enant Logistics (CVLG) - 2019 Q4 - Annual Report

Part I ITEM 1. BUSINESS 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] - 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][14][15][16][17][18] - 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][63] 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] - 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][52] - 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][67] - 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][70][73][77][78][81][90][91][95] - 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][104] - 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] ITEM 1A. RISK FACTORS 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][119] - 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][116] - 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][128] - 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][124][127][132] - 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][138][139][143][145] - 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][149][152] - 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][155][156][157] - 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][168][171][172] - 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][194] - 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][198] - 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][200][205][206][230][231] - 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][220][222] - 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] - 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][239][401][403] ITEM 1B. UNRESOLVED STAFF COMMENTS No unresolved staff comments from the SEC - No unresolved staff comments[246] ITEM 2. PROPERTIES 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] ITEM 3. LEGAL PROCEEDINGS 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][249] - 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] - 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] ITEM 4. MINE SAFETY DISCLOSURES No mine safety disclosures - No mine safety disclosures[254] Part II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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] - 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][227] - 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] ITEM 6. SELECTED FINANCIAL DATA 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 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] 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] 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] - 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][293] - 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] - 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] - 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] 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][373][377] - 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] EXECUTIVE OVERVIEW 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] - 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] 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 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] - 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] RESULTS OF CONSOLIDATED OPERATIONS 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] - 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] - Managed Freight revenue increased primarily due to Landair's full-year contribution of $83.3 million in 2019, compared to $38.5 million in 2018[280] - Factoring revenue increased due to new and existing customers[283] Salaries, Wages, and Related Expenses (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change ($) | 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 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] - 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] - 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] LIQUIDITY AND CAPITAL RESOURCES 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] - 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] - 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] - 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] - 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] Non-GAAP Financial Measures 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] 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 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][344][345] - 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] - 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] - 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][358] - 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][362][373][377] - 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][368] Recent Accounting Pronouncements 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][371][372] - 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][374][377] - 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] INFLATION, NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS 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] - 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] - 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] Geographic Areas 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] - Services within Mexico were discontinued in 2019 as part of a strategic plan to improve profitability[380] - Foreign revenue from Canada and Mexico was less than 1% in 2019 and less than 2% in 2018[380] 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] - 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] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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] - 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] - 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] - 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] - 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] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 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] ITEM 9A. CONTROLS AND PROCEDURES 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] - Management assessed internal control over financial reporting as effective as of December 31, 2019, based on COSO criteria[396] - 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][403] - 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] ITEM 9B. OTHER INFORMATION No other information is reported in this section - No other information to report[405] Part III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 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] ITEM 11. EXECUTIVE COMPENSATION 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] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 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] - Information on security ownership of certain beneficial owners and management is incorporated by reference from the Proxy Statement[412] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 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] ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 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] Part IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 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][421][422] - 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] - 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][425] ITEM 16. FORM 10-K SUMMARY No Form 10-K Summary is provided - No Form 10-K Summary is provided[428] 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][432] Report of Independent Registered Public Accounting Firm - Opinion on the Consolidated Financial Statements 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] - The opinion notes the adoption of ASU 2016-02, Leases, as of January 1, 2019, which changed the method of accounting for leases[437] - 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] Report of Independent Registered Public Accounting Firm - Opinion on Internal Control Over Financial Reporting 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] - 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] Consolidated Balance Sheets 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