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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, 2023

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

 logonew.jpg 

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 pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

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 7, 2023).

 

Class A Common Stock, $.01 par value: 10,596,735 shares

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

 

 

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

   

Page

Number

Item 1.

Financial Statements

 
     
 

Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (unaudited)

3
     
 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (unaudited)

4
     
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and 2022 (unaudited)

5
     
 

Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2023 and 2022 (unaudited)

6
     
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited)

7
     
 

Notes to Condensed Consolidated Financial Statements (unaudited)

8
     

Item 2.

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

22
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36
     

Item 4.

Controls and Procedures

37
 

PART II

OTHER INFORMATION

   

Page

Number

     

Item 1.

Legal Proceedings

38
     

Item 1A.

Risk Factors

39
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40
     

Item 3.

Defaults Upon Senior Securities

40
     

Item 4.

Mine Safety Disclosures

40
     

Item 5.

Other Information

40
     

Item 6.

Exhibits

41

 

  

 

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, 2023

   

December 31, 2022

 
   

(unaudited)

       

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 7,817     $ 68,665  

Accounts receivable, net of allowance of $2,788 in 2023 and $2,934 in 2022

    143,398       119,770  

Drivers' advances and other receivables, net of allowance of $593 in 2023 and $585 in 2022

    3,853       3,798  

Inventory and supplies

    4,125       3,516  

Prepaid expenses

    21,345       15,746  

Assets held for sale

    17,924       5,956  

Income taxes receivable

    -       4,838  

Other short-term assets

    486       367  

Total current assets

    198,948       222,656  
                 

Property and equipment, at cost

    610,799       619,686  

Less: accumulated depreciation and amortization

    (180,520 )     (211,951 )

Net property and equipment

    430,279       407,735  
                 

Goodwill

    68,946       58,217  

Other intangibles, net

    98,116       48,169  

Other assets, net

    73,292       58,843  

Noncurrent assets of discontinued operations

    925       1,025  

Total assets

  $ 870,506     $ 796,645  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Checks outstanding in excess of bank balances

  $ 2,096     $ -  

Accounts payable

    33,798       33,896  

Accrued expenses

    57,483       58,763  

Current maturities of long-term debt

    26,461       18,897  

Current portion of finance lease obligations

    2,123       5,326  

Current portion of operating lease obligations

    14,247       18,179  

Current portion of insurance and claims accrual

    17,834       21,060  

Total current liabilities

    154,042       156,121  
                 

Long-term debt

    163,195       90,367  

Long-term portion of finance lease obligations

    3,266       432  

Long-term portion of operating lease obligations

    39,278       46,428  

Insurance and claims accrual

    15,532       15,859  

Deferred income taxes

    99,625       98,716  

Other long-term liabilities

    12,204       7,494  

Long-term liabilities of discontinued operations

    3,700       4,100  

Total liabilities

    490,842       419,517  

Commitments and contingent liabilities

           

Stockholders' equity:

               

Class A common stock, $.01 par value; 40,000,000 shares authorized; 16,125,786 shares issued and 10,596,735 outstanding as of June 30, 2023; and 16,125,786 shares issued and 11,207,570 outstanding as of December 31, 2022

    161       161  

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

    154,348       152,886  

Treasury stock at cost; 5,529,051 and 4,918,216 shares as of June 30, 2023 and December 31, 2022, respectively

    (131,402 )     (106,500 )

Accumulated other comprehensive income

    1,042       1,086  

Retained earnings

    355,491       329,471  

Total stockholders' equity

    379,664       377,128  

Total liabilities and stockholders' equity

  $ 870,506     $ 796,645  

 

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, 2023 AND 2022

(In thousands, except per share data)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

(unaudited)

   

(unaudited)

 
   

2023

   

2022

   

2023

   

2022

 

Revenues

                               

Freight revenue

  $ 243,704     $ 266,856     $ 477,126     $ 524,470  

Fuel surcharge revenue

    30,312       50,521       63,741       84,492  

Total revenue

  $ 274,016     $ 317,377     $ 540,867     $ 608,962  
                                 

Operating expenses:

                               

Salaries, wages, and related expenses

  $ 101,280     $ 101,103     $ 200,439     $ 196,441  

Fuel expense

    31,428       48,484       65,519       83,986  

Operations and maintenance

    16,235       19,845       33,344       37,781  

Revenue equipment rentals and purchased transportation

    67,983       81,677       130,999       165,338  

Operating taxes and licenses

    3,317       2,740       6,780       5,480  

Insurance and claims

    11,043       13,627       23,736       22,806  

Communications and utilities

    1,215       1,214       2,499       2,384  

General supplies and expenses

    12,775       8,281       26,395       17,215  

Depreciation and amortization

    18,944       13,932       33,519       27,377  

Gain on disposition of property and equipment, net

    (1,987 )     (399 )     (11,778 )     (566 )

Total operating expenses

    262,233       290,504       511,452       558,242  

Operating income

    11,783       26,873       29,415       50,720  

Interest expense, net

    2,124       766       2,893       1,321  

Income from equity method investment

    (5,381 )     (7,076 )     (11,324 )     (13,861 )

Income before income taxes

    15,040       33,183       37,846       63,260  

Income tax expense

    2,897       8,657       9,218       16,567  

Income from continuing operations, net of tax

    12,143       24,526       28,628       46,693  

Income from discontinued operations, net of tax

    150       -       300       -  

Net income

  $ 12,293     $ 24,526     $ 28,928     $ 46,693  
                                 

Basic income per share:

                               

Income from continuing operations

  $ 0.94     $ 1.58     $ 2.18     $ 2.91  

Income from discontinued operations

    0.01       -       0.02       -  

Net income per share

  $ 0.95     $ 1.58     $ 2.20     $ 2.91  

Diluted income per share:

                               

Income from continuing operations

  $ 0.90     $ 1.56     $ 2.08     $ 2.86  

Income from discontinued operations

    0.01       -       0.02       -  

Net income per share

  $ 0.91     $ 1.56     $ 2.10     $ 2.86  

Basic weighted average shares outstanding

    12,939       15,514       13,150       16,058  

Diluted weighted average shares outstanding

    13,574       15,761       13,766       16,321  

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

 

Page 4

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(Unaudited and in thousands)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

Net income

  $ 12,293     $ 24,526     $ 28,928     $ 46,693  
                                 

Other comprehensive income:

                               
                                 

Unrealized gain on effective portion of cash flow hedges, net of tax of ($158) and ($44) in 2023 and ($198) and ($506) in 2022, respectively

    452       580       127       1,480  
                                 

Reclassification of cash flow hedge losses (gains) into statement of operations, net of tax of $33 and $60 in 2023 and ($25) and ($61) in 2022, respectively

    (93 )     73       (171 )     179  
                                 

Total other comprehensive income (loss)

    359       653       (44 )     1,659  
                                 

Comprehensive income

  $ 12,652     $ 25,179     $ 28,884     $ 48,352  

 

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, 2023 AND 2022

(Unaudited and in thousands)

 

   

For the Three and Six Months Ended June 30, 2023

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

Income

   

Earnings

   

Equity

 

Balances at December 31, 2022

  $ 161     $ 24     $ 152,886     $ (106,500 )   $ 1,086     $ 329,471     $ 377,128  

Net income

    -       -       -       -       -       16,635       16,635  

Cash dividend ($0.11 per common share)

    -       -       -       -       -       (1,466 )     (1,466 )

Share repurchase

    -       -       -       (20,805 )     -       -       (20,805 )

Other comprehensive income

    -       -       -       -       (403 )     -       (403 )

Stock-based employee compensation expense

    -       -       1,558       -       -       -       1,558  

Issuance of restricted shares, net

    -       -       (1,523 )     38       -       -       (1,485 )

Balances at March 31, 2023

  $ 161     $ 24     $ 152,921     $ (127,267 )   $ 683     $ 344,640     $ 371,162  

Net income

    -       -       -       -       -       12,293       12,293  

Cash dividend ($0.11 per common share)

    -       -       -       -       -       (1,442 )     (1,442 )

Share repurchase

    -       -       -       (4,683 )     -       -       (4,683 )

Other comprehensive income

    -       -       -       -       359       -       359  

Stock-based employee compensation expense

    -       -       1,774       -       -       -       1,774  

Exercise of stock options

    -       -       42       194       -       -       236  

Issuance of restricted shares, net

    -       -       (389 )     354       -       -       (35 )

Balances at June 30, 2023

  $ 161     $ 24     $ 154,348     $ (131,402 )   $ 1,042     $ 355,491     $ 379,664  

 

   

For the Three and Six Months Ended June 30, 2022

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

Loss

   

Earnings

   

Equity

 

Balances at December 31, 2021

  $ 161     $ 24     $ 149,406     $ (23,662 )   $ (1,306 )   $ 225,076     $ 349,699  

Net income

    -       -       -       -       -       22,167       22,167  

Cash dividend ($0.0625 per common share)

    -       -       -       -       -       (1,047 )     (1,047 )

Other comprehensive income

    -       -       -       -       1,006       -       1,006  

Share repurchase

    -       -       -       (14,800 )     -       -       (14,800 )

Stock-based employee compensation expense

    -       -       1,893       -       -       -       1,893  

Issuance of restricted shares, net

    -       -       (863 )     827       -       -       (36 )

Balances at March 31, 2022

  $ 161     $ 24     $ 150,436     $ (37,635 )   $ (300 )   $ 246,196     $ 358,882  

Net income

    -       -       -       -       -       24,526       24,526  

Cash dividend ($0.0625 per common share)

    -       -       -       -       -       (975 )     (975 )

Other comprehensive loss

    -       -       -       -       653             653  

Share repurchase

    -       -       -       (28,565 )     -       -       (28,565 )

Stock-based employee compensation expense

    -       -       1,855       -       -       -       1,855  

Issuance of restricted shares, net

    -       -       (1,053 )     708       -       -       (345 )

Balances at June 30, 2022

  $ 161     $ 24     $ 151,238     $ (65,492 )   $ 353     $ 269,747     $ 356,031  

 

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 THESIX MONTHS ENDED JUNE 30, 2023 AND 2022

(Unaudited and in thousands)

 

   

Six Months Ended June 30,

 
   

2023

   

2022

 

Cash flows from operating activities:

               

Net income

  $ 28,928     $ 46,693  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for losses on accounts receivable

    69       (26 )

Reversal of gain on sales to equity method investee

    (1 )     (30 )

Depreciation and amortization

    33,519       27,377  

Deferred income tax expense

    1,840       620  

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

    (816 )     (40 )

Stock-based compensation expense

    3,332       3,748  

Income from equity method investment

    (11,324 )     (13,861 )

Gain on disposition of property and equipment

    (11,778 )     (566 )

Changes in operating assets and liabilities:

               

Receivables and advances

    (13,225 )     21,450  

Prepaid expenses and other assets

    (6,770 )     2,074  

Inventory and supplies

    406       (638 )

Insurance and claims accrual

    (3,609 )     (6,332 )

Accounts payable and accrued expenses

    (8,203 )     (3,566 )

Net cash flows provided by operating activities

    12,368       76,903  
                 

Cash flows from investing activities:

               

Acquisition, net of cash acquired

    (99,887 )     (37,324 )

Other investments

    (1,448 )     (12 )

Purchase of property and equipment

    (59,067 )     (27,560 )

Proceeds from disposition of property and equipment

    47,073       1,931  

Net cash flows used by investing activities

    (113,329 )     (62,965 )
                 

Cash flows from financing activities:

               

Change in checks outstanding in excess of bank balances

    2,096       (216 )

Cash dividend

    (2,908 )     (2,022 )

Proceeds from issuance of notes payable

    44,673       35,917  

Repayments of notes payable

    (4,438 )     (3,526 )

Repayments of finance lease obligations

    (3,508 )     (4,295 )

Proceeds under revolving credit facility

    94,542       85,632  

Repayments under revolving credit facility and draw note

    (54,385 )     (85,632 )

Payment of contingent consideration liability

    (9,187 )     -  

Proceeds from exercise of stock options

    236       -  

Payment of minimum tax withholdings on stock compensation

    (1,520 )     (380 )

Common stock repurchased

    (25,488 )     (43,365 )

Net cash flows provided (used) by financing activities

    40,113       (17,887 )
                 

Net change in cash and cash equivalents

    (60,848 )     (3,949 )
                 

Cash and cash equivalents at beginning of period

    68,665       8,412  

Cash and cash equivalents at end of period

  $ 7,817     $ 4,463  

 

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

 

Page 7

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.

Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 2022, condensed consolidated balance sheet was derived from our audited balance sheet as of that date. Our operating results are subject to seasonal trends when measured on a quarterly basis; therefore, operating results for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2022. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets. Depreciation of revenue equipment is our largest item of depreciation. We generally depreciate new tractors over five years to salvage values ranging from 10% to 35% of their cost, depending on the reportable segment profile of the equipment. We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 28% and 29% of their cost, respectively. We annually review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations. During the three months ended March 31, 2023, we sold a Tennessee terminal resulting in a $7.6 million gain which is included in gain on disposition of property and equipment, net in the condensed consolidated statements of operations.

 

Page 8

 
 

Note 2.

Income Per Share

 

Basic income per share excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. There were approximately 235,000 and 251,000 shares issuable upon conversion of unvested restricted shares for the three and six months ended June 30, 2023, and 237,000 and 252,000 shares issuable upon conversion of unvested restricted shares for the three and six months ended June 30, 2022. There were no and less than 1,000 unvested shares excluded from the calculation of diluted earnings per share as anti-dilutive for the three and six months ended June 30, 2023. There were no unvested shares excluded from the calculation of diluted earnings per share as anti-dilutive for the three and six months ended June 30, 2022. There were 400,000 and 365,000 shares issuable upon conversion of unvested employee stock options for the three and six months ended June 30, 2023 and 10,000 and 11,000 shares issuable upon conversion of unvested employee stock options for the three and six months ended June 30, 2022. There were no and 35,000 unvested employee stock options excluded from the calculation of diluted earnings per share as anti-dilutive for the three and six months ended June 30, 2023 and 33,000 unvested employee stock options excluded from the calculation of diluted earnings per share as anti-dilutive for the three and six months ended June 30, 2022. Income per share is the same for both Class A and Class B shares.

 

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

 

(in thousands except per share data)

 

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Numerators:

                               

Income from continuing operations

  $ 12,143     $ 24,526     $ 28,628     $ 46,693  

Income from discontinued operations

    150       -       300       -  

Net income

  $ 12,293     $ 24,526     $ 28,928     $ 46,693  

Denominator:

                               

Denominator for basic income per share – weighted-average shares

    12,939       15,514       13,150       16,058  

Effect of dilutive securities:

                               

Equivalent shares issuable upon conversion of unvested restricted shares

    235       237       251       252  

Equivalent shares issuable upon conversion of unvested employee stock options

    400       10       365       11  

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

    13,574       15,761       13,766       16,321  
                                 

Basic income per share:

                               

Income from continuing operations

  $ 0.94     $ 1.58     $ 2.18     $ 2.91  

Income from discontinued operations

    0.01       -       0.02       -  

Net income per share(1)

  $ 0.95     $ 1.58     $ 2.20     $ 2.91  

Diluted income per share:

                               

Income from continuing operations

  $ 0.90     $ 1.56     $ 2.08     $ 2.86  

Income from discontinued operations

    0.01       -       0.02       -  

Net income per share

  $ 0.91     $ 1.56     $ 2.10     $ 2.86  
(1) Total may not sum due to rounding.

 

Page 9

 
 

Note 3.

Fair Value of Financial Instruments

 

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.

 

The fair value of the commodity contracts, including our former fuel hedges, is determined based on quotes from the counterparty which were verified by comparing them to the exchange on which the related futures are traded, adjusted for counterparty credit risk. There were no fuel hedge derivatives outstanding as of June 30, 2023, or December 31, 2022.

 

The fair value of our interest rate swap agreements is determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate swap agreements. The fair value of available-for-sale securities is based upon quoted prices in active markets.

 

The fair value of the contingent consideration arrangement is based on inputs that are not observable in the market and is estimated using a probability-weighted method. The significant unobservable inputs used in the fair value of the contingent consideration liability include the financial projections over the earn-out period, the volatility of the underlying financial metrics, and estimated discount rates.

 

A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

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

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

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

 

Financial Instruments Measured at Fair Value on a Recurring Basis

 

(in thousands)

                       
   

June 30, 2023

   

December 31, 2022

   

Input Level

 

Interest rate swaps

    1,407       1,466       2  

Contingent consideration

    (19,031 )     (17,023 )     3  

 

The carrying amount of cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of these instruments. 

 

Interest rates that are currently available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our revenue equipment installment notes approximated the carrying value as of  June 30, 2023, as the weighted average interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit Facility (as defined herein) approximate fair value due to the variable interest rate on that facility.

 

Contingent consideration arrangements require us to pay up to $20.0 million of additional consideration to AAT Carriers, Inc.'s ("AAT's") former shareholders based on AAT's results during the first two post-acquisition years and up to $30.0 million of additional consideration to Lew Thompson & Son Trucking, Inc.'s ("LTST's") former shareholders based on LTST's results during the first three post-acquisition years. Refer to Note 12, "Acquisition of Lew Thompson & Son Trucking, Inc.", for additional information regarding the LTST acquisition. We acquired AAT in February 2022 and LTST in April 2023. The fair value of the contingent consideration is adjusted at each reporting period based on changes to the expected cash flows and related assumptions. During the three and six months ended June 30, 2023, we paid none and $10.0 million, respectively, based on AAT's results for the first post-acquisition year. The fair value of the contingent consideration increased by $10.5 million and $1.5 million, for the three and six months ended June 30, 2023, respectively. Of the $10.5 million increase, $10.0 million was related to the initial recognition of the LTST additional consideration arrangement and $0.5 million was due to a change in the fair value for the AAT contingent consideration arrangement. Of the $10.0 million paid for the contingent consideration liability during 2023, $9.2 million was classified as financing cash flows and $0.8 million was classified as operating cash flows within the condensed consolidated statement of cash flows. The adjustment to the fair value of the contingent consideration liability was recorded as a component of general supplies and expenses within the condensed consolidated statements of operations. The contingent consideration liability is included in accrued expenses and other long-term liabilities in our condensed consolidated balance sheets. 

 

The following table provides a summary (in thousands) of the activity for the contingent consideration liability for 2023:

 

    December 31, 2022     Additions     Adjustments to fair market value     Payments     June 30, 2023  
Contingent consideration    $ (17,023 )    $ (10,016 )    $ (1,992 )    $ 10,000      $ (19,031 )

 

Page 10

 
 

Note 4.

Discontinued Operations

 

As of June 30, 2020, our former Factoring reportable segment was classified as discontinued operations as it: (i) was a component of the entity, (ii) met the criteria as held for sale, and (iii) had a material effect on the Company's operations and financial results. On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of Transport Financial Services ("TFS"), which included substantially all of the assets and operations of our Factoring reportable segment. The sale consisted primarily of $103.3 million of net accounts receivable, which included $108.7 million of gross accounts receivable, less advances and rebates of $5.4 million. 

 

We have reflected the former Factoring reportable segment as discontinued operations in the condensed consolidated statements of operations for all periods presented.

 

The following table summarizes the results of our discontinued operations for the three and six months ended June 30, 2023 and 2022:

 

(in thousands)

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Reversal of contingent loss liability

  $ (200 )   $ -     $ (400 )   $ -  

Income before income taxes

    200       -       400       -  

Income tax expense

    50       -       100       -  

Income from discontinued operations, net of tax

  $ 150     $ -     $ 300     $ -  

 

Reversal of contingent liability for the three and six months ended June 30, 2023 relates to the reduced exposure of future indemnification by the Company to the purchaser of TFS, Triumph Bancorp, Inc. ("Triumph"), as a result of the collection of covered receivables identified in the amended purchase agreement.

 

The following table summarizes the major classes of assets and liabilities included as discontinued operations as of  June 30, 2023 and December 31, 2022:

 

(in thousands)

 

June 30, 2023

   

December 31, 2022

 

Noncurrent deferred tax asset

  $ 925     $ 1,025  

Noncurrent assets from discontinued operations

    925       1,025  

Total assets from discontinued operations

  $ 925     $ 1,025  
                 

Liabilities:

               

Long-term contingent loss liability

  $ 3,700     $ 4,100  

Long-term liabilities of discontinued operations

    3,700       4,100  

Total liabilities from discontinued operations

  $ 3,700     $ 4,100  
 

There were no net cash flows related to discontinued operations for the three and six months ended June 30, 2023 and 2022.

 

Page 11

 
 

Note 5.

Segment Information

 

We have four reportable segments:

 

Expedited: The Expedited reportable segment primarily provides truckload services to customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company.

 

Dedicated: The Dedicated reportable segment provides customers with committed truckload capacity over contracted periods with the goal of three to five years in length. Equipment is either owned or leased by the Company.

 

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

 

Warehousing: The Warehousing reportable segment provides day-to-day warehouse management services to customers who have chosen to outsource this function. We also provide shuttle and switching services related to shuttling containers and trailers in or around freight yards and to/from warehouses.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in our Form 10-K for the year ended December 31, 2022. Substantially all intersegment sales prices are market based. We evaluate performance based on operating income of the respective business units.

 

The following table summarizes our total revenue by our four reportable segments, as used by our chief operating decision maker in making decisions regarding allocation of resources etc., for the three and six months ended June 30, 2023 and 2022:

 

(in thousands)

                                       

Three Months Ended June 30, 2023

 

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

   

Consolidated

 

Total revenue from external customers

  $ 104,073     $ 81,194     $ 63,281     $ 25,468     $ 274,016  

Intersegment revenue

    3,915       -       -       -       3,915  

Operating income

    5,815       3,243       1,945       780       11,783  

 

Six Months Ended June 30, 2023

 

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

   

Consolidated

 

Total revenue from external customers

  $ 204,969     $ 161,438     $ 124,155     $ 50,305     $ 540,867  

Intersegment revenue

    8,377       -       -       -       8,377  

Operating income

    15,091       10,390       3,163       771       29,415  

 

Three Months Ended June 30, 2022

 

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

   

Consolidated

 

Total revenue from external customers

  $ 121,643     $ 96,767     $ 80,281     $ 18,686     $ 317,377  

Intersegment revenue

    1,006       -       -       -       1,006  

Operating income

    14,610       2,882       8,627       754       26,873  

 

Six Months Ended June 30, 2022

 

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

   

Consolidated

 

Total revenue from external customers

  $ 220,440     $ 185,714     $ 166,432     $ 36,376     $ 608,962  

Intersegment revenue

    1,897       -       -       -       1,897  

Operating income (loss)

    23,941       5,523       19,458       1,798       50,720  

 

(in thousands)

 

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Total external revenues for reportable segments

  $ 274,016     $ 317,377     $ 540,867     $ 608,962  

Intersegment revenues for reportable segments

    3,915       1,006       8,377       1,897  

Elimination of intersegment revenues

    (3,915 )     (1,006 )     (8,377 )     (1,897 )

Total consolidated revenues

  $ 274,016     $ 317,377     $ 540,867     $ 608,962  

 

Page 12

 
 

Note 6.

Income Taxes

 

Income tax expense in both 2023 and 2022 varies from the amount computed by applying the federal corporate income tax rates of 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, 2023 is unchanged since  December 31, 2022.

 

The net deferred tax liability of $98.7 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. The Company has determined that a valuation allowance was not necessary at June 30, 2023 for its deferred tax assets since it is more likely than not they will be realized from the future reversals of temporary differences. 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 11, 2021, President Biden signed the American Rescue Plan ("ARPA") into law. The law includes several provisions meant to stimulate the U.S. economy. Of relevance to the Company, ARPA extended the reach of IRC Section 162(m) to include compensation paid to the eight highest-paid individuals other than the chief executive officer and the chief financial officers (rather than the three highest), however, this change is not effective until 2027. There is no material impact to the financial statements at this time.

 

President Biden signed the Inflation Reduction Act (the "IRA") into law on  August 16, 2022. We do not anticipate the IRA will have a significant impact on income tax expense or on other taxes. One of the most impactful provisions of the IRA includes the establishment of a Corporate Alternative Minimum Tax ("CAMT"). However, this tax only applies to corporations with three-year average earnings in excess of $1.0 billion. We will continue to monitor the CAMT each year to determine if we will become an applicable corporation. Additionally, the IRA enacted an excise tax on stock buybacks, which imposes a 1% tax on stock buybacks, subject to netting provisions regarding stock awarded to employees as part of their compensation. We do not believe this will have a material impact on our active buyback program, but will continue to monitor IRS guidance and regulations on how the buyback tax will be imposed and administered.

 

On May 11, 2023, the Tennessee Works Tax Act was signed into law by Governor Lee. The most impactful change for the Company was the phase-in of a single-sales factor apportionment formula for the logistics and leasing companies that file in Tennessee. The motor carriers already apply a single-sales factor. This resulted in the Company recording a $1.0 million benefit during the quarter ended June 30, 2023.

 

Page 13

 
 

Note 7.

Debt

 

Current and long-term debt and lease obligations consisted of the following as of  June 30, 2023 and December 31, 2022:

 

(in thousands)

 

June 30, 2023

   

December 31, 2022

 
   

Current

   

Long-Term

   

Current

   

Long-Term

 

Borrowings under Credit Facility

  $ -     $ 40,157     $ -     $ -  

Borrowings under the Draw Note

    -       -       -       -  

Revenue equipment installment notes; weighted average interest rate of 4.9% at June 30, 2023, and 4.7% at December 31, 2022, due in monthly installments with final maturities at various dates ranging from October 2024 to June 2028, secured by related revenue equipment

    25,194       104,578       17,656       71,267  

Real estate notes; interest rate of 6.9% at June 30, 2023 and 5.8% at December 31, 2022 due in monthly installments with a fixed maturity at August 2035, secured by related real estate

    1,267       18,460       1,241       19,100  

Total debt

    26,461       163,195       18,897       90,367  

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

    2,123       3,266       5,326       432  

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

    14,247       39,278       18,179       46,428  

Total debt and lease obligations

  $ 42,831     $ 205,739     $ 42,402     $ 137,227  

 

We and substantially all of our subsidiaries are parties to the Third Amended and Restated Credit Agreement (the "Credit Facility") with Bank of America, N.A., as agent (the "Agent") and JPMorgan Chase Bank, N.A. (together with the Agent, the "Lenders"). The Credit Facility is a $110.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $75.0 million subject to Lender acceptance of the additional funding commitment. The Credit Facility includes a letter of credit sub facility in an aggregate amount of $105.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time. The Credit Facility matures in May 2027.

 

Borrowings under the Credit Facility are classified as either "base rate loans" or "SOFR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or SOFR for a one month period as of such day, plus an applicable margin ranging from 0.25% to 0.75%; while SOFR loans accrued interest at SOFR, plus an applicable margin ranging from 1.25% to 1.75%. The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate, revenue equipment pledged under other financing agreements, including revenue equipment installment notes and finance leases, and revenue equipment that we do not designate as being included in the borrowing base.

 

Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $110.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 87.5% of eligible accounts receivable, plus (ii) the least of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 100% of the net book value of eligible revenue equipment, (c) 60.0% of the Lenders' aggregate revolving commitments under the Credit Facility, or (d) $65.0 million. 

 

We had $40.2 million borrowings outstanding under the Credit Facility as of June 30, 2023, undrawn letters of credit outstanding of approximately $21.6 million, and available borrowing capacity of $48.2 million. As of June 30, 2023, there were $40.0 million of base rate and $0.2 million of SOFR loans. Based on availability as of June 30, 2023 and 2022, there was no fixed charge coverage requirement.

 

Page 14

 

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  October 2024 to June 2028. The notes contain certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or other material covenants or events of default except certain notes totaling $9.7 million are cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in 2023, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, finance leases, and/or from the Credit Facility.

 

In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third-party lender. The note contains certain restrictions and covenants that are usual and customary for a note of this nature. Failure to comply with the covenants and restrictions set forth in the note could result in an event of default. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%. We expect to be in compliance with our debt covenants for the next 12 months. 

 

In connection with the settlement of a dispute related to the sale of TFS (the "TFS Settlement"), in September 2020, TBK Bank, SSB, as lender and agent for Triumph (“TBK Bank”), provided the Company with a $45 million line of credit (the “Draw Note”), the proceeds of which are to be used solely to satisfy our indemnification obligations under the TFS Settlement. We may borrow pursuant to the Draw Note until September 23, 2025. Any amount outstanding under the Draw Note will accrue interest at a per annum rate equal to one and one-half (1.5) percentage points over LIBOR, provided, however, that LIBOR shall be deemed to be at least 0.25%. Accrued interest is due monthly and the outstanding principal balance is due on September 23, 2026. To secure our obligations under the TFS Settlement and the Draw Note, we pledged certain unencumbered revenue equipment with an estimated net orderly liquidation value of $60 million. The Draw Note includes usual and customary events of default for a facility of this nature and provides that, upon occurrence and continuation of an event of default, payment of all amounts payable under the Draw Note may be accelerated. During the first quarter of 2021, we received an indemnification call from Triumph of $35.6 million related to the TFS Settlement, which was funded by drawing on the Draw Note. During the second quarter of 2021 we repaid $31.0 million of the borrowings under the Draw Note and during the third quarter of 2021 we repaid the remaining balance. As of June 30, 2023, there were no outstanding borrowings under the Draw Note.

 

Page 15

 
 

Note 8.

Lease Obligations

 

The finance leases in effect at  June 30, 2023 terminate from  August 2023 through  November 2033 and contain guarantees of the residual value of the related equipment by us.

 

 A summary of our lease obligations at June 30, 2023 and 2022 are as follows:

 

(dollars in thousands)

 

Three Months Ended

   

Three Months Ended

   

Six Months Ended

   

Six Months Ended

 
   

June 30, 2023

   

June 30, 2022

   

June 30, 2023

   

June 30, 2022

 

Finance lease cost:

                               

Amortization of right-of-use assets

  $ 257     $ 632     $ 513     $ 1,320  

Interest on lease liabilities

    57       98       66       222  

Operating lease cost

    4,639       7,210       9,245       12,647  

Variable lease cost

    388       88       885       109  

Total lease cost

  $ 5,341     $ 8,028     $ 10,709     $ 14,298  
                                 

Other information

                               

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

                               

Operating cash flows from finance leases

    57       98       66       222  

Operating cash flows from operating leases

    3,329       7,298       7,178       12,756  

Financing cash flows from finance leases

    151       3,002       3,509       4,295  

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

    3,139       -       3,139       458  

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

    3,846       16,999       3,992       17,052  

Weighted-average remaining lease term—finance leases (in years)

    2.0                          

Weighted-average remaining lease term—operating leases (in years)

    4.6                          

Weighted-average discount rate—finance leases

    12.3 %                        

Weighted-average discount rate—operating leases

    9.9 %                        

 

As of  June 30, 2023, and December 31, 2022, right-of-use assets of $52.0 million and $58.9 million for operating leases and $4.8 million and $5.3 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 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, 2023, are summarized as follows by lease category:

 

(in thousands)

 

Operating

   

Finance

 
2023 (1)   $ 9,149     $ 2,269  

2024

    18,388       857  

2025

    11,999       857  

2026

    8,399       857  

2027

    7,530       857  

Thereafter

    10,815       1,698  

Total minimum lease payments

  $ 66,280     $ 7,396  

Less: amount representing interest

    (12,755 )     (2,007 )

Present value of minimum lease payments

  $ 53,525     $ 5,389  

Less: current portion

    (14,247 )     (2,123 )

Lease obligations, long-term

  $ 39,278     $ 3,266  

 

(1) Excludes the six months ended June 30, 2023.

 

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 (the "Board"). On May 17, 2023, the stockholders, upon recommendation of the Board, approved the Third Amendment (the “Third Amendment”) to our Third Amended and Restated 2006 Omnibus Incentive Plan (the "Incentive Plan"). The Third Amendment (i) increased the number of shares of Class A common stock available for issuance under the Incentive Plan by an additional 575,000 shares, (ii) re-set the term of the plan to expire on May 1, 2033, and (iii) made other miscellaneous, administrative and conforming changes as necessary. The Incentive Plan includes (i) 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, (ii) a double-trigger vesting requirement upon a change in control, and (iii) a maximum award granted or payable to any one participant under the Incentive Plan for a calendar year of 500,000 shares of Class A common stock or $4,000,000, in the event the award is paid in cash.

 

The Incentive Plan permits annual awards of shares of our Class A common stock to executives, other key employees, consultants, non-employee directors, and eligible participants under various types of options, restricted stock, or other equity instruments. As of  June 30, 2023, there were 1,271,739 shares remaining of the 4,775,000 shares available for award under the Incentive Plan. No awards may be made under the Incentive Plan after May 1, 2033. To the extent available, we have issued treasury stock to satisfy all share-based incentive plans.

 

Included in salaries, wages, and related expenses within the condensed consolidated statements of operations is stock-based compensation expense of $1.6 million and $1.7 million for thethree months ended June 30, 2023 and 2022, respectively and expense of $3.0 million and $3.4 million for the six months ended June 30, 2023, respectively. Included in general supplies and expenses within the condensed consolidated statements of operations is stock-based compensation expense for non-employee directors of $0.2 million and $0.2 million for the three months ended June 30, 2023 and 2022, respectively, and $0.3 million and $0.3 million for the six months ended June 30, 2023 and 2022. Of the stock compensation expense recorded for the three months ended  June 30, 2023 and June 30, 2022, $0.6 million and $1.0 million relates to restricted shares, respectively, and $1.0 million and $0.7 million relates to unvested employee stock options, respectively. Of the stock compensation expense recorded for the six months ended June 30, 2023 and June 30, 2022, $1.1 million and $2.1 million relates to restricted shares, respectively, and $1.9 million and $1.4 million relates to unvested employee stock options, respectively.

 

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, 2023, certain participants elected to forfeit receipt of an aggregate of 43,771 shares of Class A common stock at a weighted average per share price of $34.72 based on the closing price of our Class A common stock on the dates the shares vested in 2023, in lieu of the federal and state minimum statutory tax withholding requirements. We remitted $1.5 million to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements.

 

Note 10.

Commitments and Contingencies

 

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

 

We had $21.6 million and $23.9 million of outstanding and undrawn letters of credit as of June 30, 2023 and December 31, 2022. The letters of credit are maintained primarily to support our insurance programs. Additionally, we had $45.0 million of availability on a line of credit from Triumph solely to fund any indemnification owed to Triumph in relation to the sale of TFS.

 

Note 11.

Equity Method Investment

 

We own a 49.0% interest in Transport Enterprise Leasing, LLC ("TEL"), a tractor and trailer equipment leasing company and used equipment reseller. There is no loss limitation on our 49.0% interest in TEL. We have not guaranteed any of TEL's debt and have no obligation to provide funding, services, or assets. There are no current put rights to purchase or sell with any owners. TEL’s majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. There are no third-party liquidity arrangements, guarantees, and/or other commitments that may affect the fair value or risk of our interest in TEL.

 

Transactions with TEL were not material for the three or six months ended June 30, 2023 and 2022.

 

Page 17

 

We have accounted for our investment in TEL using the equity method of accounting, and thus our financial results include our proportionate share of TEL's 2023 net income through June 30, 2023, or $11.3 million.

 

Our accounts receivable from TEL, accounts payable to TEL, and investment in TEL as of  June 30, 2023 and December 31, 2022 are as follows (in thousands):

 

Description:

Balance Sheet Line Item:

 

June 30, 2023

   

December 31, 2022

 

Accounts receivable from TEL

Driver advances and other receivables

  $ 86     $ 9  

Accounts payable to TEL

Accrued expenses

  $ 413     $ 763  

Investment in TEL

Other assets

  $ 66,051     $ 54,727  

Operating lease obligations

Current and long-term portion of operating lease obligations

  $ 11,099     $ 13,825  

 

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

 

See TEL's summarized financial information below:

 

(in thousands)

 

As of June 30,

   

As of December 31,

 
   

2023

   

2022

 

Total Assets

  $ 599,243     $ 480,724  

Total Liabilities

    473,747       377,548  

Total Equity

  $ 125,496     $ 103,177  

 

(in thousands)

 

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Revenue

  $ 37,124     $ 33,857     $ 77,269     $ 66,096  

Cost of Sales

    3,325       5,645       10,330       10,118  

Operating Expenses

    19,903       11,754       39,296       24,028  

Operating Income

    13,896       16,458       27,643       31,950  

Net Income

  $ 10,873     $ 14,728    

$22,319

    $ 28,386  

 

Page 18

 

 

Note 12.

Acquisition of Lew Thompson & Son Trucking, Inc.

 

On April 26, 2023, we acquired 100% of the outstanding stock of LTST and related entities, headquartered in Huntsville, AR. LTST is a dedicated contract carrier specializing in poultry feed and live haul transportation in Northwest Arkansas and surrounding areas and was acquired to expand the Dedicated reportable segment into this niche market. The acquisition date fair value of the consideration transferred was $109.9 million. The Stock Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions. The Stock Purchase Agreement includes an earnout component of up to an aggregate of $30.0 million based on LTST's adjusted earnings before interest, taxes, depreciation, and amortization reported for the first, second, and third calendar years following closing. The total purchase, including any earnout achieved, is expected to range from $109.9 million to $129.9 million depending on the results achieved by LTST.

 

LTST's results have been included in the condensed consolidated financial statements since the date of acquisition and are reported within our Dedicated reportable segment.

 

The acquisition date fair value of the consideration transferred consisted of the following:

 

   

April 26, 2023

 

(in thousands)

       

Cash paid pursuant to Stock Purchase Agreement

  $ 100,726  

Cash acquired included in historical book value of LTST's assets and liabilities

    (839 )

Contingent consideration

    10,016  

Net purchase price

  $ 109,903  

 

The contingent consideration arrangement requires us to pay up to $30.0 million of additional consideration to LTST's former shareholders based on LTST's results during the first three calendar years following closing. We estimated the fair value of the contingent consideration using a probability-weighted model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The allocation of the preliminary purchase price is subject to change based on finalization of the valuation of long-lived and intangible assets and contingent consideration, as well as our ongoing evaluation of LTST’s accounting principles for consistency with ours.

 

A determination on whether to make a 338(h)10 election has not yet been made.

 

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date:

 

   

April 26, 2023

 

Accounts receivable

  $ 5,135  

Driver advances and other receivables

    794  

Inventory and supplies

    1,015  

Prepaid expenses

    561  

Net property and equipment

    43,121  

Other assets, net

    120  

Other intangibles, net

    52,870  

Total identifiable assets acquired

    103,616  
         

Accounts payable

    (565 )

Accrued expenses

    (1,322 )

Current portion of operating lease obligations

    (396 )

Current portion of insurance and claims accrual

    (56 )

Long-term portion of operating lease obligations

    (2,103 )

Total liabilities assumed

    (4,442 )

Net identifiable assets acquired

    99,174  

Goodwill

    10,729  

Net assets acquired

  $ 109,903  

 

Goodwill and other intangible assets  may change upon the finalization of the valuation of the contingent consideration liability and intangible assets as part of the purchase accounting for the LTST acquisition. The goodwill recognized is attributable primarily to expected cost synergies in the areas of fuel, purchases of revenue equipment, and may change as a result of our ongoing evaluation of LTST’s accounting principles for consistency with ours. Refer to Note 14, "Goodwill and Other Assets" for a summary of changes to goodwill during the period as well as information related to the identifiable intangible asset acquired.

 

The amounts of revenue and earnings of LTST included in the Company’s consolidated results of operations from the acquisition date to the periods ended June 30, 2023 are as follows:

 

(in thousands)

 

Three months ended

   

Six months ended

 
   

June 30, 2023

   

June 30, 2023

 

Total revenue

  $ 10,809     $ 10,809  

Net income

  $ 1,878     $ 1,878  

 

The following unaudited pro forma consolidated results of operations for the three and six months ended June 30, 2023 and 2022 assume that the acquisition of LTST occurred as of January 1, 2022:

 

(in thousands)   Three months ended     Six months ended  
    June 30,     June 30,  
    2023     2022     2023     2022  
Total revenue   $ 279,421     $ 333,441     $ 562,485     $ 641,090  
Net income   $ 12,976     $ 26,430     $ 31,659     $ 50,500  
Basic net income per share   $ 1.00     $ 1.70     $ 2.41     $ 3.14  
Diluted net income per share   $ 0.96     $ 1.68     $ 2.30     $ 3.09  

 

The pro forma financial information for all periods presented above has been calculated after adjusting the results of LTST to reflect the business combination accounting effects resulting from this acquisition, including the amortization expense from acquired intangible assets as though the acquisition occurred as of the beginning of the Company’s fiscal year 2022. As noted above, the allocation is preliminary and changes to the value of the contingent consideration and finalization of our valuation could result in changes to the amount of amortization expense from acquired intangible assets included in the pro forma financial information presented above. The Company's historical condensed consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination and factually supportable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s fiscal 2022.

 

Page 19

 

 

Note 13.

Acquisition of AAT Carriers, Inc.

 

On February 9, 2022, we acquired 100% of the outstanding stock of AAT headquartered in Chattanooga, TN. AAT specializes in highly regulated, time-sensitive loads for the U.S. government. The acquisition date fair value of the consideration transferred was $54.7 million. The Stock Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions. The Stock Purchase Agreement includes an earnout component of up to an aggregate of $20.0 million based on AAT's adjusted earnings before interest, taxes, depreciation, and amortization reported for the first and second years following closing. The total purchase price, including any earnout achieved, is expected to range from $38.5 million to $57.0 million depending on the results achieved by AAT.

 

AAT’s results have been included in the consolidated financial statements since the date of acquisition and are reported within our Expedited reportable segment.

 

The acquisition date fair value of the consideration transferred consisted of the following:

 

   

February 9, 2022

 

(in thousands)

       

Cash paid pursuant to Stock Purchase Agreement

  $ 40,347  

Cash acquired included in historical book value of AAT's assets and liabilities

    (1,846

)

Contingent consideration

    16,210  

Net purchase price

  $ 54,711  

 

The contingent consideration arrangement requires us to pay up to $20.0 million of additional consideration to AAT's former shareholders based on AAT's results during the first two post-acquisition years. We estimated the fair value of the contingent consideration using a probability-weighted model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. Refer to Note 3, "Fair Value of Financial Instruments" for information regarding changes in the contingent consideration arrangement.

 

Because of our 338(h)10 election, all goodwill related to the acquisition is deductible for tax purposes, and there are no deferred income taxes arising from the acquisition.

 

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date.

 

   

February 9, 2022

 

Accounts receivable

  $ 842  

Prepaid expenses

    33  

Other short-term assets

    19  

Net property and equipment

    7,994  

Credentialing intangible asset

    32,000  

Total identifiable assets acquired

    40,888  
         

Accounts payable

    (19

)

Accrued expenses

    (1,396

)

Finance lease obligations

    (458

)

Other long-term liabilities

    (3

)

Total liabilities assumed

    (1,876

)

Net identifiable assets acquired

    39,012  

Goodwill

    15,699  

Net assets acquired

  $ 54,711  

 

The goodwill recognized is attributable primarily to expected cost synergies in the areas of fuel, purchases of revenue equipment. Refer to Note 14, "Goodwill and Other Assets" for a summary of changes to goodwill during the period as well as information related to the identifiable intangible asset acquired.

 

The amounts of revenue and earnings of AAT included in the Company’s consolidated results of operations from the acquisition date to the periods ended June 30, 2023 and 2022 are as follows:
 

(in thousands)   Three months ended     Six months ended  
    June 30,     June 30,  
    2023     2022     2023     2022  
Total revenue   $ 9,500     $ 8,421     $ 20,299     $ 12,587  
Net income   $ 2,059     $ 2,866     $ 6,244     $ 4,853  

 

 

 

 

Note 14.

Goodwill and Other Assets

 

The Landair Holdings, Inc. ("Landair") trade name has a residual value of $0.5 million.

 

Amortization expense of $2.9 million and $2.1 million for the six months ended June 30, 2023 and 2022, respectively, was included in depreciation and amortization in the condensed consolidated statements of operations.

 

A summary of other intangible assets as of  June 30, 2023 and  December 31, 2022 is as follows:

 

(in thousands)

 

June 30, 2023

 
   

Gross intangible assets

   

Accumulated amortization

   

Net intangible assets

   

Remaining life (months)

 

Trade name:

                               

Dedicated

  $ 4,502     $ (2,165 )   $ 2,337          

Managed Freight

    999       (885 )     114          

Warehousing

    999       (885 )     114          

Total trade name

    6,500       (3,935 )     2,565       118  

Non-Compete agreement:

                               

Dedicated

    4,670       (195 )     4,475          

Total non-compete agreement

    4,670       (195 )     4,475       46  

Customer relationships:

                               

Dedicated

    60,172       (6,315 )     53,857          

Managed Freight

    1,692       (705 )     987          

Warehousing

    12,436       (5,182 )     7,254          

Total customer relationships:

    74,300       (12,202 )     62,098       171  

Credentialing:

                               

Expedited

    32,000       (3,022 )     28,978       163  

Total credentialing

    32,000       (3,022 )     28,978          

Total other intangible assets

  $ 117,470     $ (19,354 )   $ 98,116       161  

 

(in thousands)

 

December 31, 2022

 
   

Gross intangible assets

   

Accumulated amortization

   

Net intangible assets

   

Remaining life (months)

 

Trade name:

                               

Dedicated

  $ 2,402     $ (2,130 )   $ 272          

Managed Freight

    999       (885 )     114          

Warehousing

    999       (885 )     114          

Total trade name

    4,400       (3,900 )     500       -  

Customer relationships:

                               

Dedicated

    14,072       (5,277 )     8,795          

Managed Freight

    1,692       (635 )     1,057          

Warehousing

    12,436       (4,663 )     7,773          

Total customer relationships:

    28,200       (10,575 )     17,625       90  

Credentialing:

                               

Expedited

    32,000       (1,956 )     30,044       169  

Total credentialing

    32,000       (1,956 )     30,044          

Total other intangible assets

  $ 64,600     $ (16,431 )   $ 48,169       138  

 

The expected amortization of these assets for the next five successive years is as follows:

 

   

(in thousands)

 

2023 (1)

    4,286  

2024

    8,573  

2025

    8,573  

2026

    8,573  

2027

    7,794  

Thereafter

    59,817  

 

(1) Excludes the six months ended June 30, 2023.

 

The carrying amount of goodwill and other intangible assets for 2023 is subject to change upon the completion of the purchase accounting for the LTST acquisition. The carrying amount of goodwill increased to $68.9 million at June 30, 2023 from $58.2 million at December 31, 2022. A summary of the changes in carrying amount of goodwill is as follows:

 

(in thousands)

 

June 30, 2023

 
   

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

 

Balance at December 31, 2022

  $ 15,699     $ 15,320     $ 5,448     $ 21,750  

Acquired goodwill for LTST

    -       10,729       -       -  

Goodwill

  $ 15,699     $ 26,049     $ 5,448     $ 21,750  

 

Page 20

 
 

Note 15.

Equity

 

On January 25, 2021, our Board approved the repurchase of up to $40.0 million of our outstanding Class A common stock. Under such authorization, we repurchased 0.5 million shares of our Class A common stock for $8.1 million during the three months ended March 31, 2021. On August 5, 2021, our Board increased such authorization to $40.0 million. As of January 1, 2022, there was approximately $38.0 million remaining under such authorization. On February 10, 2022, our Board of Directors adopted a 10b5-1 plan for the purchase of up to $30.0 million in shares subject to defined trading parameters. Under such authorization, we completed the repurchase program in May 2022 with a total of 1.4 million shares of our Class A common stock repurchased for $30.0 million.

 

On May 18, 2022, our Board approved a new stock repurchase authorization of up to $75.0 million of our Class A common stock, with any remaining amount available under prior authorizations being excluded and no longer available. Under such authorization, we repurchased 2.0 million shares of our Class A common stock for $54.7 million during 2022. On January 30, 2023, the Board approved an amendment to the Company's stock repurchase program authorizing the purchase of up to an aggregate $55.0 million of our Class A common stock. The amendment added an incremental approximately $37.5 million to the approximately $17.5 million that was then-remaining under the program. Since May 2022, we have repurchased a total of 2.7 million shares of our Class A common stock. There were no additional repurchases made through August 7, 2023. 

 

On January 26, 2022, our Board declared a cash dividend of $0.0625 per share, which was paid on March 25, 2022, to stockholders of record on March 4, 2022. On May 18, 2022, our Board declared a cash dividend of $0.0625 per share, which was paid on June 24, 2022, to stockholders of record on June 3, 2022. On February 15, 2023, our Board declared a cash dividend of $0.11 per share, which was paid on March 31, 2023, to stockholders of record on March 3, 2023. On May 17, 2023, our Board declared a cash dividend of $0.11 per share which was paid on June 30, 2023, to stockholders of record on June 2, 2023.

 

Page 21

 

 

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

 

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

 

This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. In this Form 10-Q, statements relating to future impact of accounting standards, future third-party transportation provider expenses, future tax rates, expenses, and deductions, expected freight demand, capacity, and volumes and trucking industry conditions, potential results of a default and testing of our fixed charge covenant under the Credit Facility or other debt agreements, expected sources, as well as adequacy, of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), future inflation, future stock repurchases and dividends, if any, expected capital expenditures, allocations, and requirements, future customer relationships, future interest expense, future driver market conditions, future use of independent contractors, expected cash flows, future investments in and growth of our reportable segments and services, future margins of our reportable segments, future market share, future rates and prices, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation, expected net fuel costs, strategies for managing fuel costs, the effectiveness and impact of, and cash flows relating to, our fuel surcharge programs, future fluctuations in operations and maintenance expenses, expected effects and mix of our solo and team operations, future fleet size, management, upgrades, and age, availability of tractors and trailers, the market value of used equipment, the anticipated impact of our investment in TEL, the future impact of our strategic plan and other strategic initiatives, anticipated levels of and fluctuations relating to insurance and claims expenses, including the erosion of available limits in our aggregate insurance policies, any future indemnification obligations related to the TFS Portfolio, the contingent consideration related to our purchase of AAT and LTST, and the future impact of our acquisition of Lew Thompson & Son, 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 the Form 10-Q for the quarter ended March 31, 2023 and our Form 10-K for the year ended December 31, 2022. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in the Form 10-Q for the quarter ended March 31, 2023 and our Form 10-K for the year ended December 31, 2022, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

 

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

 

Executive Overview

 

The freight market, consisting of a combination of freight rates and volumes, remained challenging throughout the second quarter. While the 2023 results of $0.91 per diluted share fall short of our 2022 results, we are pleased with both our results and the resiliency of our model in what we believe to be the trough of the freight cycle. Additionally, on April 26, 2023, we acquired Lew Thompson & Son Trucking, Inc. and related entities ("LTST"). LTST is a dedicated contract carrier specializing in poultry feed and live haul transportation in Northwest Arkansas and surrounding areas. We believe the acquisition is another strong step toward building a more diversified and resilient operating model.

 

Our asset-based reportable segments, Expedited and Dedicated, contributed approximately 68% of total revenue, 93% of operating income, 63% of total freight revenue, and 88% of adjusted operating income in the quarter. Freight revenue for our Expedited reportable segment declined compared to the second quarter of last year as we intentionally reduced the fleet size in response to reduced volumes of available freight with expedited service requirements. Our Dedicated reportable segment also experienced reduced revenue with approximately 14.8% fewer tractors year over year as we continue to exit underperforming business, partially offset by the addition of approximately 144 weighted average tractors as a result of the acquisition of LTST.

 

Our asset-light reportable segments contributed approximately 32% of total revenue, 7% of operating income, 37% of total freight revenue, and 12% of adjusted operating income in the quarter. Compared to a year ago, Managed Freight experienced significant reductions in both revenue and profitability as a result of reduced volumes of high-margin overflow freight from both the Expedited and Dedicated reportable segments compared to the second quarter of 2022. Warehousing was able to grow revenue through new customer startups while margins remained relatively even compared to the second quarter of 2022. We are working to increase the operating income and related margins in each of these reportable segments through focused sales efforts within managed freight and proposed customer rate increases with existing customers within Warehousing.

 

Page 22

 

Additional items of note for the second quarter of 2023 include the following:

 
 

Total revenue of $274.0 million, a decrease of 13.7% compared with the second quarter of 2022, and freight revenue (which excludes revenue from fuel surcharges) of $243.7 million, a decrease of 8.7% compared with the second quarter of 2022;

     
 

Operating income of $11.8 million, compared with $26.9 million in the second quarter of 2022;

     
 

Net income of $12.3 million, or $0.91 per diluted share, compared with $24.5 million, or $1.56 per diluted share, in the second quarter of 2022. Net income from continuing operations of $12.1 million, or $0.90 per diluted share, compared to $24.5 million or $1.56 per diluted share, in the second quarter of 2022. Net income from discontinued operations of $0.2 million, or $0.01 per diluted share, compared to $0.0 million, or $0.00 per diluted share, in the second quarter of 2022;

     
 

38% of consolidated total revenue was in our Expedited reportable segment, as compared to 38% in the second quarter of 2022;

     
 

Our Managed Freight reportable segment’s total revenue decreased to $63.3 million in the 2023 quarter from $80.3 million in the 2022 quarter and the reportable segment had an operating income of $2.0 million in the 2023 quarter compared to $8.6 million in the 2022 quarter; 

     
 

Our equity investment in TEL provided $5.4 million of pre-tax earnings in the second quarter of 2023 compared to $7.1 million in the second quarter of 2022;

     
  We distributed a total of $1.4 million to stockholders through dividends;
     
  Since December 31, 2022, total indebtedness, comprised of total debt and finance leases, net of cash, increased by $140.9 million to $187.2 million, primarily due to the approximately $99.9 million net cash paid in the acquisition of LTST, acquisition of new revenue equipment, and repurchasing $25.3 million of our outstanding Class A Common Stock under the stock repurchase program. With available borrowing capacity of $48.2 million under our Credit Facility at June 30, 2023 we do not expect to be required to test our fixed charge covenant in the foreseeable future;
     
 

Leverage ratio (ending total indebtedness, comprised of debt and finance leases, net of cash, divided by the sum of operating income, depreciation and amortization, gain on disposition of property and equipment, net, and impairment of long lived property and equipment) as of June 30, 2023 was 1.68;

     
  Stockholders' equity at June 30, 2023, was $379.7 million; and
     
 

Tangible book value at June 30, 2023, was $212.6 million.

 

Outlook

 

We are optimistic about the future but remain cautious about the pace of recovery in the freight market. Our team is intensely focused on capital allocation and cost control across our entire enterprise. We believe our more resilient operating model, together with the steps we are taking to reduce costs and inefficiencies, will continue to mitigate a portion of our historical volatility throughout economic and freight market cycles. Overall, I am pleased with our current position, which features a moderately-leveraged balance sheet, ample liquidity and a reduction of approximately 14% of the diluted weighted average shares outstanding compared to a year ago. We will remain focused on growing our market share, continuing to improve our operations, and becoming a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.

 

Page 23

 

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:

 

2023

   

OR %

   

2022

   

OR %

   

2023

   

OR %

   

2022

   

OR %

 

Total revenue

  $ 274,016             $ 317,377             $ 540,867             $ 608,962          

Total operating expenses

    262,233       95.7 %     290,504       91.5 %     511,452       94.6 %     558,242       91.7 %

Operating income

  $ 11,783             $ 26,873             $ 29,415             $ 50,720          
                                                                 

Adjusted Operating Ratio:

 

2023

   

Adj. OR %

   

2022

   

Adj. OR %

   

2023

   

Adj. OR %

   

2022

   

Adj. OR %

 

Total revenue

  $ 274,016             $ 317,377             $ 540,867             $ 608,962          

Fuel surcharge revenue

    (30,312 )             (50,521 )             (63,741 )             (84,492 )        

Freight revenue (total revenue, excluding fuel surcharge)

    243,704               266,856               477,126               524,470          
                                                                 

Total operating expenses

    262,233               290,504               511,452               558,242          

Adjusted for:

                                                               

Fuel surcharge revenue

    (30,312 )             (50,521 )             (63,741 )             (84,492 )        

Amortization of intangibles

    (1,802 )             (1,476 )             (2,922 )             (2,064 )        

Gain on disposal of terminals, net

    -               -               7,627               -          

Contingent consideration liability adjustment

    (492 )             -               (1,992 )             -          

Transaction and executive retirement

    (2,158 )             -               (2,158 )             -          

Adjusted operating expenses

    227,469       93.3 %     238,507       89.4 %     448,266       94.0 %     471,686       89.9 %

Adjusted operating income

  $ 16,235             $ 28,349             $ 28,860             $ 52,784          

 

Page 24

 

Revenue and Expenses

 

We focus on targeted markets throughout the United States where we believe our service standards can provide a competitive advantage. We are a major carrier for transportation companies such as parcel freight forwarders, less-than-truckload carriers, and third-party logistics providers that require a high level of service to support their businesses, as well as for traditional truckload customers such as manufacturers, retailers, and food and beverage shippers. 

 

We have four reportable segments, which include:

 

 

Expedited: The Expedited reportable segment primarily provides truckload services to customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company.

 

 

Dedicated: The Dedicated reportable segment provides customers with committed truckload capacity over contracted periods with the goal of three to five years in length. Equipment is either owned or leased by the Company.

 

 

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

 

 

Warehousing: The Warehousing reportable segment provides day-to-day warehouse management services to customers who have chosen to outsource this function. We also provide shuttle and switching services related to shuttling containers and trailers in or around freight yards and to/from warehouses.

 

In our Expedited and Dedicated reportable segments, we primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. AAT’s results are reported within our Expedited reportable segment and LTST's results are reported within our Dedicated reportable segment. The main factors that could affect our Expedited and Dedicated revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of shipments and miles we generate. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

 

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

 

Page 25

 

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

 

Within our Managed Freight reportable segment, we derive revenue from arranging transportation services, directly and through agents, who are paid a commission for the freight they provide, for customers on both an ad-hoc and a contractual basis. We provide these services directly and through relationships with thousands of third-party carriers and integration with our Expedited reportable segment. We also utilize technology and process management to provide detailed visibility into a customer’s movement of freight – inbound and outbound – throughout the customer’s network and can provide focused customer support through multiyear contracts. The main factors that impact profitability in terms of expenses are the variable costs of outsourcing the transportation freight for our customers and managing fixed costs, including salaries, and selling, general, and administrative expenses. 

 

Within our Warehousing reportable segment, we empower customers to outsource warehousing management, including moving containers and trailers in or around freight yards. The main factors that impact profitability in terms of expenses are 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. We define adjusted operating ratio as operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. See page [23] for the uses and limitations associated with adjusted operating ratio.

 

Revenue Equipment

 

At June 30, 2023, we operated 2,132 tractors and 5,855 trailers. Of such tractors, 1,795 were owned, 223 were financed under operating leases, and 114 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 5,577 were owned, 57 were financed under finance type leases, and 221 were held under short-term operating leases. We finance a small portion of our trailer fleet and larger portion of our tractor fleet with operating leases, which generally run for a period of three to five years for tractors and five to seven years for trailers. At June 30, 2023, our fleet had an average tractor age of 2.2 years and an average trailer age of 6.0 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.

 

Page 26

 

 

RESULTS OF CONSOLIDATED OPERATIONS

 

COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2023 TO THREE AND SIX MONTHS ENDED JUNE 30, 2022

 

The following tables set forth the percentage relationship of certain items to total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated, where applicable (dollars in thousands):

 

Revenue

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Revenue:

                               

Freight revenue

  $ 243,704     $ 266,856     $ 477,126     $ 524,470  

Fuel surcharge revenue

    30,312       50,521       63,741       84,492  

Total revenue

  $ 274,016     $ 317,377     $ 540,867     $ 608,962  

 

The decrease in total revenue primarily resulted from a $17.0 million, $6.8 million, and $6.2 million decrease in Managed Freight, Expedited, and Dedicated freight revenue, respectively, partially offset by a $6.8 million increase in Warehousing freight revenue, for the three months ended June 30, 2023 and a $42.3 million, $13.2 million, and $5.7 million decrease in Managed Freight, Dedicated, and Expedited freight revenue, respectively, partially offset by a $13.9 million increase in Warehousing freight revenue for the six months ended June 30, 2023.

 

See results of reportable segment operations section for discussion of fluctuations.

 

For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. 

 

For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentage of total revenue, and then as a percentage of freight revenue.

 

Salaries, wages, and related expenses

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Salaries, wages, and related expenses

  $ 101,280     $ 101,103     $ 200,439     $ 196,441  

% of total revenue

    37.0 %     31.9 %     37.1 %     32.3 %

% of freight revenue

    41.6 %     37.9 %     42.0 %     37.5 %

 

Salaries, wages, and related expenses for the three and six months ended June 30, 2023, increased on a dollars basis primarily as the result of driver and non-driver, including shop technicians, pay and benefits increases, as well as executive retirement costs, partially offset by reduced miles since the same 2022 periods.

 

We believe salaries, wages, and related expenses will continue to increase on a year-over-year basis for the remainder of 2023 as a result of driver pay changes put in place when the driver market was tight. Driver pay may also fluctuate based on the number of miles driven. While driver pay remains stable at the present time, we have historically put driver pay increases in place as necessary to address driver market pressure and will continue to do so in the future as necessary. If freight market rates increase further, we would expect to, as we have historically, pass a portion of those rate increases on to our professional drivers. Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Managed Freight reportable segment, for which payments are reflected in the purchased transportation line item.

 

Page 27

 

Fuel expense

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Fuel expense

  $ 31,428     $ 48,484     $ 65,519     $ 83,986  

% of total revenue

    11.5 %     15.3 %     12.1 %     13.8 %

% of freight revenue

    12.9 %     18.2 %     13.7 %     16.0 %

 

We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire cost of fuel for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.

 

The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the Department of Energy ("DOE") for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by the DOE were $1.60 per gallon, or 29.0%, lower for the quarter ended June 30, 2023 compared with the same quarter in 2022.

 

To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles driven by company tractors, our fuel economy, our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues, and the net impact of fuel hedging gains and losses.

 

Net fuel expense is shown below:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Total fuel surcharge

  $ 30,312     $ 50,521     $ 63,741     $ 84,492  

Less: Fuel surcharge revenue reimbursed to owner operators and other third parties

    2,174       3,367       4,433       5,589  

Company fuel surcharge revenue

  $ 28,138     $ 47,154     $ 59,308     $ 78,903  

Total fuel expense

  $ 31,428     $ 48,484     $ 65,519     $ 83,986  

Less: Company fuel surcharge revenue

    28,138       47,154       59,308       78,903  

Net fuel expense

  $ 3,290     $ 1,330     $ 6,211     $ 5,083  

% of freight revenue

    1.4 %     0.5 %     1.3 %     1.0 %

 

For the periods presented, net fuel expense increased as a percentage of freight revenue primarily due to lower fuel surcharge recovery partially offset by lower fuel prices. There were no diesel fuel hedge gains or losses for the quarter ended June 30, 2023 or 2022. As of June 30, 2023, we had no remaining fuel hedging contracts.

 

We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors and auxiliary power units to improve our miles per gallon, locking in fuel hedges when deemed appropriate, partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs, and testing the latest technologies that reduce fuel consumption. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.

 

Page 28

 

Operations and maintenance

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Operations and maintenance

  $ 16,235     $ 19,845     $ 33,344     $ 37,781  

% of total revenue

    5.9 %     6.3 %     6.2 %     6.2 %

% of freight revenue

    6.7 %     7.4 %     7.0 %     7.2 %

 

The decreases in operations and maintenance for the three and six months ended June 30, 2023 were primarily related to having fewer new drivers, a smaller average fleet in 2023, and reduced maintenance costs as a result of a decrease in the average age of equipment as compared to the prior year periods.

 

Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, the reliability of new and untested revenue equipment models, and the global disruption of the supply chain, however, such increases may be offset by reductions in the age of our fleet due to our replacement plan between now and the end of 2023. For 2023, due to the age of our tractor fleet and remaining unexpired warranty coverage for most of our tractors, we do not expect the percentage of our equipment being operated outside of warranty coverage to increase in any material respect even if delays occur; however, operations and maintenance costs may increase regardless due to wage and parts inflation.

 

Revenue equipment rentals and purchased transportation

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Revenue equipment rentals and purchased transportation

  $ 67,983     $ 81,677     $ 130,999     $ 165,338  

% of total revenue

    24.8 %     25.7 %     24.2 %     27.2 %

% of freight revenue

    27.9 %     30.6 %     27.5 %     31.5 %

 

The decreases in revenue equipment rentals and purchased transportation for the three and six months ended June 30, 2023 were primarily the result of a reduction in purchased transportation costs as a result of the softening freight market, as well as a reduction in leased revenue equipment compared to the prior periods as the result of largely transitioning from tractors held under operating leases to owned tractors in 2022. Additionally, the percentage of the total miles run by independent contractors increased from 6.6% for the three months ended June 30, 2022 to 7.4% for the same 2023 period and from 6.7% for the six months ended June 30, 2022 to 6.9% for the same 2023 period partially offsetting this decrease.

 

We expect revenue equipment rentals to decrease compared to 2022 as we largely transitioned from tractors held under operating leases to owned tractors in 2022. However, we expect purchased transportation to fluctuate as volumes in our Managed Freight reportable segment may be volatile. In addition, if fuel prices increase, it would result in a further increase in what we pay third party carriers and independent contractors. However, this expense category will fluctuate with the number and percentage of loads hauled by independent contractors, loads handled by Managed Freight, and tractors, trailers, and other assets financed with operating leases. In addition, factors such as the cost to obtain third party transportation services and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category. If industry-wide trucking capacity tightens in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue. If we were to recruit more independent contractors, we would expect this line item to increase as a percentage of revenue.

 

Operating taxes and licenses 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Operating taxes and licenses

  $ 3,317     $ 2,740     $ 6,780     $ 5,480  

% of total revenue

    1.2 %     0.9 %     1.3 %     0.9 %

% of freight revenue

    1.4 %     1.0 %     1.4 %     1.0 %

 

For the periods presented, the change in operating taxes and licenses were insignificant both as a percentage of total revenue and freight revenue.

 

Page 29

 

Insurance and claims

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Insurance and claims

  $ 11,043     $ 13,627     $ 23,736     $ 22,806  

% of total revenue

    4.0 %     4.3 %     4.4 %     3.7 %

% of freight revenue

    4.5 %     5.1 %     5.0 %     4.3 %

 

Insurance and claims per mile cost decreased to 16.5 cents per mile for the three months ended June 30, 2023 compared to 19.8 cents per mile for the same 2022 quarter and increased to 18.4 cents per mile for the six months ended June 30, 2023 compared to 16.1 cents per mile for the same 2022 period. The decrease for the quarter is the result of improved claims experience compared to the same 2022 quarter while the increase for the six months ended June 30, 2023 are primarily the result of a small number of prior period claims, as well as claims experienced during the first quarter of 2023.

 

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the policy period that ran from April 1, 2018 to March 31, 2021, the aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million were fully eroded based on claims expense accruals. We replaced our $9.0 million in excess of $1.0 million layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024. Due to the erosion of the $9.0 million in excess of $1.0 million layer, any adverse developments in claims filed between April 1, 2018 and March 31, 2021, could result in additional expense accruals. We have maintained our retention and limits set in place during the prior renewal cycle. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. 

 

We expect insurance and claims expense to continue to be volatile over the long-term. Recently the trucking industry has experienced a decline in the number of carriers and underwriters that write insurance policies or that are willing to provide insurance for trucking companies. 

 

Communications and utilities

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Communications and utilities

  $ 1,215     $ 1,214     $ 2,499     $ 2,384  

% of total revenue

    0.4 %     0.4 %     0.5 %     0.4 %

% of freight revenue

    0.5 %     0.5 %     0.5 %     0.5 %

 

For the periods presented, the change in communications and utilities were insignificant both as a percentage of total revenue and freight revenue.

 

General supplies and expenses

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

General supplies and expenses

  $ 12,775     $ 8,281     $ 26,395     $ 17,215  

% of total revenue

    4.7 %     2.6 %     4.9 %     2.8 %

% of freight revenue

    5.2 %     3.1 %     5.5 %     3.3 %

 

The increases in general supplies and expenses for the three and six months ended June 30, 2023 were primarily the result of acquisition costs, new leased spaces for our Warehousing reportable segment, and the increase in the contingent consideration liability since the 2022 periods.

 

Page 30

 

Depreciation and amortization

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Depreciation and amortization

  $ 18,944     $ 13,932     $ 33,519     $ 27,377  

% of total revenue

    6.9 %     4.4 %     6.2 %     4.5 %

% of freight revenue

    7.8 %     5.2 %     7.0 %     5.2 %

 

Depreciation and amortization consists primarily of depreciation of tractors, trailers, and other capital assets, as well as amortization of intangible assets.

 

Depreciation expense increased $4.7 million and $5.3 million to $17.1 million and $30.6 million for the three and six months ended June 30, 2023, respectively, compared to $12.5 million and $25.3 million in the same 2022 periods as a result of increased costs on new equipment partially offset by reduced total tractor count. Amortization of intangible assets was $1.8 million and $2.9 million for three and six months ended June 30, 2023, respectively, compared to $1.5 million and $2.1 million for the same 2022 periods. The increase for the three and six months ended June 30, 2023 is due to the amortization of the intangible asset related to the AAT and LTST acquisitions. 

 

We expect depreciation and amortization to increase compared to 2022 as the cost of new equipment increases and we implement our 2023 revenue equipment replacement plan, we largely transitioned from tractors held under operating leases to tractors owned in 2022, and as a result of the year-over-year impact of the LTST acquisition. Additionally, changes in the used tractor market could cause us to adjust residual values, increase depreciation, hold assets longer than planned, or experience increased losses on sale.

 

Gain on disposition of property and equipment, net

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Gain on disposition of property and equipment, net

  $ (1,987 )   $ (399 )   $ (11,778 )   $ (566 )

% of total revenue

    (0.7 %)     (0.1 %)     (2.2 %)     (0.1 %)

% of freight revenue

    (0.8 %)     (0.1 %)     (2.5 %)     (0.1 %)

 

The increases in gain on disposition of property and equipment, net for the three and six months ended June 30, 2023 are primarily the result of an increase in the sale of used equipment compared to the 2022 period and, for the six months ended June 30, 2023, the $7.6 million gain on sale of a Tennessee terminal in the first quarter of 2023. While we expect sales of used equipment to continue to be elevated through the remainder of 2023, we expect sequential reductions in the gain on disposition of equipment due to the soft used equipment market.

 

Page 31

 

Interest expense, net

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Interest expense, net

  $ 2,124     $ 766     $ 2,893     $ 1,321  

% of total revenue

    0.8 %     0.2 %     0.5 %     0.2 %

% of freight revenue

    0.9 %     0.3 %     0.6 %     0.3 %

 

For the periods presented, the changes in interest expense, net were insignificant both as a percentage of total revenue and freight revenue.

 

Going forward, we expect interest expense, net to increase due to an increase in borrowings under our Credit Facility related to our April 26, 2023 acquisition of LTST. Additionally, this line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases, our revenue equipment replacement plan, and changing interest rates.

 

Income from equity method investment

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Income from equity method investment

  $ 5,381     $ 7,076     $ 11,324     $ 13,861  

 

We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income or loss. The decreases in TEL's contributions to our results for the three and six months ended June 30, 2023 were primarily the result of a reduction on gain on sale of revenue equipment compared to the 2022 periods. Due to TEL's business model, gains and losses on sale of equipment is a normal part of the business and can cause earnings to fluctuate from period to period and therefore our income from investment to similarly fluctuate. We expect TEL's net income to decrease sequentially for the remainder of 2023 due to the soft used equipment market.

 

Income tax expense

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Income tax expense

  $ 2,897     $ 8,657     $ 9,218     $ 16,567  

% of total revenue

    1.1 %     2.7 %     1.7 %     2.7 %

% of freight revenue

    1.2 %     3.2 %     1.9 %     3.2 %

 

The decreases in income tax expense were primarily related to the $18.1 million and $25.4 million decrease in pre-tax income in the three and six months ended June 30, 2023, respectively, compared to the same 2022 periods, resulting from the aforementioned decreases in operating income and earnings on investment in TEL.

 

The effective tax rate is different from the expected combined tax rate due primarily to state tax expense and permanent differences, such as executive compensation disallowance in 2022. The nondeductible effect of the per diem payments was temporarily suspended for 2022 in accordance with IRS guidance issued during the quarter ended December 31, 2021. The rate impact of these items will fluctuate in future periods as income fluctuates.

 

Page 32

 

RESULTS OF SEGMENT OPERATIONS

 

We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing, each as described above.

 

COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2023TO THREE AND SIX MONTHS ENDED JUNE 30, 2022

 

The following table summarizes financial and operating data by reportable segment:

 

(in thousands)

 

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Revenues:

                               

Expedited

  $ 104,073     $ 121,643     $ 204,969     $ 220,440  

Dedicated

    81,194       96,767       161,438       185,714  

Managed Freight

    63,281       80,281       124,155       166,432  

Warehousing

    25,468       18,686       50,305       36,376  

Total revenues

  $ 274,016     $ 317,377     $ 540,867     $ 608,962  
                                 

Operating Income:

                               

Expedited

  $ 5,815     $ 14,610     $ 15,091     $ 23,941  

Dedicated

    3,243       2,882       10,390       5,523  

Managed Freight

    1,945       8,627       3,163       19,458  

Warehousing

    780       754       771       1,798  

Total operating income

  $ 11,783     $ 26,873     $ 29,415     $ 50,720  

 

The decrease in Expedited revenue for the three months ended June 30, 2023 relates to a decrease in average freight revenue per tractor per week of 1.7%, a $10.8 million decrease in fuel surcharge revenue compared to the 2022 quarter, and a 51 (or 5.7%) average tractor decrease. The decrease in average freight revenue per tractor per week for the quarter ended June 30, 2023 is the result of a 24.0 cents per mile (or 10.3%) decrease in average rate per total mile, partially offset by a 9.5% increase in average miles per unit compared to the 2022 quarter. Expedited team-driven tractors averaged 789 tractors in the second quarter of 2023 and 2022.

 

For the six months ended June 30, 2023, the decrease in Expedited revenue relates to a 33 (or 3.7%) average tractor decrease partially offset by an increase in average freight revenue tractor per week of 0.4% compared to the same 2022 period. The increase in average freight revenue per tractor per week for the six months ended June 30, 2023 is the result of a 6.9% increase in average miles per unit and a 14.0 cents per mile (or 6.1%) increase in average rate per total mile compared to the same 2022 period. Expedited team-driven tractors averaged 786 for the six months ended June 30, 2023, and 2022.

 

The decrease in Dedicated revenue for the three months ended June 30, 2023 relates to a $9.3 million decrease in fuel surcharge revenue and a 217, or 14.8% average tractor decrease, partially offset by a 4.7% increase in average miles per unit, partially offset by an increase in average freight revenue per tractor per week compared to the 2022 quarter as the result of a 7.4 cents per mile (or 2.7%) increase in average rate per total mile compared to the 2022 quarter. Average tractors decreased 217 tractors, or 14.8% as compared to the three months ended June 30, 2022, as a result of exiting underperforming contracts.

 

For the six months ended June 30, 2023, the decrease in Dedicated revenue relates to a 205 (or 14.1%) average tractor decrease partially offset by an increase in average freight revenue tractor per week of 6.1% compared to the same 2022 period. The increase in average freight revenue per tractor per week for the six months ended June 30, 2023 is the result of a 2.0% increase in average miles per unit and a 10.0 cents per mile (or 3.9%) increase in average rate per total mile compared to the same 2022 period.

 

For the three and six months ended June 30, 2023, Managed Freight total revenue decreased primarily as a result of reduced volumes of overflow freight from both Expedited and Dedicated truckload operations. With the softening freight market, we anticipate the revenue attributable to overflow freight may continue to decline.

 

For the three and six months ended June 30, 2023, Warehousing total revenue increased as a result of period-over-period new customer business.

 

The decrease in operating income for the three months ended June 30, 2023, was the result of the decrease in total revenue described above and a $6.8 million increase in Warehousing operating expenses, partially offset by a $15.9 million, $10.3 million, and $8.8 million decrease in Dedicated and Managed Freight and Expedited operating expenses, respectively. For the six months ended June 30, 2023, the decrease in operating income was the result of the decrease in total revenue described above and a $15.0 million increase in Warehousing operating expenses, partially offset by a $29.1 million, $26.0 million, and $6.6 million decrease in Dedicated, Managed Freight, and Expedited operating expenses, respectively.

 

The decreases in Expedited operating income for the three and six months ended June 30, 2023 were primarily the result of the aforementioned decreases in revenue partially offset by decreases in Expedited operating expenses. The decreases in Expedited operating expenses for the three and six months ended June 30, 2023 were primarily the result of decreased fuel costs, improved gain on sale of equipment, and decreased maintenance and parts costs partially offset by increases in depreciation expense as a result of our equipment trade cycle and increases in the contingent consideration liability since the 2022 periods. Additionally for the six months ended June 30, 2023, the decrease in Expedited operating expenses is partially offset by an increase in driver and non-driver pay compared to the same 2022 period. The increases in Dedicated operating income for the three and six months ended June 30, 2023 were primarily the result of a decrease in Dedicated operating expenses partially offset by the aforementioned decrease in revenue. The decreases in Dedicated operating expenses for the three and six months ended June 30, 2023 is primarily the result of averaging fewer drivers and tractors, resulting in lower driver salaries, wages, and benefits, reduced use of third-party purchased transportation, and improved gain on sale of equipment as compared to the 2022 period. These decreases were partially offset by acquisition costs and increased depreciation expense as a result of our equipment trade cycle. Additionally, for the six months ended June 30, 2023, Expedited and Dedicated operating expenses were reduced as a result of the sale of a Tennessee terminal.

 

The decreases in operating income for Managed Freight for the three and six months ended June 30, 2023 were primarily the result of the aforementioned decreases in revenue partially offset by decreases in Managed Freight operating expenses. The decreases in Managed Freight operating expenses were primarily the result of the changes in revenue driving changes in variable expenses, primarily purchased transportation. Additionally, the decrease in operating expenses for the six months ended June 30, 2023 was partially offset by a small number of prior period claims. The increases in Warehousing operating expenses for the three and six months ended June 30, 2023, were a result of leased space for new business and pay increases, partially offset by a reduction in outsourced labor since the 2022 periods. In our asset-light reportable segments, we are prioritizing long-term growth, focusing on talent acquisition and technology enhancements.

 

Page 33

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. Going forward, we expect revenue equipment acquisitions through purchases and finance leases to increase as a percentage of our fleet as we decrease our use of operating leases for revenue equipment. Further, we expect to increase our capital allocation toward our Dedicated, Managed Freight, and Warehousing reportable segments to become the go-to partner for our customers’ most critical transportation and logistics needs. We had working capital (total current assets less total current liabilities) of $44.9 million and $66.5 million at June 30, 2023 and December 31, 2022, respectively. Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs, and we do not expect to experience material liquidity constraints in the foreseeable future.

 

With an average fleet age of 2.2 years at June 30, 2023, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options. If we were to grow our independent contractor fleet, our capital requirements would be reduced.

 

As of June 30, 2023 and December 31, 2022 we had $248.6 million and $179.6 million in debt and lease obligations, respectively, consisting of the following:

 

 

$40.1 million and no outstanding borrowings under the Credit Facility;
     
  No outstanding borrowings under the Draw Note;
     
  $129.8 million and $88.9 million in revenue equipment installment notes, respectively;
     
  $19.7 million and $20.3 million in real estate notes, respectively;
     
  $5.4 million and $5.8 million of the principal portion of financing lease obligations, respectively; and
     
  $53.5 million and $64.6 million of the operating lease obligations, respectively.

 

The increase in borrowings under the Credit Facility is due to the acquisition of LTST and repurchasing $25.3 million of our outstanding Class A Common Stock under the stock repurchase program. The increase in revenue equipment installment notes is primarily due to replacing our older equipment with new equipment as part of our trade cycle. The decrease in the finance lease and operating lease obligations was primarily due to amortization of the lease liability.

 

As of June 30, 2023, we had $40.2 million borrowings outstanding, undrawn letters of credit outstanding of approximately $21.6 million, and available borrowing capacity of $48.2 million under the Credit Facility. Additionally, we had $45.0 million of remaining availability of a $45.0 million Draw Note from Triumph which is available solely to fund any indemnification owed to Triumph in relation to the TFS Settlement. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment. 

 

Our net capital expenditures for the six months ended June 30, 2023 totaled $111.9 million of expenditures, as compared to $63.0 million of expenditures for the prior year period. During the six months ended June 30, 2023, we took delivery of approximately 234 new tractors and 262 new trailers, while disposing of approximately 321 used tractors and 175 used trailers. Our current fleet plan for fiscal 2023 includes the delivery of an additional 454 new company replacement tractors and 357 additional new trailer deliveries. Net gains on disposal of equipment and real estate in the six months ended June 30, 2023 were $11.8 million compared to $0.6 million in the same prior year period primarily due to the $7.6 million gain on a Tennessee terminal during the 2023 period and the aforementioned disposal of revenue equipment as part of our trade cycle. For the balance of 2023, our baseline expectation for net capital expenditures is $45 million to $55 million. Our capital investment plan reflects our priorities of improving operational uptime, lowering operating costs, and maintaining a driver-friendly fleet. Global supply chain disruptions could impact the availability of tractors and trailers and lead to increased pricing.

 

We distributed a total of $2.9 million to stockholders in the first six months of 2023 through dividends.

 

We believe we have sufficient liquidity to satisfy our cash needs, and we will continue to evaluate the nature and extent of potential short-term and long-term impacts to our business.

 

Page 34

 

Cash Flows

 

Net cash flows provided by operating activities decreased to $12.4 million for the six months ended June 30, 2023, compared to $76.9 million for the same 2022 period, primarily due to an increase in receivables and driver advances as a result of an increase in our average receivable days outstanding and a $17.8 million decrease in net income, as well as decreases to non-cash expenses compared to the prior year period. 

 

Net cash flows used by investing activities were $113.3 million for the six months ended June 30, 2023, compared to $63.0 million used in the same 2022 period. The change in net cash flows used by investing activities was primarily due to the April 2023 acquisition of LTST and the timing of our trade cycle whereby we took delivery of approximately 234 new tractors and 262 new trailers, while disposing of approximately 321 used tractors and 175 used trailers during the 2023 period compared to delivery of 115 new tractors and no new trailers, while disposing of approximately 35 used tractors and no used trailers in the same 2022 period. The 2022 period includes the February 2022 acquisition of AAT.

 

Net cash flows provided by financing activities were approximately $40.1 million for the six months ended June 30, 2023, compared to $17.9 million used in the same 2022 period. The change in net cash flows provided by financing activities was primarily a function of net proceeds relating to notes payable, and our Credit Facility of $76.9 million in the 2023 period compared to net proceeds of $32.4 million in the 2022 period, the repurchase of $25.4 million of shares of our Class A common stock during the 2023 period compared to $43.3 million during the same 2022 period, as well as the payment of approximately $2.9 million in dividends during the 2023 period compared to $2.0 million during the same 2022 period.

 

Net cash flows provided by operating activities and used by financing activities in the 2023 period also included payment of $0.8 million and $9.2 million, respectively, of contingent consideration liabilities related to the acquisition of AAT.

 

On May 18, 2022 our Board approved a new stock repurchase authorization of up to $75.0 million of our Class A common stock, with any remaining amount available under prior authorizations being excluded and no longer available. Under such authorization, we repurchased 2.0 million shares of our Class A common stock for $54.7 million during 2022. On January 30, 2023, the Board approved an amendment to the Company's stock repurchase program authorizing the purchase of up to an aggregate $55.0 million of our Class A common stock. The amendment added an incremental approximately $37.5 million to the approximately $17.5 million that was then-remaining under the program. Since May 2022, we have repurchased a total of 2.7 million shares of our Class A common stock. No additional shares were repurchased through August 7, 2023.

 

Our cash flows may fluctuate depending on capital expenditures, future stock repurchases, dividends, strategic investments or divestitures, any indemnification calls related to the TFS Settlement, and the extent of future income tax obligations and refunds.

 

Page 35

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. There have been no material changes to our most critical accounting policies and estimates during the three and six months ended June 30, 2023, compared to those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Form 10-K for the year ended December 31, 2022.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our market risks have not changed materially from the market risks reported in our Form 10-K for the year ended December 31, 2022.

 

Page 36

 

 

ITEM 4.     CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2023, as a result of the deficiency described below.

 

The deficiency identified in our disclosure controls and procedures was that our review of the calculation of the significance of our acquisition of LTST did not identify than an incorrect input was used within the significance determination. As a result of this incorrect input, we did not identify the need to provide certain audited financial statements and related pro forma information for LTST on Form 8-K. This did not impact our current financial reporting or the Company’s current or historical financial statements. On April 27, 2023, we filed a Form 8-K disclosing our acquisition of LTST (the "Original Form 8-K"). On August 3, 2023, we filed an amendment to the Original Form 8-K, confirming that such financial statements, to the extent required, will be filed as an amendment to the Original Form 8-K as soon as they are available.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.

 

We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.

 

Changes in Internal Control Over Financial Reporting 

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Page 37

 

PART II

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

Information about our legal proceedings is included in Note 10, "Commitments and Contingencies" of the accompanying condensed consolidated financial statements and is incorporated by reference herein.

 

 

Page 38

 

ITEM 1A.

RISK FACTORS

 

While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our Form 10-Q for the quarter ended March 31, 2023 and Form 10-K for the year ended December 31, 2022, in the sections entitled "Item 1A. Risk Factors," describe some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects.

 

Page 39

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The table below sets forth information with respect to purchases of our Class A common stock made by us during the quarter ended June 30, 2023:

 

Period

 

Total Number of Shares Purchased

   

Average Price Paid per Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)

   

Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)

 

April 1-30, 2023

    129,320     $ 34.71       129,320     $ 32,620,200  

May 1-31, 2023

    -       -       -       32,620,200  

June 1-30, 2023

    -       -       -       32,620,200  

Total

    129,320               129,320     $ 32,620,200  

 

(1)

On May 18, 2022, our Board approved a stock repurchase authorization of up to $75.0 million of our Class A common stock, with any remaining amount available under prior authorizations being excluded and no longer available. Under such authorization, we repurchased 0.1 million shares of our Class A common stock for $2.9 million during January 2023. On January 30, 2023, the Board approved an amendment to the Company's stock repurchase program authorizing the purchase of up to an aggregate $55.0 million of our Class A common stock. The amendment added an incremental approximately $37.5 million to the approximately $17.5 million that was then-remaining under the program.

 

The payment of cash dividends is currently limited by our financing arrangements, including certain covenants under our Credit Facility. We distributed a total of $2.9 million to stockholders in the first six months of 2023 through dividends.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

 

During the second quarter of 2023, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.

 

Page 40

 

 

ITEM 6.       EXHIBITS

 

Exhibit

Number

 

Reference

 

Description

3.1

(1)

Third Amended and Restated Articles of Incorporation

3.2

(2)

Sixth Amended and Restated Bylaws

4.1

(1)

Third Amended and Restated Articles of Incorporation

4.2

(2)

Sixth Amended and Restated Bylaws

10.1 (3)* Second Amendment to the Covenant Transportation Group, Inc. Third Amended and Restated 2006 Omnibus Incentive Plan
10.2 #* Retirement Agreement, by and between Joey B. Hogan and Transport Management Services, LLC, dated as of May 22, 2023
10.3 #* Amended and Restated Covenant Logistics Group Supplemental Savings Plan, dated as of May 17, 2023
10.4 (4)** Stock Purchase Agreement, dated April 26, 2023, by and among Landair Holdings, Inc., Covenant Logistics Group, Inc., Lew Thompson & Son Trucking, Inc. and related entities, and the stockholders of Lew Thompson & Son Trucking, Inc. and related entities

31.1

#

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Principal Executive Officer

31.2

#

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by James S. Grant, the Company's Principal Financial Officer

32.1

##

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer

32.2

##

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by James S. Grant, the Company's Principal Financial Officer

101.INS

  Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104   Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101)

References:

   

(1)

Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K, filed July 2, 2020.

(2)

Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-K, filed August 9, 2021.
(3) Incorporated by reference to Appendix A to the Company's Definitive Proxy Statement filed with the SEC on April 14, 2023 in connection with the 2023 Annual Meeting of Stockholders.
(4) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K/A, filed August 3, 2023.

#

Filed herewith.

##

Furnished herewith.

* Management contract or compensatory plan or arrangement.
** Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments to the exhibit have been omitted.

 

Page 41

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

COVENANT LOGISTICS GROUP, INC.

   
   

Date: August 9, 2023

By:

/s/ James S. Grant

   

James S. Grant

   

Chief Financial Officer in his capacity as such and as a duly authorized officer on behalf of the issuer

 

 

Page 42
EX-10.2 2 ex_554927.htm EXHIBIT 10.2 ex_554927.htm

Exhibit 10.2

 

RETIREMENT AGREEMENT

 

This Retirement Agreement (the “Agreement”) is made and entered into by and between Transport Management Services, LLC (“Company”) and Joey B. Hogan (“Executive”). Once signed by both parties, this Agreement will be deemed effective as of the later of (i) June 30, 2023 and (ii) the eighth day after Executive executes and does not revoke this Agreement.

 

1.         Retirement. Executive is currently employed by the Company. Executive has previously entered into (i) that certain Confidentiality, Non-Disclosure and Restrictive Covenants Agreements (the “NDA”) with the Company, Covenant Logistics Group, Inc. (the “Parent”), or a subsidiary or affiliate of the Company or Parent (collectively, the “Company Group”), and (ii) that certain Executive Severance Agreement (the “Severance Agreement”) with the Company. In the event of a conflict between the terms set forth herein and those set forth in the NDA or Severance Agreement, the terms set forth herein shall control. Effective June 30, 2023, Executive will retire as an employee of the Company and will relinquish all titles held by Executive at the Company and any member of the Company Group; provided, however, that Executive will continue to serve as a director of Parent, assuming that he is elected as a director of Parent at the 2023 annual meeting of stockholders of Parent.

 

2.         Retirement Benefits. Subject to Sections 4, 5, and 8 of this Agreement, the Company agrees to pay Executive (i) the portion of Executive’s annual base salary accrued through June 30, 2023, (ii) any payments for reimbursement of expenses, which are due, accrued, or payable as of June 30, 2023, in accordance with the Company’s expense reimbursement policy, and (iii) a lump sum payment on the date hereof of $930,000. The amounts set forth in items (i) and (ii) of the previous sentence, and $680,000 of the amount set forth in item (iii) of the previous sentence, will, subject to the provisions of Section 5, be paid on first payroll date that occurs on or after June 30, 2023. Under the terms of the AAT Bonus Program and Section 8 of this Agreement, $150,000.00 of the amount set forth in item (iii) will be paid on the first payroll date that occurs on or after the date that is 6 months and 1 day following Executive’s separation from service on June 30, 2023. Consistent with Section 8 and Executive’s deferral elections under the Covenant Logistics Group Supplemental Savings Plan, $100,000.00 of the amount set forth in item (iii) will be paid in five annual installments, with the first installment being paid on the first payroll date that occurs on or after February 1, 2024. To the extent Executive is eligible to continue to participate after June 30, 2023 under the terms of the Company’s (or another member of the Company Group’s) health, dental, and disability plans, Executive may continue to participate in such plans at his sole expense (including with respect to premiums and deductibles). Executive will also receive compensation for his service as a director of Parent equivalent to compensation received by non-employee directors of Parent.

 

3.         Waiver of Other Retirement Benefits. Other than as provided for in this Agreement or the Equity Awards (as hereinafter defined), Executive waives any right to retirement, severance, or any other benefits (other than benefits under any retirement plan qualified under Section 401(a) of the Internal Revenue Code of 1986) in connection with or as a result of his employment with the Company or the cessation of his employment with the Company, for any reason, under any prior agreement (including, without limitation, under the NDA, the Severance Agreement, the 2023 Senior Executive Bonus Program, the AAT Bonus Program, and any other bonus or compensation plan adopted by the Company or any member of the Company Group) or otherwise, and agrees that he is only entitled to the payments and other benefits provided in this Agreement.

 

4.         Restrictive Covenants. Executive acknowledges and agrees that during the course of Executive’s employment with the Company Group, Executive has had access to confidential information which, if disclosed, would assist in competition against the Company Group and that Executive generated goodwill for the Company Group during the course of Executive’s employment. Therefore, Executive hereby acknowledges and agrees that the following restrictive covenants (i) are necessary to protect the goodwill, confidential information, and other legitimate interests of the Company Group (including, without limitation, the preservation of trade secrets, valuable confidential and professional information, and substantial relationships with prospective and existing customers and suppliers), (ii) are reasonable and necessary to induce the Company to enter into this Agreement, and (iii) are of a scope (including, without limitation, the time period and geographic parameters) that is reasonably tailored, and not broader than necessary, to protect the legitimate business interests of the Company Group, and do not prevent or preclude Executive from earning a suitable livelihood. Executive hereby agrees to abide by the following restrictive covenants:

 

(a)         Non-Competition. During the period of Executive’s employment with any member of the Company Group and continuing until the later of (i) June 30, 2026 or (ii) one (1) year after Executive’s service as a director of Parent terminates (the date of such termination, the “Director Termination Date”), Executive will not, and will not permit any other person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion, directly or indirectly engage or invest in, own, manage, operate, finance, control or participate in the ownership, management, operation, financing or control of, be employed by, serve as an agent, officer, director or consultant to, be associated with or in any manner connected with, lend his, her, or its name or any similar name to, lend his, her or its credit or render services or advice to, any Competitive Business anywhere throughout the lower 48 contiguous United States, provided, however, that nothing herein will be deemed to prevent Executive from acquiring through market purchases and owning, solely as an investment, less than one percent (1%) in the aggregate of the equity securities of any entity that derives more than fifty percent (50%) of its gross revenues from the conduct of any Competitive Business, whose shares are registered under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are listed or admitted for trading on any United States national securities exchange or are quoted on any system of automated dissemination of quotations of securities prices in common use, so long as Executive is not directly or indirectly a member of any “control group” (within the meaning of the rules and regulations of the Securities and Exchange Commission) of any such issuer; and provided further, however, that nothing herein will be deemed to prevent Executive from acquiring through market purchases and owning, solely as an investment, any shares, units or other interest in a mutual fund, exchange-traded fund, unit investment trust, or similar investment vehicle whose holdings include investments in any Competitive Business or any entity involved in a Competitive Business. For purposes of this Agreement, “Competitive Business” means any business conducted by any member of the Company Group as of Director Termination Date (including any business where strategic plans were in place as of Director Termination Date for any member of the Company Group to engage in such business).

 

(b)         Non-Solicitation. During the period of Executive’s employment with any member of the Company Group and continuing until the later of (i) June 30, 2026 or (ii) one (1) year after the Director Termination Date, Executive will not, and will not permit any other person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i) whether on Executive’s own behalf or on behalf of another person, provide or solicit to provide any Competitive Services to any person that: (x) was at any time in the twelve (12) months prior to the Director Termination Date a customer, shipper, carrier or other client of any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the Director Termination Date or solicitation of Competitive Services, a customer, shipper, carrier or other client of any member of the Company Group;

 

(ii) whether on Executive’s own behalf or on behalf of another person, solicit to employ or engage or employ or otherwise engage as an employee, independent contractor, agent or otherwise, any person who: (x) was at any time in the twelve (12) months prior to the Director Termination Date an employee, independent contractor, or agent of, or was otherwise engaged with, any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the solicitation, employment, or engagement of such person, an employee, independent contractor, or agent of, or was otherwise engaged with, any member of the Company Group, provided that (A) general advertising (including general internet advertising) not targeted at a particular employee or consultant or independent contractor (or group thereof) shall not be deemed a breach hereof, nor shall hiring or retaining any person who responds to such a general advertisement not targeted at a particular employee or consultant or independent contractor (or group thereof), and (B) nothing in this Agreement shall prohibit Executive or any other person from engaging any professional services firm or other third party advisor that provides consulting services to multiple clients.; or

 

(iii) at any time interfere with any member of the Company Group’s relationship with any person that: (x) was at any time in the twelve (12) months prior to the Director Termination Date an employee, contractor, supplier, agent, customer, shipper, carrier or other client of any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the interference an employee, contractor, supplier, agent, customer, shipper, carrier or other client of any member of the Company Group; including, without limitation, soliciting, encouraging, advising or influencing such person(s) to discontinue or reduce the extent of such relationship. For purposes of this Agreement, “Competitive Services” means those services provided in the furtherance of a Competitive Business.

 

(c)         Non-Disclosure. During the period of Executive’s employment with any member of the Company Group and continuing until the later of (i) June 30, 2026 or (ii) one (1) year after the Director Termination Date, Executive will not, and will not permit any other person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i) make, publish, communicate or take any action to disparage any member of the Company Group or any of their respective stockholders, directors, officers, employees, agents, products or services; or

 

(ii) divulge, communicate, use to the detriment of any member of the Company Group, or for the benefit of any other person(s), or misuse in any way, any confidential information or trade secrets pertaining to any member of the Company Group, except as required or compelled by law.

 

(d)         Reformation; Severability; Injunctive Relief. Executive expressly acknowledges and agrees that the restrictions contained herein are reasonable and no greater than necessary to protect the legitimate interests of the Company Group. However, if any covenant set forth in this Agreement (including, without limitation, this Section 4) is determined by any court to be unenforceable by reason of its extending for too great a period of time or over too great a geographic area, or by reason of its being too extensive in any other respect, such covenant shall be reformed and interpreted to extend only for the longest period of time and over the greatest geographic area, and to otherwise have the broadest application as shall be enforceable. The invalidity or unenforceability of any particular provision (or part thereof) of this Agreement (including, without limitation, this Section 4) shall not affect the other provisions hereof (or parts thereof), which shall continue in full force and effect. Without limiting the foregoing, the covenants contained herein shall be construed as separate covenants, covering their respective subject matters, with respect to each of the separate cities, counties and states, and each political subdivision thereof, within the lower 48 contiguous United States. Executive further acknowledges that any violation of this Agreement (including, without limitation, this Section 4) will result in irreparable injury to the Company Group, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such violation would not be reasonable or adequate compensation to Company Group for such a violation. Accordingly, Executive agrees that if Executive violates the provisions of this Agreement (including, without limitation, this Section 4), any member of the Company Group, in addition to all other remedies which may be available to it at law or in equity, shall be entitled to specific performance and injunctive relief, without posting bond or other security, and without the necessity of proving actual damages. Such relief will not be exclusive, but will be in addition to all other relief available to Company Group, at law and equity.

 

5.         Payment Conditions. In order to receive the amount payable under Section 2 hereof, Executive must execute a timely and effective release of claims in the form attached hereto and marked Exhibit A (the "Release of Claims"), and notwithstanding any other provisions of this Agreement to the contrary no amounts set forth in item (iii) of Section 2 hereof will be payable unless Executive has returned to the Company the signed Release of Claims by August 29, 2023, which is at least 60 days after Executive’s receipt of this Agreement and the attached Release of Claims, and no amounts set forth in item (iii) of Section 2 will be payable until such Release of Claims has become effective. The Release of Claims creates legally binding obligations and the Company therefore advises Executive to consult an attorney before signing it. In the event Executive breaches any of Executive’s obligations hereunder (including, without limitation, Executive’s obligations under Section 4), then, in addition to any other remedies to which the Company Group may be entitled as a result of such breach, the Company Group shall be immediately and automatically released from any obligation to make any further amounts payable under Section 2 hereof and, upon notice from the Company, Executive shall be required to immediately reimburse the Company Group for any and all such payments made to Executive by the Company.

 

6.         Equity Awards. This Agreement does not incorporate, supersede, or in any way affect Parent’s 2006 Omnibus Incentive Plan, as amended from time to time, or any restricted stock agreements, stock option grants, or other equity awards (collectively, the “Equity Awards”).

 

7.         No Admission of Wrongdoing. The parties agree that nothing in this Agreement is an admission by any party hereto of any wrongdoing, either in violation of an applicable law or otherwise, and that nothing in this Agreement is to be construed as such by any person.

 

8.         Limitation on Payments. The Company intends that all payments and benefits provided under this Agreement or otherwise are exempt from, or comply with, the requirements of Section 409A of the Internal Revenue Code of 1986 (the “Code”) and any guidance promulgated under Section 409A of the Code (collectively, “Section 409A”) so that none of the payments or benefits will be subject to the additional tax imposed under Section 409A, and any ambiguities in this Agreement will be interpreted in accordance with this intent. No payment or benefits to be paid to Executive that constitutes deferred compensation under Section 409A payable upon separation from service (including settlement of Company equity awards that constitute deferred compensation under Section 409A), if any, under this Agreement or otherwise, when considered together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A (together, the “Deferred Payments”) will be paid or otherwise provided until Executive has a “separation from service” within the meaning of Section 409A. If, at the time of Executive’s termination of employment, Executive is a “specified employee” within the meaning of Section 409A, then the payment of the Deferred Payments will be delayed to the extent necessary to avoid the imposition of the additional tax imposed under Section 409A, which generally means that Executive will receive payment on the first payroll date that occurs on or after the date that is 6 months and 1 day following Executive’s termination of employment. Executive will have a separation from service on June 30, 2023. Consistent with the terms of the AAT Bonus Program and Executive’s deferral elections under the Covenant Logistics Group Supplemental Savings Plan, (a) $150,000.00 of the amount set forth in item (iii) of Section 2 will be paid on the first payroll date that occurs on or after the date that is 6 months and 1 day following Executive’s separation from service on June 30, 2023, and (b) $100,000.00 of the amount set forth in item (iii) of Section 2 will be paid in five annual installments, with the first installment being paid on the first payroll date that occurs on or after February 1, 2024. The Company reserves the right to amend this Agreement as it considers necessary or advisable, in its sole discretion and without the consent of Executive or any other individual, to comply with any provision required to avoid the imposition of the additional tax imposed under Section 409A or to otherwise avoid income recognition under Section 409A prior to the actual payment of any benefits or imposition of any additional tax. Each payment, installment, and benefit payable under this Agreement is intended to constitute a separate payment for purposes of U.S. Treasury Regulation Section 1.409A-2(b)(2). In no event will the Company or any member of the Company Group reimburse, indemnify, or hold harmless Executive for any taxes, penalties and interest that may be imposed, or other costs that may be incurred, as a result of Section 409A.

 

9.         Voluntary Agreement; Tax Advice and Information. Executive further acknowledges that he understands this Agreement, the claims he is releasing under the Release of Claims, the promises and agreements he is making, and the effect of his signing this Agreement. Executive understands the payments to him under this Agreement are in excess of those to which he is legally entitled and agrees that he voluntarily accepts the payments described above as additional consideration for the restrictive covenants set forth in Section 4 of this Agreement and other obligations referred to herein and for the purpose of making a full and final compromise, adjustment and settlement of all claims or potential claims against the Releasees (as defined in the Release of Claims) to the extent set forth in the Release of Claims. Executive acknowledges that none of the Company, any member of the Company Group, nor any of their respective representatives have provided Executive with any tax advice or tax-related representations concerning any payments or benefits provided for in this Agreement. Further, Executive understands that he should consult Executive’s own independent tax advisors for any such tax advice or information.

 

10.         Other Provisions. Except as otherwise set forth or permitted herein, no provisions of this Agreement may be modified, waived, or discharged except by a written document signed by Executive and a duly authorized Company officer. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, representatives, heirs and estates, as applicable. This Agreement shall not be assignable by Executive without the prior written consent of the Company. This Agreement shall be governed by the laws of the State of Tennessee. Any litigation or other dispute resolution proceeding may only be brought within Tennessee, and all parties to this Agreement consent to jurisdiction in Hamilton County. It is the desire and intent of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any provision of this Agreement is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such provision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or if such provision cannot be so modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this Agreement; provided, however, that the legality, binding effect and enforceability of the remaining provisions of this Agreement, to the extent the economic benefits conferred upon the parties by virtue of this Agreement remain substantially unimpaired, shall not be affected or impaired in any manner, and any such invalidity, illegality or unenforceability with respect to such provision in such jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute the same instrument. The parties have not relied on any representations, promises, or agreements of any kind made to them in connection with this Agreement, except for those set forth in this Agreement. All oral or written agreements or representations, express or implied, with respect to the subject matter of this Agreement are set forth herein. Except as expressly provided herein, this Agreement supersedes all previous agreements, promises, representations, understandings and negotiations between the parties, whether written or oral, with respect to the subject matter hereof. Subject to Section 8, payments provided for hereunder will be subject to required withholding of federal, state and local income, excise, and employment-related taxes, without any gross-ups or similar payments made to Executive.

 

11.         Communications with Government Agencies. Notwithstanding anything contained herein, in the NDA or in the Severance Agreement to the contrary, nothing set forth herein, in the NDA or in the Severance Agreement shall limit Executive’s ability to communicate with the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (collectively, “Government Agencies”) or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company, or limit Executive’s right to receive an award for information provided to any Government Agencies.

 

12.         Notices. Any notices to be given hereunder by either party hereto to the other may be effected either by (a) personal delivery in writing or (b) mail, registered or certified, postage prepaid, with return receipt requested.  Mailed notices will be addressed to Executive at the address on file at the Company, and to the Company as follows:

 

Covenant Logistics Group, Inc.

400 Birmingham Hwy.

Chattanooga, TN 37419

Attn: Chief Executive Officer

 

[Signature Page Follows]



 

IN WITNESS WHEREOF, the parties have executed and delivered, or have caused to be executed and delivered by their duly authorized representatives, this Retirement Agreement.

 

EXECUTIVE:                                                      

 

/s/ Joey Hogan

Joey B. Hogan, individually

 

Date Signed: 5/22/2023

 

 

TRANSPORT MANAGEMENT SERVICES, LLC

 

By: /s/ David Parker

Name: David R. Parker

Title: Chief Executive Officer and President

 

Date Signed: 5/22/2023

 
EX-10.3 3 ex_554928.htm EXHIBIT 10.3 ex_554928.htm

Exhibit 10.3

 

Covenant Logistics Group

Supplemental Savings Plan

(Revised and Restated as of May 17, 2023)

 

 

 

ARTICLE I. INTRODUCTION.

 

 

 

 

WHEREAS, Covenant Logistics Group, Inc. (the "Company") established a plan solely to provide deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"), effective as of the Effective Date (as defined herein);

 

WHEREAS, this Covenant Logistics Group Supplemental Savings Plan (the "Plan") is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended ("Code Section 409A") and regulations thereunder;

 

WHEREAS, vested accrued benefits shall be paid from the Company’s general assets and/or assets set aside in a grantor trust by the Company to meet its obligations under the Plan; and

 

WHEREAS, the Company now wishes to revise and restate the Plan.

 

NOW, THEREFORE, the Company does hereby adopt the revised and restated Plan as follows:

 

ARTICLE II. DEFINITIONS.

 

"Account" means a bookkeeping account established and maintained by the Company with respect to each Participant to which (i) Salary Reduction Contributions, (ii) Bonus Reduction Contributions, (iii) Commission Reduction Contributions, (iv) Director Fee and Retainer Reduction Contributions, (v) Matching Contributions, and (vi) Nonelective Company Contributions shall be credited.

 

"Beneficiary" shall have the meaning set forth in Section 7.1.

 

"Board" means the Company's Board of Directors.

 

"Bonus" means any cash incentive or performance bonus (not including restricted stock units) payable to an Eligible Employee or Director by the Company during any portion of a Plan Year in which the Eligible Employee or Director is a Participant.

 

"Bonus Reduction Contribution" means an amount of Bonus a Participant elects to defer under his or her Deferral Agreement that shall be deducted from the Participant's Bonus without reduction for any taxes or withholding (except to the extent required by law or under Code Section 409A).

 

"Change in Control" means

 

(a) the date any Person or more than one Person acting as a group (as determined under Treasury Regulation §1.409A-3(i)(5)(v)(B)), acquires ownership of the stock of the Company that, together with stock held by such Person or group, constitutes more than fifty percent of the total fair market value or total voting power of the stock of such Company;

 

(b) the date any one Person, or more than one Person acting as a group (as defined under Treasury Regulation §1.409A-3(i)(5)(v)(B)), acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such Person or Persons) ownership of stock of the corporation possessing thirty percent or more of the total voting power of the stock of such corporation;

 

(c) the date that a majority of members of the Board is replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election; or

 

(d) the date that any Person or more than one Person acting as a group (as defined under Treasury Regulation §1.409A-3(i)(5)(v)(B)) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total gross fair market value equal to or more than forty percent of the total gross fair market value of all assets of the Company immediately before such acquisition or acquisitions. For purposes of this subsection (d), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

 

"Claimant" means a Participant (or in the case of the Participant's death, the Participant's Beneficiary or Beneficiaries) who makes a written application to the Plan Administrator for benefits that he or she believes are due under the Plan.

 

"Code" means the Internal Revenue Code of 1986, as amended.

 

"Code Section 409A" means Section 409A of the Code and all regulatory and interpretive guidance issued thereunder from time to time.

 

“Commission” means “sales commission compensation” within the meaning of Code Section 409A. Whether commissions constitute “sales commission compensation” within the meaning of Section 409A shall be determined under procedures established by the Plan Administrator and in accordance with the Code Section 409A.

 

“Commission Reduction Contribution” means an amount of Commission a Participant elects to defer under his or her Deferral Agreement that shall be deducted from the Participant’s Commission without reduction for any taxes or withholding (except to the extent required by law or under Code Section 409A).

 

"Compensation" means amounts attributable to Salary, Bonus, Commission, and/or Director Fees and Retainers.

 

"Company" means Covenant Logistics Group, Inc.

 

"Company Contributions" means Matching Contributions and/or Nonelective Company Contributions made by the Company on behalf of a Participant.

 

"Deferral Agreement" means an election by an Eligible Employee or Director to (i) make a Salary Reduction Contribution, Bonus Reduction Contribution, Commission Reduction Contribution, and/or Director Fee and Retainer Reduction, and (ii) specify a time and form of distribution for Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, Director Fee and Retainer Contributions, and/or Company Contributions made on his or her behalf.

 

“Director” means a member of the Company’s Board who is not an employee of the Company or of an employer with whom the Company would be considered a single employer under Code Sections 414(b) or (c).

 

“Director Fees and Retainers” means the cash fees and cash retainers paid to Directors as compensation for serving as a Director, which are paid following the end of each calendar quarter of service as a director.

 

“Director Fee and Retainer Reduction Contribution” means an amount of Director Fees and Retainers a Participant elects to defer under his or her Deferral Agreement that shall be deducted from the Participant’s Director Fees and Retainers without reduction for any taxes or withholding (except to the extent required by law or under Code Section 409A).

 

"Disability" or "Disabled" means: a Participant (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Company.

 

"Distributable Event" means an event described in Section 5.2.

 

"Effective Date" means July 1, 2022.

 

"Election Period" means the enrollment window(s) designated by the Company or Plan Administrator in which a Participant may be permitted to enter into or modify a Deferral Agreement in accordance with the terms of the Plan.

 

"Eligible Employee" means an individual who is part of a select group of management or highly compensated individuals who performs services, as an employee, for the Company or any employer with whom the Company would be considered a single employer under Code Sections 414(b) or (c), and who has been chosen by the Company, in its sole discretion, to be eligible to participate in the Plan.

 

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

 

"Investment Fund" means an investment fund or vehicle or other measure for crediting earnings, including, without limitation, certificates of deposit, mutual funds, money market accounts or funds, limited partnerships, or debt or equity securities, in which the amount credited to a Participant's Accounts may be deemed to be invested.

 

"Legally Binding Right" means a nonforfeitable right that cannot be reduced or eliminated within the meaning of Code Section 409A.

 

"Matching Contribution" means an amount contributed by the Company on behalf of a Participant who elects to make a Salary Reduction Contribution, Bonus Reduction Contribution, and/or Commission Reduction Contribution under the Plan, and which is a percentage of such contribution up to a maximum amount as determined by the Company in its sole discretion.

 

"Nonelective Company Contribution" means an amount contributed by the Company on behalf of a Participant, which may be designated as a flat dollar amount or as a percentage of Salary, Bonus, Commission, and/or Director Fees and Retainers.

 

"Participant" means any Eligible Employee or Director who has elected to participate in the Plan by entering into a Deferral Agreement.

 

"Performance-Based Compensation" means a Bonus to which a Participant is entitled upon satisfying organizational or individual performance goals for a performance period that is at least twelve consecutive months. Whether or not a Bonus is considered Performance-Based Compensation shall be determined under procedures established by the Plan Administrator and in accordance with Code Section 409A.

 

"Person" means such term as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 and as used in Sections 13(d)(3) and 14(d)(2) of such Act.

 

"Plan" means this Covenant Logistics Group Supplemental Savings Plan.

 

"Plan Administrator" means the Board or a committee appointed by the Board in accordance with Section 8.1.

 

"Plan Year" means a calendar year.

 

"Retirement Age" means the date on which a Participant’s age and service with the Company (as an employee or Director) first total 70.

 

"Salary" means the base cash salary payable to an Eligible Employee by the Company during any portion of a Plan Year in which the Eligible Employee is a Participant.

 

"Salary Reduction Contribution" means an amount of Salary a Participant elects to defer under his or her Deferral Agreement which shall be deducted from the Participant's Salary without reduction for any taxes or withholding (except to the extent required by law or under Code Section 409A).

 

"Separation from Service" means a "separation from service" within the meaning of Code Section 409A.

 

"Specified Employee" means a Participant who, as of the date of such Participant's Separation from Service, is a key employee of the Company if the Company is then publicly traded on an established securities market or otherwise, and, for purposes of this definition, a Participant is a key employee if the Participant meets the requirements of Code Section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding Code Section 416(i)(5)) at any time during the twelve-month period ending on the identification date. If the Participant is a key employee as of the identification date, the Participant shall be treated as a Specified Employee for purposes of the Plan for the entire twelve-month period beginning on the effective date. The identification date shall be December 31, and the effective date shall be April 1, unless subsequently changed by the Plan Administrator in accordance with the requirements of Code Section 409A.

 

"Trust" means a trust that may be established, in the Company's sole discretion, pursuant to a trust agreement between the Company and a trustee in order to set aside assets in respect of the Company's obligations under the Plan, which trust shall meet the requirements of a "grantor trust" under Revenue Procedures 92-64 and 92-65 and otherwise shall meet the requirements under Code Section 409A.

 

"Unforeseeable Emergency" means a severe financial hardship to a Participant resulting from an illness or accident of the Participant, the Participant's spouse, or a dependent (as defined in Code Section 152(a)) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Whether or not a Participant has an Unforeseeable Emergency shall be determined by the Plan Administrator in accordance with Code Section 409A.

 

ARTICLE III. ELIGIBILITY AND PARTICIPATION.

 

3.1. Eligibility to Participate in the Plan. An Eligible Employee or Director shall become a Participant in the Plan by executing a Deferral Agreement in accordance with procedures established by the Plan Administrator.

 

3.2. Change in Employment Status or Status as a Director. During any period in which a Participant remains in the employ or service of the Company, but ceases to be an Eligible Employee or Director, he or she shall cease to be eligible to make future deferrals of Compensation or receive Company Contributions under the Plan; however, all past Deferral Agreements of the Participant shall remain in effect.

 

ARTICLE IV. ELECTIONS AND CONTRIBUTIONS.

 

4.1. Deferral Elections.

 

(a) Deferral Agreement.

 

(1) Salary. An Eligible Employee may make an irrevocable Deferral Agreement to make a Salary Reduction Contribution in one-percent increments, not to exceed 50% of Salary, during an Election Period within the Plan Year preceding the Plan Year in which the Participant provides the services for which the Salary is paid.

 

(2) Bonus. An Eligible Employee may make an irrevocable Deferral Agreement to make a Bonus Reduction Contribution in one-percent increments, not to exceed 100% of a Bonus, during an Election Period within the Plan Year preceding the first Plan Year in which the Participant provides the services with respect to which the Bonus is earned.

 

(3) Commission. An Eligible Employee may make an irrevocable Deferral Agreement to make a Commission Reduction Contribution in one-percent increments, not to exceed 100%, of Commissions during an Election Period within the Plan Year preceding the Plan Year in which the Participant provides the services for which the Commissions are paid.

 

(4) Director Fees and Retainers. A Director may make an irrevocable Deferral Agreement to make a Director Fee and Retainer Reduction Contribution in one-percent increments, not to exceed 100%, of the Director Fees and Retainers during a Election Period within the Plan Year preceding the Plan Year in which the Participant provides the services for which the Director Fees and Retainers are paid.

 

(5) Any Deferral Agreement must specify, with respect to any Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, and/or Director Fee and Retainer Contributions:

 

(i) The form of distribution; and

 

(ii) The time of distribution.

 

(6) A Deferral Agreement shall be made in accordance with procedures established by the Plan Administrator and in accordance with Code Section 409A.

 

(b) Notwithstanding the foregoing:

 

(1) Newly Eligible Participants. An Eligible Employee or Director who is eligible to participate in the Plan for the first time and who has never been eligible to participate in another account balance plan (within the meaning of Code Section 409A) of the Company will become eligible on the first day of the calendar quarter after first becoming an Eligible Employee or Director. Such an Eligible Employee or Director may make an initial Deferral Agreement to make a Salary Reduction Contribution, Bonus Reduction Contribution, Commission Reduction Contribution, and/or Director Fee and Retainer Contribution either before becoming eligible or within 30 days of becoming eligible (that is, either before, or within 30 days following, the beginning of the first calendar quarter after becoming an Eligible Employee or Director). Any such Deferral Agreement must, however, apply only to Compensation paid for services performed after the election and after becoming eligible. For this purpose, an election will be considered to apply to Compensation paid for services performed after an election if the election applies to no more than an amount equal to the total amount of the Compensation for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election over the total number of days in the performance period.

 

(2) Bonuses. If the Plan Administrator, in its sole discretion, determines that a Bonus constitutes Performance-Based Compensation, an Eligible Employee may make an irrevocable Deferral Agreement to make a Bonus Reduction Contribution with respect to such Performance-Based Compensation (in one-percent increments, not to exceed 100% of the Bonus), no later than six months before the end of the applicable performance period. In order to make a Deferral Agreement under this Section 4.1.(b)(2), (i) the Participant must perform services for the Company continuously from the later of the beginning of the performance period or the date the Company establishes the performance goals through the date the Participant makes the Deferral Agreement, and (ii) the amount of the Performance-Based Compensation that will be earned must not be readily ascertainable (e.g., because the performance goals are not certain to be achieved) as of the date of the Deferral Agreement.

 

(3) Commissions. In the case of Commissions, a Participant shall be treated as providing the services to which that Commission relates only in (A) the Participant’s taxable year in which the customer remits payment to the Company, or (B) if the Plan Administrator in its sole discretion so determines, and if applied consistently to all similarly situated Participants, the Participant’s taxable year in which the sale occurs. A Participant may, therefore, make an irrevocable Deferral Agreement to make a Commission Reduction Contribution by December 31 of the calendar year preceding the year in which the customer remits payment, or if the Plan Administrator so decides, under a consistently applied rule, December 31 of the calendar year preceding the year in which the sale occurs.

 

(c) Failure to Make Timely Election. If an Eligible Employee or Director fails to enter into a timely Deferral Agreement, the Eligible Employee or Director shall be deemed to have elected to make no Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, or Director Fee and Retainer Contributions for the applicable Plan Year.

 

(d) Crediting of Reduction Contributions. Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, and Director Fee and Retainer Contributions made by a Participant under this Section shall be credited to the Participant's Account as soon as practicable after the Compensation subject to the Deferral Agreement would otherwise have been paid to the Participant.

 

(e) Vesting. A Participant shall be fully vested in his or her Salary Reduction Contributions, Bonus Reduction Contributions, Commission reduction Contributions, and Director Fee and Retainer Contributions.

 

4.2. Company Contributions.

 

(a) Matching Contributions. The Company may make a Matching Contribution, in an amount determined by the Company in its sole discretion.

 

(b) Nonelective Company Contributions. The Company may make Nonelective Company Contributions under this Plan, in an amount determined by the Company in its sole discretion.

 

(c) Election of Time and Form of Distribution for Company Contributions.

 

(1) Matching Contributions. Matching Contributions shall be distributed at the same time and in the same form as the distribution of the Salary Reduction Contribution, Bonus Reduction Contribution, Commission Reduction Contribution, and/or Director Fee and Retainer Contribution to which the Matching Contribution relates.

 

(2) Nonelective Company Contributions. A Participant may make an irrevocable Deferral Agreement with respect to Nonelective Company Contributions for a year, specifying:

 

(i) The form of distribution; and

 

(ii) The time of distribution.

 

A Participant shall have the same options as to the time and form of distribution of Nonelective Company Contributions as those set out in Article V for Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, and Director Fee and Retainer Contributions. A Participant’s election of a time and form of distribution for a Nonelective Company Contribution need not be the same as the time and form of distribution the Participant chooses for Compensation the Participant elects to defer for the same year.

 

(3) Deadline for Nonelective Company Contribution Election. The time and form of distribution for Nonelective Company Contributions must be specified prior to the time the Participant obtains a Legally Binding Right to such Company Contributions, unless the Legally Binding Right is to a payment in a subsequent year that is subject to a condition requiring the Participant to continue to provide services for a period of at least 12 months from the date the Participant obtains the Legally Binding Right to avoid forfeiture of the payment. In the latter event, an election as to the form and time of distribution for the Nonelective Company Contribution may be made on or before the 30th day after the Participant obtains the Legally Binding Right to the compensation, provided that the election is made at least 12 months in advance of the earliest date at which the forfeiture condition could lapse. After such time, modification to the time or form of distribution may only be made in accordance with Section 4.3.

 

(4) A Deferral Agreement shall be made in accordance with procedures established by the Plan Administrator and in accordance with Code Section 409A.

 

(d) Crediting of Company Contributions. Company Contributions made on behalf of a Participant and deferred under this Section shall be credited to the Participant's Account as soon as practicable.

 

(e) Vesting of Company Contributions. A Participant shall vest in Company Contributions credited to the Participant's Account with respect to a Plan Year on the date or dates specified by the Plan Administrator or Company prior to the date on which the Participant first obtained a Legally Binding Right to such Company Contributions (generally, the date they are credited to the Participant's Account), contingent upon such Participant's continued employment with the Company through the date or dates established for vesting. Company Contributions made to a Participant’s Account shall, however, become fully vested upon a Change in Control, the Participant’s death, or the Participant becoming Disabled; provided, that any Company Contributions that are not vested as of the date of a Participant's Separation from Service shall be forfeited upon such Separation from Service.

 

4.3. Changes in Time or Form of Distribution.

 

(a) A Participant may make a subsequent election to change the time and/or form of a distribution he or she specified in his or her Deferral Agreement, but only if the following conditions are satisfied:

 

(1) The election may not take effect until at least twelve months after the date on which the election is made;

 

(2) A distribution may not be made earlier than at least five years from the date the distribution would have otherwise been made;

 

(3) The election must be made at least twelve months before the date of the first scheduled distribution; and

 

(4) The election may not result in an impermissible acceleration of payment prohibited under Code Section 409A and applicable guidance thereunder. If the Plan Administrator, in its sole discretion, determines that a change in the time and/or form of a distribution will result in an impermissible acceleration, the Plan Administrator reserves the right to refuse to honor the change.

 

(b) The rules set forth in this Section may apply separately to each time and/or form of distribution specified in a Participant's Deferral Agreement.

 

(c) A change in the time and/or form of distribution shall be made in accordance with procedures established by the Plan Administrator and in accordance with Code Section 409A.

 

ARTICLE V. DISTRIBUTION OF ACCOUNT BALANCES.

 

5.1. Form of Distribution.

 

(a) Participant Contributions. A Participant may elect in his or her Deferral Agreement to have his or her Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, and/or Director Fee and Retainer Contributions distributed in:

 

(1) A single lump sum payment; or

 

(2) Annual installment payments over two, three, four, or five years where the Participant has chosen distributions to start on a date specified by the Participant; or annual installment payments over five, ten or fifteen years where the Participant elects to start distributions upon Separation from Service. A Participant electing installment payments over a period of years must designate in his or her Deferral Agreement the number of annual installments to be made.

 

(b) Matching Contributions. Vested Matching Contributions shall be distributed in the same form as the Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, and/or Director Fee and Retainer Contributions to which they relate.

 

(c) Nonelective Company Contributions. A Participant may make an irrevocable Deferral Agreement specifying the form of distribution for a Nonelective Company Contribution, choosing from the same options as those set out in subsection (a) above. If a Participant does not make a timely election (timely under the rules set out in Section 4.2(c)(3)) with respect to the form of distribution for a Nonelective Company Contribution, distribution of the vested portion of the Nonelective Company Contribution shall be made in a single lump sum.

 

(d) The distribution form(s) elected under this Section shall be made (or commence) upon the occurrence of a Distributable Event, and in accordance with the Company's distribution procedure.

 

5.2. Time of Distribution.

 

(a) Participant Contributions. A Participant may elect in his or her Deferral Agreement to have his or her Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, and/or Director Fee and Retainer Contributions distributed commencing on one of the following Distributable Events, or on the earlier to occur of the following Distributable Events:

 

(1) the Participant's Separation from Service; or

 

(2) a date specified by the Participant that is at least two years after the effective date of the Deferral Agreement.

 

(b) Special Rule for Bonus Reduction Contributions. Except for bonuses with respect to which the Board or Compensation Committee of the Board indicates when approving the Bonus program that this subsection does not apply, if a Participant’s Deferral Agreement elects Separation from Service as a Distributable Event for a Bonus Reduction Contribution, distribution of that Bonus Reduction Contribution upon Separation from Service will commence on the later of Separation from Service or the 90th day after the end of the performance period for the Bonus (or, if later, in the case of a Specified Employee at the time indicated in Section 5.3).

 

(c) Matching Contributions. Vested Matching Contributions shall be distributed at the same time as the Salary Reduction Contributions, Bonus Reduction Contributions, Commission Reduction Contributions, and/or Director Fee and Retainer Contributions to which they relate.

 

(d) Nonelective Company Contributions. A Participant may make an irrevocable Deferral Agreement specifying the time of distribution for a Nonelective Company Contribution, choosing from the same options as those set out in subsection (a) above. If a Participant does not make a timely election (timely under the rules set out in Section 4.2(c)(3)) with respect to the time of distribution a Nonelective Company Distribution, distribution of the vested portion of the Nonelective Company Contribution shall be made within 60 days after the Participant’s Separation from Service.

 

(e) Month When Payment Starts. Lump sum payments and annual installments shall be made in the month of February. In the case of a Separation from Service of a Specified Employee, distributions under subsection (a)(1) of this Section 5.2. may not, however, be made before the date which is six months after the date of the Specified Employee's Separation from Service (or, if earlier, the date of death of the Specified Employee).

 

5.3. Distribution to Specified Employee Due to Separation from Service. Notwithstanding any other provisions of this Plan to the contrary, in the case of a Separation from Service of a Specified Employee distributions that are to be made due to that Separation from Service may not be made before the date which is six months after the date of the Specified Employee's Separation from Service (or, if earlier, the date of death of the Specified Employee), and shall be made within 60 days after the end of that six month period.

 

5.4. Distribution upon Disability or Death. Notwithstanding the foregoing, if a Participant becomes Disabled or dies while employed by the Company (or while serving as a Director), the unpaid portion of his or her total vested Account balance, if any, shall vest and be distributed in a single lump sum within 60 days after the Participant’s Separation from Service.

 

 

5.5. Withdrawals for Unforeseeable Emergency.

 

(a) Notwithstanding the foregoing, a Participant may withdraw all or any portion of his or her total vested Account balance for an Unforeseeable Emergency. The amounts distributed with respect to an Unforeseeable Emergency may not exceed the amounts necessary to satisfy such Unforeseeable Emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation of such assets would not itself cause severe financial hardship) or by cessation of deferrals under the Plan. The Plan Administrator, in its sole discretion, shall determine whether an Unforeseeable Emergency has occurred and shall distribute all or any portion of a Participant's total vested Account balance as soon as practicable after such a determination.

 

(b) If a Participant receives a distribution on account of an Unforeseeable Emergency under this Plan, such Participant's Deferral Agreement shall terminate as soon as practicable following a withdrawal for an Unforeseeable Emergency.

 

5.6. Impermissible Acceleration. If the Plan Administrator, in its sole discretion, determines that a distribution under this Article will result in an impermissible acceleration prohibited under Code Section 409A and applicable guidance thereunder, the Plan Administrator reserves the right to refuse to make any such distribution unless and until the Plan Administrator determines that the distribution can be made in accordance with Code Section 409A.

 

5.7. Delay in Payment. The Plan Administrator may delay a distribution under this Article V. if making a timely payment would jeopardize the ability of the Company to continue as a going concern or if the payment would violate federal securities laws. In each case, payment must be made as soon as the reason for the delay ceases to exist.

 

5.8. Default Time and Form of Distribution. If the Participant does not select a time and form of distribution in accordance with this Article V, the time and form of distribution shall be a single lump sum distribution of the Participant's total vested Account balance paid as soon as administratively feasible following the Participant's Separation from Service in accordance with the Plan's distribution procedures (including the prohibition on distributions to a Specified Employee before the date which is (i) six months after the date of the Specified Employee’s Separation from Service, or (ii) if earlier, the date of death of the Specified Employee).

 

5.9. Accelerated Payment Exceptions. The Plan Administrator may provide for an accelerated payment of vested amounts credited to a Participant's Account under the following circumstances:

 

(a) To comply with a Qualified Domestic Relations Order. For this purpose, a Qualified Domestic Relations Order means a judgment, decree, or order (including the approval of a settlement agreement) which:

 

(1) is issued pursuant to a State's domestic relations law;

 

(2) relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child, or other dependent of the Participant;

 

(3) creates or recognizes the right of a spouse, former spouse, child, or other dependent of the Participant to receive all or a portion of the Participant's benefits under the Plan;

 

(4) requires payment to such person of their interest in the Participant's benefits in an immediate lump payment; and

 

(5) meets such other requirements established by the Company.

 

The Company shall determine whether any document received by it is a Qualified Domestic Relations Order. In making this determination, the Company may consider the rules applicable to "domestic relations orders" under Code Section 414(p) and ERISA Section 206(d), and such other rules and procedures as it deems relevant.

 

(b) To cover any employment tax, where applicable, on amounts deferred under the Plan, to pay federal income tax withholding amounts (or the corresponding state, local, or foreign tax withholding amounts as a result of the payment of any employment taxes). The total payment under this acceleration provision must not exceed the aggregate employment taxes and withholding related to such employment taxes;

 

(c) In connection with a termination and liquidation of the plan in accordance with Treasury Regulation §1.409-3(j)(4)(ix);

 

(d) Due to income inclusion resulting from a violation of Code Section 409A; and

 

(e) To cover a debt owed to the Company if the participant incurred the debt in the ordinary course of business, the offset does not exceed $5,000 per calendar year, and payment occurs on the due date of the debt.

 

5.10. Distributions under this Plan shall only be made in cash.

 

ARTICLE VI. PLAN INVESTMENTS.

 

6.1. All amounts payable under the Plan to a Participant or his or her Beneficiaries shall be paid by the Company from its general assets. The payment of benefits under the Plan represents an unfunded, unsecured obligation of the Company. Notwithstanding the fact that the Participants' Accounts may be adjusted by an amount that is measured by reference to the performance of any deemed Investment Funds as provided in Section 6.2., no person entitled to payment under the Plan shall have any claim, right, security interest, or other interest in any fund, trust, account, insurance contract, or asset of the Company which may be responsible for such payment, including any Trust.

 

6.2. In the Company's discretion, the Plan Administrator may permit Participants to elect one or more Investment Funds in which the Accounts will be deemed to be invested for purposes of crediting earnings or losses on such Accounts. Such election shall be subject to any such restrictions as deemed advisable by the Plan Administrator in its sole discretion. In the event that the Company does not permit a Participant to make a deemed investment election or in the event that the Participant fails to elect a deemed investment election with respect to his or her Accounts, the Company may designate a default Investment Fund for such purpose. Amounts to be distributed shall be valued as of the last business day of the month preceding the month in which the payment is to be made.

 

ARTICLE VII. BENEFICIARY.

 

7.1. A Participant shall designate on his or her Deferral Agreement or other form provided by the Company, the Beneficiary or Beneficiaries (i.e., a person or persons who are to receive distributions in the event of the Participant's death, which may be a trust). If the Participant has not properly designated a Beneficiary, or if for any reason such designation shall not be legally effective, or if said designated Beneficiary or Beneficiaries shall predecease the Participant, then the Participant's estate shall be treated as the Beneficiary. A Participant may change his or her Beneficiary designation at any time by amending his or her Deferral Agreement or other form provided by the Company.

 

ARTICLE VIII. ADMINISTRATION.

 

8.1. Plan Administrator. The Plan Administrator shall be the Board or a committee of employees of the Company and/or Directors appointed by the Board to administer the Plan.

 

8.2. Claims for Benefits.

 

(a) Filing a Claim. A Participant or his or her authorized representative may file a claim for benefits under the Plan. Any claim must be in writing and submitted to the Plan Administrator. Claimants will be notified in writing of approved claims, which will be processed as claimed. A claim is considered approved only if its approval is communicated in writing to a Claimant.

 

(b) Denial of Claim. In the case of the denial of a claim respecting benefits paid or payable with respect to a Participant, a written notice will be furnished to the Claimant within ninety days of the date on which the claim is received by the Plan Administrator. If special circumstances (such as for a hearing) require a longer period, the Claimant will be notified in writing, prior to the expiration of the ninety-day period, of the reasons for an extension of time; provided, however, that no extensions will be permitted beyond ninety days after the expiration of the initial ninety-day period.

 

(c) Reasons for Denial. A denial or partial denial of a claim will be dated and signed by the Plan Administrator and will clearly set forth:

 

(1) The specific reason or reasons for the denial;

 

(2) Specific reference to pertinent Plan provisions on which the denial is based;

 

(3) A description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and

 

(4) An explanation of the procedure for review of the denied or partially denied claim set forth below, including the Claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

 

(d) Review of Denial. Upon denial of a claim, in whole or in part, a Claimant or his or her duly authorized representative will have the right to submit a written request to the Plan Administrator for a full and fair review of the denied claim by filing a written notice of appeal with the Plan Administrator within sixty days of the receipt by the Claimant of written notice of the denial of the claim. A Claimant or the Claimant's authorized representative will have, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits and may submit issues and comments in writing. The review will take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

 

If the Claimant fails to file a request for review within sixty days of the denial notification, the claim will be deemed abandoned and the Claimant precluded from reasserting it. If the Claimant does file a request for review, his or her request must include a description of the issues and evidence he or she deems relevant. Failure to raise issues or present evidence on review will preclude those issues or evidence from being presented in any subsequent proceeding or judicial review of the claim.

 

(e) Decision upon Review. The Plan Administrator will provide a prompt written decision on review. If the claim is denied on review, the decision shall set forth:

 

(1) The specific reason or reasons for the adverse determination;

 

(2) Specific reference to pertinent Plan provisions on which the adverse determination is based;

 

(3) A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits; and

 

(4) A statement describing any voluntary appeal procedures offered by the Plan and the Claimant's right to obtain the information about such procedures, as well as a statement of the Claimant's right to bring an action under ERISA Section 502(a).

 

A decision will be rendered no more than sixty days after the Plan Administrator's receipt of the request for review, except that such period may be extended for an additional sixty days if the Plan Administrator determines that special circumstances (such as for a hearing) require such extension. If an extension of time is required, written notice of the extension will be furnished to the Claimant before the end of the initial sixty-day period.

 

(f) Finality of Determinations; Exhaustion of Remedies. To the extent permitted by law, decisions reached under the claims procedures set forth in this Section shall be final and binding on all parties. No legal action for benefits under the Plan shall be brought unless and until the Claimant has exhausted his or her remedies under this Section. In any such legal action, the Claimant may only present evidence and theories which the Claimant presented during the claims procedure. Any claims which the Claimant does not in good faith pursue through the review stage of the procedure shall be treated as having been irrevocably waived. Judicial review of a Claimant's denied claim shall be limited to a determination of whether the denial was an abuse of discretion based on the evidence and theories the Claimant presented during the claims procedure. Any suit or legal action initiated by a Claimant under the Plan must be brought by the Claimant no later than one year following a final decision on the claim for benefits by the Plan Administrator. The one-year limitation on suits for benefits will apply in any forum where a Claimant initiates such suit or legal action. Any claim under this Plan relating to an alleged failure to make a contribution to this Plan, and any suit or legal action for benefits under this Plan must be made within two years of the date on which the claimed contribution is alleged should have been made or, if later, the date on which the Claimant is or should have been aware that such contributions have not been made.

 

(g) Disability Claims. Claims for Disability benefits shall be determined under the DOL Regulation Section 2560.503-1 which is hereby incorporated by reference.

 

8.3. Indemnification. To the extent not covered by insurance, the Company shall indemnify the Plan Administrator, each employee, officer, director, and agent of the Company, and all persons formerly serving in such capacities, against any and all liabilities or expenses, including all legal fees relating thereto, arising in connection with the exercise of their duties and responsibilities with respect to the Plan, provided however that the Company shall not indemnify any person for liabilities or expenses due to that person's own gross negligence or willful misconduct.

 

8.4. Power and Authority. The Plan Administrator shall have full power and authority to adopt rules and regulations (including without limitation a reasonable claims procedure) for the administration of the Plan, and to interpret, alter, amend, or revoke any rules and regulations so adopted. The Plan Administrator shall have full power and authority to interpret the terms and provisions of this Plan and any instrument filed hereunder.

 

8.5. Finality of Decisions. The Plan Administrator's decisions or interpretations made under the Plan shall be binding and final on all interested parties.

 

8.6. Information Requests. Any party entitled to payment under this Plan shall comply with all written requests of the Plan Administrator or its designee to furnish the Company with any information known or available to such party and necessary to the administration of the Plan.

 

8.7. No Fiduciary Relationship. Neither the Plan, nor any action taken by the Plan Administrator or the Company, shall create or be deemed to create a trust or fiduciary relationship of any kind between the Company and the Participant, his or her Beneficiary, or any other person.

 

ARTICLE IX. MISCELLANEOUS.

 

9.1. Amendment of Plan. The Company or its delegate may amend any provisions of the Plan at any time to the extent that it may deem advisable without the consent of Participants or any Beneficiaries, provided that no such amendment shall reduce the amount of Compensation deferred before such amendment without the consent of affected Participants or Beneficiaries.

 

9.2. Termination of Plan.

 

(a) The Company may terminate the Plan at any time, provided the following requirements are satisfied:

 

(1) The termination is not proximate to a downturn in the Company's financial health;

 

(2) All plans and arrangements that would be aggregated with the Plan for purposes of Code Section 409A if the same service provider had deferrals of compensation under all of the plans and arrangements are also terminated and liquidated;

 

(3) No payments to Participants other than payments that would have been paid absent the termination are made within twelve months of the Plan termination;

 

(4) All payments in liquidation of the Plan are made within twenty-four months of the Plan termination; and

 

(5) The Company does not adopt a plan of the same type as the Plan for a period of three years following the date of Plan termination.

 

(b) Notwithstanding the foregoing, the Company may terminate the Plan:

 

(1) Within twelve months of a corporate dissolution of the Company taxed under Code Section 331 or with the approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that amounts deferred under the Plan are included in the Participants' income in the latest of:

 

(i) The calendar year in which the Plan termination occurs;

 

(ii) The calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or

 

(iii) The first calendar year in which the payment is administratively practicable.

 

(2) Within thirty days preceding or twelve months following a Change in Control, provided that all plans sponsored by the Company immediately after the Change in Control with respect to which deferrals of compensation are treated as having been deferred under a single plan for purposes of Code Section 409A are also terminated and liquidated with respect to each Participant who experienced the Change in Control, and further provided that all such Participants receive all amounts of compensation deferred under the terminated plans within twelve months of the date of termination of the plans.

 

(c) Upon Plan termination in accordance with this Section, any unpaid portion of a Participant's Account balance shall be payable in a single lump sum.

 

(d) Notwithstanding the foregoing, if the Plan Administrator, in its sole discretion, determines that any accelerated payments made on account of Plan termination are prohibited under Code Section 409A and applicable guidance thereunder, the Plan Administrator reserves the right to refuse to make any such payments unless and until the Plan Administrator determines that the payments can be made in accordance with Code Section 409A.

 

(e) For purposes of this Section, as well as Sections 9.3, 9.4, 9.5, and 9.7, "Company" shall be construed to refer to the Company and all Persons with whom the Company would be considered a single employer under Code Sections 414(b) or (c). However, solely for purposes of Section 9.2(b)(2) above, where the Change in Control results from an asset purchase transaction, the Company with the discretion to terminate and liquidate the plans is the service recipient Company that is primarily liable immediately after the transaction for the payment of the deferred compensation.

 

9.3. No benefits under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, or encumbrance. The provisions of this Plan shall be binding upon and inure to the benefit of the Company and Participants and their respective successors, heirs, personal representatives, executors, administrators, and legatees.

 

9.4. Nothing contained in the Plan shall be construed as a contract of employment or service between the Company and any Participant, or as a right of any Participant to be continued in the employment of or service to the Company, or as a limitation of the right of the Company to discharge any of its employees or service providers, with or without cause.

 

9.5. This Plan and a Participant's Deferral Agreements, and any subsequently adopted amendment thereof, shall constitute the total agreement or contract between the Company and such Participant regarding the Plan. No oral statement or other written document regarding the Plan may be relied upon by the Participant.

 

9.6. All questions arising in respect of the Plan, including those pertaining to its validity, interpretation, and administration, shall be governed, controlled, and determined in accordance with the applicable provisions of federal law and, to the extent not preempted by federal law, the laws of the State of Tennessee. All legal actions or proceedings relating to the Plan shall be brought exclusively in the courts of Tennessee.

 

9.7. Code Section 409A. It is intended that the Plan comply with the provisions of Code Section 409A. The Plan and each Deferral Agreement shall be administered in a manner consistent with this intent. Each payment made under the Plan, including each payment in a series of installment payments, shall be considered a "separate payment" within the meaning of Code Section 409A. Neither a Participant nor any of a Participant's creditors or Beneficiaries shall have the right to subject any amounts payable under the Plan to any anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment. A Participant shall be solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on a Participant or for a Participant's Account in connection with the Plan (including any taxes and penalties under Code Section 409A), and the Company shall not have any obligation to indemnify or otherwise hold a Participant harmless from any or all of such taxes or penalties.

 

This revised and restated Plan is effective on the date it is adopted (as that date is indicated below), provided that the changes to the definition of “Deferral Agreements” and the modifications to Sections 5.1, 5.2(a), 5.2(b), and 5.3 shall be effective with respect to Deferral Agreements made after the date this revised and restated Plan is adopted (as that date is indicated below).

 

IN WITNESS WHEREOF, the Company hereby adopts this revised and restated Plan this 17th day of May, 2023.

 

 

COVENANT LOGISTICS GROUP, INC.

 

 

By: /s/ James S. Grant                                    

 

 

Title: Chief Accounting Officer                  

 
EX-31.1 4 ex_532219.htm EXHIBIT 31.1 ex_532219.htm

Exhibit 31.1

 

I, David R. Parker, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Covenant Logistics Group, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: August 9, 2023

/s/ David R. Parker

 

David R. Parker

 

Principal Executive Officer

 

 
EX-31.2 5 ex_532220.htm EXHIBIT 31.2 ex_532220.htm

Exhibit 31.2

 

I, James S. Grant, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Covenant Logistics Group, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: August 9, 2023

/s/ James S. Grant

 

James S. Grant

Principal Financial Officer

 

 
EX-32.1 6 ex_532221.htm EXHIBIT 32.1 ex_532221.htm

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

 

In connection with the Quarterly Report of Covenant Logistics Group, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David R. Parker, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: August 9, 2023

/s/ David R. Parker

 

David R. Parker

 

Chief Executive Officer

 

A signed original of this written statement required by Section 906 has been provided to Covenant Logistics Group, Inc. and will be retained by Covenant Logistics Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 
EX-32.2 7 ex_532222.htm EXHIBIT 32.2 ex_532222.htm

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

 

In connection with the Quarterly Report of Covenant Logistics Group, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James S. Grant, Chief Financial Officer and Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date:   August 9, 2023

/s/ James S. Grant

  James S. Grant
 

Chief  Financial Officer

 

A signed original of this written statement required by Section 906 has been provided to Covenant Logistics Group, Inc. and will be retained by Covenant Logistics Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.