earnings per diluted share.
Mr. Parker commented “We are very pleased to welcome the entire Lew Thompson & Son team to the Covenant family. We pursued Lew Thompson & Son because of their proven track record of operating a first class dedicated contract carrier business in a niche market, which we believe has less sensitivity to economic cycles and opportunities to grow. We believe the backing of Covenant will provide additional resources to expand Lew Thompson & Son to best meet the needs of their strong customer base.
“We are pleased with our first quarter results and are excited about the opportunity Lew Thompson & Son gives us to improve upon them. Our results were achieved in the midst of a very difficult operating environment that spanned across the entire quarter.
“The second quarter has shown little to no signs of improvement in freight market supply and demand, and we anticipate a difficult freight environment for the remainder of the year, which may cause rate and margin pressure, particularly in non-Dedicated operations. Given the current market conditions, we are intensely focused on cost control across our entire enterprise. 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 moderately-leveraged balance sheet, strong liquidity and a reduction of approximately 17% of the weighted average diluted 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.”