Covenant Sees Year-End Slowdown

John Sommers II for Transport Topics

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Covenant Logistics Group Inc. saw a 35% year-over-year decline in earnings amid marginal revenue improvements during the fourth quarter of 2022, the company reported Jan. 25.

The Chattanooga, Tenn.-based truckload carrier posted net income of $11.5 million, or 81 cents a diluted share, for the three months ending Dec. 31. That compared with $17.7 million, $1.05, during the same time the previous year. The total revenue increased 0.6% to $296.1 million from $294.2 million.

“I’d like to first take a moment to reflect on 2022 as a whole as it’s a remarkable year for us in many ways,” Tripp Grant, executive vice president at Covenant, said during a conference call with investors Jan. 26. “It marked the second consecutive year of record earnings, record revenue, capital returns and safety results.”

Covenant expanded into the hazardous freight market earlier in the year with the acquisition of AAT Carriers. The company also repurchased approximately 20% of its outstanding stock while maintaining moderately low debt leverage.

The year also saw progress on improving the operating model through better contracts in the dedicated segment.

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“Although the tailwinds of a strong freight cycle may well be behind us, we believe the combination of our improved operating model and our strong balance sheet has us well positioned for the future,” Grant said. “Our company today is much improved and we are grateful to all of our team members whose dedication and commitment made this possible.”

Covenant undergoing these efforts resulted in full-year net income of $108.7 million, or $7, on revenue of $1.22 billion in 2022. That compared with net income of $60.7 million, or $3.57, on revenue of $1.05 billion in 2021.

“Focusing now on the fourth, on an adjusted basis, we believe our team performed well during a market of transition,” Grant said. “Consolidated revenue was essentially flat compared with the fourth quarter of 2021, while improved revenue per tractor and brokerage margin more than overcame the significant inflationary cost to generate a better adjusted operating ratio and higher adjusted net income.”

Covenant highlighted in the earnings report that adjusted earnings per diluted share were $1.37. The primary difference between the topline and adjusted earnings relates to an early lease abandonment, disposal charge and excess equipment expense. Basically, the company got rid of some equipment early due to several factors like receiving more than half of its new tractor orders for the year during that period.

“Looking ahead, we expect difficult year-over-year revenue and income comparisons for the first time in many quarters,” Grant said. “In this environment our playbook remains consistent and our urgency is high. The primary adjustments to our reported results revolve around our tractor fleet, particularly a group of under-performing lease units that needed to be removed from operations due to negative driver, customer and cost considerations.”

The fourth-quarter results were mixed when it came to expectations by investment analysts on Wall Street, which had been looking for $1.51 per share and quarterly revenue of $295.8 million, according to Zacks Consensus Estimate.

The combined truckload business reported revenue for fourth quarter increased 16.9% to $198.3 million from $169.7 million during the prior-year quarter. Operating income decreased 69% to $2.09 million from $6.86 million last year. The revenue increase consisted of $15.2 million in higher freight revenue primarily related to a 14.5% increase in average freight revenue per tractor that was offset by a 3.3% decrease in the average operating fleet size. The segment includes expedited and dedicated truckload operations.

  • Expedited segment revenue increased 33.2% to $114.5 million from $85.9 million. Operating income increased 6.9% to $5.97 million from $5.59 million.
  • Dedicated segment revenue increased 0.1% to $83.8 million. Operating income dropped to a loss of $3.88 million from a gain of $1.27 million.

The Managed Freight segment saw revenue decrease 29.6% to $76.2 million from $108.1 million during the same time the previous year. Operating income decreased 19.7% to $8.8 million from $11 million. The lower revenue is attributable to reduced volumes of overflow freight from both expedited and dedicated truckload operations that was at an all-time high during fourth-quarter 2021. Covenant Logistics expects revenue and operating income in the segment to fluctuate with changes in the freight market and as a percentage of contracted versus noncontracted freight.

The warehousing segment reported that revenue increased 31% to $21.2 million from $16.2 million last year. Operating income collapsed 96.5% to $15,000 from $430,000. The revenue increase was primarily driven by the impact of new customer business. The year-over-year decline in operating income is largely attributable to temporary incremental costs associated with new startup business and the costs of securing additional unoccupied leased space in key locations.

Covenant Logistics Group ranks No. 40 on the Transport Topics Top 100 list of the largest for-hire carriers in North America and No. 77 on TT’s Top 100 list of the largest logistics companies.

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