“For the quarter, Managed Freight’s freight revenue increased $20.7 million, or 67.2%, from the prior year quarter. Operating income for the Managed
Freight segment was $4.9 million and adjusted operating income was $5.1 million, compared with $0.7 million and $0.7 million, respectively, in the first quarter of 2020. The operating ratio for the Managed Freight segment was 90.5% and adjusted
operating ratio was 90.2%, compared with 97.9% and 97.7% in the first quarter of 2020, respectively. Managed Freight’s favorable results for the quarter were primarily attributable to the robust freight market, executing various spot rate
opportunities, cost structure improvements that were implemented as part of our strategic plan, and handling overflow freight from both Expedited and Dedicated truckload operations.
“For the quarter, Warehousing’s total revenue increased 28.3% versus the prior year quarter. The increase in revenue was primarily driven by the
year over year impact of new customer business that began operations in the third quarter of 2020. Operating income for the Warehousing segment was $1.2 million and adjusted operating income was $1.5 million, compared with $1.0 million and
$1.3 million, respectively, in the first quarter of 2020. Operating ratio for the Warehousing segment was 92.6% and adjusted operating ratio was 90.0%, compared with 92.0% and 89.4%, respectively, in the first quarter of 2020.”
TFS Disposition and Contingent Liability Update
During 2020, Covenant sold its accounts receivable factoring business (“TFS”) to a subsidiary of Triumph Bancorp, Inc. (“Triumph”) and later
amended the sale agreement to provide for indemnification of up to $45 million based on the collectability of certain covered receivables. The former TFS business is reflected in discontinued operations. During the first quarter of 2021,
two updates occurred. First, Triumph made an indemnification call of $35.6 million, which Covenant funded by drawing on a line of credit provided by Triumph. The full amount of this indemnification call had been reserved during 2020, which
resulted in no expense being recorded in respect of this indemnification call. Second, Triumph collected $6.9 million in covered receivables, which caused us to revalue the remaining reserve. As of March 31, 2021, we recognized a pre-tax
gain on the reversal of our contingent loss liability in the amount of $3.4 million and our remaining contingent loss liability is recorded on the balance sheet at $5.1 million.
Capitalization, Liquidity and Capital Expenditures
Joey Hogan, the Company’s President, added the following comments: “At March 31, 2021, our total indebtedness, net of cash (“net indebtedness”),
increased by $21.3 million to approximately $123.3 million as compared to the December 31, 2020 balance of $102.0 million. In addition, our debt to total capitalization increased to 29.4% at March 31, 2021 from 26.0% at March 31, 2020.
The primary drivers for the increase in net indebtedness include the indemnification call of $35.6 million described above, which was funded by a
line of credit provided by Triumph, and $8.1 million to repurchase approximately 460,000 shares under our stock repurchase program.
At March 31, 2021, we had cash and cash equivalents totaling $4.8 million. Under our ABL credit facility, we had $10.5 million borrowings
outstanding, undrawn letters of credit outstanding of $29.7 million, and available borrowing capacity of $69.8 million at March 31, 2021. 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, 2021, no testing was required, and we do not expect testing to be required in the foreseeable future.
Our net capital investment for the quarter provided net proceeds of $10.0 million as compared to $16.7 million in expenditures for the prior year
period. For 2021, we expect net capital expenditures to be approximately $20 million, including disposal of $9.5 million in assets held for sale at March 31, 2021. The average age of our tractor fleet was 22 months at March 31, 2021 and is
expected to grow moderately during 2021 before an expected increase in net capital expenditures in 2022.
Based on our current capital structure and expected 2021 net capital expenditures, we have substantial flexibility to maintain moderate financial
leverage and evaluate the full range of capital allocation alternatives, including internal growth, acquisitions, further debt paydown, and returning capital to our stockholders.”
Outlook
Mr. Parker concluded, “Going forward, our short-term focus will be to improve the profitability of our Dedicated segment. The freight environment
and our new business pipeline are both currently robust, which we believe will support our commercial plan. Potential headwinds include inefficiencies from re-engineering or replacing certain contracts, driver availability and cost, accident
experience, the cost and volatility of claims, general inflation, and supply and demand factors for our customers and our industry. At present, we expect to make steady, incremental progress on our Dedicated segment’s margins over the
remainder of 2021.
Over time, we expect our Managed Freight segment’s margin to gravitate toward the mid-single digits and Dedicated to gravitate toward the mid to
high single digits and ultimately double digits. Directionally the margin changes may offset each other to some extent as the freight and driver markets return to more balanced levels.
For the longer term, we expect to continue the execution of our strategic plan, which consists of steadily and intentionally growing the percentage
of our business generated by Dedicated, Managed Freight, and Warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less
seasonal and cyclical exposure, improving legacy contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas. With diligence and accountability, we expect to make consistent
progress and be a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.”
Conference Call Information
The Company will host a live conference call tomorrow, April 27th, 2021, at 11:00 a.m. Eastern time to discuss the quarter. Individuals may access
the call by dialing 877-271-1828 (U.S./Canada) and 800-756-3333 (International), access code 25574825. An audio replay will be available for one week following the call at 877-919-4059, access code 58530150. For additional financial and
statistical information regarding the Company that is expected to be discussed during the conference call, please visit our website at www.covenanttransport.com/investors
under the icon “Earnings Info.”
Covenant Logistics Group, Inc., through its subsidiaries, offers a portfolio of transportation and logistics services to customers throughout the
United States. Primary services include asset-based expedited and dedicated truckload capacity, as well as asset-light warehousing, transportation management, and freight brokerage capability. In addition, Transport Enterprise Leasing is an
affiliated company providing revenue equipment sales and leasing services to the trucking industry. Covenant's Class A common stock is traded on the NASDAQ Global Select market under the symbol, “CVLG.”
(1) See GAAP to Non-GAAP Reconciliation in the schedules included with this release. In addition to operating income (loss), operating ratio, net income (loss), and earnings (loss) per diluted share, we use adjusted operating income
(loss), adjusted operating ratio, adjusted net income (loss), and adjusted earnings (loss) per diluted share, non-GAAP measures, as key measures of profitability. Adjusted operating income (loss), adjusted operating ratio, adjusted net
income (loss), and adjusted diluted earnings (loss) per share are not substitutes for operating income (loss), operating ratio, net income (loss), and earnings (loss) per diluted share measured in accordance with GAAP. There are limitations
to using non-GAAP financial measures. We believe our presentation of these non-GAAP financial measures are useful because it provides investors and securities analysts with supplemental information that we use internally for purposes of
assessing profitability. Further, our Board and management use non-GAAP operating income (loss), operating ratio, net income (loss), and earnings (loss) per diluted share measures on a supplemental basis to remove items that may not be an
indicator of performance from period-to-period. Although we believe that adjusted operating income (loss), adjusted operating ratio, adjusted net income (loss), and adjusted diluted earnings (loss) per share improves comparability in
analyzing our period-to-period performance, they could limit comparability to other companies in our industry, if those companies define such measures differently. Because of these limitations, adjusted operating income (loss), adjusted
operating ratio, adjusted net income (loss), and adjusted earnings (loss) per diluted share should not be considered measures of income generated by our business or discretionary cash available to us to invest in the growth of our business.
Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
This press release contains certain statements
that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are subject to the safe harbor created by those
sections and the Private Securities Litigation Reform Act of 1995, as amended. Such statements may be identified by their use of terms or phrases such as “expects,” “estimates,” “projects,” “believes,” “anticipates,” “plans,” “could,”
“would,” “may,” “will,” "intends," “outlook,” “focus,” “seek,” “potential,” “mission,” “continue,” “goal,” “target,” “objective,” derivations thereof, and similar terms and phrases. Forward-looking statements are based upon the current
beliefs and expectations of our management and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth
in, contemplated by, or underlying the forward-looking statements. In this press release, statements relating to improving or replacing freight contracts particularly in our Dedicated business, improving margins particularly in our Dedicated business, our
ability to execute our strategic plan, comparability of operating metrics, future benefits of our safety programs and driver recruitment, future availability under our ABL credit facility, and expected fleet age, net capital expenditures,
and capital allocation, as well as the statements under “Outlook” are forward-looking statements. The following factors, among others could cause actual results to differ materially from those in the forward-looking statements: Our business
is subject to economic, credit, business, and regulatory factors affecting the truckload industry that are largely beyond our control; We may not be successful in achieving our strategic plan; We operate in a highly competitive and
fragmented industry; We may not grow substantially in the future and we may not be successful in improving our profitability; We may not make acquisitions in the future, or if we do, we may not be successful in our acquisition strategy;
Increases in driver compensation or difficulties attracting and retaining qualified drivers could have a materially adverse effect on our profitability and the ability to maintain or grow our fleet; Our engagement of independent contractors
to provide a portion of our capacity exposes us to different risks than we face with our tractors driven by company drivers; We derive a significant portion of our revenues from our major customers; Fluctuations in the price or availability
of fuel, the volume and terms of diesel fuel purchase commitments, surcharge collection, and hedging activities may increase our costs of operation; We depend on third-party providers, particularly in our Managed Freight segment; We depend
on the proper functioning and availability of our management information and communication systems and other information technology assets (including the data contained therein) and a system failure or unavailability, including those caused
by cybersecurity breaches, or an inability to effectively upgrade such systems and assets could cause a significant disruption to our business; If we are unable to retain our key employees, our business, financial condition, and results of
operations could be harmed; Seasonality and the impact of weather and other catastrophic events affect our operations and profitability; We self-insure for a significant portion of our claims exposure, which could significantly increase the
volatility of, and decrease the amount of, our earnings; Our self-insurance for auto liability claims and our use of captive insurance companies could adversely impact our operations; We have experienced, and may experience additional,
erosion of available limits in our aggregate insurance policies; We may experience additional expense to reinstate insurance policies due to liability claims; We operate in a highly regulated industry; If our independent contractor drivers
are deemed by regulators or judicial process to be employees, our business, financial condition, and results of operations could be adversely affected; Developments in labor and employment law and any unionizing efforts by employees could
have a materially adverse effect on our results of operations; The Compliance Safety Accountability program adopted by the Federal Motor Carrier Safety Administration could adversely affect our profitability and operations, our ability to
maintain or grow our fleet, and our customer relationships; Receipt of an unfavorable Department of Transportation safety rating could have a materially adverse effect on our operations and profitability; Compliance with various
environmental laws and regulations; Changes to trade regulation, quotas, duties, or tariffs; Litigation may adversely affect our business, financial condition, and results of operations; Our ABL credit facility and other financing
arrangements contain certain covenants, restrictions, and requirements, and we may be unable to comply with such covenants, restrictions, and requirements; In the future, we may need to obtain additional financing that may not be available
or, if it is available, may result in a reduction in the percentage ownership of our stockholders; Our indebtedness and finance and operating lease obligations could adversely affect our ability to respond to changes in our industry or
business; Our profitability may be materially adversely impacted if our capital investments do not match customer demand or if there is a decline in the availability of funding sources for these investments; Increased prices for new revenue
equipment, design changes of new engines, future uses of autonomous tractors, volatility in the used equipment market, decreased availability of new revenue equipment, and the failure of manufacturers to meet their sale or trade-back
obligations to us could have a materially adverse effect on our business, financial condition, results of operations, and profitability; Our 49% owned subsidiary, Transport Enterprise Leasing, faces certain additional risks particular to
its operations, any one of which could adversely affect our operating results; We may incur additional charges in connection with the
disposition of substantially all of the operations and assets of TFS, which could have a material adverse effect on our results of operations, cash flows, available liquidity, and total indebtedness; We could determine that our goodwill and
other intangible assets are impaired, thus recognizing a related loss; Our Chairman of the Board and Chief Executive Officer and his wife control a large portion of our stock and have substantial control over us, which could limit other
stockholders' ability to influence the outcome of key transactions, including changes of control; Provisions in our charter documents or Nevada law may inhibit a takeover, which could limit the price investors might be willing to pay for
our Class A common stock; The market price of our Class A common stock may be volatile; We cannot guarantee the timing or amount of repurchases of our Class A common stock, if any; If we fail to maintain effective internal control over
financial reporting in the future, there could be an elevated possibility of a material misstatement, and such a misstatement could cause investors to lose confidence in our financial statements, which could have a material adverse effect
on our stock price; and We could be negatively impacted by the COVID-19 outbreak or other similar outbreaks. Readers should review and consider these factors along with the various disclosures by the Company in its press releases,
stockholder reports, and filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking
information.
For further information contact:
Joey B. Hogan, President
Tripp Grant, Chief Accounting Officer
For copies of Company information contact:
Brooke McKenzie, Executive Administrative Assistant
