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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2020

or

 

 

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

 

For the transition period from                        to

 

Commission File Number: 0-24960

 

COVENANT LOGISTICS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

88-0320154

(State or other jurisdiction of incorporation

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

or organization)

 
   

400 Birmingham Hwy.

 

Chattanooga, TN

37419

(Address of principal executive offices)

(Zip Code)

 

423-821-1212

(Registrant's telephone number, including area code)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
$0.01 Par Value Class A common stock CVLG 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 ☒

No ☐

 

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

 

Yes ☒

No ☐

 

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

 

Large accelerated filer  ☐

  

Accelerated filer ☒

Non-accelerated filer   ☐

Smaller reporting company ☒

 

Emerging growth company ☐

 

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

 

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

 

Yes ☐

No ☒


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

 

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

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

 

Page 1

 

 
 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

   

Page

Number

Item 1.

Financial Statements

 
     
 

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

Page 3
     
 

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

Page 4
     
 

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

Page 5
     
 

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

Page 6
     
 

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

Page 7
     
 

Notes to Condensed Consolidated Financial Statements (unaudited)

Page 8
     

Item 2.

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

Page 21
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Page 36
     

Item 4.

Controls and Procedures

Page 37
 

PART II

OTHER INFORMATION

   

Page

Number

     

Item 1.

Legal Proceedings

Page 38
     

Item 1A.

Risk Factors

Page 39
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Page 39
     

Item 3.

Defaults Upon Senior Securities

Page 39
     

Item 4.

Mine Safety Disclosures

Page 39
     

Item 5.

Other Information

Page 39
     

Item 6.

Exhibits

Page 40

 

Page 2

 

  

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

   

June 30, 2020

   

December 31, 2019

 
   

(unaudited)

       

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 67,127     $ 43,591  

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

    74,880       81,205  

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

    20,929       8,507  

Inventory and supplies

    3,571       4,210  

Prepaid expenses

    10,415       11,707  

Assets held for sale

    66,005       12,010  

Income taxes receivable

    4,566       5,403  

Other short-term assets

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

Total current assets

    346,339       254,385  
                 

Property and equipment, at cost

    523,677       725,383  

Less: accumulated depreciation and amortization

    (130,725 )     (208,180 )

Net property and equipment

    392,952       517,203  
                 

Goodwill

    42,518       42,518  

Other intangibles, net

    26,822       29,615  

Other assets, net

    52,458       37,919  
                 

Total assets

  $ 861,089     $ 881,640  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Checks outstanding in excess of bank balances

  $ 613     $ 592  

Accounts payable

    18,514       19,500  

Accrued expenses

    37,896       31,840  

Current maturities of long-term debt

    53,482       54,377  

Current portion of finance lease obligations

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

Current portion of insurance and claims accrual

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

Total current liabilities

    166,098       161,257  
                 

Long-term debt

    216,632       200,177  

Long-term portion of finance lease obligations

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

Insurance and claims accrual

    37,036       20,295  

Deferred income taxes

    70,563       80,330  

Other long-term liabilities

    7,995       2,578  

Total liabilities

    554,158       531,529  

Commitments and contingent liabilities

    -       -  

Stockholders' equity:

               

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

    173       173  

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

    24       24  

Additional paid-in-capital

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

Accumulated other comprehensive loss

    (2,964 )     (1,014 )

Retained earnings

    184,487       209,043  

Total stockholders' equity

    306,931       350,111  

Total liabilities and stockholders' equity

  $ 861,089     $ 881,640  

 

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

 

Page 3

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(In thousands, except per share data)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

(unaudited)

   

(unaudited)

 
   

2020

   

2019

   

2020

   

2019

 

Revenues

                               

Freight revenue

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

Fuel surcharge revenue

    12,125       24,381       33,357       47,800  

Total revenue

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

Operating expenses:

                               

Salaries, wages, and related expenses

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

Fuel expense

    15,938       29,215       41,202       57,047  

Operations and maintenance

    12,218       14,898       25,044       30,072  

Revenue equipment rentals and purchased transportation

    47,011       47,169       93,073       95,839  

Operating taxes and licenses

    3,123       3,365       6,576       6,549  

Insurance and claims

    11,562       10,471       27,174       21,705  

Communications and utilities

    1,782       1,760       3,351       3,478  

General supplies and expenses

    11,536       7,205       19,894       13,909  

Depreciation and amortization

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

Total operating expenses

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

Operating (loss) income

    (28,950 )     7,030       (30,404 )     10,976  

Interest expense, net

    2,084       1,978       3,983       3,850  

(Income) loss from equity method investment

    (530 )     (2,375 )     205       (5,410 )

(Loss) income before income taxes

    (30,504 )     7,427       (34,592 )     12,536  

Income tax (benefit) expense

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

Net (loss) income

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

(Loss) income from continuing operations

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

Basic weighted average shares outstanding

    17,089       18,438       17,584       18,410  

Diluted weighted average shares outstanding

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

 

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

 

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

 

Page 4

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

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

(In thousands)

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net (loss) income

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

Other comprehensive (loss) income:

                               
                                 

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

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

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

    336       (9 )     377       (19 )
                                 

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

    36       11       36       21  

Total other comprehensive income (loss)

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

Comprehensive (loss) income

  $ (21,943 )   $ 5,381     $ (26,506 )   $ 9,382  

 

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

 

Page 5

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

(Unaudited and in thousands)

 

   

For the Three and Six Months Ended June 30, 2020

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

(Loss)

   

Earnings

   

Equity

 
                                                         

Balances at December 31, 2019

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

Net loss

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

Share repurchase

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

Stock-based employee compensation expense

    -       -       466       -       -       -       466  

Issuance of restricted shares, net

    -       -       (6 )     -       -       -       (6 )

Balances at March 31, 2020

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

Other comprehensive income

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

 

   

For the Three and Six Months Ended June 30, 2019

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

(Loss)

   

Earnings

   

Equity

 
                                                         

Balances at December 31, 2018

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

Net income

    -       -       -       -       -       4,433       4,433  

Other comprehensive loss

    -       -       -       -       (432 )     -       (432 )

Stock-based employee compensation expense

    -       -       1,262       -       -       -       1,262  

Issuance of restricted shares, net

    1       -       (669 )     -       -       -       (668 )

Balances at March 31, 2019

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

 

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

 

Page 6

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE six months ended June 30, 2020 and 2019

(In thousands)

 

    Six Months Ended June 30,  
   

2020

   

2019

 
Cash flows from operating activities:                

Net (loss) income

  $ (24,556 )   $ 10,504  

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

               

Provision for (reversal of losses on) accounts receivable

    3,355       (32 )

Reversal of deferred gain on sales to equity method investee

    (2 )     (7 )

Depreciation and amortization

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

Amortization of deferred financing fees

    73       73  

Deferred income tax (benefit) expense

    (9,139 )     3,221  

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

    17       668  

Stock-based compensation expense (reversal)

    822       (171 )

Loss (income) from equity method investment

    205       (5,410 )

Gain on disposition of property and equipment

    (4,946 )     (1,386 )

Return on investment in available-for-sale securities

    (2 )     (7 )

Changes in operating assets and liabilities:

               

Receivables and advances

    (34,802 )     164  

Prepaid expenses and other assets

    2,093       (2,971 )

Inventory and supplies

    639       (75 )

Insurance and claims accrual

    18,751       (4,255 )

Accounts payable and accrued expenses

    7,172       (17,145 )

Net cash flows provided by operating activities

    24,102       23,597  
                 

Cash flows from investing activities:

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

Acquisition of property and equipment

    (46,991 )     (79,125 )

Proceeds from disposition of property and equipment

    51,479       15,569  

Net cash flows provided by (used in) investing activities

    4,083       (65,336 )
                 

Cash flows from financing activities:

               

Change in checks outstanding in excess of bank balances

    21       (247 )

Proceeds from issuance of notes payable

    55,345       57,555  

Repayments of notes payable

    (39,859 )     (19,733 )

Repayments of finance lease obligations

    (2,661 )     (2,876 )

Proceeds under revolving credit facility

    803,397       843,398  

Repayments under revolving credit facility

    (803,397 )     (829,995 )

Payment of minimum tax withholdings on stock compensation

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

Net cash flows (used in) provided by financing activities

    (4,649 )     47,435  
                 

Net change in cash and cash equivalents

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

 

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

 

Page 7

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.

Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

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

 

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

 

Change in Estimates

 

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

 

Risks and Uncertainties

 

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

 

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

 

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

 

 

Page 8

 

Property and Equipment

 

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

 

Recent Accounting Pronouncements

 

Accounting Standards not yet adopted

 

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

 

Page 9

 

 

 

Note 2.

(Loss) Income Per Share

 

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

 

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

 

(in thousands except per share data)

 

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Numerators:

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

Net (loss) income

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

Denominator:

                               

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

    17,089       18,438       17,584       18,410  

Effect of dilutive securities:

                               

Equivalent shares issuable upon conversion of unvested restricted shares

    -       168       -       160  

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

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

Net (loss) income per share:

                               

(Loss) income from continuing operations

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

 

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

Page 10

 

 

 

Note 3.

Discontinued Operations

 

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

 

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

 

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

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

 

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

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

(in thousands)

 

June 30, 2020

   

December 31, 2019

 

Current assets:

               

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

  $ 98,131     $ 86,620  

Current assets of discontinued operations

    98,131       86,620  
                 

Current liabilities:

               

Accounts payable

    5,494       6,245  

Current liabilities of discontinued operations

  $ 5,494     $ 6,245  

 

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

 

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

 

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

 

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

 

Page 11

 
 

Note 4.

Segment Information

 

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

 

Our remaining reportable segments are as follows:

 

 

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

o

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

 

o

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

 

 

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

 

 

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

 

o

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

 

o

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

 

o

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

 

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

 

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

 

(in thousands)

 

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

Highway Services

                               

Expedited

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

OTR

    11,871       24,433       30,435       51,139  

Total Highway Services

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

Dedicated

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

Managed Freight:

                               

Brokerage

    28,443       20,277       50,222       44,583  

TMS

    5,919       9,431       14,877       17,801  

Warehousing

    11,609       11,924       23,737       23,920  

Total Managed Freight

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

Total revenues

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


 

Page 12

 

 

Note 5.

Income Taxes

 

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

 

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

 

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

 

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

 

 

Note 6.

Restructuring and Cost Savings Initiatives

 

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

 

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

 

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

 

(in thousands)

 

Description

 

Amount

  Segment(s) Impacted

Value Determination

Revenue equipment

  $ 16,779   Highway Services and Dedicated

Third Party Market Appraisal

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

    7,319   Highway Services and Dedicated

Third Party Market Appraisal

Leased office facility, Chattanooga, TN

    2,236   Managed Freight

Loss on ROU Asset and Leasehold Improvements

Training and orientation center, Chattanooga, TN

    235   Highway Services and Dedicated

Quoted Market Price

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

  $ 26,569      

 

Page 13

 

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

 

(in thousands)

 

Description

 

Amount

  Segment(s) Impacted

Statement of Operations Line Item

Gain on sale of Hutchins, TX terminal

  $ (5,712 ) Highway Services and Dedicated

Gain on disposition of property and equipment, net

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

Abandonment of information technology infrastructure and applications

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

General supplies and expenses

Total

  $ (22 )    

 

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

 

Page 14

 

 

Note 7.

Debt

 

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

 

(in thousands)

 

June 30, 2020

   

December 31, 2019

 
   

Current

   

Long-Term

   

Current

   

Long-Term

 

Borrowings under Credit Facility

  $ -     $ -     $ -     $ -  

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

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

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

    1,116       22,106       1,093       22,670  

Deferred loan costs

    (80 )     -       (147 )     (7 )

Total debt

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

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

    7,125       25,609       7,258       26,010  

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

    18,407       30,225       19,460       40,882  

Total debt and lease obligations

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Page 15

 

 

 

Note 8.

Lease Obligations

 

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

 

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

 

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

 

(dollars in thousands)

 

Three Months Ended

   

Three Months Ended

   

Six Months Ended

   

Six Months Ended

 
   

June 30, 2020

   

June 30, 2019

   

June 30, 2020

   

June 30, 2019

 
                                 

Finance lease cost:

                               

Amortization of right-of-use assets

  $ 968     $ 1,408     $ 2,005     $ 2,819  

Interest on lease liabilities

    278       206       525       433  

Operating lease cost

    7,445       5,475       14,047       11,657  

Variable lease cost

    156       -       314       -  
                                 

Total lease cost

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

Other information

                               

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

                               

Operating cash flows from finance leases

    968       1,297       2,005       2,443  

Operating cash flows from operating leases

    7,601       5,475       14,361       11,657  

Financing cash flows from finance leases

    278       206       525       433  

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

    2,127       -       2,127       -  

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

    2,176       3,089       2,637       6,325  

Weighted-average remaining lease term—finance leases

 

2.4 years

                         

Weighted-average remaining lease term—operating leases

 

2.7 years

                         

Weighted-average discount rate—finance leases

    3.3 %                        

Weighted-average discount rate—operating leases

    5.2 %                        

 

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

 

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

 

(in thousands)

 

Operating

   

Finance

 
2020 (1)   $ 10,885     $ 8,076  

2021

    18,682       8,548  

2022

    15,713       9,580  

2023

    6,869       7,524  

2024

    28       1,212  

Thereafter

    9       -  

Total minimum lease payments

  $ 52,186     $ 34,940  

Less: amount representing interest

    (3,554 )     (2,206 )

Present value of minimum lease payments

  $ 48,632     $ 32,734  

Less: current portion

    (18,407 )     (7,125 )

Lease obligations, long-term

  $ 30,225     $ 25,609  

 

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

 

Page 16

 

 

 

Note 9.

Stock-Based Compensation

 

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

 

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

 

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

 

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

 

 

Note 10.

Commitments and Contingencies

 

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

 

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

 

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

 

Page 17

 

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

 

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

 

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

 

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

 

 

Note 11.

Equity Method Investment

 

We own a minority investment in Transport Enterprise Leasing, LLC ("TEL"). TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have not guaranteed any of TEL's debt and have no obligation to provide funding, services, or assets. TEL’s majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. We sold no tractors or trailers to TEL during the six-months ended June 30, 2020 and 2019, and we received $4.4 million and $4.6 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 for the six-months ended June 30, 2020 and 2019, 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, 2020, are being carried as a reduction in our investment in TEL.  At  June 30, 2020 and  December 31, 2019, we had accounts receivable from TEL of $1.2 million and $1.3 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 2020 net loss through June 30, 2020, or $0.2 million. We received no equity distribution from TEL during the six-months ended June 30, 2020 and 2019.  Our investment in TEL, totaling $31.7 million and $31.9 million, at June 30, 2020 and December 31, 2019, 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,

 
   

2020

   

2019

 

Total Assets

  $ 348,506     $ 374,591  

Total Liabilities

    293,079       318,743  

Total Equity

  $ 55,427     $ 55,848  

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue

  $ 23,997     $ 24,505     $ 49,218     $ 48,715  

Cost of Sales

    2,815       3,417       7,584       10,911  

Operating Expenses

    17,649       13,635       36,525       28,088  

Operating Income

    3,533       7,453       5,109       9,716  

Net Income (Loss)

  $ 1,021     $ 4,792     $ (421 )   $ 6,482  

 

Page 18

 

 

 

Note 12.

Goodwill and Other Assets

 

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

 

As a result of management compensation structure changes and a change in the branding strategy of the organization, the Company revised the estimated remaining useful life of the Landair trade name to 15 months as of June 30, 2020. At the end of its useful life, the Landair trade name will have a residual value of $0.5 million. The non-compete agreement with a former Landair executive was terminated during the second quarter of 2020. These changes resulted in additional amortization of $1.3 million during the second quarter of June 30, 2020, or a $1.0 million, or $0.06 per diluted share, increase in net loss. The remaining useful lives as adjusted are included in the summary of other intangible assets below.

 

As of  June 30, 2020 and December 31, 2019, we had goodwill of $42.5 million.

 

A summary of other intangible assets as of  June 30, 2020 and  December 31, 2019 is as follows:

 

(in thousands)

 

June 30, 2020

 
   

Gross intangible assets

   

Accumulated amortization

   

Net intangible assets

   

Remaining life (months)

 

Trade name:

                               

Dedicated

  $ 2,402     $ (588 )   $ 1,814          

Managed Freight

    1,998       (490 )     1,508          

Total trade name

    4,400       (1,078 )     3,322       15  

Non-compete agreement:

                               

Dedicated

    914       (914 )     -          

Managed Freight

    486       (486 )     -          

Total non-compete agreement

    1,400       (1,400 )     -       -  

Customer relationships:

                               

Dedicated

    14,072       (2,345 )     11,727          

Managed Freight

    14,128       (2,355 )     11,773          

Total customer relationships:

    28,200       (4,700 )     23,500       120  

Total other intangible assets

  $ 34,000     $ (7,178 )   $ 26,822          

 

(in thousands)

 

December 31, 2019

 
   

Gross intangible assets

   

Accumulated amortization

   

Net intangible assets

   

Remaining life (months)

 

Trade name:

                               

Dedicated

  $ 2,402     $ (240 )   $ 2,162          

Managed Freight

    1,998       (200 )     1,798          

Total trade name

    4,400       (440 )     3,960       162  

Non-Compete agreement:

                               

Dedicated

    914       (274 )     640          

Managed Freight

    486       (146 )     340          

Total non-compete agreement

    1,400       (420 )     980       42  

Customer relationships:

                               

Dedicated

    14,072       (1,759 )     12,313          

Managed Freight

    14,128       (1,766 )     12,362          

Total customer relationships:

    28,200       (3,525 )     24,675       126  

Total other intangible assets

  $ 34,000     $ (4,385 )   $ 29,615          

 

The above intangible assets have a weighted average remaining life of 107 months as of June 30, 2020, compared to 128 months as of December 31, 2019, as a result of the change in estimated useful life as discussed above.  The expected amortization of these assets for the remainder of 2020 and the next five successive years is as follows:

 

   

(in thousands)

 

2020 (1)

  $ 2,304  

2021

    4,043  

2022

    2,350  

2023

    2,350  

2024

    2,350  
2025     2,350  

Thereafter

    10,575  

 

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

 

Page 19

 

 

Note 13.

Equity

 

On February 10, 2020, the Company announced that the Board approved the repurchase of up to $20.0 million worth of the Company's outstanding common stock.  The program was suspended on March 26, 2020, with approximately $2.5 million worth of the shares remaining authorized for purchase. There were 1.4 million shares repurchased in the open market for $17.5 million during the three months ended March 31, 2020. There were no changes to the stock repurchase program during the three months ended June 30, 2020. The Company has the ability to reinstate the stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors.

 

 

Note 14.

Liquidity

 

Our business requires significant capital investments over the short-term and the long-term. We generally finance our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. We had working capital (total current assets less total current liabilities) of $180.2 million and $93.1 million at June 30, 2020 and December 31, 2019, respectively. Based on our expected financial condition, net capital expenditures, and results of operations and related net cash flows, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs for at least the next year.

 

As of June 30, 2020, we had no borrowings outstanding, undrawn letters of credit outstanding of approximately $36.7 million, and available borrowing capacity of $58.3 million under the Credit Facility. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment.

 

As part of our strategic focus to reduce overhead costs and in response to the uncertainty of the upcoming economic environment as a result of COVID-19, we have begun taking measures to preserve our liquidity, including capital reductions, financing, cost reduction, and working capital actions.  Additionally, we have other potential flexible sources of liquidity that we can leverage if needed, such as currently unencumbered owned revenue equipment.

 

 

Note 15.

Subsequent Events

 

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

 

On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our Factoring reportable segment. The sale consisted primarily of $103.3 million of net accounts receivable, which included $108.7 million of gross accounts receivable, less advances and rebates of $5.4 million.  The Factoring reportable segment has been classified as discontinued operations for financial reporting purposes.

 

The Company and the purchaser of TFS’ assets are involved in a dispute related to the disposition. The purchaser asserts that, subsequent to the closing, it identified that approximately $66.0 million of the assets acquired  related to advances against future payments to be made pursuant to long-term contractual arrangements between the obligor on such contracts and TFS’ clients for services that had not yet been performed (as opposed to advances against future payments for services that had been performed), that this fact was not disclosed to the purchaser, and the purchase of such advances was not contemplated by the purchase agreement. The Company is engaged in discussions to determine whether this dispute can be amicably resolved and is also evaluating other options should the discussions not produce an amicable resolution. It is too early to determine the likely outcome of this dispute, any liability or expenses the Company may incur, any cash the Company may need to pay or invest, any impact on the Company’s total leverage, or the gain or loss the Company ultimately may record on the transaction compared with the $26.5 million gain previously estimated. The facts are still being gathered, and a solution that is acceptable to both companies may or may not be found. See "Item 1A. Risk Factors," set forth in this Form 10-Q for additional details.

 

Page 20

 

 

 

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

 

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

 

This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended.  All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing.  In this Form 10-Q, statements relating to future reclassification of losses arising from derivative instruments and the performance of counterparties to such instruments, future impact of accounting standards, future third-party transportation provider expenses, future tax rates, expenses, and deductions, expected freight demand and volumes and trucking industry conditions, potential results of a default and testing of our fixed charge covenant under the Credit Facility or other debt agreements, expected sources of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), expected capital expenditures, allocations, and requirements, future customer relationships, expected debt reduction, including future interest expense, future driver market conditions, expected cash flows, expected operating income, future investments in and growth of our segments and services, future trucking capacity, future rates and prices, future utilization, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation and the impact of our cost saving measures, expected net fuel costs, strategies for managing fuel costs, the effectiveness and impact of, and cash flows relating to, our fuel 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 finance leases relative to our payment obligations under such operating leases (including residual value guarantees and the proceeds from the sale thereof), the anticipated impact of our investment in TEL, the future impact of our restructuring activities and other strategic initiatives, anticipated levels of and fluctuations relating to insurance, claims, and litigation expenses, , including the erosion of available limits in our aggregate insurance policies and possible additional expense to reinstate certain insurance policies, the impact of the material weakness identified in our internal control over financial reporting, our disposition of the assets of Transport Financial Services, including the dispute arising therefrom and the gain related to such transaction, if any,  and the anticipated impact of the COVID-19 outbreak or other similar outbreaks, among others, are forward-looking statements. Forward-looking statements may be identified by the use of terms or phrases such as "believe," "may," "could," "would," "will," "expects," "estimates," "projects," "anticipates," "plans," " outlook," "focus," "seek," "potential," "continue," "goal," "target," "objective," "intends," derivations thereof, and similar terms and phrases.  Such statements are based on currently available operating, financial, and competitive information.  Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Item 1A. Risk Factors," set forth in this Form 10-Q, in our Form 10-K for the year ended December 31, 2019, and our Form 10-Q for the quarter ended March 31, 2020, as amended.  Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in this Form 10-Q, in our Form 10-K for the year ended December 31, 2019, and our Form 10-Q for the quarter ended March 31, 2020, as amended, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

 

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

 

Executive Overview

 

In the second quarter, we made significant progress in our efforts to restructure our business units, terminal network, and management team to focus our talent, time and capital on areas where we believe we have the ability to grow and produce a consistent, acceptable margin.  The changes are extensive, and we expect them to be ongoing through the end of the year.  In terms of second quarter results, the changes in our business mix, the restructuring gains and charges detailed below, and the impact of COVID-19-related business restrictions, particularly by automotive, airline and certain retail customers, make comparisons difficult. Moreover, certain strategies we implemented reduced our revenue during the quarter while cost savings are expected to be realized on an ongoing basis. Overall, we are pleased with our current position, which features strong liquidity, a de-leveraged balance sheet, lower overhead costs, increased accountability and speed of decision making, and re-aligned business units.

 

The following is a summary of infrequent transactions that occurred during the second quarter of 2020:

 

Gain item:

 

  Gain on sale of Hutchins, TX terminal

$  5.7 million

   

Expense items:

 

  Impairment of revenue generating equipment

$17.6 million*

  Impairment of real estate and related tangible assets

$9.8 million*

  Employee separation costs

$  1.8 million

  Abandonment of information technology infrastructure and applications

$  1.1 million

  Abandonment and change in the useful life of intangible assets

$  1.3 million

  Increase in allowance for bad debt

$  2.6 million

Contract exit costs and other restructuring related professional fees $ 0.7 million

Net strategic restructuring and other second quarter adjustments

$29.2 million

 

* Of the combined $27.4 million, $26.6 million included in impairment on property and equipment and right-of-use asset, while $0.8 million is related to leases and reflected in revenue equipment rentals and purchased transportation. 

 

Page 21

 

As of June 30, 2020, our Factoring segment was classified as discontinued operations as it: (i) is a component of the entity, (ii) meets the criteria as held for sale, and (iii) has a material effect on the Company's operations and financial results. On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of Transport Financial Services (“TFS”), a division of Covenant Transport Solutions LLC, an indirect wholly owned subsidiary of the Company, which included substantially all of the assets and operations of our Factoring segment. Beginning with the period ended June 30, 2020, we have reflected the former Factoring segment as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior periods have been adjusted to conform to the current presentation. 

 

Additional items of note for the  second quarter of   2020 include the following:
 
 

Total revenue of $191.7 million, a decrease of 11.7% compared with the second quarter of 2019, and freight revenue of $179.6 million (which excludes revenue from fuel surcharges), a decrease of 6.8% compared with the second quarter of 2019;

     
 

Operating loss of $29.0 million, compared with operating income of $7.0 million in the second quarter of 2019;

     
 

Net loss of $22.3 million, or $1.31 per basic and diluted share, compared with net income of $6.1 million, or $0.33 per basic and diluted share, in the second quarter of 2019. Net loss from continuing operations of $23.2 million, or $1.36 per basic and diluted share, compared to net income from continuing operations or $0.28 per basic and diluted share, in the second quarter of 2019.  Net income from discontinued operations of $0.8 million, or $0.05 per basic and diluted share, compared to net income from discontinued operations of $0.8 million, or $0.04 per basic and diluted share, in the second quarter of 2019.

     
 

With available borrowing capacity of $58.3 million under our Credit Facility at June 30, 2020, we do not expect to be required to test our fixed charge covenant in the foreseeable future;

     
 

Our Managed Freight reportable segment’s total revenue increased to $46.0 million in the 2020 quarter from $41.6 million in the 2019 quarter and the segment had an operating loss of $2.9 million in the 2020 quarter compared to operating income of $1.8 million in the 2019 quarter;  

     
 

Our equity investment in TEL provided $0.5 million of pre-tax earnings in the second quarter of  2020 and provided $2.4 million in the second quarter of 2019;

     
 

Since December 31, 2019, total indebtedness, net of cash, decreased by $20.2 million to $284.3 million; and 

     
 

Stockholders' equity and tangible book value at June 30, 2020, were $306.9 million and $237.6 million, respectively.

 

COVID-19

 

In March 2020, the World Health Organization declared COVID-19 a global pandemic. The outbreak of COVID-19 has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, increased border and port controls and closures, and shutdowns.

 

During the second quarter, we increased our reserves for uncollectible accounts receivable by approximately $2.6 million as a result of the bankruptcy of one customer and the heightened risk we have on certain of our retail related customers as a result of COVID-19. Local, state and national governments continue to emphasize the importance of transportation and have designated it as an essential service. The health and safety of our team members and the community is our first priority, as such, we've put certain measures into place, including remote work arrangements, enforced social distancing and increased sanitation protocols, among others.

 

We believe we have sufficient liquidity to satisfy our cash needs, however we continue to evaluate and act, as necessary to maintain sufficient liquidity to ensure our ability to operate during these unprecedented times. However, the extent to which COVID-19 could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and will depend on future developments. We will continue to evaluate the nature and extent of these potential impacts to our business.

 

Outlook

 

For the balance of 2020, our main goals will be (i) to continue to optimize our fleet size, monetize a large percentage of the assets held for sale, and further pay down debt, (ii) to allocate our fleet assets across our contract logistics, expedited, and higher margin irregular route operations, (iii) to continue to significantly lower our fixed costs, and (iv) to return managed freight back to its pre-COVID-19 margin percentage.  We believe achieving these goals will position us to enter 2021 with an improved business mix, fleet profile, cost of operation, and leverage ratio.  Pursuing our plan will continue to involve difficult decisions and may result in additional strategic restructuring expenses, in addition to those we normally expect. However, we believe the investment will strengthen our position in the U.S. logistics industry and provide for a less-cyclical business model based on more sustainable, higher margin sectors where we can add value to our partner-customers and for our stakeholders.

Page 22

 

Non-GAAP Reconciliation

 

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

 

Operating Ratio

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

GAAP Operating Ratio:

 

2020

   

OR %

   

2019

   

OR %

   

2020

   

OR %

   

2019

   

OR %

 

Total revenue

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

Total operating expenses

    220,639       115.1 %     210,010       96.8 %     432,906       107.6 %     423,397       97.5 %

Operating income

  $ (28,950 )           $ 7,030             $ (30,404 )           $ 10,976          
                                                                 

Adjusted Operating Ratio:

 

2020

   

Adj. OR %

   

2019

   

Adj. OR %

   

2020

   

Adj. OR %

   

2019

   

Adj. OR %

 

Total revenue

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

Fuel surcharge revenue

    (12,125 )             (24,381 )             (33,357 )             (47,800 )        

Freight revenue (total revenue, excluding fuel surcharge)

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

Total operating expenses

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

Adjusted for:

                                                               

Fuel surcharge revenue

    (12,125 )             (24,381 )             (33,357 )             (47,800 )        

Amortization of intangibles

    (731 )             (731 )             (1,462 )             (1,462 )        
Bad debt expense associated with customer bankruptcy and high credit risk customers     (2,617 )             -               (2,617 )             -          
Strategic restructuring adjusting items:                                                                
Gain on sale of terminal     5,712               -               5,712               -          
Impairment of real estate and related tangible assets     (9,790 )             -               (9,790 )             -          
Impairment of revenue generating equipment and related charges (1)     (17,604 )             -               (17,604 )             -          
Employee separation costs     (1,791 )             -               (1,791 )             -          
Change in useful life/abandonment of intangible assets     (1,331 )             -               (1,331 )             -          
Abandonment of information technology infrastructure and applications     (1,048 )             -               (1,048 )             -          
Contract exit costs and other restructuring related professional fees     (695 )             -               (695 )             -          

Adjusted operating expenses

    178,619       99.5 %     184,898       96.0 %     368,923       99.9 %     374,135       96.8 %

Adjusted operating income

  $ 945             $ 7,761             $ 222             $ 12,438          

 

(1) Of the $17.6 million, $0.8 million is related to operating leases and reflected in revenue equipment rentals and purchased transportation. 

 

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. 

 

Until the second quarter of 2020 we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring Services. As discussed above, our Factoring reportable segment was classified as discontinued operations as of June 30, 2020.  Our three remaining reportable segments include:

 

 

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

o

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

 

o

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

 

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

 

 

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

 

o

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

 

o

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

 

o

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

 

In our Highway Services and Dedicated reportable segments, we primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that could affect our Highway Services 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. The main factors that could affect our Dedicated revenue are the rates and utilization under the contracts with our Dedicated customers. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

 

The main expenses that impact the profitability of our Highway Services and Dedicated reportable segments are the variable costs of transporting freight for our customers. These costs include fuel expenses, driver-related expenses, such as wages, benefits, training, and recruitment, and purchased transportation expenses, which primarily include compensating independent contractors. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, self-insured retention versus insurance premiums, fleet age, efficiency, and other factors. Historically, our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities, and the compensation of non-driver personnel.

 

Within our asset based transportation service offerings (Highway Services and Dedicated), we operate tractors driven by a single driver and also tractors assigned to two-person driver teams. Our single driver tractors generally operate in shorter lengths of haul, generate fewer miles per tractor, and experience more non-revenue miles, but the lower productive miles are expected to be offset by generally higher revenue per loaded mile and the reduced employee expense of compensating only one driver. In contrast, our two-person driver tractors generally operate in longer lengths of haul, generate greater miles per tractor, and experience fewer non-revenue miles, but we typically receive lower revenue per loaded mile and incur higher employee expenses of compensating both drivers. We expect operating statistics and expenses to shift with the mix of single and team operations.

 

Within our Managed Freight reportable segment, we derive revenue from providing Brokerage, TMS, and warehousing services, particularly arranging transportation services for customers directly and through relationships with thousands of third-party carriers and integration with our Highway Services reportable segment, utilizing technology and process management to provide detailed visibility into a customer’s movement of freight – inbound and outbound – throughout the customer’s network providing focused customer support through multiyear contracts, and empowering customers to outsource warehousing management including moving containers and trailers in or around freight yards. We provide Brokerage services directly and through agents, who are paid a commission for the freight they provide. The main factors that impact profitability in terms of expenses are the variable costs of outsourcing the transportation freight for our customers and managing fixed costs, including salaries, facility warehousing costs, and selling, general, and administrative expenses. 

 

In May 2011, we acquired a 49.0% interest in TEL. TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income since May 2011.

 

Our main measures of profitability are operating ratio and adjusted operating ratio, which we define as operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. See [page 23] for the uses and limitations associated with adjusted operating ratio.

 

Revenue Equipment

 

At June 30, 2020, we operated 2,705 tractors and 6,662 trailers. Of such tractors, 1,673 were owned, 782 were financed under operating leases, and 250 were provided by independent contractors, who provide and drive their own tractors.  Of such trailers, 5,101 were owned and 1,561 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, 2020, our fleet had an average tractor age of 1.8 years and an average trailer age of 4.5 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.

 

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RESULTS OF CONSOLIDATED OPERATIONS

 

COMPARISON OF three and six months ended June 30, 2020 TO three and six months ended June 30, 2019

 

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