Covenant Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended March
31, 2006
or
[
] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period
from to
Commission
File Number: 0-24960
COVENANT
TRANSPORT, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
88-0320154
|
(State
or other jurisdiction of incorporation
|
|
(I.R.S.
Employer Identification No.)
|
or
organization)
|
|
|
|
|
|
400
Birmingham Hwy.
|
|
|
Chattanooga,
TN
|
|
37419
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
423-821-1212
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
[ X ]
No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large
accelerated filer [
] Accelerated
filer [ X ]
Non-accelerated filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [ X ]
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date (May 4, 2006).
Class
A Common Stock, $.01 par value: 11,646,690 shares
Class
B
Common Stock, $.01 par value: 2,350,000 shares
TABLE
OF
CONTENTS
PART
I
FINANCIAL
INFORMATION
|
|
|
Page
Number
|
Item
1.
|
Financial
Statements
|
|
|
Consolidated
Condensed Balance Sheets as of March 31, 2006 (Unaudited) and December
31,
2005
|
3
|
|
Consolidated
Condensed Statements of Operations for the three months ended March
31,
2006 and 2005 (Unaudited)
|
4
|
|
Consolidated
Condensed Statements of Cash Flows for the three months ended March
31,
2006 and 2005 (Unaudited)
|
5
|
|
Notes
to Consolidated Condensed Financial Statements (Unaudited)
|
6
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
23
|
Item
4.
|
Controls
and Procedures
|
24
|
PART
II
OTHER
INFORMATION
|
|
|
Page
Number
|
Item
1.
|
Legal
Proceedings
|
25
|
Item
1A.
|
Risk
Factors
|
25
|
Item
6.
|
Exhibits
|
25
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
COVENANT
TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED
BALANCE SHEETS
(In
thousands, except share data)
|
|
ASSETS
|
|
March
31, 2006
(unaudited)
|
|
December
31, 2005
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,135
|
|
$
|
3,618
|
|
Accounts
receivable, net of allowance of $2,100 in 2006 and
$2,200
in 2005
|
|
|
59,375
|
|
|
77,969
|
|
Drivers'
advances and other receivables
|
|
|
10,740
|
|
|
3,932
|
|
Inventory
and supplies
|
|
|
4,716
|
|
|
4,661
|
|
Prepaid
expenses
|
|
|
13,901
|
|
|
16,199
|
|
Deferred
income taxes
|
|
|
16,763
|
|
|
16,158
|
|
Income
taxes receivable
|
|
|
6,090
|
|
|
7,559
|
|
Total
current assets
|
|
|
112,720
|
|
|
130,096
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
320,223
|
|
|
301,129
|
|
Less
accumulated depreciation and amortization
|
|
|
(86,168
|
)
|
|
(86,767
|
)
|
Net
property and equipment
|
|
|
234,055
|
|
|
214,362
|
|
|
|
|
|
|
|
|
|
Other
assets, net
|
|
|
23,898
|
|
|
26,803
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
370,673
|
|
$
|
371,261
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Securitization
facility
|
|
|
47,281
|
|
|
47,281
|
|
Accounts
payable
|
|
|
12,535
|
|
|
8,457
|
|
Accrued
expenses
|
|
|
16,965
|
|
|
17,088
|
|
Insurance
and claims accrual
|
|
|
18,082
|
|
|
18,529
|
|
Total
current liabilities
|
|
|
94,863
|
|
|
91,355
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
33,000
|
|
|
33,000
|
|
Insurance
and claims accrual, net of current portion
|
|
|
20,264
|
|
|
23,272
|
|
Deferred
income taxes
|
|
|
33,494
|
|
|
33,910
|
|
Total
liabilities
|
|
|
181,621
|
|
|
181,537
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Class
A common stock, $.01 par value; 20,000,000 shares authorized;
13,465,090
and 13,447,608 shares issued; 11,646,690 and 11,629,208
outstanding
as of March 31, 2006 and December 31, 2005, respectively
|
|
|
135
|
|
|
134
|
|
Class
B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000
shares issued and outstanding as of March 31, 2006 and
December
31, 2005
|
|
|
24
|
|
|
24
|
|
Additional
paid-in-capital
|
|
|
91,764
|
|
|
91,553
|
|
Treasury
stock at cost; 1,818,400 shares as of March 31, 2006 and
December
31, 2005, respectively
|
|
|
(21,582
|
)
|
|
(21,582
|
)
|
Retained
earnings
|
|
|
118,711
|
|
|
119,595
|
|
Total
stockholders' equity
|
|
|
189,052
|
|
|
189,724
|
|
Total
liabilities and stockholders' equity
|
|
$
|
370,673
|
|
$
|
371,261
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
COVENANT
TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(In
thousands, except per share data)
|
|
Three
months ended March 31,
(unaudited)
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
129,434
|
|
$
|
123,570
|
|
Fuel
surcharge revenue
|
|
|
22,091
|
|
|
14,356
|
|
Total
revenue
|
|
$
|
151,525
|
|
$
|
137,926
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses
|
|
|
58,642
|
|
|
53,946
|
|
Fuel
expense
|
|
|
41,915
|
|
|
33,491
|
|
Operations
and maintenance
|
|
|
8,497
|
|
|
7,228
|
|
Revenue
equipment rentals and purchased transportation
|
|
|
14,678
|
|
|
15,360
|
|
Operating
taxes and licenses
|
|
|
3,302
|
|
|
3,339
|
|
Insurance
and claims
|
|
|
8,226
|
|
|
8,834
|
|
Communications
and utilities
|
|
|
1,591
|
|
|
1,639
|
|
General
supplies and expenses
|
|
|
4,304
|
|
|
4,150
|
|
Depreciation
and amortization, including gains and losses on
disposition
of equipment
|
|
|
10,020
|
|
|
9,663
|
|
Total
operating expenses
|
|
|
151,175
|
|
|
137,650
|
|
Operating
income
|
|
|
350
|
|
|
276
|
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,124
|
|
|
614
|
|
Interest
income
|
|
|
(137
|
)
|
|
(44
|
)
|
Other
|
|
|
(53
|
)
|
|
(236
|
)
|
Other
expenses, net
|
|
|
934
|
|
|
334
|
|
Loss
before income taxes
|
|
|
(584
|
)
|
|
(58
|
)
|
Income
tax expense
|
|
|
300
|
|
|
591
|
|
Net
loss
|
|
$
|
(884
|
)
|
$
|
(649
|
)
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
13,985
|
|
|
14,669
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
COVENANT
TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(In
thousands)
|
|
Three
months ended March 31,
(unaudited)
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(884
|
)
|
$
|
(649
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Provision
for losses on accounts receivable
|
|
|
158
|
|
|
370
|
|
Depreciation
and amortization
|
|
|
10,160
|
|
|
9,514
|
|
Deferred
income taxes (benefit)
|
|
|
(1,020
|
)
|
|
(600
|
)
|
Tax
benefit from exercise of stock options
|
|
|
-
|
|
|
50
|
|
Stock
based compensation expense
|
|
|
4
|
|
|
-
|
|
Loss
(gain) on disposition of property and equipment
|
|
|
(140
|
)
|
|
149
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
and advances
|
|
|
15,965
|
|
|
11,745
|
|
Prepaid
expenses and other assets
|
|
|
2,299
|
|
|
(301
|
)
|
Inventory
and supplies
|
|
|
(55
|
)
|
|
(248
|
)
|
Insurance
and claims accrual
|
|
|
(3,455
|
)
|
|
3,147
|
|
Accounts
payable and accrued expenses
|
|
|
3,962
|
|
|
(1,127
|
)
|
Net
cash flows provided by operating activities
|
|
|
26,994
|
|
|
22,050
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(44,227
|
)
|
|
(26,673
|
)
|
Proceeds
from disposition of property and equipment
|
|
|
14,542
|
|
|
14,301
|
|
Net
cash flows used in investing activities
|
|
|
(29,685
|
)
|
|
(12,372
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
192
|
|
|
418
|
|
Excess
tax benefits from exercise of stock options
|
|
|
16
|
|
|
-
|
|
Repurchase
of company stock
|
|
|
-
|
|
|
(1,807
|
)
|
Proceeds
from issuance of debt
|
|
|
10,000
|
|
|
20,000
|
|
Repayments
of debt
|
|
|
(10,000
|
)
|
|
(31,869
|
)
|
Deferred
costs
|
|
|
-
|
|
|
(27
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
208
|
|
|
(13,285
|
)
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(2,483
|
)
|
|
(3,607
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
3,618
|
|
|
5,066
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,135
|
|
$
|
1,459
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
COVENANT
TRANSPORT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
1. Basis of Presentation
The
consolidated condensed financial statements include the accounts of Covenant
Transport, Inc., a Nevada holding company, and its wholly owned subsidiaries.
References in this report to "we," "us," "our," the "Company," and similar
expressions refer to Covenant Transport, Inc. and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated
in
consolidation.
The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying financial statements include all adjustments which
are necessary for a fair presentation of the results for the interim periods
presented, such adjustments being of a normal recurring nature. Certain
information and footnote disclosures have been condensed or omitted pursuant
to
such rules and regulations. The December 31, 2005 consolidated condensed balance
sheet was derived from our audited balance sheet for the year then ended. It
is
suggested that these consolidated condensed financial statements and notes
thereto be read in conjunction with the consolidated condensed financial
statements and notes thereto included in our Form 10-K for the year ended
December 31, 2005. Results of operations in interim periods are not necessarily
indicative of results to be expected for a full year.
Certain
prior period financial statement balances
have been reclassified to conform to the current period's
classification.
Note
2. Comprehensive Earnings (Loss)
Comprehensive
earnings (loss) generally includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Comprehensive loss for the three-month periods ended March 31, 2006 and 2005
equaled net loss.
Note
3. Basic and Diluted Loss per Share
We
apply
the provisions of FASB Statement of Financial Accounting Standard ("SFAS")
No.
128,
Earnings per Share,
which
requires us to present basic earnings per share (EPS) and diluted EPS. Basic
EPS
excludes dilution and is computed by dividing earnings available to common
stockholders by the weighted-average number of common shares outstanding for
the
period. Diluted EPS reflects the dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in our
earnings. The
calculation of diluted earnings per share for the three months ended March
31,
2006 and March 31, 2005, excludes all unexercised shares, since the effect
of
any assumed exercise of the related options would be antidilutive.
The
following table sets forth for the periods indicated the calculation of net
earnings per share included in the consolidated condensed statements of
operations:
(in
thousands except per share data)
|
|
Three
months ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
Net
loss
|
|
$
|
(884
|
)
|
$
|
(649
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share - weighted-
average
shares
|
|
|
13,985
|
|
|
14,669
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
—
|
|
|
—
|
|
Denominator
for diluted earnings per share -
adjusted
weighted-average shares and assumed
conversions
|
|
|
13,985
|
|
|
14,669
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
Note
4. Share-Based Compensation
At
March
31,
2006, we had four stock-based compensation plans. Prior to January 1, 2006,
we
accounted for those plans under the recognition and measurement principles
of
APB Opinion No. 25, Accounting
for Stock Issued to Employees, and
related Interpretations. No stock-based compensation cost was reflected in
net
income, as all options granted under those plans had an exercise price equal
to
the market value of the underlying common stock on the date of grant.
Effective
January 1, 2006, we adopted SFAS No. 123 (revised 2004), Accounting
for Stock-Based Compensation
("No.
123R") using a modified version of the prospective transition method. Under
this
transition method, compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which the requisite
service has not yet been rendered, based on the grant-date fair value of those
awards calculated under SFAS No. 123 for either recognition or pro forma
disclosures. Stock-based employee compensation expense for the three months
ended March 31, 2006 was approximately $4,000 and is included in salaries,
wages, and related expenses within the consolidated condensed statements of
income. There was no cumulative effect of initially adopting SFAS No.
123R.
In
periods prior to January 1, 2006, we accounted for our stock-based compensation
plans under APB No. 25, Accounting
for Stock Issued to Employees, and
related Interpretations, under which no compensation expense has been recognized
because all employee and outside director stock options have been granted with
the exercise price equal to the fair value of the our Class A common stock
on
the date of grant. The fair value of options granted were estimated as of the
date of grant using the Black-Scholes option pricing model. No options were
granted during the first quarter of 2006 and the following weighted average
assumptions: risk-free interest rate of 3.8%; an expected life of 5 years;
dividend rate of zero percent; and expected volatility of 49.7% for the 2005
period. Using these assumptions, the fair value of the employee and outside
director stock options which would have been expensed in the three month period
ended March 31, 2005 would have been $0.4 million.
(in
thousands except per share data)
|
|
Three
months ended
March
31, 2005
|
|
|
|
|
|
Net
loss, as reported:
|
|
$
|
(649
|
)
|
Deduct:
Total stock-based employee compensation
expense
determined under fair value based method for
all
awards, net of related tax effects
|
|
|
(398
|
)
|
Pro
forma net loss
|
|
$
|
(1,047
|
)
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
As
reported
|
|
$
|
(0.04
|
)
|
Pro
forma
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
On
August
31, 2005, the Compensation Committee of our Board of Directors approved the
acceleration of the vesting of all outstanding unvested stock options. As a
result, the vesting of approximately 170,000 previously unvested stock options
granted under our Incentive Stock Plan (Amended and Restated as of May 17,
2001)
and our Incentive Stock Plan was accelerated and all such options became fully
exercisable as of August 31, 2005. This acceleration of vesting did not result
in any compensation expense for us during 2005. Under the fair value method
of
SFAS 123, we would have recorded $2.2 million, net of tax, for the 12
month period ended December 31, 2005, which represents the pro forma
compensation expense as well as the effect of the acceleration of the stock
options that would be recorded as compensation expense.
The
following table summarizes our stock Option Plan activity for the three months
ended March 31, 2006:
|
Number
of options
(in
thousands)
|
Weighted
average exercise price($)
|
Weighted
average remaining contractual term
|
Aggregate
intrinsic value
(in
thousands)
|
|
|
|
|
|
Outstanding
at beginning of the
period
|
1,454
|
$14.33
|
|
|
Options
granted
|
-
|
-
|
|
|
Options
exercised
|
(15)
|
$12.38
|
|
|
Options
forfeited
|
-
|
-
|
|
|
Options
expired
|
(5)
|
$15.88
|
|
|
Outstanding
at end of period
|
1,434
|
$14.35
|
5.4
years
|
$1,948
|
|
|
|
|
|
Exercisable
at end of period
|
1,424
|
$14.37
|
5.3
years
|
$1,913
|
Note
5. Income Taxes
Income
tax expense varies from the amount computed by applying the federal corporate
income tax rate of 35% to income before income taxes primarily due to state
income taxes, net of federal income tax effect, adjusted for permanent
differences, the most significant of which is the effect of the per diem pay
structure for drivers.
Note
6. Derivative Instruments
We
account for derivative instruments in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and
("SFAS No. 133"). SFAS No. 133, as amended, requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the
fair value of derivatives are recorded each period in current earnings or in
other comprehensive income, depending on whether a derivative is designated
as
part of a hedging relationship and, if it is, depending on the type of hedging
relationship.
In
2001,
we entered into two $10.0 million notional amount cancelable interest-rate
swap
agreements to manage the risk of variability in cash flows associated with
floating-rate debt. The
swaps
expired in January 2006 and March 2006.
Due to
the counter-parties' imbedded options to cancel, these derivatives did not
qualify, and were not designated as hedging instruments under SFAS No. 133.
Consequently, these derivatives were marked to fair value through earnings,
in
other expense in the accompanying statements of operations. At March 31, 2006,
the swap agreements had expired and there was no liability thereunder; however,
at March 31, 2005 the fair value of these interest-rate swap agreements was
a
liability of $0.4 million, which is included in accrued expenses on the
consolidated condensed
balance
sheets. The
derivative activity, as reported in the consolidated condensed financial
statements for the three months ended March 31, 2006 and 2005 is summarized
in
the following:
(in
thousands)
|
|
Three
months ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
liability for derivatives at January 1
|
|
$
|
(13
|
)
|
$
|
(439
|
)
|
|
|
|
|
|
|
|
|
Gain
in value of derivative instruments that do not qualify as hedging
instruments
|
|
|
13
|
|
|
195
|
|
|
|
|
|
|
|
|
|
Net
liability for derivatives at March 31
|
|
$
|
-
|
|
$
|
(244
|
)
|
From
time
to time, we enter into fuel purchase commitments for a notional amount of diesel
fuel at prices which are determined when fuel purchases occur.
Note
7. Property and Equipment
Depreciation
is calculated using the straight-line method over the estimated useful lives
of
the assets. Revenue equipment is generally depreciated over five to ten years
with salvage values ranging from 4% to 39%. The salvage value, useful life,
and
annual depreciation of tractors and trailers are evaluated annually based on
the
current market environment and on our recent experience with disposition values.
Any change could result in greater or lesser annual expense in the future.
Gains
or losses on disposal of revenue equipment are included in depreciation in
the
statements of operations. We also evaluate the carrying value of long-lived
assets for impairment by analyzing the operating performance and future cash
flows for those assets, whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable. We evaluate
the
need to adjust the carrying value of the underlying assets if the sum of the
expected cash flows is less than the carrying value. Impairment can be impacted
by our projection of the actual level of future cash flows, the level of actual
cash flows and salvage values, the methods of estimation used for determining
fair values, and the impact of guaranteed residuals. Any changes in management's
judgments could result in greater or lesser annual depreciation expense or
additional impairment charges in the future.
Note
8. Securitization Facility and Long-Term Debt
Long-term
debt and our securitization facility consisted of the following at March 31,
2006 and December 31, 2005:
(in
thousands)
|
|
March
31, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Securitization
Facility
|
|
$
|
47,281
|
|
$
|
47,281
|
|
Borrowings
under Credit Agreement
|
|
$
|
33,000
|
|
$
|
33,000
|
|
Total
long-term debt
|
|
|
33,000
|
|
|
33,000
|
|
Less
current maturities
|
|
|
-
|
|
|
-
|
|
Long-term
debt, less current portion
|
|
$
|
33,000
|
|
$
|
33,000
|
|
In
December 2004, we entered into a credit agreement with a group of banks (the
"Credit Agreement"). The facility matures in December 2009. Borrowings under
the
Credit Agreement are based on the banks' base rate, which floats daily, or
LIBOR, which accrues interest based on one, two, three, or six month LIBOR
rates
plus an applicable margin that is adjusted quarterly between 0.75% and 1.25%
based on cash flow coverage (the applicable margin was 1.0% at March 31, 2006).
At March 31, 2006, we had $33.0 million of borrowings outstanding under the
Credit Agreement.
The
Credit Agreement has a maximum borrowing limit of $150.0 million with an
accordion feature which permits an increase up to a maximum borrowing limit
of
$200.0 million. Borrowings related to revenue equipment are limited to the
lesser of 90% of net book value of revenue equipment or the maximum borrowing
limit. Letters of credit are limited to an aggregate commitment of
$85.0 million. The Credit Agreement is secured by a pledge of the stock of
most of our subsidiaries. A commitment fee, that is adjusted quarterly between
0.15% and 0.25% per annum based on cash flow coverage, is due on the daily
unused portion of the Credit Agreement. As of March 31, 2006, we had
approximately $38.5 million of available borrowing capacity. At March 31, 2006
and December 31, 2005, we had undrawn letters of credit outstanding of
approximately $78.5 million and $73.9 million, respectively.
In
December 2000, we entered into an accounts receivable securitization facility
(the "Securitization Facility"). On a revolving basis, we sell our interests
in
our accounts receivable to CVTI Receivables Corp. ("CRC"), a wholly-owned
bankruptcy-remote special purpose subsidiary incorporated in Nevada. CRC sells
a
percentage ownership in such receivables to an unrelated financial entity.
We
can receive up to $62.0 million of proceeds, subject to eligible receivables,
and pay a service fee recorded as interest expense, based on commercial paper
interest rates plus an applicable margin of 0.44% per annum and a commitment
fee
of 0.10% per annum on the daily unused portion of the Securitization Facility.
The net proceeds under the Securitization Facility are required to be shown
as a
current liability because the term, subject to annual
renewals,
is 364 days. As of March 31, 2006 and December 31, 2005, we had $47.3
million outstanding, with weighted average interest rates of 4.8% and 4.4%,
respectively. At March 31, 2006, the amount drawn under our Securitization
Facility exceeded the borrowing base by approximately $3.2 million, because
improvements in our accounts receivable collection had reduced the borrowing
base below amounts drawn. In April, in accordance with the Securitization
Facility, we deposited $2.7 million with the lender to offset the excess
borrowing. No default was declared or is continuing. CRC does not
meet the requirements for off-balance sheet accounting; therefore, it is
reflected in our consolidated condensed financial statements.
The
Credit Agreement and Securitization Facility contain certain restrictions and
covenants relating to, among other things, dividends, tangible net worth, cash
flow coverage, acquisitions and dispositions, and total indebtedness. These
agreements are cross-defaulted. We were in compliance with the covenants as
of
March 31, 2006.
Note
9. Recent Accounting Pronouncements
Effective
December 31, 2005, we adopted FIN 47, Accounting
for Conditional Asset Retirement Obligations,
which
clarifies that the term conditional asset retirement obligation as used in
SFAS
No. 143, Accounting
for Asset Retirement Obligations,
refers
to a legal obligation to perform an asset retirement activity in which the
timing and (or) method of settlement are conditioned on a future event that
may
or may not be within the control of the entity. The obligation to perform the
asset retirement activity is unconditional even though uncertainty exists about
the timing and (or) method of settlement. Accordingly, an entity is required
to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. The adoption of FIN 47 impacted our
accounting for the conditional obligation to remove Company decals and other
identifying markings from certain tractors and trailers under operating leases
at the end of the lease terms. In the first quarter of 2006, the impact of
the
adoption of FIN 47 was approximately $0.1 million of additional expense in
the
revenue equipment rentals and purchased transportation expense category.
In
May
2005, the FASB issued SFAS Statement No. 154,
Accounting Changes and Error Corrections.
SFAS 154 replaces APB No. 20,
Accounting Changes,
and
SFAS Statement No. 3,
Reporting Changes in Interim Financial Statements.
SFAS 154 changes the accounting for, and reporting of, a change in accounting
principle. SFAS 154 requires retrospective application to prior periods’
financial statements of voluntary changes in accounting principle and changes
required by new accounting standards when the standard does not include specific
transition provisions, unless it is impracticable to do so. SFAS 154
is effective for accounting changes and corrections of errors in fiscal years
beginning after December 15, 2005. Early application is permitted for
accounting changes and corrections of errors during fiscal years beginning
after
June 1, 2005. We adopted
this statement effective January 2006.
In
December 2004, the FASB issued SFAS No. 123R, Share-Based
Payments,
revising SFAS No. 123, Accounting
for Stock Based Compensation;
superseding Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees and
its
related implementation guidance; and amending SFAS No. 95, Statement
of Cash Flows.
SFAS
123R requires companies to recognize the grant date fair value of stock options
and other equity-based compensation issued to employees in its income statement,
generally over the remaining vesting period. In 2005, we accelerated the vesting
of substantially all of our outstanding stock options. SFAS 123R was effective
January 1, 2006. Our adoption of SFAS 123R had minimal impact for the period
ended March 31, 2006 (See Note 4).
Note
10. Commitments and Contingencies
In
the
normal course of business, we are party to ordinary, routine litigation, most
of
which involves claims for personal injury and property damage incurred in
connection with the transportation of freight. We maintain insurance to cover
liabilities arising from the transportation of freight for amounts in excess
of
certain self-insured retentions. In the opinion of management, our potential
exposure under pending legal proceedings is adequately provided for in the
accompanying consolidated condensed financial statements. Currently, we are
involved in the significant personal injury claim described below.
On
March
7, 2003, an accident occurred in Wisconsin involving a vehicle and one of our
tractors. Two adult occupants of the vehicle were killed in the accident. The
only other occupant of the vehicle was a child, who survived with little
apparent injury. Suit was filed in the United States District Court in Minnesota
by heirs of one of the decedents against us and our driver under the style:
Bill
Kayachitch and Susan Kayachitch as co-trustees for the heirs and next of kin
of
Souvorachak Kayachitch, deceased, vs. Julie Robinson and Covenant Transport,
Inc.
The case
was settled on October 10, 2005 at a level below the aggregate coverage limits
of our insurance policies and was formally dismissed in February 2006.
Representatives of the child may file an additional suit against
us.
Financial
risks which potentially subject us to concentrations of credit risk consist
of
deposits in banks in excess of the Federal Deposit Insurance Corporation limits.
Our sales are generally made on account without collateral. Repayment terms
vary
based on certain conditions. We maintain reserves that management believes
are
adequate to provide for potential credit losses. The majority of our customer
base spans the United States. We monitor these risks and believe the risk of
incurring material losses is remote.
We
use
purchase commitments through suppliers to reduce a portion of our cash flow
exposure to fuel price fluctuations.
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
consolidated condensed financial statements include the accounts of Covenant
Transport, Inc., a Nevada holding company, and its wholly owned subsidiaries.
References in this report to "we," "us," "our," the "Company," and similar
expressions refer to Covenant Transport, Inc. and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated
in
consolidation.
This
quarterly report 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. Such statements may be identified
by their use of terms or phrases such as "expects," "estimates," "projects,"
"believes," "anticipates," "plans," "intends," 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. Actual
results may differ from those set forth in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not
limited to those discussed in the section entitled Item
1A. Risk Factors,
set
forth below. We do not assume, and specifically disclaim, any obligation to
update any forward-looking statements contained in this report.
Executive
Overview
We
are
one of the ten largest truckload carriers in the United States measured by
revenue according to Transport
Topics,
a
publication of the American Trucking Associations. We focus on targeted markets
where we believe our service standards can provide a competitive advantage.
Currently, we categorize our business with four major transportation service
offerings: Expedited long haul service, Refrigerated service, Dedicated service,
and Regional solo-driver service. We are a major carrier for transportation
companies such as 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 and retailers.
For
the
three months ended March 31, 2006, total revenue increased $13.6 million, or
9.9%, to $151.5 million from $137.9 million in the 2005 period. The
increase was attributable to an increase in fuel surcharge revenue and
improvements in our rates and equipment utilization. Freight revenue, which
excludes revenue from fuel surcharges, increased $5.9 million, or 4.7%, to
$129.4 million in the three months ended March 31, 2006 from $123.6 million
in
the same period of 2005. We experienced a net loss for the three month period
of
approximately $0.9 million, or $.06 per share, compared with a net loss of
$0.6
million, or $.04 per share, for the first three months of 2005.
For
the
quarter, our average freight revenue per tractor per week, our main measure
of
asset productivity, increased 6.1%, to $2,938 in the first three months of
2006
compared to $2,769 in the same period of 2005. The increase was primarily
generated by a 2.3% increase in average freight revenue per loaded mile and
a
3.3% increase in average miles per tractor equipment utilization. Weighted
average tractors decreased 1.4% to 3,426 in the 2006 period from 3,473 in the
2005 period.
Our
after-tax costs increased almost $.04 per mile, or 3% per mile compared with
the
first quarter of 2005. The main factors were a $.021 per mile increase in
compensation expense, driven primarily by increases in driver pay, and a $.014
per mile increase in our health insurance claims' cost.
During
2005, we began the formal realignment of our business into four distinct service
offerings: Expedited long haul, Refrigerated, Dedicated, and Regional
solo-driver. We intend to manage and operate each service offering separately,
each under the authority of a general manager. We have hired the general
managers of the Expedited long haul, Refrigerated, and Regional solo-driver
service offerings, and we are evaluating candidates for the Dedicated service
offering. In addition, within the Regional solo-driver service offering, we
expect to divide the business into several service centers, each under separate
management as well.
The
realignment has involved significant changes, including selecting and installing
new leadership over each service offering, reassigning personnel, allocating
tractors and trailers to each service offering, migrating operations to
preferred traffic lanes for each service offering, acquainting drivers and
customers to new lanes, contacts, and procedures, developing and approving
business plans, developing systems to support, measure, and hold accountable
each service offering, including budgets, incentive targets, and individual
income statements. We also have been addressing driver retention by focusing
on
driver development and satisfaction as key components of every aspect of our
business. Although we have made significant progress, this process will continue
at least into 2007.
Initial
results of the business realignment on each service offering include the
following:
•
|
Expedited
long
haul
service. Focused attention on teams has produced a substantial increase
in
average length of haul, average miles per tractor, and average freight
revenue per tractor. As a result of greater productivity, the previous
decline in team-driven tractors has stabilized. Revenue per truck
in our
Expedited long
haul
service has increased 6% while our length of haul has grown 18% to
1,493,
and its revenue has grown by 12% during the first quarter of 2006
over the
2005 period.
|
|
|
•
|
Refrigerated
service. Prioritizing certain lanes and the allocation of teams to
this
service offering increased average length of haul, average miles
per
tractor, and average revenue per tractor. In addition, we are increasing
the allocation of tractors to this service offering. Revenue per
truck in
our Refrigerated service increased 16% during the first quarter of
2006
versus the 2005 period, while our length of haul has grown 51% to
1,436.
Revenue for our total refrigerated operations, including our SRT
subsidiary, grew during this quarter by 32% over the first quarter
of
2005.
|
|
|
•
|
Dedicated
service. There has been essentially no change in Dedicated service
because
of the longer contract duration. In addition, we are continuing to
evaluate individual candidates to manage this business.
|
|
|
•
|
Regional
solo-driver service. This service offering is our largest and is
in the
beginning stages of significant changes in its operating lanes and
territories, freight mix, personnel, and policies and procedures.
Over the
long term we expect these changes to result in a shorter average
length of
haul and an increase in average freight revenue per tractor. However,
interim results may fluctuate substantially. We expect to allocate
trucks
to other service offerings until the operating results of this service
offering improve and become more
consistent.
|
We
also
initiated a freight brokerage operation in the first quarter of 2006 and hired
a
Vice President and General Manager of Brokerage Operations. We expect the
brokerage operation to help us continue to serve customers when we lack capacity
in a given area or the load does not meet our operating profile. We expect
this
service to be especially helpful as we realign trucks between service offerings
and manage our freight mix toward preferred lanes.
Our
business realignment presents numerous challenges and may result in volatile
financial performance or periods of unprofitable results. We believe our results
will be most volatile during the first half of 2006. However, fluctuations
in
results may be ongoing as major activities within the realignment will continue
at least into 2007.
At
March
31, 2006, we had $189.1 million in stockholders' equity and $80.3 million in
debt for a total debt-to-capitalization ratio of 29.8% and a book value of
$13.51 per share.
Revenue
We
generate substantially all of our revenue by transporting freight for our
customers. Generally, we are paid by the mile or by the load for our services.
The main factors that affect our revenue are the revenue per mile we receive
from our customers, the percentage of miles for which we are compensated, the
number of tractors operating, and the number of miles we generate with our
equipment. These factors relate to, among other things, the U.S. economy,
inventory levels, the level of truck capacity in our markets, specific customer
demand, the percentage of team-driven tractors in our fleet, driver
availability, and our average length of haul.
We
also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, and other accessorial services. Prior to 2004, we measured freight
revenue, before fuel and accessorial surcharges, in addition to total revenue.
In 2004, we reclassified accessorial revenue, other than fuel surcharges, into
freight revenue, and our historical financial statements have been conformed
to
this presentation. We continue to measure revenue before fuel surcharges, or
“freight revenue,” because we believe that fuel surcharges tend to be a volatile
source of revenue. We believe the exclusion of fuel surcharges affords a more
consistent basis for comparing the results of operations from period to period.
We
operate tractors driven by a single driver and also tractors assigned to
two-person driver teams. Over time the percentage of our revenue generated
by
driver teams has trended down, although the mix depends on a variety of factors
over time. 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. We expect operating statistics and expenses to shift with the mix
of
single and team operations.
Expenses
and Profitability
The
main
factors that impact our profitability on the expense side are the variable
costs
of transporting freight for our customers. These costs include fuel expense,
driver-related expenses, such as wages, benefits, training, and recruitment,
and
independent contractor costs, which we record as purchased transportation.
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, fleet age, efficiency, and other factors. Our main fixed cost
is the acquisition and financing of long-term assets, primarily revenue
equipment and operating terminals. In addition, we have other mostly fixed
costs, such as our non-driver personnel.
Looking
forward, our profitability goal is to return to an operating ratio of
approximately 90%. We expect this to require successful execution of our
business realignment around service offerings, in particular an improvement
in
our Regional solo-driver service offering, as well as additional improvements
in
revenue per tractor per week, for all of our service offerings, to overcome
expected additional cost increases and to expand our margins. In addition,
we
expect driver availability to be a pressing issue facing us and the industry
for
the foreseeable future. We expect competition for quality drivers to remain
intense and that driver numbers will be the most substantial limiting factor
on
capacity growth. We expect many carriers to use future rate increases to
increase driver compensation. Because a large percentage of our costs are
variable, changes in revenue per mile affect our profitability to a greater
extent than changes in miles per tractor. For the foreseeable future, we do
not
expect to increase the size of our tractor fleet as we concentrate on efforts
to
improve our profitability.
Revenue
Equipment
We
operate approximately 3,438 tractors and 8,507 trailers. Of our tractors, at
March 31, 2006, approximately 2,045 were owned, 1,241 were financed under
operating leases, and 152 were provided by independent contractors, who own
and
drive their own tractors. Of our trailers, at March 31, 2006, approximately
1,369 were owned and approximately 7,138 were financed under operating leases.
We finance a portion of our tractor fleet and most of our trailer fleet with
off-balance sheet operating leases. These leases generally run for a period
of
three years for tractors and five to seven years for trailers.
In
September 2005, we entered into an agreement with a finance company to lease
approximately 1,800 model-year 2006 and 2007 dry van trailers under seven-year
walk away leases. These trailers will replace approximately 1,200 model-years
1998 and 1999 dry van trailers and approximately 600 model-year 2000 dry van
trailers. The 1,800 trailers will be replaced over the next few quarters as
new
trailers are delivered. After the completion of this transaction, our oldest
trailers in operation will be 2001 model-year trailers.
During
2006, we plan to replace approximately 2,100 tractors, or approximately 65%
of
our Company-owned tractor fleet. This is approximately twice the number of
tractors we would normally replace and will result in a substantial increase
over normal replacement capital expenditures. We are increasing our purchases
in
2006 to afford us flexibility to evaluate the cost and performance of tractors
equipped with engines that meet 2007 emissions requirements.
Independent
contractors (owner-operators) 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 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, are not incurred,
and
for independent contractor-tractors, driver compensation, fuel, and other
expenses are not incurred. Because obtaining equipment from independent
contractors and under operating leases effectively shifts financing expenses
from interest to "above the line" operating expenses, we evaluate our efficiency
using net margin as well as operating ratio.
RESULTS
OF OPERATIONS
The
following table sets forth the percentage relationship of certain items to
total
revenue and freight revenue:
|
|
Three
Months Ended
March
31,
|
|
|
|
Three
Months Ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
2006
|
|
2005
|
|
Total
revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Freight
revenue(1)
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries,
wages, and related
expenses
|
|
|
38.7
|
|
|
39.1
|
|
|
Salaries,
wages, and related
expenses
|
|
|
45.3
|
|
|
43.7
|
|
Fuel
expense
|
|
|
27.7
|
|
|
24.3
|
|
|
|
|
|
15.3
|
|
|
15.5
|
|
Operations
and maintenance
|
|
|
5.6
|
|
|
5.2
|
|
|
Operations
and maintenance
|
|
|
6.6
|
|
|
5.8
|
|
Revenue
equipment rentals
and
purchased
transportation
|
|
|
9.7
|
|
|
11.1
|
|
|
Revenue
equipment rentals
and
purchased
transportation
|
|
|
11.3
|
|
|
12.4
|
|
Operating
taxes and licenses
|
|
|
2.2
|
|
|
2.4
|
|
|
Operating
taxes and licenses
|
|
|
2.6
|
|
|
2.7
|
|
Insurance
and claims
|
|
|
5.4
|
|
|
6.4
|
|
|
|
|
|
6.4
|
|
|
7.1
|
|
Communications
and utilities
|
|
|
1.0
|
|
|
1.3
|
|
|
Communications
and utilities
|
|
|
1.2
|
|
|
1.4
|
|
General
supplies and expenses
|
|
|
2.8
|
|
|
3.0
|
|
|
General
supplies and expenses
|
|
|
3.3
|
|
|
3.4
|
|
Depreciation
and amortization
|
|
|
6.6
|
|
|
7.0
|
|
|
Depreciation
and amortization
|
|
|
7.7
|
|
|
7.8
|
|
Total
operating expenses
|
|
|
99.8
|
|
|
99.8
|
|
|
|
|
|
99.7
|
|
|
99.8
|
|
Operating
income
|
|
|
0.2
|
|
|
0.2
|
|
|
|
|
|
0.3
|
|
|
0.2
|
|
Other
expense, net
|
|
|
0.6
|
|
|
0.2
|
|
|
Other
expense, net
|
|
|
0.7
|
|
|
0.2
|
|
Loss
before income taxes
|
|
|
(0.4
|
)
|
|
0.0
|
|
|
|
|
|
(0.5
|
)
|
|
0.0
|
|
Income
tax expense
|
|
|
0.2
|
|
|
0.4
|
|
|
Income
tax expense
|
|
|
0.2
|
|
|
0.5
|
|
Net
loss
|
|
|
(0.6
|
)%
|
|
(0.4
|
)%
|
|
Net
loss
|
|
|
(0.7
|
)%
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel surcharge
revenue is shown netted against the fuel expense category ($22.1
million
and $14.4 million in the three months ended March 31, 2006, and 2005,
respectively).
|
COMPARISON
OF THREE MONTHS ENDED MARCH 31, 2006 TO THREE MONTHS ENDED MARCH 31,
2005
For
the
quarter ended March 31, 2006, total revenue increased $13.6 million, or 9.9%,
to
$151.5 million from $137.9 million in the 2005 period. Total revenue
includes $22.1 million and $14.4 million of fuel surcharge revenue in the 2006
and 2005 periods, respectively. For comparison purposes in the discussion below,
we use freight revenue (total revenue less fuel surcharge revenue) when
discussing changes as a percentage of revenue. We believe removing this
sometimes volatile source of revenue affords a more consistent basis for
comparing the results of operations from period to period.
Freight
revenue increased $5.9 million, or 4.7%, to $129.4 million in the three months
ended March 31, 2006, from $123.6 million in the same period of 2005. Average
freight revenue per tractor per week, our main measure of asset productivity,
increased 6.1%, to $2,938 in the first three months of 2006 compared to $2,769
in the same period of 2005. The increase was primarily generated by a 2.3%
increase in average freight revenue per loaded mile and a 3.3% increase in
our
equipment utilization. Weighted average tractors decreased 1.4% to 3,426 in
the
2006 period from 3,473 in the 2005 period.
Salaries,
wages, and related expenses increased $4.7 million, or 8.7%, to $58.6 million
in
the 2006 period, from $53.9 million in the 2005 period. As a percentage of
freight revenue, salaries, wages, and related expenses increased to 45.3% in
the
2006 period, from 43.7% in the 2005 period. Driver pay increased $3.2 million
to
31.1% of freight revenue in the 2006 period from 30.0% of freight revenue in
the
2005 period. The increase was largely attributable to increases in driver pay
per mile instituted in March 2005. Our payroll expense for employees, other
than
over-the-road drivers, increased $0.8 million to $10.1 million in the 2006
period from $9.3 million in the 2005 period, due to an increase in non-driving
personnel. Health insurance, employer paid taxes, workers' compensation, and
other employee benefits increased $0.7 million to $8.3 million in the 2006
period from $7.6 million in the 2005 period, due to an increase in our health
insurance claims expense partially offset by improving workers' compensation
claims experience.
Fuel
expense, net of fuel surcharge revenue of $22.1 million in the 2006 period
and
$14.4 million in the 2005 period, increased $0.7 million, or 3.6%, to $19.8
million in the 2006 period, from $19.1 million in the 2005 period. As a
percentage of freight revenue, net fuel expense remained essentially constant
at
15.3% in the 2006 period and 15.5% in the 2005 period. Fuel prices increased
sharply during 2006 from already high levels during 2005. Our fuel surcharge
program was able to offset a substantial portion of the higher fuel prices.
Fuel
surcharges amounted to $0.23 per total mile in the 2006 period and $0.15 per
total mile in the 2005 period. Fuel costs may be affected in the future by
price
fluctuations, volume purchase commitments, the terms and collectibility of
fuel
surcharges, the percentage of miles driven by independent contractors, and
lower
fuel mileage due to government mandated emissions standards that have resulted
in less fuel efficient engines.
Operations
and maintenance, consisting primarily of vehicle maintenance, repairs, and
driver recruitment expenses, increased $1.3 million to $8.5 million in the
2006
period from $7.2 million in the 2005 period. As a percentage of freight revenue,
operations and maintenance increased to 6.6% in the 2006 period from 5.8% in
the
2005 period. The increase resulted in part from increased over-the-road vehicle
maintenance, unloading costs and driver recruiting expense due to a tighter
supply of drivers.
Revenue
equipment rentals and purchased transportation decreased $0.7 million, or 4.4%,
to $14.7 million in the 2006 period, from $15.4 million in the 2005 period.
As a
percentage of freight revenue, revenue equipment rentals and purchased
transportation expense decreased to 11.3% in the 2006 period from 12.4% in
the
2005 period. The decrease is due principally to a decrease in the percentage
of
our total miles that were driven by independent contractors, partially offset
by
an increase in the fuel surcharges we pass through to the owner-operators.
Payments to independent contractors decreased $0.8 million to $4.7 million
in
the 2006 period from $5.5 million in the 2005 period, mainly due to a decrease
in the independent contractor fleet to an average of 147 during the 2006 period
versus an average of 198 in the 2005 period. Tractor and trailer equipment
rental expense remained essentially constant at $10.0 million and $9.9 million
in the 2006 and 2005 periods, respectively.
Operating
taxes and licenses remained essentially constant at $3.3 million in the 2006
and
2005 periods. As a percentage of freight revenue, operating taxes and licenses
also remained essentially constant at 2.6% and 2.7% in the 2006 and 2005
periods, respectively.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, decreased
$0.6 million, or 6.9%, to approximately $8.2 million in the 2006 period from
approximately $8.8 million in the 2005 period. As a percentage of freight
revenue, insurance and claims decreased to 6.4% in the 2006 period from 7.1%
in
the 2005 period. The decrease was due to a retroactive adjustment of
approximately $1.0 million to our liability insurance premium for the 2005
policy period. The adjustment was realized due to management's issuing a
contractual release to the insurance provider, related to favorable accident
and
safety trends. Excluding the retroactive adjustment, insurance and claims
expense for the 2006 quarter was within the range of expected accruals.
Our
current casualty program expires in February 2007. In general, for casualty
claims, we have insurance coverage up to $50.0 million per claim. We are
self-insured for personal injury and property damage claims for amounts up
to
$2.0 million per occurrence, subject to an additional $2.0 million
self-insured aggregate amount, which results in total self-insured retention
of
up to $4.0 million until the $2.0 million aggregate threshold is
reached. We are self-insured for cargo loss and damage claims for amounts up
to
$1.0 million per occurrence. Insurance and claims expense varies based on
the frequency and severity of claims, the premium expense, and the level of
self-insured
retention,
the development of claims over time, and other factors. With our significant
self-insured retention, insurance and claims expense may fluctuate significantly
from period to period.
Communications
and utilities expense remained essentially constant at $1.6 million in the
2006
and 2005 periods. As a percentage of freight revenue, communications and
utilities also remained essentially constant at 1.2% and 1.4% in the 2006 and
2005 periods, respectively.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $0.2 million to $4.3 million in the 2006 period
from $4.2 million in the 2005 period. As a percentage of freight revenue,
general supplies and expenses decreased to 3.3% in the 2006 period from 3.4%
in
the 2005 period.
In
April
2006, we entered into a sale leaseback transaction involving our corporate
headquarters, a maintenance facility, a body shop, and approximately forty-six
acres of surrounding property in Chattanooga, Tennessee. We received proceeds
of
approximately $29.0 million from the sale of the property, which we used to pay
down borrowings under our Credit Agreement and to purchase revenue equipment.
In
the transaction, we entered into a twenty-year lease agreement, whereby we
will
lease back the property at an annual rental rate of approximately $2.5 million,
subject to annual rent increases of 1.0%. The transaction resulted in a gain
of
approximately $2.1 million, which will be amortized ratably over the life of
the
lease. We expect this expense category to increase in future periods by the
amount of the additional rental expense which will be more than offset by lower
depreciation and interest expense in future periods as a result of this
transaction.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased $0.4 million, or 3.7%, to $10.0 million in the 2006 period from $9.7
million in the 2005 period. As a percentage of freight revenue, depreciation
and
amortization remained essentially constant at 7.7% in the 2006 period and 7.8%
in the 2005 period. Depreciation expense increased due to the purchase (rather
than lease) of a substantial amount of equipment during 2005. Depreciation
and
amortization expense is net of any gain or loss on the disposal of tractors
and
trailers. The gain on the disposal of tractors and trailers was approximately
$0.1 million in the 2006 period compared to a loss of approximately $0.2 million
in the 2005 period.
Amortization
expense relates to deferred debt costs incurred and covenants not to compete
from five acquisitions. Goodwill amortization ceased beginning January 1, 2002,
in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
and we
evaluate goodwill and certain intangibles for impairment, annually. During
the
second quarter of 2005, we tested our goodwill ($11.5 million) for impairment
and found no impairment.
The
other
expense category includes interest expense, interest income, and pre-tax,
non-cash gains or losses related to the accounting for interest rate derivatives
under SFAS No. 133. Other expense, net, increased $0.6 million, to $0.9 million
in the 2006 period from $0.3 million in the 2005 period, primarily due to higher
debt levels and higher interest rates. As a percentage of freight revenue,
other
expense, net, increased to 0.7% in the 2006 period from 0.2% in the 2005 period,
primarily because of higher debt levels, higher interest rates, etc. All of
our
interest-rate swaps expired during the first quarter of 2006.
Our
income tax expense was $0.3 million and $0.6 million in the 2006 and 2005
periods, respectively. The effective tax rate is different from the expected
combined tax rate due to permanent differences related to a per diem pay
structure implemented in 2001. Due to the nondeductible effect of per diem,
our
tax rate will fluctuate in future periods as income fluctuates.
Primarily
as a result of the factors described above, we experienced net losses of $0.9
million and $0.6 million in the 2006 and 2005 periods, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Our
business requires significant capital investments. In recent years, we have
financed our capital requirements with borrowings under our Securitization
Facility and a line of credit, cash flows from operations, and long-term
operating leases. Our primary sources of liquidity at March 31, 2006, were
funds
provided by operations, proceeds under the Securitization Facility, borrowings
under our Credit Agreement, and operating leases of revenue equipment.
Over
the
past several years, we have financed a large percentage of our revenue equipment
through operating leases. This has reduced the net value of revenue equipment
reflected on our balance sheet, reduced our borrowings, and increased our net
cash flows compared to purchasing all of our revenue equipment. Certain items
could fluctuate depending on whether we finance our revenue equipment through
borrowings or through operating leases. We believe our sources of liquidity
are
adequate to meet our current and projected needs for at least the next twelve
months. On a longer term basis, based on anticipated future cash flows, current
availability under our Credit Agreement and Securitization Facility, and sources
of financing that we expect will be available to us, we do not expect to
experience significant liquidity constraints in the foreseeable
future.
Cash
Flows
Net
cash
provided by operating activities was $27.0 million in the 2006 period and $22.1
million in the 2005 period. In the 2006 period, our primary source of cash
flow
from operations was improved collection of accounts receivable. The number
of
days sales in accounts receivable decreased to 35 days in 2006 from 39 days
in
2005.
Net
cash
used in investing activities was $29.7 million in the 2006 period and $12.4
million in the 2005 period. The increase was related to the purchase, rather
than lease, of tractors and trailers. We expect capital expenditures, primarily
for revenue equipment (net of trade-ins) and terminal facilities, to be
approximately $75.0 to $80.0 million in 2006, exclusive of acquisitions of
companies, assuming all revenue equipment is purchased.
Net
cash
provided by financing activities was $0.2 million in the 2006 period related
to
the exercise of stock options during the period. In the 2005 period, net cash
used in financing activities was $13.3 million, which was primarily the result
of paying off debt. The change from 2005 to 2006 related primarily to increased
purchases, rather than leases, of revenue equipment during the 2006 period.
At
March 31, 2006, we had outstanding debt of $80.3 million, primarily consisting
of approximately $47.3 million drawn under the Securitization Facility and
$33.0
million from the Credit Agreement. Interest rates on this debt range from 4.8%
to 7.8%.
In
May
2005, the Board of Directors authorized a stock repurchase plan for up to 1.3
million Company shares to be purchased in the open market or through negotiated
transactions subject to criteria established by the Board. During 2005, we
purchased a total of 720,800 shares with an average price of $16.17. We did
not
repurchase any shares in the first quarter of 2006. The stock repurchase plan
referenced herein expires June 30, 2006, and replaced our stock repurchase
program adopted in 2004.
Material
Debt Agreements
In
December 2004, we entered into the Credit Agreement with a group of banks.
The
facility matures in December 2009. Borrowings under the Credit Agreement are
based on the banks' base rate, which floats daily, or LIBOR, which accrues
interest based on one, two, three, or six month LIBOR rates plus an applicable
margin that is adjusted quarterly between 0.75% and 1.25% based on cash flow
coverage (the applicable margin was 1.0% at March 31, 2006). At March 31, 2006,
we had $33.0 million in borrowings under the Credit Agreement.
The
Credit Agreement has a maximum borrowing limit of $150.0 million with an
accordion feature, which permits an increase up to a maximum borrowing limit
of
$200.0 million. Borrowings related to revenue equipment are limited to the
lesser of 90% of net book value of revenue equipment or the maximum borrowing
limit. Letters of credit are limited to an aggregate commitment of
$85.0 million. The Credit Agreement is secured by a pledge of the stock of
most of our subsidiaries. A commitment fee that is adjusted quarterly between
0.15% and 0.25% per annum based on cash flow coverage, is due on the daily
unused portion of the Credit Agreement. As of March 31, 2006, we had
approximately $38.5 million of available borrowing capacity under the Credit
Agreement. At March 31, 2006 and December 31, 2005, we had undrawn letters
of credit outstanding of approximately $78.5 million and
$73.9 million, respectively.
In
December 2000, we entered into an accounts receivable securitization facility
(the "Securitization Facility"). On a revolving basis, we sell our interests
in
our accounts receivable to CVTI Receivables Corp. ("CRC"), a wholly-owned
bankruptcy-remote special purpose subsidiary incorporated in Nevada. CRC sells
a
percentage ownership in such receivables to an unrelated financial entity.
We
can receive up to $62.0 million of proceeds, subject to eligible receivables,
and pay a service fee recorded as interest expense, based on commercial paper
interest rates plus an
applicable
margin of 0.44% per annum and a commitment fee of 0.10% per annum on the daily
unused portion of the Securitization Facility. The net proceeds under the
Securitization Facility are required to be shown as a current liability because
the term, subject to annual renewals, is 364 days. As of March 31, 2006 and
December 31, 2005, we had $47.3 million outstanding, with weighted average
interest rates of 4.8% and 4.4%, respectively. At
March
31, 2006, the amount drawn under our Securitization Facility exceeded the
borrowing base by approximately $3.2 million, because improvements in our
accounts receivable collection had reduced the borrowing base below amounts
drawn. In April, in accordance with the Securitization Facility, we deposited
$2.7 million with the lender to offset the excess borrowing. No default
was declared or is continuing. CRC does not meet the requirements
for off-balance sheet accounting; therefore, it is reflected in our consolidated
condensed financial statements.
The
Credit Agreement and Securitization Facility contain certain restrictions and
covenants relating to, among other things, dividends, tangible net worth, cash
flow coverage, acquisitions and dispositions, and total indebtedness. These
agreements are cross-defaulted. We were in compliance with these agreements
as
of March 31, 2006.
OFF-BALANCE
SHEET ARRANGEMENTS
Operating
leases have been an important source of financing for our revenue equipment,
computer equipment, and Company airplane. At March 31, 2006, we had financed
approximately 1,241 tractors and 7,138 trailers under operating leases. Vehicles
held under operating leases are not carried on our balance sheet, and lease
payments in respect of such vehicles are reflected in our income statements
under revenue equipment rentals and purchased transportation. Our revenue
equipment rental expense was $10.0 million in the 2006 period, compared to
$9.9
million in the 2005 period. The total amount of remaining payments under
operating leases as of March 31, 2006, was approximately $112.1 million. In
connection with various operating leases, we issued residual value guarantees,
which provide that if we do not purchase the leased equipment from the lessor
at
the end of the lease term, we are liable to the lessor for an amount equal
to
the shortage (if any) between the proceeds from the sale of the equipment and
an
agreed value. As of March 31, 2006, the maximum amount of the residual value
guarantees was approximately $50.9 million. To the extent the expected value
at
the lease termination date is lower than the residual value guarantee, we would
accrue for the difference over the remaining lease term. We believe that
proceeds from the sale of equipment under operating leases would exceed the
payment obligation on all operating leases.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make decisions
based upon estimates, assumptions, and factors we consider 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.
A
summary of the significant accounting policies followed in preparation of the
financial statements is contained in Note 1 of the financial statements
contained in our annual report on Form 10-K for the fiscal year ended December
31, 2005. The following discussion addresses our most critical accounting
policies, which are those that are both important to the portrayal of our
financial condition and results of operations and that require significant
judgment or use of complex estimates.
Our
critical accounting policies include the following:
Depreciation
of Revenue Equipment - Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets and was approximately $9.1 million
on tractors and trailers in the first quarter of 2006. Depreciation of revenue
equipment is our largest item of depreciation. We generally depreciate new
tractors (excluding day cabs) over five years to salvage values of 4% to 33%
and
new trailers over seven years to salvage values of 17% to 39%. Gains and losses
on the disposal of revenue equipment are included in depreciation expense in
our
statements of operations.
We
annually review the reasonableness of our estimates regarding useful lives
and
salvage values of our revenue equipment and other long-lived assets based upon,
among other things, our experience with similar assets, conditions in the used
revenue equipment market, and prevailing industry practice. Changes in our
useful life or salvage value estimates, or fluctuations in market values that
are not reflected in our estimates, could have a material effect on our results
of operations.
Revenue
equipment and other long-lived assets are tested for impairment whenever an
event occurs that indicates an impairment may exist. Expected future cash flows
are used to analyze whether an impairment has occurred. If the sum of expected
undiscounted cash flows is less than the carrying value of the long-lived asset,
than an impairment loss is recognized. We measure the impairment loss by
comparing the fair value of the asset to its carrying value. Fair value is
determined based on a discounted cash flow analysis or the appraised value
of
the assets, as appropriate. We have not recognized any impairments of long-lived
assets to date.
Insurance
and Other Claims - The primary claims arising against us consist of cargo
liability, personal injury, property damage, workers' compensation, and employee
medical expenses. Our insurance program involves self-insurance with high-risk
retention levels. Because of our significant self-insured retention amounts,
we
have significant exposure to fluctuations in the number and severity of claims
and to variations between our estimated and actual ultimate payouts. We accrue
the estimated cost of the uninsured portion of pending claims. Our estimates
require judgments concerning the nature and severity of the claim, historical
trends, advice from third-party administrators and insurers, the size of any
potential damage award based on factors such as the specific facts of individual
cases, the jurisdictions involved, the prospect of punitive damages, future
medical costs, and inflation estimates of future claims development, and the
legal and other costs to settle or defend the claims. We have significant
exposure to fluctuations in the number and severity of claims. If there is
an
increase in the frequency and severity of claims, or we are required to accrue
or pay additional amounts if the claims prove to be more severe than originally
assessed, or any of the claims would exceed the limits of our insurance
coverage, our profitability would be adversely affected.
In
addition to estimates within our self-insured retention layers, we also must
make judgments concerning our aggregate coverage limits. If any claim occurrence
were to exceed our aggregate coverage limits, we would have to accrue for the
excess amount. Our critical estimates include evaluating whether a claim may
exceed such limits and, if so, by how much. Currently, we are not aware of
any
such claims. If one or more claims were to exceed our then effective coverage
limits, our financial condition and results of operations could be materially
and adversely affected.
Lease
Accounting and Off-Balance Sheet Transactions - Operating leases have been
an
important source of financing for our revenue equipment, computer equipment,
and
Company airplane. In connection with the leases of a majority of the value
of
the equipment we finance with operating leases, we issued residual value
guarantees, which provide that if we do not purchase the leased equipment from
the lessor at the end of the lease term, then we are liable to the lessor for
an
amount equal to the shortage (if any) between the proceeds from the sale of
the
equipment and an agreed value. As of March 31, 2006, the maximum amount of
the
residual value guarantees was approximately $50.9 million. To the extent the
expected value at the lease termination date is lower than the residual value
guarantee, we would accrue for the difference over the remaining lease term.
We
believe that proceeds from the sale of equipment under operating leases would
exceed the payment obligation on all operating leases. The estimated values
at
lease termination involve management judgments. As leases are entered into,
determination as to the classification as an operating or capital lease involves
management judgments on residual values and useful lives.
Accounting
for Income Taxes - We make important judgments concerning a variety of factors,
including the appropriateness of tax strategies, expected future tax
consequences based on future Company performance, and to the extent tax
strategies are challenged by taxing authorities, our likelihood of success.
We
utilize certain income tax planning strategies to reduce our overall cost of
income taxes. It is possible that certain strategies might be disallowed,
resulting in an increased liability for income taxes. Significant management
judgments are involved in assessing the likelihood of sustaining the strategies
and in determining the likely range of defense and settlement costs, and an
ultimate result worse than our expectations could adversely affect our results
of operations.
The
2001
and 2002 Internal Revenue Service ("IRS") audit is now complete. The IRS is
currently auditing our 2003 and 2004 tax returns and has proposed the
disallowance, with which we have agreed, of approximately $350,000 of costs
related to the November 2003 stock offering. Due to a favorable resolution
of
the 2001 and 2002 IRS audit, we do not expect to incur any additional tax
expense related to the 2003 and 2004 adjustments.
Deferred
income taxes represent a substantial liability on our consolidated condensed
balance sheet and are determined in accordance with SFAS No. 109, Accounting
for Income Taxes.
Deferred tax assets and liabilities (tax benefits and liabilities expected
to be
realized in the future) are recognized for the expected future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards.
The
carrying value of our deferred tax assets assumes that we will be able to
generate, based on certain estimates and assumptions, sufficient future taxable
income in certain tax jurisdictions to utilize these deferred tax benefits.
If
these estimates and related assumptions change in the future, we may be required
to establish a valuation allowance against the carrying value of the deferred
tax assets, which would result in additional income tax expense. On a periodic
basis we assess the need for adjustment of the valuation allowance. No valuation
reserve has been established at March 31, 2006, because, based on forecasted
income, we believe that it is more likely than not that the future benefit
of
the deferred tax assets will be realized. However, there can be no assurance
that we will meet our forecasts of future income.
We
believe that we have adequately provided for our future tax consequences based
upon current facts and circumstances and current tax law. During the first
quarter of 2006, we made no material changes in our assumptions regarding the
determination of income tax liabilities. However, should our tax positions
be
challenged, different outcomes could result and have a significant impact on
the
amounts reported through our consolidated condensed statement of
operations.
INFLATION,
NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS
Most
of
our operating expenses are inflation-sensitive, with inflation generally
producing increased costs of operations. During the past three years, the most
significant effects of inflation have been on revenue equipment prices and
the
compensation paid to the drivers. New emissions control regulations and
increases in commodity prices, wages of manufacturing workers, and other items
have resulted in higher tractor prices, and there has been an industry-wide
increase in wages paid to attract and retain qualified drivers. The cost of
fuel
also has risen substantially over the past three years. We believe this increase
primarily reflects world events rather than underlying inflationary pressure.
We
attempt to limit the effects of inflation through increases in freight rates,
certain cost control efforts, and to limit the effects of fuel prices through
fuel surcharges.
The
engines used in our tractors are subject to emissions control regulations,
which
have substantially increased our operating expenses.
As of
March 31, 2006, our entire tractor fleet has such emissions compliant engines
and is experiencing approximately 2% to 4% reduced fuel economy compared with
pre-2002 equipment. In 2007, stricter regulations will become effective.
Compliance with such regulations is expected to increase the cost of new
tractors and could impair equipment productivity, lower fuel mileage, and
increase our operating expenses. These adverse effects combined with the
uncertainty as to the reliability of the vehicles equipped with the newly
designed diesel engines and the residual values that will be realized from
the
disposition of these vehicles could increase our costs or otherwise adversely
affect our business or operations once the regulations become effective.
Fluctuations
in the price or availability of fuel, as well as hedging activities, surcharge
collection, and the volume and terms of diesel fuel purchase commitments may
increase our costs of operation, which could materially and adversely affect
our
profitability. We
impose
fuel surcharges on substantially all accounts. These arrangements may not fully
protect us from fuel price increases and also may result in us not receiving
the
full benefit of any fuel price decreases. We currently do not have any fuel
hedging contracts in place. If we do hedge, we may be forced to make cash
payments under the hedging arrangements. A small portion of our fuel
requirements for 2006 are covered by volume purchase commitments. Based on
current market conditions, we have decided to limit our hedging and purchase
commitments, but we continue to evaluate such measures. The absence of
meaningful fuel price protection through these measures could adversely affect
our profitability.
SEASONALITY
In
the
trucking industry, revenue generally decreases as customers reduce shipments
during the winter holiday season and as inclement weather impedes operations.
At
the same time, operating expenses generally increase, with fuel efficiency
declining because of engine idling and weather, creating more equipment repairs.
For the reasons stated, first quarter net income historically has been lower
than net income in each of the other three quarters of the year. Our equipment
utilization typically improves substantially between May and October of each
year because of the
trucking
industry's seasonal shortage of equipment on traffic originating in California
and because of general increases in shipping demand during those months. The
seasonal shortage typically occurs between May and August because California
produce carriers' equipment is fully utilized for produce during those months
and does not compete for shipments hauled by our dry van operation. During
September and October, business increases as a result of increased retail
merchandise shipped in anticipation of the holidays.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
experience various market risks, including changes in interest rates and fuel
prices. We do not enter into derivatives or other financial instruments for
trading or speculative purposes, or when there are no underlying related
exposures.
COMMODITY
PRICE RISK
From
time-to-time we may enter into derivative financial instruments to reduce our
exposure to fuel price fluctuations. In accordance with SFAS 133, we adjust
any
derivative instruments to fair value through earnings on a monthly basis. As
of
March 31, 2006, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
INTEREST
RATE RISK
Our
market risk is also affected by changes in interest rates. Historically, we
have
used a combination of fixed-rate and variable-rate obligations to manage our
interest rate exposure. Fixed-rate obligations expose us to the risk that
interest rates might fall. Variable-rate obligations expose us to the risk
that
interest rates might rise. Currently, all of our borrowing is under
variable-rate agreements.
Our
variable-rate obligations consist of our Credit Agreement and our Securitization
Facility. At March 31, 2006, we had variable, base rate borrowings of $33.0
million outstanding under the Credit Agreement and $47.3 million under the
Securitization Facility. Assuming variable-rate borrowings under the Credit
Agreement and Securitization Facility at March
31,
2006
levels, a one percentage point increase in interest rates could increase our
annual interest expense by approximately $803,000.
ITEM
4. CONTROLS AND PROCEDURES
As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), we have carried out an evaluation of the effectiveness
of
the design and operation of our disclosure controls and procedures as of the
end
of the period covered by this report. This evaluation was carried out under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation,
our
Chief Executive Officer and Chief Financial Officer concluded that our controls
and procedures were effective as of the end of the period covered by this
report. There were no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected or that are reasonably likely to materially affect our internal control
over financial reporting.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer, as
appropriate, to allow timely decisions regarding disclosures.
We
have
confidence in our internal controls and procedures. Nevertheless, our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure procedures and controls or our internal
controls will prevent all errors or intentional fraud. An internal control
system, no matter how well-conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of such internal controls are met.
Further, the design of an internal control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all internal
control systems, no evaluation of controls can provide absolute assurance that
all our control issues and instances of fraud, if any, have been
detected.
PART
II
OTHER
INFORMATION
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ITEM
1.
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LEGAL
PROCEEDINGS
From
time to time we are a party to ordinary, routine litigation arising
in the
ordinary course of business, most of which involves claims for personal
injury and property damage incurred in connection with the transportation
of freight. We maintain insurance to cover liabilities arising from
the
transportation of freight for amounts in excess of certain self-insured
retentions.
On
March 7, 2003, an accident occurred in Wisconsin involving a vehicle
and
one of our tractors. Two adult occupants of the vehicle were killed
in the
accident. The only other occupant of the vehicle was a child, who
survived
with little apparent injury. Suit was filed in the United States
District
Court in Minnesota by heirs of one of the decedents against us and
our
driver under the style: Bill
Kayachitch and Susan Kayachitch as co-trustees for the heirs and
next of
kin of Souvorachak Kayachitch, deceased, vs. Julie Robinson and Covenant
Transport, Inc.
The case was settled on October 10, 2005 at a level below the aggregate
coverage limits of our insurance policies and was formally dismissed
in
February 2006. Representatives of the child may file an additional
suit
against us.
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ITEM
1A.
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RISK
FACTORS
While
we attempt to identify, manage, and mitigate risks and uncertainties
associated with our business, some level of risk and uncertainty
will
always be present. Our Form 10-K for the year ended December 31,
2005, in
the section entitled Item
1A. Risk Factors,
describes some of the risks and uncertainties associated with our
business. These risks and uncertainties have the potential to materially
affect our business, financial condition, results of operations,
cash
flows, projected results, and future prospects. We do not believe
that
there have been any material changes to the risk factors previously
disclosed in our 2005 Form 10-K.
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ITEM
6. |
EXHIBITS |
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|
Exhibit
Number
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Reference
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Description
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3.1
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(1)
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Restated
Articles of Incorporation
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3.2
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(1)
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Amended
Bylaws dated September 27, 1994
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4.1
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(1)
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Restated
Articles of Incorporation
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4.2
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(1)
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Amended
Bylaws dated September 27, 1994
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31.1
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#
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Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker,
the
Company's Chief Executive Officer
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31.2
|
#
|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan,
the
Company's Chief Financial Officer
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32.1
|
#
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's
Chief
Executive Officer
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32.2
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#
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief
Financial Officer
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References:
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(1)
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Incorporated
by reference from Form S-1, Registration No. 33-82978, effective
October
28, 1994.
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#
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Filed
herewith.
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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COVENANT
TRANSPORT, INC.
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Date:
May 8, 2006
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/s/
Joey B. Hogan
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Executive
Vice President and Chief Financial Officer,
in
his capacity as such and on behalf of the
issuer.
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