Capitalization, Liquidity and Capital Expenditures

Tripp Grant, the Company’s Chief Financial Officer, added the following comments: “At September 30, 2022, our total indebtedness, composed of total debt and finance lease obligations, net of cash (“net indebtedness”), increased by $3.7 million to approximately $32.2 million as compared to December 31, 2021. In addition, our net indebtedness to total capitalization increased to 7.8% at September 30, 2022 from 7.5% at December 31, 2021.

The increase in net indebtedness is primarily attributable to the base purchase price paid for the acquisition of AAT in the amount of $37.4 million, the repurchase of approximately 3.0 million shares under our stock repurchase programs for $70.9 million, net capital expenditures of $11.3 million and dividend payments of $3.2 million, offset by cash flows from operations.

“At September 30, 2022, we had cash and cash equivalents totaling $59.3 million primarily attributable to the $43.5 million of proceeds from the sale of a California based terminal late in the quarter. Under our ABL credit facility, we had no borrowings outstanding, undrawn letters of credit outstanding of $23.9 million, and available borrowing capacity of $86.1 million. The sole financial covenant under our ABL facility is a fixed charge coverage ratio covenant that is tested only when available borrowing capacity is below a certain threshold. Based on availability as of September 30, 2022, no testing was required, and we do not expect testing to be required in the foreseeable future.

“Our net capital investment through September 30, 2022, used $11.3 million as compared to proceeds of $22.0 million for the prior year period. At the end of the quarter, we had $1.4 million in assets held for sale that we anticipate disposing within twelve months. The average age of our tractors is sequentially the same as the second quarter at 29 months and is expected to decline starting in the fourth quarter of the year and throughout 2023 as we seek to normalize the average age of our fleet.

“Our baseline expectation for net capital expenditures the remainder of 2022 is $10 million to $30 million, a wide range as a result of our efforts to opportunistically reduce the average age of our fleet and the uncertainties around scheduled deliveries, the ability to park and prepare larger volumes of used equipment to sell in a timely manner and strong but moderating sale prices for used equipment.  We believe the benefits of improved utilization, fuel economy and maintenance costs will out-weigh the increased costs of new equipment.

“Based on our current capital structure and expected net capital expenditures for the remainder of the year, we have substantial flexibility to continue to repurchase stock, declare quarterly dividends and evaluate other capital allocation alternatives.”

Planned Changes to Management

As the next step in the Company’s long term succession plan, Paul Bunn will be promoted to President and Chief Operating Officer and Joey Hogan will transition to a part time Executive Vice President role focused on strategic planning, mentoring the leadership team, government relations and other special projects, effective January 1, 2023. Mr. Parker commented, “Several years ago, we identified the next generation of leaders for Covenant, and I asked Joey to guide their development. In large part due to Joey’s unique skills and selfless personality, we are now blessed with strong leaders across our business units and corporate staff, which is reflected in the strongest financial results in our history. After 25 years, Joey has earned the right to step back on his terms, and I’m grateful to have worked with him over such a long period.  He has been a great partner and a true leader in every manner, which was most recently evidenced when he said, “Paul is ready.”  As grateful as I am for Joey’s contributions, I’m equally grateful to have Paul Bunn stepping into the President role. Paul’s ability to bridge financial and operating roles and communicate our goals and values is a key component in strengthening our company.  Over the past three years, Paul has proven himself repeatedly in positions of increasing responsibility and has over-achieved with each opportunity.  Overall, our team has never been deeper, stronger, or more aligned, and we feel very well positioned for the future.”

Outlook

Mr. Parker concluded, “For the remainder of 2022 we expect moderating freight demand, greater driver availability, and continuing cost inflation.  Absent a substantial, near-term deterioration in market forces, we expect to finish the fourth quarter with over a billion dollars of total revenue and freight revenue for the year and while we expect fourth quarter margin to worsen compared to the third quarter because of the third quarter gain on sale of a California terminal, we expect adjusted margin in the fourth quarter to be similar to that of the third quarter.

“As we look toward 2023, we anticipate a difficult freight environment coupled with cost inflation, which will pressure margins.  However, we believe our more resilient operating model, together with diligent execution and teamwork, will result in lower volatility throughout economic and freight market cycles.  We will remain focused on growing our market share, continuing to improve our operations, and becoming a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.”

Conference Call Information

The Company will host a live conference call tomorrow, October 21, 2022, at 9:00 a.m. Eastern time to discuss the quarter. Individuals may access the call by dialing 877-550-1505 (U.S./Canada) and 0800-524-4760 (International). An audio replay will be available for one week following the call at 800-645-7964, access code 3895#. For additional financial and statistical information regarding the Company that is expected to be discussed during the conference call, please visit our website at www.covenantlogistics.com/investors under the icon “Earnings Info.”

Covenant Logistics Group, Inc., through its subsidiaries, offers a portfolio of transportation and logistics services to customers throughout the United States. Primary services include asset- based expedited and dedicated truckload capacity, as well as asset-light warehousing, transportation management, and freight brokerage capability. In addition, Transport Enterprise Leasing is an affiliated company providing revenue equipment sales and leasing services to the trucking industry. Covenant's Class A common stock is traded on the NASDAQ Global Select market under the symbol, “CVLG.”

(1) See GAAP to Non-GAAP Reconciliation in the schedules included with this release. In addition to operating income (loss), operating ratio, net income, and earnings per diluted share, we use adjusted operating income (loss), adjusted operating ratio, adjusted net income, and adjusted earnings per diluted share, non-GAAP measures, as  key  measures  of  profitability.  Adjusted operating income (loss), adjusted operating ratio, adjusted net income, and adjusted diluted earnings per share are not substitutes for operating income (loss), operating ratio, net income, and earnings per diluted share measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. We believe our presentation of these non-GAAP financial measures are useful because it provides investors and securities analysts with supplemental information that we use internally for purposes of assessing profitability. Further, our Board and management use non-GAAP operating income (loss), operating ratio, net income, and earnings per diluted share measures on a supplemental basis to remove items that may not be an indicator of performance from period-to-period. Although we believe that adjusted operating income (loss), adjusted operating ratio, adjusted net income, and adjusted diluted earnings per share improves comparability in analyzing our period-to-period performance, they could limit comparability to other companies in our industry, if those companies define such measures differently. Because of these limitations, adjusted operating income (loss), adjusted operating ratio, adjusted net income, and adjusted earnings per diluted share should not be considered measures 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.

This press release contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. Such statements may be identified by their use of terms or phrases such as “expects,” “estimates,” “projects,” “believes,” “anticipates,” “plans,” “could,” “would,” “may,” “will,” "intends," “outlook,” “focus,” “seek,” “potential,” “mission,” “continue,” “goal,” “target,” “objective,” derivations thereof, and similar terms and phrases. Forward-looking statements are based upon the current beliefs and expectations of our management and 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. In this press release, statements relating to expected cost inflation and demand, future Dedicated and Expedited contracts, growth in the Warehousing segment, as well as margins in the Warehousing segment, future revenue and operating income, future availability and covenant testing under our ABL credit facility, expected fleet age, equipment and  cost, net capital expenditures, capital allocation alternatives, progress toward our strategic goals, future management changes, and the statements under “Outlook” are forward-looking statements. The following factors, among others could cause actual results to differ materially from those in the forward-looking statements: Our business is subject to economic, credit, business, and regulatory factors affecting the truckload industry that are largely beyond our control including cost inflation and global supply chain disruption that could affect (i) the volume, pricing, and predictability of customer demand, (ii) the availability, pricing, and delivery schedule of equipment and parts, (iii) the availability and compensation of employees and third-party capacity providers, and (iv) other aspects of our business; We may not be successful in achieving our strategic plan; We operate in a highly competitive and fragmented industry; We may not grow substantially in the future and we may not be successful in improving our profitability; We may not make acquisitions in the future, or if we do, we may not be successful in our acquisition strategy; Increases in driver compensation or difficulties attracting and retaining qualified drivers could have a materially adverse effect on our profitability and the ability to maintain or grow our fleet; Our engagement of independent contractors to provide a portion of our capacity exposes us to different risks than we face with our tractors driven by company drivers; We derive a significant portion of our revenues from our major customers; Fluctuations in the price or availability of fuel, the volume and terms of diesel fuel purchase commitments, surcharge collection, and hedging activities may increase our costs of operation; We depend on third-party providers, particularly in our Managed Freight segment; 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; If we are unable to retain our key employees, our business, financial condition, and results of operations could be harmed; Seasonality and the impact of weather and other catastrophic events affect our operations and profitability; We self-insure for a significant portion of our claims exposure, which could significantly increase the volatility of, and decrease the amount of, our earnings; Our self-insurance for auto liability claims and our use of captive insurance companies could adversely impact our operations; We have experienced, and may experience additional, erosion of available limits in our aggregate insurance policies; We may experience additional expense to reinstate insurance policies due to liability claims; We operate in a highly regulated industry; If our independent contractor drivers are deemed by regulators or judicial process to be employees, our business, financial condition, and results of operations could be adversely affected; Developments in labor and employment law and any unionizing efforts by employees could have a materially adverse effect on our results of operations; The Compliance Safety Accountability program adopted by the Federal Motor Carrier Safety Administration could adversely affect our profitability and operations, our ability to maintain or grow our fleet, and our customer relationships; An unfavorable development in the Department of Transportation safety rating at any of our motor carriers could have a materially adverse effect on our operations and profitability; Compliance with various environmental laws and regulations; Changes to trade regulation, quotas, duties, or tariffs; Litigation may adversely affect our business, financial condition, and results of operations; Increasing attention on environmental, social and governance matters may have a negative impact on our business, impose additional costs on us, and expose us to additional risks; Our ABL credit facility and other financing arrangements contain certain covenants, restrictions, and requirements, and we may be unable to comply with such covenants, restrictions, and requirements; In the future, we may need to obtain additional financing that may not be available or, if it is available, may result in a reduction in the percentage ownership of our stockholders; Our indebtedness and finance and operating lease obligations could adversely affect our ability to respond to changes in our industry or business; Our profitability may be materially adversely impacted if our capital investments do not match customer demand or if there is a decline in the availability of funding sources for these investments; Increased prices for new revenue equipment, design changes of new engines, future uses of autonomous tractors, volatility in the used equipment market, decreased availability of new revenue equipment, and the failure of manufacturers to meet their sale or trade-back obligations to us could have a materially adverse effect on our business, financial condition, results of operations, and profitability; Our 49% owned subsidiary, Transport Enterprise Leasing, faces certain additional risks particular to its operations, any one of which could adversely affect our operating results; We may incur additional charges in connection with the disposition of substantially all of the operations and assets of TFS; We could determine that our goodwill and other intangible assets are impaired, thus recognizing a related loss; Our Chairman of the Board and Chief Executive Officer and his wife control a large portion of our stock and have substantial control over us, which could limit other stockholders' ability to influence the outcome of key transactions, including changes of control; Provisions in our charter documents or Nevada law may inhibit a takeover, which could limit the price investors might be willing to pay for our Class A common stock; The market price of our Class A common stock may be volatile; We cannot guarantee the timing or amount of repurchases of our Class A common stock, or the declaration of future dividends, if any; If we fail to maintain effective internal control over financial reporting in the future, there could be an elevated possibility of a material misstatement, and such a misstatement could cause investors to lose confidence in our financial statements, which could have a material adverse effect on our stock price; and We could be negatively impacted by the COVID-19 outbreak or other similar outbreaks. In addition, there can be no assurance that future dividends will be declared. The declaration of future dividends is subject to approval of our board of directors and various risks and uncertainties, including, but not limited to: our cash flow and cash needs; compliance with applicable law; restrictions on the payment of dividends under existing or future financing arrangements; changes in tax laws relating to corporate dividends; deterioration in our financial condition or results: and those risks, uncertainties, and other factors identified from time-to-time in our filings with the Securities and Exchange Commission. Readers should review and consider these factors along with the various disclosures by the Company in its press releases, stockholder reports, and filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information.

For further information contact:

Joey B. Hogan, President

Tripp Grant, Chief Financial Officer

For copies of Company information contact:

Brooke McKenzie, Executive Administrative Assistant

Non-GAAP Reconciliation (Unaudited)
Adjusted Net Income and Adjusted EPS (1)
(Dollars in thousands)		Three Months Ended September 30,								Nine Months Ended September 30,
		2022				2021				2022				2021
GAAP Presentation - Net income		$	50,486			$	16,442			$	97,179			$	42,999
Adjusted for:
Amortization of intangibles (2)			1,121				1,152				3,185				3,456
Strategic restructuring adjusting items:
Discontinued operations reversal of loss contingency (3)			(700	)			-				(700	)			(3,411	)
Loss (gain) on disposal of terminals, net			(38,542	)			-				(38,542	)			-
Contingent consideration liability adjustment			813				-				813				-
Total adjustments before taxes			(37,308	)			1,152				(35,244	)			45
Provision for income tax expense at effective rate			9,463				(320	)			8,923				74
Tax effected adjustments		$	(27,845	)		$	832			$	(26,321	)		$	119
Impact of federal income tax adjustments
Non-GAAP Presentation - Adjusted net income		$	22,641			$	17,274			$	70,858			$	43,118
GAAP Presentation - Diluted earnings per share ("EPS")		$	3.39			$	0.97			$	6.12			$	2.52
Adjusted for:
Amortization of intangibles (2)			0.08				0.07				0.20				0.21
Discontinued operations reversal of loss contingency(3)			(0.05	)			-				(0.04	)			(0.20	)
Gain on sale of terminal, net			(2.59	)			-				(2.43	)			-
Contingent consideration liability adjustment			0.05				-				0.05				-
Total adjustments before taxes			(2.51	)			0.07				(2.22	)			0.01
Provision for income tax expense at effective rate			0.64				(0.02	)			0.56				-
Tax effected adjustments		$	(1.87	)		$	0.05			$	(1.66	)		$	0.01
Non-GAAP Presentation - Adjusted EPS		$	1.52			$	1.02			$	4.46			$	2.53
(1) Pursuant to the requirements of Regulation G, this table reconciles consolidated GAAP net income to consolidated non-GAAP adjusted net income and consolidated GAAP diluted earnings per share to non-GAAP consolidated Adjusted EPS.
(2) "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets.
(3) "Discontinued Operations reversal of loss contingency" reflects the non-cash reversal of a previously recorded loss contingency that is no longer considered probable. The original loss contingency was recorded in Q4 2020 as a result of our disposal of our former accounts receivable factoring segment, TFS.

Covenant Logistics Group, Inc.
Non-GAAP Reconciliation (Unaudited)
Adjusted Operating Income and Adjusted Operating Ratio (1)
(Dollars in thousands)		Three Months Ended September 30,
GAAP Presentation		2022																				2021
		Expedited				Dedicated				Combined Truckload				Managed Freight				Warehousing				Expedited				Dedicated				Combined Truckload				Managed Freight				Warehousing
Total revenue		$	117,793			$	93,423			$	211,216			$	78,382			$	22,241			$	85,289			$	83,477			$	168,766			$	90,072			$	15,723
Total operating expenses			87,133				74,007			$	161,140			$	69,777				21,863				74,225				84,136				158,361				80,821				15,296
Operating income (loss)		$	30,660			$	19,416			$	50,076			$	8,605			$	378			$	11,064			$	(659	)		$	10,405			$	9,251			$	427
Operating ratio			74.0	%			79.2	%			76.3	%			89.0	%			98.3	%			87.0	%			100.8	%			93.8	%			89.7	%			97.3	%
Non-GAAP Presentation
Total revenue		$	117,793			$	93,423			$	211,216			$	78,382			$	22,241			$	85,289			$	83,477			$	168,766			$	90,072			$	15,723
Fuel surcharge revenue			(26,163	)			(18,645	)			(44,808	)			-				(432	)			(12,330	)			(11,778	)			(24,108	)			-				(198	)
Freight revenue (total revenue, excluding fuel surcharge)			91,630				74,778				166,408				78,382				21,809				72,959				71,699				144,658				90,072				15,525
Total operating expenses			87,133				74,007				161,140				69,777				21,863				74,225				84,136				158,361				80,821				15,296
Adjusted for:
Fuel surcharge revenue			(26,163	)			(18,645	)			(44,808	)			-				(432	)			(12,330	)			(11,778	)			(24,108	)			-				(198	)
Amortization of intangibles (2)			(534	)			(293	)			(827	)			(35	)			(259	)			-				(601	)			(601	)			(163	)			(388	)
Gain on disposal of terminals, net			21,223				17,319				38,542				-				-				-				-				-				-				-
Contingent consideration liability adjustment			(813	)			-				(813	)			-				-				-				-				-				-				-
Adjusted operating expenses			80,846				72,388				153,234				69,742				21,172				61,895				71,757				133,652				80,658				14,710
Adjusted operating income (loss)			10,784				2,390				13,174				8,640				637				11,064				(58	)			11,006				9,414				815
Adjusted operating ratio			88.2	%			96.8	%			92.1	%			89.0	%			97.1	%			84.8	%			100.1	%			92.4	%			89.5	%			94.8	%
		Nine Months Ended September 30,
GAAP Presentation		2022																				2021
		Expedited				Dedicated				Combined Truckload				Managed Freight				Warehousing				Expedited				Dedicated				Combined Truckload				Managed Freight				Warehousing
Total revenue		$	338,234			$	279,136			$	617,370			$	244,814			$	58,617			$	251,139			$	240,791			$	491,930			$	213,104			$	46,741
Total operating expenses			283,632			$	254,199			$	537,831			$	216,752			$	56,439			$	223,660			$	243,420			$	467,080			$	191,594			$	44,176
Operating income (loss)		$	54,602			$	24,937			$	79,539			$	28,062			$	2,178			$	27,479			$	(2,629	)		$	24,850			$	21,510			$	2,565
Operating ratio			83.9	%			91.1	%			87.1	%			88.5	%			96.3	%			89.1	%			101.1	%			94.9	%			89.9	%			94.5	%
Non-GAAP Presentation
Total revenue		$	338,234			$	279,136			$	617,370			$	244,814			$	58,617			$	251,139			$	240,791			$	491,930			$	213,104			$	46,741
Fuel surcharge revenue			(73,238	)			(55,484	)		$	(128,722	)			-				(1,010	)			(33,571	)			(34,816	)			(68,387	)			-				(497	)
Freight revenue (total revenue, excluding fuel surcharge)			264,996				223,652				488,648				244,814				57,607				217,568				205,975				423,543				213,104				46,244
Total operating expenses			283,632				254,199				537,831				216,752				56,439				223,660				243,420				467,080				191,594				44,176
Adjusted for:
Fuel surcharge revenue			(73,238	)			(55,484	)			(128,722	)			-				(1,010	)			(33,571	)			(34,816	)			(68,387	)			-				(497	)
Amortization of intangibles (2)			(1,423	)			(879	)			(2,302	)			(106	)			(777	)			-				(1,803	)			(1,803	)			(489	)			(1,164	)
Gain on disposal of terminals, net			21,223				17,319				38,542				-				-				-				-				-				-				-
Contingent consideration liability adjustment			(813	)			-				(813	)			-				-				-				-				-				-				-
Adjusted operating expenses			229,381				215,155				444,536				216,646				54,652				190,089				206,801				396,890				191,105				42,515
Adjusted operating income (loss)			35,615				8,497				44,112				28,168				2,955				27,479				(826	)			26,653				21,999				3,729
Adjusted operating ratio			86.6	%			96.2	%			91.0	%			88.5	%			94.9	%			87.4	%			100.4	%			93.7	%			89.7	%			91.9	%
(1) Pursuant to the requirements of Regulation G, this table reconciles consolidated GAAP operating income and operating ratio to consolidated non-GAAP Adjusted operating income and Adjusted operating ratio.
(2) "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets.