UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended  June 30, 2019
or
 
 
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                         to
 
Commission File Number: 0-24960
 
COVENANT TRANSPORTATION GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
88-0320154
(State or other jurisdiction of incorporation
(I.R.S. Employer Identification No.)
or organization)
 
 
 
400 Birmingham Hwy.
 
Chattanooga, TN
37419
(Address of principal executive offices)
(Zip Code)
 
423-821-1212
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
$0.01 Par Value Class A common stock
CVTI
The NASDAQ Global Select Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes [X]
No [   ]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes [X]
No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  [   ]
  
Accelerated filer [X]
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 [X]


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (August 8, 2019).
 
Class A Common Stock, $.01 par value:  16,108,270 shares
Class B Common Stock, $.01 par value:  2,350,000 shares
 
 
Page 1

 
 
 
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
 
 
Page
Number
Item 1.
Financial Statements
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
Item 2.
17
 
 
 
Item 3.
29
 
 
 
Item 4.
30
 
PART II
OTHER INFORMATION
 
 
Page
Number
 
 
 
Item 1.
31
 
 
 
Item 1A.
31
 
 
 
Item 2.
31
 
 
 
Item 3.
31
 
 
 
Item 4.
31
 
 
 
Item 5.
31
 
 
 
Item 6.
32
 
 
 
PART I
FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
 
 
June 30, 2019
   
December 31, 2018
 
 
 
(unaudited)
   
(unaudited)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
28,823
   
$
23,127
 
Accounts receivable, net of allowance of $1,856 in 2019 and $1,985 in 2018
   
158,367
     
151,093
 
Drivers' advances and other receivables, net of allowance of $648 in 2019 and $626 in 2018
   
12,166
     
16,675
 
Inventory and supplies
   
4,142
     
4,067
 
Prepaid expenses
   
15,022
     
11,579
 
Assets held for sale
   
4,372
     
2,559
 
Income taxes receivable
   
1,788
     
1,109
 
Other short-term assets
   
934
     
1,435
 
Total current assets
   
225,614
     
211,644
 
 
               
Property and equipment, at cost
   
723,263
     
638,770
 
Less: accumulated depreciation and amortization
   
(212,060
)
   
(188,175
)
Net property and equipment
   
511,203
     
450,595
 
 
               
Goodwill
   
42,518
     
41,598
 
Other intangibles, net
   
31,077
     
32,538
 
Other assets, net
   
41,117
     
37,149
 
 
               
Total assets
 
$
851,529
   
$
773,524
 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Checks outstanding in excess of bank balances
 
$
1,610
   
$
1,857
 
Accounts payable
   
24,754
     
22,101
 
Accrued expenses
   
29,513
     
49,503
 
Current maturities of long-term debt
   
37,794
     
28,710
 
Current portion of finance lease obligations
   
6,797
     
5,374
 
Current portion of operating lease obligations
   
14,117
     
-
 
Current portion of insurance and claims accrual
   
18,084
     
19,787
 
Total current liabilities
   
132,669
     
127,332
 
 
               
Long-term debt
   
208,848
     
166,635
 
Long-term portion of finance lease obligations
   
30,820
     
35,119
 
Long-term portion of operating lease obligations
   
24,921
     
-
 
Insurance and claims accrual
   
18,811
     
22,193
 
Deferred income taxes
   
80,920
     
77,467
 
Other long-term liabilities
   
2,855
     
1,636
 
Total liabilities
   
499,844
     
430,382
 
Commitments and contingent liabilities
   
-
     
-
 
Stockholders' equity:
               
Class A common stock, $.01 par value; 40,000,000 shares authorized; 16,096,235 shares issued and outstanding as of June 30, 2019; and 20,000,000 shares authorized; 16,015,708 shares issued and outstanding as of December 31, 2018
   
172
     
171
 
Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding
   
24
     
24
 
Additional paid-in-capital
   
141,337
     
142,177
 
Accumulated other comprehensive (loss) income
   
(918
)
   
204
 
Retained earnings
   
211,070
     
200,566
 
Total stockholders' equity
   
351,685
     
343,142
 
Total liabilities and stockholders' equity
 
$
851,529
   
$
773,524
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands, except per share data)
 
 
 
 
Three months ended June 30,
(unaudited)
   
Six months ended June 30,
(unaudited)
 
 
 
2019
   
2018
   
2019
   
2018
 
Revenues
                       
Freight revenue
 
$
194,917
   
$
170,635
   
$
390,679
   
$
321,097
 
Fuel surcharge revenue
   
24,381
     
25,683
     
47,800
     
48,787
 
Total revenue
 
$
219,298
   
$
196,318
   
$
438,479
   
$
369,884
 
 
                               
Operating expenses:
                               
Salaries, wages, and related expenses
   
75,781
     
64,633
     
155,284
     
125,253
 
Fuel expense
   
29,215
     
29,209
     
57,047
     
56,390
 
Operations and maintenance
   
14,898
     
12,595
     
30,072
     
24,325
 
Revenue equipment rentals and purchased transportation
   
47,169
     
37,388
     
95,839
     
68,079
 
Operating taxes and licenses
   
3,365
     
2,613
     
6,549
     
5,273
 
Insurance and claims
   
10,472
     
9,908
     
21,707
     
18,593
 
Communications and utilities
   
1,760
     
1,666
     
3,478
     
3,406
 
General supplies and expenses
   
7,284
     
6,423
     
14,015
     
10,562
 
Depreciation and amortization, including gains and losses on disposition of property and equipment
   
20,510
     
17,818
     
40,218
     
37,513
 
Total operating expenses
   
210,454
     
182,253
     
424,209
     
349,394
 
Operating income
   
8,844
     
14,065
     
14,270
     
20,490
 
Interest expense, net
   
2,683
     
1,941
     
5,129
     
3,900
 
Income from equity method investment
   
(2,375
)
   
(1,775
)
   
(5,410
)
   
(3,265
)
Income before income taxes
   
8,536
     
13,899
     
14,551
     
19,855
 
Income tax expense
   
2,465
     
3,928
     
4,047
     
5,467
 
Net income
 
$
6,071
   
$
9,971
   
$
10,504
   
$
14,388
 
 
                               
Income per share:
                               
Basic and diluted income per share
 
$
0.33
   
$
0.54
   
$
0.57
   
$
0.78
 
Basic weighted average shares outstanding
   
18,438
     
18,337
     
18,410
     
18,334
 
Diluted weighted average shares outstanding
   
18,606
     
18,441
     
18,570
     
18,424
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands)
 
 
 
Three months ended June 30,
(unaudited)
   
Six months ended June 30,
(unaudited)
 
 
 
2019
   
2018
   
2019
   
2018
 
 
                       
Net income
 
$
6,071
   
$
9,971
   
$
10,504
   
$
14,388
 
 
                               
Other comprehensive (loss) income:
                               
 
                               
Unrealized (loss) gain on effective portion of cash flow hedges, net of tax of $262 and $425 in 2019 and ($357) and ($650) in 2018, respectively
   
(692
)
   
943
     
(1,124
)
   
1,712
 
 
                               
Reclassification of cash flow hedge (gains) into statement of operations, net of tax of $3 and $7 in 2019 and $137 and $175 in 2018, respectively
   
(9
)
   
(363
)
   
(19
)
   
(461
)
 
                               
Unrealized holding gain on investments classified as available-for-sale
   
11
     
-
     
21
     
-
 
Total other comprehensive (loss) income
   
(690
)
   
580
     
(1,122
)
   
1,251
 
 
                               
Comprehensive income
 
$
5,381
   
$
10,551
   
$
9,382
   
$
15,639
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(Unaudited and in thousands)
 
 
 
For the Three and Six Months Ended June 30, 2019
 
 
                   
Accumulated
             
 
             
Additional
   
Other
         
Total
 
 
 
Common Stock
   
Paid-In
   
Comprehensive
   
Retained
   
Stockholders'
 
 
 
Class A
   
Class B
   
Capital
   
(Loss)
   
Earnings
   
Equity
 
 
                                   
Balances at December 31, 2018
 
$
171
   
$
24
   
$
142,177
   
$
204
   
$
200,566
   
$
343,142
 
Net income
   
-
     
-
     
-
     
-
     
4,433
     
4,433
 
Other comprehensive income
   
-
     
-
     
-
     
(432
)
   
-
     
(432
)
Stock-based employee compensation expense
   
-
     
-
     
1,262
     
-
     
-
     
1,262
 
Issuance of restricted shares, net
   
1
     
-
     
(669
)
   
-
     
-
     
(668
)
Balances at March 31, 2019
 
$
172
   
$
24
   
$
142,770
   
$
(228
)
 
$
204,999
   
$
347,737
 
Net income
   
-
     
-
     
-
     
-
     
6,071
     
6,071
 
Other comprehensive loss
   
-
     
-
     
-
     
(690
)
   
-
     
(690
)
Stock-based employee compensation expense reversal
   
-
     
-
     
(1,433
)
   
-
     
-
     
(1,433
)
Issuance of restricted shares, net
   
-
     
-
     
-
     
-
     
-
     
-
 
Balances at June 30, 2019
 
$
172
   
$
24
   
$
141,337
   
$
(918
)
 
$
211,070
   
$
351,685
 
 
 
 
For the Three and Six Months Ended June 30, 2018
 
 
                   
Accumulated
             
 
             
Additional
   
Other
         
Total
 
 
 
Common Stock
   
Paid-In
   
Comprehensive
   
Retained
   
Stockholders'
 
 
 
Class A
   
Class B
   
Capital
   
(Loss)
   
Earnings
   
Equity
 
 
                                   
Balances at December 31, 2017
 
$
171
   
$
24
   
$
137,242
   
$
293
   
$
157,471
   
$
295,201
 
Net income
   
-
     
-
     
-
     
-
     
4,417
     
4,417
 
Effect of adoption of ASU 2014-09
   
-
     
-
     
-
     
-
     
591
     
591
 
Other comprehensive income
   
-
     
-
     
-
     
671
     
-
     
671
 
Stock-based employee compensation expense
   
-
     
-
     
826
     
-
     
-
     
826
 
Issuance of restricted shares, net
   
-
     
-
     
(18
)
   
-
     
-
     
(18
)
Balances at March 31, 2018
 
$
171
   
$
24
   
$
138,050
   
$
964
   
$
162,479
   
$
301,688
 
Net income
   
-
     
-
     
-
     
-
     
9,971
     
9,971
 
Other comprehensive loss
   
-
     
-
     
-
     
580
     
-
     
580
 
Stock-based employee compensation expense reversal
   
-
     
-
     
937
     
-
     
-
     
937
 
Issuance of restricted shares, net
   
-
     
-
     
375
     
-
     
-
     
375
 
Balances at June 30, 2018
 
$
171
   
$
24
   
$
139,362
   
$
1,544
   
$
172,450
   
$
313,551
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands)
 
 
 
Six months ended June 30,
(unaudited)
 
 
 
2019
   
2018
 
Cash flows from operating activities:
           
Net income
 
$
10,504
   
$
14,388
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
(Reversal of losses on) provision for accounts receivable
   
(32
)
   
113
 
Reversal of gain on sales to equity method investee
   
(7
)
   
(171
)
Depreciation and amortization
   
40,426
     
36,829
 
Amortization of deferred financing fees
   
73
     
73
 
Deferred income tax expense
   
3,221
     
6,495
 
Income tax benefit arising from restricted share vesting and stock options exercised
   
668
     
4
 
Stock-based compensation (reversal) expense
   
(171
)
   
2,138
 
Income from equity method investment
   
(5,410
)
   
(3,265
)
(Gain) Loss on disposition of property and equipment
   
(1,386
)
   
684
 
Return on investment in available-for-sale securities
   
(7
)
   
-
 
Changes in operating assets and liabilities:
               
Receivables and advances
   
164
     
11,821
 
Prepaid expenses and other assets
   
(2,971
)
   
(5,238
)
Inventory and supplies
   
(75
)
   
(81
)
Insurance and claims accrual
   
(4,255
)
   
(2,793
)
Operating leases
   
(17
)
   
-
 
Accounts payable and accrued expenses
   
(17,128
)
   
1,635
 
Net cash flows provided by operating activities
   
23,597
     
62,632
 
 
               
Cash flows from investing activities:
               
Purchase of available-for-sale securities
   
(1,780
)
   
-
 
Acquisition of property and equipment
   
(79,125
)
   
(31,771
)
Proceeds from disposition of property and equipment
   
15,569
     
38,127
 
Net cash flows (used) provided by investing activities
   
(65,336
)
   
6,356
 
 
               
Cash flows from financing activities:
               
Change in checks outstanding in excess of bank balances
   
(247
)
   
-
 
Proceeds from issuance of notes payable
   
57,555
     
78,832
 
Repayments of notes payable
   
(19,733
)
   
(30,455
)
Repayments of finance lease obligations
   
(2,876
)
   
(1,534
)
Proceeds under revolving credit facility
   
843,398
     
755,886
 
Repayments under revolving credit facility
   
(829,995
)
   
(764,892
)
Payment of minimum tax withholdings on stock compensation
   
(667
)
   
(18
)
Debt refinancing costs
   
-
     
(17
)
Net cash flows provided by financing activities
   
47,435
     
37,802
 
 
               
Net change in cash and cash equivalents
   
5,696
     
106,790
 
 
               
Cash and cash equivalents at beginning of period
   
23,127
     
15,356
 
Cash and cash equivalents at end of period
 
$
28,823
   
$
122,146
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
COVENANT TRANSPORTATION 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 Transportation 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 Transportation 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, 2018, condensed consolidated balance sheet was derived from our audited balance sheet as of that date. Our operating results are subject to seasonal trends when measured on a quarterly basis; therefore operating results for the  three months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending  December 31, 2018. 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, 2018. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.
 
Recent Accounting Pronouncements
 
Accounting Standards adopted
 
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, which establishes Topic 842 to replace Topic 840 regarding accounting for leases. Topic 842 requires lessees to recognize a right-of-use asset and a lease liability for most leases on the balance sheet. Leases that were previously described as capital leases are now called finance leases, and operating leases with a term of at least twelve months are now required to be recorded on the balance sheet. We adopted this standard on January 1, 2019 using the modified retrospective approach.
 
In July 2018, FASB issued ASU 2018-11, which provides an optional transition method allowing application of Topic 842 as of the adoption date and recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, with no restatement of comparative prior periods. We have adopted the standard using this optional transition method.
 
Within Topic 842, FASB has provided a number of practical expedients for applying the new lease standard in relation to leases that commenced prior to the standard's effective date. We have elected the package of practical expedients which allowed us, among other things, to carry forward the operating and capital lease classifications from Topic 840 to the new operating and finance lease classifications under Topic 842.
 
The adoption of this ASU resulted in the initial recognition of operating lease assets of $40.1 million and liabilities totaling $41.0 million, comprised of $15.3 million of current operating lease obligations and $25.7 million of long-term operating lease obligations.
 
Property and Equipment
 
Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is generally recorded using an accelerated method. Depreciation of revenue equipment is our largest item of depreciation. We have historically depreciated new tractors (excluding day cabs) over five years to salvage values of approximately 15% of their cost.  We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 25% of their cost. We annually review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations. Gains and losses on the disposal of revenue equipment are included in depreciation expense in the consolidated statements of operations.
 
Leases
 
At the commencement date of a new lease agreement with contractual terms longer than twelve months, we recognize a right-of-use asset and a lease liability and categorize the lease as either finance or operating. Certain lease agreements have lease and nonlease components, and we have elected to account for these components separately.
 
Right-of-use assets and lease liabilities are initially recorded based on the present value of lease payments over the term of the lease. When the rate implicit in the lease is readily determinable, this rate is used for calculating the present value of remaining lease payments; otherwise, our incremental borrowing rate is used. Right-of-use assets also include prepaid lease expenses and initial direct costs of executing the leases, which are reduced by landlord incentives. Options to extend or terminate a lease agreement are included in or excluded from the lease term, respectively, when those options are reasonably certain to be exercised. Right-of-use assets are tested for impairment in the same manner as long-lived assets.
 
Right-of-use assets are included in net property and equipment. For finance leases, right-of-use assets are amortized on a straight-line basis over the shorter of the expected useful life or the lease term, and the carrying amount of the lease liability is adjusted to reflect interest expense, which is recorded in interest expense, net. Operating lease right-of-use assets are amortized over the lease term on a straight-line basis, and the lease liability is measured at the present value of the remaining lease payments. Variable lease payments not included in the lease liability for mileage charges on leased revenue equipment are expensed as incurred. Operating lease costs are recognized on a straight-line basis over the term of the lease within operating expenses.
 
 
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 no anti-dilutive shares for the  three or six months ended June 30, 2019. There were no outstanding stock options at June 30, 2019. Income per share is the same for both Class A and Class B shares.
 
The following table sets forth for the periods indicated the calculation of net income per share included in the condensed consolidated statements of operations:
 
(in thousands except per share data)
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2019
   
2018
   
2019
   
2018
 
Numerator:
                       
Net income
 
$
6,071
   
$
9,971
   
$
10,504
   
$
14,388
 
Denominator:
                               
Denominator for basic income per share – weighted-average shares
   
18,438
     
18,337
     
18,410
     
18,334
 
Effect of dilutive securities:
                               
Equivalent shares issuable upon conversion of unvested restricted shares
   
168
     
104
     
160
     
90
 
Denominator for diluted income per share adjusted weighted-average shares and assumed conversions
   
18,606
     
18,441
     
18,570
     
18,424
 
 
                               
Net income per share:
                               
Basic and diluted income per share
 
$
0.33
   
$
0.54
   
$
0.57
   
$
0.78
 
 
 
Note 3.
Segment Information
 
We have two reportable segments, Truckload, which is comprised of our truckload services, and Managed Freight, which provides freight brokerage and logistics services.
 
The Truckload segment consists of four service offerings that are aggregated because they have similar economic characteristics and meet the aggregation criteria.  The four service offerings that comprise our Truckload segment are as follows: (i) Expedited, provided primarily by Covenant Transport, our historical flagship operation; (ii) Dedicated, provided by all of our operating fleets; (iii) Refrigerated, provided primarily through our Southern Refrigerated Transport, Inc. ("SRT") subsidiary; and (iv) over-the-road ("OTR"), provided primarily by our Landair Transport, Inc. subsidiary.
 
In addition, our Managed Freight segment has service offerings ancillary to our Truckload services, including: freight brokerage, transportation management services ("TMS"), and shuttle and switching services. These service offerings are aggregated due to similar margins and customers. Also included within Managed Freight are our warehousing and accounts receivable factoring businesses, neither of which meets the quantitative or qualitative reporting thresholds individually or in the aggregate.
 
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our  2018 Annual Report on Form 10-K. Substantially all intersegment sales prices are market based. We evaluate performance based on operating income of the respective business units.
 
The following table summarizes our revenue by our two reportable segments, Truckload and Managed Freight, disaggregated to the operating fleet level as used by our chief operating decision maker in making decisions regarding allocation of resources and assets, organized first by reportable segment (i.e. Truckload and Managed Freight) and then by operating fleet for the three and six months ended June 30, 2019 and  2018:
 
(in thousands)
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2019
   
2018
   
2019
   
2018
 
Total Revenues:
                       
 
                       
Truckload Segment:
                       
Expedited
 
$
66,529
   
$
85,589
   
$
129,251
   
$
166,351
 
Dedicated
   
80,973
     
35,028
     
160,745
     
68,435
 
Refrigerated
   
23,134
     
-
     
48,739
     
-
 
OTR
   
4,772
     
50,094
     
9,334
     
90,473
 
Truckload Revenues
   
175,408
     
170,711
     
348,069
     
325,259
 
 
                               
Managed Freight Segment:
                               
Brokerage
   
20,277
     
24,489
     
44,583
     
42,582
 
TMS
   
9,431
     
-
     
17,801
     
-
 
Shuttle & Switching
   
3,562
     
-
     
7,298
     
-
 
Warehouse
   
8,362
     
-
     
16,622
     
-
 
Factoring
   
2,258
     
1,118
     
4,106
     
2,043
 
Managed Freight Revenues
   
43,890
     
25,607
     
90,410
     
44,625
 
 
                               
Total
 
$
219,298
   
$
196,318
   
$
438,479
   
$
369,884
 
 
 
Note 4.
Income Taxes
 
Income tax expense in both 2019 and 2018 varies from the amount computed by applying the federal corporate income tax rates of 21% to income before income taxes, primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers.  Drivers who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable wages.  This per diem program increases our drivers' net pay per mile, after taxes, while decreasing gross pay, before taxes.  As a result, salaries, wages, and related expenses are slightly lower and our effective income tax rate is higher than the statutory rate.  Generally, as pre-tax income increases, the impact of the driver per diem program on our effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in periods where earnings are at or near breakeven the impact of the per diem program on our effective tax rate is significant.  Due to the partially nondeductible effect of per diem pay, our tax rate will fluctuate in future periods based on fluctuations in earnings.
 
Our liability recorded for uncertain tax positions as of  June 30, 2019 has  increased by less than $0.1 million for accrued interest since December 31, 2018.
 
The net deferred tax liability of  $80.9 million primarily relates to differences in cumulative book versus tax depreciation of property and equipment, partially off-set by net operating loss carryovers and insurance claims that have been reserved but not paid. The carrying value of our deferred tax assets assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits.  If these estimates and related assumptions change in the future, we may be required to establish a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income tax expense.  On a periodic basis, we assess the need for adjustment of the valuation allowance.  Based on forecasted taxable income resulting from the reversal of deferred tax liabilities, primarily generated by accelerated depreciation for tax purposes in prior periods, and tax planning strategies available to us, a valuation allowance has been established at June 30, 2019, for $0.1 million related to certain state net operating loss carry-forwards.  If these estimates and related assumptions change in the future, we may be required to modify our valuation allowance against the carrying value of the deferred tax assets.
  
Note 5.
Debt and Lease Obligations
 
Current and long-term debt and lease obligations consisted of the following at  June 30, 2019 and December 31, 2018:
 
(in thousands)
 
June 30, 2019
   
December 31, 2018
 
 
 
Current
   
Long-Term
   
Current
   
Long-Term
 
Borrowings under Credit Facility
 
$
-
   
$
17,314
   
$
-
   
$
3,911
 
Revenue equipment installment notes; weighted average interest rate of 3.8% at June 30, 2019, and 3.7% at December 31, 2018, due in monthly installments with final maturities at various dates ranging from July 2019 to July 2023, secured by related revenue equipment
   
36,871
     
168,392
     
27,809
     
139,115
 
 
                               
Real estate notes; interest rate of 4.2% at June 30, 2019 and 4.1% at December 31, 2018 due in monthly installments with a fixed maturity at August 2035, secured by related real estate
   
1,070
     
23,222
     
1,048
     
23,763
 
Deferred loan costs
   
(147
)
   
(80
)
   
(147
)
   
(154
)
Total debt
   
37,794
     
208,848
     
28,710
     
166,635
 
Principal portion of finance lease obligations, secured by related revenue equipment
   
6,797
     
30,820
     
5,374
     
35,119
 
Principal portion of operating lease obligations, secured by related revenue equipment
   
14,117
     
24,921
     
-
     
-
 
Total debt and lease obligations
 
$
58,708
   
$
264,589
   
$
34,084
   
$
201,754
 
 
We and substantially all of our subsidiaries are parties to the Credit Facility with Bank of America, N.A., as agent (the "Agent") and JPMorgan Chase Bank, N.A. (together with the Agent, the "Lenders"). The Credit Facility is a $95.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million subject to Lender acceptance of the additional funding commitment.  The Credit Facility includes, within our $95.0 million revolving credit facility, a letter of credit sub facility in an aggregate amount of $95.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time. The Credit Facility matures in September 2021.
 
Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.5% to 1.0%; while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.5% to 2.0%. The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility.  The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate or revenue equipment pledged under other financing agreements, including revenue equipment installment notes and capital leases.
 
 
Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $95.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 75% of the appraised fair market value of eligible real estate, as reduced by a periodic amortization amount.  We had  $17.3 million of borrowings outstanding under the Credit Facility as of June 30, 2019, undrawn letters of credit outstanding of approximately $34.8 million, and available borrowing capacity of $42.9 million. The interest rate on outstanding borrowings as of June 30, 2019, was 6.0% on $17.3 million of base rate loans and there were no outstanding LIBOR loans. Based on availability as of June 30, 2019 and 2018, there was no fixed charge coverage requirement.
 
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated.  If an event of default occurs under the Credit Facility and the Lenders cause, or have the ability to cause, all of the outstanding debt obligations under the Credit Facility to become due and payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions. The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply with the covenants and restrictions set forth in the Credit Facility could result in an event of default.
 
Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from  July 2019 to September 2023. 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  $176.7 million are cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in 2020, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, capital leases, and/or from the Credit Facility.
 
In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third party lender. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%.
  
Note 6.
Stock-Based Compensation
 
Our 2006 Omnibus Incentive Plan, as amended (the "Incentive Plan") governs the issuance of equity awards and other incentive compensation to management and members of the board of directors. On May 8, 2019, the stockholders, upon recommendation of the board of directors, approved the First Amendment (the “First Amendment”) to the Third Amended and Restated Incentive Plan. The First Amendment (i) increases the number of shares of Class A common stock available for issuance under the Incentive Plan by an additional 750,000 shares, (ii) implements additional changes designed to comply with certain shareholder advisory group guidelines and best practices, (iii) makes technical updates related to Section 162(m) of the Internal Revenue Code in light of the 2017 Tax Cuts and Jobs Act, (iv) re-sets the term of the Incentive Plan to expire with respect to the ability to grant new awards on March 31, 2029, and (v) makes such other miscellaneous, administrative and conforming changes as were necessary.
 
The Incentive Plan permits annual awards of shares of our Class A common stock to executives, other key employees, consultants, non-employee directors, and eligible participants under various types of options, restricted stock awards, or other equity instruments. As of   June 30, 2019, there were  780,747 remaining of the  2,300,000 shares available for award under the Incentive Plan. No participant in the Incentive Plan may receive awards of any type of equity instruments in any calendar year that relates to more than 200,000 shares of our Class A common stock. No awards may be made under the Incentive Plan after March 31, 2023. To the extent available, we have issued treasury stock to satisfy all share-based incentive plans.
 
Included in salaries, wages, and related expenses within the condensed consolidated statements of operations is the reversal of  $1.8 million and the recognition of approximately  $0.9 million stock-based compensation expense for the  three months ended June 30, 2019 and 2018, respectively and the reversal of  $0.5 million and recognition of $1.8 million for the  six months ended June 30, 2019 and 2018, respectively. All stock compensation expense recorded in  2019 and  2018 relates to restricted shares, as no unvested options were outstanding during these periods. An additional  $0.4 million of stock-based compensation was recorded in general supplies and expenses in the condensed consolidated statements of operations for each of the three- and six-month periods ended June 30, 2019 and 2018, respectively, as this amount relates to the issuance of restricted stock to non-employee directors.
 
The Incentive Plan allows participants to pay the federal and state minimum statutory tax withholding requirements related to awards that vest or allows participants to deliver to us shares of Class A common stock having a fair market value equal to the minimum amount of such required withholding taxes. To satisfy withholding requirements for shares that vested through June 30, 2019, certain participants elected to forfeit receipt of an aggregate of  29,390 shares of Class A common stock at a weighted average per share price of  $22.71 based on the closing price of our Class A common stock on the dates the shares vested in 2019, in lieu of the federal and state minimum statutory tax withholding requirements. We remitted  $0.7 million to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements.
 
 
Note 7.
Commitments and Contingencies
 
From time-to-time, we are a party to ordinary, routine litigation arising in the ordinary course of business, most of which involves claims for personal injury and property damage incurred in connection with the transportation of freight.
 
Our subsidiary Covenant Transport, Inc. (“Covenant Transport”) is a defendant in a lawsuit filed on November 9, 2018, in the Superior Court of Los Angeles County, California.  The lawsuit was filed on behalf of Richard Tabizon (a California resident and former driver) who is seeking to have the lawsuit certified as a class action.  The complaint asserts that the time period covered by the lawsuit is from October 31, 2014 to the present and alleges claims for failure to properly pay for rest breaks, failure to provide accurate itemized wage statements and/or reimbursement of business related expenses, unlawful deduction of wages, failure to pay proper minimum wage and overtime wages, failure to provide all wages due at termination, and other related wage and hour claims under the California Labor Code.  Since the original filing date, the case has been removed from the Los Angeles Superior Court to the U.S. District Court in the Central District of California and subsequently the case was transferred to the U.S. District Court in the Eastern District of Tennessee where the case is now pending. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of June 30, 2019.   
 
Also, in February, 2019, Covenant Transport was named in a separate (but related) lawsuit filed in the Superior Court of Los Angeles County, California requesting civil penalties under the California Private Attorneys’ General Act for the same underlying wage and hour claims at issue in the putative class action case noted above. On August 1, 2019, the Los Angeles Superior Court entered an order staying the action pending completion of the earlier-filed action that is pending in the United States District Court for the Eastern District of Tennessee. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of June 30, 2019. 
 
We maintain insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain self-insured retentions. In management's opinion, our potential exposure under pending legal proceedings is adequately provided for in the accompanying condensed consolidated financial statements.
 
Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, taking into account existing reserves, is not likely to have a materially adverse effect on our consolidated financial statements.
 
We had $34.8 million and  $36.3 million of outstanding and undrawn letters of credit as of June 30, 2019 and December 31, 2018, respectively. The letters of credit are maintained primarily to support our insurance programs.
  
Note 8.
Leases
 
We finance a portion of our revenue equipment, office and terminal properties, computer and office equipment, and other equipment using leases. A number of these leases include one or more options to renew or extend the agreements beyond the expiration date or to terminate the agreement prior to the lease expiration date, and such options are included in or excluded from the lease term, respectively, when those options are reasonably certain to be exercised. Our lease obligations do not typically include residual value guarantees or material restrictive covenants. A summary of our lease obligations at June 30, 2019 are as follows:
 
(dollars in thousands)
 
Three months Ended
   
Six Months Ended
 
 
 
June 30, 2019
   
June 30, 2019
 
Finance lease cost:
           
Amortization of right-of-use assets
 
1,408
   
2,819
 
Interest on lease liabilities
   
206
     
433
 
Operating lease cost
   
5,475
     
11,657
 
Total lease cost
 
$
7,089
   
$
14,909
 
 
               
Other information
               
Cash paid for amounts included in the measurement of lease liabilities:
               
Operating cash flows from finance leases
   
1,297
     
2,443
 
Operating cash flows from operating leases
   
5,475
     
11,657
 
Financing cash flows from finance leases
   
206
     
433
 
Right-of-use assets obtained in exchange for new operating lease liabilities
   
3,089
     
6,325
 
Weighted-average remaining lease term—finance leases
         
3.4 years
 
Weighted-average remaining lease term—operating leases
         
3.5 years
 
Weighted-average discount rate—finance leases
           
3.0
%
Weighted-average discount rate—operating leases
           
4.4
%
 
Right-of-use assets of  $38.0 million for operating leases and  $55.1 million for finance leases are included in net property and equipment in our Condensed Consolidated Balance Sheets. Operating lease right-of-use asset amortization is included in revenue equipment rentals and purchased transportation, communication and utilities, and general supplies and expenses, depending on the underlying asset.
 
Our future minimum lease payments as of June 30, 2019, including approximately $0.1 million of operating lease payments for which a lease has been executed, but not yet commenced, summarized as follows by lease category:
 
(in thousands)
 
Operating
   
Finance
 
2019 (1)
 
$
8,319
   
$
7,830
 
2020
   
13,505
     
7,702
 
2021
   
9,711
     
7,997
 
2022
   
7,476
     
9,441
 
2023
   
1,018
     
6,364
 
Thereafter
   
2,431
     
1,209
 
Total minimum lease payments
 
 
42,460
   
 
40,543
 
Less: amount representing interest
   
(3,310
)
   
(2,926
)
Present value of minimum lease payments
 
 
39,150
   
 
37,617
 
Less: current portion
   
(14,117
)
   
(6,797
)
Lease obligations, long-term
 
$
25,033
   
$
30,820
 
 
(1) Excludes the six months ended June 30, 2019
 
Note 9.
Equity Method Investment
 
We own a minority investment in Transport Enterprise Leasing, LLC ("TEL"). TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have not guaranteed any of TEL's debt and have no obligation to provide funding, services, or assets. In May 2016, the operating agreement with TEL was amended to, among other things, remove the previously agreed to fixed date purchase options. TEL’s majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. We sold no and $0.1 million tractors or trailers to TEL during the six-months ended June 30, 2019 and  2018, respectively, and we received  $4.6 million and $3.9 million, respectively, for providing various maintenance services, certain back-office functions, and for miscellaneous equipment. We recognized a net reversal of previously deferred gains totaling less than $0.1 million and  $0.2 million for the six-months ended  June 30, 2019  and  2018 , respectively, representing 49% of the gains on units sold to TEL less any gains previously deferred and recognized when the equipment was subsequently sold to a third party.  Deferred gains, totaling  $0.2 million  at  June 30, 2019 , are being carried as a reduction in our investment in TEL.  At  June 30, 2019  and  December 31, 2018 , we had accounts receivable from TEL of  $5.6 million  and  $5.1 million , respectively, related to cash disbursements made pursuant to our performance of certain back-office and maintenance functions on TEL’s behalf.
We have accounted for our investment in TEL using the equity method of accounting, and thus our financial results include our proportionate share of TEL's 2019 net income through June 30, 2019, or $5.4 million. Our investment in TEL, totaling  $31.5 million and $26.1 million, at June 30, 2019 and December 31, 2018, respectively, is included in other assets in the accompanying condensed consolidated balance sheets.
See TEL's summarized financial information below:
 
(in thousands)
 
As of
June 30,
   
As of
December 31,
 
 
 
2019
   
2018
 
Current Assets
 
$
26,400
   
$
25,877
 
Non-current Assets
   
320,129
     
273,987
 
Current Liabilities
   
15,802
     
78,530
 
Non-current Liabilities
   
275,901
     
176,389
 
Total Equity
 
$
54,826
   
$
44,945
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Revenue
 
$
24,505
   
$
23,574
   
$
51,988
   
$
48,715
 
Operating Expenses
   
17,052
     
18,374
     
37,052
     
38,999
 
Operating Income
   
7,453
     
5,200
     
14,936
     
9,716
 
Net Income
 
$
4,792
   
$
3,464
   
$
9,881
   
$
6,482
 
 
Note 10.
Goodwill and Other Assets
 
On July 3, 2018, we acquired 100% of the outstanding stock of Landair Holdings, Inc., a Tennessee corporation (“Landair”). Landair is a dedicated and for-hire truckload carrier, as well as a supplier of transportation management, warehousing and logistics inventory management services. Landair’s results have been included in the consolidated financial statements since the date of acquisition. Landair’s trucking operations’ results are reported within our Truckload segment, while Landair’s logistics operations’ results are reported within our Managed Freight segment.
 
The allocation of the purchase price has been subject to change based on finalization of the valuation of long-lived and intangible assets and self-insurance reserves, as well as our ongoing evaluation of Landair's accounting principles for consistency with ours. The assignment of goodwill and intangible assets to our reportable segments has been completed as of June 30, 2019.  A summary of the changes in carrying amount of total goodwill is as follows:
 
(in thousands)
     
 
     
Balance at December 31, 2018
 
$
41,598
 
Post-acquisition goodwill adjustments
   
920
 
Balance at June 30, 2019
 
$
42,518
 
 
 
A summary of other intangible assets as of June 30, 2019 and  December 31, 2018 is as follows:
 
(in thousands)
 
June 30, 2019
 
 
 
Gross intangible assets
   
Accumulated amortization
   
Net intangible assets
   
Remaining life (months)
 
Trade name
 
$
 4,400
   
$
 (293
)
 
$
4,107
     
168
 
Non-Compete agreement
   
1,400
   
 
(280
)
   
1,120
     
48
 
Customer relationships
   
28,200
   
 
(2,350
)
   
25,850
     
132
 
Total
 
$
 34,000
   
$
(2,923
)
 
$
31,077
         
 
 
 
December 31, 2018
 
 
 
Gross intangible assets
   
Accumulated amortization
   
Net intangible assets
   
Remaining life (months)
 
Trade name
 
$
4,400
   
$
(147
)
 
$
4,253
     
174
 
Non-Compete agreement
   
1,400
   
 
(140
)
   
1,260
     
54
 
Customer relationships
   
28,200
   
 
(1,175
)
   
27,025
     
138
 
Total
 
$
34,000
   
$
(1,462
)
 
$
32,538
         
 
 
 
The above intangible assets have a weighted average remaining life of 145 months. The expected amortization of these assets for the next five successive years is as follows:
 
 
 
(in thousands)
 
2019
 
$
1,462
 
2020
   
2,923
 
2021
   
2,923
 
2022
   
2,923
 
2023
   
2,783
 
Thereafter
   
18,063
 
 
 
ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The condensed consolidated financial statements include the accounts of Covenant Transportation 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 Transportation Group, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended.  All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing.  In this Form 10-Q, statements relating to future reclassification of losses arising from derivative instruments and the performance of counterparties to such instruments, future impact of accounting standards, future third-party transportation provider expenses, future tax rates, expenses, and deductions, expected freight demand and volumes and trucking industry conditions, potential results of a default and testing of our fixed charge covenant under the Credit Facility or other debt agreements, expected sources of working capital and liquidity (including our mix of debt, capital leases, and operating leases as means of financing revenue equipment), expected capital expenditures, allocations, and requirements, future customer relationships, expected debt reduction, future driver market conditions, expected cash flows, expected operating income and earnings per share improvements, future investments in and growth of our segments and services, future trucking capacity, future rates and prices, future utilization, 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 hedging contracts and fuel surcharge programs, future fluctuations in operations and maintenance expenses, expected effects and mix of our solo and team operations, future fleet size, management, and upgrades, the market value of used equipment, including equipment subject to operating or capital leases relative to our payment obligations under such operating leases (including residual value guarantees and the proceeds from the sale thereof), future effects of the Landair acquisition, our internal control remediation plan, the anticipated impact of our investment in TEL, and anticipated levels of and fluctuations relating to insurance, claims, and litigation expenses, among others, are forward-looking statements.  Forward-looking statements may be identified by the use of terms or phrases such as "believe," "may," "could," "expects," "estimates," "projects," "anticipates," "plans," "intends," 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 section entitled "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2018.  Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2018, 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
 
Our financial results for the second quarter illustrate the reason for our strategy of becoming more embedded in our customers’ supply chains.  Our dedicated contract operations in our Star and Landair subsidiaries, along with our managed freight and factoring businesses, and our investment in TEL, performed quite well. On the other hand, our less contracted expedited and solo refrigerated operations suffered from over-supply in relation to demand and a late-developing produce season.  We intend to continue to pursue a more predictable and consistently profitable business model as we allocate assets across our operations.
 
The main positives in the second quarter were 1) improvement in the operating income at our Managed Freight segment, including successful integration of Landair’s warehousing and transportation management service offerings, 2) improved year-over-year earnings contributed from our investment in Transport Enterprise Leasing, and 3) consistent demand and profitability from our growing dedicated businesses at Landair and Star. The main negatives in the quarter were 1) the operating margin declines of our expedited and solo refrigerated service offerings, 2) an approximate 10.6% decrease in average freight revenue per truck for our Truckload segment, excluding Landair’s truckload operations versus the second quarter of 2018, and 3) increased Truckload operating costs on a per mile basis, primarily from increased professional driver wages, group health insurance, net fuel costs and operations and maintenance expense.
 
  
Additional items of note for the second quarter of  2019 include the following:
 
 
Total revenue of $219.3 million, an  increase of  11.7% compared with the second quarter of 2018, and freight revenue of  $194.9 million (which excludes revenue from fuel surcharges), an  increase of  14.2% compared with the second quarter of 2018;
 
 
 
 
Operating income of $8.8 million, compared with operating income of  $14.1 million in the second quarter of 2018;
 
 
 
 
Net income of  $6.1 million, or  $0.33 per basic and diluted share, compared with net income of  $10.0 million , or  $0.54 per basic and diluted share, in the second quarter of 2018;
 
 
 
 
With available borrowing capacity of  $42.9 million under our Credit Facility at  June 30, 2019, we do not expect to be required to test our fixed charge covenant in the foreseeable future;
 
 
 
 
Our Managed Freight segment’s total revenue increased to $43.9 million in the  2019 quarter from  $25.6 million in the 2018 quarter and operating income  increased to  $3.7 million in the 2019 quarter from  $2.3 million in the 2018 quarter;  
 
 
 
 
Our equity investment in TEL provided  $2.4 million of pre-tax earnings compared to  $1.8 million in the second quarter of 2018;
 
 
 
 
Since December 31, 2018, total indebtedness, net of cash and including operating lease liabilities,  increased by  $39.9 million to $294.5 million; and 
 
 
 
 
Stockholders' equity and tangible book value at June 30, 2019, were  $351.7 million and  $278.1 million (or  $15.08 per basic share), respectively.
 
For the second half of 2019, our focus will be on identifying opportunities to improve the performance of our one-way truckload service offerings and adding profitable contract logistics service customers with more predictable long-term contracts in our dedicated truckload, transportation management and warehousing service offerings.
 
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, expressed as a percentage of revenue, excluding 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. 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 June 30,
   
Six months ended June 30,
 
GAAP Operating Ratio:
 
2019
   
OR %
   
2018
   
OR %
   
2019
   
OR %
   
2018
   
OR %
 
Total revenue
 
$
219,298
         
$
196,318
         
$
438,479
         
$
369,884
       
Total operating expenses
   
210,454
     
96.0 %
 
   
182,253
     
92.8%
 
   
424,209
     
96.7%
 
   
349,394
     
94.5%
 
Operating income
 
$
8,844
           
$
14,065
           
$
14,270
           
$
20,490
         
                                                                 
Adjusted Operating Ratio:
   
2019
   
Adj.
OR %
     
2018
   
Adj.
OR %
     
2019
   
Adj.
OR %
     
2018
   
Adj.
OR %
 
Total revenue
 
$
219,298
           
$
196,318
           
$
438,479
           
$
369,884
         
Fuel surcharge revenue
   
(24,381
           
(25,683
           
(47,800
           
(48,787
       
Freight revenue (total revenue, excluding fuel surcharge)
   
194,917
             
170,635
             
390,679
             
321,097
         
                                                                 
Total operating expenses
   
210,454
             
182,253
             
424,209
             
349,394
         
Adjusted for:                                                                
Fuel surcharge revenue
   
(24,381
           
(25,683
           
(47,800
           
(48,787
       
Amortization of intangibles     (731              -                (1,462              -          
Adjusted operating expenses 
   
185,342
     
95.1%
 
   
156,570
     
91.8%
 
   
374,947
     
93.6%
 
   
300,607
     
93.6%
 
Adjusted operating income
 
$
9,575
           
$
14,065
           
$
15,732
           
$
20,490
         
   
 
 
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. Our four service offerings within the Truckload segment are primarily truckload based and as such we generally dedicate an entire trailer to one customer from origin to destination. We also generate revenue through providing ancillary services, including freight brokerage and logistics services, warehousing, and accounts receivable factoring.
 
We have two reportable segments, our truckload services ("Truckload") and freight brokerage, transportation management services, and shuttle and switching services (“Managed Freight”).
 
The Truckload segment consists of four service offerings that are aggregated because they have similar economic characteristics and meet the aggregation criteria.  The four service offerings that comprise our Truckload segment are as follows: (i) Expedited; (ii) Dedicated; (iii) Temperature-Controlled; and (iv) OTR.
 
In our Truckload segment, 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. The main factors that could affect our Truckload 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.
 
Our Truckload segment also derives revenue from fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services.  We measure revenue before fuel surcharges, or "freight revenue," because we believe that fuel surcharges tend to be a volatile source of revenue.  We believe the exclusion of fuel surcharges affords a more consistent basis for comparing the results of operations from period-to-period.  Nonetheless, freight revenue represents a non-GAAP financial measure.  Accordingly, undue reliance should not be placed on the discussion of freight revenue, and discussions of freight revenue should be considered in combination with discussions of total 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.
 
The main expenses that impact the profitability of our Truckload segment 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.  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.
 
Our main measures of profitability are operating ratio and adjusted operating ratio, which we define as operating expenses, net of fuel surcharge revenue, divided by total revenue, less fuel surcharge revenue (or freight revenue) and amortization of intangibles. See page 22 for the uses and limitations associated with adjusted operating ratio.
 
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.
 
Managed Freight is comprised primarily of freight brokerage, transportation management services ("TMS"), and shuttle and switching services. These service offerings are aggregated due to similar margins and customers. Also included within Managed Freight are our warehousing and accounts receivable factoring businesses, neither of which meets the quantitative or qualitative reporting thresholds individually or in the aggregate. but only accounted for  $16.6 million and $4.1 million of our revenue, respectively, during the  six months ended June 30, 2019.
 
Revenue Equipment
 
At June 30, 2019, we operated  3,103 tractors and 6,921 trailers. Of such tractors,  2,213 were owned,  562 were financed under operating leases, and  328 were provided by independent contractors, who provide and drive their own tractors.  Of such trailers,  5,305 were owned, 1 was financed under an operating lease, and  1,615 were financed under finance type leases.  We finance a small portion of our tractor fleet and larger portion of our trailer 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 June 30, 2019, our fleet had an average tractor age of  2.2 years and an average trailer age of 4.1 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 SIX MONTHS ENDED JUNE 30, 2019 TO  THREE AND SIX MONTHS ENDED JUNE 30, 2018
 
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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Revenue:
                       
Freight revenue
 
$
194,917
   
$
170,635
   
$
390,679
   
$
321,097
 
Fuel surcharge revenue
   
24,381
     
25,683
     
47,800
     
48,787
 
Total revenue
 
$
219,298
   
$
196,318
   
$
438,479
   
$
369,884
 
 
For the quarter ended June 30, 2019, total revenue  increased approximately $23.0 million, or 11.7%, to  $219.3 million from  $196.3 million in the  2018 quarter. Freight revenue  increased approximately $24.3 million, or 14.2%, to  $194.9 million for the quarter ended June 30, 2019, from  $170.6 million in the 2018 quarter, while fuel surcharge revenue  decreased  $1.3 million quarter-over-quarter. The  increase in freight revenue resulted from an  $18.3 million  increase in freight revenue from our Managed Freight segment and a  $6.2 million  increase in freight revenue from our Truckload segment.
 
The  $6.2 million  increase in Truckload revenue relates to a  486 (or 18.7%) average tractor increase, offset by a  12.2%  decrease in average freight revenue per tractor per week from the 2018 quarter. Landair contributed  $20.6 million of freight revenue to consolidated Truckload operations for the quarter ended June 30, 2019, and the July 2018 acquisition was primarily responsible for the increase in average tractors. The decrease in average freight revenue per tractor per week for the quarter ended June 30, 2019 is the result of an  11.3%   decrease in average miles per unit, and a  1.8 cents per mile (or 1.0%)  decrease in average rate per total mile compared to the 2018 quarter. Landair’s shorter average length of haul and dedicated contract, solo-driven truck operations generally produce higher revenue per loaded mile and fewer miles per unit than our other truckload business units. Team-driven trucks  decreased to an average of  842 teams in the second quarter of 2019, a  decrease of approximately  4.1% from the average of  878 teams in the second quarter of 2018.
 
For the six-month period ended June 30, 2019, total revenue increased $68.6 million, or 18.5%, to $438.5 million from $369.9 million in the 2018 period.  Freight revenue increased $69.6 million, or 21.7%, to $390.7 million for the six months ended June 30, 2019, from $321.1 million in the 2018 period, while fuel surcharge revenue decreased $1.0 million period-over-period. The increase in freight revenue resulted from a $45.5 million increase in freight revenue from our Managed Freight segment, primarily from our Landair acquisition, as well as a $24.1 million increase in freight revenue from our Truckload segment.
 
The $24.1 million increase in Truckload freight revenue relates to a 523 (or 20.2%) average tractor increase, offset by 9.6% decrease in average freight revenue per tractor per week from the 2019 period.  Landair contributed $40.5 million of freight revenue to the consolidated Truckload operations for the six months ended June 30, 2019 and the July 2018 acquisition was primarily responsible for the increase in average tractors.  The decrease in average freight revenue per tractor per week for the six months ended June 30, 2019 is the result of an 11.9% decrease in average miles per unit partially offset by a 4.8 cents per mile increase in average rate per total mile.  Team driven units decreased approximately 3.7% to an average of 853 for the six-month period ended June 30, 2019 compared to an average of 886 teams during the same 2018 period.
 
Managed Freight total revenue increased   $18.3 million comparing the  2019 and  2018 quarters, and  $45.8 million comparing the 2019 period and 2018 period, primarily as a result of Landair’s contribution of  $21.4 million and  $41.7 million, respectively, to combined Managed Freight operations, partially offset by a $4.2 million reduction in revenue from our brokerage subsidiary in the 2019 quarter, compared with 2018. Additionally, our brokerage subsidiary contributed $2.0 million more revenue for the six months ended June 30, 2019 compared to the same 2018 period.
 
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. As it relates to the comparison of expenses to freight revenue, we believe removing fuel surcharge revenue, which is sometimes a volatile source of revenue, affords a more consistent basis for comparing the results of operations from period-to-period. Nonetheless, freight revenue represents a non-GAAP financial measure. Accordingly, undue reliance should not be placed on the discussion of freight revenue, and discussions of freight revenue should be considered in combination with discussions of total 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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Salaries, wages, and related expenses
 
$
75,781
   
$
64,633
   
$
155,284
   
$
125,253
 
% of total revenue
   
34.6
%
   
32.9
%
   
35.4
%
   
33.9
%
% of freight revenue
   
38.9
%
   
37.9
%
   
39.7
%
   
39.0
%
 
Salaries, wages, and related expenses  increased approximately $11.1 million, or 17.2%, for the  three months ended June 30, 2019, compared with the same quarter in 2018. As a percentage of total revenue, salaries, wages, and related expenses  increased to  34.6% of total revenue for the three months ended June 30, 2019, from  32.9% in the same quarter in 2018. As a percentage of freight revenue, salaries, wages, and related expenses  increased to  38.9% of freight revenue for the three months ended June 30, 2019, from  37.9% in the same quarter in 2018.
 
For the six months ended June 30, 2019, salaries, wages, and related expenses increased approximately $30.0 million, or 24.0%, compared with the same period in 2018.  As a percentage of total revenue, salaries, wages, and related expenses increased to 35.4% of total revenue for the six months ended June 30, 2019, from 33.9% for the six months ended June 30, 2018.  As a percentage of freight revenue, salaries, wages, and related expenses increased to 39.7% of freight revenue for the six months ended June 30, 2019, from 39.0% in the same period in 2018.
 
These  increases are primarily due to increased headcount from the Landair acquisition, as well as driver and non-driver pay increases since the first quarter of 2018.
 
When compared to periods prior to the Landair acquisition, we expect salaries, wages and related expenses will be higher as a result of the increased headcount resulting from the Landair acquisition. We believe salaries, wages, and related expenses will increase going forward as a result of a tight driver market, which continues to offer significant challenges, wage inflation, higher healthcare costs, and, in certain periods, increased incentive compensation due to better performance. In particular, we expect driver pay to increase as we look to reduce the number of unseated tractors in our fleet in a tight market for drivers. Additionally, as freight market rates continue to increase, 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 segment, for which payments are reflected in the purchased transportation line item.
 
Fuel expense
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Fuel expense
 
$
29,215
   
$
29,209
   
$
57,047
   
$
56,390
 
% of total revenue
   
13.3
%
   
14.9
%
   
13.0
%
   
15.2
%
% of freight revenue
   
15.0
%
   
17.1
%
   
14.6
%
   
17.6
%
 
Total fuel expense remained relatively even at  $29.2 million  for the three months ended  June 30, 2019, compared with the same quarter in 2018. As a percentage of total revenue, total fuel expense  decreased to  13.3% of total revenue for the  three months ended June 30, 2019, from  14.9% in the same quarter in 2018. As a percentage of freight revenue, total fuel expense  decreased to  15.0% of freight revenue for the  three months ended June 30, 2019, as compared to  17.1% for the 2018 quarter. 
 
For the six months ended June 30, 2019, total fuel expense increased approximately $0.7 million, or 1.4%, compared with the same period in 2018.  As a percentage of total revenue, total fuel expense decreased to 13.0% of total revenue for the six months ended June 30, 2019, from 15.2% in the 2018 period.  As a percentage of freight revenue, total fuel expense decreased to 14.6% of freight revenue from 17.6% for the six months ended June 30, 2019, compared to the 2018 period. 
 
We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire increase in fuel prices 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 remained relatively flat in the second quarter of 2019 compared with the same quarter in 2018, at $3.12 per gallon and decreased to $3.07 from $3.18 for the six months ended June 30, 2019 and 2018 respectively.
 
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
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2019
   
2018
   
2019
   
2018
 
Total fuel surcharge
 
$
24,381
   
$
25,683
   
$
47,800
   
$
48,787
 
Less: Fuel surcharge revenue reimbursed to independent contractors and other third parties
   
3,038
     
3,231
     
5,980
     
5,826
 
Company fuel surcharge revenue
 
$
21,343
   
$
22,452
   
$
41,820
   
$
42,961
 
Total fuel expense
 
$
29,215
   
$
29,209
   
$
57,047
   
$
56,390
 
Less: Company fuel surcharge revenue
   
21,343
     
22,452
     
41,820
     
42,961
 
Net fuel expense
 
$
7,872
   
$
6,757
   
$
15,227
   
$
13,429
 
% of freight revenue
   
4.0
%
   
4.0
%
   
3.9
%
   
4.2
%
 
 
 
Net fuel expense  increased  $1.1 million, or 16.5%, and  $1.8 million, or  13.4% for the quarter and  six months ended June 30, 2019, as compared to the same 2018 periods. As a percentage of freight revenue, net fuel expense remained relatively even at  4.0% and  3.9% for the quarter and six months ended June 30, 2019, as compared to the 2018 periods. The change in net fuel expense is primarily due to a lack of the favorable fuel hedging activity that was present in the 2018 periods.  We have not had any fuel hedges in place since December 2018.
 
We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. 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 by refrigerated operation (which uses diesel fuel for refrigeration, but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.
Given recent historical lows, we would expect diesel fuel prices to increase over the next few years. However, we expect to continue to experience improved fuel economy as we upgrade our tractor fleet, and while our fuel surcharge recovery has remained relatively flat, the possibility of further improvement exists if efforts to grow our dedicated business are successful.
 
Operations and maintenance
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Operations and maintenance
 
$
14,898
   
$
12,595
   
$
30,072
   
$
24,325
 
% of total revenue
   
6.8
%
   
6.4
%
   
6.9
%
   
6.6
%
% of freight revenue
   
7.6
%
   
7.4
%
   
7.7
%
   
7.6
%
 
Operations and maintenance increased approximately $2.3 million, or 18.3% and $5.7 million, or 23.6%, for the quarter and six months ended June 30, 2019, compared with the same periods in 2018. As a percentage of total revenue, operations and maintenance increased to 6.8% and 6.9% of total revenue for the quarter and six months ended June 30, 2019, from 6.4% and 6.6% in the same periods in 2018. As a percentage of freight revenue, operations and maintenance increased to 7.6% and 7.7% of freight revenue for the quarter and six months ended June 30, 2019, from 7.4% and 7.6%in the same periods in 2018. These increases were primarily the result of the acquisition of Landair and its respective higher average age of tractor and trailer equipment.
 
Going forward, we believe this category will fluctuate based on several factors, including expected upgrades to Landair’s fleet, our continued ability to maintain a relatively young fleet in our other operating companies, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models.
 
Revenue equipment rentals and purchased transportation
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Revenue equipment rentals and purchased transportation
 
$
47,169
   
$
37,388
   
$
95,839
   
$
68,079
 
% of total revenue
   
21.5
%
   
19.0
%
   
21.9
%
   
18.4
%
% of freight revenue
   
24.2
%
   
21.9
%
   
24.5
%
   
21.2
%
 
Revenue equipment rentals and purchased transportation  increased approximately $9.8 million, or 26.2%, for the  three months ended June 30, 2019, compared with the same quarter in 2018. As a percentage of total revenue, revenue equipment rentals and purchased transportation  increased to  21.5% of total revenue for the  three months ended June 30, 2019, from  19.0% in the same quarter in 2018. As a percentage of freight revenue, revenue equipment rentals and purchased transportation  increased to  24.2% of freight revenue for the three months ended June 30, 2019, from  21.9% in the same quarter in 2018.
 
For the six months ended June 30, 2019, revenue equipment rentals and purchased transportation increased approximately $27.8 million, or 40.8%, compared with the same period in 2018.  As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 21.9% of total revenue for the six months ended June 30, 2019, from 18.4% in the same period in 2018.  As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 24.5% of freight revenue for the six months ended June 30, 2019, from 21.2% in the same period in 2018. 
 
These increases were primarily the result of the acquisition of Landair's managed freight business, which added to overall purchased transportation cost but is less reliant on purchased transportation to generate revenue, compared to our existing brokerage and logistics services. Additionally, we experienced increases due to a more competitive market for sourcing third-party capacity in our existing Managed Freight segment, primarily in the first quarter of 2019. Further, the percentage of the total miles run by independent contractors increased from 11.0% and 11.9% for the three and six months ended June 30, 2018, respectively, to 12.6% and 12.8% for the same 2019 periods.
 
We expect revenue equipment rentals to decrease going forward as a result of our increase in acquisition of revenue equipment through finance leases rather than operating leases, particularly as we transition Landair from operating leases to owned equipment. As discussed below, this decrease may be partially or fully offset by an increase in purchased transportation, as we expect to continue to grow our Managed Freight segment, as well as a result of reduced capacity.
 
We expect purchased transportation to increase as we seek to grow our Managed Freight segment. 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 were to tighten 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. We continue to actively recruit independent contractors and, if we are successful, we would expect this line item to increase as a percentage of revenue.
Operating taxes and licenses  
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Operating taxes and licenses
 
$
3,365
   
$
2,613
   
$
6,549
   
$
5,273
 
% of total revenue
   
1.5
%
   
1.3
%
   
1.5
%
   
1.4
%
% of freight revenue
   
1.7
%
   
1.5
%
   
1.7
%
   
1.6
%
 
For the periods presented, the changes in operating taxes and licenses were not significant as either a percentage of total revenue or freight revenue.
 
Insurance and claims
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Insurance and claims
 
$
10,472
   
$
9,908
   
$
21,707
   
$
18,593
 
% of total revenue
   
4.8
%
   
5.0
%
   
5.0
%
   
5.0
%
% of freight revenue
   
5.4
%
   
5.8
%
   
5.6
%
   
5.8
%
 
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims,  increased approximately $0.6 million, or  5.7%  for the  three months ended June 30, 2019 compared with the same quarter in 2018. As a percentage of total revenue, insurance and claims  decreased to  4.8% of total revenue for the  three months ended June 30, 2019, from  5.0% in the same quarter in 2018. As a percentage of freight revenue, insurance and claims  decreased to 5.4% of freight revenue for the three months ended June 30, 2019, from  5.8% in the same quarter in 2018. Insurance and claims per mile cost remained relatively even at  12.4 cents per mile in the second quarter of 2019 compared to  12.6 cents per mile in the second quarter of 2018. 
For the six months ended June 30, 2019, insurance and claims increased approximately $3.1 million, or 16.7%, compared with the same period in 2018.  As a percentage of total revenue, insurance and claims remained flat at 5.0% of total revenue for the six months ended June 30, 2019 compared to the same 2018 period. As a percentage of freight revenue, insurance and claims decreased slightly to 5.6% of freight revenue for the six months ended June 30, 2019, compared to 5.8% for the same period in 2018. Insurance and claims cost per mile increased to 13.1 cents per mile in the six months ended June 30, 2019 from 12.1 cents per mile in the same 2018 period. The per mile increase is primarily the result of development on prior period claims during the six months ended June 30, 2019, partially offset by decreased frequency of accidents compared to the same 2018 period. Our rate of chargeable accidents per million miles, as measured by the U.S. Department of Transportation, decreased by 8.0% for the six months ended June 30, 2019 compared to the same 2018 period.
Our auto liability (personal injury and property damage), cargo, and general liability insurance programs include significant self-insured retention amounts. We are also self-insured for physical damage to our equipment. Because of these significant self-insured exposures, insurance and claims expense may fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-existing reserves, could adversely affect our financial condition and results of operations. We periodically evaluate strategies to efficiently reduce our insurance and claims expense. The auto liability policy contains a feature whereby we are able to retroactively obtain a partial refund of the premium in exchange for taking on the liability for incidents that occurred during the period and releasing the insurers. This is referred to as "commuting" the policy or "policy commutation." In several past periods we have commuted the policy, which has lowered our insurance and claims expense. We intend to evaluate our ability to commute the current policy and any such commutation could significantly impact insurance and claims expense. Our prior auto liability policy that ran from October 1, 2014 through March 31, 2018, included a commutation provision if we were to commute the policy for the entire 42 months. Based on claims paid to date the policy premium release refund could range from zero to $4.9 million, depending on actual claims settlements in the future. Effective April 2018, we entered into new auto liability policies with a three-year term. The policy includes a limit for a single loss of $9.0 million, an aggregate of $18.0 million for each policy year, and a $30.0 million aggregate for the 36 month term ended March 31, 2021. The policy includes a policy release premium refund or commutation option of up to $14.0 million, less any future amounts paid on claims by the insurer. A decision with respect to commutation of the policy could be made before April 1, 2021. Management cannot predict whether or not future claims or the development of existing claims will justify a commutation of either policy period, and accordingly, no related amounts were recorded at June 30, 2019.
 
Communications and utilities
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
Communications and utilities
 
$
1,760
   
$
1,666
   
$
3,478
   
$
3,406
 
% of total revenue
   
0.8
%
   
0.8
%
   
0.8
%
   
0.9
%
% of freight revenue
   
0.9
%
   
1.0
%
   
0.9
%
   
1.1
%
 
For the periods presented, the changes in communications and utilities were not significant as either a percentage of total revenue or freight revenue.
 
General supplies and expenses
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
General supplies and expenses
 
$