Citing recent improvement in the company's operating performance and credit profile, the ratings agency raised its outlook on Daseke from negative to positive. "The positive outlook reflects Daseke's better-than-expected operating performance and credit metrics in 2020 and our expectation for continued improvement in 2021," the report stated. Daseke's "B-" credit ratings were affirmed as well.
The Addison, Texas-based company's turnaround began in early 2019 with the addition of operationally focused leadership tasked with better integrating the roughly 20 acquisitions the flatbed carrier had made in the decade following its 2009 founding. The plan included the roll-up of its separately operated network of carriers, divesting its oil rig transportation unit, disposing underutilized equipment and reducing headcount.
The work done to revamp the company was on full display in its third-quarter report, a 22-cents-per-share earnings performance that beat analysts' calls for a slight loss. The result was also well ahead of the prior-year loss of $4.25 per share, which included more than $300 million in impairment charges as asset valuations from past acquisitions were reduced to reflect the current market.
The S&P report took into consideration a 16% year-over-year decline in revenue through the first nine months of 2020, but noted improvement from the internal integration and cost-savings initiatives, which drove the adjusted earnings before interest, taxes, depreciation and amortization margin 590 basis points higher year-over-year in the recent period.
On the third-quarter conference call, management was quick to caution analysts that the recent performance was not likely the new base off of which to build a linear progression. They noted an EBITDA benefit in the quarter from high-margin specialized freight, which may not recur at the same pace in the future. However, management did say that they expect the core underlying business to continue to improve in 2021.
The third-quarter outperformance also allowed Daseke to improve its balance sheet. Net debt was just under $500 million, a $135 million reduction from prior-year levels. "Because of its recent operating performance, we forecast Daseke's adjusted debt to EBITDA will be in the 4.5x-5.0x range over the next 12 months," the report continued.
The net debt-to-adjusted EBITDA leverage ratio as defined by its lending covenants declined sequentially to 2.6x in the third quarter from 3x.
With the restructuring on track, debt leverage moving lower and the potential for credit ratings to improve, it may not be too early to begin speculating on when the company starts looking at acquisitions again. A continuation of the recent operating performance will likely lead to a lower cost of capital as well as management's willingness to get back on the trail.
"We believe the gradual recovery in freight rates and the solid demand from its end markets will benefit both its revenue and profitability in 2021. Nevertheless, driver shortages across the industry could potentially affect its capacity," the report concluded.
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