Form 10-Q (Third Quarter 2006)
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 September
30, 2006
or
o
|
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.
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 o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date (November 3, 2006).
Class
A
Common Stock, $.01 par value: 11,650,690 shares
Class
B
Common Stock, $.01 par value: 2,350,000 shares
PART
I
FINANCIAL
INFORMATION
|
|
|
Page
Number
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Condensed Balance Sheets as of September 30, 2006 (Unaudited) and
December
31, 2005
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations for the three and nine months
ended
September
30, 2006 and 2005 (Unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Stockholders' Equity and Comprehensive Loss
for
the
nine months ended
September 30, 2006 (Unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows for the nine months ended
September
30, 2006 and 2005 (Unaudited)
|
|
|
|
|
|
Notes
to Consolidated Condensed Financial Statements (Unaudited)
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
|
PART
II
OTHER
INFORMATION
|
|
|
Page
Number
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
|
|
|
Item
6.
|
Exhibits
|
|
|
|
|
FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
COVENANT
TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(In
thousands, except share data)
|
|
|
|
September
30, 2006
|
|
December
31, 2005
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
8,328
|
|
$
|
3,618
|
|
Accounts
receivable, net of allowance of $1,943 in 2006 and
$2,200
in 2005
|
|
|
81,091
|
|
|
77,969
|
|
Drivers
advances and other receivables
|
|
|
8,173
|
|
|
3,932
|
|
Inventory
and supplies
|
|
|
4,572
|
|
|
4,661
|
|
Prepaid
expenses
|
|
|
11,415
|
|
|
16,199
|
|
Assets
held for sale
|
|
|
36,416
|
|
|
3,204
|
|
Deferred
income taxes
|
|
|
15,904
|
|
|
16,158
|
|
Income
taxes receivable
|
|
|
6,452
|
|
|
7,559
|
|
Total
current assets
|
|
|
172,351
|
|
|
133,300
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
326,000
|
|
|
295,433
|
|
Less
accumulated depreciation and amortization
|
|
|
(66,654
|
)
|
|
(84,275
|
)
|
Net
property and equipment
|
|
|
259,346
|
|
|
211,158
|
|
Other
assets
|
|
|
47,293
|
|
|
26,803
|
|
Total
assets
|
|
$
|
478,990
|
|
$
|
371,261
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Securitization
facility
|
|
$
|
57,281
|
|
$
|
47,281
|
|
Accounts
payable and accrued expenses
|
|
|
38,107
|
|
|
25,545
|
|
Current
maturities of long-term debt
|
|
|
5,882
|
|
|
-
|
|
Current
portion of insurance and claims accrual
|
|
|
20,624
|
|
|
18,529
|
|
Total
current liabilities
|
|
|
121,894
|
|
|
91,355
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
105,833
|
|
|
33,000
|
|
Insurance
and claims accrual, net of current portion
|
|
|
19,343
|
|
|
23,272
|
|
Deferred
income taxes
|
|
|
42,249
|
|
|
33,910
|
|
Total
liabilities
|
|
|
289,319
|
|
|
181,537
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Class
A common stock, $.01 par value; 20,000,000 shares authorized;
13,469,090
and 13,447,608 shares issued; 11,650,690 and 11,629,208
outstanding
as of September 30, 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
|
|
|
24
|
|
|
24
|
|
Additional
paid-in-capital
|
|
|
91,986
|
|
|
91,553
|
|
Treasury
stock at cost; 1,818,400 shares
|
|
|
(21,582
|
)
|
|
(21,582
|
)
|
Retained
earnings
|
|
|
119,108
|
|
|
119,595
|
|
Total
stockholders' equity
|
|
|
189,671
|
|
|
189,724
|
|
Total
liabilities and stockholders' equity
|
|
$
|
478,990
|
|
$
|
371,261
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
2005
(In
thousands, except per share data)
|
|
Three
months ended
September
30,
(unaudited)
|
|
Nine
months ended
September
30,
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Freight revenue
|
|
$
|
144,148
|
|
$
|
144,681
|
|
$
|
412,926
|
|
$
|
406,988
|
|
Fuel surcharges
|
|
|
32,513
|
|
|
25,214
|
|
|
84,621
|
|
|
57,647
|
|
Total
revenue
|
|
$
|
176,661
|
|
$
|
169,895
|
|
$
|
497,547
|
|
$
|
464,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses
|
|
|
66,892
|
|
|
63,264
|
|
|
189,955
|
|
|
178,177
|
|
Fuel
expense
|
|
|
52,858
|
|
|
48,109
|
|
|
145,075
|
|
|
121,504
|
|
Operations
and maintenance
|
|
|
9,062
|
|
|
9,174
|
|
|
26,334
|
|
|
24,846
|
|
Revenue
equipment rentals and purchased transportation
|
|
|
16,462
|
|
|
15,263
|
|
|
46,598
|
|
|
45,672
|
|
Operating
taxes and licenses
|
|
|
3,423
|
|
|
3,117
|
|
|
10,190
|
|
|
10,060
|
|
Insurance
and claims
|
|
|
8,360
|
|
|
10,090
|
|
|
24,773
|
|
|
28,527
|
|
Communications
and utilities
|
|
|
1,785
|
|
|
1,726
|
|
|
4,902
|
|
|
4,967
|
|
General
supplies and expenses
|
|
|
5,675
|
|
|
4,759
|
|
|
15,719
|
|
|
13,223
|
|
Depreciation
and amortization, including net gains on
disposition
of equipment
|
|
|
8,624
|
|
|
10,543
|
|
|
27,179
|
|
|
30,491
|
|
Total
operating expenses
|
|
|
173,141
|
|
|
166,045
|
|
|
490,725
|
|
|
457,467
|
|
Operating
income
|
|
|
3,520
|
|
|
3,850
|
|
|
6,822
|
|
|
7,168
|
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,752
|
|
|
1,290
|
|
|
3,951
|
|
|
2,942
|
|
Interest income
|
|
|
(169
|
)
|
|
(90
|
)
|
|
(491
|
)
|
|
(191
|
)
|
Other
|
|
|
-
|
|
|
(113
|
)
|
|
(13
|
)
|
|
(443
|
|
Other
expenses, net
|
|
|
1,583
|
|
|
1,087
|
|
|
3,447
|
|
|
2,308
|
|
Income
before income taxes
|
|
|
1,937
|
|
|
2,763
|
|
|
3,375
|
|
|
4,860
|
|
Income
tax expense
|
|
|
1,142
|
|
|
1,546
|
|
|
3,862
|
|
|
3,640
|
|
Net
income (loss)
|
|
$
|
795
|
|
$
|
1,217
|
|
$ |
(487
|
)
|
$
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$ |
(0.03
|
)
|
$
|
0.09
|
|
Diluted
earnings (loss) per share:
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$ |
(0.03
|
)
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
14,000
|
|
|
13,979
|
|
|
14,074
|
|
|
14,241
|
|
Diluted
weighted average shares outstanding
|
|
|
14,059
|
|
|
14,044
|
|
|
14,074
|
|
|
14,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE LOSS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(Unaudited
and in thousands)
|
|
Common
Stock
|
|
Additional
Paid-In
|
|
Treasury
|
|
Retained
|
|
Total
Stockholders'
|
|
Comprehensive
|
|
|
|
Class
A
|
|
Class
B
|
|
Capital
|
|
Stock
|
|
Earnings
|
|
Equity
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
$
|
134
|
|
$
|
24
|
|
$
|
91,553
|
|
$
|
(21,582
|
)
|
$
|
119,595
|
|
$
|
189,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options
|
|
|
1
|
|
|
-
|
|
|
245
|
|
|
-
|
|
|
-
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from
the exercise of stock options
|
|
|
-
|
|
|
-
|
|
|
17
|
|
|
-
|
|
|
-
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 123R stock-based
employee compensation cost
|
|
|
-
|
|
|
-
|
|
|
171
|
|
|
-
|
|
|
-
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(487
|
)
|
|
(487
|
)
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss for nine
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2006
|
|
$
|
135
|
|
$
|
24
|
|
$
|
91,986
|
|
$
|
(21,582
|
)
|
$
|
119,108
|
|
$
|
189,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In
thousands)
|
|
Nine
months ended September 30,
(unaudited)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(487
|
)
|
$
|
1,220
|
|
Adjustments
to reconcile net income (loss) to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
Provision
for losses on accounts receivable
|
|
|
441
|
|
|
1,440
|
|
Depreciation
and amortization
|
|
|
29,946
|
|
|
31,007
|
|
Deferred
income tax benefit
|
|
|
(1,380
|
)
|
|
(9,229
|
)
|
Net
gain on disposition of property and equipment
|
|
|
(2,884
|
)
|
|
(516
|
)
|
Non-cash
stock compensation
|
|
|
171
|
|
|
-
|
|
Changes
in operating assets and liabilities, net of effects from
purchase
of Star Transportation, Inc.:
|
|
|
|
|
|
|
|
Receivables
and advances
|
|
|
4,618
|
|
|
(3,093
|
)
|
Prepaid
expenses and other assets
|
|
|
6,044
|
|
|
(6,320
|
)
|
Inventory
and supplies
|
|
|
130
|
|
|
(951
|
)
|
Insurance
and claims accrual
|
|
|
(4,387
|
)
|
|
(2,064
|
)
|
Accounts
payable and accrued expenses
|
|
|
9,085
|
|
|
2,301
|
|
Net
cash flows provided by operating activities
|
|
|
41,297
|
|
|
13,795
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(118,958
|
)
|
|
(89,089
|
)
|
Purchase
of Star Transportation, Inc., net of cash acquired
|
|
|
(39,004
|
)
|
|
-
|
|
Proceeds
from building sale leaseback
|
|
|
29,630
|
|
|
-
|
|
Proceeds
from disposition of property and equipment
|
|
|
44,947
|
|
|
57,063
|
|
Net
cash flows used in investing activities
|
|
|
(83,385
|
)
|
|
(32,026
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Changes
in checks outstanding in excess of bank balances
|
|
|
-
|
|
|
3,890
|
|
Exercise
of stock options
|
|
|
246
|
|
|
418
|
|
Income
tax benefit arising from exercise of stock options
|
|
|
17
|
|
|
50
|
|
Proceeds
from issuance of debt
|
|
|
104,807
|
|
|
107,000
|
|
Repayments
of debt
|
|
|
(58,272
|
)
|
|
(82,888
|
)
|
Deferred
costs
|
|
|
-
|
|
|
8
|
|
Net
cash provided by financing activities
|
|
|
46,798
|
|
|
16,821
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
4,710
|
|
|
(1,410
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
3,618
|
|
|
5,066
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
8,328
|
|
$
|
3,656
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
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 as of that date. 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 include all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Comprehensive earnings (loss) for the nine month periods ended September 30,
2006 and 2005 equaled net income (loss).
Note
3. Segment Information
We
have
one reportable segment under the provisions of Statement of Financial Accounting
Standards (“SFAS”) No.131, Disclosures
about Segments of an Enterprise and Related Information.
Each of
our four transportation service offerings that meet the quantitative threshold
requirements of SFAS No. 131 provides truckload transportation services that
have been aggregated since they have similar economic characteristics and meet
the other aggregation criteria of SFAS No. 131. Accordingly, we have not
presented separate financial information for each of our service offerings
as
our consolidated condensed financial statements present our one reportable
segment. Our four major transportation service offerings are: (a) expedited
long
haul service, (b) refrigerated service, (c) dedicated service, and (d) regional
solo-driver service. We generate other revenue through a subsidiary that
provides freight brokerage services. This operation does not meet the
quantitative threshold reporting requirements of SFAS No. 131.
Note
4. Basic and Diluted Earnings (Loss) per Share
We
apply
the provisions of SFAS No. 128,
Earnings per Share,
which
requires us to present basic 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 the earnings of the Company.
The
calculation of diluted earnings per share for the three months ended September
30, 2006 and September 30, 2005, excludes approximately 1.0 million shares
and
1.3 million shares respectively, and approximately 0.4 million shares for the
nine months ended September 30, 2005 since the option price was greater than
the
average market price of the common shares. The calculation of diluted loss
per
share for the nine months ended September 30, 2006, excludes all unexercised
shares, since the effect of any assumed exercise of the related options would
be
anti-dilutive.
The
following table sets forth, for the periods indicated, the calculation of net
earnings (loss) per share included in our consolidated condensed statements
of
operations:
(in
thousands except per share data)
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$
|
795
|
|
$
|
1,217
|
|
$ |
(487
|
)
|
$
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share
- weighted-average shares
|
|
|
14,000
|
|
|
13,979
|
|
|
14,074
|
|
|
14,241
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
59
|
|
|
65
|
|
|
0
|
|
|
114
|
|
Denominator
for diluted earnings per share
-
adjusted weighted-average shares and
assumed
conversions
|
|
|
14,059
|
|
|
14,044
|
|
|
14,074
|
|
|
14,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$ |
(0.03
|
)
|
$
|
0.09
|
|
Diluted
earnings (loss) per share:
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$ |
(0.03
|
)
|
$
|
0.08
|
|
Note
5. Share-Based Compensation
Prior
to
May 23, 2006, we had four stock-based compensation plans. On May 23, 2006,
upon
the recommendation of our Board of Directors, our stockholders approved the
Covenant Transport, Inc. 2006 Omnibus Incentive Plan. The Covenant Transport,
Inc. 2006 Omnibus Incentive Plan replaced the Covenant Transport, Inc. 2003
Incentive Stock Plan, Amended and Restated Incentive Stock Plan, Outside
Director Stock Option Plan, and 1998 Non-Officer Incentive Stock
Plan.
Effective
January 1, 2006, we adopted SFAS No. 123R, Share-Based
Payment
("SFAS
No. 123R") using the modified prospective method. Under this 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. 123R for either recognition or pro forma disclosures. Stock-based
employee compensation expense for the three months and nine months ended
September 30, 2006 was $109,017 and $171,307, respectively, and is included
in
salaries, wages, and related expenses within the consolidated condensed
statements of operations. 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 Opinion 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 was estimated as of the
date of grant using the Black-Scholes option pricing model. The fair value
of
the employee and outside director stock options which would have been expensed
in the three months and nine months ended September 30, 2005 would have been
$0.8 million and $2.2 million, respectively.
(in
thousands, except per share data)
|
|
Three
months ended
September
30, 2005
|
|
Nine
months ended
September
30, 2005
|
|
|
|
|
|
|
|
Net
income, as reported:
|
|
$
|
1,217
|
|
$
|
1,220
|
|
Deduct:
Total stock-based employee compensation
expense
determined under fair value based method for
all
awards, net of related tax effects
|
|
|
(790
|
)
|
|
(2,235
|
)
|
Pro
forma net income (loss)
|
|
$
|
427
|
|
$
|
(1,015
|
)
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.09
|
|
$
|
0.09
|
|
Pro
forma
|
|
$
|
0.03
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.09
|
|
$
|
0.08
|
|
Pro
forma
|
|
$
|
0.03
|
|
$
|
(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 Amended and Restated Incentive Stock Plan and our 2003
Incentive Stock Plan was accelerated and all such options became fully
exercisable as of August 31, 2005. The primary purpose of the accelerated
vesting was to avoid recognizing compensation expense associated with these
options upon adoption of SFAS No. 123R. This acceleration of vesting did not
result in any compensation expense for us during 2005; however, without the
acceleration of vesting we would have been required to recognize compensation
expense beginning in 2006 in accordance with SFAS No. 123R. Under the fair
value
method of SFAS No. 123R, 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 tables summarize our stock option activity for the nine months ended
September 30, 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
|
|
|
5
|
|
$
|
13.80
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(19
|
)
|
$
|
12.64
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
(25
|
)
|
$
|
15.75
|
|
|
|
|
|
|
|
Options
expired
|
|
|
(178
|
)
|
$
|
15.50
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
1,237
|
|
$
|
14.16
|
|
|
5.5
years
|
|
$
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,222
|
|
$
|
14.21
|
|
|
5.5
years
|
|
$
|
861
|
|
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model, which uses a number of assumptions to
determine the fair value of the options on the date of grant. The following
weighted-average assumptions were used to determine the fair value of the
stock
options granted during the three and nine months ended September 30, 2006
and 2005:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Expected
volatility
|
|
37.4%
- 39.5%
|
|
42.3%
|
|
37.4%
- 39.5%
|
|
42.3%
- 51.9%
|
Risk-free
interest rate
|
|
4.9%
- 5.0%
|
|
2.8%
- 4.2%
|
|
4.9%
- 5.0%
|
|
2.8%
- 4.2%
|
Expected
lives (in years)
|
|
5.0
|
|
5.0
|
|
5.0
|
|
5.0
|
The
expected lives of the options are based on the historical and expected future
employee exercise behavior. Expected volatility is based upon the historical
volatility of our common stock. The risk-free interest rate is based upon the
U.S. Treasury yield curve at the date of grant with maturity dates
approximately equal to the expected life at the grant date.
The
following tables summarize our restricted stock award activity for the nine
months ended September
30, 2006:
|
|
Number
of
stock
awards
|
|
Weighted
average
grant
date
fair value
|
|
Unvested
at January 1, 2006
|
|
-
|
|
-
|
|
Granted
|
|
|
484,984
|
|
$
|
12.65
|
|
Vested
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
(28,000
|
)
|
|
-
|
|
Unvested
at September 30, 2006
|
|
|
456,984
|
|
$
|
12.65
|
|
Included
in the above table is 396,664 restricted stock awards that vest only if we
achieve an earnings-per-share target of $2.00 by 2010. The underlying
performance targets of earnings per share for these restricted stock awards
do
not begin until the 2007 fiscal year, therefore no compensation expense for
these restricted stock awards will be recorded until January 1,
2007.
As
of
September 30, 2006, we had $0.3 million and $0.9 million in unrecognized
compensation expense related to stock options and restricted stock awards,
respectively, which is expected to be recognized over a weighted average period
of approximately 3 years for stock options and 4 years for restricted stock
awards.
Note
6. 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.
On
April
20, 2006, we completed the appeals process with the IRS related to their 2001
and 2002 audits. Related to this settlement with the IRS, we recorded additional
income tax expense of approximately $0.5 million for the nine months ended
September 30, 2006. We received a favorable resolution in the Closing Agreement
received from the IRS which stated that our wholly-owned captive insurance
subsidiary made a valid election under section 953(d) of the Internal Revenue
Code and is to be respected as an insurance company.
On
September 8, 2006, the IRS completed their audit fieldwork of 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.
During the three months ended June 30, 2006, we recorded all of the $0.1 million
of income tax expense related to this proposed disallowance of tax benefits.
Additionally, the IRS has proposed to disallow the tax benefits associated
with
insurance premium payments made to our wholly-owned captive insurance subsidiary
for the 2003 and 2004 years. Due to the favorable resolution of the 2001 and
2002 IRS audit on this issue, we are vigorously defending our position related
to this proposed disallowance of tax benefits using all administrative and
legal
processes available. On October 5, 2006, we
filed
an
official Statement of Appeal with the IRS Appeals Office requesting a conference
with an IRS Appeals Officer protesting this proposed adjustment related to
the
disallowance of our deductions for the insurance premiums paid. For the three
and nine months ended September 30, 2006, income tax expense of $0.1 million
and
$0.3 million, respectively, was recorded in our consolidated condensed
statements of operations related to this uncertain tax position. If we are
unsuccessful in defending our position on this deduction, we could ultimately
owe taxes totaling $1.7 million related to this issue,
for
which we have currently accrued approximately $0.8 million of income taxes
in
our consolidated condensed balance sheets at September 30, 2006.
Note
7. Derivative Instruments and Other Comprehensive
Income
We
account for derivative instruments in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities- (as
amended, "SFAS No. 133"). SFAS No. 133 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.
With
our
acquisition of Star (see Note 10) on September 14, 2006, we assumed an interest
rate swap agreement which became effective September 2005 and terminates in
September 2010. Under this swap contract, we pay interest expense at a fixed
rate of 5.36% and receive interest income at a variable rate of LIBOR plus
1.25%
(6.49% as of September 30, 2006). The fair value of the swap at September 30,
2006 was approximately $251,852.
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. Due to the counter-parties' imbedded options to cancel,
these derivatives did not qualify, and are not designated as hedging instruments
under SFAS No. 133. Consequently, these derivatives are marked to fair value
through earnings, in other expense in the accompanying statements of operations.
At September 30, 2006, the swap agreements had expired and there was no
liability thereunder; however, at September 30, 2005 the fair value of these
interest-rate swap agreements was a liability of $0.1 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 nine months ended September 30, 2006 and 2005 is summarized
in the following table:
(in
thousands)
|
|
Nine
months ended
September
30,
|
|
|
|
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
|
|
|
372
|
|
|
|
|
|
|
|
|
|
Net
liability for derivatives at September 30
|
|
$
|
-
|
|
$
|
(67
|
)
|
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
8. 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 the Company's recent experience with
disposition values. Any change could result in greater or lesser annual expense
in the future. Included in depreciation in the consolidated condensed statements
of operations are net gains on disposal of revenue equipment of $1.2 million
and
$0.4 million for the three months ended September 30, 2006 and 2005,
respectively, and of $2.9 million and $0.5 million for the nine months ended
September 30, 2006 and 2005, respectively. 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.
Additionally, when we discontinue the utilization of revenue equipment or
terminals in our operations, we reclassify such assets to assets held for sale
in our consolidated condensed balance sheets. These assets are recorded at
the
lower of depreciated cost plus the related costs to sell or fair value less
related costs to sell. We anticipate selling the assets held for sale within
the
next twelve months and do not expect any material loss on their
disposal.
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 $29.6 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%, resulting in annual straight-line
rental expense of approximately $2.7 million. The transaction resulted in a
gain
of approximately $2.1 million, which is being amortized ratably over the life
of
the lease and recorded as depreciation expense on our consolidated condensed
statements of operations.
Note
9. Securitization Facility and Long-Term Debt
Our
securitization facility and long-term debt consisted of the following at
September 30, 2006 and December 31, 2005:
(in
thousands)
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Securitization
Facility
|
|
$
|
57,281
|
|
$
|
47,281
|
|
|
|
|
|
|
|
|
|
Borrowings
under Credit Agreement
|
|
$
|
69,000
|
|
$
|
33,000
|
|
Installment
notes payable with banks, weighted average
interest rate of 5.99% at September 30, 2006, due in
monthly installments with final maturities at various dates
through September 2010, secured by related revenue
equipment
|
|
|
42,715
|
|
|
-
|
|
|
|
|
111,715
|
|
|
33,000
|
|
Less
current maturities
|
|
|
(5,882
|
)
|
|
-
|
|
Long-term
debt, less current maturities
|
|
$
|
105,833
|
|
$
|
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 September 30,
2006). At September 30, 2006, we had $69.0 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 the Company's 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 September 30, 2006, we
had
approximately $10.5 million of available borrowing capacity. At September 30,
2006 and December 31, 2005, we had undrawn letters of credit outstanding of
approximately $70.5 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 September 30, 2006 and December 31, 2005, we had $57.3 million and
$47.3 million outstanding, respectively, with weighted average interest
rates of 5.3% and 4.4%, respectively. CRC does not meet the requirements for
off-balance sheet accounting; therefore, it is reflected in our consolidated
condensed financial statements.
The
provisions of the installment notes payable with banks place certain
restrictions and limitations related to the activities of Star. These include
limits on capital expenditures, advances to related parties, investments sales
or rental of properties and additional borrowings.
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
September 30, 2006.
Note
10. Acquisition
On
September 14, 2006, we acquired 100% of the outstanding stock of Star
Transportation, Inc. (“Star”), a short-to-medium haul dry van regional truckload
carrier based in Nashville, Tennessee. The
acquisition included 614 tractors and 1,719 trailers. The total purchase price
of approximately $39 million has been allocated to tangible and intangible
assets acquired and liabilities assumed based on their fair market values as
of
the acquisition date in accordance with Financial Accounting Standards Board
statement number 141 (SFAS No. 141), “Business Combinations”. Star’s operating
results have been accounted for in the Company's results of operations since
the
acquisition date.
Although
we continue to complete our valuation of the identifiable intangibles and
goodwill, the following table summarizes our preliminary estimated fair value
of
the assets acquired and liabilities assumed at the date of
acquisition:
(In
thousands) |
|
|
|
Current assets
|
|
$
|
10,970
|
|
Property and equipment
|
|
|
64,089
|
|
Deferred tax assets
|
|
|
297
|
|
Other assets - Interest rate swap (See Note 7)
|
|
|
252
|
|
Identifiable intangible assets:
|
|
|
|
|
Tradename
(5-year estimated useful life)
|
|
|
1,950
|
|
Customer
relationships (7-year estimated useful life)
|
|
|
1,200
|
|
Goodwill
|
|
|
19,995
|
|
Total
assets
|
|
$
|
98,753
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
13,181
|
|
Long-term debt, net of current maturities
|
|
|
36,298
|
|
Deferred tax liabilities
|
|
|
10,270
|
|
Total
liabilities
|
|
$
|
59,749
|
|
|
|
|
|
|
Total preliminary purchase price
|
|
$
|
39,004
|
|
The
total
preliminary purchase price of $39.0 million includes purchase price
consideration paid to the selling shareholders of Star, or their respective
escrow agents, totaling $38.7 million and $0.3 million of acquisition-related
costs.
The
following pro forma financial information reflects our consolidated summarized
results of operations as if the acquisition of Star had taken place on January
1, 2006. The pro forma financial information is not necessarily indicative
of
the results as it would have been if the acquisition had been effected on the
assumed date and is not necessarily indicative of future results:
(in
thousands, except per share data)
|
|
Three
months ended September 30, 2006
|
|
Nine
months ended September 30, 2006
|
|
Pro
forma revenues
|
|
$
|
198,131
|
|
$
|
572,557
|
|
Pro
forma net income
|
|
$
|
655
|
|
$
|
1,989
|
|
Pro
forma basic and diluted earnings per share
|
|
$
|
0.05
|
|
$
|
0.14
|
|
Note
11. Recent Accounting Pronouncements
In
September 2006, the Securities and Exchange Commission published Staff
Accounting Bulletin ("SAB") No. 108 (Topic 1N), Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB No.
108 requires registrants to quantify misstatements using both the balance-sheet
and income-statement approaches, with adjustment required if either method
results in a material error. The provisions of SAB No. 108 are effective for
annual financial statements for the first fiscal year ending after November
15,
2006. We are continuing to evaluate the impact of the adoption of SAB No. 108,
but management does not currently believe SAB No. 108 will have a material
effect upon initial adoption on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans-an
amendment of FASB Statements No. 87, 88, 106, and 132(R).
This
Statement requires an employer to recognize the overfunded or underfunded status
of a defined benefit postretirement plan (other than a multiemployer plan)
as an
asset or liability in its balance sheet and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income
of a
business entity. This Statement also requires an employer to measure the funded
status of a plan as of the date of its year-end balance sheet, with limited
exceptions. The provisions of SFAS No. 158 are effective as of the end of the
fiscal year ending after December 15, 2006. The adoption of SFAS No. 158 will
not have a material impact on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. The provisions of SFAS No. 157 are effective
as
of the beginning of the first fiscal year that begins after November 15, 2007.
We do not believe the adoption of SFAS No. 157 will have a material
impact on our consolidated financial statements.
In
June
2006, the FASB published Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(“FIN
48”). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The effective date of this interpretation
is
January 1, 2007, the first fiscal year beginning after December 15, 2006. We
are
continuing to evaluate the impact of the adoption of FIN 48 on our consolidated
financial statements.
Effective
December 31, 2005, we adopted FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations (“FIN
47”),
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 three and six months ended June 30, 2006, the impact of
the
adoption of FIN 47 was approximately $0.1 million and $0.2 million,
respectively, of additional expense in our revenue equipment rentals and
purchased transportation expenses.
In
May
2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 replaces APB Opinion No. 20,
Accounting Changes,
and
SFAS Statement No. 3,
Reporting Changes in Interim Financial Statements.
SFAS No. 154 changes the accounting for, and reporting of, a change in
accounting principle. SFAS No. 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 No. 154 is effective for accounting changes and corrections
of errors in fiscal years beginning after December 15, 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 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
No. 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. This allowed
us to recognize an expense in 2005 which was significantly less than the
compensation expense that would have been recognized beginning in 2006 in
accordance with SFAS No. 123R. SFAS No. 123R was effective January 1, 2006.
Our
adoption of SFAS No. 123R had minimal impact for the three and six month periods
ended June 30, 2006 (See Note 5).
Note
12. 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 the Company.
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.
Note
13. Subsequent Event
On
October 20, 2006, we amended our Securitization Facility to include Covenant
Transport Solutions, Inc., a Nevada corporation ("Solutions"), and Star
Transportation, Inc., a Tennessee corporation ("Star"), as additional
originators, permitting CRC to purchase accounts receivable from these
subsidiaries of the Company as well as from Covenant and Southern Refrigerated.
The Securitization Facility Amendments also increased the amount that the
Company, through CRC, can borrow under the Securitization Facility, from $62.0
million to $70.0 million, subject to eligible receivables.
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 (the “Exchange Act”). 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. All such
forward-looking statements speak only as of the date of this Form 10-Q. You
are
cautioned not to place undue reliance on such forward-looking statements. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein
to
reflect any change in the Company’s expectations with regard thereto or any
change in the events, conditions, or circumstances on which any such statement
is based.
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. We also generate revenue through a subsidiary
that
provides freight brokerage services.
On
September 14, 2006, we acquired 100% of the outstanding stock of Star
Transportation, Inc. (“Star”), a short-to-medium haul dry van regional truckload
carrier based in Nashville, Tennessee. Star operates primarily in the
southeastern United States, with shipments concentrated from Texas across the
Southeast to Virginia, and an average length of haul of approximately 470 miles.
We are operating Star as a separate subsidiary, continuing with substantially
the same personnel, customers, lanes and terminal locations as it had prior
to
our acquisition. The acquisition included 614 tractors and 1,719 trailers.
Star’s operating results have been accounted for in the Company's results of
operations since the acquisition date. Star’s total revenue for the sixteen days
ended September 30, 2006 totaled approximately $4.5 million, which is included
in our consolidated condensed statements of operations for the three and nine
months ended September 30, 2006.
For
the
nine months ended September 30, 2006, total revenue increased $32.9 million,
or
7.1%, to $497.5 million from $464.6 million in the 2005 period. Freight
revenue, which excludes revenue from fuel surcharges, increased $5.9 million,
or
1.5%, to $412.9 million in the 2006 period from $407.0 million in the
2005 period. We experienced a net loss of $0.5 million, or $0.03 per share,
for
the first nine months of 2006, compared with a profit of $1.2 million, or $0.09
per share, for the first nine months of 2005.
For
the
nine months ended September 30, 2006, our average freight revenue per tractor
per week, our main measure of asset productivity, increased 4.2%, to $3,058
in
the first nine months of 2006 compared to $2,934 in the same period of 2005.
The
increase was primarily generated by a 0.3% increase in average freight revenue
per total mile, and a 3.0% increase in average miles per tractor equipment
utilization. Weighted average tractors decreased 3.1% to 3,448 in the 2006
period from 3,557 in the 2005 period.
Our
after-tax costs on a per-mile basis increased 2.0%, or $.03 per mile, compared
with the first nine months of 2005. The main factors were a $.033 per mile
increase in compensation expense, driven primarily by increases in driver pay
and office salaries related to the business realignment, and a $.009 per mile
increase in our health insurance claim costs, partially offset by a $.012 per
mile decrease in our insurance and claims expense.
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 manage and operate each service offering separately, each under
the authority of a general manager. We have now hired the general managers
for
each of the service offerings. In addition, within the Regional solo-driver
service offering, we have divided the business into several service centers,
each under separate management as well. Our freight brokerage operation is
also
managed and operated as a separate subsidiary.
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 continued to make significant progress, this process
will continue at least into 2007.
For
the
three months ended September 30, 2006, results of the business realignment
on
each service offering include the following, as compared to the results we
had
achieved for the three months ended September 30, 2005:
•
|
Expedited
long haul service. Increased the fleet by approximately 4% and expanded
the length of haul to reflect a renewed focus on transcontinental
loads.
The team operation is also the main training ground for new drivers,
and
improvements in our training have allowed us to lower turnover in
a
difficult driver market. Average freight revenue per total mile has
remained basically flat with last year, although the length of haul
has
expanded about 11%.
|
|
|
•
|
Refrigerated
service. Increased our combined Southern Refrigerated Transport (“SRT”)
and Covenant Refrigerated fleet by approximately 19% and expanded
the
length of haul slightly by just over 1%. Average freight revenue
per total
mile remained basically flat. Within this service offering, SRT continues
to generate the best performance of any part of our company, and
Covenant
Refrigerated has been less proactive than desired because of taking
on
more trucks than its business plan called for to cover additional
trucks
coming out of the Covenant regional service offering.
|
|
|
•
|
Dedicated
service. Increased the fleet by approximately 23% and expanded the
average
length of haul by 22%, while miles per truck decreased about 6%.
Average
freight revenue per total mile increased 3.9% even with the much
longer
average length of haul. While we believe the reallocation of trucks
from
the regional business to new dedicated business was prudent, the
margins
on the new dedicated business have not reached our long-term targets
due
to the quick expansion of this service offering, but have continued
to
improve.
|
|
|
•
|
Regional
solo-driver service. Within our Covenant regional operation, we decreased
the fleet by approximately 37%, decreased the length of haul by
approximately 15% to 542 miles, and increased miles per truck by
7%.
Average freight revenue per total mile remained flat. The freight
mix
within our regional service offering changed substantially, as we
have
worked to reposition several hundred tractors around freight centers
and
driver domiciles. The average truck count for the quarter decreased
by
just over 500 trucks versus the third quarter of last year, and we
expect
the truck count to continue to decrease over the remainder of the
year, as
additional trucks are allocated elsewhere and the overall size of
the
company’s fleet is reduced. Our Star
regional
service is not involved in the business realignment and was only
included
in our results of operations since September 14, 2006,
the date of acquisition.
|
We
also
initiated a freight brokerage operation in the first quarter of 2006 and hired
a
Vice President and General Manager of brokerage operations. Freight brokerage
is
operated as a separate subsidiary, Covenant Transport Solutions, Inc. The
brokerage operation has helped us continue to serve customers when we lacked
capacity in a given area or the load has not met our operating profile. This
service has been helpful as we continue to 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
were 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
September 30, 2006, we had $189.7 million in stockholders' equity and $169.0
million in balance sheet debt for a total debt-to-capitalization ratio of 47.1%
and a book value of $13.49 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. We 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. The variable 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.
Revenue
Equipment
We
operate approximately 3,854 tractors and 10,106 trailers,
including the 614 tractors and 1,719 trailers for which we assumed ownership
in
connection with our acquisition of Star on September 14, 2006.
Of our
tractors, at September 30, 2006, approximately 2,704 were owned, 1,008 were
financed under operating leases, and 142 were provided by independent
contractors, who own and drive their own tractors. Of our trailers, at September
30, 2006, approximately 2,459 were owned and approximately 7,647 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-year
1998 and 1999 dry van trailers and approximately 600 model-year 2000 dry van
trailers. At September 30, 2006, we had taken delivery and replaced
substantially all of these trailers.
For
2006,
in line with our overall fleet reduction initiative, we plan to replace
approximately 2,000 tractors, or approximately 55% of our Company-owned tractor
fleet. This is a substantially greater percentage than 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 tables set forth the percentage relationship of certain items to
total
revenue and freight revenue:
|
|
Three
Months Ended
September
30,
|
|
|
|
Three
Months Ended
September
30,
|
|
|
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
|
|
37.9
|
|
37.2
|
|
Salaries,
wages, and related
expenses
|
|
46.4
|
|
43.7
|
Fuel
expense
|
|
29.9
|
|
28.3
|
|
Fuel
expense (1)
|
|
14.1
|
|
15.8
|
Operations
and maintenance
|
|
5.2
|
|
5.4
|
|
Operations
and maintenance
|
|
6.3
|
|
6.3
|
Revenue
equipment rentals and
purchased
transportation
|
|
9.3
|
|
9.0
|
|
Revenue
equipment rentals and
purchased
transportation
|
|
11.4
|
|
10.5
|
Operating
taxes and licenses
|
|
1.9
|
|
1.8
|
|
Operating
taxes and licenses
|
|
2.4
|
|
2.2
|
Insurance
and claims
|
|
4.7
|
|
5.9
|
|
Insurance
and claims
|
|
5.8
|
|
7.0
|
Communications
and utilities
|
|
1.0
|
|
1.0
|
|
Communications
and utilities
|
|
1.2
|
|
1.2
|
General
supplies and expenses
|
|
3.2
|
|
2.8
|
|
General
supplies and expenses
|
|
3.9
|
|
3.3
|
Depreciation
and amortization
|
|
4.9
|
|
6.2
|
|
Depreciation
and amortization
|
|
6.0
|
|
7.3
|
Total
operating expenses
|
|
98.0
|
|
97.7
|
|
Total
operating expenses
|
|
97.5
|
|
97.3
|
Operating
income
|
|
2.0
|
|
2.3
|
|
Operating
income
|
|
2.5
|
|
2.7
|
Other
expense, net
|
|
0.9
|
|
0.6
|
|
Other
expense, net
|
|
1.1
|
|
0.8
|
Income
before income taxes
|
|
1.1
|
|
1.6
|
|
Income
before income taxes
|
|
1.4
|
|
1.9
|
Income
tax expense
|
|
0.6
|
|
0.9
|
|
Income
tax expense
|
|
0.8
|
|
1.1
|
Net
income
|
|
0.5%
|
|
0.7%
|
|
Net
income
|
|
0.6%
|
|
0.8%
|
(1)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel surcharge
revenue is shown netted against the fuel expense category ($32.5
million
and $25.2 million in the three months ended September 30, 2006 and
2005,
respectively).
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
2006
|
|
2005
|
|
|
|
2006
|
|
2005
|
Total
revenue
|
|
100.0%
|
|
100.0%
|
|
Freight
revenue (2)
|
|
100.0%
|
|
100.0%
|
Operating
expenses:
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Salaries,
wages, and related
expenses
|
|
38.2
|
|
38.3
|
|
Salaries,
wages, and related
expenses
|
|
46.0
|
|
43.8
|
Fuel
expense
|
|
29.1
|
|
26.2
|
|
Fuel
expense (2)
|
|
14.6
|
|
15.7
|
Operations
and maintenance
|
|
5.2
|
|
5.3
|
|
Operations
and maintenance
|
|
6.4
|
|
6.1
|
Revenue
equipment rentals and
purchased
transportation
|
|
9.4
|
|
9.8
|
|
Revenue
equipment rentals and
purchased
transportation
|
|
11.3
|
|
11.2
|
Operating
taxes and licenses
|
|
2.0
|
|
2.2
|
|
Operating
taxes and licenses
|
|
2.5
|
|
2.5
|
Insurance
and claims
|
|
5.0
|
|
6.1
|
|
Insurance
and claims
|
|
6.0
|
|
7.0
|
Communications
and utilities
|
|
1.0
|
|
1.1
|
|
Communications
and utilities
|
|
1.2
|
|
1.2
|
General
supplies and expenses
|
|
3.2
|
|
2.8
|
|
General
supplies and expenses
|
|
3.8
|
|
3.2
|
Depreciation
and amortization
|
|
5.5
|
|
6.6
|
|
Depreciation
and amortization
|
|
6.6
|
|
7.5
|
Total
operating expenses
|
|
98.6
|
|
98.5
|
|
Total
operating expenses
|
|
98.4
|
|
98.2
|
Operating
income
|
|
1.4
|
|
1.5
|
|
Operating
income
|
|
1.6
|
|
1.8
|
Other
expense, net
|
|
0.7
|
|
0.5
|
|
Other
expense, net
|
|
0.8
|
|
0.6
|
Income
before income taxes
|
|
0.7
|
|
1.0
|
|
Income
before income taxes
|
|
0.8
|
|
1.2
|
Income
tax expense
|
|
0.8
|
|
0.7
|
|
Income
tax expense
|
|
0.9
|
|
0.9
|
Net
income (loss)
|
|
(0.1%)
|
|
0.3%
|
|
Net
income (loss)
|
|
(0.1%)
|
|
0.3%
|
(2)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel surcharge
revenue is shown netted against the fuel expense category ($84.6
million
and $57.6 million in the nine months ended September 30, 2006 and
2005,
respectively).
|
COMPARISON
OF THREE MONTHS ENDED SEPTEMBER 30, 2006 TO THREE MONTHS ENDED SEPTEMBER 30,
2005
For
the
quarter ended September 30, 2006, total revenue increased $6.8 million, or
4.0%,
to $176.7 million from $169.9 million in the 2005 period. Total revenue
includes $32.5 million and $25.2 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.
Star’s
revenue and expense have only been included in our results of operations since
September 14, 2006, the date of acquisition. Star’s impact on the
percentage of expenses to freight revenue was not significant and will not
be
included in our discussion of specific expense categories below.
Freight
revenue remained relatively constant at $144.1 million in the three months
ended
September 30, 2006, and $144.7 million in the same period of 2005. Average
freight revenue per tractor per week, our primary measure of productivity,
increased 1.8% to $3,123 in the 2006 period from $3,067 in the 2005 period.
The
increase was primarily generated by a 1.6% increase in average miles per
tractor, a reduction in non-revenue miles percentage and a 0.3% increase in
our
average freight revenue per total mile. Excluding the acquisition of Star,
we
continued to constrain the size of our tractor fleet to achieve greater fleet
utilization and improved profitability. In general, the changes in freight
mix
as a result of the realignment expanded the portions of our business with longer
lengths of haul, more miles per tractor, and generally lower rate structures,
while shrinking the regional service offering, which had the highest rate
structure but significantly lower miles per tractor.
Salaries,
wages, and related expenses increased $3.6 million, or 5.7%, to $66.9 million
in
the 2006 period, from $63.3 million in the 2005 period. As a percentage of
freight revenue, salaries, wages, and related expenses increased to 46.4% in
the
2006 period from 43.7% in the 2005 period. The increase was largely attributable
to driver pay per mile increases and driver retention bonus programs instituted
in the second half of 2005, an increase in the percentage of our fleet comprised
of company drivers versus owner-operators, higher health claim costs and
additional office salaries related to our business realignment. Driver pay
increased $2.9 million to $45.9 million in the 2006 period from $43.0 million
in
the 2005 period. Our payroll expense for employees, other than over-the-road
drivers, as well as our employee benefits, increased $0.8 million to $18.8
million in the 2006 period from $18.0 million in the 2005 period,
including wages paid in the 2006 period for our new brokerage operation’s
management and support employees of $0.1 million in the 2006 period. We
maintain a workers' compensation plan and group medical plan for our employees
with a deductible amount of $1.0 million for each workers' compensation claim
and a stop loss amount of $275,000 for each medical claim.
Fuel
expense, net of fuel surcharge revenue of $32.5 million in the 2006 period
and
$25.2 million in the 2005 period, decreased $2.6 million, or 11.4%, to $20.3
million in the 2006 period, from $22.9 million in the 2005 period. As a
percentage of freight revenue, net fuel expense decreased to 14.1% in the 2006
period from 15.8% in the 2005 period primarily due to a $0.30 per gallon
decrease in diesel fuel prices over the last few weeks of the 2006 period.
Although fuel prices increased sharply for most of 2006 from already high levels
during 2005, the fuel price decrease at the end of the 2006 period, our improved
fuel surcharge program, better fuel economy due to lower idle times and a lower
percentage of non-revenue miles allowed us to improve our net fuel expense.
Fuel
surcharges amounted to $0.31 per total mile in the 2006 period and $0.24 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. Even though fuel in the fourth quarter of 2006
is expected to average at or below 2005 prices, fuel prices decreased
dramatically in the fourth quarter of 2005, which included the delayed
positive
impact
of
fuel surcharge collection. Absent a significant decrease in fourth quarter
2006
fuel prices, we would expect an increase in this expense category in the fourth
quarter of 2006, as compared to the fourth quarter of 2005.
Operations
and maintenance, consisting primarily of vehicle maintenance, repairs, and
driver recruitment expenses, slightly decreased by $0.1 million to $9.1 million
in the 2006 period from $9.2 million in the 2005 period. As a percentage of
freight revenue, operations and maintenance remained at 6.3% in the 2006 and
2005 periods.
Revenue
equipment rentals and purchased transportation increased $1.2 million, or 7.8%,
to $16.5 million in the 2006 period, from $15.3 million in the 2005 period.
As a
percentage of freight revenue, revenue equipment rentals and purchased
transportation expense increased to 11.4% in the 2006 period from 10.5% in
the
2005 period. Payments to third-party transportation providers to our brokerage
operation were $1.2 million in the 2006 period, compared to zero in the 2005
period, before we began our brokerage operation. Tractor and trailer equipment
rental and other related expenses increased $1.0 million, to $10.6 million
compared with $9.6 million in the same period of 2005. We had financed
approximately 1,008 tractors and 7,647 trailers under operating leases at
September 30, 2006, compared with 1,140 tractors and 7,384 trailers under
operating leases at September 30, 2005. Payments to independent contractors
decreased $0.9 million, or 16.1%, to $4.7 million in the 2006 period from $5.6
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 190 in the 2005 period.
Operating
taxes and licenses increased $0.3 million, or 9.7%, to $3.4 million in the
2006
period from $3.1 million in the 2005 period. As a percentage of freight revenue,
operating taxes and licenses remained essentially constant at 2.4% in the 2006
period versus 2.2% in the 2005 period.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, decreased
$1.7 million, or 17.1%, to approximately $8.4 million in the 2006 period from
approximately $10.1 million in the 2005 period. As a percentage of freight
revenue, insurance and claims decreased to 5.8% in the 2006 period from 7.0%
in
the 2005 period. During the quarter, we reduced our accrual for casualty claims
to 8.0 cents per mile from 9.5 cents per mile for the same quarter in 2005
as a
result of several quarters of improved safety results that have changed our
actuarial estimate.
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 $1.8 million and $1.7
million in the 2006 and 2005 periods, respectively. As a percentage of freight
revenue, communications and utilities also remained essentially constant at
1.2%
in the 2006 and 2005 periods.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $0.9 million to $5.7 million in the 2006 period
from $4.8 million in the 2005 period. As a percentage of freight revenue,
general supplies and expenses increased to 3.9% in the 2006 period from 3.3%
in
the 2005 period. Of this increase, $0.7 million was for additional building
rent
paid on our headquarters building and surrounding property in Chattanooga,
Tennessee for which we completed a sale leaseback transaction effective April
2006 as described more fully in the following paragraph.
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 $29.6 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%, resulting in annual straight-line
rental expense of approximately $2.7 million. The transaction resulted in a
gain
of approximately $2.1 million, which is being amortized ratably over the life
of
the lease and recorded as an offset to depreciation expense on our consolidated
condensed statements of operations.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
decreased $1.9 million, or 18.1% to $8.6 million in the 2006 period from $10.5
million in the 2005 period. As a percentage of freight revenue, depreciation
and
amortization decreased to 6.0% in the 2006 period from 7.3% in the 2005 period.
The decrease primarily related to a net gain on the disposal of tractors and
trailers of approximately $1.2 million in the 2006 period compared to a net
gain
of $0.4 million in the 2005 period. Additionally, a decrease of $0.2 million
in
depreciation expense for the 2006 period resulted from the April 2006 sale
leaseback transaction involving our Chattanooga facility as compared to the
2005
period. Depreciation and amortization expense is net of any gain or loss on
the
disposal of tractors and trailers.
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.
We
evaluate goodwill and certain intangibles for impairment, annually. During
the
second quarter of 2006, we tested our goodwill totaling $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 $0.5 million to $1.6 million
in the 2006 period from $1.1 million in the 2005 period. The increase relates
primarily to increased net interest expense of $0.5 million resulting from
the
additional borrowings of debt related to the Star acquisition and higher
variable interest rates.
Our
income tax expense was $1.1 million and $1.5 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 primarily 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.
On
September 8, 2006, the IRS completed their audit fieldwork of 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.
During the three months ended June 30, 2006, we recorded all of the $0.1 million
of income tax expense related to this proposed disallowance of tax benefits.
Additionally, the IRS has proposed to disallow the tax benefits associated
with
insurance premium payments made to our wholly-owned captive insurance subsidiary
for the 2003 and 2004 years. Due to the favorable resolution of the 2001 and
2002 IRS audit on this issue, we are vigorously defending our position related
to this proposed disallowance of tax benefits using all administrative and
legal
processes available. On October 5, 2006, we filed an official Statement of
Appeal with the IRS Appeals Office requesting a conference with an IRS Appeals
Officer protesting this proposed adjustment related to the disallowance of
our
deductions for the insurance premiums paid. For the three months ended September
30, 2006, income tax expense of $0.1 million was recorded in our consolidated
condensed statements of operations related to this uncertain tax position.
Primarily
as a result of the factors described above, net income decreased approximately
$0.4 million to $0.8 million in the 2006 period from net income of $1.2 million
in the 2005 period. As a result of the foregoing, our net margin decreased
to
0.6% in the 2006 period from 0.8% in the 2005 period.
COMPARISON
OF NINE MONTHS ENDED SEPTEMBER 30, 2006 TO NINE MONTHS ENDED SEPTEMBER 30,
2005
For
the
nine months ended September 30, 2006, total revenue increased $32.9 million,
or
7.1%, to $497.5 million from $464.6 million in the 2005 period. Total
revenue includes $84.6 million and $57.6 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.
Star’s
revenue and expense have only been included in our results of operations since
September 14, 2006, the date of acquisition. Star’s impact on the
percentage of expenses to freight revenue was not significant and will not
be
included in our discussion of specific expense categories below.
Freight
revenue increased $5.9 million or 1.5% to $412.9 million in the nine months
ended September 30, 2006 from $407.0 million in the same period of 2005. Average
freight revenue per tractor per week, our primary measure of asset productivity,
increased 4.2% to $3,058 in the 2006 period from $2,934 in the 2005 period.
The
increase was primarily generated by a 3.0% increase in average miles per
tractor, an improvement in non-revenue miles percentage and a 0.4% increase
in
our average freight revenue per loaded mile. Excluding the acquisition of Star,
we continued to constrain the size of our tractor fleet to achieve greater
fleet
utilization and improved profitability. In general, the changes in freight
mix
as a result of the realignment expanded the portions of our business with longer
lengths of haul, more miles per tractor, and generally lower rate structures,
while shrinking the regional service offering, which had the highest rate
structure but significantly lower miles per tractor.
Salaries,
wages, and related expenses increased $11.8 million, or 6.6%, to $190.0 million
in the 2006 period, from $178.2 million in the 2005 period. As a percentage
of
freight revenue, salaries, wages, and related expenses increased to 46.0% in
the
2006 period, from 43.8% in the 2005 period. The increase was largely
attributable to driver pay per mile increases and driver retention bonus
programs instituted in the second half of 2005, an increase in the percentage
of
our fleet comprised of company drivers versus owner-operators, higher health
claim costs and additional office salaries related to our business realignment.
Driver pay increased $6.1 million to $130.3 million in the 2006 period from
$124.2 million in the 2005 period. This resulted in increased driver pay on
a
cost per mile basis of 3.7% in the 2006 period over the 2005 period. Our payroll
expense for employees, other than over-the-road drivers, as well as our employee
benefits, increased $7.6 million to $54.3 million in the 2006 period from $47.6
million in the 2005 period, including a $2.6 million increase in our health
insurance costs. We
maintain a workers' compensation plan and group medical plan for our employees
with a deductible amount of $1.0 million for each workers' compensation claim
and a stop loss amount of $275,000 for each medical claim.
Fuel
expense, net of fuel surcharge revenue of $84.6 million in the 2006 period
and
$57.6 million in the 2005 period, decreased $3.4 million to $60.5 million in
the
2006 period from $63.9 million in the 2005 period. As a percentage of freight
revenue, net fuel expense decreased to 14.6% in the 2006 period from 15.7%
in
the 2005 period. Although fuel prices increased sharply for most of 2006 from
already high levels during 2005, our improved fuel surcharge program, better
fuel economy due to lower idle times and a lower percentage of non-revenue
miles
allowed us to improve our net fuel expense. Our fuel surcharge program was
able
to offset all of the higher fuel prices and allowed us better overall recovery
of excess fuel costs. Fuel surcharges amounted to $0.28 per total mile in the
2006 period and $0.19 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. Even
though fuel in the fourth quarter of 2006 is expected to average at or below
2005 prices, fuel prices decreased dramatically in the fourth quarter of 2005,
which included the delayed impact of fuel surcharge collection. Absent a
significant decrease in fourth quarter 2006 fuel prices, we would expect an
increase in this expense category in the fourth quarter of 2006, as compared
to
the fourth quarter of 2005.
Operations
and maintenance, consisting primarily of vehicle maintenance, repairs, and
driver recruitment expenses, increased $1.5 million to $26.3 million in the
2006
period from $24.8 million in the 2005 period. As a percentage of freight
revenue, operations and maintenance increased to 6.4% in the 2006 period from
6.1% in the 2005 period. The increase resulted in part from higher unloading
costs, tractor maintenance costs and increased driver recruiting expense due
to
a tighter supply of drivers in the early part of 2006.
Revenue
equipment rentals and purchased transportation increased $0.9 million, or 2.0%,
to $46.6 million in the 2006 period, from $45.7 million in the 2005 period.
As a
percentage of freight revenue, revenue equipment rentals and purchased
transportation expense slightly increased to 11.3% in the 2006 period from
11.2%
in the 2005 period. The increase is due principally to purchased transportation
related to our brokerage business totaling $1.5 million in the 2006 period,
compared to only $0.1 million in the 2005 period, before we began our brokerage
operation, and an increase in revenue equipment rentals, offset partially by
a
decrease in the percentage of our total miles that were driven by independent
contractors. Payments to independent contractors decreased $2.1 million to
$14.3
million in the 2006 period from $16.4 million in the 2005 period, mainly due
to
a decrease in the independent contractor fleet to an average of 153 during
the
2006 period versus an average of 196 in the 2005 period. Tractor and trailer
equipment rental and other related expenses increased $1.6 million, to $30.7
million in the 2006 period compared with $29.1 million in the same period of
2005. We had financed approximately 1,008 tractors and 7,647 trailers under
operating leases at September 30, 2006, compared with 1,140 tractors and 7,384
trailers under operating leases at September 30, 2005. During the third quarter
of 2006, we purchased approximately 198 tractors that were previously
leased.
Operating
taxes and licenses remained essentially constant at $10.2 million and $10.1
million in the 2006 and 2005 periods, respectively. As a percentage of freight
revenue, operating taxes and licenses also remained essentially constant at
2.5%
for both the 2006 and 2005 periods.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, decreased
$3.7 million, or 13.0%, to approximately $24.8 million in the 2006 period from
approximately $28.5 million in the 2005 period. As a percentage of freight
revenue, insurance and claims decreased to 6.0% in the 2006 period from 7.0%
in
the 2005 period. During our second and third quarters, we reduced our accrual
for casualty claims to 8.0 cents per mile in the 2006 period from 9.5 cents
per
mile in the 2005 period as a result of several quarters of improved safety
results that have changed our actuarial estimate. We also recorded and received
an insurance rebate of approximately $1.0 million during the first nine months
of 2006 resulting from achieving monetary claim targets for our casualty policy
in the policy year ending February 28, 2006.
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 $4.9 million and $5.0
million in the 2006 and 2005 periods, respectively. As a percentage of freight
revenue, communications and utilities also remained essentially constant at
1.2%
in the 2006 and 2005 periods.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $2.5 million to $15.7 million in the 2006 period
from $13.2 million in the 2005 period. As a percentage of freight revenue,
general supplies and expenses increased to 3.8% in the 2006 period from 3.2%
in
the 2005 period. Of this increase, $1.5 million was for additional building
rent
paid on our headquarters building and surrounding property in Chattanooga,
Tennessee for which we completed a sale leaseback transaction effective April
2006 as described more fully in the following paragraph. The additional increase
is partially due to our paying for contract labor related to the business
realignment, an increase in our travel expenses related to customer visits
and
increased outside professional fees, offset by reduced bad debt
expense.
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 $29.6 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%, resulting in annual straight-line
rental expense of approximately $2.7 million. The transaction resulted in a
gain
of approximately $2.1 million, which is being amortized ratably over the life
of
the lease and recorded as an offset to depreciation expense on our consolidated
condensed statements of operations.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
decreased $3.3 million, or 10.8%, to $27.2 million in the 2006 period from
$30.5
million in the 2005 period. As a percentage of freight revenue, depreciation
and
amortization decreased to 6.6% in the 2006 period from 7.5% in the 2005 period.
The decrease primarily related to a net gain on the disposal of tractors and
trailers of $2.9 million in the 2006 period compared to a net gain of $0.5
million in the 2005 period. Additionally, a decrease of $0.4 million in
depreciation expense for the 2006 period resulted from the April 2006 sale
leaseback transaction involving our Chattanooga facility as compared to the
2005
period. Depreciation and amortization expense is net of any gain or loss on
the
disposal of tractors and trailers.
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 $1.1 million, to $3.4 million
in the 2006 period from $2.3 million in the 2005 period. The increase relates
primarily to increased net interest expense of $0.8 million resulting from
the
additional borrowings of debt related to the Star acquisition and higher
variable interest rates. In the 2006 period, we recognized no pre-tax, non-cash
gain compared to a $0.4 million gain in the 2005 period related to the
accounting for interest rate derivatives under SFAS No. 133.
Our
income tax expense was $3.9 million and $3.6 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. On April 20,
2006, we completed the appeals process with the IRS related to their 2001 and
2002 audits. Related to this settlement with the IRS, we recorded additional
income tax expense of approximately $0.5 million for the three months ended
June
30, 2006. We received a favorable resolution in the Closing Agreement received
from the IRS which stated that our wholly-owned captive insurance subsidiary
made a valid election under section 953(d) of the Internal Revenue Code and
is
to be respected as an insurance company.
On
September 8, 2006, the IRS completed their audit fieldwork of 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.
During the three months ended June 30, 2006, we recorded all of the $0.1 million
of income tax expense related to this proposed disallowance of tax benefits.
Additionally, the IRS has proposed to disallow the tax benefits associated
with
insurance premium payments made to our wholly-owned captive insurance subsidiary
for the 2003 and 2004 years. Due to the favorable resolution of the 2001 and
2002 IRS audit on this issue, we are vigorously defending our position related
to this proposed disallowance of tax benefits using all administrative and
legal
processes available. On October 5, 2006, we filed an official Statement of
Appeal with the IRS Appeals Office requesting a conference with an IRS Appeals
Officer protesting this proposed adjustment related to the disallowance of
our
deductions for the insurance premiums paid. For the nine months ended September
30, 2006, income tax expense of $0.3 million was recorded in our consolidated
condensed statements of operations related to this uncertain tax position.
Primarily
as a result of the factors described above, net income decreased approximately
$1.7 million to a net loss of $0.5 million in the 2006 period from net income
of
$1.2 million in the 2005 period. As a result of the foregoing, our net margin
(loss) decreased to (0.1%) in the 2006 period from 0.3% in the 2005 period.
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 September 30, 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 and increasing 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 expect
capital expenditures, primarily for revenue equipment (net of proceeds from
revenue equipment disposals and the April 2006 sale leaseback transaction),
to
be approximately $55.0 to $60.0 million in 2006, exclusive of acquisitions
of
companies, assuming all revenue equipment is purchased. 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 $41.3 million in the 2006 period and $13.8
million in the 2005 period. We have continued to focus on improved collections
of accounts receivable resulting in improved cash flows of $7.7 million in
the
2006 period as compared to the 2005 period. Our cash from operating activities
was lower in the 2005 period due primarily to $10.0 million in tax payments,
a
$10.0 million payment for two years of prepaid insurance premiums, and our
lower
performance in the collection of receivables.
Net
cash
used in investing activities was $83.4 million in the 2006 period and $32.0
million in the 2005 period. All 2005 period cash outflows were related to net
purchases of property and equipment. In the 2006 period, $39.0 million was
used
for the acquisition of Star and $74.0 million was used for net purchases of
property and equipment, which was offset by the $29.6 million of proceeds from
the April 2006 sale leaseback transaction of our Chattanooga facility. The
sale
leaseback transaction was used for purchasing additional revenue equipment
and
paying down our outstanding debt on the Credit Facility.
Net
cash
provided by financing activities was $46.8 million in the 2006 period, as we
borrowed additional funds primarily to fund our acquisition of Star. Net cash
provided by financing activities was $16.8 million in the 2005 period. At
September 30, 2006, the Company had outstanding debt of $169.0 million,
primarily consisting of approximately $69.0 million drawn under the Credit
Agreement, $57.3 million from the Securitization Facility and $42.7 million
of
installment notes payable assumed in our acquisition of Star. Interest rates
on
this debt range from 5.3% to 6.7%.
In
May
2006, the Board of Directors approved an extension of our previously approved
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. No shares have been purchased under this plan during
2006. At September 30, 2006, there were 1,154,100 shares still available to
purchase under the guidance of this plan.
Material
Debt Agreements
In
December 2004, we entered into a 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 September 30, 2006). At September
30, 2006, we had $69.0 million 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 September 30, 2006, we had
approximately $10.5 million of available borrowing capacity under the Credit
Agreement. At September 30, 2006 and December 31, 2005, we had undrawn
letters of credit outstanding of approximately $70.5 million
and $73.9 million,
respectively.
In
December 2000, we entered into 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. After giving effect to the October 26, 2006
amendment to the Securitization Facility, we can receive up to $70.0 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 September 30, 2006
and
December 31, 2005, we had $57.3 million and $47.3 million, respectively
outstanding, with weighted average interest rates of 5.3% and 3.8%,
respectively. CRC does not meet the requirements for off-balance sheet
accounting; therefore, it is reflected in our consolidated condensed financial
statements.
Our
credit agreement and securitization facilities and other financing arrangements
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 September 30, 2006.
OFF-BALANCE
SHEET ARRANGEMENTS
Operating
leases have been an important source of financing for our revenue equipment,
computer equipment, the Company airplane and certain real estate. At September
30, 2006, we had financed approximately 1,008 tractors and 7,647 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 in the line item “Revenue equipment rentals and purchased
transportation.” Our revenue equipment rental expense was $30.7 million in the
2006 period, compared to $29.1 million in the 2005 period. The total amount
of
remaining payments under operating leases as of September 30, 2006, was
approximately $181.5 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 September 30, 2006,
the maximum amount of the residual value guarantees was approximately $45.5
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 $27.6
million on tractors and trailers in the first nine months 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,
then 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.
Accounting
for Investments - Effective July 1, 2000, we combined our logistics business
with the logistics businesses of five other transportation companies into a
company called Transplace, Inc (“Transplace”). Transplace operates a global
transportation logistics service. In the transaction, we contributed our
logistics customer list, logistics business software and software licenses,
certain intellectual property, intangible assets totaling approximately
$5.1 million, and $5.0 million in cash for the initial funding of the
venture, in exchange for 12.4% ownership. We account for our investment using
the cost method of accounting, with the investment included in other assets.
We
continue to evaluate our cost method investment in Transplace for impairment
due
to declines considered to be other than temporary. This impairment evaluation
includes general economic and company-specific evaluations. If we determine
that
a decline in the cost value of this investment is other than temporary, then
a
charge to earnings will be recorded to other (income) expenses in our
consolidated condensed statements of operations for all or a portion of the
unrealized loss, and a new cost basis in the investment will be established.
As
of September 30, 2006, no such charge had been recorded. However, we are closely
evaluating this investment for impairment as our evaluation of the value of
this
investment had been steadily declining over the last few fiscal quarters until
recent cash flow improvements steadied this decline in recent months. As such
we
do not currently believe that an impairment charge will be warranted in the
near
term. We will continue to evaluate this investment for impairment on a quarterly
basis. Also, during the first quarter of 2005, the Company loaned Transplace
approximately $2.7 million. The 6% interest-bearing note receivable matures
January 2007. Based on the borrowing availability of Transplace, we do not
believe there is any impairment of this note receivable.
Accounting
for Business Combinations - In accordance with business combination accounting,
we allocate the purchase price of acquired companies to the tangible and
intangible assets acquired, and liabilities assumed based on their estimated
fair values. We engage third-party appraisal firms to assist management in
determining the fair values of certain assets acquired. Such valuations require
management to make significant estimates and assumptions, especially with
respect to intangible assets. Management makes estimates of fair value based
upon historical experience, as well as information obtained from the management
of the acquired companies and are inherently uncertain. Unanticipated events
and
circumstances may occur which may affect the accuracy or validity of such
assumptions, estimates or actual results. In certain business combinations
that
are treated as a stock purchase for income tax purposes, we must record deferred
taxes relating to the book versus tax basis of acquired assets and liabilities.
Generally, such business combinations result in deferred tax liabilities
as the
book values are reflected at fair values whereas the tax basis is carried
over
from the acquired company. Such deferred taxes are initially estimated based
on
preliminary information and are subject to change as valuations and tax returns
are finalized.
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 September 30, 2006, the maximum amount
of
the residual value guarantees was approximately $45.5 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.
On
April
20, 2006, we completed the appeals process with the IRS related to their 2001
and 2002 audits. Related to this settlement with the IRS, we recorded additional
income tax expense of approximately $0.5 million for the three months ended
June
30, 2006. We received a favorable resolution in the Closing Agreement received
from the IRS which stated that our wholly-owned captive insurance subsidiary
made a valid election under section 953(d) of the Internal Revenue Code and
is
to be respected as an insurance company.
On
September 8, 2006, the IRS completed their audit fieldwork of 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.
During the three months ended June 30, 2006, we recorded all of the $0.1 million
of income tax expense related to this proposed disallowance of tax benefits.
Additionally, the IRS has proposed to disallow the tax benefits associated
with
insurance premium payments made to our wholly-owned captive insurance subsidiary
for the 2003 and 2004 years. Due to the favorable resolution of the 2001 and
2002 IRS audit on this issue, we are vigorously defending our position related
to this proposed disallowance of tax benefits using all administrative and
legal
processes available. On October 5, 2006, we filed an official Statement of
Appeal with the IRS Appeals Office requesting a conference with an IRS Appeals
Officer protesting this proposed adjustment related to the disallowance of
our
deductions for the insurance premiums paid. For the three and nine months ended
September 30, 2006, income tax expense of $0.1 million and $0.3 million,
respectively, was recorded in our consolidated condensed statements of
operations related to this uncertain tax position. If we are unsuccessful in
defending our position on this deduction, we could ultimately owe taxes totaling
$1.7 million related to this issue,
for
which we have currently accrued approximately $0.8 million of income taxes
in
our consolidated condensed balance sheets at September 30, 2006.
Deferred
income taxes represent a substantial liability on our consolidated condensed
balance sheet and are determined in accordance with SFAS No. 109. 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 September 30, 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
nine
months 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
September 30, 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
September 30, 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, Securitization
Facility and various revenue equipment installment notes payable. At September
30, 2006, we had variable, base rate borrowings of $69.0 million outstanding
under the Credit Agreement, $57.3 million under the Securitization Facility
and $42.7 million outstanding under the various revenue equipment installment
notes payable. Assuming variable-rate borrowings under the Credit Agreement
and
Securitization Facility at September
30,
2006
levels, a one percentage point increase in interest rates could increase our
annual interest expense by approximately $1.7 million.
ITEM
4. CONTROLS AND
PROCEDURES
As
required by Rule 13a-15 under 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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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.
Reference
is made in our Form 10-Q for the quarterly period ended March 31,
2006
regarding a lawsuit against us relating to a 2003 vehicular
accident.
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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. In addition to the risk factors set forth on
our
Form 10-K, we believe that the following issues, uncertainties, and
risks,
should be considered in evaluating our business and growth outlook.
We
may not be successful in executing our business realignment and improving
or maintaining our profitability.
During
2005 we adopted, and we continue to implement, a strategic plan designed
to improve our profitability. The plan generally involves organizing
our
operations around four distinct service offerings. However, we may
not be
successful in executing this plan. As we continue to implement this
plan,
including realigning our business, we expect changes to items such
as the
customer base, rate structure, routes served, driver domiciles,
management, reporting structure, and operating procedures. These
changes,
and others that we did not expect, will present significant challenges,
including, but not limited to, the following:
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•
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Developing
management depth to oversee the service offerings and also manage
regional
terminals within the service offerings;
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•
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Adapting
our personnel to new strategies, policies, and procedures, including
more
distributed decision making;
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•
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Maintaining
customer relationships and freight volumes while changing routes,
pricing,
and other aspects of our operations;
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•
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Maintaining
a sufficient number of qualified drivers while changing routes, policies,
procedures, and management structures;
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•
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Controlling
headcount and expenses generally during a transition that may entail
a
period of duplication of some functions; and
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•
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Improving
or eliminating processes, functions, services, or other items that
are
identified as substandard.
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As
part of the realignment and our focus on improving the profitability
of
our regional operations, we acquired Star's regional operations and
decided to downsize our historical/Chattanooga-based regional operations.
As part of the downsizing, we plan to replace approximately 2,000
tractors
in 2006, or approximately 55% of our Company-owned tractor fleet.
This is
a substantially greater percentage than we would normally replace
and will
result in a substantial increase in capital expenditures. We are
also
replacing a significant number of trailers, which will be primarily
financed with operating leases. If we are unable to dispose of this
equipment at acceptable prices, our results of operations may be
adversely
affected. Additionally, selling our equipment may adversely affect
our
customer service and driver
turn-over.
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There
can be no assurance that the integration of Star's regional operations
into our operations will be successful and that we will be able to
continue and improve upon Star's profitability. As we integrate Star's
regional operations, we may lose key components of Star's operation,
including customers, drivers, other employees, and owner-operators,
none
of whom are bound to remain with Star. Further, integrating Star's
regional operations may distract our management from other operations,
including our business realignment. There can be no assurance that
the
expected synergies from the acquisition, including without limitation,
the
impact on our regional service offering, will come to fruition. In
addition, there can be no assurance that we will be able to manage
our
debt levels and cash requirements and maintain adequate liquidity
following the acquisition of Star and through the downsizing and
fleet
replacement process.
Our
credit and securitization facilities and other financing arrangements
contain restrictive and financial covenants, and we may be unable
to
comply with these covenants. A default could result in the acceleration
of
all of our outstanding indebtedness, which could have an adverse
effect on
our financial condition, liquidity, results of operations, and the
price
of our common stock.
Our
credit and securitization facilities and other financing arrangements
contain covenants that impose certain restrictions and require us
to
maintain specified financial ratios. Following the Star acquisition,
we
were very close to the upper limit on our leverage ratio at September
30,
2006. If we fail to comply with any of these covenants, we will be
in
default, which could cause cross-defaults under other loans or agreements.
A default, if not waived by our lenders, could cause our debt and
other
obligations to become immediately due and payable. To obtain waivers
of
defaults, we may incur significant fees and transaction costs. If
waivers
of defaults are not obtained and acceleration occurs, we may be unable
to
borrow sufficient additional funds to refinance the accelerated debt.
Even
if new financing is made available to us, it may not be available
on
commercially acceptable terms.
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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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#
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Stock
Purchase Agreement dated September 14, 2006, among Covenant Transport,
Inc., Star Transportation, Inc., Beth D. Franklin, David D. Dortch,
Rose
D. Shipp, David W. Dortch, and James F. Brower, Jr.
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#
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Amendment
No. 3 and Limited Waiver to Amended and Restated Credit Agreement
dated
August 11, 2006, among Covenant Asset Management, Inc., Covenant
Transport, Inc., and Bank of America, N.A.
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#
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Amendment
No. 10 to Loan Agreement dated July 2006 among Three Pillars Funding
LLC
(f/k/a Three Pillars Funding Corporation), SunTrust Capital Markets,
Inc.
(f/k/a SunTrust Equitable Securities Corporation), CVTI Receivables
Corp.,
and Covenant Transport, Inc.
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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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#
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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 Joey B. Hogan,
the
Company's Chief Financial Officer
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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 David R. Parker, the Company's
Chief
Executive Officer
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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 to 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:
November 9, 2006
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By:
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/s/
Joey B. Hogan
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Joey
B. Hogan
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Executive
Vice President and Chief Financial Officer,
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in
his capacity as such and on behalf of the
issuer.
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Page
38