# Covenant Logistics Group, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Covenant Logistics Group, Inc.](/companies/cvlg.md) (CIK 928658)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 13:53 ET
- Period: 2023-09-30
- Accession: 0001437749-23-031167
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/928658/000143774923031167/cvti20230815_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/928658/000143774923031167/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $288.7m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $829.6m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $15.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $44.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $4.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $13.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $13.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $42.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.99 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $3.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $3.24 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 13,679,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 13,739,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $53.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $112.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $4.3m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $25.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $7.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $202.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $892.2m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $171.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $498.1m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $153.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $30.9m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $394.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 62,506 characters.

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

*This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. In this Form 10-Q, statements relating to future impact of accounting standards, future third-party transportation provider expenses, future tax rates, expenses, and deductions, expected freight demand, capacity, and volumes and trucking industry conditions, potential results of a default and testing of our fixed charge covenant under the Credit Facility or other debt agreements, expected sources, as well as adequacy, of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), future inflation, future stock repurchases and dividends, if any, expected capital expenditures, allocations, and requirements, future customer relationships, future interest expense, future driver market conditions, future use of independent contractors, expected cash flows, future investments in and growth of our reportable segments and services, future margins of our reportable segments, future market share, future rates and prices, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation, expected net fuel costs, strategies for managing fuel costs, the effectiveness and impact of, and cash flows relating to, our fuel surcharge programs, future fluctuations in operations and maintenance expenses, expected effects and mix of our solo and team operations, future fleet size, management, upgrades, and age, availability of tractors and trailers, the market value of used equipment, the anticipated impact of our investment in TEL, the future impact of our strategic plan and other strategic initiatives, anticipated levels of and fluctuations relating to insurance and claims expenses, including the erosion of available limits in our aggregate insurance policies, any future indemnification obligations related to the TFS Portfolio, the contingent consideration related to our purchase of AAT, LTST and Sims, and the future impact of our acquisition of LTST and Sims, among others, are forward-looking statements. Forward-looking statements may be identified by the use of terms or phrases such as "believe," "may," "could," "would," "will," "expects," "estimates," "projects," "anticipates," "plans," " outlook," "focus," "seek," "potential," "continue," "goal," "target," "objective," "intends," derivations thereof, and similar terms and phrases. Such statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Item 1A. Risk Factors," set forth in this Form 10-Q, the Form 10-Q for the quarter ended March 31, 2023, and our Form 10-K for the year ended December 31, 2022. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in this Form 10-Q, the Form 10-Q for the quarter ended March 31, 2023, and our Form 10-K for the year ended December 31, 2022, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.*

*All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.*

### Executive Overview

While the freight market, consisting of a combination of freight rates and volumes, remained challenging throughout the third quarter we achieved $0.99 per diluted share for the third quarter and are pleased with both our results and the resiliency of our model despite these market headwinds.

Our asset-based reportable segments, Expedited and Dedicated, contributed approximately 67% of total revenue, 69% of operating income, 63% of total freight revenue, and 72% of adjusted operating income in the quarter. Our Expedited reportable segment experienced comparable freight revenue with approximately 2% fewer tractors, but experienced diminished margins compared to the third quarter last year. Our Dedicated reportable segment experienced reduced freight revenue with approximately 12% fewer tractors and improved margins year over year.

Our asset-light reportable segments contributed approximately 33% of total revenue, 31% of operating income, 37% of total freight revenue, and 28% of adjusted operating income in the quarter. Compared to a year ago, Managed Freight experienced significant reductions in both revenue and profitability with little to no project related freight in the current quarter. Warehousing was able to grow revenue through new customer startups and improve margins with contractual pricing increases put into place during the quarter. We are continuing to work to increase the operating income and related margins in each of these reportable segments through focused sales efforts within Managed Freight and additional proposed customer rate increases with existing customers within Warehousing.

Additional items of note for the third quarter of 2023 include the following:

- Total revenue of $288.7 million, a decrease of 7.4% compared with the third quarter of 2022, and freight revenue (which excludes revenue from fuel surcharges) of $253.4 million, a decrease of 5.0% compared with the third quarter of 2022;
- Operating income of $15.1 million, compared with $59.1 million in the third quarter of 2022;
- Net income of $13.5 million, or $0.99 per diluted share, compared with $50.5 million, or $3.39 per diluted share, in the third quarter of 2022. Net income from continuing operations of $13.4 million, or $0.98 per diluted share, compared to $50.0 million or $3.36 per diluted share, in the third quarter of 2022. Net income from discontinued operations of $0.2 million, or $0.01 per diluted share, compared to $0.5 million, or $0.04 per diluted share, in the third quarter of 2022;
- 39% of consolidated total revenue was in our Expedited reportable segment, as compared to 38% in the third quarter of 2022;
- Our Managed Freight reportable segment’s total revenue decreased to $69.7 million in the 2023 quarter from $78.4 million in the 2022 quarter and the reportable segment had an operating income of $3.7 million in the 2023 quarter compared to $8.6 million in the 2022 quarter;
- Our equity investment in TEL provided $5.3 million of pre-tax earnings in the third quarter of 2023 compared to $7.4 million in the third quarter of 2022;
- We distributed a total of $1.4 million to stockholders through dividends;
- Since December 31, 2022, total indebtedness, comprised of total debt and finance leases, net of cash, increased by $137.1 million to $183.5 million, primarily due to the approximately $99.9 million net cash paid in the acquisition of LTST, acquisition of new revenue equipment, and repurchasing $25.3 million of our outstanding Class A Common Stock under the stock repurchase program. With available borrowing capacity of $88.2 million under our Credit Facility at September 30, 2023 we do not expect to be required to test our fixed charge covenant in the foreseeable future;
- Leverage ratio (ending total indebtedness, comprised of debt and finance leases, net of cash, divided by the sum of operating income, depreciation and amortization, gain on disposition of property and equipment, net, and impairment of long lived property and equipment) as of September 30, 2023 was 1.68;
- Stockholders' equity at September 30, 2023, was $394.0 million; and
- Tangible book value at September 30, 2023, was $218.9 million.

### Outlook

The Company’s steady performance in a weak freight market has been encouraging and reflects progress on our strategic plan. Over the past two years, we reallocated a significant amount of fixed assets away from underperforming and highly cyclical legacy operations toward acquiring three high-performing, more steady businesses. The result has been better margins, more stable earnings, and higher return on capital than prior freight market downturns. While we are pleased with our model as it stands today, we are also optimistic about our ability to continue making incremental progress to improving it through our capital allocation program. For the fourth quarter, we expect our revenue and earnings to experience a modest decline sequentially due to a cyber-attack on a major customer in our Expedited division and the impact of the United Auto Workers strike in our Dedicated division, which has temporarily depressed load volumes and revenue per truck. Entering 2024, we believe our more resilient operating model, together with the steps we are taking to reduce costs and inefficiencies, will continue to position Covenant to generate attractive returns and mitigate volatility across economic and freight market cycles.

### Non-GAAP Reconciliation

In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices, amortization of intangibles, and significant unusual items. Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.

### Operating Ratio

| GAAP Operating Ratio: | Three Months Ended September 30, 2023 | OR % | 2022 | OR % | Nine Months Ended September 30, 2023 | OR % | 2022 | OR % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total revenue | $288,721 |  | $311,839 |  | $829,588 |  | $920,801 |  |
| Total operating expenses | 273,580 | 94.8% | 252,780 | 81.1% | 785,032 | 94.6% | 811,022 | 88.1% |
| Operating income | $15,141 |  | $59,059 |  | $44,556 |  | $109,779 |  |
| Adjusted Operating Ratio: | 2023 | Adj. OR % | 2022 | Adj. OR % | 2023 | Adj. OR % | 2022 | Adj. OR % |
| Total revenue | $288,721 |  | $311,839 |  | $829,588 |  | $920,801 |  |
| Fuel surcharge revenue | (35,344) |  | (45,240) |  | (99,085) |  | (129,732) |  |
| Freight revenue (total revenue, excluding fuel surcharge) | 253,377 |  | 266,599 |  | 730,503 |  | 791,069 |  |
| Total operating expenses | 273,580 |  | 252,780 |  | 785,032 |  | 811,022 |  |
| Adjusted for: |  |  |  |  |  |  |  |  |
| Fuel surcharge revenue | (35,344) |  | (45,240) |  | (99,085) |  | (129,732) |  |
| Amortization of intangibles | (2,220) |  | (1,121) |  | (5,142) |  | (3,185) |  |
| Gain on disposal of terminals, net | - |  | 38,542 |  | 7,627 |  | 38,542 |  |
| Contingent consideration liability adjustment | (493) |  | (813) |  | (2,485) |  | (813) |  |
| Transaction and executive retirement | - |  | - |  | (2,158) |  | - |  |
| Adjusted operating expenses | 235,523 | 93.0% | 244,148 | 91.6% | 683,789 | 93.6% | 715,834 | 90.5% |
| Adjusted operating income | $17,854 |  | $22,451 |  | $46,714 |  | $75,235 |  |

Page 27

### Revenue and Expenses

We focus on targeted markets throughout the United States where we believe our service standards can provide a competitive advantage. We are a major carrier for transportation companies such as parcel freight forwarders, less-than-truckload carriers, and third-party logistics providers that require a high level of service to support their businesses, as well as for traditional truckload customers such as manufacturers, retailers, and food and beverage shippers.

We have four reportable segments, which include:

- Expedited: The Expedited reportable segment primarily provides truckload services to customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company.
- Dedicated: The Dedicated reportable segment provides customers with committed truckload capacity over contracted periods with the goal of three to five years in length. Equipment is either owned or leased by the Company.
- Managed Freight: The Managed Freight reportable segment includes our brokerage and transport management services (“TMS”). Brokerage services provide logistics capacity by outsourcing the carriage of customers’ freight to third parties. TMS provides comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs.
- Warehousing: The Warehousing reportable segment provides day-to-day warehouse management services to customers who have chosen to outsource this function. We also provide shuttle and switching services related to shuttling containers and trailers in or around freight yards and to/from warehouses.

In our Expedited and Dedicated reportable segments, we primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. AAT’s results are reported within our Expedited reportable segment and LTST's results are reported within our Dedicated reportable segment. The main factors that could affect our Expedited and Dedicated revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of shipments and miles we generate. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

The main expenses that impact the profitability of our Expedited and Dedicated reportable segments are the variable costs of transporting freight for our customers. These costs include fuel expenses, driver-related expenses, such as wages, benefits, training, and recruitment, and purchased transportation expenses, which primarily include compensating independent contractors. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, self-insured retention versus insurance premiums, fleet age, efficiency, and other factors. Historically, our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities, and the compensation of non-driver personnel.

Within our Expedited and Dedicated reportable segments, we operate tractors driven by a single driver and also tractors assigned to two-person driver teams. Our single driver tractors generally operate in shorter lengths of haul, generate fewer miles per tractor, and experience more non-revenue miles, but the lower productive miles are expected to be offset by generally higher revenue per loaded mile and the reduced employee expense of compensating only one driver. In contrast, our two-person driver tractors generally operate in longer lengths of haul, generate greater miles per tractor, and experience fewer non-revenue miles, but we typically receive lower revenue per loaded mile and incur higher employee expenses of compensating both drivers. We expect operating statistics and expenses to shift with the mix of single and team operations.

Within our Managed Freight reportable segment, we derive revenue from arranging transportation services, directly and through agents, who are paid a commission for the freight they provide, for customers on both an ad-hoc and a contractual basis. Sims' results are reported within our Managed Freight reportable segment. We provide these services directly and through relationships with thousands of third-party carriers and integration with our Expedited reportable segment. We also utilize technology and process management to provide detailed visibility into a customer’s movement of freight – inbound and outbound – throughout the customer’s network and can provide focused customer support through multiyear contracts. The main factors that impact profitability in terms of expenses are the variable costs of outsourcing the transportation freight for our customers and managing fixed costs, including salaries, and selling, general, and administrative expenses.

Within our Warehousing reportable segment, we empower customers to outsource warehousing management, including moving containers and trailers in or around freight yards. The main factors that impact profitability in terms of expenses are fixed costs, including salaries, facility warehousing costs, and selling, general, and administrative expenses.

In May 2011, we acquired a 49.0% interest in TEL. TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income since May 2011.

Our main measures of profitability are operating ratio and adjusted operating ratio. We define adjusted operating ratio as operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. See page 27 for the uses and limitations associated with adjusted operating ratio.

### Revenue Equipment

At September 30, 2023, we operated 2,149 tractors and 5,871 trailers. Of such tractors, 1,801 were owned, 222 were financed under operating leases, and 126 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 5,634 were owned, and 237 were held under short-term operating leases. We finance a small portion of our trailer fleet and larger portion of our tractor fleet with operating leases, which generally run for a period of three to five years for tractors and five to seven years for trailers. At September 30, 2023, our fleet had an average tractor age of 1.9 years and an average trailer age of 5.9 years.

Independent contractors provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing or leasing the tractor. The payments to independent contractors and the financing of equipment under operating leases are recorded in revenue equipment rentals and purchased transportation. Expenses associated with owned equipment, such as interest and depreciation, and expenses associated with employee drivers, including driver compensation, fuel, and other expenses, are not incurred with respect to independent contractors. Obtaining equipment from independent contractors and under operating leases effectively shifts financing expenses from interest to "above the line" operating expenses, and as such, we evaluate our efficiency using net income margin, as well as operating ratio.

### RESULTS OF CONSOLIDATED OPERATIONS

### COMPARISON OF three and nine months ended September 30, 2023 TO three and nine months ended September 30, 2022

The following tables set forth the percentage relationship of certain items to total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated, where applicable (dollars in thousands):

### Revenue

| Revenue: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Freight revenue | $253,377 | $266,599 | $730,503 | $791,069 |
| Fuel surcharge revenue | 35,344 | 45,240 | 99,085 | 129,732 |
| Total revenue | $288,721 | $311,839 | $829,588 | $920,801 |

The decrease in total revenue primarily resulted from an $8.7 million and $7.8 million decrease in Managed Freight and Dedicated freight revenue, respectively, partially offset by a $3.2 million and $0.1 million increase in Warehousing and Expedited freight revenue, for the three months ended September 30, 2023 and a $50.9 million, $21.1 million, and $5.7 million decrease in Managed Freight, Dedicated, and Expedited freight revenue, respectively, partially offset by a $17.2 million increase in Warehousing freight revenue for the nine months ended September 30, 2023.

See results of reportable segment operations section for discussion of fluctuations.

For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue.

For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentage of total revenue, and then as a percentage of freight revenue.

### Salaries, wages, and related expenses

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Salaries, wages, and related expenses | $102,314 | $104,537 | $302,753 | $300,980 |
| **% of total revenue** | **35.4%** | **33.5%** | **36.5%** | **32.7%** |
| % of freight revenue | 40.4% | 39.2% | 41.4% | 38.0% |

Salaries, wages, and related expenses for the three months ended September 30, 2023 decreased, on a dollars basis primarily as a result of averaging fewer drivers and tractors, resulting in lower driver salaries, wages, and benefits, partially offset by increases to workers compensation expenses. For the nine months ended September 30, 2023, the increase on a dollars basis primarily as the result of driver and non-driver, including shop technicians, pay and benefits increases, as well as executive retirement costs and increased group health costs, partially offset by reduced miles since the same 2022 periods.

We believe salaries, wages, and related expenses will be approximately even for the full 2023 year compared to the full 2022 year as a result of driver and non-driver pay increases since the 2022 year being offset by reduced miles and reduced incentive pay since the 2022 year. Driver pay may also fluctuate based on the number of miles driven. While driver pay remains stable at the present time, we have historically put driver pay increases in place as necessary to address driver market pressure and will continue to do so in the future as necessary. If freight market rates increase further, we would expect to, as we have historically, pass a portion of those rate increases on to our professional drivers. Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Managed Freight reportable segment, for which payments are reflected in the purchased transportation line item.

### Fuel expense

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Fuel expense | $35,173 | $42,471 | $100,692 | $126,457 |
| **% of total revenue** | **12.2%** | **13.6%** | **12.1%** | **13.7%** |
| % of freight revenue | 13.9% | 15.9% | 13.8% | 16.0% |

We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire cost of fuel for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.

The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the Department of Energy ("DOE") for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by the DOE were $0.80 per gallon, or 15.8%, lower for the quarter ended September 30, 2023 compared with the same quarter in 2022.

To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles driven by company tractors, our fuel economy, our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues, and the net impact of fuel hedging gains and losses.

Net fuel expense is shown below:

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Total fuel surcharge | $35,344 | $45,240 | $99,085 | $129,732 |
| Less: Fuel surcharge revenue reimbursed to owner operators and other third parties | 2,672 | 2,852 | 7,105 | 8,442 |
| Company fuel surcharge revenue | $32,672 | $42,388 | $91,980 | $121,290 |
| Total fuel expense | $35,173 | $42,471 | $100,692 | $126,457 |
| Less: Company fuel surcharge revenue | 32,672 | 42,388 | 91,980 | 121,290 |
| Net fuel expense | $2,501 | $83 | $8,712 | $5,167 |
| % of freight revenue | 1.0% | 0.0% | 1.2% | 0.7% |

For the periods presented, net fuel expense increased as a percentage of freight revenue primarily due to lower fuel surcharge recovery partially offset by lower fuel prices. There were no diesel fuel hedge gains or losses for the quarter ended September 30, 2023 or 2022. As of September 30, 2023, we had no remaining fuel hedging contracts.

We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors and auxiliary power units to improve our miles per gallon, locking in fuel hedges when deemed appropriate, partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs, and testing the latest technologies that reduce fuel consumption. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.

### Operations and maintenance

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Operations and maintenance | $16,984 | $22,468 | $50,328 | $60,248 |
| **% of total revenue** | **5.9%** | **7.2%** | **6.1%** | **6.5%** |
| % of freight revenue | 6.7% | 8.4% | 6.9% | 7.6% |

The decreases in operations and maintenance for the three and nine months ended September 30, 2023 were primarily related to reduced maintenance costs as a result of a decrease in the average age of equipment through the replacement of older tractors that experienced higher operating costs. Additionally, for the nine months ended September 30, 2023, there were fewer new drivers and a smaller average fleet as compared to the prior year period.

Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, the reliability of new and untested revenue equipment models, and the global disruption of the supply chain, however, such increases may be offset by reductions in the age of our fleet due to our replacement plan between now and the end of 2023. For 2023, due to the age of our tractor fleet and remaining unexpired warranty coverage for most of our tractors, we do not expect the percentage of our equipment being operated outside of warranty coverage to increase in any material respect even if delays occur; however, operations and maintenance costs may increase regardless due to wage and parts inflation.

### Revenue equipment rentals and purchased transportation

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Revenue equipment rentals and purchased transportation | $72,046 | $78,943 | $203,045 | $244,281 |
| **% of total revenue** | **25.0%** | **25.3%** | **24.5%** | **26.5%** |
| % of freight revenue | 28.4% | 29.6% | 27.8% | 30.9% |

The decreases in revenue equipment rentals and purchased transportation for the three and nine months ended September 30, 2023 were primarily the result of a reduction in purchased transportation costs as a result of the softening freight market, as well as a reduction in leased revenue equipment compared to the prior periods as the result of largely transitioning from tractors held under operating leases to owned tractors in 2022. These decreases were partially offset as the percentage of the total miles run by independent contractors increased from 6.4% for the three months ended September 30, 2022 to 7.9% for the same 2023 period and from 6.6% for the nine-months ended September 30, 2022 to 7.4% for the same 2023 period partially offsetting this decrease.

We expect revenue equipment rentals to remain decreased compared to 2022 as we largely transitioned from tractors held under operating leases to owned tractors in 2022. However, we expect purchased transportation to fluctuate as volumes in our Managed Freight reportable segment may be volatile. In addition, if fuel prices increase, it would result in a further increase in what we pay third party carriers and independent contractors. However, this expense category will fluctuate with the number and percentage of loads hauled by independent contractors, loads handled by Managed Freight, and tractors, trailers, and other assets financed with operating leases. In addition, factors such as the cost to obtain third party transportation services and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category. If industry-wide trucking capacity tightens in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue. If we were to recruit more independent contractors, we would expect this line item to increase as a percentage of revenue.

### Operating taxes and licenses

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Operating taxes and licenses | $3,381 | $3,238 | $10,161 | $8,718 |
| **% of total revenue** | **1.2%** | **1.0%** | **1.2%** | **0.9%** |
| % of freight revenue | 1.3% | 1.2% | 1.4% | 1.1% |

For the periods presented, the change in operating taxes and licenses were insignificant both as a percentage of total revenue and freight revenue.

### Insurance and claims

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Insurance and claims | $13,074 | $12,947 | $36,810 | $35,752 |
| **% of total revenue** | **4.5%** | **4.2%** | **4.4%** | **3.9%** |
| % of freight revenue | 5.2% | 4.9% | 5.0% | 4.5% |

Insurance and claims per mile cost was 19.2 cents per mile for the three months ended September 30, 2023 and 2022 and increased to 18.7 cents per mile for the nine months ended September 30, 2023 compared to 17.7 cents per mile for the same 2022 period. The increase for the nine months ended September 30, 2023 is the result of increased insurance premiums compared to the same 2022 period.

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the policy period that ran from April 1, 2018 to March 31, 2021, the aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million were fully eroded based on claims expense accruals. We replaced our $9.0 million in excess of $1.0 million layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024. Due to the erosion of the $9.0 million in excess of $1.0 million layer, any adverse developments in claims filed between April 1, 2018 and March 31, 2021, could result in additional expense accruals. We have maintained our retention and limits set in place during the prior renewal cycle. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations.

We expect insurance and claims expense to continue to be volatile over the long-term. Recently the trucking industry has experienced a decline in the number of carriers and underwriters that write insurance policies or that are willing to provide insurance for trucking companies.

### Communications and utilities

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Communications and utilities | $1,254 | $1,339 | $3,753 | $3,723 |
| **% of total revenue** | **0.4%** | **0.4%** | **0.5%** | **0.4%** |
| % of freight revenue | 0.5% | 0.5% | 0.5% | 0.5% |

For the periods presented, the change in communications and utilities were insignificant both as a percentage of total revenue and freight revenue.

### General supplies and expenses

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| General supplies and expenses | $11,774 | $11,201 | $38,169 | $28,416 |
| **% of total revenue** | **4.1%** | **3.6%** | **4.6%** | **3.1%** |
| % of freight revenue | 4.6% | 4.2% | 5.2% | 3.6% |

The increases in general supplies and expenses for the three and nine months ended September 30, 2023 were primarily the result of acquisition costs, new leased spaces for our Warehousing reportable segment, and the increase in the contingent consideration liability since the 2022 periods.

### Depreciation and amortization

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Depreciation and amortization | $18,182 | $14,357 | $51,701 | $41,734 |
| **% of total revenue** | **6.3%** | **4.6%** | **6.2%** | **4.5%** |
| % of freight revenue | 7.2% | 5.4% | 7.1% | 5.3% |

Depreciation and amortization consists primarily of depreciation of tractors, trailers, and other capital assets, as well as amortization of intangible assets.

Depreciation expense increased $2.7 million and $8.0 million to $16.0 million and $46.6 million for the three and nine months ended September 30, 2023, respectively, compared to $13.2 million and $38.6 million in the same 2022 periods as a result of increased costs on new equipment and a higher percentage of owned tractors as we transitioned a large portion of tractors from operating leases to owned during 2022. These increases were partially offset by reduced total tractor count. Amortization of intangible assets was $2.2 million and $5.1 million for three and nine months ended September 30, 2023, respectively, compared to $1.1 million and $3.2 million for the same 2022 periods. The increase for the three and nine months ended September 30, 2023 is due to the amortization of the intangible assets related to the AAT, LTST, and Sims acquisitions.

We expect depreciation and amortization to remain increased compared to 2022 due to the transition of a large portion of tractors from operating leases to owned during 2022, as well as the increased cost of new equipment, implementation of our 2023 revenue equipment replacement plan, and the year-over-year impact of the LTST acquisition. Additionally, changes in the used tractor market could cause us to adjust residual values, increase depreciation, hold assets longer than planned, or experience increased losses on sale.

### Gain on disposition of property and equipment, net

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Gain on disposition of property and equipment, net | $(602) | $(38,721) | $(12,380) | $(39,287) |
| **% of total revenue** | **(0.2%)** | **(12.4%)** | **(1.5%)** | **(4.3%)** |
| % of freight revenue | (0.2%) | (14.5%) | (1.7%) | (5.0%) |

The decreases in gain on disposition of property and equipment, net for the three and nine months ended September 30, 2023 are primarily the result of the $38.5 million gain on sale of a California terminal in the third quarter of 2022 partially offset by an increase in the sale of used equipment compared to the 2022 period and, for the nine-months ended September 30, 2023, the $7.6 million gain on sale of a Tennessee terminal in the first quarter of 2023. While we expect sales of used equipment to continue to be elevated through the remainder of 2023, we expect sequential reductions in the gain on disposition of equipment due to the soft used equipment market.

### Interest expense, net

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense, net | $2,637 | $935 | $5,530 | $2,256 |
| **% of total revenue** | **0.9%** | **0.3%** | **0.7%** | **0.2%** |
| % of freight revenue | 1.0% | 0.4% | 0.8% | 0.3% |

For the periods presented, the increases in interest expense were primarily the result of an increase in revenue equipment installment notes as we implement our 2023 revenue equipment replacement plan.

Going forward, we expect interest expense, net to increase due to an increase in revenue equipment installment notes as we implement our 2023 revenue equipment replacement plan. Additionally, this line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases, our revenue equipment replacement plan, and changing interest rates.

### Income from equity method investment

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Income from equity method investment | $5,335 | $7,400 | $16,659 | $21,261 |

We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income or loss. The decreases in TEL's contributions to our results for the three and nine months ended September 30, 2023 were primarily the result of a reduction on gain on sale of revenue equipment compared to the 2022 periods. Due to TEL's business model, gains and losses on sale of equipment is a normal part of the business and can cause earnings to fluctuate from period to period and therefore our income from investment to similarly fluctuate. We expect TEL's net income to remain lower than 2022 due to the soft used equipment market.

### Income tax expense

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Income tax expense | $4,483 | $15,563 | $13,701 | $32,130 |
| **% of total revenue** | **1.6%** | **5.0%** | **1.7%** | **3.5%** |
| % of freight revenue | 1.8% | 5.8% | 1.9% | 4.1% |

The decreases in income tax expense were primarily related to the $47.7 million and $73.1 million decrease in pre-tax income in the three and nine months ended September 30, 2023, respectively, compared to the same 2022 periods resulting from the aforementioned decreases in operating income and earnings on investment in TEL.

The effective tax rate is different from the expected combined tax rate due primarily to state tax expense and permanent differences, such as executive compensation disallowance in 2022. The nondeductible effect of the per diem payments was temporarily suspended for 2022 in accordance with IRS guidance issued during the quarter ended December 31, 2021. The rate impact of these items will fluctuate in future periods as income fluctuates.

### RESULTS OF SEGMENT OPERATIONS

We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing, each as described above.

### COMPARISON OF three and nine months ended September 30, 2023 TO three and nine months ended September 30, 2022

The following table summarizes financial and operating data by reportable segment:

*(in thousands)*

| Revenues: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Expedited | $113,419 | $117,793 | $318,388 | $338,234 |
| Dedicated | 80,242 | 93,423 | 241,680 | 279,136 |
| Managed Freight | 69,713 | 78,382 | 193,868 | 244,814 |
| Warehousing | 25,347 | 22,241 | 75,652 | 58,617 |
| Total revenues | $288,721 | $311,839 | $829,588 | $920,801 |
| Operating Income: |  |  |  |  |
| Expedited | $7,522 | $30,660 | $22,613 | $54,602 |
| Dedicated | 2,976 | 19,416 | 13,366 | 24,937 |
| Managed Freight | 3,742 | 8,605 | 6,905 | 28,062 |
| Warehousing | 901 | 378 | 1,672 | 2,178 |
| Total operating income | $15,141 | $59,059 | $44,556 | $109,779 |

The decrease in Expedited revenue for the three months ended September 30, 2023 relates to a $4.4 million decrease in fuel surcharge revenue and a 22 (or 2.4%) average tractor decrease, partially offset by an increase in average freight revenue per tractor per week of 2.5%, compared to the 2022 quarter. The reduction in tractors was an intentional effort by management to adjust the fleet size down in response to the reduced volumes of available freight with expedited service requirements. The increase in average freight revenue per tractor per week for the quarter ended September 30, 2023 is the result of an 11.7% increase in average miles per unit partially offset by a 19.0 cents per mile (or 8.2%) decrease in average rate per total mile compared to the 2022 quarter. Expedited team-driven tractors averaged 831 and 825 tractors in the third quarter of 2023 and 2022, respectively.

For the nine months ended September 30, 2023, the decrease in Expedited revenue relates to a $14.2 million decrease in fuel surcharge revenue and a 29 (or 3.2%) average tractor decrease partially offset by an increase in average freight revenue tractor per week of 1.1% compared to the same 2022 period. The increase in average freight revenue per tractor per week for the nine months ended September 30, 2023 is the result of a 8.5% increase in average miles per unit partially offset by a 16.0 cents per mile (or 6.8%) decrease in average rate per total mile compared to the same 2022 period. Expedited team-driven tractors averaged 801 and 797 for the nine months ended September 30, 2023, and 2022, respectively.

The decrease in Dedicated revenue for the three months ended September 30, 2023 relates to a $5.3 million decrease in fuel surcharge revenue and a 170, or 12.1% average tractor decrease as a result of exiting business and tractor reductions negotiated with current customers, partially offset by the addition of approximately 220 weighted average tractors as a result of the LTST acquisition. These decreases in fuel surcharge revenue and average tractor count were partially offset by a 1.6% increase in average miles per unit and an increase in average freight revenue per tractor per week of 1.8% compared to the 2022 quarter as the result of a 0.6 cents per mile (or 0.2%) increase in average rate per total mile compared to the 2022 quarter.

For the nine months ended September 30, 2023, the decrease in Dedicated revenue relates to a $16.4 million decrease in fuel surcharge revenue and a 193 (or 13.5%) average tractor decrease partially offset by an increase in average freight revenue per tractor per week of 4.7% compared to the same 2022 period. The increase in average freight revenue per tractor per week for the nine months ended September 30, 2023 is the result of a 1.8% increase in average miles per unit and a 7.0 cents per mile (or 2.8%) increase in average rate per total mile compared to the same 2022 period.

For the three and nine months ended September 30, 2023, Managed Freight total revenue decreased primarily as a result of reduced volumes of high-margin overflow freight from both Expedited and Dedicated truckload operations. With the softening freight market, we anticipate the revenue attributable to overflow freight may continue to decline.

For the three and nine months ended September 30, 2023, Warehousing total revenue increased as a result of period-over-period new customer business as well as customer rate increases that went into effect during the third quarter of 2023.

The decrease in operating income for the three months ended September 30, 2023, was the result of the decrease in total revenue described above and an $18.8 million, $3.3 million, and $2.6 million increase in Expedited, Dedicated, and Warehousing, operating expenses partially offset by a $3.8 million decrease in Managed Freight operating expenses, respectively. For the nine months ended September 30, 2023, the decrease in operating income was the result of the decrease in total revenue described above and a $17.5 million and $11.4 million increase in Warehousing and Expedited operating expenses, respectively, partially offset by a $29.8 million and $25.9 million decrease in Managed Freight and Dedicated operating expenses, respectively.

The decreases in Expedited operating income for the three and nine months ended September 30, 2023 were primarily the result of the aforementioned decreases in revenue as well as increases in Expedited operating expenses. The increases in Expedited operating expenses for the three and nine months ended September 30, 2023 were primarily the result of the Expedited portion of the sale of a California terminal during the third quarter of 2022, as well as increases in depreciation expense as a result of our equipment trade cycle, driver and non-driver pay, and the contingent consideration liability since the 2022 periods. These increases to operating expense were partially offset by decreased fuel costs and decreased maintenance and parts costs. The decreases in Dedicated operating income for the three and nine months ended September 30, 2023 were primarily the result of the aforementioned decreases in revenue as well as increases in Dedicated operating expenses. The increases in Dedicated operating expenses for the three months ended September 30, 2023, were primarily the result of the Dedicated portion of the sale of a California terminal during the third quarter of 2022 and increased depreciation expense as a result of our equipment trade cycle, partially offset by averaging fewer drivers and tractors, resulting in lower driver salaries, wages, and benefits, reduced use of third-party purchased transportation, decreased fuel costs, and decreased maintenance and parts costs. The decreases in Dedicated operating expenses for the nine months ended September 30, 2023 were primarily the result of averaging fewer drivers and tractors, resulting in lower driver salaries, wages, and benefits, reduced use of third-party purchased transportation, decreased fuel costs, and decreased maintenance and parts costs Additionally, for the nine months ended September 30, 2023, Expedited and Dedicated operating expenses were reduced as a result of the sale of a Tennessee terminal.

The decreases in operating income for Managed Freight for the three and nine months ended September 30, 2023 were primarily the result of the aforementioned decreases in revenue partially offset by decreases in Managed Freight operating expenses. The decreases in Managed Freight operating expenses were primarily the result of the changes in revenue driving changes in variable expenses, primarily purchased transportation. Additionally, the decrease in operating expenses for the nine months ended September 30, 2023 was partially offset by a small number of prior period claims. The changes in operating income for Warehousing for the three and nine months ended September 30, 2023 were primarily the result of the aforementioned increases in revenue offset by increases in Warehousing operating expenses. The increases in Warehousing operating expenses for the three and nine months ended September 30, 2023, were a result of leased space and equipment for new business and pay increases, partially offset by a reduction in outsourced labor since the 2022 periods. In our asset-light reportable segments, we are prioritizing long-term growth, focusing on talent acquisition, and technology enhancements.

### LIQUIDITY AND CAPITAL RESOURCES

Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. Going forward, we expect revenue equipment acquisitions through purchases and finance leases to increase as a percentage of our fleet as we decrease our use of operating leases for revenue equipment. Further, we expect to increase our capital allocation toward our Dedicated, Managed Freight, and Warehousing reportable segments to become the go-to partner for our customers’ most critical transportation and logistics needs. We had working capital (total current assets less total current liabilities) of $31.2 million and $66.5 million at September 30, 2023 and December 31, 2022, respectively. Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs, and we do not expect to experience material liquidity constraints in the foreseeable future.

With an average fleet age of 1.9 years at September 30, 2023, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options. If we were to grow our independent contractor fleet, our capital requirements would be reduced.

As of September 30, 2023 and December 31, 2022 we had $240.9 million and $179.6 million in debt and lease obligations, respectively, consisting of the following:

- No outstanding borrowings under the Credit Facility;
- No outstanding borrowings under the Draw Note;
- $165.2 million and $88.9 million in revenue equipment installment notes, respectively;
- $19.4 million and $20.3 million in real estate notes, respectively;
- $6.3 million and $5.8 million of the principal portion of financing lease obligations, respectively; and
- $50.1 million and $64.6 million of the operating lease obligations, respectively.

The increase in revenue equipment installment notes is primarily due to replacing our older equipment with new equipment as part of our trade cycle. The decrease in the finance lease and operating lease obligations was primarily due to amortization of the lease liability. During the third quarter of 2023, we repaid $40.1 million in borrowings under the Credit Facility that we had incurred during 2023 to help fund the acquisition of LTST and repurchases of our Class A Common Stock under the stock repurchase program.

As of September 30, 2023, we had no borrowings outstanding, undrawn letters of credit outstanding of approximately $21.8 million, and available borrowing capacity of $88.2 million under the Credit Facility. Additionally, we had $45.0 million of remaining availability of a $45.0 million Draw Note from Triumph which is available solely to fund any indemnification owed to Triumph in relation to the TFS Settlement. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment.

Our net capital expenditures for the nine months ended September 30, 2023 totaled $143.0 million of expenditures, as compared to $49.8 million of expenditures for the prior year period. During the nine months ended September 30, 2023, we took delivery of approximately 607 new tractors and 367 new trailers, while disposing of approximately 926 used tractors and 518 used trailers. Our current fleet plan for fiscal 2023 includes the delivery of an additional 295 new company replacement tractors and 357 additional new trailer deliveries. Net gains on disposal of equipment and real estate in the nine months ended September 30, 2023 were $12.4 million compared to $39.3 million in the same prior year period primarily due to the $7.6 million gain on a Tennessee terminal during the 2023 period and the aforementioned disposal of revenue equipment as part of our trade cycle. For the balance of 2023, our baseline expectation for net capital expenditures is $35 million to $40 million. Our capital investment plan reflects our priorities of improving operational uptime, lowering operating costs, and maintaining a driver-friendly fleet. Global supply chain disruptions could impact the availability of tractors and trailers and lead to increased pricing.

We distributed a total of $4.3 million to stockholders in the first nine months of 2023 through dividends.

We believe we have sufficient liquidity to satisfy our cash needs, and we will continue to evaluate the nature and extent of potential short-term and long-term impacts to our business.

### Cash Flows

Net cash flows provided by operating activities decreased to $53.0 million for the nine months ended September 30, 2023, compared to $121.1 million for the same 2022 period, primarily due to an increase in receivables and driver advances as a result of an increase in our average receivable days outstanding, a $54.8 million decrease in net income, and a $1.7 million indemnification payment compared to the prior year period.

Net cash flows used by investing activities were $144.6 million for the nine months ended September 30, 2023, compared to $49.8 million used in the same 2022 period. The change in net cash flows used by investing activities was primarily due to the April 2023 acquisition of LTST, the August 2023 acquisition of Sims, and the timing of our trade cycle whereby we took delivery of approximately 607 new tractors and 367 new trailers, while disposing of approximately 926 used tractors and 518 used trailers during the 2023 period compared to delivery of 321 new tractors and no new trailers, while disposing of approximately 77 used tractors and no used trailers in the same 2022 period. The 2022 period includes the February 2022 acquisition of AAT.

Net cash flows provided by financing activities were approximately $30.4 million for the nine months ended September 30, 2023, compared to $20.4 million used in the same 2022 period. The change in net cash flows provided by financing activities was primarily a function of net proceeds relating to notes payable of $76.9 million in the 2023 period compared to net proceeds of $32.4 million in the 2022 period, the repurchase of $25.4 million of shares of our Class A common stock during the 2023 period compared to $70.8 million during the same 2022 period, as well as the payment of approximately $4.3 million in dividends during the 2023 period compared to $3.1 million during the same 2022 period.

Net cash flows provided by operating activities and used by financing activities in the 2023 period also included payment of $0.8 million and $9.2 million, respectively, of contingent consideration liabilities related to the acquisition of AAT.

On May 18, 2022 our Board approved a new stock repurchase authorization of up to $75.0 million of our Class A common stock, with any remaining amount available under prior authorizations being excluded and no longer available. Under such authorization, we repurchased 2.0 million shares of our Class A common stock for $54.7 million during 2022. On January 30, 2023, the Board approved an amendment to the Company's stock repurchase program authorizing the purchase of up to an aggregate $55.0 million of our Class A common stock. The amendment added an incremental approximately $37.5 million to the approximately $17.5 million that was then-remaining under the program. Since May 2022, we have repurchased a total of 2.7 million shares of our Class A common stock. No additional shares were repurchased during the third quarter of 2023 or through November 8, 2023.

Our cash flows may fluctuate depending on capital expenditures, future stock repurchases, dividends, strategic investments or divestitures, any indemnification calls related to the TFS Settlement, and the extent of future income tax obligations and refunds.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. There have been no material changes to our most critical accounting policies and estimates during the three and nine months ended September 30, 2023, compared to those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Form 10-K for the year ended December 31, 2022.

## Market risk

As filed, 130 characters.

Our market risks have not changed materially from the market risks reported in our Form 10-K for the year ended December 31, 2022.

## Controls and procedures

As filed, 3,546 characters.

### Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023, as a result of the deficiency described below.

The deficiency identified in our disclosure controls and procedures was that our review of the calculation of the significance of our acquisition of LTST did not identify than an incorrect input was used within the significance determination. As a result of this incorrect input, we did not identify the need to provide certain audited financial statements and related pro forma information for LTST on Form 8-K. This did not impact our current financial reporting or the Company’s current or historical financial statements. On April 27, 2023, we filed a Form 8-K disclosing our acquisition of LTST (the "Original Form 8-K"). On August 3, 2023, we filed an amendment to the Original Form 8-K, confirming that such financial statements, to the extent required, will be filed as an amendment to the Original Form 8-K as soon as they are available.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.

We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.

### Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 5,805 characters.

While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our Form 10-Q for the quarter ended March 31, 2023 and Form 10-K for the year ended December 31, 2022, in the sections entitled "Item 1A. Risk Factors," describe some of the risks and uncertainties associated with our business. The information presented below supplements such risk factors. We are amending and restating in its entirety the risk factor entitled “We depend on the proper functioning and availability of our management information and communication systems and other information technology assets (including the data contained therein) and a system failure or unavailability, including those caused by cybersecurity breaches, or an inability to effectively upgrade such systems and assets could cause a significant disruption to our business and have a materially adverse effect on our results of operations” from our Form 10-K for the year ended December 31, 2022, as set forth below. The risk factor set forth below should be read in conjunction with the risk factors included in our Form 10-Q for the quarter ended March 31, 2023 and Form 10 K for the year ended December 31, 2022. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects.

**We depend on the proper functioning and availability of our management information and communication systems and other information technology assets (including the data contained therein) and a system failure or unavailability, including those caused by cybersecurity breaches internally or with third parties, or an inability to effectively upgrade such systems and assets could cause a significant disruption to our business and have a materially adverse effect on our results of operations.**

We depend heavily on the proper functioning, availability, and security of our management information and communication systems and other information technology assets, including financial reporting and operating systems and the data contained in such systems and assets, in operating our business. Our operating system is critical to understanding customer demands, accepting and planning loads, dispatching equipment and drivers, and billing and collecting for our services. Our financial reporting system is critical to producing accurate and timely financial statements and analyzing business information to help us manage effectively. Furthermore, data privacy laws, which provide data privacy rights for consumers and operational requirements for companies, may result in increased liability and amplified compliance and monitoring costs, any of which could have a material adverse effect on our financial performance and business operations.

Our operations and those of our technology and communications service providers are vulnerable to interruption by natural disasters, such as fires, storms, and floods, which may increase in frequency and severity due to climate change, as well as, power loss, telecommunications failure, cyberattacks, terrorist attacks, Internet failures, computer viruses, and other events beyond our control. More sophisticated and frequent cyberattacks in recent years have also increased security risks associated with information technology systems. We also maintain information security policies to protect our systems, networks, and other information technology assets (and the data contained therein) from cybersecurity breaches and threats, such as hackers, malware, and viruses; however, such policies cannot ensure the protection of our systems, networks, and other information technology assets (and the data contained therein). In addition, remote or flexible work options for our employees could create increased demand for information technology resources and increase the avenues for unauthorized access to sensitive information, phishing, and other cyberattacks. If any of our critical information systems fail or become otherwise unavailable, whether as a result of a system upgrade project or otherwise, we would have to perform the functions manually, which could temporarily impact our ability to dispatch and manage our fleet efficiently, to respond to customers' requests effectively, to maintain billing and other records reliably, and to bill for services and prepare financial statements accurately or in a timely manner. Our business interruption insurance may be inadequate to protect us in the event of an unforeseeable and extreme catastrophe. Any significant system failure, upgrade complication, security breach (including cyberattacks), or other system disruption could interrupt or delay our operations, damage our reputation, cause us to lose customers, or impact our ability to manage our operations and report our financial performance, any of which could have a materially adverse effect on our business. Such risks related to system failure, upgrade complication, security breach (including cyberattacks), or other system disruption may also impact our customers, vendors, third-party capacity providers, and other counterparties, which could result in declines and volatility in customer demand and unavailability of products and services from vendors and third-party capacity providers, any of which could have a materially adverse effect on our business.

In addition, we are currently dependent on a single vendor to support several information technology functions. If the stability or capability of such vendor became compromised and we were forced to migrate such functions to a new platform, it could adversely affect our business, financial condition, and results of operations.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-031167. Last ingested by Listed: Nov 6, 2026, 17:39 ET. No prices; not investment advice.