enant Logistics (CVLG) - 2020 Q1 - Quarterly Report

Part I Financial Information Item 1. Financial Statements 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 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] - Total liabilities increased by $52.662 million, mainly due to increases in long-term debt and insurance and claims accrual[14] Condensed Consolidated Statements of Operations 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] - Total revenue decreased by 2.6% year-over-year, from $219.181 million in Q1 2019 to $213.553 million in Q1 2020[20] Condensed Consolidated Statements of Comprehensive (Loss) Income 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] Condensed Consolidated Statements of Stockholders' Equity 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] Condensed Consolidated Statements of Cash Flows 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][202] - 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][203] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information regarding the figures presented in the financial statements Note 1. Significant Accounting Policies 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] - 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] Note 2. (Loss) Income Per Share 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][43] Note 3. Segment Information 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][48][49][50] Note 4. Income Taxes 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][180][181] - 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] - 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] Note 5. Debt and Lease Obligations 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] - 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] Note 6. Leases 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] - Future minimum lease payments for operating leases total $59.794 million and for finance leases total $34.087 million[74] Note 7. Stock-Based Compensation 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] - As of March 31, 2020, 502,213 shares remained available for award under the Incentive Plan[78] Note 8. Commitments and Contingencies 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] - The company had $35.1 million in outstanding and undrawn letters of credit as of March 31, 2020, primarily supporting its insurance programs[86] Note 9. Equity Method Investment 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][179] - The investment in TEL totaled $31.2 million at March 31, 2020[90] Note 10. Goodwill and Other Intangible Assets 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] - The total other intangible assets, excluding goodwill, had a weighted average remaining life of 125 months as of March 31, 2020[95] Note 11. Equity 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] - During Q1 2020, 1.4 million shares of Class A common stock were repurchased for $17.5 million[98] Note 12. Liquidity 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] - 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] Note 13. Subsequent Events 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] - 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][108] COVID-19 Impact 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] - 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] 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] - 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] Non-GAAP Reconciliation (Operating Ratio) 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] - Adjusted Operating Ratio, which excludes fuel surcharge revenue and amortization of intangibles, also increased to 99.3% from 96.9% year-over-year[122] Revenue and Expenses 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] - Main expenses include variable costs like fuel, driver-related expenses, and purchased transportation, alongside fixed and variable components for maintenance and insurance[131] - 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] Revenue Equipment 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] Results of Consolidated Operations This section analyzes the overall financial performance of the company, detailing changes in key revenue and expense categories Total Revenue 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] - 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] Salaries, wages, and related expenses 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] - As a percentage of total revenue, these expenses increased to 38.8% from 36.3% year-over-year[144] Fuel expense 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][150][151] - 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] - 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] Operations and maintenance 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] Revenue equipment rentals and purchased transportation 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][158] Operating taxes and licenses 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] Insurance and claims 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] - 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] Communications and utilities 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] General supplies and expenses 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][169] - These expenses are expected to decrease for the remainder of 2020 due to cost-saving efforts[169] Depreciation and amortization, including gains and losses on disposition of property and equipment 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][173] - 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] Interest expense, net 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] (Loss) income from equity method investment 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] Income tax (benefit) expense 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][181] - The effective tax rate fluctuates due to permanent differences related to the per diem pay structure for drivers[182] Results of Segment Operations This section analyzes the financial performance of each of the company's operating segments, including revenue and operating income 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] Segment Revenue and Operating Income (Loss) Comparison 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] - 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] - 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][192] Liquidity and Capital Resources This section discusses the company's financial flexibility, including cash position, working capital, debt, and financing strategies Capital Requirements and Financing 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] - 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][197] Capital Expenditures and Fleet Management 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] - 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] Cash Flows 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] - 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] Stock Repurchase Program 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] - Between February 10 and March 26, 2020, the company repurchased 1.4 million shares for $17.5 million[205] Contractual Obligations 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] Critical Accounting Policies and Estimates 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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) 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][212] - During Q1 2020, the company entered into fuel hedging contracts with a fair market value of $0.7 million[212] - 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] Interest Rate Risk 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] - 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] - A 1% increase in applicable short-term interest rates would reduce annual net income by less than $0.1 million[216] Item 4. Controls and Procedures 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 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] Changes in Internal Control Over Financial Reporting 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] Part II Other Information Item 1. Legal Proceedings 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] - 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] Item 1A. Risk Factors 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] - 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][236] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - The payment of cash dividends is currently limited by the company's financing arrangements, including covenants under its Credit Facility[238] Item 3. Defaults Upon Senior Securities This item is not applicable to the current report - Not applicable[239] Item 4. Mine Safety Disclosures This item is not applicable to the current report - Not applicable[240] Item 5. Other Information This item is not applicable to the current report - Not applicable[241] Item 6. Exhibits 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]