Dive Brief:
- Covenant Logistics disclosed an $8.1 million expense related to its acquisition of poultry hauler Lew Thompson & Son Trucking in its Q1 earnings report Wednesday.
- The $100 million deal came with a contingent consideration expense based on the achievement of certain growth goals, according to Covenant. The Arkansas-based subsidiary could earn up to $30 million over the course of the first three years, depending on its results.
- The contingent consideration expense in the quarter and the sale of a terminal in Q1 2023 made Covenant’s truckload operating cost per total mile “difficult to compare on a year over year basis,” Paul Bunn, Covenant president and COO, said in the report.
Dive Insight:
The expense indicates Lew Thompson is achieving performance goals as it doubles the size of its fleet under its new parent company.
Covenant’s operating cost per total mile was comparable year-over-year in Q1 due to increased equipment and insurance costs, offset by reductions in compensation, operations and maintenance costs, the company said.
The first quarter featured a persistently bleak freight market in which the company reported $4.3 million in unadjusted operating income, down from $17.6 million in Q1 2023.
The start of Q2 hasn’t been much better.
“Although we believe freight market fundamentals are slowly improving, the second quarter has provided little evidence of a 2024 recovery,” Bunn said.
Incentives are among several expenses that can drag results in the short term after an M&A deal. Ryder System projects about $10 million in integration costs related to its acquisition of Cardinal Logistics.
But executives take the long view, directing investors’ attention toward the anticipated earnings the acquisitions will create. Covenant’s plan for Lew Thompson calls for eventually tripling the poultry carrier’s fleet and volumes as it expands the subsidiary’s operation.
