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Note 3 - Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2023
Notes to Financial Statements |
Fair Value Disclosures [Text Block] |
Note 3. | Fair Value of Financial Instruments
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. The fair value of the commodity contracts, including our former fuel hedges, is determined based on quotes from the counterparty which were verified by comparing them to the exchange on which the related futures are traded, adjusted for counterparty credit risk. There were no fuel hedge derivatives outstanding as of September 30, 2023, or December 31, 2022. The fair value of our interest rate swap agreements is determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate swap agreements. The fair value of available-for-sale securities is based upon quoted prices in active markets. The fair value of the contingent consideration arrangement is based on inputs that are not observable in the market and is estimated using a probability-weighted method. The significant unobservable inputs used in the fair value of the contingent consideration liability include the financial projections over the earn-out period, the volatility of the underlying financial metrics, and estimated discount rates. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
● | Level 1. Observable inputs such as quoted prices in active markets;
● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
● | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Financial Instruments Measured at Fair Value on a Recurring Basis
(in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | September 30, 2023 |  |  | December 31, 2022 |  |  | Input Level |
Interest rate swaps |  |  | 1,954 |  |  |  | 1,466 |  |  |  | 2 |
Contingent consideration |  |  | (21,309 | ) |  |  | (17,023 | ) |  |  | 3 |
The carrying amount of cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of these instruments. Interest rates that are currently available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our revenue equipment installment notes approximated the carrying value as of September 30, 2023, as the weighted average interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit Facility (as defined herein) approximate fair value due to the variable interest rate on that facility. Contingent consideration arrangements require us to pay up to $20.0 million of additional consideration to AAT Carriers, Inc.'s ("AAT's") former shareholders based on AAT's results during the first two post-acquisition years, up to $30.0 million of additional consideration to Lew Thompson & Son Trucking, Inc.'s ("LTST's") former shareholders based on LTST's results during the first three post-acquisition years, and up to $12.0 million of additional consideration to Sims Transport Services, LLC's ("Sims") former shareholders based on Sims' results during the first four post-acquisition years. Refer to Note 13, "Acquisition of Lew Thompson & Son Trucking, Inc.", for additional information regarding the LTST acquisition and Note 12, "Acquisition of Sims Transport Services, LLC", for additional information regarding the Sims acquisition. We acquired AAT in February 2022, LTST in April 2023, and Sims in August 2023. The fair value of the contingent consideration is adjusted at each reporting period based on changes to the expected cash flows and related assumptions. During the three and nine months ended September 30, 2023, we paid none and $10.0 million, respectively, based on AAT's results for the first post-acquisition year. Of the $10.0 million paid for the contingent consideration liability during 2023, $9.2 million was classified as financing cash flows and $0.8 million was classified as operating cash flows within the condensed consolidated statement of cash flows. The fair value of the contingent consideration increased by $2.3 million and $14.3 million for the three and nine months ended September 30, 2023, respectively. Of the $2.3 million increase, $1.8 million was related to the initial recognition of the Sims additional consideration arrangement and $0.5 million was due to a change in the fair value for the AAT contingent consideration arrangement. Of the $14.3 million increase, $10.0 million related to the initial recognition of the LTST contingent consideration arrangement, $2.5 million was due to a change in the fair value for the AAT contingent consideration arrangement, and $1.8 million was related to the initial recognition of the Sims additional consideration arrangement. The adjustment to the fair value of the contingent consideration liability was recorded as a component of general supplies and expenses within the condensed consolidated statements of operations. The contingent consideration liability is included in accrued expenses and other long-term liabilities in our condensed consolidated balance sheets. The following table provides a summary (in thousands) of the activity for the contingent consideration liability for 2023:
|  | December 31, 2022 |  |  | Additions |  |  | Adjustments to fair market value |  |  | Payments |  |  | September 30, 2023 |
Contingent consideration |  | $ | (17,023 | ) |  | $ | (11,802 | ) |  | $ | (2,484 | ) |  | $ | 10,000 |  |  | $ | (21,309 | )

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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