cvti20190331_10q.htm
0000928658 COVENANT LOGISTICS GROUP, INC. false --12-31 Q2 2020 4,567 1,440 742 692 0.01 0.01 40,000,000 40,000,000 16,168,210 14,740,506 16,165,145 16,165,145 0.01 0.01 5,000,000 5,000,000 2,350,000 2,350,000 2,350,000 2,350,000 1,429,204 0 9 809 262 425 115 129 3 7 5 7 10 0 0 600 408 0 0 0 4 3 3.6 3.6 3.7 3.7 1.9 1.9 3.3 3.3 0 0 2.4 2.7 0 0 0 42.5 0 0 Excludes the six months ended June 30, 2020. Sum of the individual amounts may not add due to rounding. 00009286582020-01-012020-06-30 xbrli:shares 0000928658us-gaap:CommonClassAMember2020-08-05 0000928658us-gaap:CommonClassBMember2020-08-05 thunderdome:item iso4217:USD 00009286582020-06-30 00009286582019-12-31 iso4217:USDxbrli:shares 0000928658us-gaap:CommonClassAMember2020-06-30 0000928658us-gaap:CommonClassAMember2019-12-31 0000928658us-gaap:CommonClassBMember2020-06-30 0000928658us-gaap:CommonClassBMember2019-12-31 0000928658us-gaap:CargoAndFreightMember2020-04-012020-06-30 0000928658us-gaap:CargoAndFreightMember2019-04-012019-06-30 0000928658us-gaap:CargoAndFreightMember2020-01-012020-06-30 0000928658us-gaap:CargoAndFreightMember2019-01-012019-06-30 0000928658cvlg:FuelSurchargeMember2020-04-012020-06-30 0000928658cvlg:FuelSurchargeMember2019-04-012019-06-30 0000928658cvlg:FuelSurchargeMember2020-01-012020-06-30 0000928658cvlg:FuelSurchargeMember2019-01-012019-06-30 00009286582020-04-012020-06-30 00009286582019-04-012019-06-30 00009286582019-01-012019-06-30 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2019-12-31 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2019-12-31 0000928658us-gaap:AdditionalPaidInCapitalMember2019-12-31 0000928658us-gaap:TreasuryStockMember2019-12-31 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-31 0000928658us-gaap:RetainedEarningsMember2019-12-31 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2020-01-012020-03-31 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2020-01-012020-03-31 0000928658us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-31 0000928658us-gaap:TreasuryStockMember2020-01-012020-03-31 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-31 0000928658us-gaap:RetainedEarningsMember2020-01-012020-03-31 00009286582020-01-012020-03-31 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2020-03-31 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2020-03-31 0000928658us-gaap:AdditionalPaidInCapitalMember2020-03-31 0000928658us-gaap:TreasuryStockMember2020-03-31 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-31 0000928658us-gaap:RetainedEarningsMember2020-03-31 00009286582020-03-31 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2020-04-012020-06-30 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2020-04-012020-06-30 0000928658us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-30 0000928658us-gaap:TreasuryStockMember2020-04-012020-06-30 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-04-012020-06-30 0000928658us-gaap:RetainedEarningsMember2020-04-012020-06-30 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2020-06-30 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2020-06-30 0000928658us-gaap:AdditionalPaidInCapitalMember2020-06-30 0000928658us-gaap:TreasuryStockMember2020-06-30 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-30 0000928658us-gaap:RetainedEarningsMember2020-06-30 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2018-12-31 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2018-12-31 0000928658us-gaap:AdditionalPaidInCapitalMember2018-12-31 0000928658us-gaap:TreasuryStockMember2018-12-31 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-31 0000928658us-gaap:RetainedEarningsMember2018-12-31 00009286582018-12-31 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2019-01-012019-03-31 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2019-01-012019-03-31 0000928658us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-31 0000928658us-gaap:TreasuryStockMember2019-01-012019-03-31 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-03-31 0000928658us-gaap:RetainedEarningsMember2019-01-012019-03-31 00009286582019-01-012019-03-31 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2019-03-31 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2019-03-31 0000928658us-gaap:AdditionalPaidInCapitalMember2019-03-31 0000928658us-gaap:TreasuryStockMember2019-03-31 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-31 0000928658us-gaap:RetainedEarningsMember2019-03-31 00009286582019-03-31 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2019-04-012019-06-30 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2019-04-012019-06-30 0000928658us-gaap:AdditionalPaidInCapitalMember2019-04-012019-06-30 0000928658us-gaap:TreasuryStockMember2019-04-012019-06-30 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-04-012019-06-30 0000928658us-gaap:RetainedEarningsMember2019-04-012019-06-30 0000928658us-gaap:CommonClassAMemberus-gaap:CommonStockMember2019-06-30 0000928658us-gaap:CommonClassBMemberus-gaap:CommonStockMember2019-06-30 0000928658us-gaap:AdditionalPaidInCapitalMember2019-06-30 0000928658us-gaap:TreasuryStockMember2019-06-30 0000928658us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-30 0000928658us-gaap:RetainedEarningsMember2019-06-30 00009286582019-06-30 0000928658us-gaap:IntangibleAssetsAmortizationPeriodMember2020-01-012020-06-30 0000928658us-gaap:IntangibleAssetsAmortizationPeriodMember2020-04-012020-06-30 00009286582021-03-31 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMemberus-gaap:SubsequentEventMember2020-07-08 utr:Y 0000928658cvlg:TractorsMember2020-01-012020-06-30 xbrli:pure 0000928658cvlg:TractorsMember2020-06-30 0000928658cvlg:RefrigeratedTrailersMember2020-01-012020-06-30 0000928658cvlg:DryVanTrailersMember2020-01-012020-06-30 0000928658cvlg:DryVanTrailersMember2020-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMember2020-04-012020-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMember2019-04-012019-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMember2020-01-012020-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMember2019-01-012019-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMember2020-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMember2019-12-31 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMembersrt:ProFormaMember2020-04-012020-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMembersrt:ProFormaMember2019-04-012019-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMembersrt:ProFormaMember2020-01-012020-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMembersrt:ProFormaMember2019-01-012019-06-30 0000928658us-gaap:DiscontinuedOperationsHeldforsaleMembercvlg:TransportFinancialServicesMemberus-gaap:SubsequentEventMember2020-07-082020-07-08 0000928658cvlg:HighwayServicesMembercvlg:ExpeditedMember2020-04-012020-06-30 0000928658cvlg:HighwayServicesMembercvlg:ExpeditedMember2019-04-012019-06-30 0000928658cvlg:HighwayServicesMembercvlg:ExpeditedMember2020-01-012020-06-30 0000928658cvlg:HighwayServicesMembercvlg:ExpeditedMember2019-01-012019-06-30 0000928658cvlg:HighwayServicesMembercvlg:OverTheRoadMember2020-04-012020-06-30 0000928658cvlg:HighwayServicesMembercvlg:OverTheRoadMember2019-04-012019-06-30 0000928658cvlg:HighwayServicesMembercvlg:OverTheRoadMember2020-01-012020-06-30 0000928658cvlg:HighwayServicesMembercvlg:OverTheRoadMember2019-01-012019-06-30 0000928658cvlg:HighwayServicesMember2020-04-012020-06-30 0000928658cvlg:HighwayServicesMember2019-04-012019-06-30 0000928658cvlg:HighwayServicesMember2020-01-012020-06-30 0000928658cvlg:HighwayServicesMember2019-01-012019-06-30 0000928658cvlg:DedicatedMember2020-04-012020-06-30 0000928658cvlg:DedicatedMember2019-04-012019-06-30 0000928658cvlg:DedicatedMember2020-01-012020-06-30 0000928658cvlg:DedicatedMember2019-01-012019-06-30 0000928658cvlg:ManagedFreightMembercvlg:BrokerageMember2020-04-012020-06-30 0000928658cvlg:ManagedFreightMembercvlg:BrokerageMember2019-04-012019-06-30 0000928658cvlg:ManagedFreightMembercvlg:BrokerageMember2020-01-012020-06-30 0000928658cvlg:ManagedFreightMembercvlg:BrokerageMember2019-01-012019-06-30 0000928658cvlg:ManagedFreightMembercvlg:TransportationManagementServicesMember2020-04-012020-06-30 0000928658cvlg:ManagedFreightMembercvlg:TransportationManagementServicesMember2019-04-012019-06-30 0000928658cvlg:ManagedFreightMembercvlg:TransportationManagementServicesMember2020-01-012020-06-30 0000928658cvlg:ManagedFreightMembercvlg:TransportationManagementServicesMember2019-01-012019-06-30 0000928658cvlg:ManagedFreightMembersrt:WarehouseMember2020-04-012020-06-30 0000928658cvlg:ManagedFreightMembersrt:WarehouseMember2019-04-012019-06-30 0000928658cvlg:ManagedFreightMembersrt:WarehouseMember2020-01-012020-06-30 0000928658cvlg:ManagedFreightMembersrt:WarehouseMember2019-01-012019-06-30 0000928658cvlg:ManagedFreightMember2020-04-012020-06-30 0000928658cvlg:ManagedFreightMember2019-04-012019-06-30 0000928658cvlg:ManagedFreightMember2020-01-012020-06-30 0000928658cvlg:ManagedFreightMember2019-01-012019-06-30 0000928658cvlg:DeferredTaxAssetsRelatedToStateNetOperatingLossCarryForwardsMember2020-06-30 0000928658cvlg:RevenueEquipmentMembercvlg:HighwayServicesAndDedicatedMember2020-01-012020-06-30 0000928658cvlg:TerminalPropertyMembercvlg:HighwayServicesAndDedicatedMember2020-01-012020-06-30 0000928658cvlg:LeasedOfficeFacilityMembercvlg:ManagedFreightMember2020-01-012020-06-30 0000928658cvlg:TrainingAndOrientationCenterMembercvlg:HighwayServicesMember2020-01-012020-06-30 0000928658cvlg:GainOnDispositionOfPropertyAndEquipmentNetMembercvlg:HighwayServicesAndDedicatedMember2020-04-012020-06-30 0000928658cvlg:SalariesWagesAndRelatedExpensesMembercvlg:HighwayServicesDedicatedAndManagedFreightMember2020-04-012020-06-30 0000928658cvlg:DepreciationAndAmortizationMembercvlg:DedicatedAndManagedFreightMember2020-04-012020-06-30 0000928658cvlg:RevenueEquipmentRentalsAndPurchasedTransportationMembercvlg:HighwayServicesAndDedicatedMember2020-04-012020-06-30 0000928658cvlg:GeneralSuppliesAndExpensesMembercvlg:HighwayServicesAndDedicatedMember2020-04-012020-06-30 0000928658us-gaap:EmployeeSeveranceMember2020-06-30 0000928658cvlg:RevenueEquipmentInstallmentNotesMember2020-06-30 0000928658cvlg:RevenueEquipmentInstallmentNotesMember2019-12-31 0000928658cvlg:RealEstateNoteMember2020-06-30 0000928658cvlg:RealEstateNoteMember2019-12-31 0000928658us-gaap:LetterOfCreditMember2020-06-30 0000928658cvlg:SwingLineSubFacilityMember2020-06-30 0000928658cvlg:BaseRateLoansMembercvlg:FederalFundsRateMember2020-01-012020-06-30 0000928658cvlg:BaseRateLoansMembersrt:MinimumMembercvlg:ApplicableMarginMember2020-01-012020-06-30 0000928658cvlg:LIBORMembersrt:MinimumMembercvlg:ApplicableMarginMember2020-01-012020-06-30 0000928658cvlg:LIBORMembersrt:MaximumMembercvlg:ApplicableMarginMember2020-01-012020-06-30 0000928658us-gaap:RevolvingCreditFacilityMembercvlg:BaseRateLoansMember2020-06-30 00009286582019-01-012019-12-31 00009286582020-04-30 0000928658cvlg:VariableRateNoteMember2015-08-31 0000928658us-gaap:InterestRateSwapMember2015-08-31 0000928658cvlg:LeasedOfficeFacilityMember2020-04-012020-06-30 00009286582019-05-082019-05-08 0000928658cvlg:SalariesWagesAndRelatedExpensesMember2020-04-012020-06-30 0000928658cvlg:SalariesWagesAndRelatedExpensesMember2020-01-012020-06-30 0000928658cvlg:SalariesWagesAndRelatedExpensesMember2019-04-012019-06-30 0000928658cvlg:SalariesWagesAndRelatedExpensesMember2019-01-012019-06-30 0000928658srt:MaximumMember2020-01-012020-06-30 0000928658cvlg:TransportEnterpriseLeasingLLCMember2020-01-012020-06-30 0000928658cvlg:TransportEnterpriseLeasingLLCMember2019-01-012019-06-30 0000928658cvlg:TransportEnterpriseLeasingLLCMember2020-06-30 0000928658cvlg:ReductionInTELInvestmentMembercvlg:TransportEnterpriseLeasingLLCMember2020-06-30 0000928658cvlg:TransportEnterpriseLeasingLLCMember2019-12-31 0000928658us-gaap:EquityMethodInvestmentNonconsolidatedInvesteeOrGroupOfInvesteesMember2020-06-30 0000928658us-gaap:EquityMethodInvestmentNonconsolidatedInvesteeOrGroupOfInvesteesMember2019-12-31 0000928658us-gaap:EquityMethodInvestmentNonconsolidatedInvesteeOrGroupOfInvesteesMember2020-04-012020-06-30 0000928658us-gaap:EquityMethodInvestmentNonconsolidatedInvesteeOrGroupOfInvesteesMember2019-04-012019-06-30 0000928658us-gaap:EquityMethodInvestmentNonconsolidatedInvesteeOrGroupOfInvesteesMember2020-01-012020-06-30 0000928658us-gaap:EquityMethodInvestmentNonconsolidatedInvesteeOrGroupOfInvesteesMember2019-01-012019-06-30 0000928658cvlg:LandairHoldingsIncMember2018-07-03 utr:M 0000928658cvlg:LandairHoldingsIncMemberus-gaap:TradeNamesMember2020-01-012020-06-30 0000928658cvlg:LandairHoldingsIncMemberus-gaap:TradeNamesMember2020-06-30 0000928658us-gaap:TradeNamesMembercvlg:DedicatedMember2020-06-30 0000928658us-gaap:TradeNamesMembercvlg:ManagedFreightMember2020-06-30 0000928658us-gaap:TradeNamesMember2020-06-30 0000928658us-gaap:TradeNamesMember2020-01-012020-06-30 0000928658us-gaap:NoncompeteAgreementsMembercvlg:DedicatedMember2020-06-30 0000928658us-gaap:NoncompeteAgreementsMembercvlg:ManagedFreightMember2020-06-30 0000928658us-gaap:NoncompeteAgreementsMember2020-06-30 0000928658us-gaap:CustomerRelationshipsMembercvlg:DedicatedMember2020-06-30 0000928658us-gaap:CustomerRelationshipsMembercvlg:ManagedFreightMember2020-06-30 0000928658us-gaap:CustomerRelationshipsMember2020-06-30 0000928658us-gaap:CustomerRelationshipsMember2020-01-012020-06-30 0000928658us-gaap:TradeNamesMembercvlg:DedicatedMember2019-12-31 0000928658us-gaap:TradeNamesMembercvlg:ManagedFreightMember2019-12-31 0000928658us-gaap:TradeNamesMember2019-12-31 0000928658us-gaap:TradeNamesMember2019-01-012019-12-31 0000928658us-gaap:NoncompeteAgreementsMembercvlg:DedicatedMember2019-12-31 0000928658us-gaap:NoncompeteAgreementsMembercvlg:ManagedFreightMember2019-12-31 0000928658us-gaap:NoncompeteAgreementsMember2019-12-31 0000928658us-gaap:NoncompeteAgreementsMember2019-01-012019-12-31 0000928658us-gaap:CustomerRelationshipsMembercvlg:DedicatedMember2019-12-31 0000928658us-gaap:CustomerRelationshipsMembercvlg:ManagedFreightMember2019-12-31 0000928658us-gaap:CustomerRelationshipsMember2019-12-31 0000928658us-gaap:CustomerRelationshipsMember2019-01-012019-12-31 00009286582020-02-10 00009286582020-03-26 0000928658us-gaap:SubsequentEventMember2020-07-012020-07-01 0000928658us-gaap:SubsequentEventMember2020-07-01
 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

or

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to

 

Commission File Number: 0-24960

 

COVENANT LOGISTICS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

88-0320154

(State or other jurisdiction of incorporation

(I.R.S. Employer Identification No.)

or organization)

 
  

400 Birmingham Hwy.

 

Chattanooga, TN

37419

(Address of principal executive offices)

(Zip Code)

 

423-821-1212

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
$0.01 Par Value Class A common stockCVLGThe NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes

No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

  

Accelerated filer

Non-accelerated filer   ☐

Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

No ☒


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (August 5, 2020).

 

Class A Common Stock, $.01 par value: 14,784,214 shares

Class B Common Stock, $.01 par value: 2,350,000 shares

 

Page 1

 

 
 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

   

Page

Number

Item 1.

Financial Statements

 
     
 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (unaudited)

Page 3
     
 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (unaudited)

Page 4
     
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (unaudited)

Page 5
     
 

Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2020 and 2019 (unaudited)

Page 6
     
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

Page 7
     
 

Notes to Condensed Consolidated Financial Statements (unaudited)

Page 8
     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Page 21
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Page 36
     

Item 4.

Controls and Procedures

Page 37
 

PART II

OTHER INFORMATION

   

Page

Number

     

Item 1.

Legal Proceedings

Page 38
     

Item 1A.

Risk Factors

Page 39
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Page 39
     

Item 3.

Defaults Upon Senior Securities

Page 39
     

Item 4.

Mine Safety Disclosures

Page 39
     

Item 5.

Other Information

Page 39
     

Item 6.

Exhibits

Page 40

 

Page 2

 

  

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

  

June 30, 2020

  

December 31, 2019

 
  

(unaudited)

    

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $67,127  $43,591 

Accounts receivable, net of allowance of $4,567 in 2020 and $1,440 in 2019

  74,880   81,205 

Drivers' advances and other receivables, net of allowance of $742 in 2020 and $692 in 2019

  20,929   8,507 

Inventory and supplies

  3,571   4,210 

Prepaid expenses

  10,415   11,707 

Assets held for sale

  66,005   12,010 

Income taxes receivable

  4,566   5,403 

Other short-term assets

  715   1,132 
Current assets of discontinued operations  98,131   86,620 

Total current assets

  346,339   254,385 
         

Property and equipment, at cost

  523,677   725,383 

Less: accumulated depreciation and amortization

  (130,725)  (208,180)

Net property and equipment

  392,952   517,203 
         

Goodwill

  42,518   42,518 

Other intangibles, net

  26,822   29,615 

Other assets, net

  52,458   37,919 
         

Total assets

 $861,089  $881,640 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Checks outstanding in excess of bank balances

 $613  $592 

Accounts payable

  18,514   19,500 

Accrued expenses

  37,896   31,840 

Current maturities of long-term debt

  53,482   54,377 

Current portion of finance lease obligations

  7,125   7,258 
Current portion of operating lease obligations  18,407   19,460 

Current portion of insurance and claims accrual

  23,810   21,800 
Other short-term liabilities  757   185 
Current liabilities of discontinued operations  5,494   6,245 

Total current liabilities

  166,098   161,257 
         

Long-term debt

  216,632   200,177 

Long-term portion of finance lease obligations

  25,609   26,010 
Long-term portion of operating lease obligations  30,225   40,882 

Insurance and claims accrual

  37,036   20,295 

Deferred income taxes

  70,563   80,330 

Other long-term liabilities

  7,995   2,578 

Total liabilities

  554,158   531,529 

Commitments and contingent liabilities

  -   - 

Stockholders' equity:

        

Class A common stock, $.01 par value; 40,000,000 shares authorized; 16,168,210 shares issued and 14,740,506 outstanding as of June 30, 2020; and 16,165,145 shares issued and outstanding as of December 31, 2019

  173   173 

Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding

  24   24 

Additional paid-in-capital

  142,657   141,885 
Treasury stock at cost; 1,427,704 and no shares as of June 30, 2020 and December 31, 2019, respectively  (17,446)  - 

Accumulated other comprehensive loss

  (2,964)  (1,014)

Retained earnings

  184,487   209,043 

Total stockholders' equity

  306,931   350,111 

Total liabilities and stockholders' equity

 $861,089  $881,640 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 3

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE three and six months ended June 30, 2020 and 2019

(In thousands, except per share data)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

(unaudited)

  

(unaudited)

 
  

2020

  

2019

  

2020

  

2019

 

Revenues

                

Freight revenue

 $179,564  $192,659  $369,145  $386,573 

Fuel surcharge revenue

  12,125   24,381   33,357   47,800 

Total revenue

 $191,689  $217,040  $402,502  $434,373 
                 

Operating expenses:

                

Salaries, wages, and related expenses

  74,688   75,424   157,152   154,593 

Fuel expense

  15,938   29,215   41,202   57,047 

Operations and maintenance

  12,218   14,898   25,044   30,072 

Revenue equipment rentals and purchased transportation

  47,011   47,169   93,073   95,839 

Operating taxes and licenses

  3,123   3,365   6,576   6,549 

Insurance and claims

  11,562   10,471   27,174   21,705 

Communications and utilities

  1,782   1,760   3,351   3,478 

General supplies and expenses

  11,536   7,205   19,894   13,909 

Depreciation and amortization

  19,663   20,568   37,846   40,413 
Gain on disposition of property and equipment, net  (3,451)  (65)  (4,975)  (208)
Impairment of long lived property, equipment, and right-of-use assets  26,569   -   26,569   - 

Total operating expenses

  220,639   210,010   432,906   423,397 

Operating (loss) income

  (28,950)  7,030   (30,404)  10,976 

Interest expense, net

  2,084   1,978   3,983   3,850 

(Income) loss from equity method investment

  (530)  (2,375)  205   (5,410)

(Loss) income before income taxes

  (30,504)  7,427   (34,592)  12,536 

Income tax (benefit) expense

  (7,336)  2,182   (8,340)  3,533 
(Loss) income from continuing operations  (23,168)  5,245   (26,252)  9,003 
Income from discontinued operations, net of tax  825   826   1,696   1,501 

Net (loss) income

 $(22,343) $6,071  $(24,556) $10,504 
                 
Basic and diluted (loss) income per share:                

(Loss) income from continuing operations

 $(1.36) $0.28  $(1.49) $0.49 
Income from discontinued operations  0.05   0.04   0.10   0.08 
Net (loss) income (1) $(1.31) $0.33  $(1.40) $0.57 

Basic weighted average shares outstanding

  17,089   18,438   17,584   18,410 

Diluted weighted average shares outstanding

  17,089   18,606   17,584   18,570 

 

(1) Sum of the individual amounts may not add due to rounding.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 4

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE three and six months ended June 30, 2020 and 2019

(In thousands)

 

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net (loss) income

 $(22,343) $6,071  $(24,556) $10,504 
                 

Other comprehensive (loss) income:

                
                 

Unrealized gain (loss) on effective portion of cash flow hedges, net of tax of ($9) and $809 in 2020 and $262 and $425 in 2019, respectively

  28   (692)  (2,363)  (1,124)
                 

Reclassification of cash flow hedge losses (gains) into statement of operations, net of tax of ($115) and ($129) in 2020 and $3 and $7 in 2019, respectively

  336   (9)  377   (19)
                 

Unrealized holding gain on investments classified as available-for-sale

  36   11   36   21 

Total other comprehensive income (loss)

  400   (690)  (1,950)  (1,122)
                 

Comprehensive (loss) income

 $(21,943) $5,381  $(26,506) $9,382 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 5

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE three and six months ended June 30, 2020 and 2019

(Unaudited and in thousands)

 

   

For the Three and Six Months Ended June 30, 2020

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

(Loss)

   

Earnings

   

Equity

 
                                                         

Balances at December 31, 2019

  $ 173     $ 24     $ 141,885     $ -     $ (1,014 )   $ 209,043     $ 350,111  

Net loss

    -       -       -       -       -       (2,213 )     (2,213 )
Other comprehensive loss     -       -       -       -       (2,350 )     -       (2,350 )

Share repurchase

    -       -       -       (17,515 )     -       -       (17,515 )

Stock-based employee compensation expense

    -       -       466       -       -       -       466  

Issuance of restricted shares, net

    -       -       (6 )     -       -       -       (6 )

Balances at March 31, 2020

  $ 173     $ 24     $ 142,345     $ (17,515 )   $ (3,364 )   $ 206,830     $ 328,493  
Net loss     -       -       -       -       -       (22,343 )     (22,343 )

Other comprehensive income

    -       -       -       -       400       -       400  
Share repurchase     -       -       -       29       -       -       29  
Stock-based employee compensation expense     -       -       355       -       -       -       355  
Issuance of restricted shares, net     -       -       (43 )     40       -       -       (3 )
Balances at June 30, 2020   $ 173     $ 24     $ 142,657     $ (17,446 )   $ (2,964 )   $ 184,487     $ 306,931  

 

   

For the Three and Six Months Ended June 30, 2019

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

(Loss)

   

Earnings

   

Equity

 
                                                         

Balances at December 31, 2018

  $ 171     $ 24     $ 142,177     $ -     $ 204     $ 200,566     $ 343,142  

Net income

    -       -       -       -       -       4,433       4,433  

Other comprehensive loss

    -       -       -       -       (432 )     -       (432 )

Stock-based employee compensation expense

    -       -       1,262       -       -       -       1,262  

Issuance of restricted shares, net

    1       -       (669 )     -       -       -       (668 )

Balances at March 31, 2019

  $ 172     $ 24     $ 142,770     $ -     $ (228 )   $ 204,999     $ 347,737  
Net income     -       -       -       -       -       6,071       6,071  
Other comprehensive loss     -       -       -       -       (690 )     -       (690 )
Stock-based employee compensation expense reversal     -       -       (1,433 )     -       -       -       (1,433 )
Issuance of restricted shares, net     -       -       -       -       -       -       -  
Balances at June 30, 2019   $ 172     $ 24     $ 141,337     $ -     $ (918 )   $ 211,070     $ 351,685  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 6

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE six months ended June 30, 2020 and 2019

(In thousands)

 

  Six Months Ended June 30, 
  

2020

  

2019

 
Cash flows from operating activities:        

Net (loss) income

 $(24,556) $10,504 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

        

Provision for (reversal of losses on) accounts receivable

  3,355   (32)

Reversal of deferred gain on sales to equity method investee

  (2)  (7)

Depreciation and amortization

  37,853   40,426 
Impairment of property and equipment  26,569   - 

Amortization of deferred financing fees

  73   73 

Deferred income tax (benefit) expense

  (9,139)  3,221 

Income tax benefit arising from restricted share vesting and stock options exercised

  17   668 

Stock-based compensation expense (reversal)

  822   (171)

Loss (income) from equity method investment

  205   (5,410)

Gain on disposition of property and equipment

  (4,946)  (1,386)

Return on investment in available-for-sale securities

  (2)  (7)

Changes in operating assets and liabilities:

        

Receivables and advances

  (34,802)  164 

Prepaid expenses and other assets

  2,093   (2,971)

Inventory and supplies

  639   (75)

Insurance and claims accrual

  18,751   (4,255)

Accounts payable and accrued expenses

  7,172   (17,145)

Net cash flows provided by operating activities

  24,102   23,597 
         

Cash flows from investing activities:

        
Purchase of available-for-sale securities  (405)  (1,780)

Acquisition of property and equipment

  (46,991)  (79,125)

Proceeds from disposition of property and equipment

  51,479   15,569 

Net cash flows provided by (used in) investing activities

  4,083   (65,336)
         

Cash flows from financing activities:

        

Change in checks outstanding in excess of bank balances

  21   (247)

Proceeds from issuance of notes payable

  55,345   57,555 

Repayments of notes payable

  (39,859)  (19,733)

Repayments of finance lease obligations

  (2,661)  (2,876)

Proceeds under revolving credit facility

  803,397   843,398 

Repayments under revolving credit facility

  (803,397)  (829,995)

Payment of minimum tax withholdings on stock compensation

  (9)  (667)
Common stock repurchased  (17,486)  - 

Net cash flows (used in) provided by financing activities

  (4,649)  47,435 
         

Net change in cash and cash equivalents

  23,536   5,696 
         
Cash and cash equivalents at beginning of period  43,591   23,127 
Cash and cash equivalents at end of period $67,127  $28,823 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 7

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.

Significant Accounting Policies

 

Basis of Presentation

 

On July 1, 2020, the stockholders of Covenant Transportation Group, Inc. approved the amendment to the organization’s Articles of Incorporation to change the Company’s name to Covenant Logistics Group, Inc. All references herein reflect the change of name to Covenant Logistics Group, Inc.

 

The condensed consolidated financial statements include the accounts of Covenant Logistics Group, Inc., a Nevada holding company, and its wholly owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Logistics Group, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. In preparing financial statements, it is necessary for management to make assumptions and estimates affecting the amounts reported in the condensed consolidated financial statements and related notes. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. In the opinion of management, the accompanying financial statements include all adjustments that are necessary for a fair presentation of the results for the interim periods presented, such adjustments being of a normal recurring nature.

 

Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 2019, condensed consolidated balance sheet was derived from our audited balance sheet as of that date. Our operating results are subject to seasonal trends when measured on a quarterly basis; therefore operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2019. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.

 

Change in Estimates

 

The Company reviews the estimated useful lives and salvage values of its assets on an ongoing basis, based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice.  During the second quarter of 2020, the Company adjusted the useful lives of certain intangible finite-lived assets, including the Landair trade name and non-compete agreement, and certain revenue equipment held under operating leases as the result of management changes, a change in the branding of the organization, and the forward looking use of these assets.  These changes are being treated as a change in accounting estimate. During the three and six months ended June 30, 2020, these changes in estimates resulted in an increase in depreciation and amortization expense of approximately $3.2 million, or a $2.2 million, or $0.13 per diluted share increase to net loss. 

 

Risks and Uncertainties

 

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic, and the President of the United States declared the COVID-19 a national emergency.  The rapid spread of the pandemic and the continuously evolving responses to combat it have had a continued negative impact on the global economy. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from COVID-19, we are currently unable to fully determine its future impact on our business. However, we are continuing to monitor the progression of the pandemic, further government response and development of treatments and vaccines and their potential effect on our financial position, results of operations, cash flows and liquidity. These events could have an impact in future periods on certain estimates used in the preparation of our second quarter financial results, including, but not limited to impairment of goodwill, other intangible assets and other long-lived assets, income tax provision and recoverability of certain receivables. Should the pandemic continue for an extended period of time, the impact on our operations could have a material adverse effect on our financial condition, results of operations, cash flows and liquidity.

 

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the current policy period ( April 1, 2018 to March 31, 2021), aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million are estimated to be fully eroded based on current claims expense accruals. As a result, any increase increases to existing claims, and/or new claims filed prior to March 31, 2021, may require additional expense accruals.  Additionally, there is the possibility of mandatory reinstatement charges for the expired policy providing coverage in the $10.0 million in excess of $10.0 million layer, for accidents that occurred prior to expiration on March 31, 2020. Due to developments, we may experience additional expense accruals, increased insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. We maintain insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain self-insured retentions. In management's opinion, our potential exposure under pending legal proceedings is adequately provided for in the accompanying condensed consolidated financial statements. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations.

 

On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our Factoring reportable segment. The sale consisted primarily of $103.3 million of net accounts receivable, which included $108.7 million of gross accounts receivable, less advances and rebates of $5.4 million.  Subsequent to the disposition, the Company and the purchaser of TFS’ assets became involved in a dispute related to the disposition of the assets of TFS. See Note 15 for additional information on the risks and uncertainties associated with this dispute. 

 

 

Page 8

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is generally recorded using an accelerated method. Depreciation of revenue equipment is our largest item of depreciation. We have historically depreciated new tractors over five years to salvage values of approximately 15% of their cost.  We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 25% of their cost. We review, at least annually, the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations. Gains and losses on the disposal of property and equipment are included in depreciation expense in the consolidated statements of operations.

 

Recent Accounting Pronouncements

 

Accounting Standards not yet adopted

 

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Measurement of Credit Losses on Financial Instruments, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. This update will be effective for our annual reporting period beginning January 1, 2023, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impacts the adoption of this standard will have on the consolidated financial statements.

 

Page 9

 

 

 

Note 2.

(Loss) Income Per Share

 

Basic (loss) income per share excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted (loss) income per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. There were approximately 274,000 shares and 257,000 shares issuable upon conversion of unvested restricted shares for the three and six months ended June 30, 2020, respectively. Such shares were not included in the computation of the diluted loss per share for the same periods as the inclusion would have been anti-dilutive due to the net loss. There were no outstanding stock options at June 30, 2020 or June 30, 2019. Income per share is the same for both Class A and Class B shares.

 

The following table sets forth, for the periods indicated, the calculation of net (loss) income per share included in the condensed consolidated statements of operations:

 

(in thousands except per share data)

 

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Numerators:

                
(Loss) income from continuing operations $(23,168) $5,245  $(26,252) $9,003 
Income from discontinued operations  825   826   1,696   1,501 

Net (loss) income

 $(22,343) $6,071  $(24,556) $10,504 

Denominator:

                

Denominator for basic (loss) income per share – weighted-average shares

  17,089   18,438   17,584   18,410 

Effect of dilutive securities:

                

Equivalent shares issuable upon conversion of unvested restricted shares

  -   168   -   160 

Denominator for diluted (loss) income per share adjusted weighted-average shares and assumed conversions

  17,089   18,606   17,584   18,570 
                 

Net (loss) income per share:

                

(Loss) income from continuing operations

 $(1.36) $0.28  $(1.49) $0.49 
Income from discontinued operations  0.05   0.04   0.10   0.08 
Net (loss) income (1) $(1.31) $0.33  $(1.40) $0.57 

 

(1Sum of the individual amounts may not add due to rounding.

Page 10

 

 

 

Note 3.

Discontinued Operations

 

As of June 30, 2020, our Factoring reportable segment was classified as discontinued operations as it: (i) is a component of the entity, (ii) meets the criteria as held for sale, and (iii) has a material effect on the Company's operations and financial results. On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of Transport Financial Services (“TFS”), a division of Covenant Transport Solutions LLC, an indirect wholly owned subsidiary of the Company, which included substantially all of the assets and operations of our Factoring reportable segment.

 

Beginning with the period ended June 30, 2020, we have reflected the former Factoring reportable segment as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior periods have been adjusted to conform to the current presentation. The sale consisted primarily of $103.3 million of net accounts receivable, which included $108.7 million of gross accounts receivable, less advances and rebates of $5.4 million. 

 

The following table summarizes the results of our discontinued operations for the three and six months ended June 30, 2020 and 2019:

(in thousands) Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
Total revenue $2,516  $2,258  $5,255  $4,106 
                 
Operating expenses  453   444   1,030   813 
Operating income  2,063   1,814   4,225   3,293 
Interest expense  955   705   1,948   1,278 
Income before income taxes  1,108   1,109   2,277   2,015 
Income tax expense  283   283   581   514 
Net income from discontinued operations, net of tax  $825  $826  $1,696  $1,501 

 

Interest expense not directly attributable to or related to other operations has been allocated to discontinued operations in a manner consistent with debt needed to finance the net average funds employed by the Factoring reportable segment, multiplied by the Company’s weighted average interest rate.

The following table summarizes the major classes of assets and liabilities included as discontinued operations as of June 30, 2020 and December 31, 2019:

(in thousands)

 

June 30, 2020

  

December 31, 2019

 

Current assets:

        

Accounts receivable, net of allowance of $600 in 2020 and $408 in 2019

 $98,131  $86,620 

Current assets of discontinued operations

  98,131   86,620 
         

Current liabilities:

        

Accounts payable

  5,494   6,245 

Current liabilities of discontinued operations

 $5,494  $6,245 

 

Net cash flows used by operating activities related to discontinued operations were $10.0 million and $20.0 million for the six months ended June 30, 2020 and 2019, respectively.  There were no investing or financing cash flows related to discontinued operations for either the six months June 30, 2020 or 2019.

 

The following unaudited summary information is presented on a consolidated pro forma basis as if the Factoring assets were sold as of January 1, 2019.

 

(in thousands) Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
Total revenue $191,689  $217,040  $402,502  $434,373 
(Loss) income from continuing operations  (23,168)  5,245   (26,251)  9,003 
(Loss) income per basic and diluted share from continuing operations $(1.36) $0.28  $(1.49)  0.49 

 

The Company and the purchaser of TFS’ assets are involved in a dispute related to the disposition. The purchaser asserts that, subsequent to the closing, it identified that approximately $66.0 million of the assets acquired  related to advances against future payments to be made pursuant to long-term contractual arrangements between the obligor on such contracts and TFS’ clients for services that had not yet been performed (as opposed to advances against future payments for services that had been performed), that this fact was not disclosed to the purchaser, and the purchase of such advances was not contemplated by the purchase agreement. The Company is engaged in discussions to determine whether this dispute can be amicably resolved and is also evaluating other options should the discussions not produce an amicable resolution. It is too early to determine the likely outcome of this dispute, any liability or expenses the Company may incur, any cash the Company may need to pay or invest, any impact on the Company’s total leverage, or the gain or loss the Company ultimately may record on the transaction compared with the $26.5 million gain previously estimated. The facts are still being gathered, and a solution that is acceptable to both companies may or may not be found.

 

Page 11

 
 

Note 4.

Segment Information

 

Until the second quarter of 2020, we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring. As discussed in Note 3, our Factoring reportable segment was classified as discontinued operations as of June 30, 2020.

 

Our remaining reportable segments are as follows:

 

 

Highway Services: Includes the Company’s Expedited and OTR services, which are typically ad-hoc and do not include long-term contracts.
 

o

Expedited services primarily involves high service freight with delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company.

 

o

OTR services provide customers with one-way load capacity over irregular routes for loads that are typically shorter in nature.

 

 

Dedicated: Specializes in providing customers with committed capacity over extended contract periods using equipment either owned or leased by the Company.

 

 

Managed Freight: Includes the Company’s Brokerage, TMS and Warehousing services.

 

o

Brokerage services provide logistics capacity by outsourcing the carriage of customers’ freight to contractual third parties.

 

o

TMS provides comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs.

 

o

Warehousing services provides day-to-day warehouse management services to customers who have chosen to outsource this function.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in our 2019 Form 10-K. Substantially all intersegment sales prices are market based. We evaluate performance based on operating income of the respective business units.

 

The following table summarizes our total revenue by our three reportable segments, disaggregated to the service offering level, as used by our chief operating decision maker in making decisions regarding allocation of resources etc., organized first by reportable segment and then by service offering for the three and six months ended June 30, 2020 and 2019:

 

(in thousands)

 

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Revenues:

                

Highway Services

                

Expedited

 $67,907  $65,230  $135,503  $126,852 

OTR

  11,871   24,433   30,435   51,139 

Total Highway Services

  79,778   89,663   165,938   177,991 
                 

Dedicated

  65,940   85,745   147,728   170,078 
                 

Managed Freight:

                

Brokerage

  28,443   20,277   50,222   44,583 

TMS

  5,919   9,431   14,877   17,801 

Warehousing

  11,609   11,924   23,737   23,920 

Total Managed Freight

  45,971   41,632   88,836   86,304 
                 

Total revenues

 $191,689  $217,040  $402,502  $434,373 


 

Page 12

 

 

Note 5.

Income Taxes

 

Income tax expense in both 2020 and 2019 varies from the amount computed by applying the federal corporate income tax rates of 21% to income before income taxes, primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers.  Drivers who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable wages.  This per diem program increases our drivers' net pay per mile, after taxes, while decreasing gross pay, before taxes.  As a result, salaries, wages, and related expenses are slightly lower and our effective income tax rate is higher than the statutory rate.  Generally, as pre-tax income increases, the impact of the driver per diem program on our effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in periods where earnings are at or near breakeven the impact of the per diem program on our effective tax rate is significant.  Due to the partially nondeductible effect of per diem pay, our tax rate will fluctuate in future periods based on fluctuations in earnings.

 

Our liability recorded for uncertain tax positions as of  June 30, 2020 has increased by less than $0.1 million since December 31, 2019.

 

The net deferred tax liability of $70.6 million primarily relates to differences in cumulative book versus tax depreciation of property and equipment, partially off-set by net operating loss carryovers and insurance claims that have been reserved but not paid. The carrying value of our deferred tax assets assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits.  If these estimates and related assumptions change in the future, we may be required to establish a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income tax expense.  On a periodic basis, we assess the need for adjustment of the valuation allowance.  Based on forecasted taxable income resulting from the reversal of deferred tax liabilities, primarily generated by accelerated depreciation for tax purposes in prior periods, and tax planning strategies available to us, a valuation allowance has been established at June 30, 2020, for $0.4 million related to certain state net operating loss carryforwards.  If these estimates and related assumptions change in the future, we may be required to modify our valuation allowance against the carrying value of the deferred tax assets.

 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions for refundable payroll tax credits, deferral of employer-side social-security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. Although the Company is still assessing the impact of the legislation, we do not expect there to be a material income tax impact to our consolidated financial statements at this time.

 

 

Note 6.

Restructuring and Cost Savings Initiatives

 

In the second quarter of 2020 we made significant changes to our operational business units, overhead structure and branding strategy in an effort to streamline our business in a manner that we believe will allow us to significantly lower our fixed costs, pay down debt and produce consistent acceptable margins.  These changes include (i) a reduction in our fleet of tractors and refrigerated trailers, which have historically produced unacceptable or unprofitable operating income, (ii) reallocation of our operating fleet toward our more profitable expedited, dedicated and irregular route operations, (iii) the sale of our Hutchins, Texas terminal and discontinued use of our Texarkana, Arkansas terminal, (iv) changes to key management and reductions to headcount, (v) the closure and early termination of our leased office space in Chattanooga, Tennessee that our brokerage group occupied, (vi) the installation of new operational processes allowing us to abandon or discontinue the use of a number of peripheral information technology infrastructure and applications and (vii) a change in our branding strategy to focus on one company name, phasing out the use of the Landair trade name.

 

Although the significant majority of restructuring and cost savings initiatives were completed in the second quarter of 2020, we do anticipate additional costs in the third and fourth quarters of 2020, as we continue to optimize our fleet profile and management team.

 

We discontinued the use of a significant amount of property and equipment, including assets owned and held under operating leases. We have adjusted the carrying value of the owned property and equipment down to fair market value less estimated costs of disposal and classified them as available held for sale as of June 30, 2020. We expect to sell all the assets within the next twelve months. We terminated the lease agreement on a leased office facility in Chattanooga, TN during the second quarter of 2020 and recognized the related loss on the termination of the right of use asset and the abandonment of leasehold improvements within the impairment of property and equipment line item of the condensed consolidated statement of operations. The following table provides a summary of the asset groups impaired, amount of the impairment and a description of the valuation technique used to determine fair value. We believe that these impairment activities are substantially complete. Accordingly, we do not expect to incur additional charges in connection with this activity.

 

(in thousands)

 

Description

 

Amount

 Segment(s) Impacted

Value Determination

Revenue equipment

 $16,779 Highway Services and Dedicated

Third Party Market Appraisal

Terminal facility, leasehold improvements, and equipment, Texarkana, AR

  7,319 Highway Services and Dedicated

Third Party Market Appraisal

Leased office facility, Chattanooga, TN

  2,236 Managed Freight

Loss on ROU Asset and Leasehold Improvements

Training and orientation center, Chattanooga, TN

  235 Highway Services and Dedicated

Quoted Market Price

Impairment of right-of-use asset, long lived properties, and equipment

 $26,569   

 

Page 13

 

Other restructuring related gains and charges incurred during the second quarter of 2020 are summarized in the table below. Unless noted below, we believe that these other restructuring related gains and charges are substantially complete. Accordingly, we do not expect to incur additional charges in connection with this activity.

 

(in thousands)

 

Description

 

Amount

 Segment(s) Impacted

Statement of Operations Line Item

Gain on sale of Hutchins, TX terminal

 $(5,712)Highway Services and Dedicated

Gain on disposition of property and equipment, net

Employee separation costs (1)  1,791 Highway Services, Dedicated and Managed FreightSalaries, wages, and related expenses

Abandonment of information technology infrastructure and applications

  1,048 Highway Services and DedicatedGain on disposition of property and equipment, net
Change in useful life/abandonment of intangible assets  1,331 Dedicated and Managed FreightDepreciation and amortization
Abandonment of revenue equipment held under operating leases  825 Highway Services and DedicatedRevenue equipment rentals and purchased transportation
Contract exit costs and restructuring related costs and professional fees  695 Highway Services and Dedicated

General supplies and expenses

Total

 $(22)  

 

(1) As of June 30, 2020 we have a $1.0 million current liability related to employee separation costs.  We expect to incur additional employee separation costs in the third and fourth quarters of 2020 related to this restructuring activity, but do not have enough information to quantify at this time.

 

Page 14

 

 

Note 7.

Debt

 

Current and long-term debt and lease obligations consisted of the following at  June 30, 2020 and December 31, 2019:

 

(in thousands)

 

June 30, 2020

  

December 31, 2019

 
  

Current

  

Long-Term

  

Current

  

Long-Term

 

Borrowings under Credit Facility

 $-  $-  $-  $- 

Revenue equipment installment notes; weighted average interest rate of 3.6% at June 30, 2020, and 3.7% at December 31, 2019, due in monthly installments with final maturities at various dates ranging from July 2020 to April 2025, secured by related revenue equipment

  52,446   194,526   53,431   177,514 
                 

Real estate notes; interest rate of 1.9% at June 30, 2020 and 3.3% at December 31, 2019 due in monthly installments with a fixed maturity at August 2035, secured by related real estate

  1,116   22,106   1,093   22,670 

Deferred loan costs

  (80)  -   (147)  (7)

Total debt

  53,482   216,632   54,377   200,177 

Principal portion of finance lease obligations, secured by related revenue equipment

  7,125   25,609   7,258   26,010 

Principal portion of operating lease obligations, secured by related revenue equipment

  18,407   30,225   19,460   40,882 

Total debt and lease obligations

 $79,014  $272,466  $81,095  $267,069 

 

We and substantially all of our subsidiaries are parties to the Credit Facility with Bank of America, N.A., as agent (the "Agent") and JPMorgan Chase Bank, N.A. (together with the Agent, the "Lenders"). The Credit Facility is a $95.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million subject to Lender acceptance of the additional funding commitment.  The Credit Facility includes, within our $95.0 million revolving credit facility, a letter of credit sub facility in an aggregate amount of $95.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time. The Credit Facility matures in September 2021.

 

Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.5% to 1.0%; while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.5% to 2.0%. The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility.  The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate or revenue equipment pledged under other financing agreements, including revenue equipment installment notes and finance leases.

 

Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $95.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 75% of the appraised fair market value of eligible real estate, as reduced by a periodic amortization amount.  We had no outstanding borrowings under the Credit Facility as of June 30, 2020, undrawn letters of credit outstanding of approximately $36.7 million, and available borrowing capacity of $58.3 million. As of June 30, 2020, there were no outstanding base rate or LIBOR loans. Based on availability as of June 30, 2020 and 2019, there was no fixed charge coverage requirement.

 

The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated.  If an event of default occurs under the Credit Facility and the Lenders cause, or have the ability to cause, all of the outstanding debt obligations under the Credit Facility to become due and payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions. The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply with the covenants and restrictions set forth in the Credit Facility could result in an event of default. 

 

Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from  July 2020 to November 2024. The notes contain certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or other material covenants or events of default except certain notes totaling $217.3 million are cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in 2020, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, finance leases, and/or from the Credit Facility.

 

In April 2020, in an effort to improve our liquidity during the COVID-19 pandemic, we executed a modification to certain of our revenue equipment installment notes, exercising an option to make interest only payments for a period of 90 days, extending the due date of $177.3 million of debt by three months.

 

In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third party lender. The note contains certain restrictions and covenants that are usual and customary for a note of this nature. Failure to comply with the covenants and restrictions set forth in the note could result in an event of default. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%. The note contains certain restrictions and covenants that are usual and customary for a note of this nature. Failure to comply with the covenants and restrictions set forth in the note could result in an event of default. For the second quarter ended June 30, 2020, we obtained a waiver from the third-party lender for a financial covenant that we did not comply with. Absent the waiver we would have been in default under our covenants.  We expect to be in compliance with our debt covenants for the next 12 months.

 

Page 15

 

 

 

Note 8.

Lease Obligations

 

We finance a portion of our revenue equipment, office and terminal properties, computer and office equipment, and other equipment using leases.  A number of these leases include one or more options to renew or extend the agreements beyond the expiration date or to terminate the agreement prior to the lease expiration date, and such options are included in or excluded from the lease term, respectively, when those options are reasonably certain to be exercised. 

 

Finance lease obligations are utilized to finance a portion of our revenue equipment and are entered into with certain finance companies who are not parties to our Credit Facility. The finance leases in effect at  June 30, 2020 terminate from  September 2020 through  April 2025 and contain guarantees of the residual value of the related equipment by us. As such, the residual guarantees are included in the related debt balance as a balloon payment at the end of the related term as well as included in the future minimum finance lease payments. These lease agreements require us to pay personal property taxes, maintenance, and operating expenses. Our operating lease obligations do not typically include residual value guarantees or material restrictive covenants.

 

 A summary of our lease obligations at June 30, 2020 and 2019 are as follows:

 

(dollars in thousands)

 

Three Months Ended

  

Three Months Ended

  

Six Months Ended

  

Six Months Ended

 
  

June 30, 2020

  

June 30, 2019

  

June 30, 2020

  

June 30, 2019

 
                 

Finance lease cost:

                

Amortization of right-of-use assets

 $968  $1,408  $2,005  $2,819 

Interest on lease liabilities

  278   206   525   433 

Operating lease cost

  7,445   5,475   14,047   11,657 

Variable lease cost

  156   -   314   - 
                 

Total lease cost

 $8,847  $7,089  $16,891  $14,909 
                 

Other information

                

Cash paid for amounts included in the measurement of lease liabilities:

                

Operating cash flows from finance leases

  968   1,297   2,005   2,443 

Operating cash flows from operating leases

  7,601   5,475   14,361   11,657 

Financing cash flows from finance leases

  278   206   525   433 

Right-of-use assets obtained in exchange for new finance lease liabilities

  2,127   -   2,127   - 

Right-of-use assets obtained in exchange for new operating lease liabilities

  2,176   3,089   2,637   6,325 

Weighted-average remaining lease term—finance leases

 

2.4 years

             

Weighted-average remaining lease term—operating leases

 

2.7 years

             

Weighted-average discount rate—finance leases

  3.3%            

Weighted-average discount rate—operating leases

  5.2%            

 

During the second quarter of 2020 we recognized approximately $2.2 million of impairment expense related to a leased office facility in Chattanooga, TN held under an operating lease and $0.8 million of additional revenue equipment and purchased transportation expense related to the abandonment of revenue equipment held under an operating lease.  At  June 30, 2020 and December 31, 2019, right-of-use assets of $46.4 million and $58.8 million for operating leases and $32.0 million and $35.6 million for finance leases, respectively, are included in net property and equipment in our condensed consolidated balance sheets. Operating lease right-of-use asset amortization is included in revenue equipment rentals and purchased transportation, communication and utilities, and general supplies and expenses, depending on the underlying asset, in the condensed consolidated statement of operations. Amortization of finance leased assets is included in depreciation and amortization expense in the condensed consolidated statement of operations.

 

Our future minimum lease payments as of June 30, 2020, are summarized as follows by lease category:

 

(in thousands)

 

Operating

  

Finance

 
2020 (1) $10,885  $8,076 

2021

  18,682   8,548 

2022

  15,713   9,580 

2023

  6,869   7,524 

2024

  28   1,212 

Thereafter

  9   - 

Total minimum lease payments

 $52,186  $34,940 

Less: amount representing interest

  (3,554)  (2,206)

Present value of minimum lease payments

 $48,632  $32,734 

Less: current portion

  (18,407)  (7,125)

Lease obligations, long-term

 $30,225  $25,609 

 

(1) Excludes the six months ended June 30, 2020.

 

Page 16

 

 

 

Note 9.

Stock-Based Compensation

 

Our Third Amended and Restated 2006 Omnibus Incentive Plan, as amended (the "Incentive Plan") governs the issuance of equity awards and other incentive compensation to management and members of the board of directors. On May 8, 2019, the stockholders, upon recommendation of the board of directors, approved the First Amendment (the “First Amendment”) to the Incentive Plan. The First Amendment (i) increases the number of shares of Class A common stock available for issuance under the Incentive Plan by an additional 750,000 shares, (ii) implements additional changes designed to comply with certain shareholder advisory group guidelines and best practices, (iii) makes technical updates related to Section 162(m) of the Internal Revenue Code in light of the 2017 Tax Cuts and Jobs Act, (iv) re-sets the term of the Incentive Plan to expire with respect to the ability to grant new awards on March 31, 2029, and (v) makes such other miscellaneous, administrative and conforming changes as were necessary.

 

The Incentive Plan permits annual awards of shares of our Class A common stock to executives, other key employees, consultants, non-employee directors, and eligible participants under various types of options, restricted stock awards, or other equity instruments. As of  June 30, 2020, there were 417,042 shares remaining of the 2,300,000 shares available for award under the Incentive Plan. No participant in the Incentive Plan may receive awards of any type of equity instruments in any calendar year that relates to more than 200,000 shares of our Class A common stock. No awards may be made under the Incentive Plan after March 31, 2023. To the extent available, we have issued treasury stock to satisfy all share-based incentive plans.

 

Included in salaries, wages, and related expenses within the condensed consolidated statements of operations is the recognition of approximately $0.4 million and $0.8 million of stock-based compensation expense for the three and six months ended June 30, 2020, respectively, and the reversal of $1.8 million and $0.5 million of stock-based compensation expense for the three and six months ended June 30, 2019, respectively. All stock compensation expense recorded in 2020 and 2019 relates to restricted shares, as no unvested options were outstanding during these periods. 

 

The Incentive Plan allows participants to pay the federal and state minimum statutory tax withholding requirements related to awards that vest or allows participants to deliver to us shares of Class A common stock having a fair market value equal to the minimum amount of such required withholding taxes. To satisfy withholding requirements for shares that vested through June 30, 2020, certain participants elected to forfeit receipt of an aggregate of 5,119 shares of Class A common stock at a weighted average per share price of $14.15 based on the closing price of our Class A common stock on the dates the shares vested in 2020, in lieu of the federal and state minimum statutory tax withholding requirements. We remitted less than $0.1 million to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements.

 

 

Note 10.

Commitments and Contingencies

 

From time-to-time, we are a party to ordinary, routine litigation arising in the ordinary course of business, most of which involves claims for personal injury and property damage incurred in connection with the transportation of freight.

 

Our subsidiary Covenant Transport, Inc. (“Covenant Transport”) is a defendant in a lawsuit filed on November 9, 2018, in the Superior Court of Los Angeles County, California.  The lawsuit was filed on behalf of Richard Tabizon (a California resident and former driver) who is seeking to have the lawsuit certified as a class action.  The complaint asserts that the time period covered by the lawsuit is from October 31, 2014 to the present and alleges claims for failure to properly pay drivers for rest breaks, failure to provide accurate itemized wage statements and/or reimbursement of business related expenses, unlawful deduction of wages, failure to pay proper minimum wage and overtime wages, failure to provide all wages due at termination, and other related wage and hour claims under the California Labor Code.  Since the original filing date, the case has been removed from the Los Angeles Superior Court to the U.S. District Court in the Central District of California and subsequently the case was transferred to the U.S. District Court in the Eastern District of Tennessee where the case is now pending.  The Court has set a bench trial to begin on August 25, 2020.  Covenant Transport intends to vigorously defend itself in this matter.  We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of June 30, 2020.    

 

On February, 28 2019, Covenant Transport was named in a separate (but related) lawsuit filed in the Superior Court of Los Angeles County, California requesting civil penalties under the California Private Attorneys’ General Act for the same underlying wage and hour claims at issue in the putative class action case noted above. On August 1, 2019, the Los Angeles Superior Court entered an order staying the action pending completion of the earlier-filed action that is pending in the United States District Court for the Eastern District of Tennessee. Covenant Transport intends to vigorously defend itself in this matter.  We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of June 30, 2020.

 

Page 17

 

On August 2, 2018, Curtis Markson, et al. (collectively, “Markson”), filed a putative class action case in United States District Court, Central District of California generically claiming that five (5) specified trucking companies (including our subsidiary Southern Refrigerated Transport, Inc.) entered into a "no poaching conspiracy" in which they agreed not to solicit or hire employees in California who were "under contract" with a fellow defendant. The allegations center around new drivers in California who received their commercial driver's license through driving schools associated with, or paid for by, one of the named defendants, in exchange for agreeing to drive for that defendant carrier for a specified amount of time (typically 8-10 months). Over the ensuing 1820 months, the Plaintiffs added Covenant Transport as a co-defendant in the lawsuit on April 23, 2020.  The lawsuit claims that the named defendants sent letters to one another, providing notice of "under contract" status, if these new California drivers were hired by another defendant carrier prior to the driver completing their contractual obligations. Plaintiffs contend that these notifications evidence a collusive agreement by the named defendants to restrain competition among trucking companies in California and suppress wages. Southern Refrigerated Transport, Inc. and Covenant Transport are vigorously defending themselves against these claims. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of June 30, 2020.    

 

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the current policy period ( April 1, 2018 to March 31, 2021), aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million are estimated to be fully eroded based on current claims expense accruals. As a result, any increases to existing claims, and/or new claims filed prior to March 31, 2021, may require additional expense accruals. Additionally, there is the possibility of mandatory reinstatement charges for the expired policy providing coverage in the $10.0 million in excess of $10.0 million layer, for accidents that occurred prior to expiration on March 31, 2020. The expenses associated with additional liability claims may be substantial and such expenses could have a material adverse effect on our business, financial condition, and results of operations. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. We maintain insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain self-insured retentions. In management's opinion, our potential exposure under pending legal proceedings is adequately provided for in the accompanying condensed consolidated financial statements.

 

Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, discussed above, taking into account existing reserves, is not likely to have a materially adverse effect on our condensed consolidated financial statements.

 

We had $36.7 million and $35.2 million of outstanding and undrawn letters of credit as of June 30, 2020 and December 31, 2019, respectively. The letters of credit are maintained primarily to support our insurance programs.

 

 

Note 11.

Equity Method Investment

 

We own a minority investment in Transport Enterprise Leasing, LLC ("TEL"). TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have not guaranteed any of TEL's debt and have no obligation to provide funding, services, or assets. TEL’s majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. We sold no tr