UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
COVENANT LOGISTICS GROUP, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) |
| or organization) | |
| | |
| | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| The |
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.
| | No ☐ |
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).
| | 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 ☐ |
| |
| 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 (November 8, 2023).
Class A Common Stock, $.01 par value:
Class B Common Stock, $.01 par value:
| PART I FINANCIAL INFORMATION |
||
| Page Number |
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| Item 1. |
Financial Statements |
|
| Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (unaudited) |
3 | |
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (unaudited) |
4 | |
| Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022 (unaudited) |
5 | |
| Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited) |
6 | |
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited) |
7 | |
| Notes to Condensed Consolidated Financial Statements (unaudited) |
8 | |
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
25 |
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
39 |
| Item 4. |
Controls and Procedures |
40 |
| PART II OTHER INFORMATION |
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| Page Number |
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| Item 1. |
Legal Proceedings |
41 |
| Item 1A. |
Risk Factors |
42 |
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
43 |
| Item 3. |
Defaults Upon Senior Securities |
43 |
| Item 4. |
Mine Safety Disclosures |
43 |
| Item 5. |
Other Information |
43 |
| Item 6. |
Exhibits |
44 |
| PART I |
FINANCIAL INFORMATION |
| FINANCIAL STATEMENTS |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| (In thousands, except share data) |
| September 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance of $ in 2023 and $ in 2022 | ||||||||
| Drivers' advances and other receivables, net of allowance of $ in 2023 and $ in 2022 | ||||||||
| Inventory and supplies | ||||||||
| Prepaid expenses | ||||||||
| Assets held for sale | ||||||||
| Income taxes receivable | ||||||||
| Other short-term assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, at cost | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Net property and equipment | ||||||||
| Goodwill | ||||||||
| Other intangibles, net | ||||||||
| Other assets, net | ||||||||
| Noncurrent assets of discontinued operations | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Checks outstanding in excess of bank balances | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Current maturities of long-term debt | ||||||||
| Current portion of finance lease obligations | ||||||||
| Current portion of operating lease obligations | ||||||||
| Current portion of insurance and claims accrual | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Long-term portion of finance lease obligations | ||||||||
| Long-term portion of operating lease obligations | ||||||||
| Insurance and claims accrual | ||||||||
| Deferred income taxes | ||||||||
| Other long-term liabilities | ||||||||
| Long-term liabilities of discontinued operations | ||||||||
| Total liabilities | ||||||||
| Stockholders' equity: | ||||||||
| Class A common stock, $ par value; shares authorized; shares issued and outstanding as of September 30, 2023; and shares issued and outstanding as of December 31, 2022 | ||||||||
| Class B common stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Additional paid-in-capital | ||||||||
| Treasury stock at cost; and shares as of September 30, 2023 and December 31, 2022, respectively | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Retained earnings | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE three and nine months ended September 30, 2023 and 2022
(In thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Freight revenue | $ | $ | $ | $ | ||||||||||||
| Fuel surcharge revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Salaries, wages, and related expenses | $ | $ | $ | $ | ||||||||||||
| Fuel expense | ||||||||||||||||
| Operations and maintenance | ||||||||||||||||
| Revenue equipment rentals and purchased transportation | ||||||||||||||||
| Operating taxes and licenses | ||||||||||||||||
| Insurance and claims | ||||||||||||||||
| Communications and utilities | ||||||||||||||||
| General supplies and expenses | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Gain on disposition of property and equipment, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Interest expense, net | ||||||||||||||||
| Income from equity method investment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Income from continuing operations, net of tax | ||||||||||||||||
| Income from discontinued operations, net of tax | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Basic income per share: | ||||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||||
| Income from discontinued operations | ||||||||||||||||
| Net income per share | $ | $ | $ | $ | ||||||||||||
| Diluted income per share: | ||||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||||
| Income from discontinued operations | ||||||||||||||||
| Net income per share | $ | $ | $ | $ | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE three and nine months ended September 30, 2023 and 2022
(Unaudited and in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Unrealized gain on effective portion of cash flow hedges, net of tax of ($) and ($) in 2023 and ($) and ($) in 2022, respectively | ||||||||||||||||
| Reclassification of cash flow hedge (gains) losses into statement of operations, net of tax of $ and $ in 2023 and ($) and ($) in 2022, respectively | ( | ) | ( | ) | ||||||||||||
| Total other comprehensive income | ||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE three and nine months ended September 30, 2023 and 2022
(Unaudited and in thousands)
| For the Three and Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Treasury | Comprehensive | Retained | Stockholders' | |||||||||||||||||||||||
| Class A | Class B | Capital | Stock | Income | Earnings | Equity | ||||||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Cash dividend ($ per common share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Share repurchase | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock-based employee compensation expense | ||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||
| Issuance of restricted shares, net | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Cash dividend ($ per common share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Share repurchase | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Stock-based employee compensation expense | ||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||
| Issuance of restricted shares, net | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Cash dividend ($ per common share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Stock-based employee compensation expense | ||||||||||||||||||||||||||||
| Balances at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| For the Three and Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||
| 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, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Cash dividend ($ per common share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Share repurchase | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock-based employee compensation expense | ||||||||||||||||||||||||||||
| Issuance of restricted shares, net | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Cash dividend ($ per common share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive loss | ||||||||||||||||||||||||||||
| Share repurchase | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock-based employee compensation expense reversal | ||||||||||||||||||||||||||||
| Issuance of restricted shares, net | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Cash dividend ($ per common share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive loss | ||||||||||||||||||||||||||||
| Share repurchase | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock-based employee compensation expense | ||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||
| Issuance of restricted shares, net | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balances at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE nine months ended September 30, 2023 and 2022
(Unaudited and in thousands)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision for losses on accounts receivable | ||||||||
| Reversal of gain on sales to equity method investee | ( | ) | ( | ) | ||||
| Depreciation and amortization | ||||||||
| Deferred income tax expense | ||||||||
| Income tax expense arising from restricted share vesting and stock options exercised | ( | ) | ( | ) | ||||
| Stock-based compensation expense | ||||||||
| Income from equity method investment | ( | ) | ( | ) | ||||
| Return on investment from equity method investee | ||||||||
| Gain on disposition of property and equipment | ( | ) | ( | ) | ||||
| Gain on reversal of contingent loss of discontinued operations | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables and advances | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Inventory and supplies | ( | ) | ( | ) | ||||
| Insurance and claims accrual | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Net cash flows provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Acquisition, net of cash acquired | ( | ) | ( | ) | ||||
| Other investments | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposition of property and equipment | ||||||||
| Net cash flows used by investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Change in checks outstanding in excess of bank balances | ( | ) | ||||||
| Cash dividend | ( | ) | ( | ) | ||||
| Proceeds from issuance of notes payable | ||||||||
| Repayments of notes payable | ( | ) | ( | ) | ||||
| Repayments of finance lease obligations | ( | ) | ( | ) | ||||
| Proceeds under revolving credit facility | ||||||||
| Repayments under revolving credit facility and draw note | ( | ) | ( | ) | ||||
| Payment of contingent consideration liability | ( | ) | ||||||
| Proceeds from exercise of stock options | ||||||||
| Payment of minimum tax withholdings on stock compensation | ( | ) | ( | ) | ||||
| Common stock repurchased | ( | ) | ( | ) | ||||
| Net cash flows provided (used) by financing activities | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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, 2022, 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 nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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, 2022. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.
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 years to salvage values ranging from
| Note 2. | Income Per Share |
Basic 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 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
The following table sets forth, for the periods indicated, the calculation of net income per share included in the condensed consolidated statements of operations:
| (in thousands except per share data) | Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerators: | ||||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||||
| Income from discontinued operations | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Denominator for basic income per share – weighted-average shares | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Equivalent shares issuable upon conversion of unvested restricted shares | ||||||||||||||||
| Equivalent shares issuable upon conversion of unvested employee stock options | ||||||||||||||||
| Denominator for diluted income per share adjusted weighted-average shares and assumed conversions | ||||||||||||||||
| Basic income per share: | ||||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||||
| Income from discontinued operations | ||||||||||||||||
| Net income per share(1) | $ | $ | $ | $ | ||||||||||||
| Diluted income per share: | ||||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||||
| Income from discontinued operations | ||||||||||||||||
| Net income per share | $ | $ | $ | $ | ||||||||||||
| (1) | Total may not sum due to rounding. |
| 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. There were no fuel hedge derivatives outstanding as of September 30, 2023, or December 31, 2022.
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 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. The fair value of available-for-sale securities is based upon quoted prices in active markets.
The fair value of the contingent consideration arrangement is based on inputs that are not observable in the market and is estimated using a probability-weighted method. The significant unobservable inputs used in the fair value of the contingent consideration liability include the financial projections over the earn-out period, the volatility of the underlying financial metrics, and estimated discount rates.
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) | ||||||||||||
| September 30, 2023 | December 31, 2022 | Input Level | ||||||||||
| Interest rate swaps | 2 | |||||||||||
| Contingent consideration | ( | ) | ( | ) | 3 | |||||||
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 September 30, 2023, 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.
Contingent consideration arrangements require us to pay up to $
We acquired AAT in February 2022, LTST in April 2023, and Sims in August 2023. The fair value of the contingent consideration is adjusted at each reporting period based on changes to the expected cash flows and related assumptions. During the three and nine months ended September 30, 2023, we paid and $
The following table provides a summary (in thousands) of the activity for the contingent consideration liability for 2023:
| December 31, 2022 | Additions | Adjustments to fair market value | Payments | September 30, 2023 | ||||||||||||||||
| Contingent consideration | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||
| 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 Transport Financial Services ("TFS"), which included substantially all of the assets and operations of our Factoring reportable segment. The sale consisted primarily of $
We have reflected the former Factoring reportable segment as discontinued operations in the condensed consolidated statements of operations for all periods presented.
The following table summarizes the results of our discontinued operations for the three and nine months ended September 30, 2023 and 2022:
| (in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Reversal of contingent loss liability | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Income from discontinued operations, net of tax | $ | $ | $ | $ | ||||||||||||
Reversal of contingent liability for the three and nine months ended September 30, 2023 relates to the reduced exposure of future indemnification by the Company to the purchaser of TFS, Triumph Bancorp, Inc. ("Triumph"), as a result of the collection of covered receivables identified in the amended purchase agreement.
The following table summarizes the major classes of assets and liabilities included as discontinued operations as of September 30, 2023 and December 31, 2022:
| (in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Noncurrent deferred tax asset | $ | $ | ||||||
| Noncurrent assets from discontinued operations | ||||||||
| Total assets from discontinued operations | $ | $ | ||||||
| Liabilities: | ||||||||
| Long-term contingent loss liability | $ | $ | ||||||
| Long-term liabilities of discontinued operations | ||||||||
| Total liabilities from discontinued operations | $ | $ | ||||||
There were $
| Note 5. | Segment Information |
We have reportable segments:
| ● | Expedited: The Expedited reportable 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 reportable 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. |
| ● | Managed Freight: The Managed Freight reportable 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 reportable segment provides day-to-day warehouse management services to customers who have chosen to outsource this function. We also provide shuttle and switching services related to shuttling containers and trailers in or around freight yards and to/from warehouses. |
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in our Form 10-K for the year ended December 31, 2022. 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 maker in making decisions regarding allocation of resources etc., for the three and nine months ended September 30, 2023 and 2022:
| (in thousands) | ||||||||||||||||||||
| Three Months Ended September 30, 2023 | Expedited | Dedicated | Managed Freight | Warehousing | Consolidated | |||||||||||||||
| Total revenue from external customers | $ | $ | $ | $ | $ | |||||||||||||||
| Intersegment revenue | ||||||||||||||||||||
| Operating income | ||||||||||||||||||||
| Nine Months Ended September 30, 2023 | Expedited | Dedicated | Managed Freight | Warehousing | Consolidated | |||||||||||||||
| Total revenue from external customers | $ | $ | $ | $ | $ | |||||||||||||||
| Intersegment revenue | ||||||||||||||||||||
| Operating income | ||||||||||||||||||||
| Three Months Ended September 30, 2022 | Expedited | Dedicated | Managed Freight | Warehousing | Consolidated | |||||||||||||||
| Total revenue from external customers | $ | $ | $ | $ | $ | |||||||||||||||
| Intersegment revenue | ||||||||||||||||||||
| Operating income | ||||||||||||||||||||
| Nine Months Ended September 30, 2022 | Expedited | Dedicated | Managed Freight | Warehousing | Consolidated | |||||||||||||||
| Total revenue from external customers | $ | $ | $ | $ | $ | |||||||||||||||
| Intersegment revenue | ||||||||||||||||||||
| Operating income (loss) | ||||||||||||||||||||
| (in thousands) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Total external revenues for reportable segments | $ | $ | $ | $ | ||||||||||||
| Intersegment revenues for reportable segments | ||||||||||||||||
| Elimination of intersegment revenues | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total consolidated revenues | $ | $ | $ | $ | ||||||||||||
| Note 6. | Income Taxes |
Income tax expense in both 2023 and 2022 varies from the amount computed by applying the federal corporate income tax rates of
Our liability recorded for uncertain tax positions as of September 30, 2023 is unchanged since December 31, 2022.
The net deferred tax liability of $
On March 11, 2021, President Biden signed the American Rescue Plan ("ARPA") into law. The law includes several provisions meant to stimulate the U.S. economy. Of relevance to the Company, ARPA extended the reach of IRC Section 162(m) to include compensation paid to the eight highest-paid individuals other than the chief executive officer and the chief financial officers (rather than the three highest), however, this change is not effective until 2027. There is no material impact to the financial statements at this time.
President Biden signed the Inflation Reduction Act (the "IRA") into law on August 16, 2022. We do not anticipate the IRA will have a significant impact on income tax expense or on other taxes. One of the most impactful provisions of the IRA includes the establishment of a Corporate Alternative Minimum Tax ("CAMT"). However, this tax only applies to corporations with three-year average earnings in excess of $1.0 billion. We will continue to monitor the CAMT each year to determine if we will become an applicable corporation. Additionally, the IRA enacted an excise tax on stock buybacks, which imposes a 1% tax on stock buybacks, subject to netting provisions regarding stock awarded to employees as part of their compensation. We do not believe this will have a material impact on our active buyback program, but will continue to monitor IRS guidance and regulations on how the buyback tax will be imposed and administered.
On May 11, 2023, the Tennessee Works Tax Act was signed into law by Governor Lee. The most impactful change for the Company was the phase-in of a single-sales factor apportionment formula for the logistics and leasing companies that file in Tennessee. The motor carriers already apply a single-sales factor. This resulted in the Company recording a $
| Note 7. | Debt |
Current and long-term debt and lease obligations consisted of the following as of September 30, 2023 and December 31, 2022:
| (in thousands) | September 30, 2023 | December 31, 2022 | ||||||||||||||
| Current | Long-Term | Current | Long-Term | |||||||||||||
| Borrowings under Credit Facility | $ | $ | $ | $ | ||||||||||||
| Borrowings under the Draw Note | ||||||||||||||||
| Revenue equipment installment notes; weighted average interest rate of % at September 30, 2023, and % at December 31, 2022, due in monthly installments with final maturities at various dates ranging from April 2028 to September 2028, secured by related revenue equipment | ||||||||||||||||
| Real estate notes; interest rate of % at September 30, 2023 and % at December 31, 2022 due in monthly installments with a fixed maturity at August 2035, secured by related real estate | ||||||||||||||||
| Total debt | ||||||||||||||||
| Principal portion of finance lease obligations, secured by related revenue equipment | ||||||||||||||||
| Principal portion of operating lease obligations, secured by related real estate and revenue equipment | ||||||||||||||||
| Total debt and lease obligations | $ | $ | $ | $ | ||||||||||||
We and substantially all of our subsidiaries are parties to the Third Amended and Restated Credit Agreement (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 $
Borrowings under the Credit Facility are classified as either "base rate loans" or "SOFR 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
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)
We had
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 April 2028 to September 2028. 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 $
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 $
In connection with the settlement of a dispute related to the sale of TFS (the "TFS Settlement"), in September 2020, TBK Bank, SSB, as lender and agent for Triumph (“TBK Bank”), provided the Company with a $
| Note 8. | Lease Obligations |
The finance leases in effect at September 30, 2023 terminate from June 2028 through November 2033 and contain guarantees of the residual value of the related equipment by us.
A summary of our lease obligations at September 30, 2023 and 2022 are as follows:
| (dollars in thousands) | Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Operating lease cost | ||||||||||||||||
| Variable lease cost | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
| Other information | ||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash flows from finance leases | ||||||||||||||||
| Operating cash flows from operating leases | ||||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | ||||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | ||||||||||||||||
| Weighted-average remaining lease term—finance leases (in years) | ||||||||||||||||
| Weighted-average remaining lease term—operating leases (in years) | ||||||||||||||||
| Weighted-average discount rate—finance leases | % | |||||||||||||||
| Weighted-average discount rate—operating leases | % | |||||||||||||||
As of September 30, 2023, and December 31, 2022, right-of-use assets of $
Our future minimum lease payments as of September 30, 2023, are summarized as follows by lease category:
| (in thousands) | Operating | Finance | ||||||
| 2023 (1) | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | $ | $ | ||||||
| Less: amount representing interest | ( | ) | ( | ) | ||||
| Present value of minimum lease payments | $ | $ | ||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Lease obligations, long-term | $ | $ | ||||||
(1) Excludes the nine months ended September 30, 2023.
| 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 May 17, 2023, the stockholders, upon recommendation of the Board, approved the Third Amendment (the “Third Amendment”) to our Third Amended and Restated 2006 Omnibus Incentive Plan (the "Incentive Plan"). The Third Amendment (i) increased the number of shares of Class A common stock available for issuance under the Incentive Plan by an additional
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 September 30, 2023, there were
Included in salaries, wages, and related expenses within the condensed consolidated statements of operations is stock-based compensation expense of $
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 September 30, 2023, certain participants elected to forfeit receipt of an aggregate of
| 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/or property damage incurred in connection with the transportation of freight.
We had $
| Note 11. | Equity Method Investment |
We own a
Transactions with TEL were not material for the three or nine months ended September 30, 2023 and 2022.
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 2023 net income through September 30, 2023, or $
Our accounts receivable from TEL, accounts payable to TEL, and investment in TEL as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
| Description: | Balance Sheet Line Item: | September 30, 2023 | December 31, 2022 | ||||||
| Accounts receivable from TEL | Driver advances and other receivables | $ | $ | ||||||
| Accounts payable to TEL | Accrued expenses | $ | $ | ||||||
| Investment in TEL | Other assets | $ | $ | ||||||
| Operating lease obligations | Current and long-term portion of operating lease obligations | $ | $ | ||||||
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 September 30, | As of December 31, | ||||||
| 2023 | 2022 | |||||||
| Total Assets | $ | $ | ||||||
| Total Liabilities | ||||||||
| Total Equity | $ | $ | ||||||
| (in thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Operating Income | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Note 12. | Acquisition of Sims Transport Services, LLC |
On August 18, 2023, we acquired
Sims' results have been included in the consolidated financial statements since the date of acquisition and are reported within our Managed Freight reportable segment.
The preliminary acquisition date fair value of the consideration transferred consisted of the following:
| August 18, 2023 | ||||
| (in thousands) | ||||
| Cash paid pursuant to Stock Purchase Agreement | $ | |||
| Cash acquired included in historical book value of Sims' assets and liabilities | ( | ) | ||
| Contingent consideration | ||||
| Net purchase price | $ | |||
The contingent consideration arrangement requires us to pay up to $
A deferred tax liability of $
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date.
| August 18, 2023 | ||||
| Accounts receivable | $ | |||
| Other intangibles, net | ||||
| Total identifiable assets acquired | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net identifiable assets acquired | ||||
| Goodwill | ||||
| Net assets acquired | $ | |||
The goodwill recognized is attributable primarily to expected cost synergies as a result of overhead support. Refer to Note 15, "Goodwill and Other Assets" for a summary of changes to goodwill during the period as well as information related to the identifiable intangible asset acquired.
| Note 13. | Acquisition of Lew Thompson & Son Trucking, Inc. |
On April 26, 2023, we acquired
LTST's results have been included in the condensed consolidated financial statements since the date of acquisition and are reported within our Dedicated reportable segment.
The preliminary acquisition date fair value of the consideration transferred consisted of the following:
| April 26, 2023 | ||||
| (in thousands) | ||||
| Cash paid pursuant to Stock Purchase Agreement | $ | |||
| Cash acquired included in historical book value of LTST's assets and liabilities | ( | ) | ||
| Contingent consideration | ||||
| Net purchase price | $ | |||
The contingent consideration arrangement requires us to pay up to $
We expect to make a 338(h)10 election, which would result in all goodwill related to the acquisition being deductible for tax purposes and no deferred income taxes arising from the acquisition.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date:
| April 26, 2023 | ||||
| Accounts receivable | $ | |||
| Driver advances and other receivables | ||||
| Inventory and supplies | ||||
| Prepaid expenses | ||||
| Net property and equipment | ||||
| Other assets, net | ||||
| Other intangibles, net | ||||
| Total identifiable assets acquired | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Current portion of operating lease obligations | ( | ) | ||
| Current portion of insurance and claims accrual | ( | ) | ||
| Long-term portion of operating lease obligations | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net identifiable assets acquired | ||||
| Goodwill | ||||
| Net assets acquired | $ | |||
During the quarter ended September 30, 2023, we recognized measurement period adjustments which reduced goodwill recognized for LTST by $
The amounts of revenue and earnings of LTST included in the Company’s consolidated results of operations from the acquisition date to the periods ended September 30, 2023 are as follows:
| (in thousands) | Three months ended | Nine months ended | ||||||
| September 30, 2023 | September 30, 2023 | |||||||
| Total revenue | $ | $ | ||||||
| Net income | $ | $ | ||||||
The following unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 2023 and 2022 assume that the acquisition of LTST occurred as of January 1, 2022:
| (in thousands) | Three months ended | Nine months ended | ||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | | $ | | ||||||||||
| Basic net income per share | $ | $ | $ | $ | ||||||||||||
| Diluted net income per share | $ | $ | $ | $ | ||||||||||||
The pro forma financial information for all periods presented above has been calculated after adjusting the results of LTST to reflect the business combination accounting effects resulting from this acquisition, including the amortization expense from acquired intangible assets as though the acquisition occurred as of the beginning of the Company’s fiscal year 2022. As noted above, the allocation is preliminary and changes to the value of the contingent consideration and finalization of our valuation could result in changes to the amount of amortization expense from acquired intangible assets included in the pro forma financial information presented above. The Company's historical condensed consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination and factually supportable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s fiscal 2022.
| Note 14. | Acquisition of AAT Carriers, Inc. |
On February 9, 2022, we acquired
AAT’s results have been included in the consolidated financial statements since the date of acquisition and are reported within our Expedited reportable segment.
The acquisition date fair value of the consideration transferred consisted of the following:
| February 9, 2022 | ||||
| (in thousands) | ||||
| Cash paid pursuant to Stock Purchase Agreement | $ | |||
| Cash acquired included in historical book value of AAT's assets and liabilities | ( | ) | ||
| Contingent consideration | ||||
| Net purchase price | $ | |||
The contingent consideration arrangement requires us to pay up to $
Because of our 338(h)10 election, all goodwill related to the acquisition is deductible for tax purposes, and there are no deferred income taxes arising from the acquisition.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date.
| February 9, 2022 | ||||
| Accounts receivable | $ | |||
| Prepaid expenses | ||||
| Other short-term assets | ||||
| Net property and equipment | ||||
| Credentialing intangible asset | ||||
| Total identifiable assets acquired | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Finance lease obligations | ( | ) | ||
| Other long-term liabilities | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net identifiable assets acquired | ||||
| Goodwill | ||||
| Net assets acquired | $ | |||
The goodwill recognized is attributable primarily to expected cost synergies in the areas of fuel and purchases of revenue equipment. Refer to Note 15, "Goodwill and Other Assets" for a summary of changes to goodwill during the period as well as information related to the identifiable intangible asset acquired.
The amounts of revenue and earnings of AAT included in the Company’s consolidated results of operations from the acquisition date to the periods ended September 30, 2023 and 2022 are as follows:
| (in thousands) | Three months ended | Nine months ended | ||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Note 15. | Goodwill and Other Assets |
The Landair Holdings, Inc. ("Landair") trade name has a residual value of $
Amortization expense of $
A summary of other intangible assets as of September 30, 2023 and December 31, 2022 is as follows:
| (in thousands) | September 30, 2023 | |||||||||||||||
| Gross intangible assets | Accumulated amortization | Net intangible assets | Remaining life (months) | |||||||||||||
| Trade name: | ||||||||||||||||
| Dedicated | $ | $ | ( | ) | $ | |||||||||||
| Managed Freight | ( | ) | ||||||||||||||
| Warehousing | ( | ) | ||||||||||||||
| Total trade name | ( | ) | ||||||||||||||
| Non-Compete agreement: | ||||||||||||||||
| Dedicated | ( | ) | ||||||||||||||
| Managed Freight | ( | ) | ||||||||||||||
| Total non-compete agreement | ( | ) | ||||||||||||||
| Customer relationships: | ||||||||||||||||
| Dedicated | ( | ) | ||||||||||||||
| Managed Freight | ( | ) | ||||||||||||||
| Warehousing | ( | ) | ||||||||||||||
| Total customer relationships: | ( | ) | ||||||||||||||
| Credentialing: | ||||||||||||||||
| Expedited | ( | ) | ||||||||||||||
| Total credentialing | ( | ) | ||||||||||||||
| Total other intangible assets | $ | $ | ( | ) | $ | |||||||||||
| (in thousands) | December 31, 2022 | |||||||||||||||
| Gross intangible assets | Accumulated amortization | Net intangible assets | Remaining life (months) | |||||||||||||
| Trade name: | ||||||||||||||||
| Dedicated | $ | $ | ( | ) | $ | |||||||||||
| Managed Freight | ( | ) | ||||||||||||||
| Warehousing | ( | ) | ||||||||||||||
| Total trade name | ( | ) | - | |||||||||||||
| Customer relationships: | ||||||||||||||||
| Dedicated | ( | ) | ||||||||||||||
| Managed Freight | ( | ) | ||||||||||||||
| Warehousing | ( | ) | ||||||||||||||
| Total customer relationships: | ( | ) | ||||||||||||||
| Credentialing: | ||||||||||||||||
| Expedited | ( | ) | ||||||||||||||
| Total credentialing | ( | ) | ||||||||||||||
| Total other intangible assets | $ | $ | ( | ) | $ | |||||||||||
The expected amortization of these assets for the next five successive years is as follows:
| (in thousands) | ||||
| 2023 (1) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
(1) Excludes the nine months ended September 30, 2023.
The carrying amount of goodwill and other intangible assets for 2023 is subject to change upon the completion of the purchase accounting for the LTST and Sims acquisitions. The carrying amount of goodwill increased to $
| (in thousands) | September 30, 2023 | |||||||||||||||
| Expedited | Dedicated | Managed Freight | Warehousing | |||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Acquired goodwill for LTST | ||||||||||||||||
| Acquired goodwill for Sims | ||||||||||||||||
| Post-acquisition goodwill adjustments | ( | ) | ||||||||||||||
| Goodwill | $ | $ | $ | $ | ||||||||||||
| Note 16. | Equity |
On January 25, 2021, our Board approved the repurchase of up to $
On May 18, 2022, our Board approved a new stock repurchase authorization of up to $
On January 26, 2022, our Board declared a cash dividend of $
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 impact of accounting standards, future third-party transportation provider expenses, future tax rates, expenses, and deductions, expected freight demand, capacity, 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, as well as adequacy, of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), future inflation, future stock repurchases and dividends, if any, expected capital expenditures, allocations, and requirements, future customer relationships, future interest expense, future driver market conditions, future use of independent contractors, expected cash flows, future investments in and growth of our reportable segments and services, future margins of our reportable segments, future market share, future rates and prices, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation, 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, upgrades, and age, availability of tractors and trailers, the market value of used equipment, the anticipated impact of our investment in TEL, the future impact of our strategic plan and other strategic initiatives, anticipated levels of and fluctuations relating to insurance and claims expenses, including the erosion of available limits in our aggregate insurance policies, any future indemnification obligations related to the TFS Portfolio, the contingent consideration related to our purchase of AAT, LTST and Sims, and the future impact of our acquisition of LTST and Sims, among others, are forward-looking statements. Forward-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 this Form 10-Q, the Form 10-Q for the quarter ended March 31, 2023, and our Form 10-K for the year ended December 31, 2022. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in this Form 10-Q, the Form 10-Q for the quarter ended March 31, 2023, and our Form 10-K for the year ended December 31, 2022, 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
While the freight market, consisting of a combination of freight rates and volumes, remained challenging throughout the third quarter we achieved $0.99 per diluted share for the third quarter and are pleased with both our results and the resiliency of our model despite these market headwinds.
Our asset-based reportable segments, Expedited and Dedicated, contributed approximately 67% of total revenue, 69% of operating income, 63% of total freight revenue, and 72% of adjusted operating income in the quarter. Our Expedited reportable segment experienced comparable freight revenue with approximately 2% fewer tractors, but experienced diminished margins compared to the third quarter last year. Our Dedicated reportable segment experienced reduced freight revenue with approximately 12% fewer tractors and improved margins year over year.
Our asset-light reportable segments contributed approximately 33% of total revenue, 31% of operating income, 37% of total freight revenue, and 28% of adjusted operating income in the quarter. Compared to a year ago, Managed Freight experienced significant reductions in both revenue and profitability with little to no project related freight in the current quarter. Warehousing was able to grow revenue through new customer startups and improve margins with contractual pricing increases put into place during the quarter. We are continuing to work to increase the operating income and related margins in each of these reportable segments through focused sales efforts within Managed Freight and additional proposed customer rate increases with existing customers within Warehousing.
Additional items of note for the third quarter of 2023 include the following:
| ● |
Total revenue of $288.7 million, a decrease of 7.4% compared with the third quarter of 2022, and freight revenue (which excludes revenue from fuel surcharges) of $253.4 million, a decrease of 5.0% compared with the third quarter of 2022; |
|
| ● |
Operating income of $15.1 million, compared with $59.1 million in the third quarter of 2022; |
|
| ● |
Net income of $13.5 million, or $0.99 per diluted share, compared with $50.5 million, or $3.39 per diluted share, in the third quarter of 2022. Net income from continuing operations of $13.4 million, or $0.98 per diluted share, compared to $50.0 million or $3.36 per diluted share, in the third quarter of 2022. Net income from discontinued operations of $0.2 million, or $0.01 per diluted share, compared to $0.5 million, or $0.04 per diluted share, in the third quarter of 2022; |
|
| ● |
39% of consolidated total revenue was in our Expedited reportable segment, as compared to 38% in the third quarter of 2022; |
|
| ● |
Our Managed Freight reportable segment’s total revenue decreased to $69.7 million in the 2023 quarter from $78.4 million in the 2022 quarter and the reportable segment had an operating income of $3.7 million in the 2023 quarter compared to $8.6 million in the 2022 quarter; |
|
| ● |
Our equity investment in TEL provided $5.3 million of pre-tax earnings in the third quarter of 2023 compared to $7.4 million in the third quarter of 2022; |
|
| ● | We distributed a total of $1.4 million to stockholders through dividends; | |
| ● | Since December 31, 2022, total indebtedness, comprised of total debt and finance leases, net of cash, increased by $137.1 million to $183.5 million, primarily due to the approximately $99.9 million net cash paid in the acquisition of LTST, acquisition of new revenue equipment, and repurchasing $25.3 million of our outstanding Class A Common Stock under the stock repurchase program. With available borrowing capacity of $88.2 million under our Credit Facility at September 30, 2023 we do not expect to be required to test our fixed charge covenant in the foreseeable future; | |
| ● |
Leverage ratio (ending total indebtedness, comprised of debt and finance leases, net of cash, divided by the sum of operating income, depreciation and amortization, gain on disposition of property and equipment, net, and impairment of long lived property and equipment) as of September 30, 2023 was 1.68; |
|
| ● | Stockholders' equity at September 30, 2023, was $394.0 million; and | |
| ● |
Tangible book value at September 30, 2023, was $218.9 million. |
Outlook
The Company’s steady performance in a weak freight market has been encouraging and reflects progress on our strategic plan. Over the past two years, we reallocated a significant amount of fixed assets away from underperforming and highly cyclical legacy operations toward acquiring three high-performing, more steady businesses. The result has been better margins, more stable earnings, and higher return on capital than prior freight market downturns. While we are pleased with our model as it stands today, we are also optimistic about our ability to continue making incremental progress to improving it through our capital allocation program. For the fourth quarter, we expect our revenue and earnings to experience a modest decline sequentially due to a cyber-attack on a major customer in our Expedited division and the impact of the United Auto Workers strike in our Dedicated division, which has temporarily depressed load volumes and revenue per truck. Entering 2024, we believe our more resilient operating model, together with the steps we are taking to reduce costs and inefficiencies, will continue to position Covenant to generate attractive returns and mitigate volatility across economic and freight market cycles.
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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| GAAP Operating Ratio: |
2023 |
OR % |
2022 |
OR % |
2023 |
OR % |
2022 |
OR % |
||||||||||||||||||||||||
| Total revenue |
$ | 288,721 | $ | 311,839 | $ | 829,588 | $ | 920,801 | ||||||||||||||||||||||||
| Total operating expenses |
273,580 | 94.8 | % | 252,780 | 81.1 | % | 785,032 | 94.6 | % | 811,022 | 88.1 | % | ||||||||||||||||||||
| Operating income |
$ | 15,141 | $ | 59,059 | $ | 44,556 | $ | 109,779 | ||||||||||||||||||||||||
| Adjusted Operating Ratio: |
2023 |
Adj. OR % |
2022 |
Adj. OR % |
2023 |
Adj. OR % |
2022 |
Adj. OR % |
||||||||||||||||||||||||
| Total revenue |
$ | 288,721 | $ | 311,839 | $ | 829,588 | $ | 920,801 | ||||||||||||||||||||||||
| Fuel surcharge revenue |
(35,344 | ) | (45,240 | ) | (99,085 | ) | (129,732 | ) | ||||||||||||||||||||||||
| Freight revenue (total revenue, excluding fuel surcharge) |
253,377 | 266,599 | 730,503 | 791,069 | ||||||||||||||||||||||||||||
| Total operating expenses |
273,580 | 252,780 | 785,032 | 811,022 | ||||||||||||||||||||||||||||
| Adjusted for: |
||||||||||||||||||||||||||||||||
| Fuel surcharge revenue |
(35,344 | ) | (45,240 | ) | (99,085 | ) | (129,732 | ) | ||||||||||||||||||||||||
| Amortization of intangibles |
(2,220 | ) | (1,121 | ) | (5,142 | ) | (3,185 | ) | ||||||||||||||||||||||||
| Gain on disposal of terminals, net |
- | 38,542 | 7,627 | 38,542 | ||||||||||||||||||||||||||||
| Contingent consideration liability adjustment |
(493 | ) | (813 | ) | (2,485 | ) | (813 | ) | ||||||||||||||||||||||||
| Transaction and executive retirement |
- | - | (2,158 | ) | - | |||||||||||||||||||||||||||
| Adjusted operating expenses |
235,523 | 93.0 | % | 244,148 | 91.6 | % | 683,789 | 93.6 | % | 715,834 | 90.5 | % | ||||||||||||||||||||
| Adjusted operating income |
$ | 17,854 | $ | 22,451 | $ | 46,714 | $ | 75,235 | ||||||||||||||||||||||||
Revenue and Expenses
We focus on targeted markets throughout the United States where we believe our service standards can provide a competitive advantage. We are a major carrier for transportation companies such as parcel freight forwarders, less-than-truckload carriers, and third-party logistics providers that require a high level of service to support their businesses, as well as for traditional truckload customers such as manufacturers, retailers, and food and beverage shippers.
We have four reportable segments, which include:
| ● |
Expedited: The Expedited reportable 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 reportable 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. |
| ● |
Managed Freight: The Managed Freight reportable 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 reportable segment provides day-to-day warehouse management services to customers who have chosen to outsource this function. We also provide shuttle and switching services related to shuttling containers and trailers in or around freight yards and to/from warehouses. |
In our Expedited and Dedicated reportable segments, we primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. AAT’s results are reported within our Expedited reportable segment and LTST's results are reported within our Dedicated reportable segment. The main factors that could affect our Expedited and Dedicated revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of shipments and miles we generate. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.
The main expenses that impact the profitability of our Expedited and Dedicated reportable segments are the variable costs of transporting freight for our customers. These costs include fuel expenses, driver-related expenses, such as wages, benefits, training, and recruitment, and purchased transportation expenses, which primarily include compensating independent contractors. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, self-insured retention versus insurance premiums, fleet age, efficiency, and other factors. Historically, our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities, and the compensation of non-driver personnel.
Within our Expedited and Dedicated reportable segments, we operate tractors driven by a single driver and also tractors assigned to two-person driver teams. Our single driver tractors generally operate in shorter lengths of haul, generate fewer miles per tractor, and experience more non-revenue miles, but the lower productive miles are expected to be offset by generally higher revenue per loaded mile and the reduced employee expense of compensating only one driver. In contrast, our two-person driver tractors generally operate in longer lengths of haul, generate greater miles per tractor, and experience fewer non-revenue miles, but we typically receive lower revenue per loaded mile and incur higher employee expenses of compensating both drivers. We expect operating statistics and expenses to shift with the mix of single and team operations.
Within our Managed Freight reportable segment, we derive revenue from arranging transportation services, directly and through agents, who are paid a commission for the freight they provide, for customers on both an ad-hoc and a contractual basis. Sims' results are reported within our Managed Freight reportable segment. We provide these services directly and through relationships with thousands of third-party carriers and integration with our Expedited reportable segment. We also utilize technology and process management to provide detailed visibility into a customer’s movement of freight – inbound and outbound – throughout the customer’s network and can provide focused customer support through multiyear contracts. The main factors that impact profitability in terms of expenses are the variable costs of outsourcing the transportation freight for our customers and managing fixed costs, including salaries, and selling, general, and administrative expenses.
In May 2011, we acquired a 49.0% interest in TEL. TEL is a tractor and trailer equipment leasing company and used equipment reseller. 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 net income since May 2011.
Our main measures of profitability are operating ratio and adjusted operating ratio. We define adjusted operating ratio as operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. See page 27 for the uses and limitations associated with adjusted operating ratio.
Revenue Equipment
At September 30, 2023, we operated 2,149 tractors and 5,871 trailers. Of such tractors, 1,801 were owned, 222 were financed under operating leases, and 126 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 5,634 were owned, and 237 were held under short-term operating leases. We finance a small portion of our trailer fleet and larger portion of our tractor fleet with operating leases, which generally run for a period of three to five years for tractors and five to seven years for trailers. At September 30, 2023, our fleet had an average tractor age of 1.9 years and an average trailer age of 5.9 years.
Independent contractors provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing or leasing the tractor. The payments to independent contractors and the financing of equipment under operating leases are recorded in revenue equipment rentals and purchased transportation. Expenses associated with owned equipment, such as interest and depreciation, and expenses associated with employee drivers, including driver compensation, fuel, and other expenses, are not incurred with respect to independent contractors. Obtaining equipment from independent contractors and under operating leases effectively shifts financing expenses from interest to "above the line" operating expenses, and as such, we evaluate our efficiency using net income margin, as well as operating ratio.
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF three and nine months ended September 30, 2023 TO three and nine months ended September 30, 2022
The following tables set forth the percentage relationship of certain items to total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated, where applicable (dollars in thousands):
Revenue
| Three Months Ended |
Nine Months Ended |
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| September 30, |
September 30, |
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| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Revenue: |
||||||||||||||||
| Freight revenue |
$ | 253,377 | $ | 266,599 | $ | 730,503 | $ | 791,069 | ||||||||
| Fuel surcharge revenue |
35,344 | 45,240 | 99,085 | 129,732 | ||||||||||||
| Total revenue |
$ | 288,721 | $ | 311,839 | $ | 829,588 | $ | 920,801 | ||||||||
The decrease in total revenue primarily resulted from an $8.7 million and $7.8 million decrease in Managed Freight and Dedicated freight revenue, respectively, partially offset by a $3.2 million and $0.1 million increase in Warehousing and Expedited freight revenue, for the three months ended September 30, 2023 and a $50.9 million, $21.1 million, and $5.7 million decrease in Managed Freight, Dedicated, and Expedited freight revenue, respectively, partially offset by a $17.2 million increase in Warehousing freight revenue for the nine months ended September 30, 2023.
See results of reportable segment operations section for discussion of fluctuations.
For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue.
For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentage of total revenue, and then as a percentage of freight revenue.
Salaries, wages, and related expenses
| Three Months Ended |
Nine Months Ended |
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| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Salaries, wages, and related expenses |
$ | 102,314 | $ | 104,537 | $ | 302,753 | $ | 300,980 | ||||||||
| % of total revenue |
35.4 | % | 33.5 | % | 36.5 | % | 32.7 | % | ||||||||
| % of freight revenue |
40.4 | % | 39.2 | % | 41.4 | % | 38.0 | % | ||||||||
Salaries, wages, and related expenses for the three months ended September 30, 2023 decreased, on a dollars basis primarily as a result of averaging fewer drivers and tractors, resulting in lower driver salaries, wages, and benefits, partially offset by increases to workers compensation expenses. For the nine months ended September 30, 2023, the increase on a dollars basis primarily as the result of driver and non-driver, including shop technicians, pay and benefits increases, as well as executive retirement costs and increased group health costs, partially offset by reduced miles since the same 2022 periods.
We believe salaries, wages, and related expenses will be approximately even for the full 2023 year compared to the full 2022 year as a result of driver and non-driver pay increases since the 2022 year being offset by reduced miles and reduced incentive pay since the 2022 year. Driver pay may also fluctuate based on the number of miles driven. While driver pay remains stable at the present time, we have historically put driver pay increases in place as necessary to address driver market pressure and will continue to do so in the future as necessary. If freight market rates increase further, we would expect to, as we have historically, pass a portion of those rate increases on to our professional drivers. Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Managed Freight reportable segment, for which payments are reflected in the purchased transportation line item.
Fuel expense
| Three Months Ended |
Nine Months Ended |
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| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Fuel expense |
$ | 35,173 | $ | 42,471 | $ | 100,692 | $ | 126,457 | ||||||||
| % of total revenue |
12.2 | % | 13.6 | % | 12.1 | % | 13.7 | % | ||||||||
| % of freight revenue |
13.9 | % | 15.9 | % | 13.8 | % | 16.0 | % | ||||||||
We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire cost of fuel for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.
The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the Department of Energy ("DOE") for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by the DOE were $0.80 per gallon, or 15.8%, lower for the quarter ended September 30, 2023 compared with the same quarter in 2022.
To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles driven by company tractors, our fuel economy, our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues, and the net impact of fuel hedging gains and losses.
Net fuel expense is shown below:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Total fuel surcharge |
$ | 35,344 | $ | 45,240 | $ | 99,085 | $ | 129,732 | ||||||||
| Less: Fuel surcharge revenue reimbursed to owner operators and other third parties |
2,672 | 2,852 | 7,105 | 8,442 | ||||||||||||
| Company fuel surcharge revenue |
$ | 32,672 | $ | 42,388 | $ | 91,980 | $ | 121,290 | ||||||||
| Total fuel expense |
$ | 35,173 | $ | 42,471 | $ | 100,692 | $ | 126,457 | ||||||||
| Less: Company fuel surcharge revenue |
32,672 | 42,388 | 91,980 | 121,290 | ||||||||||||
| Net fuel expense |
$ | 2,501 | $ | 83 | $ | 8,712 | $ | 5,167 | ||||||||
| % of freight revenue |
1.0 | % | 0.0 | % | 1.2 | % | 0.7 | % | ||||||||
For the periods presented, net fuel expense increased as a percentage of freight revenue primarily due to lower fuel surcharge recovery partially offset by lower fuel prices. There were no diesel fuel hedge gains or losses for the quarter ended September 30, 2023 or 2022. As of September 30, 2023, we had no remaining fuel hedging contracts.
We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors and auxiliary power units to improve our miles per gallon, locking in fuel hedges when deemed appropriate, partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs, and testing the latest technologies that reduce fuel consumption. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.
Operations and maintenance
| Three Months Ended |
Nine Months Ended |
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| September 30, |
September 30, |
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| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Operations and maintenance |
$ | 16,984 | $ | 22,468 | $ | 50,328 | $ | 60,248 | ||||||||
| % of total revenue |
5.9 | % | 7.2 | % | 6.1 | % | 6.5 | % | ||||||||
| % of freight revenue |
6.7 | % | 8.4 | % | 6.9 | % | 7.6 | % | ||||||||
The decreases in operations and maintenance for the three and nine months ended September 30, 2023 were primarily related to reduced maintenance costs as a result of a decrease in the average age of equipment through the replacement of older tractors that experienced higher operating costs. Additionally, for the nine months ended September 30, 2023, there were fewer new drivers and a smaller average fleet as compared to the prior year period.
Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, the reliability of new and untested revenue equipment models, and the global disruption of the supply chain, however, such increases may be offset by reductions in the age of our fleet due to our replacement plan between now and the end of 2023. For 2023, due to the age of our tractor fleet and remaining unexpired warranty coverage for most of our tractors, we do not expect the percentage of our equipment being operated outside of warranty coverage to increase in any material respect even if delays occur; however, operations and maintenance costs may increase regardless due to wage and parts inflation.
Revenue equipment rentals and purchased transportation
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Revenue equipment rentals and purchased transportation |
$ | 72,046 | $ | 78,943 | $ | 203,045 | $ | 244,281 | ||||||||
| % of total revenue |
25.0 | % | 25.3 | % | 24.5 | % | 26.5 | % | ||||||||
| % of freight revenue |
28.4 | % | 29.6 | % | 27.8 | % | 30.9 | % | ||||||||
The decreases in revenue equipment rentals and purchased transportation for the three and nine months ended September 30, 2023 were primarily the result of a reduction in purchased transportation costs as a result of the softening freight market, as well as a reduction in leased revenue equipment compared to the prior periods as the result of largely transitioning from tractors held under operating leases to owned tractors in 2022. These decreases were partially offset as the percentage of the total miles run by independent contractors increased from 6.4% for the three months ended September 30, 2022 to 7.9% for the same 2023 period and from 6.6% for the nine-months ended September 30, 2022 to 7.4% for the same 2023 period partially offsetting this decrease.
We expect revenue equipment rentals to remain decreased compared to 2022 as we largely transitioned from tractors held under operating leases to owned tractors in 2022. However, we expect purchased transportation to fluctuate as volumes in our Managed Freight reportable segment may be volatile. In addition, if fuel prices increase, it would result in a further increase in what we pay third party carriers and independent contractors. However, this expense category will fluctuate with the number and percentage of loads hauled by independent contractors, loads handled by Managed Freight, and tractors, trailers, and other assets financed with operating leases. In addition, factors such as the cost to obtain third party transportation services and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category. If industry-wide trucking capacity tightens in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue. If we were to recruit more independent contractors, we would expect this line item to increase as a percentage of revenue.
Operating taxes and licenses
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Operating taxes and licenses |
$ | 3,381 | $ | 3,238 | $ | 10,161 | $ | 8,718 | ||||||||
| % of total revenue |
1.2 | % | 1.0 | % | 1.2 | % | 0.9 | % | ||||||||
| % of freight revenue |
1.3 | % | 1.2 | % | 1.4 | % | 1.1 | % | ||||||||
For the periods presented, the change in operating taxes and licenses were insignificant both as a percentage of total revenue and freight revenue.
Insurance and claims
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Insurance and claims |
$ | 13,074 | $ | 12,947 | $ | 36,810 | $ | 35,752 | ||||||||
| % of total revenue |
4.5 | % | 4.2 | % | 4.4 | % | 3.9 | % | ||||||||
| % of freight revenue |
5.2 | % | 4.9 | % | 5.0 | % | 4.5 | % | ||||||||
Insurance and claims per mile cost was 19.2 cents per mile for the three months ended September 30, 2023 and 2022 and increased to 18.7 cents per mile for the nine months ended September 30, 2023 compared to 17.7 cents per mile for the same 2022 period. The increase for the nine months ended September 30, 2023 is the result of increased insurance premiums compared to the same 2022 period.
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 policy period that ran from April 1, 2018 to March 31, 2021, the aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million were fully eroded based on claims expense accruals. We replaced our $9.0 million in excess of $1.0 million layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024. Due to the erosion of the $9.0 million in excess of $1.0 million layer, any adverse developments in claims filed between April 1, 2018 and March 31, 2021, could result in additional expense accruals. We have maintained our retention and limits set in place during the prior renewal cycle. 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 expect insurance and claims expense to continue to be volatile over the long-term. Recently the trucking industry has experienced a decline in the number of carriers and underwriters that write insurance policies or that are willing to provide insurance for trucking companies.
Communications and utilities
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Communications and utilities |
$ | 1,254 | $ | 1,339 | $ | 3,753 | $ | 3,723 | ||||||||
| % of total revenue |
0.4 | % | 0.4 | % | 0.5 | % | 0.4 | % | ||||||||
| % of freight revenue |
0.5 | % | 0.5 | % | 0.5 | % | 0.5 | % | ||||||||
For the periods presented, the change in communications and utilities were insignificant both as a percentage of total revenue and freight revenue.
General supplies and expenses
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| General supplies and expenses |
$ | 11,774 | $ | 11,201 | $ | 38,169 | $ | 28,416 | ||||||||
| % of total revenue |
4.1 | % | 3.6 | % | 4.6 | % | 3.1 | % | ||||||||
| % of freight revenue |
4.6 | % | 4.2 | % | 5.2 | % | 3.6 | % | ||||||||
The increases in general supplies and expenses for the three and nine months ended September 30, 2023 were primarily the result of acquisition costs, new leased spaces for our Warehousing reportable segment, and the increase in the contingent consideration liability since the 2022 periods.
Depreciation and amortization
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Depreciation and amortization |
$ | 18,182 | $ | 14,357 | $ | 51,701 | $ | 41,734 | ||||||||
| % of total revenue |
6.3 | % | 4.6 | % | 6.2 | % | 4.5 | % | ||||||||
| % of freight revenue |
7.2 | % | 5.4 | % | 7.1 | % | 5.3 | % | ||||||||
Depreciation and amortization consists primarily of depreciation of tractors, trailers, and other capital assets, as well as amortization of intangible assets.
Depreciation expense increased $2.7 million and $8.0 million to $16.0 million and $46.6 million for the three and nine months ended September 30, 2023, respectively, compared to $13.2 million and $38.6 million in the same 2022 periods as a result of increased costs on new equipment and a higher percentage of owned tractors as we transitioned a large portion of tractors from operating leases to owned during 2022. These increases were partially offset by reduced total tractor count. Amortization of intangible assets was $2.2 million and $5.1 million for three and nine months ended September 30, 2023, respectively, compared to $1.1 million and $3.2 million for the same 2022 periods. The increase for the three and nine months ended September 30, 2023 is due to the amortization of the intangible assets related to the AAT, LTST, and Sims acquisitions.
We expect depreciation and amortization to remain increased compared to 2022 due to the transition of a large portion of tractors from operating leases to owned during 2022, as well as the increased cost of new equipment, implementation of our 2023 revenue equipment replacement plan, and the year-over-year impact of the LTST acquisition. Additionally, changes in the used tractor market could cause us to adjust residual values, increase depreciation, hold assets longer than planned, or experience increased losses on sale.
Gain on disposition of property and equipment, net
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Gain on disposition of property and equipment, net |
$ | (602 | ) | $ | (38,721 | ) | $ | (12,380 | ) | $ | (39,287 | ) | ||||
| % of total revenue |
(0.2 | %) | (12.4 | %) | (1.5 | %) | (4.3 | %) | ||||||||
| % of freight revenue |
(0.2 | %) | (14.5 | %) | (1.7 | %) | (5.0 | %) | ||||||||
The decreases in gain on disposition of property and equipment, net for the three and nine months ended September 30, 2023 are primarily the result of the $38.5 million gain on sale of a California terminal in the third quarter of 2022 partially offset by an increase in the sale of used equipment compared to the 2022 period and, for the nine-months ended September 30, 2023, the $7.6 million gain on sale of a Tennessee terminal in the first quarter of 2023. While we expect sales of used equipment to continue to be elevated through the remainder of 2023, we expect sequential reductions in the gain on disposition of equipment due to the soft used equipment market.
Interest expense, net
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Interest expense, net |
$ | 2,637 | $ | 935 | $ | 5,530 | $ | 2,256 | ||||||||
| % of total revenue |
0.9 | % | 0.3 | % | 0.7 | % | 0.2 | % | ||||||||
| % of freight revenue |
1.0 | % | 0.4 | % | 0.8 | % | 0.3 | % | ||||||||
For the periods presented, the increases in interest expense were primarily the result of an increase in revenue equipment installment notes as we implement our 2023 revenue equipment replacement plan.
Going forward, we expect interest expense, net to increase due to an increase in revenue equipment installment notes as we implement our 2023 revenue equipment replacement plan. Additionally, this line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases, our revenue equipment replacement plan, and changing interest rates.
Income from equity method investment
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Income from equity method investment |
$ | 5,335 | $ | 7,400 | $ | 16,659 | $ | 21,261 | ||||||||
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 net income or loss. The decreases in TEL's contributions to our results for the three and nine months ended September 30, 2023 were primarily the result of a reduction on gain on sale of revenue equipment compared to the 2022 periods. Due to TEL's business model, gains and losses on sale of equipment is a normal part of the business and can cause earnings to fluctuate from period to period and therefore our income from investment to similarly fluctuate. We expect TEL's net income to remain lower than 2022 due to the soft used equipment market.
Income tax expense
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Income tax expense |
$ | 4,483 | $ | 15,563 | $ | 13,701 | $ | 32,130 | ||||||||
| % of total revenue |
1.6 | % | 5.0 | % | 1.7 | % | 3.5 | % | ||||||||
| % of freight revenue |
1.8 | % | 5.8 | % | 1.9 | % | 4.1 | % | ||||||||
The decreases in income tax expense were primarily related to the $47.7 million and $73.1 million decrease in pre-tax income in the three and nine months ended September 30, 2023, respectively, compared to the same 2022 periods resulting from the aforementioned decreases in operating income and earnings on investment in TEL.
The effective tax rate is different from the expected combined tax rate due primarily to state tax expense and permanent differences, such as executive compensation disallowance in 2022. The nondeductible effect of the per diem payments was temporarily suspended for 2022 in accordance with IRS guidance issued during the quarter ended December 31, 2021. The rate impact of these items will fluctuate in future periods as income fluctuates.
RESULTS OF SEGMENT OPERATIONS
We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing, each as described above.
COMPARISON OF three and nine months ended September 30, 2023 TO three and nine months ended September 30, 2022
The following table summarizes financial and operating data by reportable segment:
| (in thousands) |
Three Months Ended |
Nine Months Ended |
||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Revenues: |
||||||||||||||||
| Expedited |
$ | 113,419 | $ | 117,793 | $ | 318,388 | $ | 338,234 | ||||||||
| Dedicated |
80,242 | 93,423 | 241,680 | 279,136 | ||||||||||||
| Managed Freight |
69,713 | 78,382 | 193,868 | 244,814 | ||||||||||||
| Warehousing |
25,347 | 22,241 | 75,652 | 58,617 | ||||||||||||
| Total revenues |
$ | 288,721 | $ | 311,839 | $ | 829,588 | $ | 920,801 | ||||||||
| Operating Income: |
||||||||||||||||
| Expedited |
$ | 7,522 | $ | 30,660 | $ | 22,613 | $ | 54,602 | ||||||||
| Dedicated |
2,976 | 19,416 | 13,366 | 24,937 | ||||||||||||
| Managed Freight |
3,742 | 8,605 | 6,905 | 28,062 | ||||||||||||
| Warehousing |
901 | 378 | 1,672 | 2,178 | ||||||||||||
| Total operating income |
$ | 15,141 | $ | 59,059 | $ | 44,556 | $ | 109,779 | ||||||||
The decrease in Expedited revenue for the three months ended September 30, 2023 relates to a $4.4 million decrease in fuel surcharge revenue and a 22 (or 2.4%) average tractor decrease, partially offset by an increase in average freight revenue per tractor per week of 2.5%, compared to the 2022 quarter. The reduction in tractors was an intentional effort by management to adjust the fleet size down in response to the reduced volumes of available freight with expedited service requirements. The increase in average freight revenue per tractor per week for the quarter ended September 30, 2023 is the result of an 11.7% increase in average miles per unit partially offset by a 19.0 cents per mile (or 8.2%) decrease in average rate per total mile compared to the 2022 quarter. Expedited team-driven tractors averaged 831 and 825 tractors in the third quarter of 2023 and 2022, respectively.
For the nine months ended September 30, 2023, the decrease in Expedited revenue relates to a $14.2 million decrease in fuel surcharge revenue and a 29 (or 3.2%) average tractor decrease partially offset by an increase in average freight revenue tractor per week of 1.1% compared to the same 2022 period. The increase in average freight revenue per tractor per week for the nine months ended September 30, 2023 is the result of a 8.5% increase in average miles per unit partially offset by a 16.0 cents per mile (or 6.8%) decrease in average rate per total mile compared to the same 2022 period. Expedited team-driven tractors averaged 801 and 797 for the nine months ended September 30, 2023, and 2022, respectively.
The decrease in Dedicated revenue for the three months ended September 30, 2023 relates to a $5.3 million decrease in fuel surcharge revenue and a 170, or 12.1% average tractor decrease as a result of exiting business and tractor reductions negotiated with current customers, partially offset by the addition of approximately 220 weighted average tractors as a result of the LTST acquisition. These decreases in fuel surcharge revenue and average tractor count were partially offset by a 1.6% increase in average miles per unit and an increase in average freight revenue per tractor per week of 1.8% compared to the 2022 quarter as the result of a 0.6 cents per mile (or 0.2%) increase in average rate per total mile compared to the 2022 quarter.
For the nine months ended September 30, 2023, the decrease in Dedicated revenue relates to a $16.4 million decrease in fuel surcharge revenue and a 193 (or 13.5%) average tractor decrease partially offset by an increase in average freight revenue per tractor per week of 4.7% compared to the same 2022 period. The increase in average freight revenue per tractor per week for the nine months ended September 30, 2023 is the result of a 1.8% increase in average miles per unit and a 7.0 cents per mile (or 2.8%) increase in average rate per total mile compared to the same 2022 period.
For the three and nine months ended September 30, 2023, Managed Freight total revenue decreased primarily as a result of reduced volumes of high-margin overflow freight from both Expedited and Dedicated truckload operations. With the softening freight market, we anticipate the revenue attributable to overflow freight may continue to decline.
For the three and nine months ended September 30, 2023, Warehousing total revenue increased as a result of period-over-period new customer business as well as customer rate increases that went into effect during the third quarter of 2023.
The decrease in operating income for the three months ended September 30, 2023, was the result of the decrease in total revenue described above and an $18.8 million, $3.3 million, and $2.6 million increase in Expedited, Dedicated, and Warehousing, operating expenses partially offset by a $3.8 million decrease in Managed Freight operating expenses, respectively. For the nine months ended September 30, 2023, the decrease in operating income was the result of the decrease in total revenue described above and a $17.5 million and $11.4 million increase in Warehousing and Expedited operating expenses, respectively, partially offset by a $29.8 million and $25.9 million decrease in Managed Freight and Dedicated operating expenses, respectively.
The decreases in Expedited operating income for the three and nine months ended September 30, 2023 were primarily the result of the aforementioned decreases in revenue as well as increases in Expedited operating expenses. The increases in Expedited operating expenses for the three and nine months ended September 30, 2023 were primarily the result of the Expedited portion of the sale of a California terminal during the third quarter of 2022, as well as increases in depreciation expense as a result of our equipment trade cycle, driver and non-driver pay, and the contingent consideration liability since the 2022 periods. These increases to operating expense were partially offset by decreased fuel costs and decreased maintenance and parts costs. The decreases in Dedicated operating income for the three and nine months ended September 30, 2023 were primarily the result of the aforementioned decreases in revenue as well as increases in Dedicated operating expenses. The increases in Dedicated operating expenses for the three months ended September 30, 2023, were primarily the result of the Dedicated portion of the sale of a California terminal during the third quarter of 2022 and increased depreciation expense as a result of our equipment trade cycle, partially offset by averaging fewer drivers and tractors, resulting in lower driver salaries, wages, and benefits, reduced use of third-party purchased transportation, decreased fuel costs, and decreased maintenance and parts costs. The decreases in Dedicated operating expenses for the nine months ended September 30, 2023 were primarily the result of averaging fewer drivers and tractors, resulting in lower driver salaries, wages, and benefits, reduced use of third-party purchased transportation, decreased fuel costs, and decreased maintenance and parts costs Additionally, for the nine months ended September 30, 2023, Expedited and Dedicated operating expenses were reduced as a result of the sale of a Tennessee terminal.
The decreases in operating income for Managed Freight for the three and nine months ended September 30, 2023 were primarily the result of the aforementioned decreases in revenue partially offset by decreases in Managed Freight operating expenses. The decreases in Managed Freight operating expenses were primarily the result of the changes in revenue driving changes in variable expenses, primarily purchased transportation. Additionally, the decrease in operating expenses for the nine months ended September 30, 2023 was partially offset by a small number of prior period claims. The changes in operating income for Warehousing for the three and nine months ended September 30, 2023 were primarily the result of the aforementioned increases in revenue offset by increases in Warehousing operating expenses. The increases in Warehousing operating expenses for the three and nine months ended September 30, 2023, were a result of leased space and equipment for new business and pay increases, partially offset by a reduction in outsourced labor since the 2022 periods. In our asset-light reportable segments, we are prioritizing long-term growth, focusing on talent acquisition, and technology enhancements.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed 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. Going forward, we expect revenue equipment acquisitions through purchases and finance leases to increase as a percentage of our fleet as we decrease our use of operating leases for revenue equipment. Further, we expect to increase our capital allocation toward our Dedicated, Managed Freight, and Warehousing reportable segments to become the go-to partner for our customers’ most critical transportation and logistics needs. We had working capital (total current assets less total current liabilities) of $31.2 million and $66.5 million at September 30, 2023 and December 31, 2022, respectively. Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs, and we do not expect to experience material liquidity constraints in the foreseeable future.
With an average fleet age of 1.9 years at September 30, 2023, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options. If we were to grow our independent contractor fleet, our capital requirements would be reduced.
As of September 30, 2023 and December 31, 2022 we had $240.9 million and $179.6 million in debt and lease obligations, respectively, consisting of the following:
| ● |
No outstanding borrowings under the Credit Facility; | |
| ● | No outstanding borrowings under the Draw Note; | |
| ● | $165.2 million and $88.9 million in revenue equipment installment notes, respectively; | |
| ● | $19.4 million and $20.3 million in real estate notes, respectively; | |
| ● | $6.3 million and $5.8 million of the principal portion of financing lease obligations, respectively; and | |
| ● | $50.1 million and $64.6 million of the operating lease obligations, respectively. |
The increase in revenue equipment installment notes is primarily due to replacing our older equipment with new equipment as part of our trade cycle. The decrease in the finance lease and operating lease obligations was primarily due to amortization of the lease liability. During the third quarter of 2023, we repaid $40.1 million in borrowings under the Credit Facility that we had incurred during 2023 to help fund the acquisition of LTST and repurchases of our Class A Common Stock under the stock repurchase program.
As of September 30, 2023, we had no borrowings outstanding, undrawn letters of credit outstanding of approximately $21.8 million, and available borrowing capacity of $88.2 million under the Credit Facility. Additionally, we had $45.0 million of remaining availability of a $45.0 million Draw Note from Triumph which is available solely to fund any indemnification owed to Triumph in relation to the TFS Settlement. 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.
Our net capital expenditures for the nine months ended September 30, 2023 totaled $143.0 million of expenditures, as compared to $49.8 million of expenditures for the prior year period. During the nine months ended September 30, 2023, we took delivery of approximately 607 new tractors and 367 new trailers, while disposing of approximately 926 used tractors and 518 used trailers. Our current fleet plan for fiscal 2023 includes the delivery of an additional 295 new company replacement tractors and 357 additional new trailer deliveries. Net gains on disposal of equipment and real estate in the nine months ended September 30, 2023 were $12.4 million compared to $39.3 million in the same prior year period primarily due to the $7.6 million gain on a Tennessee terminal during the 2023 period and the aforementioned disposal of revenue equipment as part of our trade cycle. For the balance of 2023, our baseline expectation for net capital expenditures is $35 million to $40 million. Our capital investment plan reflects our priorities of improving operational uptime, lowering operating costs, and maintaining a driver-friendly fleet. Global supply chain disruptions could impact the availability of tractors and trailers and lead to increased pricing.
We distributed a total of $4.3 million to stockholders in the first nine months of 2023 through dividends.
We believe we have sufficient liquidity to satisfy our cash needs, and we will continue to evaluate the nature and extent of potential short-term and long-term impacts to our business.
Cash Flows
Net cash flows provided by operating activities decreased to $53.0 million for the nine months ended September 30, 2023, compared to $121.1 million for the same 2022 period, primarily due to an increase in receivables and driver advances as a result of an increase in our average receivable days outstanding, a $54.8 million decrease in net income, and a $1.7 million indemnification payment compared to the prior year period.
Net cash flows used by investing activities were $144.6 million for the nine months ended September 30, 2023, compared to $49.8 million used in the same 2022 period. The change in net cash flows used by investing activities was primarily due to the April 2023 acquisition of LTST, the August 2023 acquisition of Sims, and the timing of our trade cycle whereby we took delivery of approximately 607 new tractors and 367 new trailers, while disposing of approximately 926 used tractors and 518 used trailers during the 2023 period compared to delivery of 321 new tractors and no new trailers, while disposing of approximately 77 used tractors and no used trailers in the same 2022 period. The 2022 period includes the February 2022 acquisition of AAT.
Net cash flows provided by financing activities were approximately $30.4 million for the nine months ended September 30, 2023, compared to $20.4 million used in the same 2022 period. The change in net cash flows provided by financing activities was primarily a function of net proceeds relating to notes payable of $76.9 million in the 2023 period compared to net proceeds of $32.4 million in the 2022 period, the repurchase of $25.4 million of shares of our Class A common stock during the 2023 period compared to $70.8 million during the same 2022 period, as well as the payment of approximately $4.3 million in dividends during the 2023 period compared to $3.1 million during the same 2022 period.
Net cash flows provided by operating activities and used by financing activities in the 2023 period also included payment of $0.8 million and $9.2 million, respectively, of contingent consideration liabilities related to the acquisition of AAT.
On May 18, 2022 our Board approved a new stock repurchase authorization of up to $75.0 million of our Class A common stock, with any remaining amount available under prior authorizations being excluded and no longer available. Under such authorization, we repurchased 2.0 million shares of our Class A common stock for $54.7 million during 2022. On January 30, 2023, the Board approved an amendment to the Company's stock repurchase program authorizing the purchase of up to an aggregate $55.0 million of our Class A common stock. The amendment added an incremental approximately $37.5 million to the approximately $17.5 million that was then-remaining under the program. Since May 2022, we have repurchased a total of 2.7 million shares of our Class A common stock. No additional shares were repurchased during the third quarter of 2023 or through November 8, 2023.
Our cash flows may fluctuate depending on capital expenditures, future stock repurchases, dividends, strategic investments or divestitures, any indemnification calls related to the TFS Settlement, and the extent of future income tax obligations and refunds.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. There have been no material changes to our most critical accounting policies and estimates during the three and nine months ended September 30, 2023, compared to those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Form 10-K for the year ended December 31, 2022.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risks have not changed materially from the market risks reported in our Form 10-K for the year ended December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023, as a result of the deficiency described below.
The deficiency identified in our disclosure controls and procedures was that our review of the calculation of the significance of our acquisition of LTST did not identify than an incorrect input was used within the significance determination. As a result of this incorrect input, we did not identify the need to provide certain audited financial statements and related pro forma information for LTST on Form 8-K. This did not impact our current financial reporting or the Company’s current or historical financial statements. On April 27, 2023, we filed a Form 8-K disclosing our acquisition of LTST (the "Original Form 8-K"). On August 3, 2023, we filed an amendment to the Original Form 8-K, confirming that such financial statements, to the extent required, will be filed as an amendment to the Original Form 8-K as soon as they are available.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.
We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| PART II |
OTHER INFORMATION |
| LEGAL PROCEEDINGS |
Information about our legal proceedings is included in Note 10, "Commitments and Contingencies" of the accompanying condensed consolidated financial statements and is incorporated by reference herein.
| RISK FACTORS |
While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our Form 10-Q for the quarter ended March 31, 2023 and Form 10-K for the year ended December 31, 2022, in the sections entitled "Item 1A. Risk Factors," describe some of the risks and uncertainties associated with our business. The information presented below supplements such risk factors. We are amending and restating in its entirety the risk factor entitled “We depend on the proper functioning and availability of our management information and communication systems and other information technology assets (including the data contained therein) and a system failure or unavailability, including those caused by cybersecurity breaches, or an inability to effectively upgrade such systems and assets could cause a significant disruption to our business and have a materially adverse effect on our results of operations” from our Form 10-K for the year ended December 31, 2022, as set forth below. The risk factor set forth below should be read in conjunction with the risk factors included in our Form 10-Q for the quarter ended March 31, 2023 and Form 10 K for the year ended December 31, 2022. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects.
We depend on the proper functioning and availability of our management information and communication systems and other information technology assets (including the data contained therein) and a system failure or unavailability, including those caused by cybersecurity breaches internally or with third parties, or an inability to effectively upgrade such systems and assets could cause a significant disruption to our business and have a materially adverse effect on our results of operations.
We depend heavily on the proper functioning, availability, and security of our management information and communication systems and other information technology assets, including financial reporting and operating systems and the data contained in such systems and assets, in operating our business. Our operating system is critical to understanding customer demands, accepting and planning loads, dispatching equipment and drivers, and billing and collecting for our services. Our financial reporting system is critical to producing accurate and timely financial statements and analyzing business information to help us manage effectively. Furthermore, data privacy laws, which provide data privacy rights for consumers and operational requirements for companies, may result in increased liability and amplified compliance and monitoring costs, any of which could have a material adverse effect on our financial performance and business operations.
Our operations and those of our technology and communications service providers are vulnerable to interruption by natural disasters, such as fires, storms, and floods, which may increase in frequency and severity due to climate change, as well as, power loss, telecommunications failure, cyberattacks, terrorist attacks, Internet failures, computer viruses, and other events beyond our control. More sophisticated and frequent cyberattacks in recent years have also increased security risks associated with information technology systems. We also maintain information security policies to protect our systems, networks, and other information technology assets (and the data contained therein) from cybersecurity breaches and threats, such as hackers, malware, and viruses; however, such policies cannot ensure the protection of our systems, networks, and other information technology assets (and the data contained therein). In addition, remote or flexible work options for our employees could create increased demand for information technology resources and increase the avenues for unauthorized access to sensitive information, phishing, and other cyberattacks. If any of our critical information systems fail or become otherwise unavailable, whether as a result of a system upgrade project or otherwise, we would have to perform the functions manually, which could temporarily impact our ability to dispatch and manage our fleet efficiently, to respond to customers' requests effectively, to maintain billing and other records reliably, and to bill for services and prepare financial statements accurately or in a timely manner. Our business interruption insurance may be inadequate to protect us in the event of an unforeseeable and extreme catastrophe. Any significant system failure, upgrade complication, security breach (including cyberattacks), or other system disruption could interrupt or delay our operations, damage our reputation, cause us to lose customers, or impact our ability to manage our operations and report our financial performance, any of which could have a materially adverse effect on our business. Such risks related to system failure, upgrade complication, security breach (including cyberattacks), or other system disruption may also impact our customers, vendors, third-party capacity providers, and other counterparties, which could result in declines and volatility in customer demand and unavailability of products and services from vendors and third-party capacity providers, any of which could have a materially adverse effect on our business.
In addition, we are currently dependent on a single vendor to support several information technology functions. If the stability or capability of such vendor became compromised and we were forced to migrate such functions to a new platform, it could adversely affect our business, financial condition, and results of operations.
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The table below sets forth information with respect to purchases of our Class A common stock made by us during the quarter ended September 30, 2023:
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) |
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1) |
||||||||||||
| July 1-31, 2023 |
- | - | - | $ | 32,620,200 | |||||||||||
| August 1-31, 2023 |
- | - | - | 32,620,200 | ||||||||||||
| September 1-30, 2023 |
- | - | - | 32,620,200 | ||||||||||||
| Total |
- | - | $ | 32,620,200 | ||||||||||||
| (1) |
On May 18, 2022, our Board approved a stock repurchase authorization of up to $75.0 million of our Class A common stock, with any remaining amount available under prior authorizations being excluded and no longer available. Under such authorization, we repurchased 0.1 million shares of our Class A common stock for $2.9 million during January 2023. On January 30, 2023, the Board approved an amendment to the Company's stock repurchase program authorizing the purchase of up to an aggregate $55.0 million of our Class A common stock. The amendment added an incremental approximately $37.5 million to the approximately $17.5 million that was then-remaining under the program. |
The payment of cash dividends is currently limited by our financing arrangements, including certain covenants under our Credit Facility. We distributed a total of $4.3 million to stockholders in the first nine months of 2023 through dividends.
| DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
| MINE SAFETY DISCLOSURES |
Not applicable.
| OTHER INFORMATION |
During the quarter of 2023, director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.
| Exhibit Number |
Reference |
Description |
| (1) |
Third Amended and Restated Articles of Incorporation |
|
| (2) |
Sixth Amended and Restated Bylaws |
|
| (1) |
Third Amended and Restated Articles of Incorporation |
|
| (2) |
Sixth Amended and Restated Bylaws |
|
| 10.1 | #* | Amended and Restated Covenant Logistics Group Supplemental Savings Plan, dated as of August 15, 2023 |
| # |
Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Principal Executive Officer |
|
| # |
Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by James S. Grant, the Company's Principal Financial Officer |
|
| ## |
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer |
|
| ## |
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by James S. Grant, the Company's Principal Financial Officer |
|
| 101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Labels Linkbase Document |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101) | |
| References: |
||
| (1) |
Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K, filed July 2, 2020. | |
| (2) |
Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-K, filed August 9, 2021. | |
| # |
Filed herewith. |
|
| ## |
Furnished herewith. |
|
| * | Management contract or compensatory plan or arrangement. | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COVENANT LOGISTICS GROUP, INC. |
||
| Date: November 9, 2023 |
By: |
/s/ James S. Grant |
| James S. Grant |
||
| Chief Financial Officer in his capacity as such and as a duly authorized officer on behalf of the issuer |
||