0000928658 COVENANT LOGISTICS GROUP, INC. false --12-31 Q1 2021 3,361 2,992 558 764 0.01 0.01 40,000,000 40,000,000 16,211,918 14,413,492 16,183,139 14,784,214 0.01 0.01 5,000,000 5,000,000 2,350,000 2,350,000 2,350,000 2,350,000 1,798,426 1,398,925 392 820 51 14 5 7 10 1,827 3,106 1,827 3,106 122 1,541 1,310 1,310 220,889 210,813 3,084 0.51 0.17 0.50 0.17 4 21 1.6 2.0 1.8 1.8 1.9 1.9 0.75 0 1.8 2.1 1 29.7 0 0.1 0 1,023 661 42.5 10.5 Includes derivative assets of $122 at December 31, 2020. Excludes the three months ended March 31, 2021. 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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 March 31, 2021

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 (May 4, 2021).

 

Class A Common Stock, $.01 par value: 14,402,012 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 March 31, 2021 and December 31, 2020 (unaudited)

Page 3
     
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited)

Page 4
     
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020 (unaudited)

Page 5
     
 

Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2021 and 2020 (unaudited)

Page 6
     
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (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 22
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Page 37
     

Item 4.

Controls and Procedures

Page 38
 

PART II

OTHER INFORMATION

   

Page

Number

     

Item 1.

Legal Proceedings

Page 39
     

Item 1A.

Risk Factors

Page 40
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Page 40
     

Item 3.

Defaults Upon Senior Securities

Page 40
     

Item 4.

Mine Safety Disclosures

Page 40
     

Item 5.

Other Information

Page 40
     

Item 6.

Exhibits

Page 41

 

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)

 

 

  

March 31, 2021

  

December 31, 2020

 
  

(unaudited)

    

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $4,790  $8,407 

Accounts receivable, net of allowance of $3,361 in 2021 and $2,992 in 2020

  102,736   91,295 

Drivers' advances and other receivables, net of allowance of $558 in 2021 and $764 in 2020

  7,122   13,624 

Inventory and supplies

  3,471   3,119 

Prepaid expenses

  13,074   11,924 

Assets held for sale

  9,457   15,007 

Income taxes receivable

  3,747   4,155 

Other short-term assets

  -   265 

Total current assets

  144,397   147,796 
         

Property and equipment, at cost

  526,135   541,276 

Less: accumulated depreciation and amortization

  (155,623)  (149,824)

Net property and equipment

  370,512   391,452 
         

Goodwill

  42,518   42,518 

Other intangibles, net

  23,366   24,518 

Other assets, net

  65,844   60,897 
Noncurrent assets of discontinued operations  1,275   9,535 
         

Total assets

 $647,912  $676,716 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Checks outstanding in excess of bank balances

 $783  $1,215 

Accounts payable

  32,421   31,695 

Accrued expenses

  38,646   38,538 

Current maturities of long-term debt

  6,065   7,577 

Current portion of finance lease obligations

  6,147   5,687 
Current portion of operating lease obligations  16,844   16,989 

Current portion of insurance and claims accrual

  21,770   30,221 
Other short-term liabilities  633   643 
Current liabilities of discontinued operations  816   816 

Total current liabilities

  124,125   133,381 
         

Long-term debt

  71,803   47,888 

Long-term portion of finance lease obligations

  9,663   10,756 
Long-term portion of operating lease obligations  17,532   21,474 

Insurance and claims accrual

  43,789   44,077 

Deferred income taxes

  71,193   74,553 

Other long-term liabilities

  8,050   9,794 
Long-term liabilities of discontinued operations  5,100   44,151 

Total liabilities

  351,255   386,074 

Stockholders' equity:

        

Class A common stock, $.01 par value; 40,000,000 shares authorized; 16,211,918 shares issued and 14,413,492 outstanding as of March 31, 2021; and 16,183,139 shares issued and 14,784,214 outstanding as of December 31, 2020

  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

  144,874   143,438 
Treasury stock at cost; 1,798,426 and 1,398,925 shares as of March 31, 2021 and December 31, 2020, respectively  (24,560)  (17,067)

Accumulated other comprehensive (loss) income

  (1,319)  (2,251)

Retained earnings

  177,465   166,325 

Total stockholders' equity

  296,657   290,642 

Total liabilities and stockholders' equity

 $647,912  $676,716 

 

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 months ended March 31, 2021 and 2020

(In thousands, except per share data)

 

   

Three Months Ended March 31,

 
   

(unaudited)

 
   

2021

   

2020

 

Revenues

               

Freight revenue

  $ 200,688     $ 189,581  

Fuel surcharge revenue

    20,201       21,232  

Total revenue

  $ 220,889     $ 210,813  
                 

Operating expenses:

               

Salaries, wages, and related expenses

    82,586       82,463  

Fuel expense

    22,822       25,265  

Operations and maintenance

    14,719       12,825  

Revenue equipment rentals and purchased transportation

    57,236       46,062  

Operating taxes and licenses

    2,585       3,454  

Insurance and claims

    7,838       15,611  

Communications and utilities

    1,247       1,569  

General supplies and expenses

    8,183       8,359  

Depreciation and amortization

    14,087       18,183  

Gain on disposition of property and equipment, net

    (923 )     (1,524 )

Total operating expenses

    210,380       212,267  

Operating income (loss)

    10,509       (1,454 )

Interest expense, net

    743       1,899  

(Income) Loss from equity method investment

    (2,960 )     735  

Income (Loss) before income taxes

    12,726       (4,088 )

Income tax expense (benefit)

    4,145       (1,004 )

Income (loss) from continuing operations, net of tax

    8,581       (3,084 )

Income from discontinued operations, net of tax

    2,559       871  

Net income (loss)

  $ 11,140     $ (2,213 )
                 

Basic income (loss) per share:

               

Income (loss) from continuing operations

  $ 0.51     $ (0.17 )

Income from discontinued operations

    0.15       0.05  

Net income (loss) (1)

  $ 0.66     $ (0.12 )

Diluted income (loss) per share:

               

Income (loss) from continuing operations

  $ 0.50     $ (0.17 )

Income from discontinued operations

    0.15       0.05  

Net income (loss) (1)

  $ 0.65     $ (0.12 )

Basic weighted average shares outstanding

    16,954       18,088  

Diluted weighted average shares outstanding

    17,086       18,088  

 

(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 INCOME (LOSS)

FOR THE three months ended March 31, 2021 and 2020

(Unaudited and in thousands)

 

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 
         

Net income (loss)

 $11,140  $(2,213)
         

Other comprehensive income (loss):

        
         

Unrealized gain (loss) on effective portion of cash flow hedges, net of tax of ($392) in 2021 and $820 in 2020, respectively

  1,145   (2,391)
         

Reclassification of cash flow hedge (gains) losses into statement of operations, net of tax of $51 in 2021 and ($14) in 2020, respectively

  (150)  41 
         

Reclassification of gains on sale of investments classified as available-for-sale

  (63)  - 

Total other comprehensive income (loss)

  932   (2,350)
         

Comprehensive income (loss)

 $12,072  $(4,563)

 

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 months ended March 31, 2021 and 2020

(Unaudited and in thousands)

 

  

For the Three Months Ended

 
                  

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, 2020

 $173  $24  $143,438  $(17,067) $(2,251) $166,325  $290,642 

Net loss

  -   -   -   -   -   11,140   11,140 
Other comprehensive income  -   -   -   -   932   -   932 

Share repurchase

  -   -   -   (8,118)  -   -   (8,118)

Stock-based employee compensation expense

  -   -   2,594   -   -   -   2,594 

Issuance of restricted shares, net

  -   -   (1,158)  625   -   -   (533)

Balances at March 31, 2021

 $173  $24  $144,874  $(24,560) $(1,319) $177,465  $296,657 

 

   

For the Three Months Ended

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

Income (Loss)

   

Earnings

   

Equity

 

Balances at December 31, 2019

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

Net income

    -       -       -       -       -       (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  

 

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 three months ended March 31, 2021 and 2020

(Unaudited and in thousands)

 

  Three Months Ended March 31, 
  

2021

  

2020

 
Cash flows from operating activities:        

Net income

 $11,140  $(2,213)

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

        

Provision for losses on accounts receivable

  402   320 

Reversal (deferral) of gain on sales to equity method investee

  45   (2)

Depreciation and amortization

  14,087   18,187 

Amortization of deferred financing fees

  -   37 

Deferred income tax expense (benefit)

  4,735   (904)

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

  (120)  9 

Stock-based compensation expense

  2,594   466 

(Income) Loss from equity method investment

  (2,960)  735 

Gain on disposition of property and equipment

  (923)  (1,524)
Gain on reversal of contingent loss of discontinued operations  (3,412)  - 

Gain on investment in available-for-sale securities

  (63)  - 

Changes in operating assets and liabilities:

        

Receivables and advances

  (6,917)  (48,218)

Prepaid expenses and other assets

  (1,064)  3,802 

Inventory and supplies

  (352)  398 
Insurance and claims accrual  (8,739)  22,805 

Accounts payable and accrued expenses

  1,163   2,586 

Net cash flows provided (used) by operating activities

  9,616   (3,516)
         
Cash flows from investing activities:        
Purchase of available-for-sale securities  (33)  245 

Acquisition of property and equipment

  (3,907)  (35,240)

Proceeds from disposition of property and equipment

  13,871   18,497 

Net cash flows provided (used) by investing activities

  9,931   (16,498)
         

Cash flows from financing activities:

        

Change in checks outstanding in excess of bank balances

  (646)  (111)

Proceeds from issuance of notes payable

  -   29,746 

Repayments of notes payable

  (8,713)  (18,993)

Repayments of finance lease obligations

  (633)  (1,305)

Proceeds under revolving credit facility

  216,128   411,981 

Repayments under revolving credit facility

  (220,651)  (387,719)

Payment of minimum tax withholdings on stock compensation

  (531)  (6)
Common stock repurchased  (8,118)  (17,515)

Net cash flows (used) provided by financing activities

  (23,164)  16,078 
         

Net change in cash and cash equivalents

  (3,617)  (3,936)
         
Cash and cash equivalents at beginning of period  8,407   43,591 
Cash and cash equivalents at end of period $4,790  $39,655 

 

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

 

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, 2020, 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 three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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, 2020. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.

 

Risks and Uncertainties

 

On July 8, 2020, we sold a portfolio of accounts receivable, contract rights, and associated assets consisting of approximately $103.3 million in net funds employed (the “Portfolio”) previously held by Transport Financial Services ("TFS"), a division of Covenant Transport Solutions, LLC, an indirect wholly owned subsidiary of the Company, to a subsidiary of Triumph Bancorp, Inc. ("Triumph") for approximately $122.3 million, consisting of $108.4 million in cash and $13.9 million in Triumph stock, plus an earn-out opportunity of up to $9.9 million. After the transaction closed, the Company and Triumph became involved in a dispute over the nature of approximately $66.0 million of the assets included in the Portfolio. The dispute was resolved on September 23, 2020 with an amendment of the purchase agreement and related funding arrangements that reduced the purchase price of the Portfolio to approximately $108.4 million, representing the cash amount received by us at closing. Additionally, the earnout opportunity was terminated and we are required to sell the Triumph stock we received at closing and will deliver the net proceeds to Triumph. In October 2020, we sold the Triumph stock acquired as part of the amended purchase agreement for $28.1 million and remitted the proceeds to Triumph upon settlement. The amended purchase agreement resulted in a gain on the sale of the Portfolio of $3.7 million, net of related expenses.

 

The amended purchase agreement specifically identified approximately $62.0 million accounts within the Portfolio, which related to advances on services that had not yet been performed, were placed in a loss sharing pool to be repaid with proceeds other than those generated from ordinary working capital factoring. To the extent losses on covered accounts are incurred, we will indemnify Triumph on a dollar for dollar basis for up to the first $30.0 million of losses, and on a 50% basis for up to the next $30.0 million of losses, for total indemnification exposure of up to $45.0 million (the “TFS Settlement”). During the fourth quarter of 2020, we recorded $44.2 million of contingent liabilities, reflected as other long-term liabilities from discontinued operations in our consolidated balance sheet, because as of December 31, 2020 it was probable and estimable that such amount would be due to Triumph under the TFS Settlement. During the first quarter of 2021, we received an indemnification call from Triumph of $35.6 million related to the TFS Settlement, all of which was reserved during the fourth quarter of 2020. Additionally, Triumph was able to collect some funds related to our fourth quarter 2020 accrual that allowed us the opportunity to reverse $3.4 million of our accrual. The payment of amounts with respect to the indemnification obligations could create volatility in our reported future financial results and could have an adverse effect on our results of operations, cash flows, available liquidity, and total indebtedness.

 

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. Depreciation of revenue equipment is our largest item of depreciation. We generally depreciate new tractors over five years to salvage values that range from 10% to 35% of their cost, depending on the operating segment profile of the equipment. We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 28% and 21% of their cost, respectively. We annually review 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. 

 

Recent Accounting Pronouncements

 

Accounting Standards adopted

 

In December 2019, FASB issued ASU 2019-12, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. We adopted this standard effective January 1, 2021. The adoption of this standard had no impact on our consolidated financial statements and related disclosures.

 

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.

Income (Loss) Per Share

 

Basic income (loss) 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 income (loss) 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 132,000 shares issuable upon conversion of unvested restricted shares for the three months ended March 31, 2021. Such shares were not included in the computation of diluted (loss) income per share for the same prior year period as the inclusion would have been anti-dilutive due to the net loss. There were 721,000 and no outstanding stock options at March 31, 2021 and March 31, 2020, respectively. 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 income (loss) per share included in the condensed consolidated statements of operations:

 

(in thousands except per share data)

 

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Numerators:

        

Income (loss) from continuing operations

 $8,581  $(3,084)

Income from discontinued operations

  2,559   871 

Net income (loss)

 $11,140  $(2,213)

Denominator:

        

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

  16,954   18,088 

Effect of dilutive securities:

        

Equivalent shares issuable upon conversion of unvested restricted shares

  132   - 
Equivalent shares issuable upon conversion of unvested employee stock options  -   - 

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

 $17,086  $18,088 
         

Basic income (loss) per share:

        

Income (loss) from continuing operations

 $0.51  $(0.17)

Income from discontinued operations

  0.15   0.05 

Net income (loss) (1)

 $0.66  $(0.12)

Diluted income (loss) per share:

        

Income (loss) from continuing operations

 $0.50  $(0.17)

Income from discontinued operations

  0.15   0.05 

Net income (loss) (1)

 $0.65  $(0.12)

 

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

Page 10

 

 

 

Note 3.

Fair Value of Financial Instruments

 

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. The fair value of the commodity contracts, including our former fuel hedges, is determined based on quotes from the counterparty which were verified by comparing them to the exchange on which the related futures are traded, adjusted for counterparty credit risk. The fair value of our interest rate swap agreements is determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair value of available-for-sale securities is based upon quoted prices in active markets. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate swap agreements.  A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

 

Level 1. Observable inputs such as quoted prices in active markets;

 

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Financial Instruments Measured at Fair Value on a Recurring Basis

 
         

(in thousands)

        

Hedge derivatives

 

March 31, 2021

  

December 31, 2020 (1)

 

Net Fair Value of Derivative

 $(1,827) $(3,106)

Quoted Prices in Active Markets (Level 1)

  -   - 

Significant Other Observable Inputs (Level 2)

  (1,827)  (3,106)

Significant Unobservable Inputs (Level 3)

  -   - 
         

(1) Includes derivative assets of $122 at December 31, 2020.

        
         

Available-for-sale securities

 

March 31, 2021

  

December 31, 2020

 

Fair Value of Securities

 $1,541  $1,310 

Quoted Prices in Active Markets (Level 1)

  1,541   1,310 

Significant Other Observable Inputs (Level 2)

  -   - 

Significant Unobservable Inputs (Level 3)

  -   - 

 

Our financial instruments consist primarily of cash and cash equivalents, certificates of deposit, accounts receivable, commodity contracts, accounts payable, debt, and interest rate swaps. The carrying amount of cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of these instruments. 

 

Interest rates that are currently available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our revenue equipment installment notes approximated the carrying value as of  March 31, 2021, as the weighted average interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit Facility (as defined herein) approximate fair value due to the variable interest rate on that facility. There were no fuel hedge derivatives outstanding as of March 31, 2021. The fair value of all interest rate swap agreements that were in effect as of March 31, 2021 was approximately $1.8 million.

 

Page 11

 

Note 4.

Discontinued Operations

 

As of June 30, 2020, our former Factoring reportable segment was classified as discontinued operations as it: (i) was a component of the entity, (ii) met the criteria as held for sale, and (iii) had 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 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. 

 

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 following table summarizes the results of our discontinued operations for the three months ended March 31, 2021 and 2020:

 

(in thousands)

 

Three months ended March 31,

 
  

2021

  

2020

 

Total revenue

 $-  $2,739 

Operating expenses

  -   577 

Operating income

  -   2,162 

Reversal of contingent loss liability

  (3,412)  - 

Interest expense

  -   993 

Income before income taxes

  3,412   1,169 

Income tax expense

  853   298 

Income from discontinued operations, net of tax

 $2,559  $871 

 

Operating income for the three months ended March 31, 2021 relates to the gain on the reversal of our contingent loss liability in the amount of $3.4 million. Reversal of contingent liability for the three months ended March 31, 2021 relates to the reduced exposure of future indemnification by the Company to Triumph, as a result of the collection of covered receivables identified in the amended purchase agreement, as described in Note 1.

 

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  March 31, 2021 and December 31, 2020:

(in thousands)

 

March 31, 2021

  

December 31, 2020

 

Noncurrent deferred tax asset

 $1,275  $9,535 

Noncurrent assets from discontinued operations

  1,275   9,535 

Total assets from discontinued operations

 $1,275  $9,535 
         

Liabilities:

        

Accounts payable

 $816  $816 

Current liabilities of discontinued operations

  816   816 

Long-term contingent loss liability

  5,100   44,151 

Long-term liabilities of discontinued operations

  5,100   44,151 

Total liabilities from discontinued operations

 $5,916  $44,967 
 

There were no net cash flows related to discontinued operations for the three months ended March 31, 2021. For the three months ended March 31, 2020, discontinued operations used $22.0 million of net cash flows from operating activities, and there were no related investing or financing cash flows.

 

The following unaudited summary information is presented on a consolidated pro forma basis as if the Factoring assets were sold as of January 1, 2020.

 

(in thousands)

Three months ended March 31,

 

2021

 

2020

Total revenue

$ 220,889

 

$ 210,813

Income (loss) from continuing operations

8,581

 

(3,084)

Income (loss) per basic share from continuing operations

$ 0.51

 

$ (0.17)

Income (loss) per diluted share from continuing operations

$ 0.50

 

$ (0.17)

 

Refer to Note 1, “Significant Accounting Policies” of the accompanying condensed consolidated financial statements for further information about the amended TFS purchase agreement. 

 

Page 12

 

 

Note 5.

Segment Information

 

Until the second quarter of 2020, we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring Services. As discussed above, our Factoring reportable segment was classified as discontinued operations as of June 30, 2020. As of September 30, 2020, the segment formerly known as Highway Services is now reflected as Expedited, given the change in business mix surrounding the exit of the majority of the solo-refrigerated business in the second quarter of 2020. In addition, given management changes and growth, we have reported Warehousing as a separate reportable segment from Managed Freight. We believe the updated reportable segments reflect our service offerings, strategic direction, and how management, including our chief operating decision maker, monitors our performance.

 

Our four reportable segments include:

 

 

Expedited: The Expedited segment primarily provides truckload services to customers with high service freight and 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.

 

 

Dedicated: The Dedicated segment provides customers with committed truckload capacity over contracted periods with the goal of three to five years in length. Equipment is either owned or leased by the Company. Many of our Dedicated contract customers are automotive companies or shippers of produce, where the nature of the product we ship requires high service standards.

 

 

Managed Freight: The Managed Freight segment includes our brokerage and transport management services (“TMS”). Brokerage services provide logistics capacity by outsourcing the carriage of customers’ freight to third parties. TMS provides comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs.

 

 

Warehousing: The Warehousing segment 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 2020 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 four reportable segments, as used by our chief operating decision makers in making decisions regarding allocation of resources etc., for the three months ended March 31, 2021 and 2020:

 

(in thousands)

                    

Three Months Ended March 31, 2021

 

Expedited

  

Dedicated

  

Managed Freight

  

Warehousing

  

Consolidated

 

Total revenue from external customers

 $78,481  $75,446  $51,397  $15,565  $220,889 

Intersegment revenue

  446   -   -   -   446 

Operating income (loss)

  6,237   (1,770)  4,887   1,155   10,509 
                     

Three Months Ended March 31, 2020

 

Expedited

  

Dedicated

  

Managed Freight

  

Warehousing

  

Consolidated

 

Total revenue from external customers

 $86,161  $81,788  $30,737  $12,127  $210,813 

Intersegment revenue

  2,880   -   -   -   2,880 

Operating (loss) income

  (1,757)  (1,325)  653   975   (1,454)
                     

 

(in thousands)

 

For the Three Months Ended March 31,

 
  

2021

  

2020

 

Total external revenues for reportable segments

 $220,889  $210,813 

Intersegment revenues for reportable segments

  446   2,880 

Elimination of intersegment revenues

  (446)  (2,880)

Total consolidated revenues

 $220,889  $210,813 

 

Page 13

 

 

Note 6.

Income Taxes

 

Income tax expense in both 2021 and 2020 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  March 31, 2021 has decreased by less than $0.1 million since December 31, 2020.

 

The net deferred tax liability of $71.2 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 March 31, 2021, 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, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. The CARES Act, among other things, includes provisions for refundable payroll tax credits, deferral for 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. The Company considered the impacts of the legislation in the 2020 financial statements, noting that some items are continuing to be assessed through preparation of the 2020 income tax returns.

 

Page 14

 

 

Note 7.

Debt

 

Current and long-term debt and lease obligations consisted of the following as of  March 31, 2021 and December 31, 2020:

 

(in thousands)

 

March 31, 2021

  

December 31, 2020

 
  

Current

  

Long-Term

  

Current

  

Long-Term

 

Borrowings under Credit Facility

 $-  $10,477  $-  $15,000 
Borrowings under the Draw Note  -   35,639   -   - 

Revenue equipment installment notes; weighted average interest rate of 1.6% at March 31, 2021, and 2.0% at December 31, 2020, due in monthly installments with final maturities at various dates ranging from December 2021 to November 2022, secured by related revenue equipment

  4,913   4,450   6,437   11,358 

Real estate notes; interest rate of 1.8% at March 31, 2021 and 1.9% at December 31, 2020 due in monthly installments with a fixed maturity at August 2035, secured by related real estate

  1,152   21,237   1,140   21,530 

Deferred loan costs

  -   -   0   0 

Total debt

  6,065   71,803   7,577   47,888 

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

  6,147   9,663   5,687   10,756 

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

  16,844   17,532   16,989   21,474 

Total debt and lease obligations

 $29,056  $98,998  $30,253  $80,118 

 

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"). On October 23, 2020, we amended and extended the Credit Facility (the “Eighteenth Amendment”). The Credit Facility is a $110.0 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 a letter of credit sub facility in an aggregate amount of $105.0 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 October 2025.

 

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 0.25% to 0.75%; while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.25% to 1.75%. 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) $110.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 87.5% of eligible accounts receivable, plus (ii) the least of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 100% of the net book value of eligible revenue equipment, (c) 40.9% of the Lenders' aggregate revolving commitments under the Credit Facility, or (d) $45.0 million, plus (iii) the lesser of (a) $10.4 million or (b) 80% of the appraised fair market value of eligible real estate, as reduced by a periodic amortization amount. We had $10.5 million borrowings under the Credit Facility as of March 31, 2021, undrawn letters of credit outstanding of approximately $29.7 million, and available borrowing capacity of $69.8 million. As of March 31, 2021, there were $0.5 million of base rate and $10.0 million of LIBOR loans. Based on availability as of March 31, 2021 and 2020, there was no fixed charge coverage requirement.

 

Page 15

 

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  December 2021 to November 2022. 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 $6.4 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 2021, 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 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. We expect to be in compliance with our debt covenants for the next 12 months. 

 

In connection with the TFS Settlement, in September 2020, TBK Bank, SSB, as lender and agent for Triumph (“TBK Bank”), provided the Company with a $45 million line of credit (the “Draw Note”), the proceeds of which are to be used solely to satisfy our indemnification obligations under the TFS Settlement. We may borrow pursuant to the Draw Note until September 23, 2025. Any amount outstanding under the Draw Note will accrue interest at a per annum rate equal to one and one-half (1.5) percentage points over LIBOR, provided, however, that LIBOR shall be deemed to be at least 0.25%.  Accrued interest is due monthly and the outstanding principal balance is due on September 23, 2026. To secure our obligations under the TFS Settlement and the Draw Note, we pledged certain unencumbered revenue equipment with an estimated net orderly liquidation value of $60 million. The Draw Note includes usual and customary events of default for a facility of this nature and provides that, upon occurrence and continuation of an event of default, payment of all amounts payable under the Draw Note may be accelerated. During the first quarter of 2021, we received an indemnification call from Triumph of $35.6 million related to the TFS Settlement, which was funded by drawing on the Draw Note.

 

Page 16

 

 

 

Note 8.

Lease Obligations

 

The finance leases in effect at  March 31, 2021 terminate from  September 2021 through  November 2023 and contain guarantees of the residual value of the related equipment by us.

 

 A summary of our lease obligations at March 31, 2021 and 2020 are as follows:

 

(dollars in thousands)

 

Three Months Ended

  

Three Months Ended

 
  

March 31, 2021

  

March 31, 2020

 

Finance lease cost:

        

Amortization of right-of-use assets

 $1,007  $1,037 

Interest on lease liabilities

  174   247 

Operating lease cost

  5,911   6,602 

Variable lease cost

  63   158 
         

Total lease cost

 $7,155  $8,044 
         

Other information

        

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

        

Operating cash flows from finance leases

  1,007   1,037 

Operating cash flows from operating leases

  5,974   6,760 

Financing cash flows from finance leases

  633   1,305 

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

  224   461 

Weighted-average remaining lease term—finance leases

 

1.8 years

     

Weighted-average remaining lease term—operating leases

 

2.1 years

     

Weighted-average discount rate—finance leases

  4.3%    

Weighted-average discount rate—operating leases

  5.3%    

 

As of  March 31, 2021 and December 31, 2020, right-of-use assets of $33.4 million and $37.4 million for operating leases and $25.1 million and $29.4 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 March 31, 2021, are summarized as follows by lease category:

 

(in thousands)

 

Operating

  

Finance

 
2021 (1) $13,837  $6,736 

2022

  15,613   7,678 

2023

  6,852   1,607 

2024

  49   - 

2025

  9   - 

Thereafter

  -   - 

Total minimum lease payments

 $36,360  $16,021 

Less: amount representing interest

  (1,984)  (211)

Present value of minimum lease payments

 $34,376  $15,810 

Less: current portion

  (16,844)  (6,147)

Lease obligations, long-term

 $17,532  $9,663 

 

(1) Excludes the three months ended March 31, 2021.

 

Page 17

 

 

 

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 (the "Board"). On  July 1, 2020, the stockholders, upon recommendation of the Board, approved the Second Amendment (the “Second Amendment”) to our Third Amended and Restated 2006 Omnibus Incentive Plan (the "Incentive Plan"). The Second Amendment (i) increased the number of shares of Class A common stock available for issuance under the Incentive Plan by an additional 1,900,000 shares, (ii) added a fungible share reserve feature, under which shares subject to stock options and stock appreciation rights will be counted as one share for every share granted and shares subject to all other awards will be counted as 1.80 shares for every share granted, (iii) added a double-trigger vesting requirement upon a change in control, (iv) eliminated the Compensation Committee’s discretion to accelerate vesting, except in cases involving death or disability, (v) increased the maximum award granted or payable to any one participant under the Incentive Plan for a calendar year from 200,000 shares of Class A common stock or $2,000,000, in the event the award is paid in cash, to 500,000 shares of Class A common stock or $4,000,000, in the event the award is paid cash, (vi) re-set the date through which awards  may be made under the Incentive Plan to  June 1, 2030, and (vii) made other miscellaneous, administrative and conforming changes.

 

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, or other equity instruments. As of  March 31, 2021, there were 1,685,323 shares remaining of the 4,200,000 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 500,000 shares of our Class A common stock or $4,000,000, in the event the award is paid in cash. No awards may be made under the Incentive Plan after June 1, 2030. 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 stock-based compensation expense of $2.6 million and $0.5 million for the three-months ended March 31, 2021 and 2020, respectively. $2.2 million of stock compensation expense recorded in 2021 relates to restricted shares, and $0.4 million relates to unvested options. All stock compensation expense recorded in the 2020 quarter relates to restricted shares, as no unvested options were outstanding during this period.

 

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 March 31, 2021, certain participants elected to forfeit receipt of an aggregate of 27,041 shares of Class A common stock at a weighted average per share price of $19.66 based on the closing price of our Class A common stock on the dates the shares vested in 2021, in lieu of the federal and state minimum statutory tax withholding requirements. We remitted $0.5 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. Subsequent to March 31, 2021, this lawsuit was settled at mediation for an immaterial amount, pending court approval. Our accruals related to this claim as of March 31, 2021 were sufficient to cover this settlement.

 

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 March 31, 2021.

 

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 1824 months, the Plaintiffs added more trucking companies as co-defendants in the lawsuit, including Covenant Transport 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, Inc. 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 March 31, 2021.

 

Page 18

 

On February 11, 2021, a lawsuit was filed against Covenant Transport on behalf of Wesley Maas (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The lawsuit was filed in the Superior Court of San Bernardino County, California. The Complaint alleges claims for failure to pay all lawful wages, failure to provide lawful meal and rest periods or compensation in lieu thereof, failure to timely pay wages, failure to comply with itemized wage statement provisions, failure to indemnify for expenditures, and violations of California Labor Code and unfair competition laws. 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  March 31, 2021. 

 

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, however, any future liability claims would impact this analysis.

 

We had $29.7 million of outstanding and undrawn letters of credit as of March 31, 2021 and December 31, 2020. The letters of credit are maintained primarily to support our insurance programs. Additionally, we had $9.4 million of availability on a line of credit from Triumph solely to fund any indemnification owed to Triumph in relation to the sale of TFS.

 

 

Note 11.

Equity Method Investment

 

We own a 49.0% interest in Transport Enterprise Leasing, LLC ("TEL"), a tractor and trailer equipment leasing company and used equipment reseller. There is no loss limitation on our 49.0% interest in TEL. We have not guaranteed any of TEL's debt and have no obligation to provide funding, services, or assets. In May 2016, the operating agreement with TEL was amended to, among other things, remove the previously agreed to fixed date purchase options. Our option to acquire up to the remaining 51% of TEL would have expired May 31, 2016, and TEL’s majority owners would have received the option to purchase our ownership in TEL. There are no current put rights to purchase or sell with any owners. TEL’s majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. There are no third party liquidity arrangements, guarantees, and/or other commitments that may affect the fair value or risk of our interest in TEL.

 

We sold $0.8 million and no tractors or trailers to TEL during the three-months ended March 31, 2021 and 2020, respectively, and we received $0.3 million and $2.3 million, respectively, for providing various maintenance services, certain back-office functions, and for miscellaneous equipment. There was no equipment purchased from TEL during the three-months ended March 31, 2021 and 2020. Additionally, we paid less than $0.1 million to TEL for leases of revenue equipment during each of the three-months ended March 31, 2021 and 2020.  We recognized a net deferral of gains totaling less than $0.1 million and net reversal of previously deferred gains totaling less than $0.1 million for the three-months ended March 31, 2021 and 2020, respectively, representing 49% of the gains on units sold to TEL less any gains previously deferred and recognized when the equipment was subsequently sold to a third party. Deferred gains, totaling $0.3 million and $0.2 million at  March 31, 2021 and 2020, respectively, are being carried as a reduction in our investment in TEL. At  March 31, 2021 and  December 31, 2020, we had accounts receivable from TEL of $1.0 million and $0.7 million, respectively, related to cash disbursements made pursuant to our performance of certain back-office and maintenance functions on TEL’s behalf.

 

We have accounted for our investment in TEL using the equity method of accounting, and thus our financial results include our proportionate share of TEL's 2021 net income through March 31, 2021, or $3.0 million. We received no equity distributions from TEL during the three-months ended March 31, 2021 and 2020.

 

Our accounts receivable from TEL and investment in TEL as of  March 31, 2021 and 2020 are as follows:

 

Description:

Balance Sheet Line Item:

March 31, 2021

 

December 31, 2020

Accounts receivable from TEL

Driver advances and other receivables

$ 1,023

 

$ 661

Investment in TEL

Other assets

37,281

 

34,365

 

Our accounts receivable from TEL related to cash disbursements made pursuant to our performance of certain back-office and maintenance functions on TEL’s behalf.

 

See TEL's summarized financial information below:

 

(in thousands)

 

As of March 31,

  

As of December 31,

 
  

2021

  

2020

 

Total Assets

 $322,254  $374,591 

Total Liabilities

  255,059   318,743 

Total Equity

 $67,195  $55,848 

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Revenue

 $22,903  $25,221 

Cost of Sales

  1,143   4,769 

Operating Expenses

  13,905   18,875 

Operating Income

  7,855   1,577 

Net Income (Loss)

 $6,003  $(1,442)

 

Page 19

 

 

 

Note 12.

Goodwill and Other Assets

 

On July 3, 2018, we acquired 100% of the outstanding stock of Landair Holdings, Inc., a Tennessee corporation (“Landair”). Landair is a dedicated and for-hire truckload carrier, as well as a supplier of transportation management, warehousing and logistics inventory management services. Landair’s results have been included in the consolidated financial statements since the date of acquisition. Landair’s trucking operations’ results are reported within our Dedicated reportable segment, while Landair’s logistics operations’ results are reported within our Managed Freight and Warehousing reportable segments.

 

There was no change to the gross amount of identifiable intangible assets during the three-months ended March 31, 2021. At the end of its useful life, the Landair trade name will have a residual value of $0.5 million. Amortization expense of $1.2 million and $0.7 million for the three-months ended March 31, 2021 and 2020, respectively, was included in depreciation and amortization in the condensed consolidated statements of operations.

 

A summary of other intangible assets as of  March 31, 2021 and  December 31, 2020 is as follows:

 

(in thousands)

 

March 31, 2021

 
  

Gross intangible assets

  

Accumulated amortization

  

Net intangible assets

  

Remaining life (months)

 

Trade name:

                

Dedicated

 $2,402  $(1,512) $890     

Managed Freight

  999   (629)  370     
Warehousing  999   (629)  370     

Total trade name

  4,400   (2,770)  1,630   6 

Non-Compete agreement:

                

Dedicated

  914   (914)  -     

Managed Freight

  130   (130)  -     
Warehousing  356   (356)  -     

Total non-compete agreement

  1,400   (1,400)  0   - 

Customer relationships:

                

Dedicated

  14,072   (3,225)  10,847     

Managed Freight

  1,692   (389)  1,303     
Warehousing  12,436   (2,850)  9,586     

Total customer relationships:

  28,200   (6,464)  21,736   111 

Total other intangible assets

 $34,000  $(10,634) $23,366     

 

The carrying amount of goodwill was $42.5 million at March 31, 2021 and December 31, 2020, respectively.

 

Page 20

 

 

Note 13.

Equity

 

On February 10, 2020, our Board approved the repurchase of up to $20.0 million worth of the Company’s outstanding Class A common stock. The program was suspended on March 26, 2020, with approximately $2.5 million remaining authorized.

 

On January 25, 2021, our Board approved the repurchase of up to $40.0 million worth of the Company's outstanding Class A common stock. There were 0.5 million and 1.4 million shares repurchased in the open market for $8.1 million and $17.5 million during the three-months ended March 31, 2021 and 2020, respectively. The Company has the ability to repurchase up to $31.9 million worth of the Company's outstanding Class A common stock under the current stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors.

 

Note 14.

Liquidity

 

Our business requires significant capital investments over the short-term and the long-term. We generally finance our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. We had working capital (total current assets less total current liabilities) of $20.3 million and $14.4 million at March 31, 2021 and December 31, 2020, respectively. Based on our expected financial condition, net capital expenditures, and results of operations and related net cash flows, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs for at least the next year.

 

As of March 31, 2021, we had $10.5 million borrowings outstanding, undrawn letters of credit outstanding of approximately $29.7 million, and available borrowing capacity of $69.8 million under the Credit Facility. Additionally, we had $9.6 million of availability on a line of credit from Triumph solely to fund any indemnification owed to Triumph in relation to the sale of TFS. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment.

 

During the first half of 2020, in response to the uncertainty of the upcoming economic environment as a result of COVID-19 and as part of our strategic focus to reduce overhead costs, we took measures to preserve our liquidity, including capital reductions, financing, cost reduction, and working capital actions. During 2020, we paid down approximately $200.0 million of debt and lease obligations and plan to continue to pay down debt as we are able. If needed, we have other potential flexible sources of liquidity that we can leverage, such as currently unencumbered owned revenue equipment.

 

 
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ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.

 

This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. In this Form 10-Q, statements relating to future reclassification of losses arising from derivative instruments and the performance of counterparties to such instruments, future impact of accounting standards, future third-party transportation provider expenses, future tax rates, expenses, and deductions, expected freight demand and volumes and trucking industry conditions, potential results of a default and testing of our fixed charge covenant under the Credit Facility or other debt agreements, expected sources of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), expected capital expenditures, allocations, and requirements, future customer relationships, expected debt reduction, including future interest expense, future driver market conditions, expected cash flows, expected operating income, future investments in and growth of our segments and services, expected adjusted operating ratio, future trucking capacity, future rates and prices, future utilization, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation and the impact of our cost saving measures, expected net fuel costs, strategies for managing fuel costs, the effectiveness and impact of, and cash flows relating to, our fuel surcharge programs, future fluctuations in operations and maintenance expenses, expected effects and mix of our solo and team operations, future fleet size, management, and upgrades, the market value of used equipment, including equipment subject to operating or finance leases relative to our payment obligations under such operating leases (including residual value guarantees and the proceeds from the sale thereof), the anticipated impact of our investment in TEL, the future impact of our restructuring activities, strategic plan, and other strategic initiatives, anticipated levels of and fluctuations relating to insurance, claims, and litigation expenses, , including the erosion of available limits in our aggregate insurance policies and possible additional expense to reinstate certain insurance policies, our disposition of the assets of TFS, including any future indemnification obligations related to the TFS Portfolio, and the anticipated impact of the COVID-19 outbreak or other similar outbreaks, among others, are forward-looking statements.  -looking statements may be identified by the use of terms or phrases such as "believe," "may," "could," "would," "will," "expects," "estimates," "projects," "anticipates," "plans," " outlook," "focus," "seek," "potential," "continue," "goal," "target," "objective," "intends," derivations thereof, and similar terms and phrases. Such statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2020, as amended. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2020, as amended, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

 

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

 

Executive Overview

 

For the first quarter of 2021, we were pleased to report earnings per share of $0.65, which is the highest first quarter earnings in the Company's history. The team was able to exceed our previous best first quarter result in 2015 by 16%, or $0.09 per share, on a GAAP basis. The resolve and hard work of our team over the last year, transforming our company into a multi-service logistics company is bearing fruit and we’re honored to serve and lead an exceptional team.

 

Perhaps even more encouraging is the fact that we are less than a year into restructuring our business and have substantial remaining opportunity for further improvement. In the short run, this means continuing to improve or replace underperforming freight contracts, and in the long run, this means holding ourselves accountable for improved margins and returns across all aspects of our business. The freight market this year was noticeably stronger than the prior year's quarter due to growing economic activity, supply chain disruptions, and an intensifying national driver shortage all of which have continued into the second quarter. The full impact of these factors on our operating statistics year-over-year is complicated by changes in business mix due to downsizing our refrigerated fleet and solo tractor count in the Expedited business, as well as severe winter weather in February.  We expect year-over-year comparability to be clearer in the second half of 2021.

 

The following is a summary of infrequent and (or) non-cash transactions that occurred during the first quarter of 2021:

 

Reversal of contingent loss liability in discontinued operations

$  (3.4) million

Intangible asset amortization $    1.2 million

Net first quarter expense adjustment

$  (2.2) million

 

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As of June 30, 2020, our Factoring segment was classified as discontinued operations as it: (i) was a component of the entity, (ii) met the criteria as held for sale, and (iii) had 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 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 segment. Beginning with the period ended June 30, 2020, we have reflected the former Factoring 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.

 

Additional items of note for the  first quarter of  2021 include the following:
 
 

Total revenue of $220.9 million, an increase of 4.8% compared with the first quarter of 2020, and freight revenue (which excludes revenue from fuel surcharges) of $200.7 million, an increase of 5.9% compared with the first quarter of 2020, despite our reduced tractor fleet;

     
 

Operating income of $10.5 million, compared with operating loss of $1.5 million in the first quarter of 2020;

     
 

Net income of $11.1 million, or $0.65 per diluted share, compared with net loss of $2.2 million, or ($0.12) per diluted share, in the first quarter of 2020. Net income from continuing operations of $8.6 million, or $0.50 per basic share, compared to $3.1 million net loss from continuing operations or ($0.17) per diluted share, in the first quarter of 2020. Net income from discontinued operations of $2.5 million, or $0.15 per diluted share, compared to net income from discontinued operations of $0.9 million, or $0.05 per diluted share, in the first quarter of 2020.

     
 

35% of consolidated total revenue was in our more volatile Expedited reportable segment, as compared to 41% in the first quarter of 2020;

     
 

Our Managed Freight reportable segment’s total revenue increased to $51.4 million in the 2021 quarter from $30.7 million in the 2020 quarter and the segment had an operating income of $4.9 million in the 2021 quarter compared to operating income of $4.2 million in the 2020 quarter; 

     
 

Our equity investment in TEL has fully recovered from the soft equipment market and provided $3.0 million of pre-tax earnings in the first quarter of 2021 and provided $0.7 million in the first quarter of 2020;

     
  We received an indemnification call from Triumph of $35.6 million related to the TFS Settlement, all of which was reserved during the fourth quarter of 2020. Additionally, Triumph was able to collect some funds related to our fourth quarter 2020 accrual that allowed us the opportunity to reverse $3.4 million of our accrual;
     
  We were able to repurchase approximately 460,000 shares of our Class A common stock at $8.1 million;
     
 

Since December 31, 2020, total indebtedness, net of cash, increased by $21.3 million to $123.3 million, primarily related to the indemnification call under the TFS Settlement, and with available borrowing capacity of $69.8 million under our Credit Facility at March 31, 2021, we do not expect to be required to test our fixed charge covenant in the foreseeable future; and

     
 

Stockholders' equity and tangible book value at March 31, 2021, were $296.7 million and $230.8 million, respectively.

 

Outlook

 

Going forward, our short-term focus will be to improve the profitability of our Dedicated segment. The freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan. Potential headwinds include inefficiencies from re-engineering or replacing certain contracts, driver availability and cost, accident experience, the cost and volatility of claims, general inflation, and supply and demand factors for our customers and our industry. At present, we expect to make steady, incremental progress on our Dedicated segment’s margins over the remainder of 2021. We feel the freight market will continue to provide opportunities for price and utilization improvement to battle the driver market and other cost headwinds, primarily casualty insurance.

 

Over time, we expect our Managed Freight segment’s margin to gravitate toward the mid-single digits and Dedicated to gravitate toward the mid to high single digits and ultimately double digits.  Directionally the margin changes may offset each other to some extent as the freight and driver markets return to more balanced levels.

 

For the longer term, we expect to continue the execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by Dedicated, Managed Freight, and Warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure, improving legacy contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas.  With diligence and accountability, we expect to make consistent progress and be a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.

 

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Non-GAAP Reconciliation

 

In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices, amortization of intangibles, and significant unusual items. Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.

 

Operating Ratio

 

   

Three Months Ended March 31,

GAAP Operating Ratio:

 

2021

   

OR %

 

2020

   

OR %

Total revenue

  $ 220,889             $ 210,813          

Total operating expenses

    210,380     95.2%     212,267     100.7%

Operating income (loss)

  $ 10,509             $ (1,454 )        
                                 

Adjusted Operating Ratio:

 

2021

   

Adj. OR %

 

2020

   

Adj. OR %

Total revenue

  $ 220,889             $ 210,813          

Fuel surcharge revenue

    (20,201 )             (21,232 )        

Freight revenue (total revenue, excluding fuel surcharge)

    200,688               189,581          
                                 

Total operating expenses

    210,380