10-Q 1 cvti20220331_10q.htm FORM 10-Q cvti20220331_10q.htm
0000928658 COVENANT LOGISTICS GROUP, INC. false --12-31 Q1 2022 4,180 4,112 555 542 0.01 0.01 40,000,000 40,000,000 16,125,786 13,813,121 16,125,786 14,414,159 0.01 0.01 5,000,000 5,000,000 2,350,000 2,350,000 2,350,000 2,350,000 2,312,665 1,711,627 308 392 36 51 0.0625 5 7 10 0 0 0 0 4 21 0.75 0 1.3 5.2 5.6 6.9 1 0 0.1 49 34 802 99 102 Includes derivative assets of $122 at December 31, 2020. Excludes the three months ended March 31, 2022. 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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 March 31, 2022

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 classTrading Symbol(s)Name of each exchange on which registered
$0.01 Par Value Class A common stockCVLGThe 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 (May 4, 2022).

 

Class A Common Stock, $.01 par value: 13,247,838 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 March 31, 2022 and December 31, 2021 (unaudited)

3
     
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 (unaudited)

4
     
 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021 (unaudited)

5
     
 

Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2022 and 2021 (unaudited)

6
     
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (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

37
     

Item 4.

Controls and Procedures

38
 

PART II

OTHER INFORMATION

   

Page

Number

     

Item 1.

Legal Proceedings

39
     

Item 1A.

Risk Factors

40
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41
     

Item 3.

Defaults Upon Senior Securities

41
     

Item 4.

Mine Safety Disclosures

41
     

Item 5.

Other Information

41
     

Item 6.

Exhibits

42

 

  

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

  

March 31, 2022

  

December 31, 2021

 
  

(unaudited)

    

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $7,144  $8,412 

Accounts receivable, net of allowance of $4,180 in 2022 and $4,112 in 2021

  135,612   142,362 

Drivers' advances and other receivables, net of allowance of $555 in 2022 and $542 in 2021

  7,466   8,792 

Inventory and supplies

  3,731   3,323 

Prepaid expenses

  9,479   12,536 

Assets held for sale

  2,272   2,925 

Income taxes receivable

  3,193   10,177 

Other short-term assets

  69   - 

Total current assets

  168,966   188,527 
         

Property and equipment, at cost

  529,930   518,406 

Less: accumulated depreciation and amortization

  (184,757)  (171,923)

Net property and equipment

  345,173   346,483 
         

Goodwill

  72,006   42,518 

Other intangibles, net

  19,887   20,475 

Other assets, net

  52,762   52,384 

Noncurrent assets of discontinued operations

  1,275   1,275 

Total assets

 $660,069  $651,662 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable

  27,851   29,907 

Accrued expenses

  39,165   38,001 

Accrued purchased transportation

  17,120   24,689 

Current maturities of long-term debt

  4,607   5,722 

Current portion of finance lease obligations

  7,574   6,848 

Current portion of operating lease obligations

  13,149   15,811 

Current portion of insurance and claims accrual

  20,150   21,210 

Other short-term liabilities

  415   557 

Total current liabilities

  130,031   142,745 
         

Long-term debt

  43,167   20,347 

Long-term portion of finance lease obligations

  2,408   3,969 

Long-term portion of operating lease obligations

  19,438   21,554 

Insurance and claims accrual

  14,192   21,438 

Deferred income taxes

  86,011   84,661 

Other long-term liabilities

  840   2,149 

Long-term liabilities of discontinued operations

  5,100   5,100 

Total liabilities

  301,187   301,963 

Commitments and contingent liabilities

  -   - 

Stockholders' equity:

          

Class A common stock, $.01 par value; 40,000,000 shares authorized; 16,125,786 shares issued and 13,813,121 outstanding as of March 31, 2022; and 16,125,786 shares issued and 14,414,159 outstanding as of December 31, 2021

  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

  150,436   149,406 

Treasury stock at cost; 2,312,665 and 1,711,627 shares as of March 31, 2022 and December 31, 2021, respectively

  (37,635)  (23,662)

Accumulated other comprehensive loss

  (300)  (1,306)

Retained earnings

  246,196   225,076 

Total stockholders' equity

  358,882   349,699 

Total liabilities and stockholders' equity

 $660,069  $651,662 

 

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

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE three months ended March 31, 2022 and 2021

(In thousands, except per share data)

 

  

Three Months Ended March 31,

 
  

(unaudited)

 
  

2022

  

2021

 

Revenues

        

Freight revenue

 $257,614  $200,688 

Fuel surcharge revenue

  33,971   20,201 

Total revenue

 $291,585  $220,889 
         

Operating expenses:

        

Salaries, wages, and related expenses

 $95,338  $82,586 

Fuel expense

  35,502   22,822 

Operations and maintenance

  17,936   14,719 

Revenue equipment rentals and purchased transportation

  83,661   57,236 

Operating taxes and licenses

  2,740   2,585 

Insurance and claims

  9,179   7,838 

Communications and utilities

  1,170   1,247 

General supplies and expenses

  8,934   8,183 

Depreciation and amortization

  13,445   14,087 

Gain on disposition of property and equipment, net

  (167)  (923)

Total operating expenses

  267,738   210,380 

Operating income

  23,847   10,509 

Interest expense, net

  555   743 

Income from equity method investment

  (6,785)  (2,960)

Income before income taxes

  30,077   12,726 

Income tax expense

  7,910   4,145 

Income from continuing operations, net of tax

  22,167   8,581 

Income from discontinued operations, net of tax

  -   2,559 

Net income

 $22,167  $11,140 
         

Basic income per share:

        

Income from continuing operations

 $1.34  $0.51 

Income from discontinued operations

  -   0.15 

Net income

 $1.34  $0.66 

Diluted income per share:

        

Income from continuing operations

 $1.32  $0.50 

Income from discontinued operations

  -   0.15 

Net income

 $1.32  $0.65 

Basic weighted average shares outstanding

  16,602   16,954 

Diluted weighted average shares outstanding

  16,769   17,086 

 

 

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

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE three months ended March 31, 2022 and 2021

(Unaudited and in thousands)

 

  

Three Months Ended March 31,

 
  

2022

  

2021

 
         

Net income

 $22,167  $11,140 
         

Other comprehensive income:

        
         

Unrealized gain on effective portion of cash flow hedges, net of tax of ($308) in 2022 and ($392) in 2021, respectively

  900   1,145 
         

Reclassification of cash flow hedge losses (gains) into statement of operations, net of tax of ($36) in 2022 and $51 in 2021, respectively

  106   (150)
         

Reclassification of (gains) on sale of investments classified as available-for-sale

  -   (63)

Total other comprehensive income

  1,006   932 
         

Comprehensive income

 $23,173  $12,072 

 

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

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE three months ended March 31, 2022 and 2021

(Unaudited and in thousands)

 

  

For the Three Months Ended

 
                  

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 

 

   

For the Three Months Ended

 
                                   

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, 2020

  $ 173     $ 24     $ 143,438     $ (17,067 )   $ (2,251 )   $ 166,325     $ 290,642  

Net income

    -       -       -       -       -       11,140       11,140  

Other comprehensive income

    -       -       -       -       932       -       932  

Share repurchase

    -       -       -       (8,118 )     -       -       (8,118 )

Stock-based employee compensation expense

    -       -       2,594       -       -       -       2,594  

Issuance of restricted shares, net

    -       -       (1,158 )     625       -       -       (533 )

Balances at March 31, 2021

  $ 173     $ 24     $ 144,874     $ (24,560 )   $ (1,319 )   $ 177,465     $ 296,657  

 

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

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE three months ended March 31, 2022 and 2021

(Unaudited and in thousands)

 

    Three Months Ended March 31,  
   

2022

   

2021

 

Cash flows from operating activities:

               

Net income

  $ 22,167     $ 11,140  

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

               

Provision for losses on accounts receivable

    199       402  

(Reversal) deferral of gain on sales to equity method investee

    (30 )     45  

Depreciation and amortization

    13,445       14,087  

Deferred income tax expense

    1,047       4,735  

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

    (84 )     (120 )

Stock-based compensation expense

    1,893       2,594  

Income from equity method investment

    (6,785 )     (2,960 )

Gain on disposition of property and equipment

    (167 )     (923 )

Gain on reversal of contingent loss of discontinued operations

    -       (3,412 )

Gain on investment in available-for-sale securities

    -       (63 )

Changes in operating assets and liabilities:

               

Receivables and advances

    22,213       (6,917 )

Prepaid expenses and other assets

    3,028       (1,064 )

Inventory and supplies

    (408 )     (352 )

Insurance and claims accrual

    (8,306 )     (8,739 )

Accounts payable and accrued expenses

    (8,796 )     1,163  

Net cash flows provided by operating activities

    39,416       9,616  
                 

Cash flows from investing activities:

               

Acquisition of AAT Carriers, Inc., net of cash acquired

    (37,000 )     -  

Other investment

    (12 )     -  

Purchase of available-for-sale securities

    -       (33 )

Acquisition of property and equipment

    (8,690 )     (3,907 )

Proceeds from disposition of property and equipment

    704       13,871  

Net cash flows (used) provided by investing activities

    (44,998 )     9,931  
                 

Cash flows from financing activities:

               

Change in checks outstanding in excess of bank balances

    (216 )     (646 )

Cash dividend

    (1,047 )     -  

Repayments of notes payable

    (1,427 )     (8,713 )

Repayments of finance lease obligations

    (1,293 )     (633 )

Proceeds under revolving credit facility

    70,031       216,128  

Repayments under revolving credit facility and draw note

    (46,899 )     (220,651 )

Payment of minimum tax withholdings on stock compensation

    (35 )     (531 )

Common stock repurchased

    (14,800 )     (8,118 )

Net cash flows provided (used) by financing activities

    4,314       (23,164 )
                 

Net change in cash and cash equivalents

    (1,268 )     (3,617 )
                 

Cash and cash equivalents at beginning of period

    8,412       8,407  

Cash and cash equivalents at end of period

  $ 7,144     $ 4,790  

 

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

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.

Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 2021, condensed consolidated balance sheet was derived from our audited balance sheet as of that date. Our operating results are subject to seasonal trends when measured on a quarterly basis; therefore, operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.

 

Risks and Uncertainties

 

On July 8, 2020, we sold a portfolio of accounts receivable, contract rights, and associated assets consisting of approximately $103.3 million in net funds employed (the “Portfolio”) previously held by Transport Financial Services ("TFS"), a division of Covenant Transport Solutions, LLC, an indirect wholly owned subsidiary of the Company, to a subsidiary of Triumph Bancorp, Inc. ("Triumph") for approximately $122.3 million, consisting of $108.4 million in cash and $13.9 million in Triumph stock, plus an earn-out opportunity of up to $9.9 million. After the transaction closed, the Company and Triumph became involved in a dispute over the nature of approximately $66.0 million of the assets included in the Portfolio. The dispute was resolved on September 23, 2020 with an amendment of the purchase agreement and related funding arrangements that reduced the purchase price of the Portfolio to approximately $108.4 million, representing the cash amount received by us at closing. Additionally, the earnout opportunity was terminated and we were required to sell, and subsequently sold, the Triumph stock we received at closing for $28.1 million and remitted the proceeds to Triumph upon settlement. The amended purchase agreement resulted in a gain on the sale of the Portfolio of $3.7 million, net of related expenses.

 

The amended purchase agreement specifically identified approximately $62.0 million of accounts within the Portfolio, which related to advances on services that had not yet been performed, were placed in a loss sharing pool to be repaid with proceeds other than those generated from ordinary working capital factoring. To the extent losses on covered accounts are incurred, we will indemnify Triumph on a dollar for dollar basis for up to the first $30.0 million of losses, and on a 50% basis for up to the next $30.0 million of losses, for total indemnification exposure of up to $45.0 million (the “TFS Settlement”). During the fourth quarter of 2020, we recorded $44.2 million of contingent liabilities, reflected as other long-term liabilities from discontinued operations in our consolidated balance sheet, because as of December 31, 2020 it was probable and estimable that such amount would be due to Triumph under the TFS Settlement. During the first quarter of 2021, we received an indemnification call from Triumph of $35.6 million related to the TFS Settlement, all of which was reserved during the fourth quarter of 2020. Additionally, Triumph was able to collect some funds related to our fourth quarter 2020 accrual that allowed us the opportunity to reverse $3.4 million of our accrual during the first quarter of 2021. 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 March 31, 2022, there were no outstanding borrowings under the Draw Note and a remaining contingent liability of $5.1 million. The payment of amounts with respect to the indemnification obligations could create volatility in our reported future financial results and could have an adverse effect on our cash flows, available liquidity, and total indebtedness.

 

Page 8

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets. Depreciation of revenue equipment is our largest item of depreciation. We generally depreciate new tractors over five years to salvage values of approximately 35% of their cost, depending on the operating 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 21% 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. 

 

Recent Accounting Pronouncements

 

Accounting Standards not yet adopted

 

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

 

Page 9

 
 

Note 2.

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 167,000 and 132,000 shares issuable upon conversion of unvested restricted shares for the three months ended  March 31, 2022 and March 31, 2021, respectively. There were 153,000 unvested shares excluded from the calculation of diluted earnings per share because the performance targets were not achieved as of March 31, 2022. However, no unvested shares have been excluded from the calculation of diluted earnings per share as anti-dilutive for either of the three months ended March 31, 2022 and 2021. There were no shares issuable upon conversion of unvested employee stock options for the three months ended  March 31, 2022 and March 31, 2021, respectively. There were 196,000 unvested employee stock options excluded from the calculation of diluted earnings per share because the performance targets were not achieved as of March 31, 2022. Additionally, no unvested employee stock options were anti-dilutive for the three months ended March 31, 2022 and March 31, 2021, respectively. 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

 
  

March 31,

 
  

2022

  

2021

 

Numerators:

        

Income from continuing operations

 $22,167  $8,581 

Income from discontinued operations

  -   2,559 

Net income

 $22,167  $11,140 

Denominator:

        

Denominator for basic income per share – weighted-average shares

  16,602   16,954 

Effect of dilutive securities:

        

Equivalent shares issuable upon conversion of unvested restricted shares

  167   132 

Equivalent shares issuable upon conversion of unvested employee stock options

  -   - 

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

  16,769   17,086 
         

Basic income per share:

        

Income from continuing operations

 $1.34  $0.51 

Income from discontinued operations

  -   0.15 

Net income

 $1.34  $0.66 

Diluted income per share:

        

Income from continuing operations

 $1.32  $0.50 

Income from discontinued operations

  -   0.15 

Net income

 $1.32  $0.65 

 

Page 10

 
 

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. 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 of available-for-sale securities is based upon quoted prices in active markets. 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. 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)

               

Hedge derivatives

 

March 31, 2022

   

December 31, 2021

 

Net Fair Value of Derivative

  $ (415 )   $ (1,808 )

Quoted Prices in Active Markets (Level 1)

    -       -  

Significant Other Observable Inputs (Level 2)

    (415 )     (1,808 )

Significant Unobservable Inputs (Level 3)

    -       -  

 

There were no available-for-sale securities recorded as of March 31, 2022 or December 31, 2021. Our financial instruments consist primarily of cash and cash equivalents, certificates of deposit, accounts receivable, commodity contracts, accounts payable, debt, and interest rate swaps. 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  March 31, 2022, 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. There were no fuel hedge derivatives outstanding as of March 31, 2022. The fair value of all interest rate swap agreements that were in effect as of  March 31, 2022 was an approximately $0.4 million liability.

 

Page 11

 

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 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 months ended March 31, 2022 and 2021:

 

(in thousands)

 

Three Months Ended March 31,

 
  

2022

  

2021

 

Total revenue

 $-  $- 

Operating expenses

  -   - 

Operating income

  -   - 

Reversal of contingent loss liability

  -   (3,412)

Interest expense

  -   - 

Income before income taxes

  -   3,412 

Income tax expense

  -   853 

Income from discontinued operations, net of tax

 $-  $2,559 

 

Reversal of contingent liability for the three months ended March 2021 relates to the reduced exposure of future indemnification by the Company to Triumph, as a result of the collection of covered receivables identified in the amended purchase agreement, as described in Note 1.

The following table summarizes the major classes of assets and liabilities included as discontinued operations as of  March 31, 2022 and December 31, 2021:

(in thousands)

 

March 31, 2022

  

December 31, 2021

 

Noncurrent deferred tax asset

 $1,275  $1,275 

Noncurrent assets from discontinued operations

  1,275   1,275 

Total assets from discontinued operations

 $1,275  $1,275 
         

Liabilities:

        

Long-term contingent loss liability

  5,100   5,100 

Long-term liabilities of discontinued operations

  5,100   5,100 

Total liabilities from discontinued operations

 $5,100  $5,100 
 

There were no net cash flows related to discontinued operations for the three months ended March 31, 2022 and 2021.

 

Refer to Note 1, “Significant Accounting Policies” of the accompanying condensed consolidated financial statements for further information about the amended TFS purchase agreement. 

 

Page 12

 
 

Note 5.

Segment Information

 

We have four reportable segments:

 

Expedited: The Expedited 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 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. Many of our Dedicated contract customers are automotive companies or shippers of produce, where the nature of the product we ship requires high service standards.

 

Managed Freight: The Managed Freight 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 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, 2021. 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 months ended March 31, 2022 and 2021:

 

(in thousands)

                                       

Three Months Ended March 31, 2022

 

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

   

Consolidated

 

Total revenue from external customers

  $ 98,797     $ 88,947     $ 86,151     $ 17,690     $ 291,585  

Intersegment revenue

    891       -       -       -       891  

Operating income

    9,331       2,641       10,831       1,044       23,847  

 

Three Months Ended March 31, 2021

 

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

   

Consolidated

 

Total revenue from external customers

  $ 78,481     $ 75,446     $ 51,397     $ 15,565     $ 220,889  

Intersegment revenue

    446       -       -       -       446  

Operating income (loss)

    6,237       (1,770 )     4,887       1,155       10,509  

 

(in thousands)

 

For the Three Months Ended March 31,

 
   

2022

   

2021

 

Total external revenues for reportable segments

  $ 291,585     $ 220,889  

Intersegment revenues for reportable segments

    891       446  

Elimination of intersegment revenues

    (891 )     (446 )

Total consolidated revenues

  $ 291,585     $ 220,889  

 

Page 13

 
 

Note 6.

Income Taxes

 

Income tax expense in both 2022 and 2021 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 IRS has issued guidance that allows meals and incidental expense per diem to be 100% deductible for tax years 2021 and 2022. Accordingly, there is no adjustment in 2021 or 2022 as our per diem plan qualifies for this treatment. In years with partially nondeductible per diem, the 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. Drivers who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable wages.

 

Our liability recorded for uncertain tax positions as of  March 31, 2022 has decreased by less than $0.1 million since December 31, 2021.

 

The net deferred tax liability of $84.7 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 March 31, 2022 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 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. The CARES Act, among other things, includes provisions for refundable payroll tax credits, deferral for employer-side social-security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. As of September 30, 2021, the Company recorded a benefit of $0.6 million against labor expense for refundable payroll tax credits. The Company will continue to monitor the benefits of the Cares Act going forward.

 

On March 11, 2021, President Biden signed the American Rescue Plan ("ARPA") into law. Of relevance to the Company, the ARPA extended the reach of Internal Revenue Code Section 162(m) to include compensation paid to the eight highest-paid individuals (rather than three highest); however, this change is not effective until 2027. There is no material impact to the financial statements at this time.

 

Page 14

 
 

Note 7.

Debt

 

Current and long-term debt and lease obligations consisted of the following as of  March 31, 2022 and December 31, 2021:

 

(in thousands)

 

March 31, 2022

  

December 31, 2021

 
  

Current

  

Long-Term

  

Current

  

Long-Term

 

Borrowings under Credit Facility

 $-  $23,132  $-  $- 

Borrowings under the Draw Note

  -   -   -   - 

Revenue equipment installment notes; weighted average interest rate of 1.8% at March 31, 2022, and 1.2% at December 31, 2021, due in monthly installments with final maturities at various dates ranging from April 2022 to November 2022, secured by related revenue equipment

  3,405   -   4,537   2 

Real estate notes; interest rate of 2.0% at March 31, 2022 and 1.8% at December 31, 2021 due in monthly installments with a fixed maturity at August 2035, secured by related real estate

  1,202   20,035   1,185   20,345 

Total debt

  4,607   43,167   5,722   20,347 

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

  7,574   2,408   6,848   3,969 

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

  13,149   19,438   15,811   21,554 

Total debt and lease obligations

 $25,330  $65,013  $28,381  $45,870 

 

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 $50.0 million subject to Lender acceptance of the additional funding commitment. The accordion feature was increased to $75.0 million in May 2022. Refer to Note 15, "Subsequent Events" for a summary of certain changes made to the Credit Facility in May 2022. 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.

 

As of March 31, 2022, borrowings under the Credit Facility were classified as either "base rate loans" or "LIBOR loans." Base rate loans accrued interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.25% to 0.75%; while LIBOR loans accrued interest at LIBOR, 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. Refer to Note 15, "Subsequent Events" for a summary of certain changes made to the Credit Facility in May 2022.

 

As of March 31, 2022, borrowings under the Credit Facility were 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) 40.9% of the Lenders' aggregate revolving commitments under the Credit Facility, or (d) $45.0 million, plus (iii) the lesser of (a) $10.4 million or (b) 80% of the appraised fair market value of eligible real estate, as reduced by a periodic amortization amount. In May 2022, the Credit Facility was amended to remove real estate from this calculation and increase the noted caps on eligible revenue equipment from 40.9% and $45.0 million to 60.0% and $65.0 million, respectively. Refer to Note 15, "Subsequent Events" for a summary of certain other changes made to the Credit Facility in May 2022.

 

We had $23.1 million borrowings outstanding under the Credit Facility as of March 31, 2022, undrawn letters of credit outstanding of approximately $25.2 million, and available borrowing capacity of $61.7 million. As of March 31, 2022, there were $11.1 million base rate and $12.0 million of LIBOR loans. Based on availability as of March 31, 2022 and 2021, there was no fixed charge coverage requirement.

 

Page 15

 

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

 

Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from  April 2022 to November 2022. 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 $3.4 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 2022, 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 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 March 31, 2022, there were no outstanding borrowings under the Draw Note.

 

Page 16

 
 

Note 8.

Lease Obligations

 

The finance leases in effect at  March 31, 2022 terminate from  May 2022 through  November 2023 and contain guarantees of the residual value of the related equipment by us.

 

 A summary of our lease obligations at March 31, 2022 and 2021 are as follows:

 

(dollars in thousands)

 

Three Months Ended

   

Three Months Ended

 
   

March 31, 2022

   

March 31, 2021

 

Finance lease cost:

               

Amortization of right-of-use assets

  $ 688     $ 1,007  

Interest on lease liabilities

    124       174  

Operating lease cost

    5,437       5,935  

Variable lease cost

    22       39  

Total lease cost

  $ 6,271     $ 7,155  
                 

Other information

               

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

               

Operating cash flows from finance leases

    124       174  

Operating cash flows from operating leases

    5,459       5,974  

Financing cash flows from finance leases

    1,293       633  

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

    458       -  

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

    53       224  

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

    1.3          

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

    5.2          

Weighted-average discount rate—finance leases

    5.6 %        

Weighted-average discount rate—operating leases

    6.9 %        

 

As of  March 31, 2022, and December 31, 2021, right-of-use assets of $31.1 million and $35.7 million for operating leases and $22.9 million and $23.2 million for finance leases, respectively, are included in net property and equipment in our condensed consolidated balance sheets. Operating lease right-of-use asset amortization is included in revenue equipment rentals and purchased transportation, communication and utilities, and general supplies and expenses, depending on the underlying asset, in the condensed consolidated statement of operations. Amortization of finance leased assets is included in depreciation and amortization expense in the condensed consolidated statement of operations.

 

Our future minimum lease payments as of March 31, 2022, are summarized as follows by lease category:

 

(in thousands)

 

Operating

   

Finance

 
2022 (1)   $ 11,840     $ 6,834  

2023

    9,398       2,942  

2024

    2,497       108  

2025

    2,112       108  

2026

    2,170       108  

Thereafter

    11,499       747  

Total minimum lease payments

  $ 39,516     $ 10,847  

Less: amount representing interest

    (6,929 )     (865 )

Present value of minimum lease payments

  $ 32,587     $ 9,982  

Less: current portion

    (13,149 )     (7,574 )

Lease obligations, long-term

  $ 19,438     $ 2,408  

 

(1) Excludes the three months ended March 31, 2022.

 

Page 17

 
 

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

 

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  March 31, 2022, there were 1,125,479 shares remaining of the 4,200,000 shares available for award under the Incentive Plan. No awards may be made under the Incentive Plan after June 1, 2030. 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 $1.7 million and the expense of $2.6 million for the three months ended March 31, 2022 and 2021, respectively. Of the stock compensation expense recorded for the three months ended  March 31, 2022, $1.0 million relates to restricted shares and $0.7 million relates to unvested employee stock options. Of the stock compensation expense recorded for the three months ended March 31, 2021, $2.2 million relates to restricted shares and $0.4 million relates to unvested employee stock options. Included in general supplies and expenses within the condensed consolidated statements of operations is stock-based compensation expense for non-employee directors of $0.1 million and $0.0 million for the three months ended March 31, 2022 and 2021, 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 March 31, 2022, certain participants elected to forfeit receipt of an aggregate of 1,569 shares of Class A common stock at a weighted average per share price of $22.44 based on the closing price of our Class A common stock on the dates the shares vested in 2022, in lieu of the federal and state minimum statutory tax withholding requirements. We remitted less than $0.1 million to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements.

 

Note 10.

Commitments and Contingencies

 

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

 

Our subsidiary Covenant Transport, Inc. (“Covenant Transport”) is a defendant in a lawsuit filed on November 9, 2018, in the Superior Court of Los Angeles County, California. The lawsuit was filed on behalf of Richard Tabizon (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The complaint asserts that the time period covered by the lawsuit is from October 31, 2014 to the present and alleges claims for failure to properly pay drivers for rest breaks, failure to provide accurate itemized wage statements and/or reimbursement of business related expenses, unlawful deduction of wages, failure to pay proper minimum wage and overtime wages, failure to provide all wages due at termination, and other related wage and hour claims under the California Labor Code. Since the original filing date, the case has been removed from the Los Angeles Superior Court to the U.S. District Court in the Central District of California and subsequently the case was transferred to the U.S. District Court in the Eastern District of Tennessee where the case is now pending. This lawsuit was settled at mediation on April 29, 2021, for an immaterial amount, pending court approval. The Court entered an Order preliminarily approving the Class Settlement on December 31, 2021. Our accruals related to this claim as of March 31, 2022 were sufficient to cover this settlement. 

 

On February, 28 2019, Covenant Transport was named in a separate (but related) lawsuit filed in the Superior Court of Los Angeles County, California requesting civil penalties under the California Private Attorneys’ General Act for the same underlying wage and hour claims at issue in the putative class action case noted above. On August 1, 2019, the Los Angeles Superior Court entered an order staying the action pending completion of the earlier-filed action that is pending in the United States District Court for the Eastern District of Tennessee. The claims set forth in this lawsuit are included in the settlement referenced above.

 

On August 2, 2018, Curtis Markson, et al. (collectively, “Markson”), filed a putative class action case in United States District Court, Central District of California generically claiming that five (5) specified trucking companies (including our subsidiary Southern Refrigerated Transport, Inc.) entered into a "no poaching conspiracy" in which they agreed not to solicit or hire employees in California who were "under contract" with a fellow defendant. The allegations center around new drivers in California who received their commercial driver's license through driving schools associated with, or paid for by, one of the named defendants, in exchange for agreeing to drive for that defendant carrier for a specified amount of time (typically 8-10 months). Over the ensuing 1824 months, the Plaintiffs added more trucking companies as co-defendants in the lawsuit, including our subsidiary, Covenant Transport, Inc., on April 23, 2020. The lawsuit claims that the named co-defendants sent letters to one another, providing notice of "under contract" status, if these new California drivers were hired by another defendant carrier prior to the driver completing their contractual obligations. Plaintiffs contend that these notifications evidence a collusive agreement by the named defendants to restrain competition among trucking companies in California and suppress wages. This lawsuit was settled following mediation on August 20, 2021, for an immaterial amount pending court approval. Our accruals related to this claim as of March 31, 2022 were sufficient to cover this settlement.

 

Page 18

 

On February 11, 2021, a lawsuit was filed against Covenant Transport on behalf of Wesley Maas (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The lawsuit was filed in the Superior Court of San Bernardino County, California. The Complaint alleges claims for failure to pay all lawful wages, failure to provide lawful meal and rest periods or compensation in lieu thereof, failure to timely pay wages, failure to comply with itemized wage statement provisions, failure to indemnify for expenditures, and violations of California Labor Code and unfair competition laws. Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, discussed above, taking into account existing reserves, is not likely to have a materially adverse effect on our condensed consolidated financial statements, however, any future liability claims could impact this analysis. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of  March 31, 2022.

 

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

 

We had $25.2 million and $26.4 million of outstanding and undrawn letters of credit as of March 31, 2022 and December 31, 2021. 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.

 

We sold tractors and trailers to TEL for $0.0 million and $0.8 million during the three months ended March 31, 2022 and 2021, respectively, and we received $0.2 million and $0.3 million, respectively, for providing various maintenance services, certain back-office functions, building and lot rental, and for miscellaneous equipment for the same periods. There was no equipment purchased from TEL during the three months ended March 31, 2022 and 2021. Additionally, we paid approximately $0.2 million and less than $0.1 million to TEL for leases of revenue equipment during each of the three months ended March 31, 2022 and 2021, respectively. We recognized a net reversal of previously deferred gains totaling less than $0.1 million and net deferred gains totaling less than $0.1 million for the three months ended March 31, 2022 and 2021, respectively, representing 49% of the gains on units sold to TEL less any gains previously deferred and recognized when the equipment was subsequently sold to a third-party. Deferred gains, totaling $0.2 million and $0.3 million at  March 31, 2022 and 2021, respectively, are being carried as a reduction in our investment in TEL. At  March 31, 2022 and  December 31, 2021, we had accounts receivable from TEL of $0.0 million and $1.0 million, respectively, related to cash disbursements made pursuant to our performance of certain back-office and maintenance functions on TEL’s behalf.

 

We have accounted for our investment in TEL using the equity method of accounting, and thus our financial results include our proportionate share of TEL's 2022 net income through March 31, 2022, or $6.8 million. We received no equity distributions from TEL during the three months ended March 31, 2022.

 

Our accounts receivable from TEL and investment in TEL as of  March 31, 2022 and December 31, 2021 are as follows (in thousands):

 

Description:

Balance Sheet Line Item:

 

March 31, 2022

  

December 31, 2021

 

Accounts receivable from TEL

Driver advances and other receivables

 $34  $802 

Investment in TEL

Other assets

  51,011   44,196 

 

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 March 31,

  

As of December 31,

 
  

2022

  

2021

 

Total Assets

 $369,908  $346,218 

Total Liabilities

  274,980   264,948 

Total Equity

 $94,928  $81,270 

 

(in thousands)

 

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Revenue

 $32,336  $22,903 

Cost of Sales

  4,499   1,143 

Operating Expenses

  12,345   13,905 

Operating Income

  15,492   7,855 

Net Income

 $13,658  $6,003 

 

Page 19

 

 

 

Note 12.

Acquisition of AAT Carriers, Inc.

 

On February 9, 2022, we acquired 100% of the outstanding stock of AAT Carriers, Inc. ("AAT") headquartered in Chattanooga, TN. AAT specializes in highly regulated, time-sensitive loads for the U.S. government. The total cash consideration at closing was $38.8 million, not considering approximately $1.8 million of cash balances acquired. 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 $35.0 million to $57.0 million depending on the results achieved by AAT.

 

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

 

The allocation of the preliminary purchase price detailed below is subject to change based on finalization of the valuation of long-lived and intangible assets, as well as our ongoing evaluation of AAT’s accounting principles for consistency with ours.

 

  

February 9, 2022

 

(in thousands)

    

Cash paid pursuant to Stock Purchase Agreement

 $38,796 

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

  (1,796)

Net cash paid

 $37,000 

 

There are no deferred income taxes arising from the acquisition because of our 338(h)(10) election.

 

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

 

  

February 9, 2022

 

Cash and cash equivalents

 $1,796 

Accounts receivable

  842 

Prepaid expenses

  33 

Other short-term assets

  69 

Net property and equipment

  7,994 

Total identifiable assets acquired

  10,734 
     

Accounts payable

  (19)

Accrued expenses

  (946)

Finance lease obligations

  (458)

Other long-term liabilities

  (3)

Total liabilities assumed

  (1,426)

Net identifiable assets acquired

  9,308 

Goodwill

  29,488 

Net assets acquired

 $38,796 

 

Goodwill and other intangible assets will change upon the completion of the valuation of the contingent consideration liability and intangible asset as part of the purchase accounting for the AAT acquisition. The goodwill recognized is attributable primarily to expected cost synergies in the areas of fuel, purchases of revenue equipment, and recruiting.

 

The amounts of revenue and earnings of AAT included in the Company’s consolidated results of operations from the acquisition date to the period ended March 31, 2022 are as follows:

 

(in thousands)

 

Three months ended

 
  

March 31, 2022

 

Total revenue

 $4,166 

Net income

 $1,987 
 

Note 13.

Goodwill and Other Assets

 

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

 

The Landair trade name has a residual value of $0.5 million.

 

Amortization expense of $0.6 million and $1.2 million for the three months ended March 31, 2022 and 2021, respectively, was included in depreciation and amortization in the condensed consolidated statements of operations.

 

A summary of other intangible assets as of  March 31, 2022 and  December 31, 2021 is as follows:

 

(in thousands)

 

March 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       (4,398 )     9,674          

Managed Freight

    1,692       (528 )     1,164          

Warehousing

    12,436       (3,887 )     8,549          

Total customer relationships:

    28,200       (8,813 )     19,387       99  

Total other intangible assets

  $ 32,600     $ (12,713 )   $ 19,887          

 

(in thousands)

 

December 31, 2021

 
   

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       (4,104 )     9,968          

Managed Freight

    1,692       (494 )     1,198          

Warehousing

    12,436       (3,627 )     8,809          

Total customer relationships:

    28,200       (8,225 )     19,975       102  

Total other intangible assets

  $ 32,600     $ (12,125 )   $ 20,475          

 

The carrying amount of goodwill increased to $72.0 million at March 31, 2022 from $42.5 million at December 31, 2021, as a result of the AAT acquisition. The carrying amount of goodwill and other intangible assets for 2022 is subject to change upon the completion of the purchase accounting for the AAT acquisition.

 

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Note 14.