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FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2023

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

NOTE B – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial Instruments

The following table presents the components of cash and cash equivalents and short-term investments:


		June 30			December 31
		2023			2022

		(in thousands)
Cash and cash equivalents
Cash deposits⁽¹⁾		$	161,176		$	137,247
Variable rate demand notes⁽¹⁾⁽²⁾			122			9,285
Money market funds⁽³⁾			25,988			11,732
Total cash and cash equivalents		$	187,286		$	158,264

Short-term investments
Certificates of deposit⁽¹⁾		$	113,542		$	88,851
U.S. Treasury securities⁽⁴⁾			39,574			78,811
Total short-term investments		$	153,116		$	167,662

(1)	Recorded at cost plus accrued interest, which approximates fair value.

(2)	Amounts may be redeemed on a daily basis with the original issuer.

(3)	Recorded at fair value as determined by quoted market prices (see amounts presented in the table of financial assets and liabilities measured at fair value within this Note).

(4)	Recorded at amortized cost plus accrued interest, which approximates fair value. U.S. Treasury securities included in short-term investments are held-to-maturity investments with maturity dates of less than one year.

The Company’s long-term financial instruments are presented in the table of financial assets and liabilities measured at fair value within this Note.

Concentrations of Credit Risk of Financial Instruments

The Company is potentially subject to concentrations of credit risk related to its cash, cash equivalents, and short-term investments. The Company reduces credit risk by maintaining its cash deposits and short-term investments in accounts and certificates of deposit which are primarily FDIC-insured or in direct obligations of the U.S. government. At June 30, 2023 and December 31, 2022, cash deposits and short-term investments which were neither FDIC insured nor direct obligations of the U.S. government totaled $118.9 million and $87.6 million, respectively. The Company also holds money market funds, which are invested in U.S. government securities and repurchase agreements collateralized solely by U.S. government securities.

Fair Value Disclosure of Financial Instruments

Fair value disclosures are made in accordance with the following hierarchy of valuation techniques based on whether the inputs of market data and market assumptions used to measure fair value are observable or unobservable:

●

Level 1 — Quoted prices for identical assets and liabilities in active markets.

●

Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

●

Level 3 — Unobservable inputs (Company’s market assumptions) that are significant to the valuation model.

Fair value and carrying value disclosures of financial instruments are presented in the following table:


		June 30						December 31
		2023						2022

		(in thousands)
			Carrying			Fair			Carrying			Fair
			Value			Value			Value			Value
Credit Facility⁽¹⁾		$	50,000		$	50,000		$	50,000		$	50,000
Notes payable⁽²⁾			182,987			178,490			214,623			207,778
New England Pension Fund withdrawal liability⁽³⁾			19,755			18,726			20,100			18,911
		$	252,742		$	247,216		$	284,723		$	276,689

(1)	The revolving credit facility (the “Credit Facility”) carries a variable interest rate based on Secured Overnight Financing Rate (“SOFR”), plus a margin, priced at market for debt instruments having similar terms and collateral requirements (Level 2 of the fair value hierarchy).

(2)	Fair value of the notes payable was determined using a present value income approach based on quoted interest rates from lending institutions with which the Company would enter into similar transactions (Level 2 of the fair value hierarchy).

(3)

ABF Freight’s multiemployer pension plan obligation with the New England Teamsters and Trucking Industry Pension Fund (the “New England Pension Fund”) was restructured under a transition agreement effective on August 1, 2018, which resulted in a related withdrawal liability. The fair value of the outstanding withdrawal liability is equal to the present value of the future withdrawal liability payments, discounted at an interest rate of 5.2% and 5.3% at June 30, 2023 and December 31, 2022, respectively, determined using the 20-year U.S. Treasury rate plus a spread (Level 2 of the fair value hierarchy). As of June 30, 2023, the outstanding withdrawal liability totaled $19.8 million, of which $0.7 million was recorded in accrued expenses, and the remaining portion was recorded in other long-term liabilities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the assets and liabilities that are measured at fair value on a recurring basis:

June 30, 2023

Fair Value Measurements Using

Quoted Prices

Significant

Significant

In Active

Observable

Unobservable

Markets

Inputs

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Assets:

Money market funds⁽¹⁾

$

25,988

$

25,988

$

—

$

—

Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan⁽²⁾

4,159

4,159

—

—

Interest rate swap⁽³⁾

2,955

—

2,955

—

$

33,102

$

30,147

$

2,955

$

—

Liabilities:

Contingent consideration⁽⁴⁾

117,040

—

—

117,040

$

117,040

$

—

$

—

$

117,040


		December 31, 2022
					Fair Value Measurements Using
					Quoted Prices			Significant			Significant
					In Active			Observable			Unobservable
					Markets			Inputs			Inputs
		Total			(Level 1)			(Level 2)			(Level 3)

		(in thousands)
Assets:
Money market funds⁽¹⁾		$	11,732		$	11,732		$	—		$	—
Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan⁽²⁾			3,982			3,982			—			—
Interest rate swap⁽³⁾			3,526			—			3,526			—
		$	19,240		$	15,714		$	3,526		$	—
Liabilities:
Contingent consideration⁽⁴⁾			112,000			—			—			112,000
		$	112,000		$	—		$	—		$	112,000

(1)	Included in cash and cash equivalents.

(2)

Nonqualified deferred compensation plan investments consist of U.S. and international equity mutual funds, government and corporate bond mutual funds, and money market funds which are held in a trust with a third-party brokerage firm. Included in other long-term assets, with a corresponding liability reported within other long-term liabilities.

(3)

Included in other long-term assets. The fair value of the interest rate swap was determined by discounting future cash flows and receipts based on expected interest rates observed in market interest rate curves adjusted for estimated credit valuation considerations reflecting nonperformance risk of the Company and the counterparty, which are generally considered to be in Level 3 of the fair value hierarchy. However, the Company assessed Level 3 inputs as insignificant to the valuation at June 30, 2023 and December 31, 2022, and considers the interest rate swap valuation in Level 2 of the fair value hierarchy.

(4)

As part of the Agreement and Plan of Merger (the “Merger Agreement”) of MoLo, executed in November 2021, certain additional cash consideration is required to be paid by the Company based on the achievement of certain incremental targets of adjusted earnings before interest, taxes, depreciation, and amortization for each of the years ended December 31, 2023, 2024, and 2025. At 100% of the target, the cumulative additional consideration for years 2023 through 2025 would be $215.0 million, with the possible undiscounted cash consideration due ranging from a total of $95.0 million at 80% of target to $455.0 million at 300% of target, as outlined in the Merger Agreement. The estimated fair value of contingent earnout consideration is determined by assessing Level 3 inputs. The Level 3 assessments utilize a Monte Carlo simulation with inputs including scenarios of estimated revenues and earnings before interest, taxes, depreciation, and amortization to be achieved for the applicable performance periods, volatility factors applied to the simulations, and the discount rate applied, which was 14.2% and 14.0% as of June 30, 2023 and December 31, 2022, respectively. Changes in the significant unobservable inputs might result in a significantly higher or lower fair value at the reporting date. As of June 30, 2023, the contingent earnout consideration totaled $117.0 million, which was recorded in long-term liabilities. The increase in fair value of contingent earnout consideration as of June 30, 2023, compared to December 31, 2022, reflects revised assumptions for business growth in 2024 and 2025, partially offset by the impact of continuing softer market conditions during 2023 and a higher discount rate at the June 30, 2023 remeasurement date. Based on the most recent

remeasurement, achievement of the 2023 target is not expected; therefore, the current portion of the contingent consideration was reduced to zero as of June 30, 2023. Adjustments to the contingent earnout consideration liability are included in operating income.

The following table provides the changes in fair value of the liabilities measured at fair value using inputs categorized in Level 3 of the fair value hierarchy:


		Contingent Consideration
		(in thousands)
Balance at December 31, 2022		$	112,000
Change in fair value included in operating income			5,040
Balance at June 30, 2023		$	117,040

Assets Measured at Fair Value on a Nonrecurring Basis

The following table provides the change in fair value of the assets measured on a nonrecurring basis using inputs categorized in Level 3 of the fair value hierarchy.


		Equity Investment⁽¹⁾
		(in thousands)
Balance at December 31, 2022		$	25,000
Change in fair value included in operating income			3,739
Balance at June 30, 2023		$	28,739

(1)

Represents the Company’s equity investment in Phantom Auto, the leading provider of human-centered remote operation software. The equity investment is accounted for as a nonmarketable equity security without a readily determinable value using the measurement alternative, which allows for the investment to be recorded at cost, less any impairment and adjusted for observable price changes in orderly transactions for an identical or similar equity security of the same issuer. The $3.7 million increase in fair value of the Company’s equity investment was measured as of April 26, 2023, based on an observable price change upon the closing of Phantom Auto’s Series B-2 funding round. The fair value of the investment was estimated using a hybrid method of the Black-Scholes option pricing model and the probability-weighted expected return method. This method produces a per-share value based on a probability-weighted scenario analysis. The scenarios reflect changes to the liquidation preferences based on the potential liquidity event. The Black-Scholes option pricing model used various inputs, including expected volatility, expected term to liquidity, risk-free rate over the expected term, breakpoints values, and liquidation preferences.

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.

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