Covenant Logistics squeezed a significant amount of profit out of a relatively small increase in revenue in the third quarter, improving its operating ratio by more than 500 points compared to the third quarter of last year.
Total revenue including fuel rose 4.3%, to $210.8 million, while revenue excluding fuel was down by about $1 million. But operating income for the company turned around to a $6.8 million profit, up from a loss of $3.1 million last year, and the company’s adjusted operating ratio improved to 93.2% from 101.6%.
Covenant had foreshadowed a significant improvement in an announcement it made last month.
The bottom line was a nonadjusted net income of $7.5 million, up from $3.2 million last year, and an even bigger surge in adjusted net income, rising to $9.6 million from a net loss of $2.6 million last year. In the prepared statement accompanying the earnings, Chairman and CEO David Parker said the company’s net income for the quarter was the second-best third quarter in the past decade and the third best of any quarter in the past five years.
The net income figure of 56 cents per share was in line or more than what Barchart said were two earnings forecasts for Covenant, one of 56 cents and another of 50 cents.
Income was adversely affected by a $3.7 million charge on the sale of its TFS brokerage unit to Triumph Business Capital.
Improvement in the company’s performance came as it cut the number of tractors in its combined truckload operations to 2,527 from 3,071 last year. But the miles put in by those tractors rose to 2,224 per week from 2,027.
The strong profitability performance is particularly striking in light of several other numbers. Combined truckload revenue net of fuel dropped to $135 million from $152 million, a decline of 11.1%. The expedited division posted a decline to $71.7 million from $77.65 million, and the dedicated division’s revenue dropped to $63.3 million from $74.4 million.
But Parker said that was all part of the company’s strategic plan. The drop in revenue is “consistent with our plan to refocus our asset-based fleet around dedicated and expedited operations while downsizing solo-driver refrigerated and other less profitable operations.”
Overall, Parker said, “we were pleased with the progress on executing our strategic plan, which is focused on growing our more consistent and profitable freight commitments, improving margins, improving return on capital, and managing leverage at a reasonable level.”
Freight revenue per total mile fell in the expedited division, to $1.78 from $1.92, while in the dedicated division, it rose to $1.89 from $1.80.
Unlike several other companies that have reported tough times for their brokerage division this quarter, Covenant had a strong three months. Revenue in what it calls the Managed Freight segment rose to $47.5 million, up from $33.3 million, and its adjusted operating income climbed to $2.24 million from $564,000. The adjusted OR was 95.3% compared to 98.3%.
Cost reductions were significant. In his statement, Parker said the truckload operating cost per mile improved 22 cents on an adjusted basis, a gain of 11.8%. The reduction, he said, was “as a direct result of strategic plan initiatives to reduce fixed costs and increase asset utilization by downsizing our terminal network and solo-driver fleet, as well as short-term cost reductions to improve liquidity in response to COVID-19.”
Of that 22-cent improvement, just 3 cents can be attributed to “business mix.” Of the balance, Parker said 14 cents is owing to what he called “ongoing improvement” while the balance was because of temporary changes put into place because of COVID-19.
In the prepared statement, Covenant also revealed that its revolving credit facility with Bank of America and JP Morgan Chase had been increased to $110 million from $95 million, with improved pricing of 25 basis points. Covenant also said it has paid down about $175 million of debt and lease obligations in the past year.
Covenant will hold its conference call with analysts Tuesday at 11 a.m.