COVENANT LOGISTICS GROUP, INC. [CVLG] Filings

10-Q 1 cvti20230630_10q.htm FORM 10-Q cvti20230630_10q.htm

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

☐

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

For the transition period from to

Commission File Number: 0-24960

COVENANT LOGISTICS GROUP, INC.

(Exact name of registrant as specified in its charter)

Nevada	88-0320154
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
or organization)

400 Birmingham Hwy.
Chattanooga, TN	37419
(Address of principal executive offices)	(Zip Code)

423-821-1212

(Registrant's telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
$0.01 Par Value Class A common stock	CVLG	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒

No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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

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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

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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.

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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.

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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.

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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.

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COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE six 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.

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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.

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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.

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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	)

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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.

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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

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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.

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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.

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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.

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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