COVENANT LOGISTICS GROUP, INC. Fair Value Disclosure

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, 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.

 

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 the life insurance policies was determined by the underwriting insurance company’s valuation models and represents the guaranteed value we would receive upon surrender of these policies as of the reporting date.

 

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)
	December 31, 2025			December 31, 2024			Input Level
Interest rate swaps	$	826		$	1,397			2
Contingent consideration	$	(22,489	)	$	(27,794	)		3
Cash surrender value life insurance policies	$	5,041		$	3,370			2

 

Contingent consideration arrangements require us to pay up to $20.0 million of additional consideration to AAT's former shareholders based on AAT's results during the first two post-acquisition years, of which the final installment was made during 2024, up to $30.0 million of additional consideration to Lew Thompson & Son Trucking, LLC's ("LTST's") former shareholders based on LTST's results during the first three calendar years following closing, 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 calendar years following closing, and up to $5.0 million of additional consideration to the seller of the assets of a small, multi-stop distribution carrier we acquired in  February 2025 (the "Asset Acquisition"). Additionally, the acquisition of assets that are now operating as Star (the "Star Acquisition") requires us to pay additional consideration to the sellers as described in Note 6 "Acquisition of Assets of a Brokerage Business Operating as Star Logistics Solutions".

 

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 year ended  December 31, 2025, there were contingent payments made of $12.5 million based on LTST's results for the first calendar year following closing and $0.8 million as a result of the Asset Acquisition. During the year ended  December 31, 2024, there were contingent payments made of $10.0 million based on AAT's results for the second post-acquisition year. Of the $13.3 million paid for the contingent consideration liability during 2025, $5.3 million was classified as financing cash flows and $8.0 million was classified as operating cash flows within the consolidated statements of cash flows. Of the $10.0 million paid for the contingent consideration liability during 2024, $7.0 million was classified as financing cash flows and $3.0 million was classified as operating cash flows within the consolidated statements of cash flows. The fair value of the contingent consideration increased $2.8 million and $16.0 million related to a change in the fair value for the LTST contingent consideration for the years ended  December 31, 2025 and 2024, respectively, as well as $0.2 million related to a change in the fair value for the Sims contingent consideration for the year ended  December 31, 2024. Additionally, contingent consideration increased $5.0 million as a result of the Asset Acquisition and $0.2 million for the Star Acquisition for the year ended  December 31, 2025. 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 accounts payable 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 2025, 2024, and 2023:

 

(in thousands)		Beginning balance January 1,				Additions				Adjustments to fair market value				Payments				Ending Balance December 31,
2025		$	(27,794	)		$	(5,159	)		$	(2,837	)		$	13,301			$	(22,489	)
2024		$	(21,802	)		$	-			$	(15,992	)		$	10,000			$	(27,794	)
2023		$	(17,023	)		$	(11,802	)		$	(2,977	)		$	10,000			$	(21,802	)