Covenant’s restructuring leads to sharp but better-than-projected decline

Covenant Logistics’ belatedly released second-quarter earnings for 2020 show an adjusted operating ratio close to the 100% mark.

The bottom line at Covenant exceeded expectations, according to a summary provided by SeekingAlpha. Covenant’s non-GAAP earnings per share of 3 cents were better than the consensus Wall Street projection of 1 cent. Revenue of $191.69 million was above forecasts by $12.79 million.

Covenant suffered a drop in revenue similar to that of many other companies, seeing a decline from $217 million last year. Without fuel surcharge revenue being counted, the drop in revenue was down to $179.56 million from $192.65 million.

In a prepared statement accompanying the earnings, Covenant Chairman and CEO David Parker said the relatively weak performance of the company was secondary to other changes the company made. For example, Covenant took $35 million in charges as part of its strategic overhaul, offset in part by a gain on the sale of a terminal. “The net financial impact of these actions negatively impacted our second quarter results,” Parker said.

Under GAAP, with all the charges baked into the number, Covenant posted a net loss of $1.31 per share. But on an adjusted basis for non-GAAP standards, net income was $427,000, or 3 cents per share, down from 35 cents per share last year.

“In the second quarter, we made significant progress in our efforts to restructure our business units, terminal network, and management team to focus our talent, time and capital on areas where we believe we have the ability to grow and produce a consistent, acceptable margin,” Parker said in the statement. “The changes are extensive, and we expect them to be ongoing through the end of the year.”

Given those changes, plus the impact of COVID-19, comparisons to the second quarter of 2019 are “difficult,” Parker said. “(C)ertain strategies we implemented reduced our revenue during the quarter while cost savings are expected to be realized on an ongoing basis,” Parker said.

But where many other truckload companies saw their expenses held in check during the quarter, that was not the case at Covenant. It saw total operating expenses rise to $220.6 million from $210 million. Salaries and wages were down slightly, to $74.68 million from $75.42 million. A relatively big jump in expenses occurred in the category of general supplies and expenses, which rose to $11.5 million from $7.2 million.

The result was an operating loss of $28.95 million for the quarter, down from operating income in the second quarter of last year of $7 million. Under GAAP, the operating ratio at Covenant was 115.1%, compared to 96.8% last year. But under non-GAAP, it was 99.5% compared to 96% last year.

Excluding fuel and the impact of restructuring costs, the company’s total operating expenses rose 7.4 cents per mile compared to the first quarter of 2019 for the company’s truckload segment. Although salaries were down year over year slightly, the drop in miles driven means that those expenses per mile rose 6.7 cents from last year. Some of those expenses involved repositioning trucks as part of the company’s strategic plan. Average miles per tractor for the period dropped to 25,970 from 26,589.

Covenant’s earnings call will be Tuesday at 11 a.m. ET.

John Kingston