Financial Data and Key Metrics Changes - The company reported revenue approximately the same as the previous year despite operating with a fleet nearly 18% smaller [4] - A significant reduction in net debt was achieved, with over $200 million paid down in debt and lease obligations since December 31, 2020 [4] - The adjusted operating income for the quarter was reported at $47.8 million, which included a $44 million non-cash charge related to discontinued factoring operations [5][6] Business Line Data and Key Metrics Changes - The Expedited truckload segment's revenue, excluding fuel surcharges, decreased by 13.9%, primarily due to a 27.5% decrease in average operating fleet [6] - The Dedicated truckload segment's revenue decreased by 14.2% to $62 million, driven by a 10.5% reduction in average operating fleet and a decline in total miles per unit [8] - The Managed Freight segment's operating revenue increased by 51.3% to $64.9 million, attributed to a robust freight market and improved cost structure [9] - The Warehousing segment's operating revenue increased by 25.8% to $14.6 million, primarily due to new customer business [10] Market Data and Key Metrics Changes - The freight market remained strong across all segments, driven by expanding economic activity and inventory restocking [3] - The company faced significant challenges in driver recruitment and retention, exacerbated by COVID-19, impacting operational efficiency [12] Company Strategy and Development Direction - The company aims to grow its Dedicated, Managed Freight, and Warehousing segments while reducing unnecessary overhead and improving safety and productivity [13] - A focus on diversifying the customer base to reduce seasonal and cyclical exposure is part of the strategic plan [13] - The company announced a share repurchase program to allocate capital effectively, reflecting confidence in its financial flexibility [15] Management's Comments on Operating Environment and Future Outlook - Management highlighted the ongoing challenges in driver availability and the impact of COVID-19 on operations [38] - The outlook for rate increases in 2021 is positive, with expectations of 6% to 8% increases on the expedited side and 3% to 4% on the dedicated side [44] - The company anticipates continued margin improvement as revenue increases are expected to outpace cost increases [66] Other Important Information - The company implemented the largest pay increase in its history for the Expedited driving force to attract and retain drivers [14] - The transition of dedicated contracts is expected to improve profitability, with plans to renegotiate contracts that currently yield insufficient returns [28] Q&A Session Summary Question: What terms need to be changed for dedicated contracts? - Management indicated that about half of the dedicated contracts are operating under insufficient terms, primarily related to pricing and other conditions [24][26] Question: How far below market are the dedicated contracts currently? - It was noted that the pricing for some contracts is currently 4% to 5% below market rates [30][31] Question: What is the outlook for rate increases in 2021? - Management confirmed that the rate environment is strong, with expectations for significant increases in the second quarter [44][45] Question: How is the company managing driver availability issues? - The company is actively working to improve driver recruitment and retention, with a focus on increasing the number of student hires [39][61] Question: What is the expected free cash flow for the year? - The company anticipates generating over $50 million in free cash flow, even after accounting for potential indemnification payments [53][55]

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 September 30, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-24960 COVENANT LOGISTICS GROUP, INC. (Exact name of registrant as specified in its charter) Nevada 88-0320154 (State or other ...

Covenant Logistics Group, Inc. (NYSE:CVLG) Q3 2020 Earnings Conference Call October 27, 2020 11:00 AM ET Company Participants Paul Bunn - EVP, CFO & Secretary Joey Hogan - Co-President & Chief Administrative Officer John Tweed - Co-President & COO David Parker - Chairman & CEO Conference Call Participants Jason Seidl - Cowen and Company David Ross - Stifel, Nicolaus & Company Scott Group - Wolfe Research Jack Atkins - Stephens Inc. Operator Excuse me, everyone, we now have all of our speakers in conference ...

[PART I FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The company reported a net loss of $22.3 million for Q2 2020, a significant downturn from $6.1 million net income in Q2 2019, driven by revenue decline and $26.6 million asset impairment. [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2020, total assets decreased to $861.1 million from $881.6 million, while total liabilities increased to $554.2 million and stockholders' equity decreased to $306.9 million. Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | **$861,089** | **$881,640** | | Cash and cash equivalents | $67,127 | $43,591 | | Net property and equipment | $392,952 | $517,203 | | Assets held for sale | $66,005 | $12,010 | | **Total Liabilities** | **$554,158** | **$531,529** | | Total debt (current & long-term) | $270,114 | $254,554 | | **Total Stockholders' Equity** | **$306,931** | **$350,111** [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Q2 2020 total revenue declined 11.7% YoY to $191.7 million, resulting in a net loss of $22.3 million, significantly impacted by a $26.6 million asset impairment charge. Q2 and H1 2020 vs 2019 Operating Results (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | **$191,689** | **$217,040** | **$402,502** | **$434,373** | | Freight Revenue | $179,564 | $192,659 | $369,145 | $386,573 | | Operating (Loss) Income | $(28,950) | $7,030 | $(30,404) | $10,976 | | **Net (Loss) Income** | **$(22,343)** | **$6,071** | **$(24,556)** | **$10,504** | | Net (Loss) Income per Share | $(1.31) | $0.33 | $(1.40) | $0.57 | - A significant impairment charge of **$26.6 million** on long-lived property, equipment, and right-of-use assets was recorded in Q2 2020, heavily contributing to the operating loss[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2020, net cash from operating activities was $24.1 million, while investing activities provided $4.1 million, a significant shift from a $65.3 million use in 2019. Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | **$24,102** | **$23,597** | | **Net cash provided by (used in) investing activities** | **$4,083** | **$(65,336)** | | **Net cash (used in) provided by financing activities** | **$(4,649)** | **$47,435** | | Net change in cash and cash equivalents | $23,536 | $5,696 | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Key notes detail the company's name change, the Factoring segment's classification as discontinued operations and subsequent sale, and significant restructuring initiatives leading to $26.6 million in asset impairments. - The company changed its name from Covenant Transportation Group, Inc. to **Covenant Logistics Group, Inc.** on July 1, 2020[22](index=22&type=chunk) - The Factoring reportable segment (TFS) was classified as a discontinued operation as of June 30, 2020, and was sold on July 8, 2020, with a dispute arising with the purchaser regarding approximately **$66.0 million** of the acquired assets[36](index=36&type=chunk)[42](index=42&type=chunk)[108](index=108&type=chunk) - In Q2 2020, the company undertook significant restructuring, including fleet reduction, terminal sales, and management changes, resulting in a **$26.6 million impairment charge** and other related costs[55](index=55&type=chunk)[57](index=57&type=chunk) - The company's Board approved a **$20.0 million stock repurchase program** in February 2020, repurchasing **1.4 million shares for $17.5 million** before suspending the program in March 2020 due to the COVID-19 pandemic[102](index=102&type=chunk) [Management's Discussion and Analysis (MD&A)](index=29&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses significant Q2 2020 restructuring, resulting in $29.2 million net strategic adjustments, and the impact of the COVID-19 pandemic, with an outlook focused on fleet optimization, debt reduction, and margin improvement. [Executive Overview and Outlook](index=29&type=section&id=Executive%20Overview%20and%20Outlook) Q2 2020 was marked by significant restructuring to focus on core profitable areas, leading to **$29.2 million in net strategic adjustments**, including a $5.7 million gain on a terminal sale and $34.9 million in various expense items. - The company made significant progress on restructuring to focus on areas with consistent, acceptable margins, resulting in lower overhead costs and a de-leveraged balance sheet[112](index=112&type=chunk) Summary of Infrequent Transactions in Q2 2020 (in millions) | Item | Amount | | :--- | :--- | | **Gain Item:** | | | Gain on sale of Hutchins, TX terminal | $5.7 | | **Expense Items:** | | | Impairment of revenue generating equipment | $17.6 | | Impairment of real estate & tangible assets | $9.8 | | Employee separation costs | $1.8 | | Abandonment of IT infrastructure | $1.1 | | Abandonment/change in useful life of intangibles | $1.3 | | Increase in allowance for bad debt | $2.6 | | Contract exit costs & professional fees | $0.7 | | **Net Strategic Restructuring Adjustments** | **$29.2** | - Goals for the remainder of 2020 include optimizing fleet size, monetizing assets held for sale to pay down debt, allocating assets to higher-margin operations, and lowering fixed costs[120](index=120&type=chunk) [Results of Consolidated Operations](index=33&type=section&id=Results%20of%20Consolidated%20Operations) Q2 2020 total revenue fell 11.7% YoY to $191.7 million, with operating expenses significantly higher due to one-time restructuring costs, including a $26.6 million impairment charge, and increased insurance and general supplies expenses. - Q2 2020 freight revenue decreased by **$13.1 million (6.8%) YoY**, primarily from a **$12.0 million decrease in Dedicated** and a **$5.5 million decrease in Highway Services**, partially offset by a **$4.4 million increase in Managed Freight**[139](index=139&type=chunk) - Insurance and claims costs increased **10.4% in Q2 2020 YoY** due to the erosion of excess insurance coverage, higher cost per claim, and increased fixed premiums, despite a **$7.3 million premium refund** from a policy commutation[164](index=164&type=chunk)[166](index=166&type=chunk) - General supplies and expenses increased by **$4.3 million (60.1%) in Q2 2020 YoY**, mainly due to additional reserves for uncollectible accounts receivable and legal fees related to class action litigation and restructuring[171](index=171&type=chunk)[174](index=174&type=chunk) - Depreciation expense decreased due to a smaller fleet, but this was offset by increased amortization expense resulting from a change in the useful life of the Landair trade name and termination of a non-compete agreement[177](index=177&type=chunk) [Results of Segment Operations](index=41&type=section&id=Results%20of%20Segment%20Operations) In Q2 2020, Highway Services and Dedicated segments experienced revenue declines and significant operating losses due to fleet reductions and restructuring impacts, while Managed Freight revenue increased from brokerage opportunities. Segment Operating (Loss) Income (in thousands) | Segment | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Highway Services | $(12,809) | $1,667 | $(14,165) | $827 | | Dedicated | $(13,196) | $3,514 | $(14,921) | $5,623 | | Managed Freight | $(2,945) | $1,849 | $(1,318) | $4,526 | | **Total Operating (Loss) Income** | **$(28,950)** | **$7,030** | **$(30,404)** | **$10,976** | - The decrease in Dedicated revenue was driven by an **8.6% decrease in average tractors** and an **8.7% decrease in average freight revenue per tractor per week**[195](index=195&type=chunk) - Managed Freight revenue grew by **$4.4 million YoY**, primarily due to increased opportunities in the brokerage market related to COVID-19, though this was partially offset by decreases in TMS revenue[196](index=196&type=chunk) [Liquidity and Capital Resources](index=43&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained adequate liquidity with **$180.2 million working capital** and **$58.3 million available borrowing capacity** as of June 30, 2020, reflecting fleet reduction and asset sales, and temporarily deferred principal payments on **$177.3 million of debt**. - As of June 30, 2020, the company had working capital of **$180.2 million** and available borrowing capacity of **$58.3 million** under its Credit Facility[204](index=204&type=chunk)[207](index=207&type=chunk) - The fleet plan for the remainder of 2020 includes delivering **304 new tractors** and disposing of **516 used tractors** and **882 used trailers**, reducing the average operational fleet size[208](index=208&type=chunk) - In April 2020, the company executed a modification on certain equipment notes to make interest-only payments for 90 days, extending the due date of **$177.3 million of debt** by three months to improve liquidity[210](index=210&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=44&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to market risks from changes in fuel prices and interest rates, with a $1.00 increase in diesel price estimated to decrease net income by $0.8 million, and a 1% interest rate increase reducing net income by less than $0.1 million. - A **$1.00 increase in the price per gallon of diesel fuel** would decrease annual net income by an estimated **$0.8 million**, after accounting for fuel surcharge recovery and existing hedges[223](index=223&type=chunk) - A **1% increase in interest rates** on the company's variable-rate debt would reduce annual net income by less than **$0.1 million**, with the majority of debt at fixed rates or hedged[224](index=224&type=chunk) [Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were not effective as of June 30, 2020, due to a material weakness in internal control over financial reporting related to the Transport Financial Solutions (TFS) subsidiary, which was eliminated upon its sale. - A material weakness was identified in internal controls related to credit approval and monitoring within the Transport Financial Solutions (TFS) subsidiary[227](index=227&type=chunk)[228](index=228&type=chunk) - Due to the material weakness, the CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2020[226](index=226&type=chunk) - Management believes the material weakness was eliminated upon the sale of the TFS subsidiary on July 8, 2020, as the issue was isolated to that unit's systems and processes[232](index=232&type=chunk)[233](index=233&type=chunk) [PART II OTHER INFORMATION](index=46&type=section&id=PART%20II%20OTHER%20INFORMATION) [Legal Proceedings](index=46&type=section&id=Item%201.%20Legal%20Proceedings) The company is a defendant in several legal proceedings, including two class-action lawsuits in California alleging wage and hour violations for drivers and a "no poaching conspiracy," which the company intends to vigorously defend. - The company is defending a putative class-action lawsuit in California (Tabizon case) alleging failure to properly pay drivers for rest breaks and other wage-related claims[236](index=236&type=chunk)[237](index=237&type=chunk) - A separate lawsuit (Markson case) names the company as a co-defendant in an alleged "no poaching conspiracy" related to the hiring of new drivers in California[239](index=239&type=chunk) [Risk Factors](index=47&type=page&id=Item%201A.%20Risk%20Factors) The company highlights significant risks, including potential for increased insurance expenses due to aggregate limit erosion, the previously identified material weakness in internal controls, and a dispute with the purchaser of its TFS assets. - A key risk is the erosion of aggregate insurance policy limits, which could lead to operating with less coverage and incurring additional expenses for claims or policy reinstatement[242](index=242&type=chunk)[243](index=243&type=chunk) - The company is involved in a dispute with the purchaser of its TFS assets over approximately **$66.0 million** of the assets, with an uncertain outcome that could materially adversely affect financial condition[247](index=247&type=chunk)[248](index=248&type=chunk) - The previously disclosed material weakness in internal control over financial reporting is noted as a risk factor, which could impact investor confidence if not effectively managed[244](index=244&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=48&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the quarter ended June 30, 2020, the company did not engage in any unregistered sales of equity securities, and cash dividend payments are currently limited by financing arrangement covenants. - No unregistered sales of securities occurred during the quarter[250](index=250&type=chunk) [Exhibits](index=48&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including amended articles of incorporation, bylaws, award notices, and required CEO and CFO certifications. - The filing includes required certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[255](index=255&type=chunk)

Part I Financial Information [Item 1. Financial Statements](index=4&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents Covenant Transportation Group's unaudited condensed consolidated financial statements and detailed notes for Q1 2020 and Q1 2019 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----- | :---------------------------- | :------------------------------- | | Total Assets | $912,684 | $881,640 | | Total Liabilities | $584,191 | $531,529 | | Total Stockholders' Equity | $328,493 | $350,111 | - Total assets increased by **$31.044 million** from December 31, 2019, to March 31, 2020, primarily driven by increases in accounts receivable and assets held for sale[14](index=14&type=chunk) - Total liabilities increased by **$52.662 million**, mainly due to increases in long-term debt and insurance and claims accrual[14](index=14&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's financial performance over a period, showing revenues, expenses, and net income or loss | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Total Revenue | $213,553 | $219,181 | | Operating Income | $708 | $5,426 | | Net (Loss) Income | $(2,213) | $4,433 | | Basic and Diluted (Loss) Income Per Share | $(0.12) | $0.24 | - The company reported a **net loss of $2.213 million** for Q1 2020, a significant decline from a net income of $4.433 million in Q1 2019[20](index=20&type=chunk) - Total revenue decreased by **2.6% year-over-year**, from $219.181 million in Q1 2019 to $213.553 million in Q1 2020[20](index=20&type=chunk) [Condensed Consolidated Statements of Comprehensive (Loss) Income](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20(Loss)%20Income) This section presents the total comprehensive income or loss, including net income and other comprehensive income items | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Net (Loss) Income | $(2,213) | $4,433 | | Total Other Comprehensive (Loss) Income | $(2,350) | $(432) | | Comprehensive (Loss) Income | $(4,563) | $4,001 | - Comprehensive loss for Q1 2020 was **$(4.563) million**, a substantial decrease from comprehensive income of $4.001 million in Q1 2019, primarily due to increased unrealized losses on cash flow hedges[22](index=22&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This section outlines changes in the company's equity, reflecting net income, share repurchases, and other comprehensive income | Metric | December 31, 2019 (in thousands) | March 31, 2020 (in thousands) | | :----- | :------------------------------- | :---------------------------- | | Total Stockholders' Equity | $350,111 | $328,493 | | Net (Loss) Income | - | $(2,213) | | Other Comprehensive Income (Loss) | - | $(2,350) | | Share Repurchase | - | $(17,515) | - Total stockholders' equity decreased by **$21.618 million** from December 31, 2019, to March 31, 2020, largely due to a net loss, other comprehensive loss, and share repurchases[25](index=25&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section reports on the cash generated and used by operating, investing, and financing activities over a period | Cash Flow Activity | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----------------- | :--------------------------------------------- | :--------------------------------------------- | | Operating Activities | $(3,516) | $9,170 | | Investing Activities | $(16,498) | $(33,495) | | Financing Activities | $16,078 | $32,199 | | Net Change in Cash and Cash Equivalents | $(3,936) | $7,874 | | Cash and Cash Equivalents at End of Period | $39,655 | $31,001 | - Net cash used by operating activities was **$3.516 million** in Q1 2020, a significant shift from $9.170 million provided in Q1 2019, primarily due to increased receivables and a net loss[30](index=30&type=chunk)[202](index=202&type=chunk) - Net cash used by investing activities decreased to **$16.498 million** in Q1 2020 from $33.495 million in Q1 2019, mainly due to the timing of tractor deliveries and disposals[30](index=30&type=chunk)[203](index=203&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and additional information regarding the figures presented in the financial statements [Note 1. Significant Accounting Policies](index=10&type=section&id=Note%201.%20Significant%20Accounting%20Policies) This note outlines the key accounting principles and methods used in preparing the financial statements - The company is monitoring the rapidly evolving impact of the COVID-19 pandemic, which could materially affect its financial position, results of operations, cash flows, and liquidity in future periods[36](index=36&type=chunk) - FASB issued ASU 2016-13, requiring entities to measure credit losses for financial instruments, effective for the company's annual reporting period beginning January 1, 2023[37](index=37&type=chunk) [Note 2. (Loss) Income Per Share](index=12&type=section&id=Note%202.%20(Loss)%20Income%20Per%20Share) This note details the calculation of basic and diluted earnings per share, reflecting the company's profitability on a per-share basis | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----- | :-------------------------------- | :-------------------------------- | | Net (Loss) Income | $(2,213) | $4,433 | | Basic and Diluted Net (Loss) Income Per Share | $(0.12) | $0.24 | | Weighted-Average Shares Outstanding (Basic) | 18,088 | 18,381 | | Weighted-Average Shares Outstanding (Diluted) | 18,088 | 18,533 | - Diluted (loss) income per share for Q1 2020 was **$(0.12)**, with approximately 240,000 unvested restricted shares excluded from the computation due to the net loss being anti-dilutive[42](index=42&type=chunk)[43](index=43&type=chunk) [Note 3. Segment Information](index=13&type=section&id=Note%203.%20Segment%20Information) This note provides financial data for the company's distinct business segments, offering insights into their individual performance | Segment | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :------ | :---------------------------- | :---------------------------- | | Highway Services | $86,161 | $88,328 | | Dedicated | $81,788 | $84,332 | | Managed Freight | $42,865 | $44,673 | | Factoring | $2,739 | $1,848 | | Total Revenues | $213,553 | $219,181 | - The company operates in four reportable segments: Highway Services (Expedited and OTR), Dedicated, Managed Freight (Brokerage, TMS, Warehousing), and Factoring services[47](index=47&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk) [Note 4. Income Taxes](index=14&type=section&id=Note%204.%20Income%20Taxes) This note details the company's income tax provisions, including current and deferred tax assets and liabilities - The company recorded an income tax benefit of **$(0.706) million** for the three months ended March 31, 2020, compared to an expense of $1.582 million in the prior year, primarily due to a decrease in pre-tax income[20](index=20&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk) - The net deferred tax liability was **$78.7 million** as of March 31, 2020, mainly from differences in book versus tax depreciation, partially offset by net operating loss carryovers and insurance claims[56](index=56&type=chunk) - The company is assessing the impact of the CARES Act but does not expect a material income tax impact to its consolidated financial statements at this time[57](index=57&type=chunk) [Note 5. Debt and Lease Obligations](index=15&type=section&id=Note%205.%20Debt%20and%20Lease%20Obligations) This note provides a breakdown of the company's debt and lease commitments, including current and long-term portions | Debt/Lease Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :---------------- | :---------------------------- | :------------------------------- | | Total Debt | $289,606 | $254,554 | | Current Maturities of Long-Term Debt | $61,403 | $54,377 | | Long-Term Debt | $228,203 | $200,177 | | Current Portion of Finance Lease Obligations | $7,062 | $7,258 | | Long-Term Portion of Finance Lease Obligations | $24,901 | $26,010 | | Current Portion of Operating Lease Obligations | $18,452 | $19,460 | | Long-Term Portion of Operating Lease Obligations | $36,357 | $40,882 | | Total Debt and Lease Obligations | $376,400 | $348,200 | - Total debt and lease obligations increased to **$376.4 million** at March 31, 2020, from $348.2 million at December 31, 2019[196](index=196&type=chunk) - The company had **$24.3 million** of borrowings outstanding under its $95.0 million revolving Credit Facility as of March 31, 2020, with an available borrowing capacity of $35.6 million[64](index=64&type=chunk) [Note 6. Leases](index=17&type=section&id=Note%206.%20Leases) This note details the company's lease arrangements, distinguishing between operating and finance leases and their financial impact | Lease Category | Present Value of Minimum Lease Payments (in thousands) | | :------------- | :--------------------------------------------------- | | Operating Leases | $54,809 | | Finance Leases | $31,963 | - Right-of-use assets for operating leases were **$53.3 million** and for finance leases were **$31.8 million** at March 31, 2020[73](index=73&type=chunk) - Future minimum lease payments for operating leases total **$59.794 million** and for finance leases total **$34.087 million**[74](index=74&type=chunk) [Note 7. Stock-Based Compensation](index=19&type=section&id=Note%207.%20Stock-Based%20Compensation) This note describes the company's stock-based compensation plans and the associated expense recognized in the financial statements | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Stock-based compensation expense | $500 | $1,300 | - Stock-based compensation expense decreased to approximately **$0.5 million** in Q1 2020 from $1.3 million in Q1 2019, all related to restricted shares[79](index=79&type=chunk) - As of March 31, 2020, **502,213 shares** remained available for award under the Incentive Plan[78](index=78&type=chunk) [Note 8. Commitments and Contingencies](index=19&type=section&id=Note%208.%20Commitments%20and%20Contingencies) This note discloses the company's significant contractual obligations, legal proceedings, and other potential future liabilities - Covenant Transport is a defendant in a putative class action lawsuit filed in November 2018, alleging wage and hour claims under California Labor Code, with no reasonable estimate of loss currently available[82](index=82&type=chunk) - The company had **$35.1 million** in outstanding and undrawn letters of credit as of March 31, 2020, primarily supporting its insurance programs[86](index=86&type=chunk) [Note 9. Equity Method Investment](index=21&type=section&id=Note%209.%20Equity%20Method%20Investment) This note details the company's investment in TEL, accounted for using the equity method, and its financial performance | TEL Financials | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------- | :---------------------------- | :------------------------------- | | Total Assets | $360,538 | $374,591 | | Total Liabilities | $306,132 | $318,743 | | Total Equity | $54,406 | $55,848 | | Revenue (Q1) | $25,221 | $27,525 | | Net (Loss) Income (Q1) | $(1,442) | $5,088 | - The company recognized a **$0.7 million** proportionate share of TEL's net loss for Q1 2020, a decline from a $3.0 million income in Q1 2019, primarily due to a customer bankruptcy[90](index=90&type=chunk)[179](index=179&type=chunk) - The investment in TEL totaled **$31.2 million** at March 31, 2020[90](index=90&type=chunk) [Note 10. Goodwill and Other Intangible Assets](index=22&type=section&id=Note%2010.%20Goodwill%20and%20Other%20Intangible%20Assets) This note provides information on the company's goodwill and other intangible assets, including their carrying values and amortization | Intangible Asset | March 31, 2020 Net (in thousands) | December 31, 2019 Net (in thousands) | | :--------------- | :-------------------------------- | :----------------------------------- | | Goodwill | $42,518 | $42,518 | | Trade Name | $3,887 | $3,960 | | Non-Compete Agreement | $909 | $980 | | Customer Relationships | $24,088 | $24,675 | | Total Other Intangible Assets | $28,884 | $29,615 | - Goodwill remained constant at **$42.5 million** as of March 31, 2020, and December 31, 2019[94](index=94&type=chunk) - The total other intangible assets, excluding goodwill, had a weighted average remaining life of **125 months** as of March 31, 2020[95](index=95&type=chunk) [Note 11. Equity](index=24&type=section&id=Note%2011.%20Equity) This note details changes in the company's equity, including stock repurchases and authorized share programs | Metric | Q1 2020 (in thousands) | | :----- | :--------------------- | | Class A Common Stock Repurchased | 1,429,204 shares | | Value of Repurchases | $17,515 | | Remaining Authorized for Repurchase | $2,485,495 | - The Board approved a **$20.0 million** stock repurchase program on February 10, 2020, which was temporarily suspended on March 26, 2020, with $2.5 million remaining authorized[98](index=98&type=chunk) - During Q1 2020, **1.4 million shares** of Class A common stock were repurchased for **$17.5 million**[98](index=98&type=chunk) [Note 12. Liquidity](index=24&type=section&id=Note%2012.%20Liquidity) This note discusses the company's ability to meet its short-term obligations, including cash, working capital, and available credit | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----- | :---------------------------- | :------------------------------- | | Cash and Cash Equivalents | $39,655 | $43,591 | | Working Capital | $114,100 | $93,100 | | Available Borrowing Capacity (Credit Facility) | $35,600 | N/A | - Working capital increased to **$114.1 million** at March 31, 2020, from $93.1 million at December 31, 2019[99](index=99&type=chunk) - The company is taking measures to preserve liquidity, including capital reductions, financing, cost reduction, and working capital actions, in response to COVID-19 uncertainty[101](index=101&type=chunk) [Note 13. Subsequent Events](index=24&type=section&id=Note%2013.%20Subsequent%20Events) This note discloses significant events that occurred after the balance sheet date but before the financial statements were issued - On May 22, 2020, the company sold its Dallas-area terminal for approximately **$10.0 million net**, expecting a pre-tax gain of approximately $6.5 million in Q2 2020[102](index=102&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial performance and condition for Q1 2020, highlighting strategic initiatives, COVID-19 impacts, and market conditions [Executive Overview](index=25&type=section&id=Executive%20Overview) This overview summarizes the key financial and operational highlights, challenges, and strategic focus for the reporting period - Q1 2020 was characterized by strategic plan execution, COVID-19 response, and a declining used equipment market, pressuring operating margins but accelerating strategic initiatives[106](index=106&type=chunk) - Key positives included progress on capital reduction and leverage reduction, cost control planning, effective COVID-19 response, year-over-year average freight revenue per tractor increases in Highway Services and Dedicated, and growth in the Factoring segment[107](index=107&type=chunk) - Key negatives included revenue and profitability loss from dedicated automotive customer shutdowns due to COVID-19, a pass-through loss from the TEL investment, and a **$32.2 million** increase in net indebtedness due to stock repurchases and Factoring segment growth[107](index=107&type=chunk)[108](index=108&type=chunk) [COVID-19 Impact](index=27&type=section&id=COVID-19%20Impact) This section assesses the direct and indirect effects of the COVID-19 pandemic on the company's operations and financial results - The overall impact of COVID-19 on Q1 2020 results was not material, with transportation designated as an essential service[113](index=113&type=chunk) - The company believes it has sufficient liquidity but continues to evaluate and act to maintain it, acknowledging high uncertainty regarding future impacts on operations and financial condition[114](index=114&type=chunk) [Outlook](index=27&type=section&id=Outlook) This section provides management's forward-looking statements regarding future performance, market conditions, and strategic direction - The prior 2020 outlook is no longer applicable, and the company does not expect to provide earnings expectations for the foreseeable future due to anticipated month-to-month volatility[115](index=115&type=chunk) - Long-term, the company believes its structural improvements and strategic initiatives will strengthen its position in the U.S. logistics industry, de-risk its leverage profile, and focus on higher-margin sectors[115](index=115&type=chunk) [Non-GAAP Reconciliation (Operating Ratio)](index=27&type=section&id=Non-GAAP%20Reconciliation%20(Operating%20Ratio)) This section reconciles GAAP operating ratio to an adjusted non-GAAP measure, providing a clearer view of core operational efficiency | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----- | :-------------------------------- | :-------------------------------- | | GAAP Operating Ratio | 99.7% | 97.5% | | Adjusted Operating Ratio | 99.3% | 96.9% | | Operating Income | $708 | $5,426 | | Adjusted Operating Income | $1,439 | $6,157 | - The GAAP Operating Ratio increased to **99.7%** in Q1 2020 from 97.5% in Q1 2019, indicating reduced profitability[122](index=122&type=chunk) - Adjusted Operating Ratio, which excludes fuel surcharge revenue and amortization of intangibles, also increased to **99.3%** from 96.9% year-over-year[122](index=122&type=chunk) [Revenue and Expenses](index=29&type=section&id=Revenue%20and%20Expenses) This section describes the primary sources of revenue and the major categories of expenses incurred by the company - Revenue is primarily generated by transporting freight, with additional charges for detention, loading/unloading, and fuel surcharges[130](index=130&type=chunk) - Main expenses include variable costs like fuel, driver-related expenses, and purchased transportation, alongside fixed and variable components for maintenance and insurance[131](index=131&type=chunk) - The company operates both single and two-person driver teams, with differing impacts on miles per tractor, revenue per loaded mile, and employee expenses[132](index=132&type=chunk) [Revenue Equipment](index=30&type=section&id=Revenue%20Equipment) This section provides details on the company's fleet of tractors and trailers, including ownership structure and average age | Equipment Type | Total at March 31, 2020 | Owned | Operating Leased | Independent Contractor Provided | | :------------- | :---------------------- | :---- | :--------------- | :------------------------------ | | Tractors | 2,967 | 1,891 | 784 | 292 | | Trailers | 6,609 | 5,049 | N/A | N/A | | Finance Leased Trailers | N/A | N/A | 1,560 | N/A | - At March 31, 2020, the fleet had an average tractor age of **1.8 years** and an average trailer age of **4.3 years**[137](index=137&type=chunk) [Results of Consolidated Operations](index=31&type=section&id=Results%20of%20Consolidated%20Operations) This section analyzes the overall financial performance of the company, detailing changes in key revenue and expense categories [Total Revenue](index=31&type=section&id=Total%20Revenue) This section analyzes the company's total revenue, breaking down freight and fuel surcharge components and their changes | Revenue Type | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----------- | :--------------------------------------------- | :--------------------------------------------- | | Freight Revenue | $192,321 | $195,761 | | Fuel Surcharge Revenue | $21,232 | $23,420 | | Total Revenue | $213,553 | $219,181 | - Total revenue decreased by **$5.6 million (2.6%)** to $213.6 million in Q1 2020, with freight revenue decreasing by $3.4 million (1.8%)[141](index=141&type=chunk) - The decrease in freight revenue was primarily due to Managed Freight, Dedicated, and Highway Services, partially offset by an increase in Factoring segment revenue[141](index=141&type=chunk) [Salaries, wages, and related expenses](index=31&type=section&id=Salaries,%20wages,%20and%20related%20expenses) This section examines changes in employee compensation and related costs, including their impact on overall profitability | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Salaries, wages, and related expenses | $82,824 | $79,503 | | % of Total Revenue | 38.8% | 36.3% | | % of Freight Revenue | 43.1% | 40.6% | - Salaries, wages, and related expenses increased by **$3.3 million (4.2%)** in Q1 2020, primarily due to driver and non-driver pay increases, group health insurance, and workers' compensation insurance[144](index=144&type=chunk) - As a percentage of total revenue, these expenses increased to **38.8%** from 36.3% year-over-year[144](index=144&type=chunk) [Fuel expense](index=33&type=section&id=Fuel%20expense) This section analyzes fuel costs, including the impact of prices, surcharges, and hedging activities on net fuel expense | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Fuel Expense | $25,265 | $27,832 | | % of Total Revenue | 11.8% | 12.7% | | % of Freight Revenue | 13.1% | 14.2% | | Net Fuel Expense | $6,814 | $7,354 | | Net Fuel Expense % of Freight Revenue | 3.5% | 3.8% | - Total fuel expense decreased by **$2.6 million** in Q1 2020, primarily due to lower fuel prices[148](index=148&type=chunk)[150](index=150&type=chunk)[151](index=151&type=chunk) - Net fuel expense decreased by **$0.5 million (7.3%)** and as a percentage of freight revenue, it decreased to **3.5%** from 3.8%[151](index=151&type=chunk) - The company entered into fuel hedging contracts with a fair market value of **$0.7 million** in Q1 2020, which will be reclassified into fuel expense as they mature[151](index=151&type=chunk) [Operations and maintenance](index=34&type=section&id=Operations%20and%20maintenance) This section reviews expenses related to the daily operation and upkeep of the company's fleet and facilities | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Operations and Maintenance | $12,825 | $15,174 | | % of Total Revenue | 6.0% | 6.9% | | % of Freight Revenue | 6.7% | 7.8% | - Operations and maintenance expenses decreased by **$2.3 million (15.5%)** in Q1 2020, mainly due to the timing of tractor trade cycles, reduced maintenance on a younger fleet, and lower recruiting expenses[155](index=155&type=chunk) [Revenue equipment rentals and purchased transportation](index=34&type=section&id=Revenue%20equipment%20rentals%20and%20purchased%20transportation) This section analyzes costs associated with renting revenue-generating equipment and outsourcing transportation services | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Revenue equipment rentals and purchased transportation | $46,062 | $48,670 | | % of Total Revenue | 21.6% | 22.2% | | % of Freight Revenue | 24.0% | 24.9% | - These expenses decreased by **$2.6 million (5.4%)** in Q1 2020, primarily due to a reduction in the percentage of total miles run by independent contractors[157](index=157&type=chunk)[158](index=158&type=chunk) [Operating taxes and licenses](index=34&type=section&id=Operating%20taxes%20and%20licenses) This section reviews the costs incurred for various operating taxes and licenses required for the company's operations | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Operating taxes and licenses | $3,454 | $3,183 | | % of Total Revenue | 1.6% | 1.5% | | % of Freight Revenue | 1.8% | 1.6% | - Changes in operating taxes and licenses were not significant as a percentage of total or freight revenue[160](index=160&type=chunk) [Insurance and claims](index=35&type=section&id=Insurance%20and%20claims) This section analyzes expenses related to insurance coverage and the costs associated with settling claims | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Insurance and Claims | $15,614 | $11,235 | | % of Total Revenue | 7.3% | 5.1% | | % of Freight Revenue | 8.1% | 5.7% | | Insurance and Claims per mile | 19.5 cents | 13.9 cents | - Insurance and claims expenses increased significantly by **$4.4 million (39.0%)** in Q1 2020, driven by higher cost per claim and adverse development on prior period claims[163](index=163&type=chunk) - Effective April 1, 2020, insurance renewal terms include a higher fixed premium expense of approximately **$0.5 million per quarter**, greater self-insured retention, and lower aggregate limits[165](index=165&type=chunk) [Communications and utilities](index=35&type=section&id=Communications%20and%20utilities) This section reviews expenses for communication services and utility consumption across the company's operations | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Communications and Utilities | $1,569 | $1,718 | | % of Total Revenue | 0.7% | 0.8% | | % of Freight Revenue | 0.8% | 0.9% | - Changes in communications and utilities expenses were not significant[166](index=166&type=chunk) [General supplies and expenses](index=35&type=section&id=General%20supplies%20and%20expenses) This section covers miscellaneous operating costs, including office supplies, administrative expenses, and other general overheads | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | General supplies and expenses | $8,568 | $6,731 | | % of Total Revenue | 4.0% | 3.1% | | % of Freight Revenue | 4.5% | 3.4% | - General supplies and expenses increased by **$1.8 million (27.3%)** in Q1 2020, mainly due to investments in strategic planning and additional reserves for uncollectible accounts receivable[167](index=167&type=chunk)[169](index=169&type=chunk) - These expenses are expected to decrease for the remainder of 2020 due to cost-saving efforts[169](index=169&type=chunk) [Depreciation and amortization, including gains and losses on disposition of property and equipment](index=37&type=section&id=Depreciation%20and%20amortization,%20including%20gains%20and%20losses%20on%20disposition%20of%20property%20and%20equipment) This section analyzes non-cash expenses related to asset usage and the financial impact of selling property and equipment | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Depreciation and Amortization | $16,663 | $19,709 | | % of Total Revenue | 7.8% | 9.0% | | % of Freight Revenue | 8.7% | 10.1% | | Gains on Sale of Property and Equipment | $1,500 | $100 | - Depreciation and amortization decreased by **$3.0 million (15.5%)** in Q1 2020, primarily due to lower depreciation and higher gains on asset dispositions ($1.5 million vs. $0.1 million)[172](index=172&type=chunk)[173](index=173&type=chunk) - The company plans to reduce its operating tractors by **12.0% to 14.0%** by the end of 2020, which is expected to reduce future depreciation expense but could result in equipment impairments or losses on sale[174](index=174&type=chunk) [Interest expense, net](index=37&type=section&id=Interest%20expense,%20net) This section details the net cost of borrowing, reflecting interest paid on debt less any interest income earned | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Interest Expense, Net | $2,892 | $2,446 | | % of Total Revenue | 1.4% | 1.1% | | % of Freight Revenue | 1.5% | 1.2% | - Interest expense, net, increased by **$0.4 million (18.3%)** in Q1 2020, mainly due to a $67.3 million increase in balance sheet debt, partially offset by a decrease in the weighted average interest rate[175](index=175&type=chunk) [(Loss) income from equity method investment](index=38&type=section&id=(Loss)%20income%20from%20equity%20method%20investment) This section reports the company's share of net income or loss from its equity method investments | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | (Loss) income from equity method investment | $(735) | $3,035 | - Earnings from equity method investment declined to a **loss of $0.7 million** in Q1 2020 from an income of $3.0 million in Q1 2019, primarily due to a customer bankruptcy at TEL[179](index=179&type=chunk) [Income tax (benefit) expense](index=38&type=section&id=Income%20tax%20(benefit)%20expense) This section details the income tax expense or benefit recognized, reflecting the company's pre-tax income and effective tax rate | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Income tax (benefit) expense | $(706) | $1,582 | | % of Total Revenue | (0.3%) | 0.7% | | % of Freight Revenue | (0.4%) | 0.8% | - Income tax (benefit) expense decreased by **$2.3 million (144.6%)** in Q1 2020, primarily due to an $8.9 million decrease in pre-tax income[180](index=180&type=chunk)[181](index=181&type=chunk) - The effective tax rate fluctuates due to permanent differences related to the per diem pay structure for drivers[182](index=182&type=chunk) [Results of Segment Operations](index=39&type=section&id=Results%20of%20Segment%20Operations) This section analyzes the financial performance of each of the company's operating segments, including revenue and operating income [Overview](index=39&type=section&id=Overview) This overview identifies the company's distinct reportable segments and their primary business activities - The company has four reportable segments: Highway Services (Expedited and OTR), Dedicated, Managed Freight (Brokerage, TMS, and Warehousing), and Factoring[186](index=186&type=chunk) [Segment Revenue and Operating Income (Loss) Comparison](index=39&type=section&id=Segment%20Revenue%20and%20Operating%20Income%20(Loss)%20Comparison) This section compares the revenue and operating income or loss across the company's various business segments | Segment | Q1 2020 Revenue (in thousands) | Q1 2019 Revenue (in thousands) | Q1 2020 Operating Income (Loss) (in thousands) | Q1 2019 Operating Income (Loss) (in thousands) | | :------ | :----------------------------- | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Highway Services | $86,161 | $88,328 | $(1,757) | $(834) | | Dedicated | $81,788 | $84,332 | $(1,325) | $2,110 | | Managed Freight | $42,865 | $44,673 | $1,628 | $2,670 | | Factoring | $2,739 | $1,848 | $2,162 | $1,480 | | Total | $213,553 | $219,181 | $708 | $5,426 | - Highway Services revenue decreased by **$2.2 million**, primarily due to an 81 (5.8%) average tractor decrease, partially offset by a **5.1% increase** in average freight revenue per tractor per week[188](index=188&type=chunk) - Dedicated revenue decreased by **$2.5 million**, driven by a 53 (3.1%) average tractor decrease, partially offset by a **0.6% increase** in average freight revenue per tractor per week[190](index=190&type=chunk) - Factoring revenue increased by **$0.9 million** due to new and existing customers, while Managed Freight revenue decreased by **$1.8 million** due to a **14.9% decrease** in revenue per load[191](index=191&type=chunk)[192](index=192&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's financial flexibility, including cash position, working capital, debt, and financing strategies [Capital Requirements and Financing](index=41&type=section&id=Capital%20Requirements%20and%20Financing) This section outlines how the company funds its operations and investments, including credit facilities and strategic shifts in financing | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----- | :---------------------------- | :------------------------------- | | Cash and Cash Equivalents | $39,655 | $43,591 | | Working Capital | $114,100 | $93,100 | | Long-Term Debt and Lease Obligations | $376,400 | $348,200 | | Borrowings under Credit Facility | $24,300 | $0 | | Available Borrowing Capacity (Credit Facility) | $35,600 | N/A | - The company finances capital requirements through credit facilities, cash flows, leases, installment notes, and asset sales, with a strategic shift towards increasing purchases and finance leases over operating leases[195](index=195&type=chunk) - Long-term debt and lease obligations increased by **$28.2 million** to $376.4 million at March 31, 2020, primarily due to increased revenue equipment installment notes[196](index=196&type=chunk)[197](index=197&type=chunk) [Capital Expenditures and Fleet Management](index=41&type=section&id=Capital%20Expenditures%20and%20Fleet%20Management) This section details the company's investments in property and equipment, along with its strategies for managing its vehicle fleet | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Net Capital Expenditures | $16,500 | $33,300 | | New Tractors Delivered | ~250 | ~209 | | Used Tractors Disposed | ~375 | ~40 | | New Trailers Delivered | ~65 | N/A | | Used Trailers Disposed | ~190 | N/A | - Net capital expenditures decreased to **$16.5 million** in Q1 2020 from $33.3 million in Q1 2019[199](index=199&type=chunk) - The company plans to reduce its operating tractor fleet by **12.0% to 14.0%** by the end of 2020, with expected deliveries of 35 new tractors and 35 new trailers, and disposals of 340 used tractors and 340 used trailers[199](index=199&type=chunk) [Cash Flows](index=42&type=section&id=Cash%20Flows) This section summarizes the cash generated and used by operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Cash Flows (Used) by Operating Activities | $(3,500) | $9,200 | | Net Cash Flows Used by Investing Activities | $(16,500) | $(33,500) | | Net Cash Flows Provided by Financing Activities | $16,100 | $32,200 | - Net cash used by operating activities was **$3.5 million** in Q1 2020, a decrease from $9.2 million provided in Q1 2019, mainly due to increased receivables and a net loss[202](index=202&type=chunk) - Net cash provided by financing activities decreased to **$16.1 million** in Q1 2020 from $32.2 million in Q1 2019, primarily due to the stock repurchase program[204](index=204&type=chunk) [Stock Repurchase Program](index=42&type=section&id=Stock%20Repurchase%20Program) This section details the company's share repurchase activities, including program authorization and execution - The Board approved a **$20.0 million** Class A common stock repurchase program on February 10, 2020, and temporarily suspended it on March 26, 2020, due to COVID-19 uncertainty[205](index=205&type=chunk) - Between February 10 and March 26, 2020, the company repurchased **1.4 million shares** for **$17.5 million**[205](index=205&type=chunk) [Contractual Obligations](index=43&type=section&id=Contractual%20Obligations) This section outlines the company's long-term commitments and liabilities arising from contracts - There were no material changes in the company's commitments or contractual liabilities during the three months ended March 31, 2020[208](index=208&type=chunk) [Critical Accounting Policies and Estimates](index=43&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section highlights the accounting policies and estimates that require significant judgment and can materially impact financial results - There have been no material changes to the company's critical accounting policies and estimates during the three months ended March 31, 2020, compared to those disclosed in the 2019 Form 10-K[209](index=209&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section outlines the company's exposure to market risks, specifically commodity price risk related to fuel and interest rate risk, and its strategies for managing these exposures, including the use of derivative instruments [Commodity Price Risk (Fuel)](index=43&type=section&id=Commodity%20Price%20Risk%20(Fuel)) This section discusses the company's exposure to fluctuations in fuel prices and its use of hedging strategies - The company is exposed to market risks from changes in fuel prices and uses derivative instruments, such as forward futures swap contracts, to reduce volatility[211](index=211&type=chunk)[212](index=212&type=chunk) - During Q1 2020, the company entered into fuel hedging contracts with a fair market value of **$0.7 million**[212](index=212&type=chunk) - A one-dollar change in diesel price per gallon would impact net income by **$0.7 million**, considering an **84.0%** fuel surcharge recovery rate for the remaining 2020[213](index=213&type=chunk) [Interest Rate Risk](index=44&type=section&id=Interest%20Rate%20Risk) This section describes the company's exposure to interest rate fluctuations and its strategies for managing this risk - The company manages interest rate exposure using a combination of fixed-rate and variable-rate obligations and interest rate swaps[216](index=216&type=chunk) - At March 31, 2020, **$55.2 million** of the total $376.4 million debt and lease obligations were variable rate, with $23.5 million hedged by an interest rate swap at **4.2%** and $7.5 million hedged at a weighted average of **2.9%**[216](index=216&type=chunk) - A **1% increase** in applicable short-term interest rates would reduce annual net income by less than **$0.1 million**[216](index=216&type=chunk) [Item 4. Controls and Procedures](index=44&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=44&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section reports on management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[218](index=218&type=chunk) [Changes in Internal Control Over Financial Reporting](index=44&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section discloses any material changes in the company's internal control over financial reporting during the period - There were no changes in internal control over financial reporting during the three months ended March 31, 2020, that materially affected or are reasonably likely to materially affect internal control[219](index=219&type=chunk) Part II Other Information [Item 1. Legal Proceedings](index=45&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section describes the company's involvement in routine litigation and specific class action lawsuits, including the Tabizon case, and management's assessment of potential exposure - Covenant Transport is a defendant in a putative class action lawsuit (Richard Tabizon) alleging wage and hour claims under California Labor Code, with no reasonable estimate of loss currently available[224](index=224&type=chunk) - Management believes the resolution of open claims and pending litigation, considering existing reserves, is not likely to have a materially adverse effect on the consolidated financial statements[227](index=227&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section supplements the risk factors from the company's Form 10-K, focusing on new or updated risks, particularly the potential negative impacts of the COVID-19 outbreak and expenses related to future terminal closures - The COVID-19 outbreak could have a materially adverse effect on the company's financial condition, liquidity, results of operations, and cash flows due to travel bans, quarantines, and reduced demand[229](index=229&type=chunk) - The company may experience additional expenses, impairments, and losses related to future terminal closures and other restructuring activities as part of its strategic plan[235](index=235&type=chunk)[236](index=236&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section provides information on the company's Class A common stock repurchase program during the quarter and notes limitations on cash dividends | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs | | :----- | :----------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :----------------------------------------------------------------------------------- | | February 1-29, 2020 | 546,647 | $13.99 | 546,647 | $12,328,598 | | March 1-31, 2020 | 882,557 | $11.19 | 882,557 | $2,485,495 | | Total | 1,429,204 | N/A | 1,429,204 | $2,485,495 | - The company repurchased **1,429,204 shares** of Class A common stock for **$17.5 million** during Q1 2020 under a program that was temporarily suspended on March 26, 2020[237](index=237&type=chunk) - The payment of cash dividends is currently limited by the company's financing arrangements, including covenants under its Credit Facility[238](index=238&type=chunk) [Item 3. Defaults Upon Senior Securities](index=46&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This item is not applicable to the current report - Not applicable[239](index=239&type=chunk) [Item 4. Mine Safety Disclosures](index=46&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the current report - Not applicable[240](index=240&type=chunk) [Item 5. Other Information](index=46&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This item is not applicable to the current report - Not applicable[241](index=241&type=chunk) [Item 6. Exhibits](index=48&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed as part of the Form 10-Q, including articles of incorporation, bylaws, certifications, and XBRL documents - The report includes various exhibits such as the Second Amended and Restated Articles of Incorporation, Third Amended and Restated Bylaws, certifications by the Principal Executive Officer and Principal Financial Officer, and XBRL documents[244](index=244&type=chunk)

Financial Data and Key Metrics Changes - Revenue from the Highway Services Truckload segment decreased by 1% to $77 million, primarily due to an 80 tractors average operating fleet reduction of 5.8%, partially offset by a 5.1% increase in average freight revenue per tractor [5] - The Dedicated Truckload segment's revenue decreased by 2.5% to $69.9 million, mainly due to a 3.1% reduction in average operating fleet [6] - Managed Freight segment's operating revenue decreased by 4% to $42.7 million, driven by a 10.4% decrease in freight brokerage operating revenue [7] - Factoring segment net fee revenue increased by 48.2% to $2.7 million, with operating income rising to $2.2 million from $1.5 million [7] - Total indebtedness net of cash increased by $32.2 million to $336.8 million by March 31, 2020, due to stock repurchases and increased funds in the factoring business [9] Business Line Data and Key Metrics Changes - Highway Services Truckload segment saw a 3.7% decrease in average freight revenue per total mile, while average miles per tractor increased by 9.1% [5] - Dedicated Truckload segment experienced a 1.6% decrease in average freight revenue per total mile, with average miles per tractor up by 2.2% [6] - Managed Freight's operating income was $1.6 million, with an operating ratio of 96.2% [7] - The average age of the tractor fleet decreased to 1.8 years from 2.3 years year-over-year [8] Market Data and Key Metrics Changes - The company expects a 12% to 14% reduction in operational tractor fleet size by the end of 2020 compared to the end of 2019 [8] - The company noted a significant increase in the percentage of team-driven tractors, contributing to improved utilization [5] Company Strategy and Development Direction - The company is focused on reducing total capital employed while prioritizing higher margin and less volatile core service offerings [11] - Strategic initiatives include cost control planning and a realignment of the executive structure to enhance operational efficiency [11] - The company aims to strengthen its position in the U.S. logistics industry and concentrate on sustainable higher margin sectors [14][15] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about initial positive results from strategic plan execution, despite expecting volatility in the coming months due to external factors [13] - The outlook for 2020 is no longer applicable, with management indicating readiness to support partner customers as business levels return to normal [14] - Management highlighted the importance of structural improvements and strategic initiatives in mitigating risks and enhancing profitability [14] Other Important Information - The company recognized a pre-tax loss of $700,000 from its equity investment in TEL, compared to a pre-tax income of $3 million in the same quarter of the previous year [8] - The company has suspended its 401(k) match for employees as a temporary cost-saving measure [24] Q&A Session Summary Question: What percentage of your automotive businesses is in your dedicated side? - Management indicated that approximately 10% to 12% of the total fleet is dedicated to automotive, which was significantly impacted by shutdowns due to COVID-19 [17] Question: How are automotive customers ramping up production? - Management expects a gradual ramp-up, with projections of reaching 100% production levels by mid-June [18] Question: How many of the costs should be considered permanent versus variable? - Management stated that many of the cost reductions are permanent, including the rationalization of fixed infrastructure and headcount reductions [25] Question: What is the expectation for the tractor count by year-end? - Management confirmed that the tractor count is expected to be down to approximately 2,600 by year-end [59] Question: How has fuel impacted margins recently? - Management noted that while lower fuel costs are beneficial, the corresponding decrease in fuel surcharges has balanced the effect on margins [61] Question: Will TEL continue to be a headwind? - Management expects TEL to remain a headwind in the third quarter but anticipates improvement in the fourth quarter compared to the previous year [64]

Part I [ITEM 1. BUSINESS](index=4&type=section&id=ITEM%201.%20BUSINESS) Covenant Transportation Group provides expedited freight and logistics solutions, operating approximately 3,100 tractors across Highway, Dedicated, Managed Freight, and Factoring services - The Company was founded in 1986 as an expedited freight transportation provider, growing from 25 to approximately **3,100 tractors** and expanding services to include a wide array of transportation and logistics solutions[9](index=9&type=chunk) - Strategic focus areas include organizational excellence, driver focus, customer experience, rigorous capital allocation, risk management, and technology adoption to improve operational results and profitability[13](index=13&type=chunk)[14](index=14&type=chunk)[15](index=15&type=chunk)[16](index=16&type=chunk)[17](index=17&type=chunk)[18](index=18&type=chunk) - The Company operates a modern fleet with an average age of **2.0 years for tractors** and **4.2 years for trailers**, incorporating advanced technologies for freight optimization, routing, tracking, electronic logging, fuel efficiency, and safety[20](index=20&type=chunk)[63](index=63&type=chunk) 2019 Freight Revenue by Service Offering (Net of Fuel Surcharge) | Service Offering | Percentage of Total Freight Revenue | | :-------------------------- | :---------------------------------- | | Highway Services: Expedited | 29% | | OTR | 10% | | **Total Highway Services** | **39%** | | Dedicated | 36% | | Managed Freight: Brokerage | 13% | | TMS | 5% | | Warehousing | 6% | | **Total Managed Freight** | **24%** | | Factoring | 1% | | **Total** | **100%** | Highway Services Key Performance Metrics (2018 vs. 2019) | Metric | 2018 | 2019 | | :----------------------------------- | :-------- | :-------- | | Average freight revenue per total mile | $2.03 | $1.93 | | Average miles per tractor | 126,116 | 124,228 | | Average freight revenue per tractor per week | $4,908 | $4,595 | Dedicated Services Key Performance Metrics (2018 vs. 2019) | Metric | 2018 | 2019 | | :----------------------------------- | :-------- | :-------- | | Average freight revenue per total mile | $1.79 | $1.81 | | Average miles per tractor | 95,652 | 91,318 | | Average freight revenue per tractor per week | $3,275 | $3,168 | - Walmart accounted for over **10% of consolidated revenue** in both 2019 and 2018, serviced across Highway Services, Dedicated, and Managed Freight segments. The top ten customers represented approximately **45% and 49% of total revenue** in 2019 and 2018, respectively[47](index=47&type=chunk) - The Company employed approximately **3,900 drivers** and **1,650 non-driver personnel**, and engaged about **300 independent contractor drivers** as of December 31, 2019. Driver recruitment and retention remain critical challenges in the industry[59](index=59&type=chunk)[52](index=52&type=chunk) - The U.S. trucking industry is highly competitive and fragmented, with service and price being primary competition factors. The industry faces challenges from driver shortages, freight demand fluctuations, fuel price volatility, and increasing government regulations[66](index=66&type=chunk)[67](index=67&type=chunk) - The Company is subject to extensive transportation regulations (DOT, FMCSA, TSA) and environmental regulations (EPA, CARB), which impact operating efficiency, costs, and driver availability. Recent regulatory changes include proposed hours-of-service flexibility, national drug and alcohol clearinghouse, and stricter emissions standards (Phase 2 Standards, California Phase 2)[69](index=69&type=chunk)[70](index=70&type=chunk)[73](index=73&type=chunk)[77](index=77&type=chunk)[78](index=78&type=chunk)[81](index=81&type=chunk)[90](index=90&type=chunk)[91](index=91&type=chunk)[95](index=95&type=chunk) - Fuel costs decreased in 2019 to **$3.06 per gallon** from **$3.18 in 2018**. The Company manages fuel costs through routing, discounts, and surcharges, but full recovery is not always achieved due to lagging surcharge programs and non-revenue miles[103](index=103&type=chunk)[104](index=104&type=chunk) - The transportation industry experiences seasonality, with lower freight volumes and increased operating expenses in the first quarter due to reduced consumer demand and inclement weather. The fourth quarter typically sees surges related to holiday shopping[106](index=106&type=chunk) [ITEM 1A. RISK FACTORS](index=16&type=section&id=ITEM%201A.%20RISK%20FACTORS) The Company faces significant risks from cyclical economic conditions, intense competition, driver shortages, self-insurance exposure, fuel price volatility, substantial debt, and regulatory changes - The truckload industry is highly cyclical and dependent on factors like excess capacity, declining used equipment values, driver shortages, and rising operating costs (interest rates, fuel taxes, healthcare, insurance)[114](index=114&type=chunk)[119](index=119&type=chunk) - Recessionary economic cycles, changes in customer inventory practices, and downturns in customer business cycles (especially retail and manufacturing) can lead to reduced freight levels, lower rates, increased credit risk, and impaired asset utilization[115](index=115&type=chunk)[116](index=116&type=chunk) - Failure to successfully implement strategic initiatives, such as growing Dedicated and Managed Freight segments, improving driver retention, and controlling expenses, could adversely affect financial condition and cash flows[122](index=122&type=chunk)[128](index=128&type=chunk) - The highly competitive and fragmented industry, with numerous carriers and alternative transportation modes, can lead to freight rate reductions, loss of business to competitors, and increased investment in technology to remain competitive[123](index=123&type=chunk)[124](index=124&type=chunk)[127](index=127&type=chunk)[132](index=132&type=chunk) - The Company self-insures a significant portion of its claims exposure (auto liability, workers' compensation, cargo, employee medical, physical damage), leading to potential volatility in earnings if actual claims exceed estimates or if insurance premiums rise significantly[137](index=137&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk)[143](index=143&type=chunk)[145](index=145&type=chunk) - Fluctuations in diesel fuel prices, due to factors like political events, terrorist activities, and commodity trading, can significantly increase operating costs, as fuel surcharges may not fully offset price increases, especially during periods of rising prices or for non-revenue miles[148](index=148&type=chunk)[149](index=149&type=chunk)[152](index=152&type=chunk) - Dependence on information systems for operations, financial reporting, and communications makes the Company vulnerable to system failures, cyberattacks, and disruptions, which could interrupt operations, damage reputation, and impact financial performance[154](index=154&type=chunk)[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk) - Substantial indebtedness and capital/operating lease obligations could limit the Company's flexibility, require a significant portion of cash flow for debt repayment, and restrict access to additional financing, potentially diluting stockholder ownership[165](index=165&type=chunk)[168](index=168&type=chunk)[171](index=171&type=chunk)[172](index=172&type=chunk) - Difficulty in attracting and retaining qualified drivers, exacerbated by regulatory requirements (hours-of-service, ELDs) and economic expansion offering alternative employment, could lead to increased driver compensation, reduced equipment utilization, and negatively impact profitability[193](index=193&type=chunk)[194](index=194&type=chunk) - The risk of independent contractors being reclassified as employees by regulatory authorities or judicial processes (e.g., California's AB5 law) could result in significant additional exposure under federal and state tax, workers' compensation, and labor laws, including for prior periods[197](index=197&type=chunk)[198](index=198&type=chunk) - Changes in existing transportation and environmental regulations, or violations thereof, could increase operating costs, impair efficiency, and negatively impact profitability. Examples include stricter emissions standards, driver coercion rules, and potential changes to the CSA safety program[199](index=199&type=chunk)[200](index=200&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk)[230](index=230&type=chunk)[231](index=231&type=chunk) - The Company's 49% equity investment in Transport Enterprise Leasing, LLC (TEL) carries risks such as TEL's significant capital requirements, debt, customer defaults (especially from small trucking companies), and volatility in the used equipment market[219](index=219&type=chunk)[220](index=220&type=chunk)[222](index=222&type=chunk) - The Chairman and CEO, David Parker, and his wife control approximately **34% of the Company's voting power**, allowing them to substantially influence stockholder decisions, which could limit other stockholders' ability to influence key transactions or changes of control[227](index=227&type=chunk) - A material weakness in internal control over financial reporting related to IT general controls was identified as of December 31, 2018, but was remediated by December 31, 2019. Failure to maintain effective controls could lead to misstatements and impact stock price[238](index=238&type=chunk)[239](index=239&type=chunk)[401](index=401&type=chunk)[403](index=403&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=33&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) No unresolved staff comments from the SEC - No unresolved staff comments[246](index=246&type=chunk) [ITEM 2. PROPERTIES](index=33&type=section&id=ITEM%202.%20PROPERTIES) The Company owns or leases administrative offices and truck terminals across the U.S., none individually material - The Company owns or leases administrative offices and truck terminals throughout the continental U.S., none of which are individually material[247](index=247&type=chunk) [ITEM 3. LEGAL PROCEEDINGS](index=33&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) The Company faces routine litigation and a pending class action lawsuit regarding driver wage and hour claims, but management anticipates no material adverse effect on financial statements - The Company is a party to ordinary, routine litigation, mostly involving claims for personal injury and/or property damage from freight transportation, covered by insurance in excess of self-insured retentions[248](index=248&type=chunk)[249](index=249&type=chunk) - A class action lawsuit filed in November 2018 against Covenant Transport, Inc. alleges failure to properly pay drivers for rest breaks, provide accurate wage statements, and pay minimum/overtime wages under California labor law. The case is pending in the U.S. District Court in the Eastern District of Tennessee[250](index=250&type=chunk) - Management believes the resolution of open claims and pending litigation, considering existing reserves, is not likely to have a materially adverse effect on the consolidated financial statements[254](index=254&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=34&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) No mine safety disclosures - No mine safety disclosures[254](index=254&type=chunk) Part II [ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=35&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) The Company's Class A common stock is traded on NASDAQ (CVTI), with approximately 87 stockholders of record, and the Chairman and his wife holding all Class B stock, influencing decisions - Class A common stock is traded on the NASDAQ Global Select Market (CVTI). As of March 6, 2020, there were approximately **87 stockholders of record** for Class A common stock[257](index=257&type=chunk) - The Chairman of the Board and Chief Executive Officer, David Parker, and his wife, Jacqueline Parker, own all outstanding Class B common stock, which is entitled to **two votes per share**, giving them substantial influence over stockholder decisions[257](index=257&type=chunk)[227](index=227&type=chunk) - The Company has never declared or paid cash dividends on its common stock and intends to retain earnings for business financing and debt reduction, with current financing arrangements limiting dividend payments[258](index=258&type=chunk) [ITEM 6. SELECTED FINANCIAL DATA](index=35&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) Selected financial data for 2015-2019 shows total revenue increased slightly in 2019 to **$894.5 million**, but operating income and net income significantly decreased, with declines in key operating metrics Selected Statement of Operations Data (2015-2019, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :------------------------------------------------------------------ | :-------- | :-------- | :-------- | :-------- | :-------- | | Freight revenue | $800,401 | $779,729 | $626,809 | $610,845 | $640,120 | | Fuel surcharge revenue | 94,127 | 105,726 | 78,198 | 59,806 | 84,120 | | Total revenue | $894,528 | $885,455 | $705,007 | $670,651 | $724,240 | | Total operating expenses | 878,494 | 826,469 | 676,852 | 638,204 | 656,458 | | Operating income | 16,034 | 58,986 | 28,155 | 32,447 | 67,782 | | Net income | $8,477 | $42,503 | $55,439 | $16,835 | $42,085 | | Basic income per share | $0.46 | $2.32 | $3.03 | $0.93 | $2.32 | | Diluted income per share | $0.45 | $2.30 | $3.02 | $0.92 | $2.30 | Selected Balance Sheet Data (2015-2019, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :------------------------------------------------------------------ | :---------- | :---------- | :---------- | :---------- | :---------- | | Net property and equipment | $517,203 | $450,595 | $464,072 | $465,471 | $454,049 | | Total assets | $881,640 | $773,524 | $649,668 | $620,538 | $646,717 | | Long-term debt and finance lease obligations, less current maturities | $267,069 | $201,754 | $186,242 | $188,437 | $206,604 | | Total stockholders' equity | $350,111 | $343,142 | $295,201 | $236,414 | $202,160 | Selected Operating Data (2015-2019) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Capital expenditures, net | $91,664 | $33,093 | $72,006 | $59,052 | $148,994 | | Average freight revenue per loaded mile | $2.07 | $2.13 | $1.89 | $1.86 | $1.89 | | Average freight revenue per total mile | $1.87 | $1.94 | $1.70 | $1.67 | $1.69 | | Average freight revenue per tractor per week | $3,778 | $4,191 | $3,917 | $3,881 | $3,967 | | Average miles per tractor per year | 105,379 | 112,736 | 120,043 | 121,782 | 122,508 | | Weighted average tractors for year | 3,073 | 2,843 | 2,557 | 2,593 | 2,700 | | Total tractors at end of period | 3,021 | 3,154 | 2,559 | 2,535 | 2,656 | | Total trailers at end of period | 6,739 | 6,950 | 6,846 | 7,389 | 6,978 | | Team-driven tractors as percentage of fleet | 27.4% | 30.8% | 38.1% | 38.7% | 35.3% | [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=38&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) In 2019, the Company faced a challenging operating environment with excess industry capacity and weak freight volumes, leading to a significant decline in operating and net income despite a slight increase in total revenue - In 2019, the Company experienced a difficult operating environment characterized by excess industry capacity, lackluster freight volumes, intense competition, and higher operating costs[271](index=271&type=chunk) Consolidated Financial Results (2019 vs. 2018, in millions) | Metric | 2019 | 2018 | | :----------------------------------------- | :---------- | :---------- | | Total revenue | $894.5 | $885.5 | | Freight revenue | $800.4 | $779.7 | | Operating income | $16.0 | $59.0 | | Net income | $8.5 | $42.5 | | Diluted EPS | $0.45 | $2.30 | | Equity investment in TEL (pre-tax earnings)| $7.0 | $7.7 | | Total indebtedness, net of cash | $304.6 | $192.3 | | Stockholders' equity | $350.1 | $343.1 | | Tangible book value | $278.0 | N/A | - The Company expects operating cash flows and the ratio of debt to total capitalization to improve in fiscal 2020, with improvements weighted towards the second half of the year, driven by declining truckload industry capacity, continued U.S. economic expansion, and asset reallocation[275](index=275&type=chunk) Revenue by Segment (2019 vs. 2018, in thousands) | Segment | 2019 | 2018 | | :---------------- | :--------- | :--------- | | Highway Services | $356,521 | $469,308 | | Dedicated | 342,473 | 257,739 | | Managed Freight | 186,394 | 153,346 | | Factoring | 9,140 | 5,062 | | **Total** | **$894,528** | **$885,455** | - Salaries, wages, and related expenses increased by **$17.6 million (5.8%)** in 2019, primarily due to increased headcount from the Landair acquisition, pay adjustments for drivers and non-drivers, and higher workers' compensation and health insurance costs[285](index=285&type=chunk) - Total fuel expense decreased by **$6.0 million** in 2019 due to lower fuel prices, despite a **1.0% increase in total miles**. Net fuel expense, however, increased by **$4.7 million (16.6%)** due to reduced fuel hedge gains and lower fuel surcharge reimbursement[287](index=287&type=chunk)[293](index=293&type=chunk) - Insurance and claims expense increased by **$4.4 million (10.1%)** in 2019, with per mile cost rising to **14.3 cents** from **13.3 cents** in 2018, driven by inflation in expected claim costs, prior period claim development, and increased frequency of higher severity incidents[303](index=303&type=chunk) - Depreciation and amortization increased by **$2.7 million (3.6%)** in 2019, mainly due to increased tractor and trailer counts from the Landair Acquisition, partially offset by gains on equipment sales[309](index=309&type=chunk) - Net cash flows provided by operating activities decreased to **$64.0 million** in 2019 from **$124.8 million** in 2018, primarily due to a **$34.0 million decrease in net income** and a **$22.8 million negative swing** in accounts receivable and payables[332](index=332&type=chunk) Contractual Cash Obligations and Commitments (as of Dec 31, 2019, in thousands) | Payment Due by Period | Total | < 1 Year | 1-3 Years | 3-5 Years | > 5 Years | | :-------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Revenue equipment and property installment notes, including interest | $279,645 | $63,317 | $163,386 | $30,787 | $22,155 | | Operating leases | $65,952 | $21,991 | $34,237 | $7,732 | $1,992 | | Finance leases | $35,642 | $8,184 | $16,988 | $10,470 | $0 | | Purchase obligations | $68,422 | $68,422 | $0 | $0 | $0 | | **Total** | **$446,846**| **$159,099**| **$214,611**| **$48,989** | **$24,147** | Operating Ratio (2019 vs. 2018, in thousands) | Metric | 2019 | OR % | 2018 | OR % | | :------------------------------------------------------------------ | :-------- | :------ | :-------- | :------ | | GAAP Operating Ratio: | | | | | | Total revenue | $894,528 | | $885,455 | | | Total operating expenses | 878,494 | 98.2% | 826,469 | 93.3% | | Operating income | $16,034 | | $58,986 | | | Adjusted Operating Ratio: | | | | | | Freight revenue (total revenue, excluding fuel surcharge) | $800,401 | | $779,729 | | | Adjusted operating expenses (net of fuel surcharge and intangibles amortization) | 781,444 | 97.6% | 719,281 | 92.2% | | Adjusted operating income | $18,957 | | $60,448 | | - The Company adopted ASU 2016-02 (ASC 842, Leases) on January 1, 2019, using a modified retrospective approach, resulting in the initial recognition of **$40.1 million in operating lease assets** and **$41.0 million in liabilities**[361](index=361&type=chunk)[373](index=373&type=chunk)[377](index=377&type=chunk) - Inflation, new emissions control regulations, and fuel costs significantly impact operating expenses, particularly revenue equipment prices, litigation and claims, and driver/non-driver wages. The nationwide shortage of qualified drivers has led to faster-than-inflation wage increases[379](index=379&type=chunk) [EXECUTIVE OVERVIEW](index=38&type=section&id=EXECUTIVE%20OVERVIEW) The Company's strategy focuses on high-service, less commoditized transportation services to reduce cyclicality and enhance long-term earnings, with 2019 seeing slight revenue growth despite a difficult operating environment - The Company's strategy is to focus on value-added, less commoditized portions of customer supply chains to reduce cyclicality and enhance long-term earnings[269](index=269&type=chunk) - In 2019, the Company faced a difficult operating environment with excess industry capacity, lackluster freight volumes, intense competition, and higher operating costs. Managed Freight and Factoring segments were profitable, Dedicated was moderately profitable, and Highway Services was unprofitable[271](index=271&type=chunk) Revenue Trends by Segment (2019 vs. 2018, in thousands) | Segment | 2019 | 2018 | | :---------------- | :--------- | :--------- | | Highway Services | $356,521 | $469,308 | | Dedicated | 342,473 | 257,739 | | Managed Freight | 186,394 | 153,346 | | Factoring | 9,140 | 5,062 | | **Total** | **$894,528** | **$885,455** | [Outlook](index=39&type=section&id=Outlook) The Company anticipates improved operating cash flows and a reduced debt-to-total capitalization ratio for fiscal 2020, contingent on declining industry capacity, continued economic expansion, and successful asset reallocation - Operating cash flows and the ratio of debt to total capitalization are expected to improve for fiscal 2020, primarily in the second half of the year[275](index=275&type=chunk) - Expected improvements are contingent on declining truckload industry capacity, continued U.S. economic expansion, successful disposal of excess real estate and revenue equipment, and reallocation of assets to more profitable operations[275](index=275&type=chunk) [RESULTS OF CONSOLIDATED OPERATIONS](index=39&type=section&id=RESULTS%20OF%20CONSOLIDATED%20OPERATIONS) In 2019, total revenue increased by **1.0% to $894.5 million**, driven by growth in Dedicated, Managed Freight, and Factoring, but operating income significantly decreased to **$16.0 million**, leading to a substantial drop in net income and diluted EPS Revenue (2019 vs. 2018, in thousands) | Revenue Type | 2019 | 2018 | Change ($) | Change (%) | | :------------------- | :-------- | :-------- | :--------- | :--------- | | Freight revenue | $800,401 | $779,729 | $20,672 | 2.7% | | Fuel surcharge revenue | 94,127 | 105,726 | (11,599) | (11.0%) | | **Total revenue** | **$894,528**| **$885,455**| **$9,073** | **1.0%** | - Dedicated revenue increased due to a **40.9% average tractor increase**, partially offset by a **3.3% decrease** in average freight revenue per tractor per week. Landair contributed **$68.2 million** to Dedicated freight revenue in 2019[278](index=278&type=chunk) - Highway Services revenue decreased due to a **17.6% average tractor decrease** and a **6.4% decrease** in average freight revenue per tractor per week, driven by a **5.0% decrease** in average rate per total mile[279](index=279&type=chunk) - Managed Freight revenue increased primarily due to Landair's full-year contribution of **$83.3 million** in 2019, compared to **$38.5 million** in 2018[280](index=280&type=chunk) - Factoring revenue increased due to new and existing customers[283](index=283&type=chunk) Salaries, Wages, and Related Expenses (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | | Salaries, wages, and related expenses | $321,997 | $304,447 | $17,550 | 5.8% | | % of total revenue | 36.0% | 34.4% | 1.6 pp | | | % of freight revenue | 40.2% | 39.0% | 1.2 pp | | Fuel Expense (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :----------------------- | :--------- | :--------- | :--------- | :--------- | | Fuel expense | $115,307 | $121,264 | ($5,957) | (4.9%) | | % of total revenue | 12.9% | 13.7% | (0.8 pp) | | | % of freight revenue | 14.4% | 15.6% | (1.2 pp) | | Net Fuel Expense (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :----------------------- | :--------- | :--------- | :--------- | :--------- | | Net fuel expense | $32,853 | $28,173 | $4,680 | 16.6% | | % of freight revenue | 4.1% | 3.6% | 0.5 pp | | Operations and Maintenance (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------- | :--------- | :--------- | :--------- | :--------- | | Operations and maintenance | $59,505 | $55,505 | $4,000 | 7.2% | | % of total revenue | 6.7% | 6.3% | 0.4 pp | | | % of freight revenue | 7.4% | 7.1% | 0.3 pp | | Revenue Equipment Rentals and Purchased Transportation (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :---------------------------------------------- | :--------- | :--------- | :--------- | :--------- | | Revenue equipment rentals and purchased transportation | $204,655 | $183,645 | $21,010 | 11.4% | | % of total revenue | 22.9% | 20.7% | 2.2 pp | | | % of freight revenue | 25.6% | 23.6% | 2.0 pp | | Insurance and Claims (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :----------------------- | :--------- | :--------- | :--------- | :--------- | | Insurance and claims | $47,724 | $43,333 | $4,391 | 10.1% | | % of total revenue | 5.3% | 4.9% | 0.4 pp | | | % of freight revenue | 6.0% | 5.6% | 0.4 pp | | | Per mile cost | 14.3 cents | 13.3 cents | 1.0 cent | 7.5% | General Supplies and Expenses (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :---------------------------- | :--------- | :--------- | :--------- | :--------- | | General supplies and expenses | $30,434 | $23,227 | $7,207 | 31.0% | | % of total revenue | 3.4% | 2.6% | 0.8 pp | | | % of freight revenue | 3.8% | 3.0% | 0.8 pp | | Depreciation and Amortization (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :---------------------------------------------- | :--------- | :--------- | :--------- | :--------- | | Depreciation and amortization | $78,879 | $76,156 | $2,723 | 3.6% | | % of total revenue | 8.8% | 8.6% | 0.2 pp | | | % of freight revenue | 9.9% | 9.8% | 0.1 pp | | Income from Equity Method Investment (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :----------------------------------- | :-------- | :-------- | :--------- | :--------- | | Income from equity method investment | $7,017 | $7,732 | ($715) | (9.2%) | Income Tax Expense (Benefit) (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :------------------------- | :-------- | :-------- | :--------- | :--------- | | Income tax expense (benefit) | $3,464 | $15,507 | ($12,043) | (77.7%) | | % of total revenue | 0.4% | 1.8% | (1.4 pp) | | | % of freight revenue | 0.4% | 2.0% | (1.6 pp) | | [RESULTS OF SEGMENT OPERATIONS](index=44&type=section&id=RESULTS%20OF%20SEGMENT%20OPERATIONS) In 2019, Highway Services revenue decreased significantly, resulting in an operating loss, while Dedicated and Managed Freight saw revenue growth but declining operating income due to contract pricing and margin pressure, respectively, with Factoring showing increased revenue and operating income Revenue and Operating Income by Segment (2019 vs. 2018, in thousands) | Segment / Service Offering | 2019 Revenue | 2018 Revenue | 2019 Operating Income (Loss) | 2018 Operating Income | | :------------------------- | :----------- | :----------- | :--------------------------- | :-------------------- | | Highway Services: | | | | | | Expedited | $262,764 | $317,244 | $10,629 | $25,877 | | OTR | 93,757 | 152,064 | (11,727) | 6,816 | | **Total Highway Services** | **356,521** | **469,308** | **(1,098)** | **32,693** | | Dedicated | 342,473 | 257,739 | 1,026 | 12,699 | | Managed Freight: | | | | | | Brokerage | 102,479 | 102,730 | 314 | 3,805 | | TMS | 36,136 | 27,036 | 3,014 | 3,457 | | Warehousing | 47,779 | 23,580 | 5,520 | 2,873 | | **Total Managed Freight** | **186,394** | **153,346** | **8,848** | **10,135** | | Factoring | 9,140 | 5,062 | 7,258 | 3,459 | | **Total Revenues** | **$894,528** | **$885,455** | **$16,034** | **$58,986** | - Highway Services operating income decreased by **$33.8 million**, primarily due to negative pressure on rates and volumes in a difficult operating environment, with temperature-controlled business being significantly unprofitable[326](index=326&type=chunk) - Dedicated operating income declined by **$11.7 million**, attributed to contract pricing in non-Landair operations that were below targeted profitability, despite improved results at Landair[326](index=326&type=chunk) - Managed Freight operating income decreased by **$1.3 million**, mainly due to lower gross margin in brokerage services from significant pressure on revenue per load[327](index=327&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=46&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The Company's working capital increased to **$93.1 million** in 2019, with **$59.8 million** in available borrowing capacity, while net cash from operating activities decreased significantly, and financing activities increased due to changes in equipment acquisition methods - Working capital increased to **$93.1 million** at December 31, 2019, from **$84.3 million** in 2018. The Company believes its working capital and liquidity sources are adequate for current and projected needs[329](index=329&type=chunk) - As of December 31, 2019, the Company had no borrowings outstanding under its Credit Facility, **$35.2 million** in undrawn letters of credit, and **$59.8 million** in available borrowing capacity[330](index=330&type=chunk) - Net cash flows provided by operating activities decreased to **$64.0 million** in 2019 from **$124.8 million** in 2018, primarily due to lower net income and negative changes in accounts receivable/payable[332](index=332&type=chunk) - Net cash flows used by investing activities were **$93.0 million** in 2019, down from **$120.9 million** in 2018 (which included the Landair acquisition). Net investment in the fleet increased in 2019 due to a shift towards financed purchases over leases[333](index=333&type=chunk) - Net cash flows provided by financing activities were **$49.5 million** in 2019, up from **$3.9 million** in 2018, reflecting reduced net borrowings related to the revenue equipment trade cycle[336](index=336&type=chunk) [Non-GAAP Financial Measures](index=48&type=section&id=Non-GAAP%20Financial%20Measures) The Company uses "adjusted operating ratio" as a key profitability measure, which excludes fuel surcharge revenue and intangibles amortization from operating expenses, showing a decrease in profitability in 2019 compared to 2018 - The Company uses "adjusted operating ratio" (operating expenses, net of fuel surcharge revenue and intangibles amortization, as a percentage of revenue excluding fuel surcharge revenue) to compare periods more effectively by excluding volatile fuel price effects[341](index=341&type=chunk) Operating Ratio (2019 vs. 2018, in thousands) | Metric | 2019 | OR % | 2018 | OR % | | :------------------------------------------------------------------ | :-------- | :------ | :-------- | :------ | | GAAP Operating Ratio: | | | | | | Total revenue | $894,528 | | $885,455 | | | Total operating expenses | 878,494 | 98.2% | 826,469 | 93.3% | | Operating income | $16,034 | | $58,986 | | | Adjusted Operating Ratio: | | | | | | Freight revenue (total revenue, excluding fuel surcharge) | $800,401 | | $779,729 | | | Adjusted operating expenses (net of fuel surcharge and intangibles amortization) | 781,444 | 97.6% | 719,281 | 92.2% | | Adjusted operating income | $18,957 | | $60,448 | | [CRITICAL ACCOUNTING POLICIES AND ESTIMATES](index=48&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES%20AND%20ESTIMATES) The Company's critical accounting policies involve significant estimates for revenue recognition, depreciation, impairment testing, self-insurance claims, and the 2019 adoption of ASC 842 for lease accounting, alongside income tax and stock-based compensation accounting - Revenue for Highway Services and Dedicated segments is recognized proportionally based on the percentage of miles completed, while Managed Freight and Factoring revenue is recognized upon service completion[343](index=343&type=chunk)[344](index=344&type=chunk)[345](index=345&type=chunk) - Depreciation of revenue equipment (tractors, trailers) is calculated using the straight-line method over estimated useful lives (5 years for tractors, 7-10 years for trailers) to salvage values, with annual reviews for reasonableness[347](index=347&type=chunk) - Goodwill and other intangible assets are tested for impairment annually or when circumstances indicate impairment, using qualitative and quantitative assessments based on fair value estimates[353](index=353&type=chunk) - The Company self-insures significant portions of auto liability (**$1.0M**), workers' compensation (**$1.3M**), cargo (**$0.3M**), employee medical (**$0.4M**), and **100% of physical damage claims**, requiring substantial judgment in accruing estimated costs[355](index=355&type=chunk)[358](index=358&type=chunk) - Effective January 1, 2019, the Company adopted ASC 842 (Leases), requiring the recognition of right-of-use assets and lease liabilities on the balance sheet for most leases with terms longer than twelve months[361](index=361&type=chunk)[362](index=362&type=chunk)[373](index=373&type=chunk)[377](index=377&type=chunk) - Deferred tax assets and liabilities are recognized for temporary differences, measured using enacted tax rates. The Company assesses income tax positions and records tax benefits based on the likelihood of being sustained[367](index=367&type=chunk)[368](index=368&type=chunk) [Recent Accounting Pronouncements](index=51&type=section&id=Recent%20Accounting%20Pronouncements) The Company adopted ASU 2014-09 (Revenue Recognition) in 2018 and ASU 2016-02 (Leases) in 2019, recognizing **$40.1 million** in operating lease assets and **$41.0 million** in liabilities, and is currently evaluating ASU 2016-13 (Credit Losses) for 2023 implementation - ASU 2014-09 (Revenue Recognition) was adopted on January 1, 2018, using a modified retrospective approach, resulting in a **$0.6 million positive adjustment** to retained earnings. Revenue is now recognized proportionally based on miles completed[370](index=370&type=chunk)[371](index=371&type=chunk)[372](index=372&type=chunk) - ASU 2016-02 (Leases) was adopted on January 1, 2019, using a modified retrospective approach, leading to the initial recognition of **$40.1 million in operating lease assets** and **$41.0 million in liabilities**[373](index=373&type=chunk)[374](index=374&type=chunk)[377](index=377&type=chunk) - ASU 2016-13 (Credit Losses on Financial Instruments) will be effective for the Company on January 1, 2023, requiring recognition of an allowance for expected credit losses over the life of financial instruments, and its impact is currently being evaluated[378](index=378&type=chunk) [INFLATION, NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS](index=52&type=section&id=INFLATION%2C%20NEW%20EMISSIONS%20CONTROL%20REGULATIONS%2C%20AND%20FUEL%20COSTS) The Company's operating expenses are highly sensitive to inflation, new emissions regulations, and volatile fuel costs, with driver wages increasing faster than general inflation due to ongoing shortages - Most operating expenses are inflation-sensitive, with significant effects on revenue equipment prices, litigation and claims, and driver/non-driver wages[379](index=379&type=chunk) - New emissions control regulations and increased manufacturing wages have led to higher tractor prices, while the used equipment market has fluctuated. Fuel costs have been volatile, increasing in 2018 and 2019[379](index=379&type=chunk) - The nationwide shortage of qualified drivers has caused driver wages per mile to increase faster than general inflation for the past four years, a trend expected to continue due to government regulations constraining industry capacity[379](index=379&type=chunk) [Geographic Areas](index=52&type=section&id=Geographic%20Areas) The Company primarily operates within the U.S., generating substantially all its revenue domestically, having discontinued services in Mexico in 2019 to improve profitability - The Company operates primarily in the U.S. and parts of Canada, with substantially all revenue generated from within the U.S[380](index=380&type=chunk) - Services within Mexico were discontinued in 2019 as part of a strategic plan to improve profitability[380](index=380&type=chunk) - Foreign revenue from Canada and Mexico was less than **1%** in 2019 and less than **2%** in 2018[380](index=380&type=chunk) [SEASONALITY](index=52&type=section&id=SEASONALITY) The Company's operations are seasonal, with lower freight volumes and increased operating expenses in the first quarter due to reduced consumer demand and inclement weather, while the fourth quarter typically sees holiday-related surges - Results of operations generally follow a seasonal pattern, with lower freight volumes and increased operating expenses in the first quarter due to reduced consumer demand and inclement weather[381](index=381&type=chunk) - The fourth quarter typically experiences surges related to holiday shopping, but the duration of this peak season has shortened, potentially negatively affecting the Company's ability to capitalize on demand and its fourth-quarter profitability[381](index=381&type=chunk) [ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=52&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The Company is exposed to market risks from fuel price and interest rate fluctuations, using derivatives to hedge fuel volatility and an interest rate swap to fix a **$28.0 million** real estate note, with a **$1** diesel price increase potentially decreasing net income by **$5.8 million** - The Company is exposed to market risks from changes in fuel prices and interest rates, but not a material amount of foreign currency risk[382](index=382&type=chunk) - To reduce fuel price volatility, the Company has periodically used derivative instruments like forward futures swap contracts, but had no remaining fuel hedge contracts as of December 31, 2019[386](index=386&type=chunk) - A **$1 increase in diesel price per gallon** would decrease net income by **$5.8 million**, based on an annual purchase of approximately **42.3 million gallons** and an **86.1% fuel surcharge recovery rate**[387](index=387&type=chunk) - Interest rate risk is managed using fixed-rate and variable-rate obligations. An interest rate swap agreement effectively converts the variable rate on a **$28.0 million real estate note** to a fixed rate of **4.2%** through August 2035[388](index=388&type=chunk) - As of December 31, 2019, **$31.5 million of the Company's debt was variable rate**, with **$23.8 million hedged** by an interest rate swap. A **1% increase** in the applicable rate on non-hedged variable rate debt would reduce annual net income by less than **$0.1 million**[389](index=389&type=chunk) [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=53&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section refers to the consolidated financial statements and supplementary data, including balance sheets, statements of operations, comprehensive income, stockholders' equity, cash flows, and related notes, located elsewhere in the report - The consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows for the three-year period ended December 31, 2019, are included in this report[390](index=390&type=chunk) [ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE](index=53&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) No changes in or disagreements with accountants on accounting or financial disclosure have occurred during the two most recent fiscal years - No changes in or disagreements with accountants on accounting or financial disclosure during the two most recent fiscal years[391](index=391&type=chunk) [ITEM 9A. CONTROLS AND PROCEDURES](index=54&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) The Company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with a previously identified material weakness in IT general controls remediated during the year - Disclosure controls and procedures were evaluated and deemed effective as of December 31, 2019[395](index=395&type=chunk) - Management assessed internal control over financial reporting as effective as of December 31, 2019, based on COSO criteria[396](index=396&type=chunk) - A material weakness in internal control over financial reporting related to ineffective program change management controls over certain IT operating systems, databases, and applications, identified as of December 31, 2018, was remediated during 2019[401](index=401&type=chunk)[403](index=403&type=chunk) - Remediation efforts included developing ITGC training, implementing controls for completeness and accuracy of system-generated information, enhancing change-management intake procedures, and implementing an IT management review and testing plan[402](index=402&type=chunk) [ITEM 9B. OTHER INFORMATION](index=55&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) No other information is reported in this section - No other information to report[405](index=405&type=chunk) Part III [ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE](index=56&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%2C%20AND%20CORPORATE%20GOVERNANCE) Information regarding the Company's executive officers, directors, and corporate governance is incorporated by reference from its definitive proxy statement for the 2020 Annual Meeting of Stockholders - Information on executive officers, directors, and corporate governance is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[408](index=408&type=chunk) [ITEM 11. EXECUTIVE COMPENSATION](index=56&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Information on executive compensation is incorporated by reference from the Company's definitive proxy statement for the 2020 Annual Meeting of Stockholders - Information on executive compensation is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[409](index=409&type=chunk) [ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS](index=56&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) This section provides information on equity compensation plans and security ownership, incorporating details from the Proxy Statement, with **787,460 unvested restricted shares** outstanding and **477,245 shares** remaining eligible for future issuance as of December 31, 2019 Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining eligible for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :----------------------------------------------------- | :---------------------------------------------------------------------------- | :------------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 787,460 (1) | - | 477,245 | | Equity compensation plans not approved by security holders | - | - | | | **Total** | **787,460** | **-** | **477,245** | - The table represents unvested restricted shares granted under the 2006 Omnibus Incentive Plan, as amended, with a weighted average stock price on the grant date of **$18.25**[411](index=411&type=chunk) - Information on security ownership of certain beneficial owners and management is incorporated by reference from the Proxy Statement[412](index=412&type=chunk) [ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE](index=56&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Information on certain relationships, related transactions, and director independence is incorporated by reference from the Company's definitive proxy statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[413](index=413&type=chunk) [ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES](index=56&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTING%20FEES%20AND%20SERVICES) Information on principal accounting fees and services is incorporated by reference from the Company's definitive proxy statement - Information on principal accounting fees and services is incorporated by reference from the Proxy Statement[414](index=414&type=chunk) Part IV [ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES](index=57&type=section&id=ITEM%2015.%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists the financial statements, financial statement schedules, and exhibits filed with the Form 10-K, including audited consolidated financial statements and various agreements - The section lists financial statements, financial statement schedules, and exhibits required by Item 601 of Regulation S-K[420](index=420&type=chunk)[421](index=421&type=chunk)[422](index=422&type=chunk) - Audited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, are set forth from page 59 onwards[417](index=417&type=chunk) - Various agreements, such as the Stock Purchase Agreement for Landair Holdings, Inc., Articles of Incorporation, Bylaws, Credit Agreements, and Incentive Plans, are incorporated by reference[418](index=418&type=chunk)[425](index=425&type=chunk) [ITEM 16. FORM 10-K SUMMARY](index=59&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) No Form 10-K Summary is provided - No Form 10-K Summary is provided[428](index=428&type=chunk) [SIGNATURES](index=60&type=section&id=SIGNATURES) The report is signed on behalf of Covenant Transportation Group, Inc. by its Executive Vice President and Chief Financial Officer, Richard B. Cribbs, and other principal officers and directors, as of March 9, 2020 - The report is signed by Richard B. Cribbs, Executive Vice President and Chief Financial Officer, and other principal officers and directors, as of March 9, 2020[431](index=431&type=chunk)[432](index=432&type=chunk) [Report of Independent Registered Public Accounting Firm - Opinion on the Consolidated Financial Statements](index=61&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm%20-%20Opinion%20on%20the%20Consolidated%20Financial%20Statements) KPMG LLP issued an unqualified opinion on the consolidated financial statements for 2017-2019, affirming fair presentation in accordance with U.S. GAAP, noting the adoption of ASU 2016-02 and reliance on other auditors for the TEL investment - KPMG LLP issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2019, 2018, and 2017, affirming fair presentation in accordance with U.S. GAAP[434](index=434&type=chunk) - The opinion notes the adoption of ASU 2016-02, Leases, as of January 1, 2019, which changed the method of accounting for leases[437](index=437&type=chunk) - The opinion relies on the report of other auditors for the Company's **49% investment in Transport Enterprise Leasing, LLC (TEL)**, which was **$31.9 million** as of December 31, 2019, and contributed **$7.0 million** in equity earnings for 2019[436](index=436&type=chunk) [Report of Independent Registered Public Accounting Firm - Opinion on Internal Control Over Financial Reporting](index=62&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm%20-%20Opinion%20on%20Internal%20Control%20Over%20Financial%20Reporting) KPMG LLP issued an unqualified opinion on the effectiveness of Covenant Transportation Group, Inc.'s internal control over financial reporting as of December 31, 2019, based on COSO criteria - KPMG LLP issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, based on COSO criteria[441](index=441&type=chunk) - The audit of internal control over financial reporting was conducted in accordance with PCAOB standards, obtaining reasonable assurance about the maintenance of effective internal control[444](index=444&type=chunk) [Consolidated Balance Sheets](index=63&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets show total assets increased to **$881.6 million** in 2019 from **$773.5 million** in 2018, driven by property, goodwill, and intangibles, while total liabilities rose to **$531.5 million** due to new operating lease obligations Consolidated Balance Sheets (as of Dec 31, 2019 and 2018, in thousands) | ASSETS | 2019 | 2018 | | :------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | :------------ | :------------ | | Current assets: | | | | Cash and cash equivalents | $43,591 | $23,127 | | Accounts receivable, net | 167,825 | 151,093 | | Drivers' advances and other receivables, net | 8,507 | 16,675 | | Inventory and supplies | 4,210 | 4,067 | | Prepaid expenses | 11,707 | 11,579 | | Assets held for sale | 12,010 | 2,559 | | Income taxes receivable | 5,403 | 1,109 | | Other short-term assets | 1,132 | 1,435 | | **Total current assets** | **254,385** | **211,644** | | Property and equipment, at cost | 725,383 | 638,770 | | Less: accumulated depreciation and amortization | (208,180) | (188,175) | | **Net property and equipment** | **517,203** | **450,595** | | Goodwill | 42,518 | 41,598 | | Other intangibles, net | 29,615 | 32,538 | | Other assets, net | 37,919 | 37,149 | | **Total assets** | **$881,640** | **$773,524** | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Current liabilities: | | | | Checks outstanding in excess of bank balances | $592 | $1,857 | | Accounts payable | 25,745 | 22,101 | | Accrued expenses | 31,840 | 49,503 | | Current maturities of long-term debt | 54,377 | 28,710 | | Current portion of finance lease obligations | 7,258 | 5,374 | | Current portion of operating lease obligations | 19,460 | - | | Current portion of insurance and claims accrual | 21,800 | 19,787 | | Other short-term liabilities | 185

Financial Data and Key Metrics Changes - The Truckload segment's revenue, excluding fuel, decreased by 13.4% to $152.8 million, primarily due to a 10.4% decrease in average freight revenue per truck and a $105 million or 3.4% average truck decrease compared to the previous year [6][10] - Average freight revenue per total mile was down $0.242 or 11.3%, while average miles per tractor increased by 1.1% [7] - Total lease-adjusted indebtedness, net of cash, increased by approximately $50 million to $304.6 million, with a net lease-adjusted indebtedness to total capitalization ratio of 46.5% compared to 42.6% a year ago [12] Business Line Data and Key Metrics Changes - The Managed Freight segment's revenue, excluding fuel, decreased by 15.5% to $57 million from $67.5 million, attributed to reduced peak season capacity needs from brokerage customers [10] - The Truckload segment's operating cost per mile, net of surcharge revenue, decreased by approximately $0.033 compared to the previous year, mainly due to lower employee wages and health claims costs [9] Market Data and Key Metrics Changes - The company noted a capacity and demand imbalance affecting freight revenue, with a reduction in certain customers' peak season team capacity needs [8] - The average age of the tractor fleet was two years at the end of 2019, down from 2.2 years at the end of 2018 [11] Company Strategy and Development Direction - The company aims to reduce financial volatility by reallocating assets to more profitable operations and enhancing sustainable long-term earnings power through disciplined strategic planning [18][19] - Focus areas include tightening the one-way irregular route Truckload freight network and reallocating capacity from solo-driven refrigerated to more profitable dedicated and dry-van opportunities [19] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about improving performance in 2020, driven by declining truckload industry capacity and continued U.S. economic expansion [17] - The first quarter is expected to be challenging, with profitability unlikely, but there is potential for improvement in the second half of the year [31][32] Other Important Information - The company expects to dispose of most excess tractor units in the first half of 2020 [11] - A significant new long-term business in dedicated Truckload service is scheduled to begin in the second quarter of 2020 [20] Q&A Session Summary Question: What are the demand and capacity trends seen in January? - Management noted that a significant part of the business is up compared to the same time last year, with utilization expected to increase by 2% to 3% year-over-year in the first quarter [22][25] Question: How are early 2020 bids and pricing trends? - Management believes rates have bottomed out, with some increases observed, particularly in dedicated services, while existing business remains flat [26][29] Question: What is the outlook for profitability in the first quarter and full year? - Management does not expect profitability in the first quarter but sees potential for improvement in the second half of the year [31][32] Question: Can you provide insights on the managed services pipeline? - The company has five significant startups planned, with an annualized revenue opportunity of $50 million to $60 million, expected to build throughout the year [39][54] Question: How will fleet size change throughout the year? - A slight decrease in fleet size is anticipated in the first half, with potential growth in the second half as new dedicated accounts come online [50][61]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-24960 COVENANT TRANSPORTATION GROUP, INC. (Exact name of registrant as specified in its charter) Nevada 88-0320154 (State ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-24960 COVENANT TRANSPORTATION GROUP, INC. (Exact name of registrant as specified in its charter) Nevada 88-0320154 (State or o ...