Form 10-K (Year Ended December 31, 2006)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2006
OR
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[
]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from to
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Commission
file number 0-24960
COVENANT
TRANSPORT, INC.
(Exact
name of registrant as specified in its charter)
Nevada
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88-0320154
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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400
Birmingham Hwy.
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Chattanooga,
TN
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37419
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
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423-821-1212
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Securities
registered pursuant to Section 12(b) of the Act:
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$0.01
Par Value Class A Common Stock - The NASDAQ Stock Market
LLC
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(Title
of class)
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
[
] Yes [X] No
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.
[X]
Yes
[ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [
]
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.
[
] Large Accelerated Filer
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[X]
Accelerated Filer
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[
] Non-Accelerated Filer
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
[
] Yes [X] No
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2006, was approximately
$112.9
million
(based
upon the $15.22 per share closing price on that date as reported by Nasdaq
and
affiliate voting stock ownership reported on our most recent Schedule 14A,
filed
April 17, 2006). In making this calculation the registrant has assumed, without
admitting for any purpose,
that all executive officers, directors, and affiliated holders of more than
10%
of a class of outstanding common stock, and no other persons, are
affiliates.
As
of
March 1, 2007, the registrant had 11,650,690 shares of Class A common stock
and
2,350,000 shares of Class B common stock outstanding.
Materials
from the registrant's definitive proxy statement for the 2007 Annual Meeting
of
Stockholders to be held on May 22, 2007 have been incorporated by reference
into
Part III of this Form 10-K.
Part
I
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Item
1.
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Business
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Item
1A.
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Risk
Factors
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Item
1B.
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Unresolved
Staff Comments
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Item
2.
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Properties
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Item
3.
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Legal
Proceedings
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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Part
II
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Item
5.
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Market
for
Registrant's Common Equity
and
Related Stockholder Matters
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Item
6.
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Selected
Financial
Data
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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Item
8.
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Financial
Statements and Supplementary Data
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Item
9A.
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Controls
and Procedures
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Item
9B.
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Other
Information
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Part
III
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Item
10.
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Directors,
Executive Officers,
and Corporate Governance
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Item
11.
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Executive
Compensation
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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Item
14.
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Principal
Accountant
Fees and Services
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Part
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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Signatures
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Reports
of Independent Registered Public Accounting Firm
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Financial
Data
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Consolidated
Balance Sheets
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Consolidated
Statements of Operations
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Consolidated
Statements of Stockholders' Equity and Comprehensive Income
(Loss)
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Consolidated
Statements of Cash Flows
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Notes
to Consolidated Financial Statements
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PART
I
This
Annual Report on Form 10-K 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. All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements, including without
limitation: any projections of earnings, revenues, or other financial items;
any
statement of plans, strategies, and objectives of management for future
operations; any statements concerning proposed new services or developments;
any
statements regarding future economic conditions or performance; and any
statements of belief and any statement of assumptions underlying any of the
foregoing. Such statements may be identified by their use of terms or phrases
such as "expects," "estimates," "projects," "believes," "anticipates,"
"intends," and similar terms and phrases. Forward-looking statements 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. Readers should review and consider the factors
discussed in "Risk Factors" of this Annual Report on Form 10-K, along with
various disclosures in our press releases, stockholder reports, and other
filings with the Securities and Exchange Commission.
All
such forward-looking statements speak only as of the date of this Annual Report
on Form 10-K. 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.
References
in this Annual Report to "we," "us," "our," or the "Company" or similar terms
refer to Covenant Transport, Inc. and its
subsidiaries.
General
We
are
one of the ten largest truckload carriers in the United States measured by
2005
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.
We
are a major carrier for traditional truckload customers such as manufacturers
and retailers, as well as 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.
We
were
founded as a provider of expedited long-haul freight transportation, primarily
using two-person driver teams in transcontinental lanes. Beginning in the late
1990's and continuing into 2001, a combination of customer demand for additional
services, changes in freight distribution patterns, a desire to reduce exposure
to the more cyclical and seasonal long-haul markets, and a desire for additional
growth markets convinced us to offer additional services. Through our
acquisitions of Bud Meyer Truck Line and Southern Refrigerated Transport, we
entered the refrigerated market.
Through
our acquisitions of Harold Ives Trucking, Con-Way Truckload Services and Star
Transportation, we developed a significant solo-driver operation. In addition,
over the past several years, we internally developed the capacity to provide
dedicated fleet and freight brokerage services.
In
the
second quarter of 2006,
we
initiated a freight brokerage operation and hired a Vice President and General
Manager of brokerage operations. Freight brokerage is operated as a separate
subsidiary, Covenant Transport Solutions, Inc.
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. For the fourth quarter 2006, Star
accounted for 12.8% of our consolidated revenue.
Since
the
middle of 2005, we have undertaken a realignment of our business into distinct
service offerings, each managed under the authority of a general manager who
reports to our Chief Executive Officer and other senior executive officers.
The
primary objectives of each general manager are to achieve strategic and
financial goals for each specific service offering. The primary objectives
of
our senior executive officers with respect to the service offerings are
to:
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Establish
and manage toward strategic goals;
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Seek
and provide the necessary human, capital, and other resources necessary
to
execute strategic goals;
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Establish
and hold the service offering general managers accountable for achieving
their goals; and
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Allocate
assets to successful service offerings and mitigate
risks.
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Our
business realignment presents numerous challenges and may result in volatile
financial performance or periods of unprofitable results. Fluctuations in
results may be ongoing as major activities within the realignment are expected
to continue throughout 2007.
Following
our business realignment, we operate as a holding company with several, discrete
service offerings, some of which are offered through separate subsidiaries.
As
of March 2007, our service offerings were as follows:
•
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Expedited
service offering. At December 31, 2006, we operated approximately
935
tractors in our Expedited service offering. Our expedited teams in
this
service offering generally operate over distances ranging from 1,000
to
2,000 miles and had an average length of haul of 1,543 miles in the
fourth
quarter of 2006. Our expedited teams offer service standards such
as
coast-to-coast delivery in 72 hours, meeting delivery appointments
within
15 minutes, and delivering 99% of loads on-time. We believe our expedited
teams offer greater speed and reliability than rail, rail-truck
intermodal, and solo-driver competitors at a lower cost than air
freight.
The
main advantage to us of expedited team service is the relatively
high
revenue per tractor. The main challenges are managing the mileage
on the
trucks to avoid decreasing the resale value and recruiting and pairing
two
drivers, particularly during driver shortages, which tend to coincide
with
strong economic activity that increases demand.
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Dedicated
service offering. At December 31, 2006, we operated approximately
705
tractors in our Dedicated service offering with an average length
of haul
of 685 miles in the fourth quarter of 2006. These tractors operate
for a
single customer or on a defined route and frequently have contractually
guaranteed revenue. This part of our business has grown over the
past few
years as customers have desired committed capacity, and we have expanded
our participation in their design, development, and execution of
supply
chain solutions. We believe the advantages of dedicated service include
protection against rate pressure during the term of the agreement
and
predictable equipment utilization and routes, which assist with driver
retention, asset productivity, and management planning. We believe
the
challenges of dedicated fleets include limited ability to react to
certain
cost changes and to increase rates to take advantage of market
shifts.
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Refrigerated
service offering. In January 2007, we consolidated substantially
all of
our refrigerated operations under our SRT subsidiary. We now operate
approximately 770 tractors with an average length of haul of 1,200
miles
in SRT. Our refrigerated service offering includes the transport
of fresh
produce from the West Coast to the Midwest or Southeast and return
with
either refrigerated or general commodities and a growing presence
within
traditional food and beverage shippers. We believe the advantages
of
refrigerated service include less cyclical freight patterns and a
growing
population that requires food products. We believe the challenges
of
refrigerated service include more expensive trailers, the perishable
nature of commodities, and the fuel and maintenance expense associated
with refrigeration units.
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Covenant
regional solo-driver service offering. At December 31, 2006, we
operated approximately 575 tractors in our Regional solo-driver service
offering. This service offering consists of units that operate under
the
Covenant Transport name excluding Star Transportation. The average
length
of haul was approximately 520 miles in 2006. As expected, this has
decreased over time as our business gravitates toward movements with
lengths of haul closer to 500-600 miles. We believe the advantages
of
regional truckload service include access to large freight volumes,
generally higher rates per mile, and driver-friendly routes. We believe
the disadvantages of regional truckload service include lower equipment
utilization and a greater percentage of non-revenue miles than in
long-haul lanes. Over the past year we substantially downsized the
Covenant regional truck fleet in order to concentrate on more attractive
lanes and freight. This process requires intricate planning, and
we expect
it will not be completed until sometime in 2007.
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Star
regional solo-driver service offering. Star
operates primarily in the southeastern United States, with shipments
concentrated from Texas across the Southeast to Virginia, and has
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.
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Brokerage
freight service offering. At December 31, 2006, the brokerage freight
offering accounted for approximately 0.67% of our total loads. Since
our
tractors
are not utilized in this division, our methods of performance measurement
vary from the other service offerings. We expect the brokerage freight
offering to help us continue to serve customers when we lack capacity
in a
given area or the load does not meet our operating profile. We expect
this
service to be especially helpful as we continue to realign trucks
between
the other four service offerings and manage our freight mix toward
preferred lanes.
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The
following chart reflects the size of our service offerings measured by
revenue:
The
development of our business into discrete service offerings has affected our
operating metrics over time, and we expect that the complete formal separation
of our business into these service offerings will create even more change.
With
the exception of our freight brokerage service, we measure performance of our
service offerings in four areas: average length of haul, average freight revenue
per total mile (excluding fuel surcharges), average miles per tractor, and
average freight revenue per tractor per week. A description of each
follows:
Average
Length of Haul. Our average length of haul has decreased over time
as we
have increased the use of solo-driver tractors and increased our
focus on
regional markets. Shorter lengths of haul frequently involve higher
rates
per mile from customers, fewer miles per truck, and a greater percentage
of non-revenue miles caused by re-positioning of equipment.
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Average
Freight Revenue Per Total Mile. Our average freight revenue per mile
has
increased sharply. Average freight revenue per loaded mile has increased
approximately 21.6% since 2000, while non-revenue miles have also
increased. This led to a 17.4% increase in average freight revenue
per
total mile. All freight revenue per mile numbers exclude fuel surcharge
revenue.
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Average
Miles Per Tractor. We are beginning to see our average miles per
tractor
increase due to our ability to move units between divisions to where
they
are better utilized.
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Average
Freight Revenue per Tractor per Week. We use average freight revenue
per
tractor per week (which excludes fuel surcharges) as our main measure
of
asset productivity. This operating metric takes into account the
effects
of freight rates, non-revenue miles, and miles per tractor. In addition,
because we calculate average freight revenue per tractor using all
of our
trucks, it takes into account the percentage of our fleet that is
unproductive due to lack of drivers, repairs, and other
factors.
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Customers
and Operations
Our
primary customers include manufacturers and retailers, as well as other
transportation companies. In 2006, our five largest customers were Georgia
Pacific, UPS, Wal-Mart, Shaw Industries and First American Carrier. Our top
five
customers accounted for 32.4% of our revenue in 2006, a 1.5% decrease versus
the
top five customers of 2005 that generated 33.9%.
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 will depend 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
equip
our tractors with a satellite-based tracking and communications system that
permits direct communication between drivers and fleet managers. We believe
that
this system enhances our operating efficiency and improves customer service
and
fleet management. This system also updates the tractor's position every 30
minutes, which allows us and our customers to locate freight and accurately
estimate pick-up and delivery times. We also use the system to monitor engine
idling time, speed, performance, and other factors that affect operating
efficiency.
As
an
additional service to customers, we offer electronic data interchange and
Internet-based communication for customer usage in tendering loads and accessing
information such as cargo position, delivery times, and billing information.
These services allow us to communicate electronically with our customers,
permitting real-time information flow, reductions or eliminations in paperwork,
and the employment of fewer clerical personnel. We use a document imaging system
to reduce paperwork and enhance access to important information.
Our
operations generally follow the seasonal norm for the trucking industry.
Equipment utilization is usually at its highest from May to August, maintains
high levels through October, and generally decreases during the winter holiday
season and as inclement weather impedes operations.
We
operate throughout the United States and in parts of Canada and Mexico, with
substantially all of our revenue generated from within the United States. All
of
our assets are domiciled in the United States, and for the past three years
less
than one percent of our revenue has been generated in Canada and Mexico. We
do
not separately track domestic and foreign revenue from customers or domestic
and
foreign long-lived assets, and providing such information would be
impracticable.
Drivers
and Other Personnel
Driver
recruitment, retention, and satisfaction are essential to our success, and
we
have made each of these factors a primary element of our strategy. We recruit
both experienced and student drivers as well as independent contractor drivers
who own and drive their own tractor and provide their services to us under
lease. We conduct recruiting and/or driver orientation efforts from four of
our
locations and we offer ongoing training throughout our terminal network. We
emphasize driver-friendly operations throughout our organization. We have
implemented automated programs to signal when a driver is scheduled to be routed
toward home, and we assign fleet managers specific tractor units, regardless
of
geographic region, to foster positive relationships between the drivers and
their principal contact with us.
The
truckload industry has periodically experienced difficulty in attracting and
retaining enough qualified truck drivers. It is also common for the driver
turnover rate of individual carriers to exceed 100%. We believe a combination
of
greater demand for freight transportation and the alternative careers provided
by the expansion in economic activity over the past few years, together with
the
demographics of the truck driving population and other factors, have exacerbated
the shortage of drivers recently. This has increased our costs of recruiting,
training, and retaining drivers and has resulted in more of our trucks lacking
drivers. We have implemented new strategies focusing on driver satisfaction
and
ultimately a greater retention rate. Additionally, we hope that our newly
realigned business structure, with separate accountability within each service
offering, will lead to higher retention rates.
We
use
driver teams in a substantial portion of our tractors. Driver teams permit
us to
provide expedited service on selected long-haul lanes because driver teams
are
able to handle longer routes and drive more miles while remaining within
Department of Transportation ("DOT") safety rules. The use of teams contributes
to greater equipment utilization of the tractors they drive than obtained with
single drivers. The use of teams, however, increases personnel costs as a
percentage of revenue and the number of drivers we must recruit. At December
31,
2006, teams operated approximately 24% of our tractors.
We
are
not a party to a collective bargaining agreement. At December 31, 2006, we
employed approximately 4,817 drivers and approximately 1,109 non-driver
personnel. At December 31, 2006, we also contracted with approximately 144
independent contractor drivers. We believe that we have a good relationship
with
our personnel.
Revenue
Equipment
We
believe that operating high quality, late-model equipment contributes to
operating efficiency, helps us recruit and retain drivers and is an important
part of providing excellent service to customers. Our policy is to operate
our
tractors while under warranty to minimize repair and maintenance costs and
reduce service interruptions caused by breakdowns. We also order most of our
equipment with uniform specifications to reduce our parts inventory and
facilitate maintenance. At December 31, 2006, our tractor fleet had an average
age of approximately 18 months and our trailer fleet had an average age of
approximately 34 months. All of our tractors were equipped with post October
2002 emission-compliant engines. Approximately
83% of our trailers were dry vans and the remainder were refrigerated
vans.
Industry
and Competition
The
U.S.
market for truck-based transportation services generated total revenues of
approximately $622.9 billion in 2005 and is projected to follow the overall
U.S.
economy. The trucking industry includes both private fleets and "for-hire"
carriers. We operate in the highly fragmented for-hire truckload segment of
this
market, which generated estimated revenues of approximately $298.3 billion
in
2005. Our dedicated business also competes in the estimated $280.1 billion
private fleet portion of the overall trucking market, by seeking to convince
private fleet operators to outsource or supplement their private fleets. The
trucking industry accounted for approximately 84.3% of domestic spending on
freight transportation in 2005. All market estimates contained in this section
are derived from data compiled by Global Insight, Inc., as reported by the
American Trucking Associations in U.S.
Freight Transportation Forecast to 2017.
The
United States trucking industry is highly competitive and includes thousands
of
"for-hire" motor carriers, none of which dominates the market. Service and
price
are the principal means of competition in the trucking industry. Based on
Commercial Carrier Journal: The Top 250 (August 2006), the ten largest truckload
carriers (measured by annual revenue) accounted for approximately
$22 billion, a 10.9% increase over 2004, in "for-hire" truckload revenue in
2005. We compete to some extent with railroads and rail-truck intermodal service
but differentiate our self from them on the basis of service. Rail and
rail-truck intermodal movements are more often subject to delays and disruptions
arising from rail yard congestion, which reduces the effectiveness of such
service to customers with time-definite pick-up and delivery
schedules.
We
believe that the cost and complexity of operating trucking fleets are increasing
and that economic and competitive pressures are likely to force many smaller
competitors and private fleets to consolidate or exit the industry. As a result,
we believe that larger, better-capitalized companies, like us, will have
opportunities to increase profit margins and gain market share. In the market
for dedicated services, we believe that truckload carriers, like us, have a
competitive advantage over truck lessors, who are the other major participants
in the market, because we can offer lower prices by utilizing back-haul freight
within our network that traditional lessors may not have.
Over
the
past two years our industry has enjoyed an improved pricing environment compared
with our historical experience. We believe that stronger freight demand and
industry-wide capacity constraints caused by a shortage of truck drivers and
a
lack of capital investment in additional revenue equipment by many carriers
contributed to the pricing environment. In addition, many customers have
recognized that the costs of operating in our industry have increased
significantly, particularly in the areas of driver compensation, revenue
equipment, fuel, and insurance and claims. The pricing environment may not
remain favorable, and we may not continue to capitalize on any increases in
pricing.
Regulation
Our
operations are regulated and licensed by various U.S. agencies. Our company
drivers and independent contractors also must comply with the safety and fitness
regulations of the United States Department of Transportation ("DOT"), including
those relating to drug and alcohol testing and hours-of-service. Such matters
as
weight and equipment dimensions are also subject to U.S. regulations. We also
may become subject to new or more restrictive regulations relating to fuel
emissions, drivers' hours-of-service, ergonomics, or other matters affecting
safety or operating methods. Other agencies, such as the EPA and the Department
of Homeland Security ("DHS"), also regulate our equipment, operations, and
drivers.
The
Transportation Security Administration ("TSA") has adopted regulations that
require determination by the TSA that each driver who applies for or renews
his
or her license for carrying hazardous materials is not a security threat. This
could reduce the pool of qualified drivers, which could require us to increase
driver compensation, limit our fleet growth, or result in trucks sitting idle.
These regulations also could complicate the matching of available equipment
with
hazardous material shipments, thereby increasing our response time on customer
orders and our non-revenue miles. As a result, it is possible we may fail to
meet the needs of our customers or may incur increased expenses to do
so.
Some
states and municipalities have begun to restrict the locations and amount of
time where diesel-powered tractors, such as ours, may idle, in order to reduce
exhaust emissions. These restrictions could force us to alter our drivers'
behavior, purchase on-board power units that do not require the engine to idle,
or face a decrease in productivity.
We
are
subject to various environmental laws and regulations dealing with the hauling
and handling of hazardous materials, fuel storage tanks, air emissions from
our
vehicles and facilities, engine idling, and discharge and retention of storm
water. We operate in industrial areas, where truck terminals and other
industrial activities are located, and where groundwater or other forms of
environmental contamination have occurred. Our operations involve the risks
of
fuel spillage or seepage, environmental damage, and hazardous waste disposal,
among others. We also maintain above-ground bulk fuel storage tanks and fueling
islands at four of our facilities. A small percentage of our freight consists
of
low-grade hazardous substances, which subjects us to a wide array of
regulations. Although we have instituted programs to monitor and control
environmental risks and promote compliance with applicable environmental laws
and regulations, if we are involved in a spill or other accident involving
hazardous substances, if there are releases of hazardous substances we
transport, or if we are found to be in violation of applicable laws or
regulations, we could be subject to liabilities, including substantial fines
or
penalties or civil and criminal liability, any of which could have a materially
adverse effect on our business and operating results.
Regulations
further limiting exhaust emissions became effective in 2002 and on January
1,
2007 and become progressively more restrictive in 2010. Newer engines generally
cost more, produce lower fuel mileage, and require additional maintenance
compared with older models. We expect additional cost increases and possibly
degradation in fuel mileage from the 2007 and 2010 engines. These adverse
effects, combined with the uncertainty as to the reliability of the newly
designed diesel engines and the residual values of these vehicles, could
materially increase our costs or otherwise adversely affect our business or
operations.
Fuel
Availability and Cost
We
actively manage our fuel costs by routing our drivers through fuel centers
with
which we have negotiated volume discounts. During 2006, the cost of fuel was
in
the range at which we received fuel surcharges. Even with the fuel surcharges,
the high price of fuel decreased our profitability. Although we historically
have been able to pass through a substantial part of increases in fuel prices
and taxes to customers in the form of higher rates and surcharges, the increases
usually are not fully recovered. We do not collect surcharges on fuel used
for
non-revenue or out-of-route miles, or for fuel used by refrigeration units
or
while the tractor is idling.
Seasonality
Our
tractor productivity decreases during the winter season because inclement
weather impedes operations, and some shippers reduce their shipments after
the
winter holiday season. Revenue can also be affected by bad weather and holidays,
since revenue is directly related to available working days of shippers. At
the
same time, operating expenses increase, with fuel efficiency declining because
of engine idling and harsh weather creating higher accident frequency, increased
claims, and more equipment repairs. We can also suffer short-term impacts from
weather-related events such as hurricanes, blizzards, ice storms, and floods
that could harm our results or make our results more volatile.
Additional
Information
At
December 31, 2006, our corporate structure included Covenant Transport, Inc.,
a
Nevada holding company organized in May 1994, and its wholly owned subsidiaries:
Covenant Transport, Inc., a Tennessee corporation; Covenant Asset Management,
Inc., a Nevada corporation; CIP, Inc., a Nevada corporation; Covenant.com,
Inc.,
a Nevada corporation; SRT; Harold Ives Trucking Co., an Arkansas corporation;
CVTI Receivables Corp. ("CRC"), a Nevada corporation; Star; Volunteer Insurance
Limited, a Cayman Island company; and Covenant Transport Solutions, Inc., a
Nevada corporation. Tony Smith Trucking, Inc., an Arkansas corporation and
former subsidiary, was dissolved in December 2004.
Our
headquarters are located at 400 Birmingham Highway, Chattanooga, Tennessee
37419, and our website address is www.covenanttransport.com.
Our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all other reports we file with the SEC pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")
are available free of charge through our website. Information contained in
or
available through our website is not incorporated by reference into, and you
should not consider such information to be part of, this Annual Report on Form
10-K.
Factors
That May Affect Future Results
Our
future results may be affected by a number of factors over which we have little
or no control. The following issues, uncertainties, and risks, among others,
should be considered in evaluating our business and growth outlook.
Our
business is subject to general economic and business factors that are largely
out of our control, any of which could have a materially adverse effect on
our
operating results.
Our
business is dependent on a number of factors that may have a materially adverse
effect on our results of operations, many of which are beyond our control.
Some
of the most significant of these factors include excess tractor and trailer
capacity in the trucking industry, declines in the resale value of used
equipment, strikes or other work stoppages, increases in interest rates, fuel
taxes, tolls, and license and registration fees, and rising costs of
healthcare.
We
also
are affected by recessionary economic cycles, changes in customers' inventory
levels, and downturns in customers' business cycles, particularly in market
segments and industries, such as retail and manufacturing, where we have a
significant concentration of customers, and regions of the country, such as
California, Texas, and the Southeast, where we have a significant amount of
business. Economic conditions may adversely affect our customers and their
ability to pay for our services. Customers encountering adverse economic
conditions represent a greater potential for loss, and we may be required to
increase our allowance for doubtful accounts.
In
addition, it is not possible to predict the effects of actual or threatened
terrorist attacks, efforts to combat terrorism, military action against any
foreign state, heightened security requirements, or other related events. Such
events, however, could negatively impact the economy and consumer confidence
in
the United States. Such events could also have a materially adverse effect
on
our future results of operations.
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 distinct service offerings. However, we may not be successful in
executing this plan. As we continue to implement this plan, 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:
•
|
Developing
management depth to oversee the service offerings and also manage
regional
terminals within the service offerings;
|
•
|
Adapting
our personnel to new strategies, policies, and procedures, including
more
distributed decision making;
|
•
|
Maintaining
customer relationships and freight volumes while changing routes,
pricing,
and other aspects of our operations;
|
•
|
Maintaining
a sufficient number of qualified drivers while changing routes, policies,
procedures, and management structures;
|
•
|
Controlling
headcount and expenses generally during a transition that may entail
a
period of duplication of some functions; and
|
•
|
Improving
or eliminating processes, functions, services, or other items that
are
identified as substandard.
|
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
replaced 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 resulted in a substantial increase in capital
expenditures. We also replaced a significant number of trailers, which were
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.
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 or improve
upon Star's profitability. As we integrate Star's regional operations, we may
lose key components of Star's operation, including customers, drivers, and
other
employees, none of whom are legally 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 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.
We
self-insure for a significant portion of our claims exposure, which could
significantly increase the volatility of, and decrease the amount of, our
earnings.
Our
future insurance and claims expense could reduce our earnings and make our
earnings more volatile. We self-insure for a significant portion of our claims
exposure and related expenses. We accrue amounts for liabilities based on our
assessment of claims that arise and our insurance coverage for the periods
in
which the claims arise, and we evaluate and revise these accruals from
time-to-time based on additional information. We do not currently maintain
directors and officers' insurance coverage, although we are obligated to
indemnify them against certain liabilities they may incur while serving in
such
capacities. Because of our significant self-insured amounts, we have significant
exposure to fluctuations in the number and severity of claims and the risk
of
being required to accrue or pay
additional amounts if the claims prove to be more severe than originally
assessed. Historically, we have had to significantly adjust our reserves on
several occasions, and future significant adjustments may occur.
We
maintain insurance above the amounts for which we self-insure with licensed
insurance carriers. If any claim were to exceed our coverage, we would bear
the
excess, in addition to our other self-insured amounts. Our insurance and claims
expense could increase when our current coverage expires, or we could raise
our
self-insured retention. Although we believe our aggregate insurance limits
are
sufficient to cover reasonably expected claims, it is possible that one or
more
claims could exceed those limits. Insurance carriers recently have been raising
premiums for many businesses, including trucking companies. As a result, our
insurance and claims expense could increase, or we could find it necessary
to
again raise our self-insured retention or decrease our aggregate coverage limits
when our policies are renewed or replaced. Our operating results and financial
condition may be adversely affected if these expenses increase, if we experience
a claim in excess of our coverage limits, if we experience a claim for which
we
do not have coverage, or if we have to increase our reserves again.
Our
substantial indebtedness and operating lease obligations could adversely affect
our ability to respond to changes in our industry or business.
As
a
result of our level of debt, operating lease obligations, and encumbered assets:
•
|
Our
vulnerability to adverse economic conditions and competitive pressures
is
heightened;
|
•
|
We
will continue to be required to dedicate a substantial portion of
our cash
flows from operations to operating lease payments and repayment of
debt,
limiting the availability of cash for other purposes;
|
•
|
Our
flexibility in planning for, or reacting to, changes in our business
and
industry will be limited;
|
•
|
Our
profitability is sensitive to fluctuations in interest rates because
some
of our debt obligations are subject to variable interest rates, and
future
borrowings and lease financing arrangements will be affected by any
such
fluctuations;
|
•
|
Our
ability to obtain additional financing in the future for working
capital,
capital expenditures, acquisitions, or other purposes may be limited;
and
|
•
|
We
may be required to issue additional equity securities to raise funds,
which would dilute the ownership position of our
stockholders.
|
Our
financing obligations could negatively impact our future operations, our ability
to satisfy our capital needs, or our ability to engage in other business
activities. We also cannot assure you that additional financing will be
available to us when required or, if available, will be on terms satisfactory
to
us.
Our
revolving credit facility contains 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. 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.
Outstanding
letters of credit could constrain our borrowing capacity.
Outstanding
letters of credit with certain financial institutions reduce the available
borrowings under our credit agreement, which could negatively affect our
liquidity should we need to increase our borrowings in the future.
We
operate in a highly competitive and fragmented industry, and numerous
competitive factors could impair our ability to maintain or improve our
profitability.
These
factors include:
•
|
We
compete with many other truckload carriers of varying sizes and,
to a
lesser extent, with less-than-truckload carriers, railroads, and
other
transportation companies, many of which have more equipment and greater
capital resources than we do.
|
•
|
Many
of our competitors periodically reduce their freight rates to gain
business, especially during times of reduced growth rates in the
economy,
which may limit our ability to maintain or increase freight rates
or
maintain significant growth in our business.
|
•
|
Many
of our customers are other transportation companies, and they may
decide
to transport their own freight.
|
•
|
Many
customers reduce the number of carriers they use by selecting "core
carriers" as approved service providers, and in some instances we
may not
be selected.
|
•
|
Many
customers periodically accept bids from multiple carriers for their
shipping needs, and this process may depress freight rates or result
in
the loss of some business to competitors.
|
•
|
The
trend toward consolidation in the trucking industry may create other
large
carriers with greater financial resources and other competitive advantages
relating to their size.
|
•
|
Advances
in technology require increased investments to remain competitive,
and our
customers may not be willing to accept higher freight rates to cover
the
cost of these investments.
|
•
|
Competition
from non-asset-based logistics and freight brokerage companies may
adversely affect our customer relationships and freight rates.
|
•
|
Economies
of scale that may be passed on to smaller carriers by procurement
aggregation providers may improve their ability to compete with us.
|
We
derive a significant portion of our revenue from our major customers, the loss
of one or more of which could have a materially adverse effect on our
business.
A
significant portion of our revenue is generated from our major customers.
Generally, we do not have long term contractual relationships with our major
customers, and our customers may not continue to use our services or could
reduce their use of our services. For some of our customers, we have entered
into multi-year contracts, and the rates we charge may not remain advantageous.
A reduction in or termination of our services by one or more of our major
customers could have a materially adverse effect on our business and operating
results.
Increases
in driver compensation or difficulty in attracting and retaining qualified
drivers could adversely affect our profitability.
Like
many
truckload carriers, we experience substantial difficulty in attracting and
retaining sufficient numbers of qualified drivers, including independent
contractors. In addition, due in part to current economic conditions, including
the higher cost of fuel, insurance, and tractors, the available pool of
independent contractor drivers has been declining. Because of the shortage
of
qualified drivers, the availability of alternative jobs, and intense competition
for drivers from other trucking companies, we expect to continue to face
difficulty increasing the number of our drivers, including independent
contractor drivers. The compensation we offer our drivers and independent
contractors is subject to market conditions, and we may find it necessary to
continue to increase driver and independent contractor compensation in future
periods. In addition, we and our industry suffer from a high turnover rate
of
drivers. Our high turnover rate requires us to continually recruit a substantial
number of drivers in order to operate existing revenue equipment. If we are
unable to continue to attract and retain a sufficient number of drivers, we
could be required to adjust our compensation packages, let trucks sit idle,
or
operate with fewer trucks and face difficulty meeting shipper demands, all
of
which would adversely affect our growth and profitability.
We
operate in a highly regulated industry, and increased costs of compliance with,
or liability for violation of, existing or future regulations could have a
materially adverse effect on our business.
Our
operations are regulated and licensed by various U.S., Canadian, and Mexican
agencies. Our company drivers and independent contractors also must comply
with
the safety and fitness regulations of the United States DOT, including those
relating to drug and alcohol testing and hours-of-service. Such matters as
weight and equipment dimensions are also subject to U.S. and Canadian
regulations. We also may become subject to new or more restrictive regulations
relating to fuel emissions, drivers' hours-of-service, ergonomics, or other
matters affecting safety or operating methods. Other agencies, such as the
Environmental Protection Agency, or EPA, and the Department of Homeland
Security, or DHS, also regulate our equipment, operations, and drivers. Future
laws and regulations may be more stringent and require changes in our operating
practices, influence the demand for transportation services, or require us
to
incur significant additional costs. Higher costs incurred by us or by our
suppliers who pass the costs onto us through higher prices could adversely
affect our results of operations.
The
DOT,
through the Federal Motor Carrier Safety Administration Act, or FMCSA, imposes
safety and fitness regulations on us and our drivers. New rules that limit
driver hours-of-service were adopted effective January 4, 2004, and then
modified effective October 1, 2005. The rules effective October 1, 2005, did
not
substantially change the existing rules but are likely to create a moderate
reduction in the amount of time available to drivers in longer lengths of haul,
which could reduce equipment productivity in those lanes. The FMCSA is studying
rules relating to braking distance and on-board data recorders that could result
in new rules being proposed. We are unable to predict the effect of any rules
that might be proposed, but we expect that any such proposed rules would
increase costs in our industry, and the on-board recorders potentially could
decrease productivity and the number of people interested in being drivers.
In
the
aftermath of the September 11, 2001 terrorist attacks, federal, state, and
municipal authorities have implemented and continue to implement various
security measures, including checkpoints and travel restrictions on large
trucks. The Transportation Security Administration, or TSA, of the DHS has
adopted regulations that require determination by the TSA that each driver
who
applies for or renews his license for carrying hazardous materials is not a
security threat. This could reduce the pool of qualified drivers, which could
require us to increase driver compensation, limit our fleet growth, or let
trucks sit idle. These regulations also could complicate the matching of
available equipment with hazardous material shipments, thereby increasing our
response time on customer orders and our non-revenue miles. As a result, it
is
possible we may fail to meet the needs of our customers or may incur increased
expenses to do so. These security measures could negatively impact our operating
results.
Some
states and municipalities have begun to restrict the locations and amount of
time where diesel-powered tractors, such as ours, may idle, in order to reduce
exhaust emissions. These restrictions could force us to alter our
drivers'
behavior, purchase on-board power units that do not require the engine to idle,
or face a decrease in productivity.
Regulations
further limiting exhaust emissions became effective in 2002 and on January
1,
2007 and become progressively more restrictive in 2010. Newer engines generally
cost more, produce lower fuel mileage, and require additional maintenance
compared with older models. We expect additional cost increases and possibly
degradation in fuel mileage from the 2007 and 2010 engines. These adverse
effects, combined with the uncertainty as to the reliability of the newly
designed diesel engines and the residual values of these vehicles, could
materially increase our costs or otherwise adversely affect our business or
operations.
We
have significant ongoing capital requirements that could affect our
profitability if we are unable to generate sufficient cash from operations
and
obtain financing on favorable terms.
The
truckload industry is capital intensive, and our policy of operating newer
equipment requires us to expend significant amounts annually. For the past
few
years, we have depended on cash from operations, our credit facilities, proceeds
from the sale of used equipment, and operating leases to fund our revenue
equipment. If we elect to expand our fleet in future periods, our capital needs
would increase. We expect to pay for projected capital expenditures with cash
flows from operations, borrowings under our line of credit, proceeds under
our
financing facilities, and operating leases of revenue equipment. If we are
unable to generate sufficient cash from operations and obtain financing on
favorable terms in the future, we may have to limit our growth, enter into
less
favorable financing arrangements, or operate our revenue equipment for longer
periods, any of which could have a materially adverse effect on our
profitability.
We
currently have trade-in or fixed residual agreements with certain equipment
suppliers concerning the substantial majority of our tractor fleet. If the
suppliers refuse or are unable to meet their financial obligations under these
agreements or if we decline to purchase the relevant number of replacement
units
from the suppliers, we may suffer a financial loss upon the disposal of our
equipment.
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.
Fuel
is
one of our largest operating expenses. Diesel fuel prices fluctuate greatly
due
to economic, political, and other factors beyond our control. Fuel also is
subject to regional pricing differences and often costs more on the West Coast,
where we have significant operations. From time-to-time we have used hedging
contracts and volume purchase arrangements to attempt to limit the effect of
price fluctuations. If we do hedge, we may be forced to make cash payments
under
the hedging arrangements. The absence of meaningful fuel price protection
through these measures, fluctuations in fuel prices, or a shortage of diesel
fuel, could materially and adversely affect our results of operations.
We
may not make acquisitions in the future, or if we do, we may not be successful
in our acquisition strategy.
We
made
ten acquisitions between 1996 and 2006. Accordingly, acquisitions have provided
a substantial portion of our growth. We may not be successful in identifying,
negotiating, or consummating any future acquisitions. If we fail to make any
future acquisitions, our growth rate could be materially and adversely affected.
Any acquisitions we undertake could involve the dilutive issuance of equity
securities and/or incurring indebtedness. In addition, acquisitions involve
numerous risks, including difficulties in assimilating the acquired company's
operations, the diversion of our management's attention from other business
concerns, risks of entering into markets in which we have had no or only limited
direct experience, and the potential loss of customers, key employees, and
drivers of the acquired company, all of which could have a materially adverse
effect on our business and operating results. If we make acquisitions in the
future, we may not be able to successfully integrate the acquired companies
or
assets into our business.
Our
operations are subject to various environmental laws and regulations, the
violation of which could result in substantial fines or
penalties.
We
are
subject to various environmental laws and regulations dealing with the hauling
and handling of hazardous materials, fuel storage tanks, air emissions from
our
vehicles and facilities, engine idling, and discharge and retention of storm
water. We operate in industrial areas, where truck terminals and other
industrial activities are located, and where groundwater or other forms of
environmental contamination have occurred. Our operations involve the risks
of
fuel spillage or seepage, environmental damage, and hazardous waste disposal,
among others. We also maintain above-ground bulk fuel storage tanks and fueling
islands at four of our facilities. A
small
percentage of our freight consists of low-grade hazardous substances, which
subjects us to a wide array of
regulations.
Although we have instituted programs to monitor and control environmental risks
and promote compliance with applicable environmental laws and regulations,
if we
are involved in a spill or other accident involving hazardous substances, if
there are releases of hazardous substances we transport, or if we are found
to
be in violation of applicable laws or regulations, we could be subject to
liabilities, including substantial fines or penalties or civil and criminal
liability, any of which could have a materially adverse effect on our business
and operating results.
Regulations
limiting exhaust emissions became effective in 2002 and become progressively
more restrictive in 2007 and 2010. Engines manufactured after October 2002
generally cost more, produce lower fuel mileage, and require additional
maintenance compared with earlier models. All of our tractors are equipped
with
these engines. We expect additional cost increases and possibly degradation
in
fuel mileage from the 2007 engines. These adverse effects, combined with the
uncertainty as to the reliability of the newly designed diesel engines and
the
residual values of these vehicles, could increase our costs or otherwise
adversely affect our business or operations.
Increased
prices, reduced productivity, and restricted availability of new revenue
equipment may adversely affect our earnings and cash flows.
We
have
experienced higher prices for new tractors over the past few years, partially
as
a result of government regulations applicable to newly manufactured tractors
and
diesel engines, in addition to higher commodity prices and better pricing power
among equipment manufacturers. More restrictive EPA emissions standards for
2007
will require vendors to introduce new engines, and some carriers may seek to
purchase large numbers of tractors with pre-2007 engines, possibly leading
to
shortages. Our business could be harmed if we are unable to continue to obtain
an adequate supply of new tractors and trailers for these or other reasons.
As a
result, we expect to continue to pay increased prices for equipment and incur
additional expenses and related financing costs for the foreseeable future.
Furthermore, the new engines are expected to reduce equipment productivity
and
lower fuel mileage and, therefore, increase our operating expenses.
We
have
agreements covering the terms of trade-in and/or repurchase commitments from
our
primary equipment vendors for disposal of a substantial portion of our revenue
equipment. The prices we expect to receive under these arrangements may be
higher than the prices we would receive in the open market. We may suffer a
financial loss upon disposition of our equipment if these vendors refuse or
are
unable to meet their financial obligations under these agreements, if we fail
to
enter into definitive agreements that reflect the terms we expect, if we fail
to
enter into similar arrangements in the future, or if we do not purchase the
required number of replacement units from the vendors.
If
we are unable to retain our key employees, our business, financial condition,
and results of operations could be harmed.
We
are
highly dependent upon the services of the following key employees: David R.
Parker, our Chairman of the Board, Chief Executive Officer, and President;
Joey
B. Hogan, our Executive Vice President and Chief Financial Officer; Michael
W.
Miller, our Executive Vice President - Procurement and Corporate Operations
Manager; Tony Smith, our President of SRT; James Brower, our President of Star;
Jeffrey S. Paulsen, our Senior Vice President and General Manager; Jerry Eddy,
our Vice President and General Manager, Jeffrey D. Taylor, our Vice President
and General Manager; and Jeffery D. Acuff, our Vice President and General
Manager. We currently do not have employment agreements with any of them. We
do
maintain key-man life insurance on David Parker. The loss of any of their
services could negatively impact our operations and future profitability. We
must continue to develop and retain a core group of managers if we are to
realize our goal of improving our profitability.
Our
Chief Executive Officer and President and his wife control a large portion
of
our stock and have substantial control over us, which could limit your ability
to influence the outcome of key transactions, including changes of control.
Our
Chairman of the Board, Chief Executive Officer, and President, David Parker,
and
his wife, Jacqueline Parker, beneficially own approximately 38% of our
outstanding Class A common stock and 100% of our Class B common stock. On all
matters with respect to which our stockholders have a right to vote, including
the election of directors, each share of Class A common stock is entitled to
one
vote, while each share of Class B common stock is entitled to two votes. All
outstanding shares of Class B common stock are owned by the Parkers and are
convertible to Class A common stock on a share-for-share basis at the election
of the Parkers or automatically upon transfer to someone outside of the Parker
family. This voting structure gives the Parkers approximately 47% of our
outstanding votes.
The
Parkers are able to effectively control decisions requiring stockholder
approval, including the election of our entire board of directors, the adoption
or extension of anti-takeover provisions, mergers, and other business
combinations. This concentration of ownership could limit the price that some
investors might be willing to pay for the Class A common stock, and could allow
the Parkers to prevent or delay a change of control, which other stockholders
may favor. The interests of the Parkers may conflict with the interests of
other
holders of Class A common stock, and they may take actions affecting us with
which you disagree.
Seasonality
and the impact of weather affect our operations and
profitability.
Our
tractor productivity decreases during the winter season because inclement
weather impedes operations, and some customers reduce their shipments after
the
winter holiday season. Revenue can also be affected by bad weather and holidays,
since revenue is directly related to available working days of shippers. At
the
same time, operating expenses increase due to declining fuel efficiency because
of engine idling and due to harsh weather creating higher accident frequency,
increased claims, and more equipment repairs. We could also suffer short-term
impacts from weather-related events such as hurricanes, blizzards, ice storms,
and floods that could harm our results or make our results more volatile.
Weather and other seasonal events could adversely affect our operating
results.
None.
Our
headquarters and main terminal are located on approximately 180 acres of
property in Chattanooga, Tennessee. This facility includes an office building
of
approximately 182,000 square feet, a maintenance facility of approximately
65,000 square feet, a body shop of approximately 16,600 square feet, and a
truck
wash. We maintain sixteen terminals located on our major traffic lanes in or
near the cities listed below. These terminals provide a base for drivers in
proximity to their homes, a transfer location for trailer relays on
transcontinental routes, parking space for equipment dispatch, and the other
uses indicated below.
Terminal
Locations
|
Maintenance
|
Recruiting/
Orientation
|
Sales
|
Ownership
|
Chattanooga,
Tennessee
|
x
|
x
|
x
|
Leased
|
Dalton,
Georgia
|
x
|
|
|
Owned
|
Charlotte,
North Carolina
|
|
|
|
Leased
|
Dayton,
Ohio
|
|
|
|
Leased
|
Indianapolis,
Indiana
|
|
|
|
Leased
|
Texarkana,
Arkansas
|
x
|
x
|
x
|
Owned
|
Little
Rock, Arkansas
|
|
|
|
Owned
|
Hutchins,
Texas
|
x
|
x
|
|
Owned
|
El
Paso, Texas
|
|
x
|
|
Leased
|
Columbus,
Ohio
|
|
|
|
Leased
|
French
Camp, California
|
|
|
|
Leased
|
Fontana,
California
|
x
|
|
|
Leased
|
Long
Beach, California
|
|
|
|
Owned
|
Pomona,
California
|
|
x
|
|
Owned
|
Allentown,
Pennsylvania
|
|
|
|
Leased
|
Nashville,
Tennessee
|
x
|
x
|
x
|
Owned
|
Desoto,
Mississippi
|
x
|
|
x
|
Owned
|
Knoxville,
Tennessee
|
x
|
|
|
Leased
|
Maryville,
Tennessee
|
|
|
|
Leased
|
Jacksonville,
Florida
|
x
|
|
x
|
Leased
|
Orlando,
Florida
|
|
|
|
Leased
|
Jackson,
Mississippi
|
x
|
|
|
Leased
|
Atlanta,
Georgia
|
|
|
x
|
Leased
|
From
time
to time we are a party to routine litigation arising in the ordinary course
of
business, most of which involves claims for personal injury and property damage
incurred in connection with the transportation of freight. We maintain insurance
to cover liabilities arising from the transportation of freight for amounts
in
excess of certain self-insured retentions.
On
March
7, 2003, an accident occurred in Wisconsin involving a vehicle and one of our
tractors. Two adult occupants of the vehicle were killed in the accident. The
only other occupant of the vehicle was a child, who survived with little
apparent injury. Suit was filed in the United States District Court in Minnesota
by heirs of one of the decedents against us and our driver under the style:
Bill
Kayachitch and Susan Kayachitch as co-trustees for the heirs and next of kin
of
Souvorachak Kayachitch, deceased, vs. Julie Robinson and Covenant Transport,
Inc.
The case
was settled on October 10, 2005 at a level below the aggregate coverage limits
of our insurance policies and was formally dismissed in February 2006.
Representatives of the child may file an additional suit against us.
ITEM
4. SUBMISSION
OF
MATTERS TO A VOTE OF SECURITY HOLDERS
During
the fourth quarter of the year ended December 31, 2006, no matters were
submitted to a vote of security holders.
PART
II
ITEM
5. MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price
Range of Common Stock
Our
Class
A common stock is traded on the NASDAQ National Market, under the symbol "CVTI."
The following table sets forth for the calendar periods indicated the range
of
high and low sales price for our Class A common stock as reported by NASDAQ
from
January 1, 2005 to December 31, 2006.
Period
|
High
|
|
Low
|
|
|
|
|
Calendar
Year 2005:
|
|
|
|
|
|
|
|
1st
Quarter
|
$21.65
|
|
$16.05
|
2nd
Quarter
|
$18.13
|
|
$10.75
|
3rd
Quarter
|
$14.95
|
|
$11.93
|
4th
Quarter
|
$14.40
|
|
$9.81
|
|
|
|
|
Calendar
Year 2006:
|
|
|
|
|
|
|
|
1st
Quarter
|
$16.43
|
|
$12.98
|
2nd
Quarter
|
$15.64
|
|
$12.54
|
3rd
Quarter
|
$15.44
|
|
$11.31
|
4th
Quarter
|
$13.00
|
|
$10.88
|
As
of
March 13, 2007, we had approximately 52 stockholders of record of our Class
A
common stock. However, we estimate our actual number of stockholders is much
higher because a substantial number of our shares are held of record by brokers
or dealers for their customers in street names.
Dividend
Policy
We
have
never declared and paid a cash dividend on our Class A or Class B common stock.
It is the current intention of our Board of Directors to continue to retain
earnings to finance our business and reduce our indebtedness rather than to
pay
dividends. The payment of cash dividends is currently limited by our credit
agreements. Future payments of cash dividends will depend upon our financial
condition, results of operations, capital commitments, restrictions under
then-existing agreements, and other factors deemed relevant by our Board of
Directors.
See
"Equity Compensation Plan Information" under Item 12 in Part III of this Annual
Report for certain information concerning shares of our Class A common
stock authorized for issuance under our equity compensation
plans.
ITEM
6. SELECTED
FINANCIAL DATA
(In
thousands, except per share and operating data
amounts)
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
572,239
|
|
$
|
555,428
|
|
$
|
558,453
|
|
$
|
555,678
|
|
$
|
550,603
|
|
Fuel
surcharges
|
|
|
111,589
|
|
|
87,626
|
|
|
45,169
|
|
|
26,779
|
|
|
13,815
|
|
Total
revenue
|
|
$
|
683,828
|
|
$
|
643,054
|
|
$
|
603,622
|
|
$
|
582,457
|
|
$
|
564,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses (1)
|
|
|
262,303
|
|
|
242,157
|
|
|
225,778
|
|
|
220,665
|
|
|
227,332
|
|
Fuel
expense
|
|
|
194,355
|
|
|
170,582
|
|
|
127,723
|
|
|
109,231
|
|
|
96,332
|
|
Operations
and maintenance
|
|
|
36,112
|
|
|
33,625
|
|
|
30,555
|
|
|
39,822
|
|
|
39,625
|
|
Revenue
equipment rentals and
purchased
transportation
|
|
|
63,532
|
|
|
61,701
|
|
|
69,928
|
|
|
69,997
|
|
|
59,265
|
|
Operating
taxes and licenses
|
|
|
14,516
|
|
|
13,431
|
|
|
14,217
|
|
|
14,354
|
|
|
13,934
|
|
Insurance
and claims expense (2)
|
|
|
34,104
|
|
|
41,034
|
|
|
54,847
|
|
|
35,454
|
|
|
31,761
|
|
Communications
and utilities
|
|
|
6,727
|
|
|
6,579
|
|
|
6,517
|
|
|
7,177
|
|
|
7,021
|
|
General
supplies and expenses
|
|
|
21,387
|
|
|
17,778
|
|
|
15,104
|
|
|
14,495
|
|
|
14,677
|
|
Depreciation
and amortization, including
net
gains on disposition of equipment
and
impairment of assets (3)
|
|
|
41,163
|
|
|
39,101
|
|
|
45,001
|
|
|
43,041
|
|
|
49,497
|
|
Total
operating expenses
|
|
|
674,199
|
|
|
625,988
|
|
|
589,670
|
|
|
554,236
|
|
|
539,444
|
|
Operating
income
|
|
|
9,629
|
|
|
17,066
|
|
|
13,952
|
|
|
28,221
|
|
|
24,974
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
7,153
|
|
|
4,203
|
|
|
3,098
|
|
|
2,332
|
|
|
3,542
|
|
Interest
income
|
|
|
(568
|
)
|
|
(273
|
)
|
|
(48
|
)
|
|
(114
|
)
|
|
(63
|
)
|
Other
|
|
|
(157
|
)
|
|
(538
|
)
|
|
(926
|
)
|
|
(468
|
)
|
|
916
|
|
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,434
|
|
Other
expenses, net
|
|
|
6,428
|
|
|
3,392
|
|
|
2,124
|
|
|
1,750
|
|
|
5,829
|
|
Income
before income taxes and cumulative
effect
of change in accounting principle
|
|
|
3,201
|
|
|
13,674
|
|
|
11,828
|
|
|
26,471
|
|
|
19,145
|
|
Income
tax expense
|
|
|
4,582
|
|
|
8,003
|
|
|
8,452
|
|
|
14,315
|
|
|
10,871
|
|
Income
(loss) before cumulative effect of
change
in accounting principle
|
|
|
(1,381
|
)
|
|
5,671
|
|
|
3,376
|
|
|
12,156
|
|
|
8,274
|
|
Cumulative
effect of change in accounting
principle,
net of tax (4)
|
|
|
-
|
|
|
(485
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
$
|
(1,381
|
)
|
$
|
5,186
|
|
$
|
3,376
|
|
$
|
12,156
|
|
$
|
8,274
|
|
(1)
|
Includes
a $1,500 pre-tax increase to workers' compensation claims reserve
in
2004.
|
(2)
|
Includes
an $18,000 pre-tax increase to casualty claims reserve in
2004.
|
(3)
|
Includes
a $3,300 pre-tax impairment charge related to tractors in
2002.
|
(4)
|
Represents
a
$485 adjustment, net of tax, related to the adoption of FIN 47,
Accounting
for Conditional Asset Retirement Obligations.
|
Basic
earnings (loss) per share before
cumulative
effect of change in accounting
principle:
|
|
$
|
(0.10
|
)
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.84
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
principle
|
|
|
-
|
|
|
(0.03
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$
|
(0.10
|
)
|
$
|
0.37
|
|
$
|
0.23
|
|
$
|
0.84
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share before
cumulative
effect of change in
accounting
principle:
|
|
$
|
(0.10
|
)
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.83
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
principle
|
|
|
-
|
|
|
(0.03
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
$
|
(0.10
|
)
|
$
|
0.37
|
|
$
|
0.23
|
|
$
|
0.83
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares
outstanding
|
|
|
13,996
|
|
|
14,175
|
|
|
14,641
|
|
|
14,467
|
|
|
14,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares
outstanding
|
|
|
13,996
|
|
|
14,270
|
|
|
14,833
|
|
|
14,709
|
|
|
14,519
|
|
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Selected
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
$
|
274,974
|
|
$
|
211,158
|
|
$
|
209,422
|
|
$
|
221,734
|
|
$
|
238,488
|
|
Total
assets
|
|
$
|
475,094
|
|
$
|
371,261
|
|
$
|
357,383
|
|
$
|
354,281
|
|
$
|
361,541
|
|
Long-term
debt, less current maturities
|
|
$
|
104,900
|
|
$
|
33,000
|
|
$
|
8,013
|
|
$
|
12,000
|
|
$
|
1,300
|
|
Total
stockholders' equity
|
|
$
|
188,844
|
|
$
|
189,724
|
|
$
|
195,699
|
|
$
|
192,142
|
|
$
|
175,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
freight revenue per loaded mile (1)
|
|
$
|
1.51
|
|
$
|
1.51
|
|
$
|
1.40
|
|
$
|
1.27
|
|
$
|
1.24
|
|
Average
freight revenue per total mile (1)
|
|
$
|
1.36
|
|
$
|
1.36
|
|
$
|
1.27
|
|
$
|
1.17
|
|
$
|
1.15
|
|
Average
freight revenue per tractor per week
(1)
|
|
$
|
3,077
|
|
$
|
3,013
|
|
$
|
2,995
|
|
$
|
2,897
|
|
$
|
2,870
|
|
Average
miles per tractor per year
|
|
|
117,621
|
|
|
115,765
|
|
|
122,899
|
|
|
129,656
|
|
|
129,906
|
|
Weighted
average tractors for year (2)
|
|
|
3,546
|
|
|
3,535
|
|
|
3,558
|
|
|
3,667
|
|
|
3,680
|
|
Total
tractors at end of period (2)
|
|
|
3,719
|
|
|
3,471
|
|
|
3,476
|
|
|
3,752
|
|
|
3,738
|
|
Total
trailers at end of period (3)
|
|
|
9,820
|
|
|
8,565
|
|
|
8,867
|
|
|
9,255
|
|
|
7,485
|
|
(1)
|
Excludes
fuel surcharge revenue.
|
(2)
|
Includes
monthly rental tractors and tractors provided by
owner-operators.
|
(3)
|
Excludes
monthly rental trailers.
|
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We
are
one of the ten largest truckload carriers in the United States measured by
2005
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.
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.
Recent
Results and Year-End Financial Condition
For
the
year ended December 31, 2006, total revenue increased 6.3%, to
$683.8 million from $643.1 million during 2005. Freight revenue, which
excludes revenue from fuel surcharges, increased 3.0%, to $572.2 million in
2006
from $555.4 million in 2005. We experienced a net loss of
$1.4 million, or $0.10 per share, for 2006 compared with a profit of
$5.2 million, or $0.37 per share, for 2005.
For
the
year ended December 31, 2006, our average freight revenue per tractor per week,
our main measure of asset productivity, increased 2.1%, to $3,077 compared
to
$3,013 for the year ended December 31, 2005. The increase was primarily
generated by a 1.6% increase in average miles per tractor equipment
utilization.
Our
after-tax costs on a per-mile basis increased 2.4%, or $.03 per mile, compared
with the 2005 results. The main factors were a $.037 per mile increase in
compensation expense, driven primarily by increases in driver pay and office
salaries related to the business realignment and an increase in our health
insurance claim costs, a $.008 per mile increase in general supplies and
expenses, primarily related to the increase in building rent resulting from
our
building sale leaseback transaction in April 2006, and a $0.007 per mile
increase in interest expense. These increases were partially offset by a $.019
per mile decrease in our insurance and claims expense.
At
December 31, 2006, our total balance sheet debt was $159.9 million and our
total
stockholders' equity was $188.8
million,
for a total debt-to-capitalization ratio of 45.8 % and a book value of $13.49
per share. We also had approximately $60.1 million in undrawn letters of credit
posted with insurance carriers. At December 31, 2006, we had a combined $36.9
million of available borrowing capacity under our revolving credit facility
and
securitization facility.
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
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 3,719 tractors and 9,820 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 December
31,
2006, approximately 2,460 were owned, 1,116 were financed under operating
leases, and 143 were provided by independent contractors, who own and drive
their own tractors. Of our trailers, at December 31, 2006, approximately 2,245
were owned and approximately 7,575 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 replaced approximately 1,200 model-year 1998
and 1999 dry van trailers and approximately 600 model-year 2000 dry van
trailers. At December 31, 2006, we had taken delivery and replaced substantially
all of the 600 model-year 2000 dry van trailers.
For
2006,
in line with our overall fleet reduction initiative, we replaced 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 resulted in a substantial increase over normal replacement
capital expenditures. We increased 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.
Business
Realignment and Outlook for 2007
Since
the
middle of 2005, we have undertaken a realignment of our business into distinct
service offerings, each managed under the authority of a general manager who
reports to our Chief Executive Officer and other senior executive officers.
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.
Between
2005 and 2006, our business realignment had the following effects on each
service offering:
•
|
Expedited
service. Increased the fleet by approximately 3%. 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 decreased 5%, while length
of haul
increased approximately 1%.
|
|
|
•
|
Refrigerated
service. Increased our combined Southern Refrigerated Transport
("SRT")
and Covenant refrigerated fleet by approximately 18%, while decreasing
the
length of haul by approximately 7% and the miles per truck by about
8%.
Average freight revenue per total mile declined by approximately
2%.
Within this service offering, SRT continued to generate strong operating
profit performance and Covenant Refrigerated had 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. On January 14, 2007, as a result of our continual review
of
underperforming assets and examining means to streamline and improve
efficiencies within the consolidated group, we consolidated the solo
operations of the Covenant refrigerated fleet into SRT and the team
operations of the Covenant refrigerated fleet into the Covenant expedited
service offering. Approximately 170 solo tractors were moved to SRT
and
115 team tractors were moved to the expedited service offering.
|
|
|
•
|
Dedicated
service. Increased the fleet by approximately 21% and expanded the
average
length of haul by 11%, while miles per truck decreased about 4%.
Average
freight revenue per truck per week increased 10%. 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. However, we believe we have identified the customer contracts
that carry unfavorable terms and are in the process of renewing them
with
more favorable terms. Contracts covering 46% of the dedicated fleet
were
renewed during the fourth quarter of 2006, as evidenced by the improved
average freight revenue per truck per week of 16%. Contracts covering
approximately 37% of the dedicated fleet are subject to renewal by
June
30, 2007, with an additional 13% subject to renewal in the second
half of
2007. We have received generally positive responses concerning improved
renewal terms with most of our customers with the 2006 and 2007 contract
renewals. Based
on these responses, we expect profitability from our dedicated service
offering in 2007, with margins improving throughout the year. If
contract
renewals do not proceed on an acceptable basis, we would expect to
dispose
of the unprofitable equipment or shift it into a more profitable
service
offering.
|
|
|
•
|
Covenant
regional solo-driver service. Decreased the fleet by approximately
44%,
along with decreasing the average length of haul by about 19% and
increasing the average miles per truck by approximately 5%. Average
freight revenue per total mile declined by approximately 8%. 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. During the third and fourth quarters of 2006, we
allocated several trucks and trailers from this service offering
to our
more profitable service offerings, as well as reducing the service
offering's overall fleet size.
|
|
|
•
|
Star
regional solo-driver service. On September 14, 2006, we acquired
100% of
the outstanding stock of Star, a short-to-medium haul dry van regional
truckload carrier based in Nashville, Tennessee. The acquisition
included
614 tractors and 1,719 trailers. Star's operating results have
been accounted for in our results of operations since the acquisition
date. Star's average length of haul since the acquisition has been
462
miles. The major industries that Star serves include consumer products,
manufacturing, and automotive. In general, Star's operations are
characterized by good equipment utilization, low non-revenue miles,
and a
moderate rate structure. Star operates as a separate subsidiary and
a general integration with the Covenant regional service offering is
not expected. However, Star's management has been sharing best practices
in regional freight operations with the Covenant regional service
management team that may assist with improved profitability in the
Covenant regional service offering.
|
|
|
•
|
Brokerage
freight service. In the first quarter of 2006, we initiated our freight
brokerage operation and hired a Vice President and General Manager
of this
separate subsidiary operating as Covenant Transport Solutions, Inc.
The
brokerage operation has helped us continue to serve customers when
we
lacked capacity in a given area or when the load has not met the
operating
profile of one of our service offerings. This service has been useful
as
we continue to realign trucks between service offerings and subsidiaries
and in the management of our freight mix toward preferred lanes.
Since
inception, the loads and revenues provided by this operation have
steadily
grown each quarter.
|
Our
business realignment presents numerous challenges and may result in volatile
financial performance or periods of unprofitable results. Fluctuations in
results may be ongoing as major activities within the realignment are expected
to continue throughout 2007. Our primary goal for 2007 is to improve our
operating ratio by 100 to 200 basis points versus the full year of 2006. Due
to
seasonably slow freight volumes and the resultant concern regarding capacity
supply and demand in the marketplace, earnings improvement during the first
half
of 2007 could be very challenging, particularly in the first quarter, when
we
expect a greater loss than in the first quarter of 2006. Our expectation is
that
the combination of 1) the downsizing of the Covenant regional service
offering during the second half of 2006, 2) reallocating non-performing
assets from the Covenant refrigerated service offering to SRT and Covenant's
expedited long-haul service offering which occurred in January 2007,
3) aggressively improving the dedicated service offering's profitability as
contracts expire and 4) reducing overhead and capital costs in all
non-performing areas, should produce earnings improvement during the second
half
of 2007.
RESULTS
OF OPERATIONS
For
comparison purposes in the table below, we use freight revenue, or total revenue
less fuel surcharges, in addition to total revenue when discussing changes
as a
percentage of revenue. We believe excluding this sometimes volatile source
of
revenue affords a more consistent basis for comparing our results of operations
from period to period. Freight revenue excludes $111.6 million, $87.6 million
and $45.2 million of fuel surcharges in each of 2006, 2005, and 2004
respectively.
The
following table sets forth the percentage relationship of certain items to
total
revenue and freight revenue:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
Freight
revenue
(1)
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
Operating
expenses:
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Salaries,
wages, and related
expenses
|
|
38.4
|
|
37.7
|
|
37.4
|
|
Salaries,
wages, and related
expenses
|
|
45.8
|
|
43.6
|
|
40.4
|
Fuel
expense
|
|
28.4
|
|
26.5
|
|
21.2
|
|
Fuel
expense (1)
|
|
14.5
|
|
14.9
|
|
14.8
|
Operations
and maintenance
|
|
5.3
|
|
5.2
|
|
5.1
|
|
Operations
and maintenance
|
|
6.3
|
|
6.1
|
|
5.5
|
Revenue
equipment rentals
and
purchased transportation
|
|
9.3
|
|
9.6
|
|
11.6
|
|
Revenue
equipment rentals
and
purchased transportation
|
|
11.1
|
|
11.1
|
|
12.5
|
Operating
taxes and licenses
|
|
2.1
|
|
2.1
|
|
2.4
|
|
Operating
taxes and licenses
|
|
2.5
|
|
2.4
|
|
2.5
|
Insurance
and claims
|
|
5.0
|
|
6.4
|
|
9.1
|
|
Insurance
and claims
|
|
6.0
|
|
7.4
|
|
9.8
|
Communications
and utilities
|
|
1.0
|
|
1.0
|
|
1.1
|
|
Communications
and utilities
|
|
1.2
|
|
1.2
|
|
1.2
|
General
supplies and expenses
|
|
3.1
|
|
2.8
|
|
2.5
|
|
General
supplies and expenses
|
|
3.7
|
|
3.2
|
|
2.7
|
Depreciation
and amortization,
including
net gains on
disposition
of equipment
|
|
6.0
|
|
6.1
|
|
7.5
|
|
Depreciation
and amortization,
including
net gains on
disposition
of equipment
|
|
7.2
|
|
7.0
|
|
8.1
|
Total
operating expenses
|
|
98.6
|
|
97.3
|
|
97.7
|
|
Total
operating expenses
|
|
98.3
|
|
96.9
|
|
97.5
|
Operating
income
|
|
1.4
|
|
2.7
|
|
2.3
|
|
Operating
income
|
|
1.7
|
|
3.1
|
|
2.5
|
Other
expense, net
|
|
0.9
|
|
0.5
|
|
0.4
|
|
Other
expense, net
|
|
1.1
|
|
0.6
|
|
0.4
|
Income
before income taxes and
cumulative
effect of change
in
accounting principle
|
|
0.5
|
|
2.1
|
|
2.0
|
|
Income
before income taxes and
cumulative
effect of change
in
accounting principle
|
|
0.6
|
|
2.5
|
|
2.1
|
Income
tax expense
|
|
0.7
|
|
1.2
|
|
1.4
|
|
Income
tax expense
|
|
0.8
|
|
1.4
|
|
1.5
|
Cumulative
effect of change in
accounting
principle,
net
of tax
|
|
0.0
|
|
0.1
|
|
0.0
|
|
Cumulative
effect of change in
accounting
principle,
net
of tax
|
|
0.0
|
|
0.1
|
|
0.0
|
Net
income (loss)
|
|
(0.2)%
|
|
0.9%
|
|
0.6%
|
|
Net
income (loss)
|
|
(0.2)%
|
|
1.0%
|
|
0.6%
|
(1)
|
Freight
revenue is total revenue less fuel surcharges. In this table, fuel
surcharges are eliminated from revenue and subtracted from fuel expense.
The amounts were $111.6 million, $87.6 million, and $45.2 million
in 2006,
2005, and 2004, respectively.
|
Comparison
of Year Ended December 31, 2006 to Year Ended December 31,
2005
Total
revenue
increased $40.7 million, or 6.3%, to $683.8 million in 2006, from
$643.1 million in 2005. Freight revenue excludes $111.6 million of
fuel surcharge revenue in 2006 and $87.6 million in 2005.
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 462 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 forty-seven days ended December
31, 2006 totaled approximately $28.3 million, which is included in our
consolidated statements of operations for the year ended December 31, 2006.
Star's cost structure is similar to that of our additional operating
subsidiaries, and therefore has a minimal impact on the following discussion
and
analysis of revenues and costs of our consolidated entities.
Freight
revenue (total revenue less fuel surcharges) increased $16.8 million, or
3.0%, to $572.2 million in 2006, from $555.4 million in 2005. Average
freight revenue per tractor per week, our primary measure of asset productivity,
increased 2.1% to $3,077 in 2006 from $3,013 in 2005. The increase was primarily
generated by a 1.6% increase in average miles per tractor and a 0.1% 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 $20.1 million, or 8.3%, to $262.3 million
in 2006, from $242.2 million in 2005. As a percentage of freight revenue,
salaries, wages, and related expenses increased to 45.8% in 2006 from 43.6%
in
2005. 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 $11.9 million to $181.0 million
in
2006, from $169.1 million in the 2005 period.
This
resulted in increased driver pay on a cost per mile basis of 3.9% in 2006 over
2005. Our payroll expense for employees, other than over-the-road drivers,
as
well as our employee benefits, increased $10.3 million to $74.3 million in
2006
from $64.0 million in 2005, including a $2.9 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 $111.6 million in 2006 and $87.6
million in 2005, decreased $0.2 million to $82.8 million in 2006 from $83.0
million in 2005. As a percentage of freight revenue, net fuel expense decreased
to 14.5% in 2006 from 14.9% in 2005. 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 $0.27 per total mile in 2006 and $0.21 per total mile
in
2005. 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. At
December 31, 2006, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
Operations
and maintenance, consisting primarily of vehicle maintenance, repairs, and
driver recruitment expenses, increased $2.5 million to $36.1 million in 2006
from $33.6 million in 2005. As
a
percentage of freight revenue, operations and maintenance increased slightly
to
6.3% in 2006 from 6.1% in 2005. 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 $1.8 million, or 3.0%,
to $63.5 million in 2006, from $61.7 million in 2005. As a percentage of freight
revenue, revenue equipment rentals and purchased transportation expense remained
flat
at
11.1% in 2006 and 2005. Although
flat,
purchased transportation related to our brokerage business formed in 2006
totaled $3.3 million, but was offset primarily by a decrease in the percentage
of our total miles that were driven by independent contractors. Payments to
independent contractors decreased $2.4 million to $19.1 million in 2006 from
$21.5 million in 2005, mainly due to a decrease in the independent contractor
fleet to an average of 150 during 2006 versus an average of 186 in 2005. Tractor
and trailer equipment rental and other related expenses increased $1.0 million,
to $41.0 million in 2006 compared with $40.0 million in 2005. We had financed
approximately 1,116 tractors and 7,575 trailers under operating leases at
December 31, 2006, compared with 1,140 tractors and 7,545 trailers under
operating leases at December 31, 2005.
Operating
taxes and licenses increased $1.1 million, or 8.1%, to $14.5 million in 2006
from $13.4 million in 2005. As a percentage of freight revenue, operating taxes
and licenses remained essentially constant at 2.5% in 2006 and 2.4% in
2005.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, decreased
$6.9 million, or 16.9%, to approximately $34.1 million in 2006 from
approximately $41.0 million in 2005. As
a
percentage of freight revenue, insurance and claims decreased sharply to 6.0%
in
2006 from 7.4% in 2005.
We
reduced our accrual for casualty claims to 8.2 cents per mile in 2006 from
10.0
cents per mile in 2005 as a result of several quarters of improved safety
results that have changed our actuarial estimate of unpaid claims. We also
recorded and received an insurance rebate of approximately $1.0 million during
2006 resulting from achieving monetary claim targets for our casualty policy
in
the policy year ending February 28, 2006. In the first quarter of 2007,
subsequent to December 31, 2006, we have recorded an additional $1.0 million
insurance rebate receivable resulting from achieving those same monetary claim
targets for our casualty policy in the policy year ending February 28,
2007.
In
general, for casualty claims, we have insurance coverage up to $50.0 million
per
claim. For 2005 and 2006, we were 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 resulted in total
self-insured retention of up to $4.0 million until the $2.0 million aggregate
threshold was reached. We
renewed our casualty program in February 2007.
Subsequent to the renewal, we are self-insured for personal injury and property
damage claims for amounts up to the first $4.0 million. 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 remained constant at $6.7 million in 2006 and
$6.6 million in 2005. As a percentage of freight revenue, communications
and utilities also remained constant at 1.2% in 2006 and 2005.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $3.6 million to $21.4 million in 2006 from $17.8
million in 2005. As a percentage of freight revenue, general supplies and
expenses increased to 3.7% in 2006 from 3.2% in 2005. Of this increase, $2.3
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 Facility
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.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased $2.1 million, or 5.3%, to $41.2 million in 2006 from $39.1 million
in
2005. As
a
percentage of freight revenue, depreciation and amortization increased slightly
to 7.2% in 2006 from 7.0% in 2005. The increase primarily related to an increase
in the number of owned tractors and trailers in 2006
and
increased amortization expense of $0.4 million related to the identifiable
intangibles acquired with our Star acquisition on September 14, 2006.
Approximately 2,460 of our tractors and 2,245 of our trailers were owned at
December 31, 2006 as compared to only 2,186 owned tractors and 1,020 owned
trailers at December 31, 2005. These increases were offset by a net gain on
the
disposal of tractors and trailers of $2.1 million in 2006 compared to a net
gain
of only $0.7 million in 2005. Additionally, a decrease of $0.6 million in
depreciation expense for 2006 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. Trade-in preparation costs are reflected as a
component of gains (losses) on disposal of assets.
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 $3.0 million, to $6.4 million
in 2006 from $3.4 million in 2005. The increase relates primarily to increased
net interest expense of $2.9 million resulting from the additional borrowings
of
debt related to the Star acquisition and higher variable interest rates. In
2006, we recognized minimal pre-tax, non-cash gain compared to a $0.4 million
gain in 2005 related to the accounting for interest rate derivatives under
SFAS
No. 133.
Our
income tax expense was $4.6 million and $8.0 million in 2006 and 2005,
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. In 2006, income tax expense of
$0.4
million was recorded in our consolidated statements of operations related to
this uncertain tax position.
In
2005,
we recorded a $0.5 million, net of tax, adjustment related to the cumulative
effect of change in accounting principle. In December 2005, we adopted the
provisions of FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations,
an
interpretation of FASB Statement No. 143 ("FIN 47"). The adoption of FIN 47
resulted in our recording an asset retirement obligation for the estimated
costs
for the de-identification obligations in certain of our equipment
leases.
Primarily
as a result of the factors described above, net income decreased approximately
$6.6 million to a net loss of $1.4 million in 2006 from net income of $5.2
million in 2005. As a result of the foregoing, our net margin (loss) decreased
to (0.2%) in 2006 from 0.9%
in
2005.
Comparison
of Year Ended December 31, 2005 to Year Ended December 31,
2004
Total
revenue increased $39.4 million, or 6.5%, to $643.1 million in 2005, from $603.6
million in 2004. Freight revenue excludes $87.6 million of fuel surcharge
revenue in 2005 and $45.2 million in 2004.
Freight
revenue (total revenue less fuel surcharges) decreased $3.0 million (0.5%),
to
$555.4 million in 2005, from $558.5 million in 2004. Average freight revenue
per
tractor per week, a key statistic that we use to evaluate our asset
productivity, increased 0.6% to $3,013 in 2005 from $2,995 in 2004. Our average
freight revenue per tractor per week increase was primarily generated by a
7.6%
increase in average freight revenue per loaded mile, which was partially offset
by lower miles per tractor and an increase in our percentage of non-revenue
miles. Our rates have increased primarily due to a strong freight market,
tightened truck capacity, a decrease in our average length of haul, and an
improvement in our freight selection. Weighted average tractors decreased 0.6%
to 3,535 in 2005 from 3,558 in 2004. We have elected to constrain the size
of
our tractor fleet until fleet production and profitability improve.
Salaries,
wages, and related expenses increased $16.4 million, or 7.3%, to $242.2 million
in 2005, from $225.8 million in 2004. As a percentage of freight revenue,
salaries, wages, and related expenses increased to 43.6% in 2005, from 40.4%
in
2004. Driver pay increased $14.7 million, to 30.4% of freight revenue in 2005
from 27.7% of freight revenue in 2004. The increase was largely attributable
to
mileage pay increases and new retention bonus programs. A driver retention
bonus
program went into effect in September 2004, and mileage pay increases went
into
effect in March and April 2005. If the shortage of qualified drivers continues,
additional driver pay increases may be necessary in the future. Our payroll
expense for employees other than over-the-road drivers remained relatively
constant at 7.0% of freight revenue in 2005 and 2004. Health insurance, employer
paid taxes, workers' compensation, and other employee benefits increased to
6.2%
of freight revenue in 2005 from 5.8% of freight revenue in 2004 partially due
to
higher payroll taxes and an increase in our health insurance claims.
Fuel
expense, net of fuel surcharge revenue of $87.6 million in 2005 and $45.2
million in 2004, remained relatively constant at $83.0 million in 2005 and
$82.6
million in 2004. Fuel prices increased sharply during 2005 from already high
levels during 2004. As a percentage of freight revenue, net fuel expense
remained relatively constant at 14.9% in 2005 and 14.8% in 2004. Our fuel
surcharge program was able to offset a substantial portion of the higher fuel
prices. Fuel surcharges amounted to $0.214 per revenue mile in 2005 and $0.103
per revenue mile in 2004. Fuel costs may be affected in the future by price
fluctuations, supply shortages, 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. At December 31,
2005, we had no derivative financial instruments to reduce our exposure to
fuel
price fluctuations.
Operations
and maintenance, which consists primarily of vehicle maintenance and repairs
and
driver recruitment expenses, increased $3.1 million, or 10.0%, to $33.6 million
in 2005, from $30.6 million in 2004. As a percentage of freight revenue,
operations and maintenance increased to 6.1% of freight revenue from 5.5% in
2004. The increase resulted in part from increased tire costs, unloading costs,
and increased driver recruiting expense due to a tighter supply of drivers.
Revenue
equipment rentals and purchased transportation decreased $8.2 million, or 11.8%,
to $61.7 million in 2005 from $69.9 million in 2004. The decrease is due
primarily to a decrease in the percentage of our total miles driven by
independent contractors, which more than offset an increase in revenue equipment
rental payments. Payments to independent contractors decreased $13.2 million,
to
$21.5 million in 2005 from $34.7 million in 2004, mainly due to a decrease
in
the independent contractor fleet to an average of 186 trucks in 2005 from an
average of 301 in 2004. We have experienced difficulty in retaining our
independent contractors due to the challenging operating conditions. Tractor
and
trailer equipment rental and other related amounts increased $4.9 million,
to
$40.2 million in 2005, compared to $35.3 million in 2004. We had approximately
1,140 tractors and 7,545 trailers under operating leases at December 31, 2005,
compared with 1,320 tractors and 7,668 trailers financed at December 31, 2004.
Although we ended the year with fewer pieces of equipment financed through
lease
agreements, during 2005 we averaged more equipment financed through lease
agreements than during 2004.
Operating
taxes and licenses decreased $0.8 million, or 5.5%, to $13.4 million in 2005
from $14.2 million in 2004. The decrease partially resulted from a property
tax
settlement of approximately $0.4 million relating to the 2002 tax year. As
a
percentage of freight revenue, operating taxes and licenses remained essentially
constant at 2.4% in 2005 and 2.5% in 2004.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, decreased
$13.8 million, or 25.2%, to $41.0 million in 2005 from $54.8 million in 2004.
As
a percentage of freight revenue, insurance and claims expense decreased to
7.4%
in 2005 from 9.8% in 2004. During the fourth quarter of 2004, we recorded an
$18.0 million non-cash increase to our reserves for casualty claims. Excluding
the $18.0 million increase to reserves, insurance and claims increased to 7.4%
as a percentage of freight revenue from 6.6% as a percentage of freight revenue.
The increase as a percentage of freight revenue was attributable to a higher
actuarial accrual rate based on historical trends. Insurance and claims expense
will vary based on the frequency and severity of claims, premium expenses,
and
our level of self-insured retention and may cause our insurance and claims
expense to be higher or more volatile in future periods than in historical
periods.
During
the first quarter of 2005, we renewed our casualty program through February
2007. In general, for casualty claims after March 1, 2005 and to the February
2007 renewal, we had insurance coverage up to $50.0 million per claim. During
such period, we were 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 the 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.
Communications
and utilities remained relatively constant at $6.6 million in 2005 and $6.5
million in 2004. As a percentage of freight revenue, communications and
utilities remained constant at 1.2% in 2005 and 2004.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $2.7 million, or 17.7%, to $17.8 million in
2005,
from $15.1 million in 2004. As a percentage of freight revenue, general supplies
and expenses increased to 3.2% in 2005 from 2.7% in 2004. The increase is due
to
our paying for physicals and drug tests for our drivers, which in the past
were
paid for by the drivers, an increase in our travel expenses related to customer
visits, and an increase in our bad debt allowance related to two customers.
One
customer is in mediation and the other customer announced a planned liquidation.
Depreciation
and amortization expense, consisting primarily of depreciation of revenue
equipment, decreased $5.9 million, or 13.1%, to $39.1 million in 2005 from
$45.0
million in 2004. As a percentage of freight revenue, depreciation and
amortization decreased to 7.0% in 2005 from 8.1% in 2004. Depreciation and
amortization expense is net of any gain or loss on the disposal of tractors
and
trailers. The decrease in depreciation as a percentage of revenue was
attributable to gains on the disposal of tractors and trailers of approximately
$0.7 million in 2005 compared to a loss of $3.5 million in 2004, an increase
in
the average percentage of our tractor and trailer fleet comprised of leased
equipment, and increases in revenue per tractor, which more efficiently spread
this fixed cost. Depreciation expense is expected to increase as a percentage
of
revenue in future periods, due to a shift toward owned rather than leased
equipment, and increased preparation costs related to a large planned trade
package for 2006 of approximately 1,800 trailers and approximately 2,000
tractors. The trade-in preparation costs will be reflected as a component of
gains (losses) on disposition of assets.
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 2005, we tested our goodwill ($11.5 million) for impairment
and found no impairment.
The
other
expense category includes interest expense, interest income, and pre-tax
non-cash gains or losses related to the accounting for interest rate derivatives
under SFAS No. 133. Other expense, net, increased $1.3 million, or 59.7%, to
$3.4 million in 2005 from $2.1 million in 2004. As a percentage of freight
revenue, other expense increased to 0.6% in 2005 from 0.4% in 2004. The increase
is primarily due to higher interest rates and higher debt balances. In 2004,
we
accrued a $0.4 million interest charge related to a proposed disallowed IRS
transaction. We recorded a $0.4 million pre-tax, non-cash gain in 2005 compared
to a gain of $0.8 million in 2004, related to the accounting for interest rate
derivatives under SFAS No. 133.
Income
tax expense decreased $0.4 million, or 5.3%, to $8.0 million in 2005 from $8.5
million in 2004. 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.
We
recorded a $0.5 million, net of tax, adjustment related to the cumulative effect
of change in accounting principle. In December 2005, we adopted the provisions
of FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations,
an
interpretation of FASB Statement No. 143 ("FIN 47"). The adoption of FIN 47
resulted in our recording an asset retirement obligation for the estimated
costs
for the de-identification obligations in certain of our equipment
leases.
As
a
result of the factors described above, net income increased $1.8 million, or
53.6%, to $5.2 million in 2005 from $3.4 million in 2004. As a result of the
foregoing, our net margin increased to 0.9% in 2005 from 0.6% in
2004.
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 Credit Facility, cash flows from operations, and long-term
operating leases. Our primary sources of liquidity at December 31, 2006, were
funds provided by operations, proceeds from the sale of used revenue equipment,
proceeds from the sale leaseback transaction of our Chattanooga facility,
proceeds under the Securitization Facility and borrowings under our Credit
Facility, each as defined in Notes 6 and 7 to our consolidated financial
statements contained herein, and operating leases of revenue equipment. 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 Facility
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 $60.7 million in 2006 and $25.6
million
in 2005. We have continued to focus on improved collections of accounts
receivable resulting in improved cash flows of $20.1 million in 2006 as compared
to 2005. Our cash from operating activities was lower in 2005 due primarily
to
$14.8 million in additional tax payments as compared to 2006, 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 $100.6 million in 2006 and $43.9 million in
2005. All 2005 period cash outflows were related to net purchases of property
and equipment. In 2006, $39.1 million was used for the acquisition of Star
and
$91.1 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 $41.7 million in 2006, as we borrowed
additional funds primarily to fund our acquisition of Star. Net cash provided
by
financing activities was $17.0 million in 2005. At December 31, 2006, the
Company had outstanding debt of $159.9 million, primarily consisting of
approximately $104.9 million drawn under the Credit Facility and $55.0 million
from the Securitization Facility. Interest rates on this debt range from 5.3%
to
6.8%.
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 were purchased under this plan during 2006.
At December 31, 2006, there were 1,154,100 shares still available to purchase
under the guidance of this plan. The stock repurchase plan expires June 30,
2007.
Material
Debt Agreements
In
December 2006, we entered into our Credit Facility with a group of banks. The
Credit Facility matures in December 2011. Borrowings under the Credit Facility
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 0.625% and 1.625% based on cash flow
coverage (the applicable margin was 1.250% at December 31, 2006). At
December 31, 2006, we had LIBOR and Prime borrowings outstanding totaling
$94.0 million and $10.9 million, respectively, with a weighted average
interest rate of 6.771%. The Credit Facility is guaranteed by the Company and
all of its subsidiaries except CRC and Volunteer.
The
Credit Facility has a maximum borrowing limit of $200.0 million with an
accordion feature which permits an increase up to a maximum borrowing limit
of
$275.0 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 $100.0
million. The Credit Facility is secured by a pledge of the stock of most of
the
Company's subsidiaries. A commitment fee, which is adjusted quarterly between
0.125% and 0.35% per annum based on cash flow coverage, is due on the daily
unused portion of the Credit Facility. As of December 31, 2006, we had
approximately $35.0 million of available borrowing capacity. At December 31,
2006 and December 31, 2005, we had undrawn letters of credit outstanding of
approximately $60.1 million and $73.9 million, respectively.
The
Credit Facility contains certain restrictions and covenants relating to, among
other things, dividends, tangible net worth, cash flow, acquisitions and
dispositions, and total indebtedness and is cross-defaulted with our
securitization facility. We were in compliance with the Credit Facility
covenants as of December 31, 2006.
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 CRC, a wholly-owned, bankruptcy-remote,
special-purpose subsidiary incorporated in Nevada. CRC sells a percentage
ownership in such receivables to unrelated financial entities. 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
December 31, 2006 and December 31, 2005, we had $55.0 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 the our consolidated financial
statements.
The
Securitization Facility contains certain restrictions and covenants relating
to,
among other things, dividends, tangible net worth, cash flow coverage,
acquisitions and dispositions, and total indebtedness. We were in compliance
with the Securitization Facility covenants as of December 31, 2006.
Contractual
Obligations and Commercial Commitments
The
following table sets forth our contractual cash obligations and commitments
as
of December 31, 2006.
Payments
due by period:
(in
thousands)
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, including current
maturities (1)
|
|
$
|
140,415
|
|
$ |
7,103
|
|
$
|
7,103
|
|
$
|
7,103
|
|
$
|
7,103
|
|
$
|
112,003
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization
facility, including
interest (2)
|
|
|
57,725
|
|
|
57,725
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases (3)
|
|
|
175,299
|
|
|
42,033
|
|
|
34,164
|
|
|
24,642
|
|
|
18,279
|
|
|
8,859
|
|
|
47,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
residual value guarantees
|
|
|
45,302
|
|
|
14,714
|
|
|
14,067
|
|
|
1,440
|
|
|
7,906
|
|
|
7,175
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel
fuel (4)
|
|
|
275,358
|
|
|
137,679
|
|
|
137,679
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
(5)
|
|
|
6,244
|
|
|
6,244
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
700,343
|
|
$
|
265,498
|
|
$
|
193,013
|
|
$
|
33,185
|
|
$
|
33,288
|
|
$
|
128,037
|
|
$
|
47,322
|
|
(1)
|
Represents
principal and interest payments owed at December 31, 2006. The borrowings
consist of draws under a revolving line of credit, with fluctuating
borrowing amounts and variable interest rates. In determining future
contractual interest and principal obligations, for variable interest
rate
debt, the interest rate and principal amount in place at December
31, 2006
was utilized. The table assumes long-term debt is held to maturity.
Refer
to Note 6, "Long-term Debt."
|
(2)
|
In
2007, this amount represents proceeds drawn under our Securitization
Facility, and the interest rate in place at December 31, 2006 was
utilized. 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. We expect the Securitization Facility to be
renewed
in December 2007. Refer to Note 7, "Accounts Receivable Securitization
and
Allowance for Doubtful Accounts."
|
(3)
|
Represents
future monthly rental payment obligations under operating leases
for
over-the-road tractors, day-cabs, trailers, office and terminal
properties, and computer and office equipment. Substantially all
lease
agreements for revenue equipment have fixed payment terms based on
the
passage of time. The tractor lease agreements generally stipulate
maximum
miles and provide for mileage penalties for excess miles. Lease terms
for
tractors and trailers range from 30 to 60 months and 60 to 84 months,
respectively. Refer to Item 7, Management's Discussion and Analysis
of
Financial Condition and Results of Operations - Off Balance Sheet
Arrangements and Note 8, "Leases," in the accompanying consolidated
financial statements for further information.
|
(4)
|
This
amount represents volume purchase commitments through our truck stop
network. We estimate that these amounts represent approximately 67%
of our
fuel needs for 2007.
|
(5)
|
Amount
reflects the total purchase price or lease commitment of tractors
and
trailers scheduled for delivery throughout 2007. Net of estimated
trade-in
values and other dispositions, the estimated amount due under these
commitments is approximately $3.6 million. These purchases are expected
to
be financed by debt, proceeds from sales of existing equipment, cash
flows
from operations, and operating leases. We have the option to cancel
commitments relating to tractor equipment with 60 days notice.
|
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 December
31, 2006, we had financed approximately 1,116 tractors and 7,575 trailers under
operating leases. Vehicles held under operating leases are not carried on our
consolidated
balance
sheets,
and
lease payments in respect of such vehicles are reflected in our consolidated
statements
of
operations in
the
line item "Revenue equipment rentals and purchased transportation." Our revenue
equipment rental expense was $41.0 million in 2006, compared to $40.0 million
in
2005. The total amount of remaining payments under operating leases as of
December 31, 2006, was approximately $175.3
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 December 31, 2006, the maximum amount
of
the residual value guarantees was approximately $45.3 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 substantially 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 as 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 attached
hereto. 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.
Revenue
Recognition
Revenue,
drivers' wages and other direct operating expenses are recognized on the date
shipments are delivered to the customer. Revenue includes transportation
revenue, fuel surcharges, loading and unloading activities, equipment detention,
and other accessorial services.
Depreciation
of Revenue Equipment
Depreciation
is determined using the straight-line method over the estimated useful lives
of
the assets and was approximately $39.5 million on tractors and trailers in
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 consolidated statements of
operations.
We
annually review the reasonableness of our estimates regarding useful lives
and
salvage values of our revenue equipment and other long-lived assets based upon,
among other things, our experience with similar assets, conditions in the used
revenue equipment market, and prevailing industry practice. Changes in our
useful life or salvage value estimates, or fluctuations in market values that
are not reflected in our estimates, could have a material effect on our results
of operations.
Revenue
equipment and other long-lived assets are tested for impairment whenever an
event occurs that indicates an impairment may exist. Expected future cash flows
are used to analyze whether an impairment has occurred. If the sum of expected
undiscounted cash flows is less than the carrying value of the long-lived asset,
than an impairment loss is recognized. We measure the impairment loss by
comparing the fair value of the asset to its carrying value. Fair value is
determined based on a discounted cash flow analysis or the appraised value
of
the assets, as appropriate.
Assets
Held For Sale
Assets
held for sale include property and revenue equipment no longer utilized in
continuing operations which is available and held for sale. Assets held for
sale
are no longer subject to depreciation, and are recorded at the lower of
depreciated book value plus the related costs to sell or fair market value
less
selling costs. We periodically review the carrying value of these assets for
possible impairment. We expect to sell these assets within twelve
months.
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 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 December 31, 2006, no such charge had
been
recorded. However, we are continuing to evaluate 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 2009,
an
extension of the original January 2007 maturity date.
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.
During
2004, we engaged an independent, third-party actuarial firm to assist us in
evaluating our claims reserves estimates. As a result of the actuarial study
and
our own procedures, we recorded a $19.6 million non-cash, pretax increase to
claims reserves during the fourth quarter of 2004. We have incorporated several
procedures suggested by the actuary into our claims estimation process for
future periods.
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. 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 substantially 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. In 2006, income tax expense of
$0.4
million was recorded in our consolidated 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 $0.9 million
of
income taxes in our consolidated balance sheets at December 31,
2006.
Deferred
income taxes represent a substantial liability on our consolidated balance
sheets
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. Based
on
forecasted income, no
valuation reserve has been established at December 31, 2006, because 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 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 statements
of
operations.
Performance-based
Employee Stock Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123R, under which we estimate compensation expense that is recognized
in our consolidated statements of operations for the fair value of employee
stock-based compensation related to grants of performance-based stock options
and restricted stock awards. This estimate requires various subjective
assumptions, including probability of meeting the underlying performance-based
earnings per share targets and estimating forfeitures. If any of these
assumptions change significantly, stock-based compensation expense may differ
materially in the future from the expense recorded in the current
period.
New
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(SFAS
159). SFAS 159 permits entities to choose to measure certain financial assets
and liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We are currently
assessing the impact of SFAS 159 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
September 2006, the Securities and Exchange Commission released Staff Accounting
Bulletin 108 ("SAB 108"). SAB 108 provides interpretative guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB 108 is effective
for
fiscal years ending after November 15, 2006. SAB 108 did not have an impact
on
our consolidated financial statements.
In
July
2006, the FASB issued Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes
, which
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS 109,
Accounting for Income Taxes.
FIN 48
provides guidance on 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, disclosures, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We will adopt FIN 48 as of January
1,
2007, as required. The cumulative effect of adopting FIN 48 will be recorded
as
a change to opening retained earnings in the first quarter of 2007. While we
continue to analyze and quantify the impact of FIN 48, we estimate a cumulative
effect adjustment to reduce retained earnings of between $1.0 million and $3.0
million.
In
March
2006, the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets - an amendment of SFAS No.
140,
that
provides guidance on accounting for separately recognized servicing assets
and
servicing liabilities. In accordance with SFAS No. 156, separately recognized
servicing assets and servicing liabilities must be initially recognized at
fair
value, if practicable. Subsequent to initial recognition, companies may use
either the amortization method or the fair value measurement method to account
for servicing assets and servicing liabilities within the scope of this
Statement. The provisions of SFAS No. 156 are effective as of the beginning
of
the first fiscal year that begins after September 15, 2006. We do not believe
the adoption of SFAS No. 156 will have a material impact on our consolidated
financial statements.
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 year ended December 31,
2006.
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 December 31, 2006,
our entire tractor fleet has such emissions compliant engines and is
experiencing approximately 2% to 4% reduced fuel economy compared with pre-2002
equipment. In 2007, stricter regulations will become effective. Compliance
with
such regulations is expected to increase the cost of new tractors and could
impair equipment productivity, lower fuel mileage, and increase our operating
expenses. These adverse effects combined with the uncertainty as to the
reliability of the vehicles equipped with the newly designed diesel engines
and
the residual values that will be realized from the disposition of these vehicles
could increase our costs or otherwise adversely affect our business or
operations once the regulations become effective.
Fluctuations
in the price or availability of fuel, as well as hedging activities, surcharge
collection, and the volume and terms of diesel fuel purchase commitments may
increase our costs of operation, which could materially and adversely affect
our
profitability. We impose fuel surcharges on substantially all accounts. These
arrangements may not fully protect us from fuel price increases and also may
result in us not receiving the full benefit of any fuel price decreases. We
currently do not have any fuel hedging contracts in place. If we do hedge,
we
may be forced to make cash payments under the hedging arrangements. A small
portion of our fuel requirements for 2006 were 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.
The
table
below sets forth quarterly information reflecting our equipment utilization
(miles per tractor per period) during 2006, 2005 and 2004. We believe that
equipment utilization more accurately demonstrates the seasonality for our
business than changes in revenue, which are affected by the timing of deliveries
of new revenue equipment. Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends.
Equipment
Utilization Table
(Miles
Per Tractor Per Period)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
2006
|
|
|
28,136
|
|
|
29,808
|
|
|
30,051
|
|
|
29,620
|
|
2005
|
|
|
27,245
|
|
|
28,589
|
|
|
29,592
|
|
|
30,376
|
|
2004
|
|
|
29,749
|
|
|
31,215
|
|
|
31,043
|
|
|
30,911
|
|
ITEM
7A. 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
December 31, 2006, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
INTEREST
RATE RISK
Our
market risk is also affected by changes in interest rates. Historically, we
have
used a combination of fixed-rate and variable-rate obligations to manage our
interest rate exposure. Fixed-rate obligations expose us to the risk that
interest rates might fall. Variable-rate obligations expose us to the risk
that
interest rates might rise. Currently, all of our borrowing is under
variable-rate agreements.
Our
variable rate obligations consist of our Credit Facility and our Securitization
Facility. Borrowings under the Credit Facility, provided there has been no
default, 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 a
consolidated leverage ratio, which is generally defined as the ratio of
borrowings, letters of credit, and the present value of operating lease
obligations to our earnings before interest, income taxes, depreciation,
amortization, and rental payments under operating leases. The applicable margin
was 1.25% at December 31, 2006. At December 31, 2006, we had variable, LIBOR
borrowings of $104.9 million outstanding under the Credit Facility.
During
the first quarter of 2001, we entered into two $10 million notional amount
interest rate swap agreements to manage the risk of variability in cash flows
associated with floating-rate debt. The swaps expired January 2006 and March
2006. Due to the counter-parties' embedded options to cancel, these derivatives
were not designated as hedging instruments under SFAS No. 133 and consequently
were marked to fair value through earnings, in other expense in the accompanying
consolidated statements of operations.
Our
Securitization Facility carries a variable interest rate based on the commercial
paper rate plus an applicable margin of 0.44% per annum. At December 31, 2006,
borrowings of $55.0 million had been drawn on the Securitization Facility.
Assuming variable rate borrowings under the Credit Facility
and
Securitization Facility at December 31, 2006 levels, a one percentage point
increase in interest rates could increase our annual interest expense by
approximately $550 thousand.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
consolidated financial statements of Covenant Transport, Inc. and subsidiaries,
as of December 31, 2006 and 2005, and the related consolidated balance sheets,
statements of operations, statements of stockholders'
equity
and comprehensive income, and statements of cash flows for each of the years
in
the three-year period ended December 31, 2006, consolidated selected quarterly
financial data (unaudited) for the years ended December 31, 2006 and 2005,
together with the related notes, and the report of KPMG LLP, our independent
registered public accounting firm for the years ended December 31, 2006, 2005,
and 2004 are set forth at pages 46 through 68, elsewhere in this
report.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
has
been no change in accountants during our three most recent fiscal years.
Evaluation
of Disclosure Controls and Procedures
We
have
established disclosure controls and procedures to ensure that material
information relating to us and our consolidated subsidiaries is made known
to
the officers who certify our financial reports and to other members of senior
management and the Board of Directors.
Based
on
their evaluation as of December 31, 2006, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rule 13a-15 under the Exchange Act) are effective
to
ensure that the information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized,
and
reported within the time periods specified in SEC rules and forms.
Management's
Annual Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in
Rule 13a-15 promulgated under the Exchange Act as a process designed by, or
under the supervision of, the principal executive and principal financial
officers and effected by the board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
•
|
pertain
to the maintenance of records, that in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of our
assets;
|
|
|
•
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that our receipts and expenditures are
being
made only in accordance with authorizations of our management and
directors; and
|
|
|
•
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could
have
a material effect on our financial
statements.
|
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.
Management
assessed the effectiveness of our internal control over financial reporting
as
of December 31, 2006. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) an Internal Control-Integrated Framework. Based on its
assessment, management believes that, as of December 31, 2006, our internal
control over financial reporting is effective based on those
criteria.
The
scope
of management's assessment of the effectiveness of our internal controls over
financial reporting as of December 31, 2006, includes all of our subsidiaries,
except for Star Transportation, Inc. ("Star"). We acquired Star on September
14,
2006. Management excluded from its assessment of the effectiveness of internal
controls over financial reporting as of December 31, 2006, Star's internal
controls over financial reporting associated with total assets of $106.0 million
and total revenue of $28.3 million included in our consolidated financial
statements as of and for the year ended December 31, 2006. In accordance with
guidance issued by the SEC, companies are allowed to exclude acquisitions from
their assessment of the effectiveness of internal controls over financial
reporting during the first year subsequent to an acquisition while integrating
the acquired company.
Management's
assessment of the effectiveness of internal control over financial reporting
as
of December 31, 2006, has been audited by KPMG LLP, the independent registered
public accounting firm who also audited our consolidated financial statements.
KPMG LLP's attestation report on management's assessment of our internal control
over financial reporting appears on page 47 herein.
Design
and Changes in 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. In accordance with these controls and procedures,
information is accumulated and communicated to management, including our Chief
Executive Officer, as appropriate, to allow timely decisions regarding
disclosures. There were no changes in our internal control over financial
reporting that occurred during the quarter ended December 31, 2006, that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Not
applicable.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS,
AND CORPORATE GOVERNANCE
We
incorporate by reference the information respecting executive officers and
directors set forth under the captions "Election of Directors - Information
Concerning Directors and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Proxy Statement for the 2007 annual
meeting of stockholders, which will be filed with the Securities and Exchange
Commission in accordance with Rule 14a-6 promulgated under the Securities
Exchange Act of 1934, as amended (the "Proxy Statement"); provided, that the
section entitled "Report of the Audit Committee" and the Stock Performance
Graph
contained in the Proxy Statement are not incorporated by reference.
We
incorporate by reference the information set forth under the section entitled
"Executive Compensation" in our Proxy Statement for the 2007 annual meeting
of
stockholders; provided, that the section entitled "Report of the Compensation
Committee" contained in the Proxy Statement is not incorporated by
reference.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
We
incorporate by reference the information set forth under the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement. The following table provides certain information as of
December 31, 2006, with respect to our compensation plans and other
arrangements under which shares of our Class A common stock are authorized
for
issuance.
Equity
Compensation Plan Information
Plan
category
|
Number
of
securities
to
be
issued
upon
exercise
of
outstanding
options,
warrants
and
Rights
|
Weighted-
average
exercise
price
of
outstanding
options,
warrants
and
rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
|
|
(a)
|
(b)
|
(c)
|
Equity
compensation plans approved
by
security holders (1)
|
1,162,432
|
$13.99
|
440,466
|
Equity
compensation plans not
approved
by security holders (2)
|
125,000
|
$13.93
|
-
|
Total
|
1,287,432
|
$13.98
|
440,466
|
(1)
|
Includes
1994 Incentive Stock Plan, Outside Director Stock Option Plan, 2003
Incentive Stock Plan, and the 2006 Omnibus Incentive
Plan.
|
(2)
|
Includes
1998 Non-Officer Incentive Stock Plan, and shares issued pursuant
to
grants outside any plan.
|
Summary
Description of Equity Compensation Plans Not Approved by Security
Holders
Summary
of 1998 Non-Officer Incentive Stock Plan
In
October 1998, our Board of Directors adopted the Non-Officer Plan to attract
and
retain executive personnel and other key employees and motivate them through
incentives that were aligned with our goals of increased profitability and
stockholder value. The Board of Directors authorized 200,000 shares of our
Class
A common stock for grants or awards pursuant to the Non-Officer Plan. Awards
under the Plan could be in the form of incentive stock options, non-qualified
stock options, restricted stock awards, or any other awards of stock consistent
with the Non-Officer Plan's purpose. The Non-Officer Plan was to be administered
by the Board of Directors or a committee that could be appointed by the Board
of
Directors. All non-officer employees were eligible for participation, and actual
participants
in the Non-Officer Plan were selected from time-to-time by the administrator.
The administrator could substitute
new stock options for previously granted options. In conjunction with adopting
the 2003 Plan, the Board of Directors voted to terminate the Non-Officer Plan
effective as of May 31, 2003. Option grants previously issued continue in effect
and may be exercised on the terms and conditions under which the grants were
made.
Summary
of Grants Outside the Plan
On
August
31, 1998, our Board of Directors approved the grant of an option to purchase
5,000 shares of our Class A common stock to each of our four outside directors.
The exercise price of the stock was equal to the mean between the lowest
reported bid price and the highest reported asked price on the date of the
grant. The options have a term of ten years from the date of grant, and the
options vested 20% on each of the first through fifth anniversaries of the
grant.
On
September 23, 1998, our Board of Directors approved the grant of an option
to
purchase 20,000 shares of our Class A common stock to Tony Smith upon closing
of
the acquisition of SRT and Tony Smith Trucking, Inc. The exercise price was
the
mean between the low bid price and the high asked price on the closing date.
The
options have a term of ten years from the date of grant, and the options vested
20% on each of the first through fifth anniversaries of the grant.
On
May
20, 1999, our Board of Directors approved the grant of an option to purchase
2,500 shares of our Class A common stock to each of our four outside directors.
The exercise price of the stock was equal to the mean between the lowest
reported bid price and the highest reported asked price on the date of the
grant. The options have a term of ten years from the date of grant, and the
options vested 20% on each of the first through fifth anniversaries of the
grant.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
We
incorporate by reference the information set forth under the sections entitled
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" in the Proxy Statement.
ITEM
14. PRINCIPAL
ACCOUNTANT
FEES AND SERVICES
We
incorporate by reference the information set forth under the section entitled
"Principal Accountant
Fees and
Services" in
the
Proxy Statement.
ITEM
15. EXHIBITS
AND
FINANCIAL STATEMENT SCHEDULES
(a)
|
1.
|
Financial
Statements.
|
|
|
|
|
|
|
|
Our
audited consolidated financial statements are set forth at the following
pages of this report:
|
|
|
|
Reports
of Independent Registered Public Accounting Firm - KPMG
LLP
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income
(Loss)
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
|
|
2.
|
Financial
Statement Schedules.
|
|
|
|
|
|
|
|
Financial
statement schedules are not required because all required information
is
included in the financial statements.
|
|
|
|
|
|
|
3.
|
Exhibits.
|
|
|
|
|
|
|
|
The
exhibits required to be filed by Item 601 of Regulation S-K are listed
under paragraph (b) below and on the Exhibit Index appearing at the
end of
this report. Management contracts and compensatory plans or arrangements
are indicated by an asterisk.
|
|
|
|
|
|
(b)
|
|
Exhibits.
|
|
|
|
|
|
|
|
The
following exhibits are filed with this Form10-K or incorporated by
reference to the document set forth next to the exhibit listed
below.
|
|
Exhibit
Number
|
Reference
|
Description
|
3.1
|
(1)
|
Restated
Articles of Incorporation
|
3.2
|
(1)
|
Amended
Bylaws dated September 27, 1994
|
4.1
|
(1)
|
Restated
Articles of Incorporation
|
4.2
|
(1)
|
Amended
Bylaws dated September 27, 1994
|
10.1
|
(1)
|
401(k)
Plan filed as Exhibit 10.10
|
10.2
|
(2)
|
Outside
Director Stock Option Plan, filed as Appendix A*
|
10.3
|
(3)
|
Amendment
No. 1 to the Outside Director Stock Option Plan, filed as Exhibit
10.11*
|
10.4
|
(4)
|
Loan
Agreement dated December 12, 2000, among CVTI Receivables Corp.,
Covenant
Transport, Inc., Three Pillars Funding Corporation, and SunTrust
Equitable
Securities Corporation, filed as Exhibit 10.10
|
10.5
|
(4)
|
Receivables
Purchase Agreement dated as of December 12, 2000, among CVTI
Receivables Corp., Covenant Transport, Inc., and Southern Refrigerated
Transport, Inc., filed as Exhibit 10.11
|
10.6
|
(5)
|
Clarification
of Intent and Amendment No. 1 to Loan Agreement dated March 7,
2001, among
CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars
Funding
Corporation, and SunTrust Equitable Securities Corporation, filed
as
Exhibit 10.12
|
10.7
|
(6)
|
Incentive
Stock Plan, Amended and Restated as of May 17, 2001, filed as
Appendix B*
|
10.8
|
(7)
|
Covenant
Transport, Inc. 2003 Incentive Stock Plan, filed as Appendix
B*
|
10.9
|
(8)
|
Consolidating
Amendment No. 1 to Loan Agreement effective May 2, 2003, among
CVTI
Receivables Corp., Covenant Transport, Inc., Three Pillars Funding
Corporation, and SunTrust Capital Markets, Inc. (formerly SunTrust
Equitable Securities Corporation), filed as Exhibit
10.3
|
10.10
|
(9)
|
Master
Lease Agreement dated April 15, 2003, between Transport International
Pool, Inc. and Covenant Transport, Inc., filed as Exhibit
10.4
|
10.11
|
(10)
|
Amendment
No. 5 to Loan Agreement dated December 9, 2003, among CVTI Receivables
Corp., Covenant Transport, Inc., Three Pillars Funding LLC (successor
to
Three Pillars Funding Corporation), and SunTrust Capital Markets,
Inc.
(formerly SunTrust Equitable Securities Corporation), filed as
Exhibit
10.16
|
10.12
|
(11)
|
Amendment
No. 6 to Loan Agreement dated July 8, 2004, among CVTI Receivables
Corp.,
Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a Three
Pillars
Funding Corporation), and SunTrust Capital Markets, Inc. (formerly
SunTrust Equitable Securities Corporation) effective July 1, 2004,
filed
as Exhibit 10.1
|
10.13
|
(11)
|
Form
of Indemnification Agreement between Covenant Transport, Inc. and
each
officer and director, effective May 1, 2004, filed as Exhibit
10.2*
|
10.14
|
(12)
|
Amendment
No. 7 to Loan Agreement dated November 17, 2004, among CVTI Receivables
Corp., Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a
Three
Pillars Funding Corporation), and SunTrust Capital Markets, Inc.
(formerly
SunTrust Equitable Securities Corporation), filed as Exhibit
10.14
|
10.15
|
(13)
|
Amendment
No. 8 to Loan Agreement dated March 29, 2005, 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., filed as Exhibit
10.16
|
|
#
|
Amendment
No. 9 to Loan Agreement dated December 6, 2005, 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.
|
10.17
|
(14)
|
Purchase
and Sale Agreement dated April 3, 2006, between Covenant Transport,
Inc.,
a Tennessee corporation, and CT Chattanooga TN, LLC, filed as Exhibit
10.18
|
10.18
|
(14)
|
Lease
Agreement dated April 3, 2006, between Covenant Transport, Inc.,
a
Tennessee corporation, and CT Chattanooga TN, LLC, filed as Exhibit
10.19
|
10.19
|
(14)
|
Lease
Guaranty dated April 3, 2006, by Covenant Transport, Inc., a Nevada
corporation, for the benefit of CT Chattanooga TN, LLC, filed as
Exhibit
10.20
|
10.20
|
(15)
|
Covenant
Transport, Inc. 2006 Omnibus Incentive Plan*
|
10.21
|
(16)
|
Form
of Restricted Stock Award Notice under the Covenant Transport,
Inc. 2006
Omnibus Incentive Plan, filed as Exhibit 10.22*
|
10.22
|
(16)
|
Form
of Restricted Stock Special Award Notice under the Covenant Transport,
Inc. 2006 Omnibus Incentive Plan, filed as Exhibit
10.23*
|
10.23
|
(16)
|
Form
of Incentive Stock Option Award Notice under the Covenant Transport,
Inc.
2006 Omnibus Incentive Plan, filed as Exhibit 10.24*
|
10.24
|
(17)
|
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., filed as Exhibit
10.26
|
10.25
|
(17)
|
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., filed as Exhibit 10.28
|
|
#
|
Amendment
No. 11 to Loan Agreement dated October 20, 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.
|
|
#
|
Amendment
and Joinder Agreement to Receivables Purchase Agreement dated October
20,
2006, among Covenant Transport, Inc., Southern Refrigerated Transport,
Inc., CVTI Receivables Corp., Covenant Transport Solutions, Inc.,
and Star
Transportation, Inc.
|
|
#
|
Second
Amended and Restated Credit Agreement dated December 21, 2006, among
Covenant Asset Management, Inc., Covenant Transport, Inc., Bank of
America, N. A., and each other financial institution which is a party
to
the Credit Agreement
|
|
#
|
Amendment
No. 12 to Loan Agreement dated December 5, 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.
|
|
#
|
List
of Subsidiaries
|
|
#
|
Consent
of Independent Registered Public Accounting Firm - KPMG
LLP
|
|
#
|
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
|
|
#
|
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
|
|
#
|
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
|
|
#
|
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
|
References:
#
|
Filed
herewith
|
*
|
Management
contract or compensatory plan or
arrangement.
|
All
other
footnotes indicate a document previously filed as an exhibit to and incorporated
by reference from the following:
(1)
|
Form
S-1, Registration No. 33-82978, effective October 28,
1994
|
(2)
|
Schedule
14A, filed April 13, 2000 (SEC Commission File No.
0-24960)
|
(3)
|
Form
10-Q, filed November 13, 2000 (SEC Commission File No.
0-24960)
|
(4)
|
Form
10-K, filed March 29, 2001 (SEC Commission File No.
0-24960)
|
(5)
|
Form
10-Q, filed May 14, 2001 (SEC Commission File No.
0-24960)
|
(6)
|
Schedule
14A, filed April 5, 2001 (SEC Commission File No.
0-24960)
|
(7)
|
Schedule
14A, filed April 16, 2003 (SEC Commission File No.
0-24960)
|
(8)
|
Form
10-Q, filed August 11, 2003 (SEC Commission File No.
0-24960)
|
(9)
|
Form
10-Q/A for the quarter ended June 30, 2003, filed October 31, 2003
(SEC
Commission File No. 0-24960)
|
(10)
|
Form
10-K, filed March 15, 2004 (SEC Commission File No.
0-24960)
|
(11)
|
Form
10-Q, filed August 5, 2004 (SEC Commission File No.
0-24960)
|
(12)
|
Form
10-K, filed March 16, 2005 (SEC Commission File No.
0-24960)
|
(13)
|
Form
10-Q, filed May 9, 2005 (SEC Commission File No.
0-24960)
|
(14)
|
Current
Report on Form 8-K, filed April 7, 2006 (SEC Commission File No.
0-24960)
|
(15)
|
Schedule
14A, filed April 17, 2006 (SEC Commission File No.
0-24960)
|
(16)
|
Form
10-Q, filed August 9, 2006 (SEC Commission File No.
0-24960)
|
(17)
|
Form
10-Q, filed November 9, 2006 (SEC Commission File No.
0-24960)
|
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
COVENANT
TRANSPORT, INC.
|
|
|
|
|
Date:
March 15, 2007
|
By:
|
/s/
Joey B. Hogan
|
|
|
Joey
B. Hogan
|
|
|
Executive
Vice President and Chief
Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
and Title
|
|
Date
|
|
|
|
/s/
David R. Parker
|
|
March
15, 2007
|
David
R. Parker
|
|
|
Chairman
of the Board, President, and Chief Executive Officer (principal executive
officer)
|
|
|
|
|
|
/s/
Joey B. Hogan
|
|
March
15, 2007
|
Joey
B. Hogan
|
|
|
Executive
Vice President and Chief Financial Officer
(principal
financial and accounting officer)
|
|
|
|
|
|
/s/
Bradley A. Moline
|
|
March
15, 2007
|
Bradley
A. Moline
|
|
|
Director
|
|
|
|
|
|
/s/
William T. Alt
|
|
March
15, 2007
|
William
T. Alt
|
|
|
Director
|
|
|
|
|
|
/s/
Robert E. Bosworth
|
|
March
15, 2007
|
Robert
E. Bosworth
|
|
|
Director
|
|
|
|
|
|
/s/
Hugh O. Maclellan, Jr.
|
|
March
13, 2007
|
Hugh
O. Maclellan, Jr.
|
|
|
Director
|
|
|
|
|
|
/s/
Mark A. Scudder
|
|
March
15, 2007
|
Mark
A. Scudder
|
|
|
Director
|
|
|
|
|
|
/s/
Niel B. Nielson
|
|
March
13, 2007
|
Niel
B. Nielson
|
|
|
Director
|
|
|
The
Board
of Directors and Stockholders
Covenant
Transport, Inc.:
We
have
audited the accompanying Consolidated Balance Sheets of Covenant Transport,
Inc.
and subsidiaries as of December 31, 2006 and 2005, and the related Consolidated
Statements of Operations, Stockholders’ Equity and Comprehensive Income (Loss),
and Cash Flows for each of the years in the three-year period ended December
31,
2006. These Consolidated Financial Statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
Consolidated Financial Statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the Consolidated Financial Statements referred to above present
fairly,
in all material respects, the financial position of Covenant Transport, Inc.
and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Covenant Transport,
Inc.
and subsidiaries’ internal control over financial reporting as of December 31,
2006, based on criteria established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and
our report dated March 15, 2007, expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2006, the Company adopted the fair value of recording stock-based
compensation expense in accordance with Statement of Financial Accounting
Standards No. 123 and the Company changed its method of accounting for
conditional asset retirement obligations in 2005.
KPMG
LLP
/s/
KPMG
LLP
Atlanta,
Georgia
March 15,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Covenant
Transport, Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting set forth in Item 9A
of
Covenant Transport, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2006, that Covenant Transport, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Covenant Transport, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on criteria
established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Covenant Transport, Inc. and subsidiaries maintained,
in
all material respects, effective internal control over financial reporting
as of
December 31, 2006, based on criteria
established in Internal
Control—Integrated Framework issued
by
the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Covenant
Transport, Inc. acquired Star Transportation during 2006, and management
excluded from its assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, Star Transportation’s
internal control over financial reporting associated with total assets of
$106.0
million and total revenue of $28.3 million included in the consolidated
financial statements of Covenant Transport, Inc. and subsidiaries as of and
for
the year ended December 31, 2006. Our audit of internal control over financial
reporting of Covenant Transport, Inc. and subsidiaries also excluded an
evaluation of the internal control over financial reporting of Star
Transportation.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Consolidated Balance Sheets of Covenant
Transport, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
related Consolidated Statements of Operations, Stockholders’ Equity and
Comprehensive Income (Loss), and Cash Flows for each of the years in the
three-year period ended December 31 2006, and our report dated March 15,
2007, expressed
an unqualified opinion on those consolidated financial statements.
KPMG
LLP
/s/
KPMG
LLP
Atlanta,
Georgia
March
15,
2007
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2006 AND 2005
(In
thousands, except share data)
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,407
|
|
$
|
3,618
|
|
Accounts
receivable, net of allowance of $1,491 in 2006
and
$2,200 in
2005
|
|
|
72,581
|
|
|
77,969
|
|
Drivers
advances and other receivables,
net of allowance
of
$2,598 in 2006 and
$2,464 in 2005
|
|
|
4,259
|
|
|
3,932
|
|
Inventory
and supplies
|
|
|
4,985
|
|
|
4,661
|
|
Prepaid
expenses
|
|
|
11,162
|
|
|
16,199
|
|
Assets
held for sale
|
|
|
22,581
|
|
|
3,204
|
|
Deferred
income taxes
|
|
|
16,021
|
|
|
16,158
|
|
Income
taxes receivable
|
|
|
6,371
|
|
|
7,559
|
|
Total
current assets
|
|
|
143,367
|
|
|
133,300
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
349,663
|
|
|
295,433
|
|
Less
accumulated depreciation and amortization
|
|
|
(74,689
|
)
|
|
(84,275
|
)
|
Net
property and equipment
|
|
|
274,974
|
|
|
211,158
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
36,210
|
|
|
11,539
|
|
Other
assets, net
|
|
|
20,543
|
|
|
15,264
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
475,094
|
|
$
|
371,261
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Securitization
facility
|
|
$
|
54,981
|
|
$
|
47,281
|
|
Checks
outstanding in excess of bank balances
|
|
|
4,280
|
|
|
-
|
|
Current
maturities of acquisition obligation
|
|
|
333
|
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
30,521
|
|
|
25,545
|
|
Current
portion of insurance and claims accrual
|
|
|
20,097
|
|
|
18,529
|
|
Total
current liabilities
|
|
|
110,212
|
|
|
91,355
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
104,900
|
|
|
33,000
|
|
Insurance
and claims accrual, net of current portion
|
|
|
18,002
|
|
|
23,272
|
|
Deferred
income taxes
|
|
|
50,685
|
|
|
33,910
|
|
Other
long-term liabilities
|
|
|
2,451
|
|
|
-
|
|
Total
liabilities
|
|
|
286,250
|
|
|
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
December 31, 2006 and 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
|
|
|
92,053
|
|
|
91,553
|
|
Treasury
stock at cost; 1,818,400 shares
|
|
|
(21,582
|
)
|
|
(21,582
|
)
|
Retained
earnings
|
|
|
118,214
|
|
|
119,595
|
|
Total
stockholders' equity
|
|
|
188,844
|
|
|
189,724
|
|
Total
liabilities and stockholders' equity
|
|
$
|
475,094
|
|
$
|
371,261
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2006, 2005, AND 2004
(In
thousands, except per share data)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Revenues
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
572,239
|
|
$
|
555,428
|
|
$
|
558,453
|
|
Fuel
surcharges
|
|
|
111,589
|
|
|
87,626
|
|
|
45,169
|
|
Total
revenue
|
|
$
|
683,828
|
|
$
|
643,054
|
|
$
|
603,622
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses
|
|
|
262,303
|
|
|
242,157
|
|
|
225,778
|
|
Fuel
expense
|
|
|
194,355
|
|
|
170,582
|
|
|
127,723
|
|
Operations
and maintenance
|
|
|
36,112
|
|
|
33,625
|
|
|
30,555
|
|
Revenue
equipment rentals and purchased transportation
|
|
|
63,532
|
|
|
61,701
|
|
|
69,928
|
|
Operating
taxes and licenses
|
|
|
14,516
|
|
|
13,431
|
|
|
14,217
|
|
Insurance
and claims
|
|
|
34,104
|
|
|
41,034
|
|
|
54,847
|
|
Communications
and utilities
|
|
|
6,727
|
|
|
6,579
|
|
|
6,517
|
|
General
supplies and expenses
|
|
|
21,387
|
|
|
17,778
|
|
|
15,104
|
|
Depreciation
and amortization, including net gains on
disposition
of
equipment
|
|
|
41,163
|
|
|
39,101
|
|
|
45,001
|
|
Total
operating expenses
|
|
|
674,199
|
|
|
625,988
|
|
|
589,670
|
|
Operating
income
|
|
|
9,629
|
|
|
17,066
|
|
|
13,952
|
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
7,153
|
|
|
4,203
|
|
|
3,098
|
|
Interest
income
|
|
|
(568
|
)
|
|
(273
|
)
|
|
(48
|
)
|
Other
|
|
|
(157
|
)
|
|
(538
|
)
|
|
(926
|
)
|
Other
expenses, net
|
|
|
6,428
|
|
|
3,392
|
|
|
2,124
|
|
Income
before income taxes and cumulative effect of change
in
accounting principle
|
|
|
3,201
|
|
|
13,674
|
|
|
11,828
|
|
Income
tax expense
|
|
|
4,582
|
|
|
8,003
|
|
|
8,452
|
|
Income
(loss) before cumulative effect of change in accounting
principle
|
|
|
(1,381
|
)
|
|
5,671
|
|
|
3,376
|
|
Cumulative
effect of change in accounting principle, net of tax
(Note
1)
|
|
|
-
|
|
|
(485
|
)
|
|
-
|
|
Net
income (loss)
|
|
$
|
(1,381
|
)
|
$
|
5,186
|
|
$
|
3,376
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share before cumulative effect of change
in
accounting principle:
|
|
$
|
(0.10
|
)
|
$
|
0.40
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
(0.03
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$
|
(0.10
|
)
|
$
|
0.37
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share before cumulative effect of change
in
accounting principle:
|
|
$
|
(0.10
|
)
|
$
|
0.40
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
(0.03
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
$
|
(0.10
|
)
|
$
|
0.37
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
13,996
|
|
|
14,175
|
|
|
14,641
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
13,996
|
|
|
14,270
|
|
|
14,833
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME (LOSS)
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(In
thousands)
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Treasury
Stock
|
|
Retained
Earnings
|
|
Total
Stockholders'
Equity
|
|
Comprehensive
Income
(Loss)
|
|
|
|
Class
A
|
|
Class
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2003
|
|
$
|
133
|
|
$
|
24
|
|
$
|
88,888
|
|
$
|
(7,935
|
)
|
$
|
111,032
|
|
$
|
192,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options
|
|
|
1
|
|
|
-
|
|
|
1,960
|
|
|
-
|
|
|
-
|
|
|
1,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from the
exercise
of stock options
|
|
|
-
|
|
|
-
|
|
|
210
|
|
|
-
|
|
|
-
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
repurchase
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,990
|
)
|
|
-
|
|
|
(1,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,376
|
|
|
3,376
|
|
|
3,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income for 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2004
|
|
$
|
134
|
|
$
|
24
|
|
$
|
91,058
|
|
$
|
(9,925
|
)
|
$
|
114,408
|
|
$
|
195,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options
|
|
|
-
|
|
|
-
|
|
|
445
|
|
|
-
|
|
|
-
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from the
exercise
of stock options
|
|
|
-
|
|
|
-
|
|
|
50
|
|
|
-
|
|
|
-
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
repurchase
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,657
|
)
|
|
-
|
|
|
(11,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,186
|
|
|
5,186
|
|
|
5,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income for 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
-
|
|
|
238
|
|
|
-
|
|
|
-
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,381
|
)
|
|
(1,381
|
)
|
|
(1,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
for 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
$
|
135
|
|
$
|
24
|
|
$
|
92,053
|
|
$
|
(21,582
|
)
|
$
|
118,214
|
|
$
|
188,844
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,381
|
)
|
$
|
5,186
|
|
$
|
3,376
|
|
Adjustments
to reconcile net income (loss) to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
provision for losses on accounts receivable
|
|
|
590
|
|
|
1,598
|
|
|
547
|
|
Depreciation
and amortization
|
|
|
43,234
|
|
|
39,769
|
|
|
41,456
|
|
Income
tax benefit from exercise of stock options
|
|
|
-
|
|
|
50
|
|
|
210
|
|
Deferred
income taxes (benefit)
|
|
|
3,660
|
|
|
(6,249
|
)
|
|
(12,063
|
)
|
Loss
(gain) on disposition of property and equipment
|
|
|
(2,071
|
)
|
|
(668
|
)
|
|
3,545
|
|
Non-cash
stock compensation
|
|
|
239
|
|
|
-
|
|
|
-
|
|
Cumulative
effect of change in accounting principle,
net
of tax
|
|
|
-
|
|
|
485
|
|
|
-
|
|
Changes
in operating assets and liabilities, net of effects
from
purchase of Star Transportation, Inc.:
|
|
|
|
|
|
|
|
|
|
|
Receivables
and advances
|
|
|
14,449
|
|
|
(4,841
|
)
|
|
(9,454
|
)
|
Prepaid
expenses and other assets
|
|
|
6,295
|
|
|
(4,555
|
)
|
|
4,542
|
|
Inventory
and supplies
|
|
|
(283
|
)
|
|
(1,081
|
)
|
|
-
|
|
Insurance
and claims accrual
|
|
|
(6,255
|
)
|
|
(4,399
|
)
|
|
18,779
|
|
Accounts
payable and accrued expenses
|
|
|
2,187
|
|
|
278
|
|
|
(6,825
|
)
|
Net
cash flows provided by operating activities
|
|
|
60,664
|
|
|
25,573
|
|
|
44,113
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(162,750
|
)
|
|
(109,918
|
)
|
|
(81,615
|
)
|
Proceeds from disposition of property and equipment
|
|
|
71,652
|
|
|
65,992
|
|
|
49,179
|
|
Proceeds from building sale leaseback
|
|
|
29,630
|
|
|
-
|
|
|
-
|
|
Payment of acquisition obligation
|
|
|
(83
|
)
|
|
-
|
|
|
-
|
|
Purchase of Star Transportation, Inc., net of cash
acquired
|
|
|
(39,061
|
)
|
|
-
|
|
|
-
|
|
Net
cash flows used in investing activities
|
|
|
(100,612
|
)
|
|
(43,926
|
)
|
|
(32,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
246
|
|
|
445
|
|
|
1,961
|
|
Income
tax benefit from exercise of stock options
|
|
|
17
|
|
|
-
|
|
|
-
|
|
Repurchase
of company stock
|
|
|
-
|
|
|
(11,657
|
)
|
|
(1,990
|
)
|
Proceeds
from disposition of interest rate hedge
|
|
|
175
|
|
|
-
|
|
|
-
|
|
Change
in checks outstanding in excess of bank balances
|
|
|
4,280
|
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of debt
|
|
|
167,188
|
|
|
122,000
|
|
|
57,026
|
|
Repayments
of debt
|
|
|
(129,768
|
)
|
|
(93,889
|
)
|
|
(66,510
|
)
|
Deferred
costs
|
|
|
(401
|
)
|
|
6
|
|
|
(404
|
)
|
Net
cash flows provided by (used in) financing activities
|
|
|
41,737
|
|
|
16,905
|
|
|
(9,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
1,789
|
|
|
(1,448
|
)
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
3,618
|
|
|
5,066
|
|
|
3,306
|
|
Cash
and cash equivalents at end of year
|
|
$
|
5,407
|
|
$
|
3,618
|
|
$
|
5,066
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest,
net of capitalized interest
|
|
$
|
7,486
|
|
$
|
4,255
|
|
$
|
3,031
|
|
Income
taxes
|
|
$
|
1,485
|
|
$
|
16,261
|
|
$
|
20,867
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
1. SUMMARY
OF
SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Covenant
Transport,
Inc., a Nevada holding company, together with its wholly-owned subsidiaries
offers truckload transportation services to customers throughout the United
States.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Covenant Transport,
Inc. a holding company incorporated in the state of Nevada in 1994, and its
wholly-owned subsidiaries: Covenant Transport, Inc., a Tennessee corporation;
("Covenant"); Harold Ives Trucking Co., an Arkansas corporation; ("Harold
Ives"); Southern Refrigerated Transport, Inc., an Arkansas corporation; ("SRT");
Star Transportation, Inc., a Tennessee corporation; ("Star"); Covenant Transport
Solutions, Inc., a Nevada corporation; ("Solutions"); Covenant.com, Inc., a
Nevada corporation; Covenant Asset Management, Inc., a Nevada corporation;
CIP,
Inc., a Nevada corporation; CVTI Receivables Corp., a Nevada corporation;
("CRC"); and Volunteer Insurance Limited, a Cayman Islands company;
("Volunteer"). Tony Smith Trucking, Inc., an Arkansas corporation was dissolved
in December 2004. All significant intercompany balances and transactions have
been eliminated in consolidation.
Revenue
Recognition
Revenue,
drivers' wages and other direct operating expenses are recognized on the date
shipments are delivered to the customer. Revenue includes transportation
revenue, fuel surcharges, loading and unloading activities, equipment detention,
and other accessorial services.
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less to be cash equivalents. At December 31, 2006, we had checks outstanding
in excess of cash balances for our primary disbursement accounts totaling $4.3
million which is recorded in current liabilities on our consolidated balance
sheets.
Concentrations
of Credit Risk
The
Company performs ongoing credit evaluations of our customers and do not require
collateral for its accounts receivable. The Company maintains reserves which
management believes are adequate to provide for potential credit losses. The
Company's customer base spans the continental United States with a diverse
customer base that results in a lack of a concentration of credit risk for
the
year ended December 31, 2006. However, during 2004, three of the Company's
customers, which were autonomously managed and operated, were wholly owned
subsidiaries of a public entity, that when added together amounted to
approximately 9% of that year's revenue.
Inventories
and supplies
Inventories
and supplies consist of parts, tires, fuel, and supplies. Tires on new revenue
equipment are capitalized as a component of the related equipment cost when
the
tractor or trailer is placed in service and recovered through depreciation
over
the life of the vehicle. Replacement tires and parts on hand at year end are
recorded at the lower of cost or market with cost determined using the first-in,
first-out (FIFO) method. Replacement tires are expensed when placed in
service.
Assets
Held for Sale
Assets
held for sale include property and revenue equipment no longer utilized in
continuing operations which is available and held for sale. Assets held for
sale
are no longer subject to depreciation, and are recorded at the lower of
depreciated book value plus the related costs to sell or fair market value
less
selling costs. The Company periodically reviews the carrying value of these
assets for possible impairment. The Company expects to sell these assets within
twelve months.
Property
and Equipment
Depreciation
is determined using the straight-line method over the estimated useful lives
of
the assets. Depreciation of revenue equipment is the
Company's
largest
item of depreciation. The
Company
generally depreciates
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%. The
Company
annually
reviews
the
reasonableness of its
estimates regarding useful lives and salvage values of its
revenue
equipment and other long-lived assets based upon, among other things,
its
experience with similar assets, conditions in the used revenue equipment market,
and prevailing industry practice. Changes in the
useful
life or salvage value estimates, or fluctuations in market values that are
not
reflected in the
Company's
estimates, could have a material effect on its
results
of operations. Gains and losses on the disposal of revenue equipment are
included in depreciation expense in the
consolidated statements of operations.
Long-Lived
Assets and Asset Impairment
The
Company account for impairments of long-lived assets subject to amortization
and
depreciation in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets.
As such,
revenue equipment and other long-lived assets are tested for impairment whenever
events or circumstances indicate an impairment may exist. The
Company
measures
the impairment loss by comparing the fair value of the asset to its carrying
value. Expected future cash flows are used to analyze whether an impairment
has
occurred. Fair value is determined based on a discounted cash flow analysis
or
the appraised value of the assets, as appropriate. If the sum of expected
undiscounted cash flows is less than the carrying value of the long-lived asset,
than an impairment loss is recognized.
Intangibles
and Other Assets
SFAS
No.
142, Goodwill
and Other Intangible Assets,
which
requires companies
to
evaluate goodwill and other intangible assets with indefinite useful lives for
impairment on an annual basis, with any resulting impairment losses being
recorded as a component of income from operations in the consolidated statements
of operations. During the second quarter of each year, the Company completes
its
annual evaluation of its goodwill for impairment and determined that its
carrying value did not exceed its fair value and, accordingly, no impairment
loss existed. There were no indicators of impairment subsequent to this annual
review that required further assessment. Other identifiable intangible assets
are amortized over their estimated lives. Non-compete agreements are amortized
by the straight-line method over the life of the agreements, acquired tradenames
are amortized by the straight-line method over the expected useful life of
the
tradename, acquired customer relationships are amortized by an accelerated
method based on the estimated future cash inflows to be generated by such
customers and deferred loan costs are amortized over the life of the
loan.
Insurance
and Claims
The
Company's
insurance program for liability, property damage, and cargo loss and damage,
involves self-insurance with high retention levels. Under the casualty program,
the
Company is
self-insured for personal injury and property damage claims for varying amounts
depending on the date the claim was incurred. The insurance retention also
provides for an additional self-insured aggregate amount, with a limit per
occurrence until an aggregate threshold is reached. The deductible amount
increased from $250,000 in 2001 to $2.0 million in 2005, subject to aggregate
thresholds. For the years ended December 31, 2006 and 2005, the
Company was
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 resulted in total self-insured retention of up to $4.0
million until the $2.0 million aggregate threshold was reached. We
renewed our casualty program in February 2007.
Subsequent to the renewal, we are self-insured for personal injury and property
damage claims for amounts up to $4.0 million. For cargo loss and damage claims,
the
Company is
self-insured for amounts up to the first $1.0 million per occurrence.
The
Company maintains
a workers' compensation plan and group medical plan for its
employees with a deductible amount of $1.0 million for each workers'
compensation claim and a per claim limit amount of
$275,000
for each group medical claim. The
Company accrues
the estimated cost of the retained portion of incurred claims. These accruals
are based on an evaluation of the nature and severity of the claim and estimates
of future claims development based on historical trends. Insurance and claims
expense will vary based on the frequency and severity of claims, the premium
expense, and self-insured retention levels.
The
Company
recorded
an aggregate $19.6 million pre-tax adjustment to its
claims
reserves during the fourth quarter of 2004. The adjustment included an $18.0
million increase to the
Company's
casualty
reserve, which was reflected in insurance and claims in
the
consolidated statements
of
operations, and a $1.5 million increase to the
workers'
compensation reserve, which was reflected in salaries, wages, and benefits
in
the
consolidated statements
of
operations.
Fair
Value of Financial Instruments
The
Company's
financial instruments consist primarily of cash, accounts receivable, accounts
payable, and long term debt. The carrying amount of cash, accounts receivable,
and accounts payable approximates their fair value because of the short term
maturity of these instruments. Interest rates that are currently available
to
the
Company
for
issuance of long term debt with similar terms and remaining maturities are
used
to estimate the fair value of the
Company's
long
term debt. The carrying amount of the
Company's
short
and long term debt at December 31, 2006 and 2005 was approximately $159.9
million and $80.3 million, respectively, including the accounts receivable
securitization borrowings and approximates the estimated fair value, due to
the
variable interest rates on these instruments.
Income
Taxes
Income
taxes are accounted for using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Capital
Structure
The
shares of Class A and B common stock are substantially identical except that
the
Class B shares are entitled to two votes per share while beneficially owned
by
David Parker or certain members of his immediate family and Class A shares
are
entitled to one vote per share. The terms of any future issuances of preferred
shares will be set by the
Company's
Board of
Directors.
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 2006 and 2005 equaled net income
(loss).
Earnings
(Loss) Per Share
The
Company
applies
the provisions of SFAS No. 128,
Earnings per Share,
which
require companies
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 loss per share for the year ended December 31, 2006
excludes all 1.3 million unexercised shares, since the effect of any assumed
exercise of the related options would be anti-dilutive. The calculation of
diluted earnings per share for the years ended December 31, 2005 and 2004
excludes approximately 1.4 million shares and 1.1 million shares, respectively,
since the option price was greater than the average market price of the common
shares.
The
following table sets forth the calculation of net earnings (loss) per share
included in the
consolidated
statements of operations for each of the three years ended December
31:
(in
thousands except per share data)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$
|
(1,381
|
)
|
$
|
5,186
|
|
$
|
3,376
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share
- weighted-average shares
|
|
|
13,996
|
|
|
14,175
|
|
|
14,641
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
0
|
|
|
95
|
|
|
192
|
|
Denominator
for diluted earnings per share
- adjusted weighted-average shares and assumed
conversions
|
|
|
13,996
|
|
|
14,270
|
|
|
14,833
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$
|
(0.10
|
)
|
$
|
0.37
|
|
$
|
0.23
|
|
Diluted
earnings (loss) per share:
|
|
$
|
(0.10
|
)
|
$
|
0.37
|
|
$
|
0.23
|
|
Derivative
Instruments and Hedging Activities
The
Company
engages
in activities that expose it
to
market risks, including the effects of changes in interest rates and fuel
prices. Financial exposures are evaluated as an integral part of the
Company's
risk
management program, which seeks, from time to time, to reduce potentially
adverse effects that the volatility of the interest rate and fuel markets may
have on operating results. The
Company
does not
regularly engage in speculative transactions, nor does it regularly hold or
issue financial instruments for trading purposes.
All
derivatives are recognized on the balance sheet at their fair values. On the
date the derivative contract is entered into, the
Company
designates the derivative a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability ("cash flow hedge"). The
Company
formally
documents
all
relationships between hedging instruments and hedged items, as well as
the
Company's
risk-management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that are designated
as cash-flow hedges to specific assets and liabilities on the balance sheet
or
to specific firm commitments or forecasted transactions.
Also,
the
Company
formally
assesses,
both at
the hedge's inception and on an ongoing basis, whether the derivatives that
are
used in hedging transactions are highly effective in offsetting changes in
fair
values or cash flows of hedged items. Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a fair-value
hedge, along with the loss or gain on the hedged asset or liability or
unrecognized firm commitment of the hedged item that is attributable to the
hedged risk, are recorded in earnings. Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a cash-flow
hedge are recorded in other comprehensive income, until earnings are affected
by
the variability in cash flows or unrecognized firm commitment of the designated
hedged item.
The
Company
discontinues hedge accounting prospectively when it
determines
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of the hedged item: the derivative expires or is sold,
terminated, or exercised; the derivative is undesignated as a hedging
instrument, because it is unlikely that a forecasted transaction will occur;
a
hedged firm commitment no longer meets the definition of a firm commitment;
or
management determines that designation of the derivative as a hedging instrument
is no longer appropriate.
When
hedge accounting is discontinued because it is determined that the derivative
no
longer qualifies as an effective fair-value hedge, the
Company
continues to carry the derivative on the balance sheet at its fair value, and
no
longer adjust the hedged asset or liability for changes in fair value. The
adjustment of the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because the hedged item
no
longer meets the definition of a firm commitment, the
Company
continues to carry the derivative on the balance sheet at its fair value, remove
any asset or liability that was recorded pursuant to recognition of the firm
commitment from the balance sheet, and recognize any gain or loss in earnings.
When hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the
Company
continues to carry the derivative on the balance sheet at its fair value, and
gains and losses that were accumulated in other comprehensive income are
recognized immediately in earnings. In all other situations in which hedge
accounting is discontinued, the
Company
continues to carry the derivative at its fair value on the balance sheet and
recognize any changes in its fair value in earnings.
Segment
Information
The
Company has
one
reportable segment under the provisions of SFAS No.131, Disclosures
about Segments of an Enterprise and Related Information.
Each of
the
Company's
transportation service offerings and subsidiaries 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, the
Company
has not
presented separate financial information for each of its
service
offerings and subsidiaries as the
consolidated financial statements present the
Company's
one
reportable segment. The
Company
generates other revenue through a subsidiary that provides freight brokerage
services. This operation does not meet the quantitative threshold reporting
requirements of SFAS No. 131.
Reclassifications
Certain
reclassifications have been made to the prior years'
consolidated financial statements to conform to the 2006
presentation.
New
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(SFAS
159). SFAS 159 permits entities to choose to measure certain financial assets
and liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The
Company is
currently assessing the impact of SFAS 159 in
the
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 the Company's 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.
The
Company
does not
believe the adoption of SFAS No. 157 will have a material impact in
the
consolidated financial statements.
In
September 2006, the Securities and Exchange Commission released Staff Accounting
Bulletin 108 ("SAB 108"). SAB 108 provides interpretative guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB 108 is effective
for
fiscal years ending after November 15, 2006. SAB 108 did not have an impact
in
the consolidated financial statements.
In
July
2006, the FASB issued Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes,
which
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS 109,
Accounting for Income Taxes.
FIN 48
provides guidance on 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, disclosures, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The
Company
will
adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of
adopting FIN 48 will be recorded as a change to opening retained earnings in
the
first quarter of 2007. While the
Company
continues to analyze and quantify the impact of FIN 48, it
estimates a cumulative effect adjustment to reduce retained earnings of between
$1.0 million and $3.0 million.
In
March
2006, the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets - an amendment of SFAS No.
140,
that
provides guidance on accounting for separately recognized servicing assets
and
servicing liabilities. In accordance with SFAS No. 156, separately recognized
servicing assets and servicing liabilities must be initially recognized at
fair
value, if practicable. Subsequent to initial recognition, companies may use
either the amortization method or the fair value measurement method to account
for servicing assets and servicing liabilities within the scope of this
Statement. The provisions of SFAS No. 156 are effective as of the beginning
of
the first fiscal year that begins after September 15, 2006. The Company does
not
believe the adoption of SFAS No. 156 will have a material impact on its
consolidated financial statements.
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, the Company
accelerated the vesting of substantially all of our outstanding stock options.
This allowed the Company 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. The Company's adoption of SFAS No. 123R had minimal impact for the year
ended December 31, 2006.
Effective
December 31, 2005, the
Company
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 the
Company's
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. Upon adoption of this standard, the Company
recorded an increase to other assets of $0.8 million and accrued expenses of
$1.6 million, in addition to recognizing a non-cash pre-tax cumulative effect
charge of $0.8 million ($0.5 million on an after tax-basis, or $0.03 per diluted
share). For
the year
ended December 31, 2006, the impact of the adoption of FIN 47 was approximately
$0.2 million of additional expense in the
Company's
revenue
equipment rentals and purchased transportation expenses.
Had
the
adoption of FIN 47 occurred at the beginning of the earliest period presented,
the Company's results of operations and earnings per share would have been
affected as follows:
(in
thousands except per share data)
|
|
2005
|
|
2004
|
|
Income
before cumulative effect of change in accounting principle, as
reported:
|
|
$
|
5,671
|
|
$
|
3,376
|
|
Deduct:
Accretion of conditional asset retirement liability and
amortization
of related asset, net of related tax effects
|
|
|
(251
|
)
|
|
(130
|
)
|
Pro
forma net income
|
|
$
|
5,420
|
|
$
|
3,246
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
As
reported, before cumulative effect of change in accounting principle
|
|
$
|
0.40
|
|
$
|
0.23
|
|
Pro
forma earnings per share:
|
|
$
|
0.38
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
As
reported, before cumulative effect of change in accounting principle
|
|
$
|
0.40
|
|
$
|
0.23
|
|
Pro
forma diluted earnings per share:
|
|
$
|
0.38
|
|
$
|
0.22
|
|
The
value
of the conditional asset retirement obligation liability calculated on a pro
forma basis as if the standard had been retrospectively applied to prior periods
presented are as follows:
December
31, 2005
|
December
31, 2004
|
$1.6
million
|
$1.3
million
|
2. SHARE-BASED
COMPENSATION
Prior
to
May 23, 2006, the
Company
had four
stock-based compensation plans. On May 23, 2006, upon the recommendation of
the
Company's Board
of
Directors, its
stockholders approved the Covenant Transport, Inc. 2006 Omnibus Incentive Plan
("2006 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. The 2006 Plan permits annual
awards of shares of the Company's Class A common stock to executives, other
key
employees, and nonemployee directors
under
various types of options, restricted stock awards, or other equity instruments.
The
number of shares available for issuance under the 2006 Plan is 1,000,000 shares
unless adjustment is determined necessary by the Committee as the result of
dividend or other distribution, recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Class A common stock, or other corporate transaction
in order to prevent dilution or enlargement of benefits or potential benefits
intended to be made available. At December 31, 2006, 440,466 of these
1,000,000 shares were available for award under the 2006 Plan. No participant
in
the 2006 Plan may receive awards of any type of equity instruments in any
calendar-year that relates to more than 250,000 shares of the Company's Class
A
common stock. No awards may be made under the 2006 Plan after May 23, 2016.
The
Company has a policy of issuing treasury stock to satisfy all share-based
incentive plans.
Effective
January 1, 2006, the
Company
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 year ended December 31, 2006 was $0.2
million, and is included in salaries, wages, and related expenses in
the
consolidated statements of operations. There was no cumulative effect of
initially adopting SFAS No. 123R.
In
periods prior to January 1, 2006, the
Company
accounted for its
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 the
Company's
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 years ended December 31, 2005 and 2004 would have
been
$2.2 million and $1.2 million, respectively.
(in
thousands, except per share data)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
income, as reported:
|
|
$
|
5,186
|
|
$
|
3,376
|
|
Deduct:
Total stock-based employee compensation
expense
determined under fair value based method for
all
awards, net of related tax effects
|
|
|
(2,235
|
)
|
|
(1,185
|
)
|
Pro
forma net income
|
|
$
|
2,951
|
|
$
|
2,190
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.37
|
|
$
|
0.23
|
|
Pro
forma
|
|
$
|
0.21
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.37
|
|
$
|
0.23
|
|
Pro
forma
|
|
$
|
0.21
|
|
$
|
0.15
|
|
On
August
31, 2005, the Compensation Committee of the
Company's
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 the
Company's
Amended
and Restated Incentive Stock Plan and its
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 the
Company
during
2005; however, without the acceleration of vesting the
Company
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,
the
Company
would
have recorded $2.2 million, net of tax, for the year
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 the
Company's
stock
option activity for the fiscal years ended December 31, 2004, 2005 and
2006:
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term
|
|
Aggregate
intrinsic value
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Under
option at December 31, 2003
|
|
|
1,229,390
|
|
$
|
14.37
|
|
|
75
months
|
|
$
|
5,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted in 2004
|
|
|
196,300
|
|
$
|
15.81
|
|
|
|
|
|
|
|
Options
exercised in 2004
|
|
|
(126,501
|
)
|
$
|
15.50
|
|
|
|
|
|
|
|
Options
canceled in 2004
|
|
|
(38,097
|
)
|
$
|
16.45
|
|
|
|
|
|
|
|
Under
option at December 31, 2004
|
|
|
1,261,092
|
|
$
|
14.42
|
|
|
71
months
|
|
$
|
8,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted in 2005
|
|
|
237,085
|
|
$
|
14.11
|
|
|
|
|
|
|
|
Options
exercised in 2005
|
|
|
(28,081
|
)
|
$
|
15.86
|
|
|
|
|
|
|
|
Options
canceled in 2005
|
|
|
(16,583
|
)
|
$
|
14.99
|
|
|
|
|
|
|
|
Under
option at December 31, 2005
|
|
|
1,453,513
|
|
$
|
14.33
|
|
|
68
months
|
|
$
|
1,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted in 2006
|
|
|
106,300
|
|
$
|
13.15
|
|
|
|
|
|
|
|
Options
exercised in 2006
|
|
|
(19,482
|
)
|
$
|
12.64
|
|
|
|
|
|
|
|
Options
canceled in 2006
|
|
|
(252,899
|
)
|
$
|
15.74
|
|
|
|
|
|
|
|
Under
option at December 31, 2006
|
|
|
1,287,432
|
|
$
|
13.98
|
|
|
68
months
|
|
$
|
685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
1,179,616
|
|
$
|
14.07
|
|
|
64
months
|
|
$
|
683
|
|
|
Options
Outstanding
|
Options
Exercisable
|
Range
of Exercise
Prices
|
Number
Outstanding
at
12/31/06
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
|
Number
Exercisable
at
12/31/06
|
Weighted-
Average
Exercise
Price
|
$
8.00 to $13.00
|
385,939
|
39
months
|
$10.08
|
375,523
|
$10.04
|
$13.01
to $16.50
|
562,806
|
91
months
|
$14.48
|
465,406
|
$14.75
|
$16.51
to $21.50
|
338,687
|
65
months
|
$17.61
|
338,687
|
$17.61
|
|
1,287,432
|
|
|
1,179,616
|
|
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 for each of the years ended December 31:
|
|
2006
|
|
2005
|
|
2004
|
Expected
volatility
|
|
37.4%
|
|
42.2%
|
|
50.7%
|
Risk-free
interest rate
|
|
4.6%
- 5.0%
|
|
2.3%
- 4.3%
|
|
2.3%
- 4.3%
|
Expected
lives (in years)
|
|
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 the Company's 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
Company issues performance-based restricted stock awards whose vesting is
contingent upon meeting certain earnings-per-share targets selected by the
Compensation Committee. Determining the appropriate amount to expense is based
on likelihood of achievement of the stated targets and requires judgement,
including forecasting future financial results. This estimate is revised
periodically based on the probability of achieving the required performance
targets and adjustments are made as appropriate. The cumulative impact of any
revision is reflected in the period of change.
The
following tables summarize the
Company's
restricted stock award activity for the year ended December 31,
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 December 31,
2006
|
|
|
456,984
|
|
$
|
12.65
|
|
Included
in the above table is 396,664 restricted stock awards that vest only if the
Company achieves 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
December 31, 2006, the
Company
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.
3. INVESTMENT
IN TRANSPLACE
Effective
July 1, 2000, the
Company
combined
its
logistics business with the logistics businesses of five other transportation
companies into a company called Transplace, Inc. Transplace operates a global
transportation logistics service. In the transaction, the
Company
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. The
Company
accounts
for its
investment
using the cost method of accounting, with the investment included in other
assets.
During
the first quarter of 2005, the Company loaned Transplace approximately $2.7
million. Transplace paid down $0.1 million of principal and all accumulated
accrued interest through September 14, 2006 during September 2006. The remaining
$2.6 million, 6% interest-bearing note matures January 2009, an extension of
the
original January 2007 maturity date.
4. PROPERTY
AND
EQUIPMENT
A
summary
of property and equipment, at cost, as of December 31, 2006 and 2005 is as
follows:
(in
thousands)
|
|
Estimated
Useful
Lives
|
|
2006
|
|
2005
|
|
Revenue
equipment
|
|
|
3-8
years
|
|
$
|
264,063
|
|
$
|
196,331
|
|
Communications
equipment
|
|
|
5
years
|
|
|
17,565
|
|
|
16,422
|
|
Land
and improvements
|
|
|
10-24
years
|
|
|
17,483
|
|
|
15,216
|
|
Buildings
and leasehold improvements
|
|
|
10-40
years
|
|
|
31,069
|
|
|
46,503
|
|
Construction
in-progress
|
|
|
|
|
|
3,333
|
|
|
6,432
|
|
Other
|
|
|
1-5
years
|
|
|
16,150
|
|
|
14,529
|
|
|
|
|
|
|
$
|
349,663
|
|
$
|
295,433
|
|
Depreciation
expense amounts were $42.7 million, $39.7 million, and $41.2 million in 2006,
2005, and 2004, respectively.
5. OTHER
ASSETS
A
summary
of other assets as of December 31, 2006 and 2005 is as follows:
(in
thousands)
|
|
2006
|
|
2005
|
|
Covenants
not to compete
|
|
$
|
2,690
|
|
$
|
1,690
|
|
Trade
name
|
|
|
1,250
|
|
|
330
|
|
Customer
relationships
|
|
|
3,490
|
|
|
-
|
|
Less:
accumulated amortization of intangibles
|
|
|
(2,167
|
)
|
|
(1,689
|
)
|
Net
intangible
assets
|
|
|
5,263
|
|
|
331
|
|
Investment
in
Transplace
|
|
|
10,666
|
|
|
10,666
|
|
Note
receivable
from Transplace
|
|
|
2,642
|
|
|
2,869
|
|
Other,
net
|
|
|
1,972
|
|
|
1,398
|
|
|
|
$
|
20,543
|
|
$
|
15,264
|
|
6. LONG-TERM
DEBT
Long-term
debt consists of the following at December 31, 2006 and 2005:
(in
thousands)
|
|
2006
|
|
2005
|
|
Borrowings
under the Credit Facility
|
|
$
|
104,900
|
|
$
|
33,000
|
|
In
December 2006, the
Company
entered
into a second amended and restated revolving credit agreement, (the "Credit
Facility") with a group of banks. The Credit Facility matures in December 2011.
Borrowings under the Credit Facility 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
0.625% and 1.625% based on cash flow coverage (the applicable margin was 1.25%
at December 31, 2006). At December 31, 2006, the
Company
had
LIBOR and Prime borrowings outstanding totaling $94.0 million and $10.9 million,
respectively, with a weighted average interest rate of 6.771%. The Credit
Facility is guaranteed by the Company and all of its subsidiaries except CRC
and
Volunteer.
The
Credit Facility has a maximum borrowing limit of $200.0 million with an
accordion feature which permits an increase up to a maximum borrowing limit
of
$275.0 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 $100.0
million. The Credit Facility is secured by a pledge of the stock of most of
the
Company's subsidiaries. A commitment fee, which is adjusted quarterly between
0.125% and 0.35% per annum based on cash flow coverage, is due on the daily
unused portion of the Credit Facility. As of December 31, 2006, the
Company
had
approximately $35.0 million of available borrowing capacity. At December 31,
2006 and December 31, 2005, the
Company
had
undrawn letters of credit outstanding of approximately $60.1 million and $73.9
million, respectively.
The
Credit Facility contains certain restrictions and covenants relating to, among
other things, dividends, tangible net worth, cash flow, acquisitions and
dispositions, and total indebtedness and is cross-defaulted with the
Company's
securitization facility. The
Company
was in
compliance with the Credit Facility covenants as of December 31,
2006.
7. ACCOUNTS
RECEIVABLE SECURITIZATION AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS
In
December 2000, the
Company
entered
into an accounts receivable securitization facility (the "Securitization
Facility"). On a revolving basis, the
Company
sells
its interests in its
accounts
receivable to CRC, a wholly-owned, bankruptcy-remote, special-purpose subsidiary
incorporated in Nevada. CRC sells a percentage ownership in such receivables
to
unrelated financial entities. The
Company
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 is
shown as
a current liability because the term, subject to annual renewals, is 364 days.
As of December 31, 2006 and December 31, 2005, the
Company
had
$55.0 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
the
consolidated financial statements.
The
Securitization Facility contains certain restrictions and covenants relating
to,
among other things, dividends, tangible net worth, cash flow coverage,
acquisitions and dispositions, and total indebtedness. The
Company was
in
compliance with the Securitization Facility covenants as of December 31,
2006.
The
activity in allowance for doubtful accounts (in thousands) is as
follows:
Years
ended December 31:
|
|
Beginning
balance
January
1,
|
|
Additional
provisions
to
allowance
|
|
Write-offs
and
other
deductions
|
|
Ending
balance
December
31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
$2,200
|
|
$590
|
|
$1,299
|
|
$1,491
|
|
|
|
|
|
|
|
|
|
2005
|
|
$1,700
|
|
$1,598
|
|
$1,098
|
|
$2,200
|
|
|
|
|
|
|
|
|
|
2004
|
|
$1,350
|
|
$547
|
|
$197
|
|
$1,700
|
|
|
|
|
|
|
|
|
|
8. LEASES
The
Company
has
operating lease commitments for office and terminal properties, revenue
equipment, and computer and office equipment, exclusive of owner/operator
rentals and month-to-month equipment rentals, summarized for the following
fiscal years (in thousands):
2007
|
|
$
|
42,033
|
|
2008
|
|
|
34,164
|
|
2009
|
|
|
24,642
|
|
2010
|
|
|
18,279
|
|
2011
|
|
|
8,859
|
|
Thereafter
|
|
|
47,322
|
|
A
portion
of the
Company's
operating leases of tractors and trailers contain residual value guarantees
under which the
Company
guarantees a certain minimum cash value payment to the leasing company at the
expiration of the lease. The
Company
estimates that the residual guarantees are approximately $45.3 million and
$47.4
million at December 31, 2006 and December 31, 2005, respectively. The
Company expects
its residual guarantees to approximate the expected market value at the end
of
the lease term.
Rental
expense is summarized as follows for each of the three years ended December
31:
(in
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Revenue
equipment rentals
|
|
$
|
42,129
|
|
$
|
41,379
|
|
$
|
36,625
|
|
Building
and lot rentals
|
|
|
3,508
|
|
|
1,252
|
|
|
1,236
|
|
Other
equipment rentals
|
|
|
3,311
|
|
|
3,060
|
|
|
3,158
|
|
|
|
$
|
48,948
|
|
$
|
45,691
|
|
$
|
41,019
|
|
In
April
2006, the Company 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. The Company
received proceeds of approximately $29.6 million from the sale of the property,
which was used to pay down borrowings under its Credit Agreement and to purchase
revenue equipment. In the transaction, the Company entered into a twenty-year
lease agreement, whereby it 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.
9. INCOME
TAXES
Income
tax expense from continuing operations for the years ended December 31, 2006,
2005, and 2004 is comprised of:
(in
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Federal,
current
|
|
$
|
784
|
|
$
|
13,344
|
|
$
|
17,796
|
|
Federal,
deferred
|
|
|
3,415
|
|
|
(6,056
|
)
|
|
(10,930
|
)
|
State,
current
|
|
|
138
|
|
|
1,205
|
|
|
2,720
|
|
State,
deferred
|
|
|
245
|
|
|
(490
|
)
|
|
(1,134
|
)
|
|
|
$
|
4,582
|
|
$
|
8,003
|
|
$
|
8,452
|
|
Income
tax expense from continuing operations varies from the amount computed by
applying the federal corporate income tax rate of 35% to income before income
taxes for the years ended December 31, 2006, 2005, and 2004 as
follows:
(in
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Computed
"expected" income tax expense
|
|
$
|
1,120
|
|
$
|
4,786
|
|
$
|
4,140
|
|
State
income taxes, net of federal income tax effect
|
|
|
96
|
|
|
465
|
|
|
1,031
|
|
Per
diem allowances
|
|
|
2,233
|
|
|
2,591
|
|
|
2,760
|
|
Tax
contingency accruals
|
|
|
470
|
|
|
542
|
|
|
445
|
|
Nondeductible
foreign operating loss
|
|
|
294
|
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
369
|
|
|
(381
|
)
|
|
76
|
|
Actual
income tax expense
|
|
$
|
4,582
|
|
$
|
8,003
|
|
$
|
8,452
|
|
The
temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 2006 and 2005 are as
follows:
(in
thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
deferred tax assets:
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
345
|
|
$
|
475
|
|
Insurance
and claims
|
|
|
13,237
|
|
|
15,493
|
|
Net
operating loss carryovers
|
|
|
3,375
|
|
|
179
|
|
Investments
|
|
|
161
|
|
|
161
|
|
Other,
net
|
|
|
866
|
|
|
11
|
|
Total
net deferred tax assets
|
|
|
17,984
|
|
|
16,319
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities:
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
50,352
|
|
|
33,305
|
|
Intangible
and other assets
|
|
|
2,183
|
|
|
766
|
|
Other,
net
|
|
|
113
|
|
|
-
|
|
Total
net deferred tax liabilities
|
|
|
52,648
|
|
|
34,071
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
|
|
$
|
(34,664
|
)
|
$
|
(17,752
|
)
|
|
|
|
|
|
|
|
|
Based
upon the expected reversal of deferred tax liabilities and the level of
historical and projected taxable income over periods in which the deferred
tax
assets are deductible, the Company's management believes it is more likely
than
not that the Company will realize the benefits of the deductible differences
at
December 31, 2006.
On
April
20, 2006, the
Company
completed the appeals process with the IRS related to their 2001 and 2002
audits. Related to this settlement with the IRS, the
Company
recorded
additional income tax expense of approximately $0.5 million for the three months
ended June 30, 2006. The
Company
received
a favorable resolution in the Closing Agreement received from the IRS which
stated that its
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 the
Company's
2003 and
2004 tax returns and has proposed the disallowance, with which the
Company
has
agreed, of approximately $350,000 of costs related to the November 2003 stock
offering. During the three months ended June 30, 2006, the
Company
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 the
Company's
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,
the
Company is
vigorously defending its
position
related to this proposed disallowance of tax benefits using all administrative
and legal processes available. On October 5, 2006, the
Company
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 the
Company's
deductions for the insurance premiums paid. In 2006, income tax expense of
$0.4
million was recorded in the
consolidated statements of operations related to this uncertain tax position.
If
the
Company is
unsuccessful in defending its
position
on this deduction, it
could
ultimately owe taxes totaling $1.7 million related to this issue, for which
the
Company has
currently accrued approximately $0.9 million of income taxes in the
consolidated
balance sheets at December 31, 2006.
In
the
normal course of business, the
Company is
also
subject to audits by the state and local tax authorities. The
Company
believes
that it
has
adequately provided for its
future
tax consequences based upon current facts and circumstances and current tax
law.
However, should the
Company's
tax
positions be challenged, different outcomes could result and have a significant
impact on the amounts reported in
the
consolidated
statement of operations.
10. STOCK
REPURCHASE PLAN
In
May
2006, the Board of Directors approved an extension of the
Company's
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 were purchased under this plan
during 2006. During 2005, the
Company
purchased a total of 720,800 shares with an average price of $16.17. At December
31, 2006, there were 1,154,100 shares still available to purchase under the
guidance of this plan. The stock repurchase plan expires June 30,
2007.
11. DEFERRED
PROFIT SHARING EMPLOYEE BENEFIT PLAN
The
Company
has a
deferred profit sharing and savings plan under which all of its
employees
with at least six months of service are eligible to participate. Employees
may
contribute a percentage of their annual compensation up to the maximum amount
allowed by the Internal Revenue Code. The
Company
may make
discretionary contributions as determined by a committee of its
Board
of
Directors. The
Company
contributed approximately $1.2 million, $1.1 million, and $0.9 million in 2006,
2005, and 2004, respectively, to the profit sharing and savings
plan.
12. RELATED
PARTY
TRANSACTIONS
Transactions
involving related parties are as follows:
The
Company
utilizes
outside legal services from one of the members of its
Board
of
Directors. During 2006, 2005, and 2004, the Company paid approximately $597,000,
$332,000 and $196,000, respectfully, for legal and consulting services to a
firm
that employs a member of its
Board
of
Directors.
The
Company provides
transportation services to Transplace. During 2006, 2005, and 2004, gross
revenue from services provided to Transplace was approximately $12.9 million,
$14.1 million and $15.0 million, respectively. The accounts receivable balance
as of December 31, 2006 was approximately $2.5 million. During the first quarter
of 2005, the Company loaned Transplace approximately $2.7 million. Transplace
paid down $0.1 million of principal and all accumulated accrued interest through
September 14, 2006 during September 2006. The remaining $2.6 million, 6%
interest-bearing note matures January 2009, an extension of the original January
2007 maturity date.
A
company
wholly owned by a relative of a significant shareholder and executive officer
operates a "company store" on a rent-free basis in the Company's headquarters
building, and uses Covenant service marks on its products at no cost. The
Company pays fair market value for all supplies that are purchased which totaled
approximately $163,000, $373,000 and $512,000 in 2006, 2005, and 2004
respectively.
13. DERIVATIVE
INSTRUMENTS
The
Company accounts 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
the
Company's acquisition of Star (see Note 14) on September 14, 2006, it assumed
an
interest rate swap agreement which became effective September 2005. Under this
swap contract, the Company paid interest expense at a fixed rate of 5.36% and
receive interest income at a variable rate of LIBOR plus 1.25%. This swap was
terminated in December 2006.
In
2001,
the Company 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 consolidated statements
of operations. At December 31, 2006, the swap agreements had expired and there
was no liability. At December 31, 2005 the fair value of these interest-rate
swap agreements was a minor amount of liability, which was included in accrued
expenses in the consolidated balance sheets. The derivative activity, as
reported in the
consolidated financial statements for the years ended December 31, 2006 and
2005
is summarized in the following table:
(in
thousands)
|
|
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
|
|
|
426
|
|
|
|
|
|
|
|
|
|
Net
liability for derivatives at December 31
|
|
$
|
-
|
|
$
|
(13
|
)
|
From
time
to time, the
Company
enters
into fuel purchase commitments for a notional amount of diesel fuel at prices
which are determined when fuel purchases occur.
14. ACQUISITION
On
September 14, 2006, the
Company
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 $40.1 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 SFAS No. 141, "Business
Combinations". Star's operating results have been accounted for in the Company's
consolidated results of operations since the acquisition date.
The
following table summarizes the Company's estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition:
(In
thousands) |
|
|
|
|
|
|
|
Current
assets
|
|
$
|
10,970
|
|
Property
and equipment
|
|
|
62,339
|
|
Deferred
tax assets
|
|
|
275
|
|
Other
assets -
Interest rate swap (See Note 13)
|
|
|
252
|
|
Identifiable
intangible assets:
|
|
|
|
|
Tradename
(4-year estimated useful life)
|
|
|
920
|
|
Noncompetition
agreement (7-year useful life)
|
|
|
1,000
|
|
Customer
relationships
(20-year estimated useful life)
|
|
|
3,490
|
|
Goodwill
|
|
|
24,655
|
|
Total
assets
|
|
$
|
103,901
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
13,181
|
|
Long-term
debt, net of current maturities
|
|
|
36,298
|
|
Deferred
tax liabilities
|
|
|
14,361
|
|
Total
liabilities
|
|
$
|
63,840
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
40,061
|
|
The
total
purchase price of $40.1 million includes purchase price consideration paid
to
the selling shareholders of Star, or their respective escrow agents, totaling
$38.8 million and $0.3 million of acquisition-related costs, as well as an
additional 3-year acquisition obligation note payable totaling $1.0 million
to
one of the selling shareholders of Star related to her 7-year noncompetition
agreement.
The
following pro forma financial information reflects the
Company's
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)
|
|
Year
ended December 31, 2006
|
|
Pro
forma revenues
|
|
$
|
744,813
|
|
Pro
forma net income
|
|
$
|
389
|
|
Pro
forma basic and diluted earnings per share
|
|
$
|
0.03
|
|
15. COMMITMENTS
AND CONTINGENT LIABILITIES
From
time
to time,the
Company is
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. The
Company
maintains insurance to cover liabilities arising from the transportation of
freight for amounts in excess of certain self-insured retentions. In
management's
opinion,
the
Company's
potential exposure under pending legal proceedings is adequately provided for
in
the accompanying consolidated financial statements.
On
March
7, 2003, an accident occurred in Wisconsin involving a vehicle and one of
the
Company's
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 the
Company
and
its
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 the
Company's
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 the
Company
to
concentrations of credit risk consist of deposits in banks in excess of the
Federal Deposit Insurance Corporation limits. The
Company's
sales
are generally made on account without collateral. Repayment terms vary based
on
certain conditions. The
Company
maintains reserves which it
believes
are adequate to provide for potential credit losses. The majority of
its
customer
base spans the United States. The
Company monitors
these risks and believes the risk of incurring material losses is
remote.
The
Company
uses
purchase commitments through suppliers to reduce a portion of its
cash
flow
exposure to fuel price fluctuations.
16. QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)
(In
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
ended
|
|
March
31, 2006
|
|
June
30, 2006
|
|
Sept.
30, 2006
|
|
Dec.
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
129,434
|
|
$
|
139,334
|
|
$
|
144,148
|
|
$
|
159,313
|
|
Operating
income
|
|
|
350
|
|
|
2,953
|
|
|
3,520
|
|
|
2,806
|
|
Net
income (loss)
|
|
|
(884
|
)
|
|
(398
|
)
|
|
795
|
|
|
(894
|
)
|
Basic
earnings (loss) per share
|
|
|
(0.06
|
)
|
|
(0.03
|
)
|
|
0.06
|
|
|
(0.06
|
)
|
Diluted
earnings (loss) per share
|
|
|
(0.06
|
)
|
|
(0.03
|
)
|
|
0.06
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
ended
|
|
March
31, 2005
|
|
June
30, 2005
|
|
Sept.
30, 2005
|
|
Dec.
31, 2005 (1)
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
123,570
|
|
$
|
138,736
|
|
$
|
144,681
|
|
$
|
148,442
|
|
Operating
income
|
|
|
276
|
|
|
3,042
|
|
|
3,850
|
|
|
9,898
|
|
Net
income (loss) before cumulative
effect
of change in accounting
principle
|
|
|
(649
|
)
|
|
652
|
|
|
1,217
|
|
|
4,451
|
|
Cumulative
effect of change in
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(485
|
)
|
Net
income (loss)
|
|
|
(649
|
)
|
|
652
|
|
|
1,217
|
|
|
3,966
|
|
Basic
earnings (loss) per share
before
cumulative effect of
change
in accounting principle
|
|
|
(0.04
|
)
|
|
0.05
|
|
|
0.09
|
|
|
0.31
|
|
Cumulative
effect of change in
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.03
|
)
|
Basic
earnings (loss) per share
|
|
|
(0.04
|
)
|
|
0.05
|
|
|
0.09
|
|
|
0.28
|
|
Diluted
earnings (loss) per share
before
cumulative effect of
change
in accounting principle
|
|
|
(0.04
|
)
|
|
0.05
|
|
|
0.09
|
|
|
0.31
|
|
Cumulative
effect of change in
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.03
|
)
|
Diluted
earnings (loss) per share
|
|
|
(0.04
|
)
|
|
0.05
|
|
|
0.09
|
|
|
0.28
|
|
(1)
|
Includes
a $485 net of tax adjustment for the cumulative effect of a change
in
accounting principle.
|