Covenant's Operating Numbers Mostly Hold Up in Challenging First Quarter

Covenant's adjusted earnings per share on a non-GAAP basis came in at 84 cents per share, down from 93 cents per share a year ago. According to SeekingAlpha, that figure beat the consensus forecast by 4 cents per share. But adjusted operating income, the most basic profitability measure, rose to $14.8 million from $12.62 million a year ago. 

That can be seen in the fact that Covenant's operating ratio as a whole on a non-GAAP basis improved to 94% from 94.6% in the first quarter of 2023. That OR takes into consideration not only the company's trucking activities but its managed freight operations, which houses its brokerage division, and its Warehouse segment. 

Net income was impacted by about $8.1 million in expenses related to last year's acquisition of poultry hauler Lew Thompson & Son. The end result of that was net income of 29 cents per share, down from $1.20 per share on a GAAP basis. 

On the trucking side, the adjusted OR for its combined truckload operations deteriorated to 93.7% from 92.5%, a relatively small decline. The adjusted OR in the expedited division, which operates team drivers, was 93.9%, weakening from 91% in 2023's first quarter. But the adjusted OR in dedicated improved to 93.5% from 94.4%.

The adjusted OR in Covenant's brokerage improved to 96% from 97.9% a year ago. 

Covenant CVLG also managed to increase several key revenue metrics. Total revenue in the combined truckload operations rose to $190 million from $181.1 million including fuel, but net of fuel, the gain was higher, to $159.2 million from $148 million. But adjusted operating income fell to $10 million from $11.1 million.

Although the company overall had a 4.5% increase in revenue, Covenant experienced a significant increase in expenses. Salaries and wages were mostly flat, just over $100 million after being just under that mark a year ago. 

Bit insurance and claims rose to $15.4 million from $12.7 million, general supplies and administration, known as GS&A, climbed to $20.8 million from $13.6 million, and depreciation and amortization rose to $21.1 million from $14.6 million.

The end result is that expenses were $274.4 million compared to $249.2 million a year ago. However, last year's expenses were reduced in part by about $9.8 million in gains from property and equipment sales. 

The bottom line also was impacted by an increase in interest expenses to $3.34 million from $769,000 a year ago. But that was offset in part by a drop in income tax expense to $849,000 from $6.32 million a year ago. 

Adding it all up and net income dropped to $3.97 million from $16.63 million a year ago, for a drop in diluted net income per share to 29 cts/share from $1.20.

Operational metrics were mostly higher or less by a small amount. Average revenue per tractor per week rose 2.8% for the combined truckload operations, while average revenue per total mile dropped 1.7%. But utilization, defined as average miles per tractor per period, climbed 5.4% for the combined operations, to 31,201 miles from 29,613 miles.

Utilization for Dedicated was up about 2%, to 20,657 miles for the quarter. But in the Expedited division, it climbed 6.64% to 46,046 miles.

In the prepared statement accompanying the earnings release, President Paul Bunn spelled out some of the reasons for the increase in expenses, breaking it down on its impact on truckload operations. 

He said the increase in insurance worked out to 6 cents per mile "as a result of increases in current period claims expense and the development of prior period claims." Covenant self-insures most of its exposure to claims. "Given our self-insurance limits, the amount of expense recognized from period to period can fluctuate" Bunn said in the statement. 

The higher depreciation charges were as a result of "operating newer more costly equipment and a reduction of gains on the sale of used equipment" Bunn said. 

David Parker, Covenant's chairman and CEO, echoed an overview of the first quarter heard by multiple companies in the last several days. 

"The first quarter's freight market, consisting of freight rates and volumes, remained soft and in many ways comparable to a year ago" he said. "Adding to the general market headwinds, used equipment prices continued to decline and adverse weather conditions experienced in January created incremental cost and operational challenges."

Parker wrapped up the company's statement with a cautionary observation about the future. "Although we believe freight market fundamentals are slowly improving, the second quarter has provided little evidence of a 2024 recovery" he said.

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