enant Logistics (CVLG) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements 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 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 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] Condensed Consolidated Statements of Cash Flows 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 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] - 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][42][108] - 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][57] - 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] Management's Discussion and Analysis (MD&A) 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 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] 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] Results of Consolidated Operations 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] - 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][166] - 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][174] - 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] Results of Segment Operations 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] - 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] Liquidity and Capital Resources 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][207] - 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] - 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] Quantitative and Qualitative Disclosures about Market Risk 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] - 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] Controls and Procedures 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][228] - Due to the material weakness, the CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2020[226] - 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][233] PART II OTHER INFORMATION Legal Proceedings 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][237] - 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] Risk Factors 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][243] - 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][248] - 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] Unregistered Sales of Equity Securities and Use of Proceeds 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] Exhibits 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]