The condensed consolidated financial statements include the accounts ofCovenant Logistics Group, Inc. , aNevada holding company, and its wholly owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer toCovenant 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 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 of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), future stock repurchases, if any, expected capital expenditures, allocations, and requirements, future customer relationships, expected debt reduction, including future interest expense, future driver market conditions, future use of independent contractors, expected cash flows, expected operating income, future investments in and growth of our segments and services, expected adjusted operating ratio, future trucking capacity, future rates and prices, future utilization, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation and the impact of our cost saving measures, 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, and upgrades, the market value of used equipment, including equipment subject to operating or finance leases relative to our payment obligations under such operating leases (including residual value guarantees and the proceeds from the sale thereof), the anticipated impact of our investment in TEL, the future impact of our restructuring activities, strategic plan, and other strategic initiatives, anticipated levels of and fluctuations relating to insurance, claims, and litigation expenses, including the erosion of available limits in our aggregate insurance policies, our disposition of the assets of TFS, including any future indemnification obligations related to the TFS Portfolio, futureDepartment of Transportation ("DOT") safety ratings for our motor carriers and the potential impact of a change in such ratings, and the anticipated impact of the COVID-19 outbreak or other similar outbreaks, 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 and our Form 10-K for the year endedDecember 31, 2020 , as amended. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in this Form 10-Q and our Form 10-K for the year endedDecember 31, 2020 , as amended, along with various disclosures in our press releases, stockholder reports, and other filings with theSecurities 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 For the second quarter of 2021, we were pleased to report earnings per share of$0.91 , which is the highest earnings for any quarter in the Company's history. In the second quarter, we saw freight market demand firing on all cylinders as a result of growing economic activity, low inventories, and supply chain disruptions, accompanied by constrained supply due to an intensifying national driver shortage. These conditions have continued into the third quarter. The full impact of these factors on our operating statistics year-over-year is complicated by changes in business mix due to downsizing our refrigerated fleet and solo tractor count in the Expedited business. We expect year-over-year comparability to be clearer in the second half of 2021. Although we are pleased with these results, we recognize the opportunity for further improvement, particularly in our Dedicated segment. In the short run, this means continuing to improve rates and contractual terms with customers who are not yielding the level of consistent profit we expect from this segment of the business, and in the long run, this means holding ourselves accountable for improved margins and returns across all aspects of our business. Page 22 -------------------------------------------------------------------------------- As ofJune 30, 2020 , our Factoring segment was classified as discontinued operations as it: (i) was a component of the entity, (ii) met the criteria as held for sale, and (iii) had a material effect on the Company's operations and financial results. OnJuly 8, 2020 , we closed on the disposition of substantially all of the operations and assets of TFS, a division ofCovenant Transport Solutions LLC , an indirect wholly owned subsidiary of the Company, which included substantially all of the assets and operations of our Factoring segment. Beginning with the period endedJune 30, 2020 , we have reflected the former Factoring segment as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior periods have been adjusted to conform to the current presentation.
Additional items of note for the second quarter of 2021 include the following:
? Total revenue of
quarter of 2020, and freight revenue (which excludes revenue from fuel
surcharges) of
quarter of 2020, despite our reduced tractor fleet;
? Operating income of
million in the second quarter of 2020;
? Net income of
net loss of
of 2020. Net income from continuing operations of
per diluted share, compared to
operations or
income from discontinued operations of
share, compared to net income from discontinued operations of
$0.05 per diluted share, in the second quarter of 2020. ? 34% of consolidated total revenue was in our more volatile Expedited reportable segment, as compared to 42% in the second quarter of 2020;
? Our Managed Freight reportable segment's total revenue increased to
million in the 2021 quarter from
segment had an operating income of
to operating loss of
? Our equity investment in TEL has fully recovered from the soft equipment
market and provided
of 2021 compared to
? Since
million to
the TFS Settlement, and with available borrowing capacity of
under our Credit Facility at
test our fixed charge covenant in the foreseeable future; and
? Stockholders' equity and tangible book value at
million and$248.8 million , respectively. Outlook For the balance of 2021, our short-term focus will be to continue to improve the profitability of our Dedicated segment and continue working to solidify longer term agreements with certain of our key Expedited and Brokerage customers. Thus far, we have seen some success in these efforts. The freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan. Potential headwinds include inefficiencies from re-engineering or replacing certain contracts, driver availability and cost, accident experience, the cost and volatility of claims, general inflation, and supply and demand factors for our customers and our industry. At present, we expect to continue to make steady, incremental progress on our Dedicated segment's margins over the remainder of 2021. Over time, we expect our Managed Freight segment's margin to gravitate toward the mid-single digits and Dedicated to gravitate toward the mid to high single digits and ultimately double digits. Directionally the margin changes may offset each other to some extent as the freight and driver markets return to more balanced levels. For the longer term, we expect to continue the execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by Dedicated, Managed Freight, and Warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure, implementing more consistent contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas. With diligence and accountability, we expect to make consistent progress and be a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation. Page 23
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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 Three Months EndedJune 30 , Six Months EndedJune 30 ,
GAAP Operating Ratio: 2021 OR % 2020 OR %
2021 OR % 2020 OR % Total revenue$ 256,324 $ 191,689 $ 477,213 $ 402,502 Total operating expenses 237,992 92.8% 220,639 115.1%
448,370 94.0% 432,906 107.6%
Operating income (loss)
$ (28,950 ) $ 28,843 $ (30,404 ) Adjusted Operating Ratio: 2021 Adj. OR % 2020 Adj. OR % 2021 Adj. OR % 2020 Adj. OR % Total revenue$ 256,324 $ 191,689 $ 477,213 $ 402,502 Fuel surcharge revenue (24,376 ) (12,125 ) (44,577 ) (33,357 ) Freight revenue (total revenue, excluding fuel surcharge) 231,948 179,564 432,636 369,145 Total operating expenses 237,992 220,639 448,370 432,906 Adjusted for: Fuel surcharge revenue (24,376 ) (12,125 ) (44,577 ) (33,357 ) Amortization of intangibles (1,152 ) (2,062 ) (2,304 ) (2,793 ) Bad debt expense associated with customer bankruptcy and high credit risk customers - (2,617 ) - (2,617 ) Insurance policy erosion - - - - Strategic restructuring adjusting items: Gain on disposal of terminals, net - 5,712 - 5,712 Impairment of real estate and related tangible assets - (9,790 ) - (9,790 ) Impairment of revenue equipment and related charges - (17,604 ) - (17,604 ) Restructuring related severance and other - (1,791 ) - (1,791 ) Abandonment of information technology infrastructure - (1,048 ) - (1,048 ) Contract exit costs and other restructuring - (695 ) - (695 ) Adjusted operating expenses 212,464 91.6% 178,619 99.5% 401,489 92.8% 368,923 99.9% Adjusted operating income (loss)$ 19,484 $ 945 $ 31,147 $ 222 Page 24
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Revenue and Expenses We focus on targeted markets throughoutthe 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. Until the second quarter of 2020, we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring Services. As discussed above, our Factoring reportable segment was classified as discontinued operations as ofJune 30, 2020 . As ofSeptember 30, 2020 , the segment formerly known as Highway Services is now reflected as Expedited, given the change in business mix surrounding the exit of the majority of the solo-refrigerated business in the second quarter of 2020. In addition, given management changes and growth, we have reported Warehousing as a separate reportable segment from Managed Freight. We believe the updated reportable segments reflect our service offerings, strategic direction, and how management, including our chief operating decision maker, monitors our performance.
Our four reportable segments include:
? Expedited: The Expedited 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 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. Many of our
Dedicated contract customers are automotive companies or shippers of produce,
where the nature of the product we ship requires high service standards.
? Managed Freight: The Managed Freight 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 segment provides day-to-day warehouse management
services to customers who have chosen to outsource this function. 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. The main factors that could affect our Expedited 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. The main factors that could affect our Dedicated revenue are the rates and utilization under the contracts with our Dedicated customers. These factors relate, among other things, to the general level of economic activity inthe 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. Page 25 -------------------------------------------------------------------------------- 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. 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. InMay 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 sinceMay 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 24 for the uses and limitations associated with adjusted operating ratio. Revenue Equipment AtJune 30, 2021 , we operated 2,407 tractors and 5,314 trailers. Of such tractors, 1,570 were owned, 670 were financed under operating leases, and 167 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 4,607 were owned, 621 were financed under finance type leases, and 86 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. AtJune 30, 2021 , our fleet had an average tractor age of 1.9 years and an average trailer age of 4.7 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. Page 26
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RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF three and six months ended
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 Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenue: Freight revenue$ 231,948 $ 179,564 $ 432,636 $ 369,145 Fuel surcharge revenue 24,376 12,125 44,577 33,357 Total revenue$ 256,324 $ 191,689 $ 477,213 $ 402,502 The increase in total revenue resulted from a$37.2 million ,$9.3 million ,$3.8 million , and$2.0 million increase in Managed Freight, Dedicated, Warehousing, and Expedited freight revenue, respectively, for the three months endedJune 30, 2021 and a$57.9 million ,$7.2 million , and$4.0 million increase in Managed Freight, Warehousing, and Dedicated freight revenue, respectively, partially offset by a$5.7 million decrease in Expedited freight revenue for the six months endedJune 30, 2021 .
See results of segment operations section for discussion of fluctuations.
For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue.
For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentage of total revenue, and then as a percentage of freight revenue.
Salaries, wages, and related expenses
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Salaries, wages, and related expenses$ 88,477 $ 74,688 $ 171,062 $ 157,152 % of total revenue 34.5 % 39.0 % 35.8 % 39.0 % % of freight revenue 38.1 % 41.6 % 39.5 % 42.6 % Salaries, wages, and related expenses for the three months endedJune 30, 2021 , increased on a dollars basis primarily as the result of substantial cents per mile driver pay increases made effective in earlyJanuary 2021 , increases in workers' compensation insurance, and management incentive compensation attributable to favorable second quarter results. The decreases on a percentage basis are due to increased revenue over which to spread those costs. For the six months endedJune 30, 2021 , the increase on a dollars basis in salaries, wages, and benefits was primarily the result of substantial cents per mile driver pay increases made effective in earlyJanuary 2021 , as well as management incentive compensation attributable to favorable results in the 2021 period, and increases in workers' compensation insurance. The decreases on a percentage basis are due to increased revenue over which to spread those costs. For the remainder of 2021 we believe salaries, wages, and related expenses will increase in comparison to the first half of 2021 and 2020 as a result of driver pay changes put in place in the tight freight market, partially offset by fewer drivers as a result of our change in business model and our smaller fleet. Additionally, we expect salaries, wages, and related expenses to continue to increase period over period as the result of reinstatement of the 401(k) match, wage inflation, and, in certain periods, increased incentive compensation due to improved performance. 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. Page 27 --------------------------------------------------------------------------------
Fuel expense Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Fuel expense$ 26,372 $ 15,938 $ 49,194 $ 41,202 % of total revenue 10.3 % 8.3 % 10.3 % 10.2 % % of freight revenue 11.4 % 8.9 % 11.4 % 11.2 % 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 theDepartment 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 theDOE were$0.10 per gallon higher for the quarter endedJune 30, 2021 compared with the same quarter in 2020. To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles driven by company tractors, our fuel economy, our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues, and the net impact of fuel hedging gains and losses.
Net fuel expense is shown below:
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Total fuel surcharge$ 24,376 $ 12,125 $ 44,577 $ 33,357 Less: Fuel surcharge revenue reimbursed to owner operators and other third parties 2,135 1,319 3,786 4,100 Company fuel surcharge revenue$ 22,241 $ 10,806 $ 40,791 $ 29,257 Total fuel expense$ 26,372 $ 15,938 $ 49,194 $ 41,202 Less: Company fuel surcharge revenue 22,241 10,806 40,791 29,257 Net fuel expense$ 4,131 $ 5,132 $ 8,403 $ 11,945 % of freight revenue 1.8 % 2.9 % 1.9 % 3.2 % Net fuel expense for the three months endedJune 30, 2021 , decreased primarily due to higher fuel surcharge recovery, partially offset by slightly higher fuel prices. There were no diesel fuel hedge gains or losses for the quarter, compared to$0.3 million of losses for the same 2020 quarter. Also, as a result of the change in our business mix our fleet was more fuel efficient due to less idling and less temperature-controlled freight thus reducing refrigerated trailer fuel expense. As ofJune 30, 2021 , we had no remaining fuel hedging contracts. For the six months endedJune 30, 2021 , net fuel expense decreased primarily due to higher fuel surcharge recovery, partially offset by slightly higher fuel prices. Additionally, there were$0.4 million of diesel fuel hedge gains for the year-to-date period, compared to$0.3 million of losses for the same 2020 period. Also, as a result of the change in our business mix our fleet was more fuel efficient due to less idling and less temperature-controlled freight thus reducing refrigerated trailer fuel expense. We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operations (which uses diesel fuel for refrigeration but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives. Page 28 --------------------------------------------------------------------------------
Operations and maintenance
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Operations and maintenance$ 14,294 $ 12,218 $ 29,013 $ 25,044 % of total revenue 5.6 % 6.4 % 6.1 % 6.2 % % of freight revenue 6.2 % 6.8 % 6.7 % 6.8 % The increases in operations and maintenance on a dollar basis for the three months and six months endedJune 30, 2021 were primarily related to an additional$2.3 million and$3.4 million in costs related to the recruitment and onboarding of drivers, respectively, when compared to the prior year periods, despite having a smaller fleet in 2021. This increase is attributable to the extremely tight driver market and our focused effort to seat more of our tractors. This was partially offset by a reduction in tolls, cargo damage, and other costs associated with temperature-controlled freight that was exited in the second quarter of 2020 as a result of our business restructuring. Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models.
Revenue equipment rentals and purchased transportation
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenue equipment rentals and purchased transportation$ 75,455 $ 47,011 $ 132,691 $ 93,073 % of total revenue 29.4 % 24.5 % 27.8 % 23.1 % % of freight revenue 32.5 % 26.2 % 30.7 % 25.2 % The increases in revenue equipment rentals and purchased transportation for the three and six months endedJune 30 , 2021,were primarily the result of a more competitive market for sourcing third-party capacity and growth in the Managed Freight reportable segment, partially offset by a reduction in the percentage of the total miles run by independent contractors from 11.1% for the three months endedJune 30, 2020 to 8.5% for the same 2021 period and from 11.6% for the six months endedJune 30, 2020 to 8.7% for the same 2021 period. When compared year-over-year, we expect revenue equipment rentals to decrease going forward as a result of the reduction of our tractor fleet. However, we expect purchased transportation to increase as we seek to grow the Managed Freight reportable segment. 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 continues to tighten 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 Six Months Ended June 30, June 30, 2021 2020 2021 2020 Operating taxes and licenses$ 2,960 $ 3,123 $ 5,545 $ 6,576 % of total revenue 1.2 % 1.6 % 1.2 % 1.6 % % of freight revenue 1.3 % 1.7 % 1.3 % 1.8 % The decreases in operating taxes and licenses as a percentage of revenue for the three and six months endedJune 30, 2021 are primarily due to increased revenue over which to spread those costs. Page 29 --------------------------------------------------------------------------------
Insurance and claims Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Insurance and claims$ 9,577 $ 11,562 $ 17,415 $ 27,174 % of total revenue 3.7 % 6.0 % 3.6 % 6.8 % % of freight revenue 4.1 % 6.4 % 4.0 % 7.4 % Insurance and claims per mile cost decreased to12.8 cents per mile for the three months endedJune 30, 2021 compared to15.4 cents per mile for the same 2020 quarter and11.8 cents per mile for the six months endedJune 30, 2021 compared to17.4 cents per mile for the same 2020 period. This change is primarily a result of the occurrence and development of large claims in the 2020 periods partially offset by the 2020 refund of$7.3 million of previously expensed premiums from our commutation of theApril 10, 2015 throughMarch 31, 2018 policy for our primary auto liability insurance. Additionally, incident rates during the 2021 periods have decreased as compared to the same 2020 periods. The auto liability policy contains a feature whereby we are able to retroactively obtain a partial refund of the premium in exchange for taking on the liability for incidents that occurred during the period and releasing the insurers. This is referred to as "commuting" the policy or "policy commutation." In the second quarter of 2020, as well as in several past periods we have commuted the policy, which has lowered our insurance and claims expense. We intend to evaluate our ability to execute the policy release premium refund or commutation option for the auto liability policy for the three years endedMarch 31, 2021 , which could reduce insurance and claims expense by up to$14.0 million , less any future amounts paid on claims by the insurer. A decision with respect to commutation of the policy has not yet been made. Management cannot predict whether or not future claims or the development of existing claims will justify a commutation of the policy period, and accordingly, no related amounts were recorded atJune 30, 2021 . Our auto liability (personal injury and property damage), cargo, and general liability insurance programs include significant self-insured retention amounts. We are also self-insured for physical damage to our equipment. Because of these significant self-insured exposures, insurance and claims expense may fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-existing reserves, could adversely affect our financial condition and results of operations. We periodically evaluate strategies to efficiently reduce our insurance and claims expense. Our current policy for the$7.0 million in excess of$3.0 million layer runs fromJanuary 28, 2021 toApril 1, 2024 . Due to the erosion of the$9.0 million in excess of$1.0 million layer of our prior policy, any adverse developments in claims filed betweenApril 1, 2018 andMarch 31, 2021 , could result in additional expense accruals. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. In addition, in future periods, insurance and claims costs may be more volatile depending on our future accident experience, which could have a material adverse effect on our business, financial condition, and results of operations. Page 30 --------------------------------------------------------------------------------
Communications and utilities Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Communications and utilities$ 1,130 $ 1,782 $ 2,377 $ 3,351 % of total revenue 0.4 % 0.9 % 0.5 % 0.8 % % of freight revenue 0.5 % 1.0 % 0.5 % 0.9 %
For the periods presented, the changes in communications and utilities as a
percentage of revenue for the three and six months ended
General supplies and expenses Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 General supplies and expenses$ 7,752 $ 11,536 $ 15,934 $ 19,894 % of total revenue 3.0 % 6.0 % 3.3 % 4.9 % % of freight revenue 3.3 % 6.4 % 3.7 % 5.4 % The decreases in general supplies and expenses for the three and six months endedJune 30, 2021 primarily relate to additional reserves put in place during the second quarter of 2020 for potentially uncollectible accounts receivable and 2020 strategic planning and process improvement investments that were part of our organizational restructuring. Additionally, travel expenses were decreased for the six months endedJune 30, 2021 compared to the same 2020 period due to the travel limitations brought on by the COVID-19 pandemic. Page 31 --------------------------------------------------------------------------------
Depreciation and amortization
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Depreciation and amortization$ 13,863 $ 19,663 $ 27,951 $ 37,846 % of total revenue 5.4 % 10.3 % 5.9 % 9.4 % % of freight revenue 6.0 % 11.0 % 6.5 % 10.3 %
Depreciation and amortization consists primarily of depreciation of tractors, trailers, and other capital assets, as well as amortization of intangible assets.
Depreciation expense decreased$4.9 million and$9.5 million to$12.7 million and$25.6 million for the three and six months endedJune 30, 2021 , respectively, compared to$17.6 million and$35.1 million in the same 2020 periods. The decreases in depreciation expense are due to the mix change in the overall business that reduced total tractor count and increased utilization, along with reductions in terminals and other capital assets. Amortization of intangible assets was$1.2 million and$2.3 million for the three and six months endedJune 30, 2021 , respectively, and$2.1 million and$2.8 million for the same 2020 periods. The decrease is a result of the 2020 termination of the non-compete agreement with a former Landair executive partially offset by the revised remaining useful life of the Landair trade name to 15 months as ofJune 30, 2020 , as a result of management changes, a change in the branding of the organization, and the expected use of the Landair trade name.
For the remainder of 2021, we expect our average operational fleet size to remain relatively flat at approximately 2,500 tractors.
Gain on disposition of property and equipment, net
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Gain on disposition of property and equipment, net$ (1,888 ) $ (3,451 ) $ (2,812 ) $ (4,975 ) % of total revenue (0.7 %) (1.8 %) (0.6 %) (1.2 %) % of freight revenue (0.8 %) (1.9 %) (0.6 %) (1.3 %)
The decreases in gain on disposition of property and equipment, net are
primarily the result of the
Impairment of long-lived property and equipment
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Impairment of long-lived property and equipment $ -$ 26,569 $ -$ 26,569 % of total revenue 0.0 % 13.9 % 0.0 % 6.6 % % of freight revenue 0.0 % 14.8 % 0.0 % 7.2 % During the second quarter of 2020, we recognized impairment of$16.8 million on revenue equipment,$7.3 million on a terminal, related leasehold improvements, and equipment,$2.2 million on an office facility held under an operating lease, and$0.2 million on a training and orientation facility. Page 32 --------------------------------------------------------------------------------
Interest expense, net Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Interest expense, net$ 708 $ 2,084 $ 1,450 $ 3,983 % of total revenue 0.3 % 1.1 % 0.3 % 1.0 % % of freight revenue 0.3 % 1.2 % 0.3 % 1.1 % The decreases in interest expense, net for the three and six months endedJune 30, 2021 are primarily the result of the reduction of our total indebtedness since the same 2020 periods, partially offset by interest expense on the$35.6 million Draw Note related to the indemnification call by Triumph. This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage.
Income from equity method investment
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Income (loss) from equity method investment$ 3,382 $ 530 $ 6,342 $ (205 ) 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 increase in TEL's contributions to our results for the three and six months endedJune 30, 2021 is the result of constricted used equipment capacity in the transportation market. We expect the impact on our earnings for the remaining quarters of 2021 to be consistent with the first half of 2021. Income tax expense (benefit) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Income tax expense (benefit)$ 5,570 $ (7,336 ) $ 9,716 $ (8,340 ) % of total revenue 2.2 % (3.8 %) 2.0 % (2.1 %) % of freight revenue 2.4 % (4.1 %) 2.2 % (2.3 %) The changes in income tax expense (benefit) were primarily related to the$51.5 million and$68.3 million increases in pre-tax income in the three and six months endedJune 30, 2021 , respectively, compared to the same 2020 periods, resulting from the increases in operating income, earnings on investment in TEL, and income from discontinued operations. The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related to our per diem pay structure for drivers. Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates. We are currently estimating our 2021 effective income tax rate to be approximately 27.4%. Page 33 --------------------------------------------------------------------------------
RESULTS OF SEGMENT OPERATIONS
We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing, each as described above.
COMPARISON OF three and six months ended
The following table summarizes financial and operating data by reportable segment: (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenues: Expedited$ 87,369 $ 79,778 $ 165,849 $ 165,938 Dedicated 81,868 65,940 157,314 147,728 Managed Freight 71,635 34,362 123,032 65,099 Warehousing 15,452 11,609 31,018 23,737 Total revenues$ 256,324 $ 191,689 $ 477,213 $ 402,502 Operating Income (Loss): Expedited$ 10,225 $ (12,844 ) $ 16,436 $ (14,396 ) Dedicated (191 ) (13,177 ) (1,990 ) (14,718 ) Managed Freight 7,316 (3,611 ) 12,261 (2,946 ) Warehousing 982 682 2,136 1,656 Total operating income$ 18,332 $ (28,950 ) $ 28,843 $ (30,404 ) The increase in Expedited revenue for the three months endedJune 30, 2021 relates to an increase in average freight revenue per tractor per week of 43.3% and a$5.6 million increase in fuel surcharge revenue compared to the 2020 quarter, partially offset by a 342 (or 28.3%) average tractor decrease related to the exit of the solo-refrigerated business in the second quarter of 2020. The increase in average freight revenue per tractor per week for the quarter endedJune 30, 2021 is the result of a 31.0% increase in average miles per unit and a16.5 cents per mile (or 9.4%) increase in average rate per total mile compared to the 2020 quarter. Expedited team-driven tractors averaged 866 tractors in the second quarter of 2021, a decrease of approximately 0.8% from the average of 873 tractors in the second quarter of 2020. For the six months endedJune 30, 2021 , the change in Expedited revenue relates to a 383 (or 30.4%) average tractor decrease related to the exit of the solo-refrigerated business in the second quarter of 2020 partially offset by an increase in average freight revenue per tractor per week of 39.0% compared to the same 2020 period. The increase in average freight revenue per tractor per week for the six months endedJune 30, 2021 is the result of a 31.9% increase in average miles per unit and an8.0 cents per mile (or 4.4%) increase in average rate per total mile compared to the same 2020 period. Expedited team-driven tractors averaged 871 tractors for the six months endedJune 30, 2021 , an increase of approximately 1.2% from the average of 860 tractors for the same 2020 period. The increase in Dedicated revenue relates to an increase in average freight revenue per tractor per week compared to the 2020 quarter as the result of a 7.4% increase in average miles per unit as well as a18.0 cents per mile (or 9.4% increase) in average rate per total mile compared to the 2020 quarter, as well as a$6.6 million increase in fuel surcharge revenue. These increases were partially offset by a 27 (or 1.7%) average tractor decrease as a result of not renewing underperforming contracts. For the six months endedJune 30, 2021 , the increase in Dedicated revenue relates to an increase in average freight revenue per tractor per week compared to the same 2020 period as the result of a17.0 cents per mile (or 9.2%) increase in average rate per total mile, partially offset by a 3.5% decrease in average miles per unit as compared to the same 2020 period. Additionally, fuel surcharge revenue increased$5.6 million compared to the 2020 period. These increases were partially offset by a 35 (or 2.1%) average tractor decrease as a result of not renewing underperforming contracts. Managed Freight total revenue increased as a result of a robust freight market and executing various spot rate opportunities in the quarter and year-to-date periods, as well as handling overflow freight from both Expedited and Dedicated truckload operations. Warehousing total revenue for the quarter and year-to-date periods increased as a result of new customer business that began operations during the third quarter of 2020. In addition to the changes in revenue described above for the three and six months endedJune 30, 2021 , the change in operating income for the three months endedJune 30, 2021 , resulted from a$26.3 million ,$3.5 million , and$2.9 million increase in Managed Freight, Warehousing, and Dedicated operating expenses, respectively, partially offset by a$15.5 million decrease in Expedited operating expenses. For the six months endedJune 30, 2021 , the change in operating income resulted from a$42.7 million and$6.8 million increase in Managed Freight and Warehousing operating expenses, respectively, partially offset by a$30.9 million and$3.1 million decrease in Expedited and Dedicated operating expenses, respectively. The decrease in Expedited operating expenses for the three and six months endedJune 30, 2021 , and the decrease in Dedicated operating expenses for the six months endedJune 30, 2021 , is primarily the result of the restructuring costs incurred in the second quarter of 2020 related to downsizing our solo-driver refrigerated, one-way irregular routes, and other less profitable operations. Operating expenses for Expedited were further reduced by a decrease in insurance and claims expense and a 28.3% and 30.4% average operating fleet reduction, respectively, partially offset by higher variable costs associated with driver pay increases and greater concentration of team driven units. The increase in Dedicated operating expenses for the three months endedJune 30, 2021 primarily related to driver pay increases partially offset by the aforementioned 2020 restructuring costs. The increase in Managed Freight operating expenses is the result of increased revenue driving an increase in variable expenses, primarily purchased transportation. The increase for Warehousing was primarily driven by the new customer business that began operations during the third quarter of 2020. Page 34 --------------------------------------------------------------------------------
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. Further, we expect to increase our capital allocation toward Dedicated and Managed Freight 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$21.5 million and$14.4 million atJune 30, 2021 andDecember 31, 2020 , 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 atJune 30, 2021 , 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
?
Facility, respectively;
?
?$9.0 million and$17.8 million in revenue equipment installment notes, respectively; ?$22.1 million and$22.7 million in real estate notes, respectively; ? No deferred loan costs (which reduce long-term debt) as ofJune 30, 2021 and$0.1 million as ofDecember 31, 2020 ;
?
obligations, respectively; and ?$32.4 million and$38.5 million of the operating lease obligations, respectively. The decrease in our revenue equipment installment notes and financing lease obligations was primarily due to a strategic decision to reduce our debt and lease obligations through the second quarter of 2021. The decrease in operating lease obligations was primarily due to the amortization of the operating lease liability. As ofJune 30, 2021 , we had$10.0 million of borrowings outstanding, undrawn letters of credit outstanding of approximately$29.5 million , and available borrowing capacity of$70.5 million under the Credit Facility. Additionally, we had$40.4 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. Refer to Note 7, "Debt" of the accompanying condensed consolidated financial statements for further information about material debt agreements. Our net capital expenditures for the six months endedJune 30, 2021 totaled$19.9 million of proceeds, as compared to$4.5 million of proceeds for the prior year period. In the first half of 2021, we took delivery of approximately 88 new tractors and 75 new trailers, while disposing of approximately 249 used tractors and 482 used trailers. Our current fleet plan for fiscal 2021 includes the delivery of an additional 196 new company replacement tractors and no additional new trailer deliveries. For the remainder of 2021, we expect our average operational fleet size to remain relatively flat with the first quarter of 2021 at approximately 2,500 tractors. Net gains on disposal of equipment and real estate in the first half of 2021 were$2.8 compared to$5.0 million in the same prior year period. We believe we have sufficient liquidity to satisfy our cash needs, however we continue to evaluate and act, as necessary, to maintain sufficient liquidity to ensure our ability to operate during these unprecedented times. The extent to which COVID-19 and its variants could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and will depend on future developments. We will continue to evaluate the nature and extent of the potential short-term and long-term impacts to our business. Page 35
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Cash Flows Net cash flows provided by operating activities increased to$34.1 million for the six months endedJune 30, 2021 , compared to$24.1 million for the same 2020 period, primarily due to a$51.1 million increase in net income, as well as, funding receivables of our discontinued Factoring reportable segment in the prior year period, partially offset by changes in the timing and amount of payments on insurance claims. Net cash flows provided by investing activities were$19.8 million for the six months endedJune 30, 2021 , compared to$4.1 million in the same 2020 period. The change in net cash flows provided by investing activities was primarily the result of the timing of our trade cycle whereby we took delivery of approximately 88 new company tractors and disposed of approximately 249 used tractors in the 2021 period compared to delivery and disposal of approximately 305 and 781 tractors, respectively in the same 2020 period. Net cash flows used by financing activities were approximately$57.3 million for the six months endedJune 30, 2021 , compared to$4.6 million in the same 2020 period. The change in net cash flows used by financing activities was primarily a function of net proceeds in the 2020 period and net repayments in the 2021 period relating to notes payable, the Draw Note, and under our Credit Facility. OnFebruary 10, 2020 , our Board approved the repurchase of up to$20.0 million of the Company's Class A common stock. The program was suspended onMarch 26, 2020 with approximately$2.5 million remaining authorized. OnJanuary 25, 2021 , our Board approved the repurchase of up to$40.0 million of the Company's outstanding Class A common stock. There were 0.5 million and 1.4 million shares repurchased in the open market for$8.4 million and$17.5 million during the six months endedJune 30, 2021 and 2020, respectively. The Company has the ability to repurchase up to$31.6 million of the Company's outstanding Class A common stock under the current stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors. Going forward, the disposition of our Factoring reportable segment is expected to continue to improve our cash flows used by financing activities. However, on an ongoing basis, our cash flows may fluctuate depending on capital expenditures, future stock repurchases, strategic investments or divestitures, any indemnification calls related to the TFS Settlement, and the extent of future income tax obligations and refunds. Page 36 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in theU.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 six months endedJune 30, 2021 , compared to those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our 2020 Form 10-K, as amended, other than those discussed above.
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