form10k.htm
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, 2007
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
TRANSPORTATION GROUP, INC.
(Exact
name of registrant as specified in its charter)
Nevada
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88-0320154
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(State
/ other jurisdiction of incorporation or organization)
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(I.R.S.
Employer 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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Securities
registered pursuant to Section 12(g) of the
Act:
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(Title
of class)
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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 common equity held by non-affiliates of the
registrant as of June 29, 2007, was approximately $87.0 million (based upon the
$11.40 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 20,
2007). 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 13, 2008, the registrant had 11,676,298 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 2008 Annual Meeting of
Stockholders to be held on May 13, 2008 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 Transportation Group, Inc. and its subsidiaries.
General
We are
the tenth largest truckload carrier in the United States measured by fiscal 2006
revenue according to Transport
Topics, a publication of the American Trucking Associations. We focus on
targeted markets where we believe our services can provide a competitive
advantage. Currently, we categorize our business with five major service
offerings: Expedited long haul service, SRT Refrigerated service, Dedicated
service, Covenant regional solo-driver service, and Star regional solo-driver
service. We are a major carrier for transportation companies such as freight
forwarders, less-than-truckload carriers, and third-party logistics providers
that require a high level of service to support their businesses, as well as for
traditional truckload customers such as manufacturers and retailers. We also
generate revenue through a subsidiary that provides freight brokerage
services.
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 ("SRT"), we entered the refrigerated market. Through our acquisitions
of Harold Ives Trucking, Con-Way Truckload Services and Star Transportation
("Star"), 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
mid-2005, we undertook a realignment of our business into distinct service
offerings. Following
our business realignment, we operate as a holding company with several service
offerings, some of which are offered through separate
subsidiaries. As of March 2008, our service offerings were as
follows:
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Expedited long-haul service. At December 31, 2007, we operated
approximately 927 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 1,484 miles in the fourth quarter of 2007.
Our expedited teams can offer service standards such as coast-to-coast
delivery in 72 hours, meeting delivery appointments within 15 minutes, and
delivering 97% 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.
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Dedicated
service. At December 31, 2007, we operated approximately 670 tractors in
our Dedicated service offering with an average length of haul of 632 miles
in the fourth quarter of 2007. These tractors operate for a single
customer or on a defined route and frequently have contractually
guaranteed revenue. Customers for this service offering desire 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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Covenant
regional solo-driver service. At December 31, 2007, we operated
approximately 637 tractors in our Regional solo-driver service
offering. This service offering consists of units that operate
under the Covenant Transport name. The average length of haul was
approximately 565 miles during the fourth quarter of 2007. 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.
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•
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SRT
Refrigerated service. At December 31, 2007, we operated
approximately 721 tractors under our Southern Refrigerated Transport (SRT)
subsidiary with an average length of haul of 1,174 miles during the fourth
quarter of 2007. 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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•
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Star
regional solo-driver service. Star operates primarily in the southeastern
United States, with shipments concentrated from Texas across the Southeast
to Virginia, and had an average length of haul of approximately 497 miles
during the fourth quarter of 2007. We are operating Star as a separate
subsidiary.
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•
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Covenant
Transport Solutions' brokerage freight service. During the
fourth quarter of 2007, the brokerage freight offering accounted for
approximately 4% of our total loads. As 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. This service offering has helped us to 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 asset-based service
offerings.
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The
following chart reflects the size of our service offerings measured by
revenue:
The
development of our business into service offerings has affected our operating
metrics over time. 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
(excluding fuel surcharges). 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
increased sharply until 2006, and since then has been relatively flat.
Average freight revenue per loaded mile has increased approximately 22%
since 2000, while non-revenue miles have also increased. This led to an
18% 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 to service offerings 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 2007, our five largest customers were Georgia
Pacific, UPS, Alcoa, Wal-Mart, and Nissan. Our top five customers
accounted for 21.5% of our revenue in 2007. Our top five customers accounted for
32.4% of our revenue in 2006.
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 three 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%. At times, there are
driver shortages in the trucking industry. In past years, the number of
qualified drivers has not kept pace with freight growth because of (i) changes
in the demographic composition of the workforce; (ii) alternative employment
opportunities other than truck driving that become available in a growing
economy; and (iii) individual drivers' desire to be home more
often.
While the
driver recruiting and retention market remained
challenging in 2007, it was less difficult than
the driver market experienced in the first half of 2006. We
believe weakness in the housing market contributed favorably to our
recruiting and
retention efforts for much of 2007. In
addition, if adopted, recent rules proposed by the FMCSA requiring additional
training for potential drivers to obtain a commercial driver's license could
materially impact the number of potential new drivers entering the industry
and accordingly, negatively impact our results of
operation. We anticipate that
competition for qualified drivers will remain high and
cannot predict whether we will experience future
shortages. If such a shortage were to occur and a
driver pay rate increase became
necessary to attract and retain drivers, our consolidated
results of operations would be negatively impacted to the
extent that we may be unable to obtain corresponding freight rate
increases.
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,
2007, teams operated approximately 24% of our tractors.
We are
not a party to a collective bargaining agreement. At December 31, 2007, we
employed approximately 4,144 drivers and approximately 908 non-driver personnel.
At December 31, 2007, we also contracted with approximately 127 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, 2007, our tractor fleet had an average
age of approximately 22 months and our trailer fleet had an average age of
approximately 41 months. All of our tractors were equipped with post October
2002 emission-compliant engines. Approximately 84% of our trailers were dry vans
and the remainder were refrigerated vans.
Industry
and Competition
The U.S.
market for truck-based transportation services generates total revenues of
greater than an estimated $600 billion 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 generates estimated revenues of approximately $300 billion. Our
dedicated business also competes in the estimated $280 billion-plus private
fleet portion of the overall trucking market, by seeking to convince private
fleet operators to outsource or supplement their private fleets.
The
United States trucking industry is highly competitive and includes thousands of
"for-hire" motor carriers, none of which dominate the market. Service and price
are the principal means of competition in the trucking industry. We compete to
some extent with railroads and rail-truck intermodal service but differentiate
ourself 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 reduce 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.
The significant
industry-wide accelerated purchase of new trucks in advance of the January 2007
EPA emissions standards for newly manufactured trucks contributed to
excess truck capacity. This excess capacity partially disrupted the
supply and demand balance for trucks in the second half of 2006 and in
2007. The recent softness in the housing and automotive sectors
(including us) caused carriers dependent on these freight markets to
aggressively compete in other freight markets. Other demand-related factors that
may have contributed to lower freight demand and flat to lower freight
rates in 2006 and 2007 were (i) inventory tightening by some large
retailers, (ii) some shippers shifting to more intermodal intact
container shipments for lower value freight, and (iii) moderating
economic growth in the retail sector. Since April 2007,
Class 8 truck production has declined
dramatically, and we expect this decline will continue for
several more months. Over time, lower new truck production and inventory
depletion of 2006 engine trucks on truck dealer lots should help to balance
the supply of trucks with the freight market. During the
same period in which truckload freight rates have been depressed,
inflationary and operational cost pressures have challenged truckload
carriers, particularly highly leveraged private carriers. If this
environment continues, an increase in trucking
company failures is more likely, which could also
help to balance the supply of trucks.
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 DOT,
through the Federal Motor Carrier Safety Administration, 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 "2005
Rules"). On July 24, 2007, a federal appeals court vacated portions
of the 2005 Rules. Two of the key portions that were vacated include
the expansion of the driving day from 10 hours to 11 hours, and the "34-hour
restart," which allows drivers to restart calculations of the weekly on-duty
time limits after the driver has at least 34 consecutive hours off
duty. The court indicated that, in addition to other reasons, it
vacated these two portions of the 2005 Rules because FMCSA failed to provide
adequate data supporting its decision to increase the driving day and provide
for the 34-hour restart. Following a request by FMCSA for a 12-month
extension of the vacated rules, the court, in an order filed on September 28,
2007, granted a 90-day stay of the mandate and directed that issuance of the its
ruling be withheld until December 27, 2007, to allow
FMCSA time to
prepare its response. On December 17, 2007, FMCSA submitted an
interim final rule, which became effective December 27, 2007 (the "Interim
Rule"). The Interim Rule retains the 11 hour driving day and the
34-hour restart, but provides greater statistical support and analysis regarding
the increased driving time and the 34-hour restart. We understand
that FMCSA expects to publish a final rule later in 2008. As the
Interim Rule appears to be very similar to the one struck down by the federal
appeals court in July of 2007, advocacy groups may challenge the Interim
Rule. On January 23, 2008, the court denied an advocacy group's
motion to invalidate the interim rule. If further motions are made,
the court's decision could have varying effects, as reducing driving time to 10
hours daily may reduce productivity in some lanes, while eliminating the 34-hour
restart could enhance productivity in certain instances. On the
whole, however, we believe a court's decision to strike down the Interim Rule
would decrease productivity and cause some loss of efficiency, as drivers and
shippers may need to be retrained, computer programming may require
modifications, additional drivers may need to be employed or engaged, additional
equipment may need to be acquired, and some shipping lanes may need to be
reconfigured. We are also unable to predict the effect of any new
rules that might be proposed, but any such proposed rules could increase costs
in our industry or decrease productivity.
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 the past several years, fuel
cost per gallon has increased substantially. We have a fuel surcharge
revenue program in place with the majority of our customers, which has
historically enabled us to recover some of the higher fuel costs; however, even
with the fuel surcharges, the high price of fuel has decreased our
profitability. Most of these programs automatically adjust weekly depending on
the cost of fuel. There can be timing differences between a change in
our fuel cost and the timing of the fuel surcharges billed to our
customers. In addition, we incur additional costs when fuel prices rise
that can not be fully recovered due to our engines being idled during cold or
warm weather, empty or out-of-route miles, nor for fuel used by refrigerated
trailer
units that cannot be billed to customers. In addition, during 2007, many
customers attempted to modify their surcharge programs, some successfully, which
has resulted in recovery of a smaller portion of fuel price
increases. Rapid increases in fuel costs or shortages of fuel could
have a material adverse effect on our operations or future profitability.
As of December 31, 2007, we had no derivative financial instruments to
reduce our exposure to fuel-price fluctuations.
Seasonality
Our
tractor productivity generally 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, 2007, our corporate structure included Covenant Transportation
Group, 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.
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 improving our profitability.
In
mid-2005 we undertook a strategic plan designed to improve our profitability.
Among other things, this plan included 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, have presented, and are expected to continue to
present, significant challenges, particularly in light of weak freight
demand and escalating fuel prices that have persisted since the second half of
2006. Despite our efforts to execute the strategic plan, we
experienced a net loss in 2007 and may experience a net loss in 2008
also. If we are unable to improve our profitability, liquidity, and
financial position, our results of operations may be adversely
affected.
We
may not be able to cause the performance of Star Transportation, Inc. to return
to historical levels.
The
profitability of our Star subsidiary has declined substantially since we
acquired Star in September 2006. We believe the primary factor has
been a lack of freight demand in the southeastern United States, where Star's
operations are concentrated. However, other factors may be
contributing, as well. We may not be able to return Star to its
former level of profitability. If we do not, our results of
operations and financial condition may suffer and we could be forced to
write-down all or a portion of the goodwill associated with the Star
acquisition.
Fluctuations
in the price or availability of fuel, hedging activities and the volume and
terms of diesel fuel purchase commitments, and surcharge collection and
surcharge policies approved by customers 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. We use a fuel surcharge program to
recapture a portion of the increases in fuel prices over a base rate negotiated
with our customers. Our fuel surcharge program does not protect us
against the full effect of increases in fuel prices. The terms of
each customer's fuel surcharge program vary and certain customers have sought to
modify the terms of their fuel surcharge programs to minimize recoverability for
fuel price increases. Over the past year, the failure to recover fuel
price increases resulted in a materially negative impact to our results of
operations. A failure to improve our fuel price protection through these
measures, further increases in fuel prices, or a shortage of diesel fuel, could
materially and adversely affect our results of operations.
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
our estimates are revised or the claims ultimately 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. 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:
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Our
vulnerability to adverse economic conditions and competitive pressures is
heightened;
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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;
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Our
flexibility in planning for, or reacting to, changes in our business and
industry will be limited;
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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;
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Our
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, or other purposes may be limited;
and
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We
may be required to issue additional equity securities to raise funds,
which would dilute the ownership position of our
stockholders.
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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
minority investment in Transplace has not performed in accordance with our
expectations, and we could be subject to a write-down or write-off of our
investment if the operations of Transplace fail to improve.
Transplace,
Inc. is a transportation logistics company owned by several truckload carriers,
including us. Our ownership percentage is approximately 12.4%,
and we account for our $10.7 million investment using
the cost method. Transplace has incurred substantial losses since
inception. If these losses continue, or Transplace or we engage in
transactions that indicate a value for our interest below our carrying cost, we
may be forced to write down the value of our investment. Such write
down, if it occurred, could cause losses, which if significant enough,
could cause us to violate financial covenants in our Credit
Agreement. However,
in our quarterly assessment of this investment for impairment, we have noted
that Transplace’s enterprise value had been steadily declining prior to the
first quarter of 2007, at which time Transplace's cash flow
improvements have steadied this decline.
Our
revolving credit and securitization facilities and other financing arrangements
contains certain covenants, restrictions, and requirements, and we may be unable
to comply with these covenants, restrictions, and requirements. 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.
We have a
$200.0 million Credit Facility with a group of banks under which we had
borrowings outstanding totaling $75.0 million as of December 31, 2007. This
Credit Facility is cross-defaulted to our accounts receivable securitization
facility. We were in default of our financial covenants under our
Credit Facility as of June 30, 2007. The Company signed Amendment No. 1 to the
Credit Facility on August 28, 2007, which among other revisions, granted and
expanded the security interest to include, with limited exceptions, then owned
revenue equipment, as well as revenue equipment acquired subsequently utilizing
proceeds from the Credit Facility. As amended, the Credit Facility is
secured by a pledge of the stock of most of the Company's subsidiaries and
certain owned revenue equipment, as well as revenue equipment acquired
subsequently utilizing proceeds from the Credit Facility. The Credit Facility
includes a number of covenants, including financial covenants. We were in
compliance with the financial covenants at September 30, 2007, and December 31,
2007.
Based on
our financial condition and results of operation at and for the year ended
December 31, 2007, a failure to materially improve our profitability in 2008,
along with certain other events, could result in a default. If we
experience future defaults under our Credit Facility, our bank group could cease
making further advances, declare our debt to be immediately due and payable,
impose significant restrictions and requirements on our operations, and
institute foreclosure procedures against their security. If we were
required 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 have difficulty in borrowing sufficient additional funds to
refinance the accelerated debt or we may have to issue equity securities, which
would dilute stock ownership. Even if new financing is made available to us, it
may not be available on acceptable terms. As a result, any future default could
cause a materially adverse effect on our liquidity, financial condition, and
results of operations.
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:
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We
compete with many other truckload carriers of varying sizes and, to a
lesser extent, with less-than-truckload carriers,
railroads, intermodal companies, and other transportation
companies, many of which have more equipment and greater capital resources
than we do.
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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.
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Many
of our customers are other transportation companies, and they may decide
to transport their own freight.
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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.
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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.
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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.
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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.
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Competition
from non-asset-based logistics and freight brokerage companies may
adversely affect our customer relationships and freight
rates.
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Economies
of scale that may be passed on to smaller carriers by procurement
aggregation providers may improve their ability to compete with
us.
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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 "2005 Rules"). On July 24,
2007, a federal appeals court vacated portions of the 2005 Rules. Two
of the key portions that were vacated include the expansion of the driving day
from 10 hours to 11 hours, and the "34-hour restart," which allows drivers to
restart calculations of the weekly on-duty time limits after the driver has at
least 34 consecutive hours off duty. The court indicated that, in
addition to other reasons, it vacated these two portions of the 2005 Rules
because FMCSA failed to provide adequate data supporting its decision to
increase the driving day and provide for the 34-hour
restart. Following a request by FMCSA for a 12-month extension of the
vacated rules, the court, in an order filed on September 28, 2007, granted a
90-day stay of the mandate and directed that issuance of the its ruling be
withheld until December 27, 2007, to allow FMSCA time to prepare its
response. On December 17, 2007, FMCSA submitted an interim final
rule, which became effective December 27, 2007 (the "Interim
Rule"). The Interim Rule retains the 11 hour driving day and the
34-hour restart, but provides greater statistical support and analysis regarding
the increased driving time and the 34-hour restart. We understand
that FMCSA
expects to publish a final rule later in 2008. As the Interim Rule
appears to be very similar to the one struck down by the federal appeals court
in July of 2007, advocacy groups may challenge the Interim Rule. On
January 23, 2008, the court denied an advocacy group's motion to invalidate the
interim rule. If further motions are made, the court's decision could
have varying effects, as reducing driving time to 10 hours daily may reduce
productivity in some lanes, while eliminating the 34-hour restart could enhance
productivity in certain instances. On the whole, however, we believe
a court's decision to strike down the Interim Rule would
decrease
productivity
and cause some loss of efficiency, as drivers and shippers may need to be
retrained, computer programming may require modifications, additional drivers
may need to be employed or engaged, additional equipment may need to be
acquired, and some shipping lanes may need to be reconfigured. We are
also unable to predict the effect of any new rules that might be proposed, but
any such proposed rules could increase costs in our industry or decrease
productivity.
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.
On December 26, 2007, the
FMCSA published NPRM in the
Federal Register regarding minimum requirements for Entry
Level Driver Training. Under the proposed rule, a CDL
applicant would be required to present a valid driver training
certificate obtained from an accredited institution or
program. Entry-level drivers applying for a Class A CDL
would be required to complete a minimum of 120 hours of training,
consisting of
76 classroom hours and 44 driving hours. The
current regulations do not require a minimum number
of training hours and require only classroom education.
Drivers who obtain their first CDL during the three-year period after the
FMCSA issues a final rule would be exempt. Comments on the NPRM
are to be received by
March 25, 2008. If the NPRM is approved as
written, this rule could materially impact the number
of potential new drivers entering the industry and, accordingly
negatively impact our results of operations.
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. Additionally, new truck production and significant
industry-wide purchase of new trucks to comply with the January 2007 EPA
emissions standards could continue to contribute to lower freight demand and
freight rates. 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.
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, could 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 Senior Executive Vice President and Chief Operating Officer, as
well as President and Chief Operating Officer of our Covenant subsidiary; Tony
Smith, our President of SRT; James Brower, our President of Star; Jerry Eddy,
our Covenant subsidiary's Senior Vice President of Operations; Micky
Miller, our Covenant subsidiary's Executive Vice President of Sales and
Marketing; M. David Hughes, our Senior Vice President, Corporate Treasurer and
Covenant subsidiary's Senior Vice President of Fleet Management and Procurement;
R.H. Lovin, Jr., our Covenant subsidiary's Executive Vice President of
Administration; and Richard B. Cribbs, our Vice President and Chief
Accounting Officer. We currently do not have employment agreements
with any of the employees referenced above. 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 twelve 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
|
Charlotte,
North Carolina
|
|
|
|
Leased
|
Indianapolis,
Indiana
|
|
|
|
Leased
|
Texarkana,
Arkansas
|
x
|
x
|
x
|
Owned
|
Hutchins,
Texas
|
x
|
x
|
|
Owned
|
El
Paso, Texas
|
|
|
|
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
|
|
|
|
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.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
During
the fourth quarter of the year ended December 31, 2007, 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, 2006 to December 31, 2007.
Period
|
High
|
|
Low
|
|
|
|
|
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
|
|
|
|
|
Calendar
Year 2007:
|
|
|
|
|
|
|
|
1st
Quarter
|
$12.50
|
|
$10.64
|
2nd
Quarter
|
$11.83
|
|
$10.42
|
3rd
Quarter
|
$11.55
|
|
$ 6.18
|
4th
Quarter
|
$ 8.25
|
|
$ 6.27
|
As of
March 12, 2008, we had approximately 59 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.
(in
thousands, except per share and operating data amounts)
|
|
|
|
|
|
|
|
Years Ended December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$ |
602,629 |
|
|
$ |
572,239 |
|
|
$ |
555,428 |
|
|
$ |
558,453 |
|
|
$ |
555,678 |
|
Fuel
surcharges
|
|
|
109,897 |
|
|
|
111,589 |
|
|
|
87,626 |
|
|
|
45,169 |
|
|
|
26,779 |
|
Total revenue
|
|
$ |
712,526 |
|
|
$ |
683,828 |
|
|
$ |
643,054 |
|
|
$ |
603,622 |
|
|
$ |
582,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and related
expenses (1)
|
|
|
270,435 |
|
|
|
262,303 |
|
|
|
242,157 |
|
|
|
225,778 |
|
|
|
220,665 |
|
Fuel expense
|
|
|
211,022 |
|
|
|
194,355 |
|
|
|
170,582 |
|
|
|
127,723 |
|
|
|
109,231 |
|
Operations and
maintenance
|
|
|
40,437 |
|
|
|
36,112 |
|
|
|
33,625 |
|
|
|
30,555 |
|
|
|
39,822 |
|
Revenue equipment rentals
and
purchased
transportation
|
|
|
66,515 |
|
|
|
63,532 |
|
|
|
61,701 |
|
|
|
69,928 |
|
|
|
69,997 |
|
Operating taxes and
licenses
|
|
|
14,112 |
|
|
|
14,516 |
|
|
|
13,431 |
|
|
|
14,217 |
|
|
|
14,354 |
|
Insurance and claims expense
(2)
|
|
|
36,391 |
|
|
|
34,104 |
|
|
|
41,034 |
|
|
|
54,847 |
|
|
|
35,454 |
|
Communications and
utilities
|
|
|
7,377 |
|
|
|
6,727 |
|
|
|
6,579 |
|
|
|
6,517 |
|
|
|
7,177 |
|
General supplies and
expenses
|
|
|
23,377 |
|
|
|
21,387 |
|
|
|
17,778 |
|
|
|
15,104 |
|
|
|
14,495 |
|
Depreciation and amortization,
including
net gains on disposition of
equipment
and impairment of assets
(3)
|
|
|
53,541 |
|
|
|
41,150 |
|
|
|
39,101 |
|
|
|
45,001 |
|
|
|
43,041 |
|
Total
operating expenses
|
|
|
723,207 |
|
|
|
674,186 |
|
|
|
625,988 |
|
|
|
589,670 |
|
|
|
554,236 |
|
Operating
income (loss)
|
|
|
(10,681 |
) |
|
|
9,642 |
|
|
|
17,066 |
|
|
|
13,952 |
|
|
|
28,221 |
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
12,285 |
|
|
|
7,166 |
|
|
|
4,203 |
|
|
|
3,098 |
|
|
|
2,332 |
|
Interest income
|
|
|
(477 |
) |
|
|
(568 |
) |
|
|
(273 |
) |
|
|
(48 |
) |
|
|
(114 |
) |
Other
|
|
|
(183 |
) |
|
|
(157 |
) |
|
|
(538 |
) |
|
|
(926 |
) |
|
|
(468 |
) |
Loss on early extinguishment of
debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
expenses, net
|
|
|
11,625 |
|
|
|
6,441 |
|
|
|
3,392 |
|
|
|
2,124 |
|
|
|
1,750 |
|
Income
(loss) before income taxes and
cumulative effect of change
in
accounting
principle
|
|
|
(22,306 |
) |
|
|
3,201 |
|
|
|
13,674 |
|
|
|
11,828 |
|
|
|
26,471 |
|
Income
tax expense (benefit)
|
|
|
(5,580 |
) |
|
|
4,582 |
|
|
|
8,003 |
|
|
|
8,452 |
|
|
|
14,315 |
|
Income
(loss) before cumulative effect of
change in accounting
principle
|
|
|
(16,726 |
) |
|
|
(1,381 |
) |
|
|
5,671 |
|
|
|
3,376 |
|
|
|
12,156 |
|
Cumulative
effect of change in accounting
principle, net of tax
(4)
|
|
|
- |
|
|
|
- |
|
|
|
(485 |
) |
|
|
- |
|
|
|
- |
|
Net
income (loss)
|
|
$ |
(16,726 |
) |
|
$ |
(1,381 |
) |
|
$ |
5,186 |
|
|
$ |
3,376 |
|
|
$ |
12,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $1,665 pre-tax impairment charge related to an airplane in
2007.
|
(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:
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.40 |
|
|
$ |
0.23 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
principle
|
|
|
- |
|
|
|
- |
|
|
|
(0.03 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.37 |
|
|
$ |
0.23 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share before
cumulative effect of change
in
accounting
principle:
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.40 |
|
|
$ |
0.23 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
principle
|
|
|
- |
|
|
|
- |
|
|
|
(0.03 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.37 |
|
|
$ |
0.23 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares
outstanding
|
|
|
14,018 |
|
|
|
13,996 |
|
|
|
14,175 |
|
|
|
14,641 |
|
|
|
14,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares
outstanding
|
|
|
14,018 |
|
|
|
13,996 |
|
|
|
14,270 |
|
|
|
14,833 |
|
|
|
14,709 |
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Selected
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
$ |
247,530 |
|
|
$ |
274,974 |
|
|
$ |
211,158 |
|
|
$ |
209,422 |
|
|
$ |
221,734 |
|
Total
assets
|
|
$ |
439,794 |
|
|
$ |
475,094 |
|
|
$ |
371,261 |
|
|
$ |
357,383 |
|
|
$ |
354,281 |
|
Long-term
debt, less current maturities
|
|
$ |
86,467 |
|
|
$ |
104,900 |
|
|
$ |
33,000 |
|
|
$ |
8,013 |
|
|
$ |
12,000 |
|
Total
stockholders' equity
|
|
$ |
172,266 |
|
|
$ |
188,844 |
|
|
$ |
189,724 |
|
|
$ |
195,699 |
|
|
$ |
192,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
freight revenue per loaded mile (1)
|
|
$ |
1.52 |
|
|
$ |
1.51 |
|
|
$ |
1.51 |
|
|
$ |
1.40 |
|
|
$ |
1.27 |
|
Average
freight revenue per total mile (1)
|
|
$ |
1.36 |
|
|
$ |
1.36 |
|
|
$ |
1.36 |
|
|
$ |
1.27 |
|
|
$ |
1.17 |
|
Average
freight revenue per tractor per
week (1)
|
|
$ |
3,088 |
|
|
$ |
3,077 |
|
|
$ |
3,013 |
|
|
$ |
2,995 |
|
|
$ |
2,897 |
|
Average
miles per tractor per year
|
|
|
118,159 |
|
|
|
117,621 |
|
|
|
115,765 |
|
|
|
122,899 |
|
|
|
129,656 |
|
Weighted
average tractors for year (2)
|
|
|
3,623 |
|
|
|
3,546 |
|
|
|
3,535 |
|
|
|
3,558 |
|
|
|
3,667 |
|
Total
tractors at end of period (2)
|
|
|
3,555 |
|
|
|
3,719 |
|
|
|
3,471 |
|
|
|
3,476 |
|
|
|
3,752 |
|
Total
trailers at end of period (3)
|
|
|
8,667 |
|
|
|
9,820 |
|
|
|
8,565 |
|
|
|
8,867 |
|
|
|
9,255 |
|
(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
the tenth largest truckload carrier in the United States measured by fiscal 2006
revenue according to Transport
Topics, a publication of the American Trucking Associations. We focus on
targeted markets where we believe our services can provide a competitive
advantage. Currently, we categorize our business with five major transportation
service offerings: Expedited long haul service, SRT Refrigerated service,
Dedicated service, Covenant regional solo-driver service, and Star regional
solo-driver service. We are a major carrier for transportation companies such as
freight forwarders, less-than-truckload carriers, and third-party logistics
providers that require a high level of service to support their businesses, as
well as for traditional truckload customers such as manufacturers and retailers.
We also generate revenue through a subsidiary that provides freight brokerage
services.
Recent
Results and Year-End Financial Condition
For the
year ended December 31, 2007, total revenue increased 4.2%, to
$712.5 million from $683.8 million during 2006. Freight revenue, which
excludes revenue from fuel surcharges, increased 5.3%, to $602.6 million in 2007
from $572.2 million in 2006. We experienced a net loss of
$16.7 million, or $1.19 per share, for 2007 compared to a net loss of
$1.4 million, or $0.10 per share, for 2006.
For the
year ended December 31, 2007, our average freight revenue per tractor per week,
our main measure of asset productivity, increased 0.4%, to $3,088 compared to
$3,077 for the year ended December 31, 2006. The increase was primarily
generated by a 0.5% increase in average miles per tractor equipment
utilization.
At
December 31, 2007, our total balance sheet debt was $136.8 million and our total
stockholders' equity was $172.3 million, for a total debt-to-capitalization
ratio of 44.3% and a book value of $12.28 per share. We also had approximately
$62.5 million in undrawn letters of credit posted with insurance carriers. At
December 31, 2007, we had a combined $34.1 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.
In our
trucking operations, 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. In our brokerage operations, we
derive revenue from arranging loads for other carriers.
We
operate tractors driven by a single driver and also tractors assigned to
two-person driver teams. Our single driver tractors generally operate
in shorter lengths of haul, generate fewer miles per tractor, and experience
more non-revenue miles, but the lower productive miles are expected to be offset
by generally higher revenue per loaded mile and the reduced employee expense of
compensating only one driver. We expect operating statistics and expenses to
shift with the mix of single and team operations.
Expenses
and Profitability
The main
factors that impact our profitability on the expense side are the variable costs
of transporting freight for our customers. The variable costs include fuel
expense, driver-related expenses, such as wages, benefits, training, and
recruitment, and independent contractor costs, which we record as purchased
transportation. Expenses that have both fixed and variable components
include maintenance and tire expense and our total cost of insurance and claims.
These expenses generally vary with the miles we travel, but also have a
controllable component based on safety, fleet age, efficiency, and other
factors. Our main fixed cost is the acquisition and financing of long-term
assets, primarily revenue equipment and operating terminals. In addition, we
have other mostly fixed costs, such as our non-driver personnel
expenses. We continue to caution that we are anticipating slow and modest
improvements given the current freight environment.
Revenue
Equipment
We
operate approximately 3,555 tractors and 8,667 trailers. Of our tractors, at
December 31, 2007, approximately 2,862 were owned, 693 were financed under
operating leases, and 127 were provided by independent contractors, who own and
drive their own tractors. Of our trailers, at December 31, 2007, approximately
2,345 were owned and approximately 6,322 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.
During
2006, 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 have replaced and 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. During
2007, we continued to have a young fleet with an average tractor age of 1.8
years and an average trailer age of 3.4 years.
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.
Service
Offerings
For 2007,
results of each of our service offerings included the following, as compared to
the results we had achieved for 2006:
•
|
Expedited
long haul service. We increased the average fleet size by approximately
7%, primarily through the January 2007 assimilation of the former Covenant
Refrigerated service offering's team-driver trucks into this service
offering. The Expedited long haul service offering suffered from lower
fuel surcharge collection and a reduction in team drivers within this
fleet, resulting in an increase in solo-driver loads. However, this trend
was reversed during the fourth quarter of 2007 when additional team
drivers were added within this fleet. Average freight revenue per truck
per week increased by 0.5%, with average freight revenue per total mile up
less than one percent and miles per truck down less than one
percent.
|
|
|
•
|
SRT
Refrigerated service. In January 2007, we assimilated the single-driver
trucks from our former Covenant Refrigerated service offering into our
Southern Refrigerated Transport ("SRT") service offering. The
incorporation of the unprofitable Covenant Refrigerated operations into
SRT resulted in a deterioration of SRT's performance, primarily due to a
significant increase in freight from freight brokers and acceptance of new
customer contracts at lower rates to keep trucks loaded. SRT's rates
declined by approximately $.03 per mile. Fuel surcharge recovery also
suffered, primarily led by the additional broker freight and an increase
in non-revenue miles from 9.6% to 10.9% of total miles. Since the
assimilation of the single-driver trucks from our Covenant Refrigerated
service offering, SRT has gradually reduced its dependency on broker
freight.
|
|
|
•
|
Dedicated
service. We increased the average fleet by approximately 1%. Average
freight revenue per truck per week increased by 0.4%, with average freight
revenue per total mile decreased approximately 2.7% and miles per truck
increased 3.1%.
|
|
|
•
|
Covenant
regional solo-driver service. We decreased the average fleet by
approximately 316 trucks or about 35%. Average freight revenue per truck
increased 7.1%, due primarily to a 7.4% increase in average miles per
truck, which was partially offset by a 0.5% decrease in average freight
revenue per total mile. Fuel surcharge recovery also declined. Substantial
additional improvements are needed for this service offering to become
profitable.
|
|
|
•
|
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. Star's total revenue for
2007 totaled approximately $96.2 million. Especially soft freight demand
in the southeastern United States, where Star's lanes are
concentrated, resulted in rate pressure, fewer loaded miles, a larger
percentage of unloaded miles, and reduced fuel surcharge collection,
related in part, to greater reliance on brokered
freight.
|
|
|
•
|
Covenant
Transport Solutions' brokerage freight service. Covenant Transport
Solutions has continued to grow through the addition of agents, who are
paid a commission for each load of freight they provide. The number of
loads increased to 10,643 in 2007 from 2,233 loads in 2006. Average
revenue per load also increased 10.8% to $1,673 in 2007 from $1,435 per
load in 2006. 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.
|
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 $109.9 million, $111.6 million,
and $87.6 million of fuel surcharges in 2007, 2006, and 2005
respectively.
The
following table sets forth the percentage relationship of certain items to total
revenue and freight revenue:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
38.0 |
|
|
|
38.4 |
|
|
|
37.7 |
|
Salaries, wages, and
related
expenses
|
|
|
44.9 |
|
|
|
45.8 |
|
|
|
43.6 |
|
Fuel expense
|
|
|
29.6 |
|
|
|
28.4 |
|
|
|
26.5 |
|
Fuel expense
(1)
|
|
|
16.8 |
|
|
|
14.5 |
|
|
|
14.9 |
|
Operations and
maintenance
|
|
|
5.7 |
|
|
|
5.3 |
|
|
|
5.2 |
|
Operations and
maintenance
|
|
|
6.7 |
|
|
|
6.3 |
|
|
|
6.1 |
|
Revenue equipment
rentals
and purchased
transportation
|
|
|
9.3 |
|
|
|
9.3 |
|
|
|
9.6 |
|
Revenue equipment
rentals
and purchased
transportation
|
|
|
11.0 |
|
|
|
11.1 |
|
|
|
11.1 |
|
Operating taxes and
licenses
|
|
|
2.0 |
|
|
|
2.1 |
|
|
|
2.1 |
|
Operating taxes and
licenses
|
|
|
2.3 |
|
|
|
2.5 |
|
|
|
2.4 |
|
Insurance and
claims
|
|
|
5.1 |
|
|
|
5.0 |
|
|
|
6.4 |
|
Insurance and
claims
|
|
|
6.0 |
|
|
|
6.0 |
|
|
|
7.4 |
|
Communications and
utilities
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
Communications and
utilities
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
1.2 |
|
General supplies and
expenses
|
|
|
3.3 |
|
|
|
3.1 |
|
|
|
2.8 |
|
General supplies and
expenses
|
|
|
3.9 |
|
|
|
3.7 |
|
|
|
3.2 |
|
Depreciation and
amortization,
including net gains
on
disposition of
equipment
|
|
|
7.5 |
|
|
|
6.0 |
|
|
|
6.1 |
|
Depreciation and
amortization,
including net gains
on
disposition of
equipment
|
|
|
8.9 |
|
|
|
7.2 |
|
|
|
7.0 |
|
Total
operating expenses
|
|
|
101.5 |
|
|
|
98.6 |
|
|
|
97.3 |
|
Total
operating expenses
|
|
|
101.8 |
|
|
|
98.3 |
|
|
|
96.9 |
|
Operating
income (loss)
|
|
|
(1.5 |
) |
|
|
1.4 |
|
|
|
2.7 |
|
Operating
income (loss)
|
|
|
(1.8 |
) |
|
|
1.7 |
|
|
|
3.1 |
|
Other
expense, net
|
|
|
1.6 |
|
|
|
0.9 |
|
|
|
0.5 |
|
Other
expense, net
|
|
|
1.9 |
|
|
|
1.1 |
|
|
|
0.6 |
|
Income
(loss) before income
taxes and cumulative
effect
of change in
accounting
principle
|
|
|
(3.1 |
) |
|
|
0.5 |
|
|
|
2.1 |
|
Income
(loss) before income
taxes and cumulative
effect
of change in
accounting
principle
|
|
|
(3.7 |
) |
|
|
0.6 |
|
|
|
2.5 |
|
Income
tax expense (benefit)
|
|
|
(0.8 |
) |
|
|
0.7 |
|
|
|
1.2 |
|
Income
tax expense (benefit)
|
|
|
(0.9 |
) |
|
|
0.8 |
|
|
|
1.4 |
|
Cumulative
effect of change in
accounting
principle,
net of tax
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.1 |
|
Cumulative
effect of change in
accounting
principle,
net of tax
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.1 |
|
Net
income (loss)
|
|
|
(2.3 |
)% |
|
|
(0.2 |
)% |
|
|
0.9 |
% |
Net
income (loss)
|
|
|
(2.8 |
)% |
|
|
(0.2 |
)% |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $109.9 million, $111.6 million, and $87.6 million in
2007, 2006, and 2005, respectively.
|
Comparison
of Year Ended December 31, 2007 to Year Ended December 31, 2006
Total
revenue increased $28.7 million, or 4.2%, to $712.5 million in 2007,
from $683.8 million in 2006. Freight revenue excludes $109.9 million of
fuel surcharge revenue in 2007 and $111.6 million in 2006.
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. 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 424 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
year ended December 31, 2007 totaled approximately $96.2 million, which is
included in our consolidated statements of operations for the year ended
December 31, 2007. Star's cost structure is similar to that of our additional
operating subsidiaries, and therefore has a minimal impact on expenses as a
percentage of freight revenue.
Freight
revenue (total revenue less fuel surcharges) increased $30.4 million, or
5.3%, to $602.6 million in 2007, from $572.2 million in 2006. Average
freight revenue per tractor per week, our primary measure of asset productivity,
increased 0.4% to $3,088 in 2007 from $3,077 in 2006. The increase was primarily
generated by a 0.5% increase in average miles per tractor and a 1.1% 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 reducing the regional service offering, which had the highest
rate structure but significantly lower miles per tractor. The lackluster freight
environment continued to impact every subsidiary and service
offering.
Salaries,
wages, and related expenses increased $8.1 million, or 3.1%, to $270.4 million
in 2007, from $262.3 million in 2006. As a percentage of freight revenue,
salaries, wages, and related expenses decreased to 44.9% in 2007 from 45.8% in
2006. Driver pay increased $7.5 million to $188.5 million in 2007, from $181.0
million in the 2006 period, as improved driver retention resulted in higher
wages for more experienced drivers. This resulted in increased driver pay on a
cost per mile basis of 1.0% in the 2007 period over the 2006 period. Our
employee benefits, decreased $1.9 million to $34.7 million in 2007 from
$36.6 million in 2006, attributable to favorable health insurance expense of
$1.3 million and reduced workers' compensation exposure resulting in a $1.3
million reduction in related expense, offset by increased payroll taxes of $0.8
million related to increased salaries and wages. These benefit expenses
decreased to 5.8% of freight revenue in 2007 from 6.4% of freight revenue in
2006.
Fuel
expense, net of fuel surcharge revenue of $109.9 million in 2007 and $111.6
million in 2006, increased $18.4 million to $101.1 million in 2007 from $82.8
million in 2006. As a percentage of freight revenue, net fuel expense increased
to 16.8% in 2007 from 14.5% in 2006. Fuel surcharges amounted to $0.257 per
total mile in 2007 compared to $0.266 per total mile in 2006. In 2007, we had a
lower surcharge collection rate due primarily to three factors: 1) the increase
in freight obtained through brokers, 2) less compensatory fuel surcharge
programs, and 3) an increase in the percentage of non-revenue miles, due to the
decrease in freight demand. Our total miles
increased approximately 2.7% while our fuel surcharge revenue
decreased 1.5%. The resulting net effect was that our fuel expense, net of
surcharge, increased approximately $.038 per total mile. 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, 2007, 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 $4.3 million to $40.4 million in 2007
from $36.1 million in 2006. As a percentage of freight revenue, operations and
maintenance increased slightly to 6.7% in 2007 from 6.3% in 2006. The
increase resulted in part from higher unloading costs, tractor and trailer
maintenance costs, and tire expense, but was offset by reduced driver recruiting
expense and tolls.
Revenue
equipment rentals and purchased transportation increased $3.0 million, or 4.7%,
to $66.5 million in 2007, from $63.5 million in 2006. As a percentage
of freight revenue, revenue equipment rentals and purchased transportation
expense remained essentially flat at 11.0% in 2007 and 11.1% in 2006. Payments
to third-party transportation providers primarily from Covenant Transport
Solutions, our brokerage subsidiary, were $16.3 million in 2007, compared to
$3.4 million in 2006. Tractor and trailer equipment rental and other related
expenses decreased $8.5 million, to $32.5 million in 2007 compared with $41.0
million in 2006. We had financed approximately 693 tractors and 6,322 trailers
under operating leases at December 31, 2007, compared with 1,116 tractors and
7,575 trailers under operating leases at December 31, 2006. Payments to
independent contractors decreased $1.3 million to $17.8 million in 2007 from
$19.1 million in 2006, mainly due to a decrease in the independent contractor
fleet.
Operating
taxes and licenses decreased $0.4 million, or 2.8%, to $14.1 million in 2007
from $14.5 million in 2006. As a percentage of freight revenue, operating taxes
and licenses remained essentially constant at 2.3% in 2007 and 2.5% in
2006.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, increased
$2.3 million, or 6.7%, to approximately $36.4 million in 2007 from approximately
$34.1 million in 2006. The increase was the result of unfavorable developments
on two separate claims occurring in 2004 and 2005, which were ultimately settled
during the second quarter of 2007, increasing our accrual for casualty claims by
$5.2 million. Our frequency and severity of accidents during 2007 has
improved versus 2006, and as a percentage of freight revenue, insurance and
claims remained essentially constant at 6.0% in 2007 and 2006.
In
general, for casualty claims, we have insurance coverage up to $50.0 million per
claim. In 2006 and through February 28, 2007, 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 as of
February 28, 2007. In conjunction with 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, and any increase in frequency or
severity of claims could adversely affect our financial condition and results of
operations.
Communications
and utilities increased to $7.4 million in 2007 from $6.7 million in
2006. As a percentage of freight revenue, communications and utilities remained
constant at 1.2% in 2007 and 2006.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $1.9 million to $23.3 million in 2007 from $21.4
million in 2006. As a percentage of freight revenue, general supplies and
expenses increased to 3.9% in 2007 from 3.7% in 2006. Of this increase,
$0.7 million was for additional building rent paid on our headquarters
building and surrounding property in Chattanooga, Tennessee for which we
completed a sale leaseback transaction effective April 2006 as described more
fully in the following paragraph. Sales agent commissions, primarily
from our growing brokerage subsidiary, increased $1.1 million to $1.3 million in
2007, compared to $0.2 million in 2006.
In April
2006, we entered into a sale leaseback transaction involving our corporate
headquarters, a maintenance facility, and approximately forty-six acres of
surrounding property in Chattanooga, Tennessee (collectively, the "Headquarters
Facility"). We received proceeds of approximately $29.6 million from the sale of
the Headquarters Facility, 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 Headquarters
Facility 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 $2.4 million, which is being amortized ratably over the life of
the lease and recorded as an offset to general supplies and expenses
(specifically to building rent) on our consolidated statements of
operations.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased $12.4 million, or 30.1%, to $53.5 million in 2007 from $41.2 million
in 2006. As a percentage of freight revenue, depreciation and amortization
increased to 8.9% in 2007 from 7.2% in 2006. The increase related to several
factors, including an increase in the number of owned tractors and trailers in
2007; a softer market for used equipment resulting in a loss of $1.7 million in
2007 compared to a gain of $2.1 million in 2006; and increased amortization
expense of $1.5 million related to the identifiable intangibles acquired with
our Star acquisition on September 14, 2006. Depreciation and amortization
expense is net of any gain or loss on the disposal of tractors and
trailers.
The asset
impairment charge relates to our decision to sell our corporate aircraft to
reduce ongoing operating costs. We recorded an impairment charge of $1.7
million, reflecting the unfavorable fair market value of the airplane as
compared to the combination of the estimated payoff of the long-term operating
lease and current book value of related airplane leasehold
improvements.
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, Accounting
for Derivative Instruments and Hedging Activities,
as amended ("SFAS No. 133"). Other expense, net, increased
$5.2 million, to $11.6 million in 2007 from $6.4 million in 2006. The
increase relates primarily to increased net interest expense of $4.9 million
resulting from the additional borrowings related to the Star acquisition, along
with increased average interest rates. However a portion of this increase has
been offset by a reduction in overall balance sheet debt since the Star
acquisition.
Our
income tax benefit was $5.6 million in 2007 compared to income tax expense of
$4.6 million in 2006. The effective tax rate is different from the expected
combined tax rate as a result of permanent differences primarily 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. In addition, we received a net tax benefit in 2007, as compared with
the 2006 period because we reversed a contingent tax accrual effective March 31,
2007, based on the recommendation by an IRS appeals officer that the IRS concede
a case in our favor. This concession resulted in recognition of
approximately $0.4 million of income tax benefit in 2007.
Primarily
as a result of the factors described above, net income decreased approximately
$15.3 million to a net loss of $16.7 million in 2007 from a net loss of $1.4
million in 2006.
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, 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.
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 the Headquarters
Facility. We received proceeds of approximately $29.6 million from the sale of
the Headquarters Facility, 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 Headquarters
Facility 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 $2.4 million, which is being amortized ratably over the life of
the lease and recorded as an offset to general supplies and expenses
(specifically to building rent) on our consolidated statements of
operations.
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.
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.
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.
LIQUIDITY
AND CAPITAL RESOURCES
Our
business requires significant capital investments over the short-term and the
long-term. In recent years, we have financed our capital requirements
with borrowings under our Securitization Facility and Credit Facility, cash
flows from operations, long-term operating leases, and secured installment notes
with finance companies. Our primary sources of liquidity at December
31, 2007, were funds provided by operations, proceeds from the sale of used
revenue equipment, proceeds under the Securitization Facility, borrowings under
our Credit Facility, borrowings from secured installment notes (each as defined
in Note 7 to our consolidated financial statements contained herein), and
operating leases of revenue equipment. Based on our expected financial
condition, results of operation, and net cash flows during the next twelve
months, which contemplate an improvement compared with the past twelve months,
we believe our sources of liquidity will be adequate to meet our current and
projected needs for at least the next twelve months. On a longer term basis,
based on anticipated financial condition, results of operations, and cash flows,
continued 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 material liquidity constraints in the foreseeable
future.
Cash
Flows
Net cash
provided by operating activities was $33.7 million in 2007 and $60.7 million in
2006. Our cash from operating activities was lower in 2007 primarily due to our
net loss, less efficient collection of receivables which resulted in an
approximately $22.1 million reduction in cash from operating activities in 2007,
and the payment of our prepaid casualty insurance premiums. During 2007,
we paid one year of prepaid casualty insurance premiums equaling $3.8 million,
while in 2006 all of our prepaid casualty insurance premiums had been paid as
part of a two-year policy that began in 2005.
Net cash
used in investing activities was $11.1 million in 2007 and $100.6 million in
2006. Primarily all the 2007 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 Headquarters Facility.
Net cash
used in financing activities was $23.5 million in 2007, as we used the proceeds
from equipment sales to pay down Credit Facility and Securitization Facility
debt. Net cash provided by financing activities was $41.7 million in 2006,
primarily used for the acquisition of Star on September 14, 2006. At December
31, 2007, the Company had outstanding balance sheet debt of $136.8 million,
consisting of $75.0 million drawn under the Credit Facility, $48.0 million from
the Securitization Facility, and $13.8 million from revenue equipment
installment notes. Weighted average interest rates on this debt range from 5.2%
to 7.2% as of December 31, 2007.
We have a
stock repurchase plan for up to 1.3 million Company shares to be purchased in
the open market or through negotiated transactions subject to criteria
established by the Board. No shares were purchased under this plan
during 2007. At December 31, 2007, there were 1,154,100 shares still
available to purchase under the guidance of this plan. The stock repurchase plan
expires June 30, 2008.
Material
Debt Agreements
In
December 2006, the Company entered into our Credit Facility with a group of
banks. The Credit Facility matures in December 2011. The Company signed
Amendment No. 1 to the Credit Facility on August 28, 2007, which, among other
revisions, modified the financial covenants to levels better aligned with the
Company's expected ability to maintain compliance and granted and expanded the
security interest to include, with limited exceptions, then owned revenue
equipment, as well as revenue equipment acquired subsequently utilizing proceeds
from the Credit Facility. 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 0.875% and 2.250% based on a 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 2.25% at December 31, 2007). At December 31, 2007,
the Company had borrowings outstanding under the Credit Facility totaling $75.0
million, with a weighted average interest rate of 7.21%. The Company's
obligations under the Credit Facility are guaranteed by the Company and all of
its subsidiaries, except CVTI Receivables Corp., a Nevada corporation ("CRC")
and Volunteer Insurance Limited, a Cayman Island company ("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. As amended, the Credit Facility is secured by a pledge of the stock of
most of the Company's subsidiaries and certain owned revenue equipment, as well
as revenue equipment acquired subsequently utilizing proceeds from the Credit
Facility. A commitment fee, which is adjusted quarterly between 0.175% and
0.500% per annum based on a 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, is due on the daily
unused portion of the Credit Facility. At December 31, 2007 and December 31,
2006, the Company had undrawn letters of credit outstanding of approximately
$62.5 million and $60.1 million, respectively. As of December 31, 2007, the
Company had approximately $34.1 million of available borrowing
capacity.
In
December 2000, the Company entered into our 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. On December 4, 2007, the Company and CRC entered into
certain amendments to the Securitization Facility. Among other
things, the amendments to the Securitization Facility extended the scheduled
commitment termination date to December 2, 2008, reduced the facility limit from
$70,000,000 to $60,000,000, tightened certain performance ratios required to be
maintained with respect to accounts receivable including, the default ratio, the
delinquency ratio, the dilution ratio, and the accounts receivable turnover
ratio, and amended the master servicer event of default relating to
cross-defaults on material indebtedness with the effect that such master
servicer event of default may now be more readily triggered. As a
result of the amendments to the Securitization Facility, the Company can receive
up to $60.0 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, 2007 and December 31, 2006, the Company had $48.0 million and $55.0
million in outstanding current liabilities related to the Securitization
Facility, respectively, with weighted average interest rates of 5.24% for 2007
and 5.31% for 2006. CRC's Securitization Facility does not meet the requirements
for off-balance sheet accounting; therefore, it is reflected in the consolidated
financial statements.
The
Credit Facility and Securitization Facility contain certain restrictions and
covenants relating to, among other things, dividends, tangible net worth, cash
flow coverage, acquisitions and dispositions, and total
indebtedness. Although certain defaults under the Securitization
Facility create a default under the Credit Facility, a default under the Credit
Facility does not create a default under the Securitization Facility. We were in
compliance with the covenants as of December 31, 2007.
Contractual
Obligations and Commercial Commitments (1)
The
following table sets forth our contractual cash obligations and commitments as
of December 31, 2007:
Payments
due by period:
(in
thousands)
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
There-
after
|
|
Credit
Facility, including
interest (2)
|
|
$ |
96,632 |
|
|
$ |
5,408 |
|
|
$ |
5,408 |
|
|
$ |
5,408 |
|
|
$ |
80,408 |
|
|
$ |
- |
|
|
$ |
- |
|
Securitization
Facility, including
interest (3)
|
|
|
50,324 |
|
|
|
50,324 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Revenue
equipment installment
notes, including interest (4)
|
|
|
15,936 |
|
|
|
3,054 |
|
|
|
3,054 |
|
|
|
7,625 |
|
|
|
2,203 |
|
|
|
- |
|
|
|
- |
|
Operating
leases (5)
|
|
|
140,147 |
|
|
|
35,038 |
|
|
|
27,317 |
|
|
|
20,764 |
|
|
|
8,724 |
|
|
|
7,632 |
|
|
|
40,672 |
|
Lease
residual value
guarantees
|
|
|
36,350 |
|
|
|
11,595 |
|
|
|
765 |
|
|
|
10,295 |
|
|
|
13,695 |
|
|
|
|
|
|
|
|
|
Purchase
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel
fuel (6)
|
|
|
193,166 |
|
|
|
193,166 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equipment
(7)
|
|
|
1,901 |
|
|
|
1,901 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
contractual cash
obligations
|
|
$ |
534,456 |
|
|
$ |
300,486 |
|
|
$ |
36,544 |
|
|
$ |
44,092 |
|
|
$ |
105,030 |
|
|
$ |
7,632 |
|
|
$ |
40,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes
any unrecognized tax benefits under FIN 48 as we are unable to reasonably
predict the ultimate amount or timing of settlement of such unrecognized
tax benefits.
|
(2)
|
Represents
principal and interest payments owed at December 31, 2007. 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, 2007
was utilized. The table assumes long-term debt is held to
maturity. Refer to Note 7, "Securitization Facility and
Long-term Debt."
|
(3)
|
In
2007, this amount represents proceeds drawn under our Securitization
Facility, and the interest rate in place at December 31, 2007 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. Refer to Note 7, "Securitization Facility and
Long-term Debt."
|
(4)
|
Represents
principal and interest payments owed at December 31, 2007. The borrowings
consist of installment notes with a finance company, with fixed borrowing
amounts and fixed interest rates. The table assumes these installment
notes are held to maturity. Refer to Note 7, "Securitization Facility and
Long-term Debt."
|
(5)
|
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 9, "Leases," of
the accompanying consolidated financial statements for further
information.
|
(6)
|
This
amount represents volume purchase commitments through our truck stop
network. We estimate that these amounts represent approximately
70% of our fuel needs for 2008.
|
(7)
|
Amount
reflects the total purchase price or lease commitment
of tractors and trailers scheduled for delivery throughout the
first quarter of 2008.
Net of estimated trade-in values and other dispositions, the estimated
amount due under these commitments is approximately $1.0 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 90
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, 2007, we had financed approximately 693 tractors and 6,322 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 $32.5 million in 2007, compared to $41.0 million in
2006. The total amount of remaining payments under operating leases
as of December 31, 2007, was approximately $140.1 million. In
connection with various operating leases, we issued residual value guarantees,
which provide that if we do not purchase the leased equipment from the lessor at
the end of the lease term, we are liable to the lessor for an amount equal to
the shortage (if any) between the proceeds from the sale of the equipment
and an agreed value. As of December 31, 2007, the maximum amount of
the residual value guarantees was approximately $36.3 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, "Summary of
Significant Accounting Policies," of the consolidated 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 $45.2 million on tractors and trailers in
2007. 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 7% to 26% and new trailers over seven
to ten years to salvage values of 22% to 39%. 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. Gains and losses on the disposal of revenue equipment are included
in depreciation expense in our consolidated statements of
operations.
Revenue
equipment and other long-lived assets are tested for impairment whenever an
event occurs that indicates an impairment may exist. Expected future
cash flows are used to analyze whether an impairment has occurred. If the sum of
expected undiscounted cash flows is less than the carrying value of the
long-lived asset, then an impairment loss is recognized. We measure
the impairment loss by comparing the fair value of the asset to its carrying
value. Fair value is determined based on a discounted cash flow
analysis or the appraised value of the assets, as appropriate. During 2007,
related to our decision to sell our corporate aircraft, we recorded an
impairment charge of $1.7 million, reflecting the unfavorable market value of
the airplane as compared to the combination of the estimated payoff of the
long-term operating lease and current net book value of related airplane
leasehold improvements.
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, 2007, no such charge had been recorded. However, we have continued to assess
this investment for impairment as our evaluation of the value of this investment
had been steadily declining prior to the first quarter of 2007, at which
time Transplace's cash flow improvements have steadied this decline. 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.
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.
In July 2006, the FASB issued
FIN 48. The Company was required to adopt the
provisions of FIN 48, effective January 1, 2007. As a result of this adoption,
the Company recognized additional tax liabilities of $0.3 million with a
corresponding reduction to beginning retained earnings as of January 1, 2007. As
of January 1, 2007, the
Company had a $2.8 million liability recorded for unrecognized tax benefits,
which includes interest and penalties of $0.5 million. The Company recognizes
interest and penalties accrued related to unrecognized tax benefits in tax
expense. If recognized, $1.7 million of unrecognized tax benefits would impact
the Company's effective tax rate as of December 31, 2007.
Deferred
income taxes represent a substantial liability on our consolidated balance
sheets and are determined in accordance with SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities (tax benefits and liabilities expected to be
realized in the future) are recognized for the expected future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards.
The
carrying value of our deferred tax assets assumes that we will be able to
generate, based on certain estimates and assumptions, sufficient future taxable
income in certain tax jurisdictions to utilize these deferred tax benefits. If
these estimates and related assumptions change in the future, we may be required
to establish a valuation allowance against the carrying value of the deferred
tax assets, which would result in additional income tax expense. On a periodic
basis we assess the need for adjustment of the valuation
allowance. Based on forecasted income and prior years' taxable
income, no valuation reserve has been established at December 31, 2007, 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.
While it
is often difficult to predict the final outcome or the timing of resolution of
any particular tax matter, the Company believes that its reserves reflect the
probable outcome of known tax contingencies. The Company adjusts these reserves,
as well as the related interest, in light of changing facts and circumstances.
Settlement of any particular issue would usually require the use of cash.
Favorable resolution would be recognized as a reduction to the Company's annual
tax rate in the year of resolution.
Performance-Based Employee Stock
Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123R (revised 2004) Share-Base Payment ("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 December 2007,
the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 (revised 2007), Business Combinations ("SFAS
No. 141R"). This statement establishes requirements for (i)
recognizing and measuring in an acquiring company's financial
statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree,
(ii) recognizing and measuring the goodwill acquired in the
business combination or a
gain from a bargain purchase, and (iii)
determining what information to disclose to enable
users of the financial statements to
evaluate the nature and financial effects of the
business combination. The provisions of SFAS No.
141R are effective for business combinations for which
the acquisition date is on or after the beginning of the
first annual reporting period
beginning on or after December 15, 2008. The
Company does not believe the adoption of SFAS No. 141R will have a material
impact in the consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51 ("SFAS No.
160"). This statement amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. The provisions of SFAS No.
160 are effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The
Company does not believe the adoption of SFAS No. 160 will have a material
impact in the consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities ("SFAS No. 159"). SFAS No.
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 No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company does not believe the adoption of SFAS No. 159
will have a material impact in the consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). 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 July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"). The Company was required to adopt the provisions of FIN
48, effective January 1, 2007. As a result of this adoption, the Company
recognized additional tax liabilities of $0.3 million with a corresponding
reduction to beginning retained earnings as of January 1, 2007. As of January 1,
2007, the Company had a $2.8 million liability recorded for unrecognized tax
benefits, which includes interest and penalties of $0.5 million. The Company
recognizes interest and penalties accrued related to unrecognized tax benefits
in tax expense.
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 years ended December 31, 2007 and 2006, the
impact of the adoption of FIN 47 was approximately $24,000 and $0.2 million,
respectively, of additional expense in the Company's revenue equipment rentals
and purchased transportation expenses.
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. Although, we
believe at least some of 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 since additional and more
stringent regulation began in 2002. As of December 31, 2007, 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 regarding emissions became
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 as the regulations impact our business through
new tractor purchases.
Fluctuations
in the price or availability of fuel, as well as hedging activities, surcharge
collection, the percentage of freight we obtain through brokers, 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 2007 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 generally increases as a
result of increased retail merchandise shipped in anticipation of the
holidays.
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, 2007, 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.
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 0.875% and 2.25% based on a
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 2.25% at December 31,
2007. At December 31, 2007, we had variable, LIBOR borrowings of $75.0 million
outstanding under the Credit Facility. 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, 2007, borrowings of $48.0 million had
been drawn on the Securitization Facility. Assuming variable rate borrowings
under the Credit Facility and Securitization Facility at December 31, 2007
levels, a one percentage point increase in interest rates could increase our
annual interest expense by approximately $1.2 million.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
consolidated financial statements of Covenant Transportation Group, Inc. and
subsidiaries, as of December 31, 2007 and 2006, 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, 2007, consolidated selected quarterly
financial data (unaudited) for the years ended December 31, 2007 and 2006,
together with the related notes, and the report of KPMG LLP, our independent
registered public accounting firm for the years ended December 31, 2007, 2006,
and 2005 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, 2007, our Chief Executive Officer and
Principal Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rule 13a-15 and 15d-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 Principal 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, 2007. 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, 2007, our internal
control over financial reporting is effective based on those
criteria.
KPMG
LLP's attestation report on 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, 2007, 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 "Proposal 1 Election of Directors",
"Corporate Governance – Compliance with Section 16(a) of the Exchange Act",
"Corporate Governance – Our Executive Officers", "Corporate Governance – Code of
Conduct and Ethics", and "Corporate Governance – Committees of the Board of
Directors – The Audit Committee" in our Proxy Statement for the 2008 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 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 sections entitled
"Executive Compensation", "Corporate Governance – Committees of the Board of
Directors – The Compensation Committee – Compensation Committee Interlocks and
Insider Participation", and "Corporate Governance – Committees of the Board of
Directors – The Compensation Committee - Report of the Compensation Committee"
in our Proxy Statement for the 2008 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, 2007, 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)
|
1,205,060
|
$13.33
|
310,604
|
Equity
compensation plans not
approved by
security holders (2)
|
125,000
|
$13.93
|
-
|
Total
|
1,330,060
|
$13.39
|
310,604
|
(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
"Corporate Governance – Board of Directors and Its Committees" 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 Form 10-K or incorporated by
reference to the document set forth next to the exhibit listed
below.
|
|
Exhibit
Number
|
Reference
|
Description
|
3.1
|
(1)
|
Amended
and Restated Articles of Incorporation
|
|
#
|
Amended
and Restated Bylaws dated December 6, 2007
|
4.1
|
(1)
|
Amended
and Restated Articles of Incorporation
|
|
#
|
Amended
and Restated Bylaws dated December 6, 2007 (Incorporated by reference to
Exhibit 3.2, filed herewith)
|
10.1
|
(2)
|
401(k)
Plan, filed as Exhibit 10.10
|
10.2
|
(3)
|
Outside
Director Stock Option Plan, filed as Appendix A*
|
10.3
|
(4)
|
Amendment
No. 1 to the Outside Director Stock Option Plan, filed as Exhibit
10.11*
|
10.4
|
(5)
|
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
|
(5)
|
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
|
(6)
|
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
|
(7)
|
Incentive
Stock Plan, Amended and Restated as of May 17, 2001, filed as
Appendix B*
|
10.8
|
(8)
|
Covenant
Transport, Inc. 2003 Incentive Stock Plan, filed as Appendix
B*
|
10.9
|
(9)
|
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
|
(10)
|
Master
Lease Agreement dated April 15, 2003, between Transport International
Pool, Inc. and Covenant Transport, Inc., filed as Exhibit
10.4
|
10.11
|
(11)
|
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
|
(12)
|
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
|
(12)
|
Form
of Indemnification Agreement between Covenant Transport, Inc. and each
officer and director, effective May 1, 2004, filed as Exhibit
10.2*
|
10.14
|
(13)
|
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
|
(14)
|
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
|
10.16
|
(21)
|
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., filed as Exhibit
10.16
|
10.17
|
(15)
|
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
|
(15)
|
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
|
(15)
|
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
|
(16)
|
Covenant
Transport, Inc. 2006 Omnibus Incentive Plan*
|
10.21
|
(17)
|
Form
of Restricted Stock Award Notice under the Covenant Transport, Inc. 2006
Omnibus Incentive Plan, filed as Exhibit 10.22*
|
10.22
|
(17)
|
Form
of Restricted Stock Special Award Notice under the Covenant Transport,
Inc. 2006 Omnibus Incentive Plan, filed as Exhibit
10.23*
|
10.23
|
(17)
|
Form
of Incentive Stock Option Award Notice under the Covenant Transport, Inc.
2006 Omnibus Incentive Plan, filed as Exhibit 10.24*
|
10.24
|
(18)
|
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
|
(18)
|
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
|
10.26
|
(21)
|
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., filed as Exhibit
10.26
|
10.27
|
(21)
|
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., filed as Exhibit
10.27
|
10.28
|
(21)
|
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, filed as Exhibit 10.28
|
10.29
|
(21)
|
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., filed as Exhibit
10.29
|
|
#
|
Amendment
No. 13 to Loan Agreement dated August 31, 2007, among Three Pillars
Funding LLC (f/k/a Three Pillars Funding Corporation), SunTrust Robinson
Humphrey, Inc. (f/k/a SunTrust Capital Markets, Inc.), CVTI Receivables
Corp., and Covenant Transportation Group, Inc. (f/k/a Covenant Transport,
Inc.)
|
|
#
|
Amendment
No. 14 to Loan Agreement dated December 4, 2007, among Three Pillars
Funding LLC (f/k/a Three Pillars Funding Corporation), SunTrust Robinson
Humphrey, Inc. (f/k/a SunTrust Capital Markets, Inc.), CVTI Receivables
Corp., and Covenant Transportation Group, Inc. (f/k/a Covenant Transport,
Inc.)
|
10.32
|
(19)
|
Amendment
No. 1 to the Second Amended and Restated Credit Agreement dated August 28,
2007, among Covenant Asset Management, Inc., Covenant Transport, Inc.,
Bank of America, N.A., and each other financial institution that is a
party to the Credit Agreement
|
10.33
|
(20)
|
Covenant
Transport, Inc. 2007 Named Executive Bonus Program, dated February 28,
2007*
|
|
#
|
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 Principal
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 Principal
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
8-K, filed May 29, 2007 (SEC Commission File No.
0-24960)
|
(2)
|
Form
S-1, Registration No. 33-82978, effective October 28,
1994
|
(3)
|
Schedule
14A, filed April 13, 2000 (SEC Commission File No.
0-24960)
|
(4)
|
Form
10-Q, filed November 13, 2000 (SEC Commission File No.
0-24960)
|
(5)
|
Form
10-K, filed March 29, 2001 (SEC Commission File No.
0-24960)
|
(6)
|
Form
10-Q, filed May 14, 2001 (SEC Commission File No.
0-24960)
|
(7)
|
Schedule
14A, filed April 5, 2001 (SEC Commission File No.
0-24960)
|
(8)
|
Schedule
14A, filed April 16, 2003 (SEC Commission File No.
0-24960)
|
(9)
|
Form
10-Q, filed August 11, 2003 (SEC Commission File No.
0-24960)
|
(10)
|
Form
10-Q/A for the quarter ended June 30, 2003, filed October 31, 2003 (SEC
Commission File No. 0-24960)
|
(11)
|
Form
10-K, filed March 15, 2004 (SEC Commission File No.
0-24960)
|
(12)
|
Form
10-Q, filed August 5, 2004 (SEC Commission File No.
0-24960)
|
(13)
|
Form
10-K, filed March 16, 2005 (SEC Commission File No.
0-24960)
|
(14)
|
Form
10-Q, filed May 9, 2005 (SEC Commission File No.
0-24960)
|
(15)
|
Current
Report on Form 8-K, filed April 7, 2006 (SEC Commission File No.
0-24960)
|
(16)
|
Schedule
14A, filed April 17, 2006 (SEC Commission File No.
0-24960)
|
(17)
|
Form
10-Q, filed August 9, 2006 (SEC Commission File No.
0-24960)
|
(18)
|
Form
10-Q, filed November 9, 2006 (SEC Commission File No.
0-24960)
|
(19)
|
Form
10-Q, filed November 6, 2007 (SEC Commission File No.
0-24960)
|
(20)
|
Form
10-Q, filed May 10, 2007 (SEC Commission File No.
0-24960)
|
(21)
|
Form
10-K, filed March 13, 2007 (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
TRANSPORTATION GROUP, INC.
|
|
|
|
|
Date: March
17, 2008
|
By:
|
/s/
Joey B. Hogan
|
|
|
Joey
B. Hogan
|
|
|
Senior
Executive Vice President and Chief Operating Officer, in his capacity as
such and on behalf of the issuer
|
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
17, 2008
|
David
R. Parker
|
|
|
Chairman
of the Board, President, and Chief Executive Officer
(principal
executive officer)
|
|
|
|
|
|
/s/
Joey B. Hogan
|
|
March
17, 2008
|
Joey
B. Hogan
|
|
|
Senior
Executive Vice President and Chief Operating Officer
(principal
financial officer)
|
|
|
|
|
|
/s/
Richard B. Cribbs
|
|
March
17, 2008
|
Richard
B. Cribbs
|
|
|
Vice
President and Chief Accounting Officer
(principal
accounting officer)
|
|
|
|
|
|
/s/
Bradley A. Moline
|
|
March
17, 2008
|
Bradley
A. Moline
|
|
|
Director
|
|
|
|
|
|
/s/
William T. Alt
|
|
March
17, 2008
|
William
T. Alt
|
|
|
Director
|
|
|
|
|
|
/s/
Robert E. Bosworth
|
|
March
17, 2008
|
Robert
E. Bosworth
|
|
|
Director
|
|
|
|
|
|
/s/
Hugh O. Maclellan, Jr.
|
|
March
17, 2008
|
Hugh
O. Maclellan, Jr.
|
|
|
Director
|
|
|
|
|
|
/s/
Niel B. Nielson
|
|
March
17, 2008
|
Niel
B. Nielson
|
|
|
Director
|
|
|
The
Board of Directors and Stockholders
Covenant
Transportation Group, Inc.
We
have audited the accompanying consolidated balance sheets of Covenant
Transportation Group, Inc. and subsidiaries as of December 31, 2007 and 2006,
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, 2007. 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
Transportation Group, Inc. and subsidiaries as of December 31, 2007 and 2006,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2007, in conformity with U.S. generally
accepted accounting
principles.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, as of January 1, 2007 and Statement of Financial Accounting
Standards No. 123R, Share Based Payment, as of January 1, 2006.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
Covenant Transportation Group, Inc.’s internal control over financial reporting
as of December 31, 2007, 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 14, 2008 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial
reporting.
KPMG
LLP
/s/
KPMG LLP
Atlanta,
Georgia
March
14, 2008
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
Covenant
Transportation Group, Inc.:
We
have audited Covenant Transportation Group, Inc.’s internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Covenant Transportation Group, Inc.'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,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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, Covenant Transportation Group, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance
sheets of Covenant Transportation Group, Inc. as of December 31, 2007 and 2006,
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, 2007,
and our report dated March 14, 2008 expressed
an unqualified opinion on those consolidated financial statements.
KPMG
LLP
/s/
KPMG LLP
Atlanta,
Georgia
March
14, 2008
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
DECEMBER
31, 2007 AND 2006
(In
thousands, except share data)
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
4,500 |
|
|
$ |
5,407 |
|
Accounts receivable, net of
allowance of $1,537 in 2007
and $1,491 in
2006
|
|
|
79,207 |
|
|
|
72,581 |
|
Drivers' advances and other
receivables, net of allowance
of $2,706 in 2007 and $2,598 in 2006
|
|
|
5,479 |
|
|
|
4,259 |
|
Inventory and
supplies
|
|
|
4,102 |
|
|
|
4,985 |
|
Prepaid
expenses
|
|
|
7,030 |
|
|
|
11,162 |
|
Assets held for
sale
|
|
|
10,448 |
|
|
|
22,581 |
|
Deferred income
taxes
|
|
|
18,484 |
|
|
|
16,021 |
|
Income taxes
receivable
|
|
|
7,500 |
|
|
|
6,371 |
|
Total
current assets
|
|
|
136,750 |
|
|
|
143,367 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
350,158 |
|
|
|
349,663 |
|
Less
accumulated depreciation and amortization
|
|
|
(102,628 |
) |
|
|
(74,689 |
) |
Net property and
equipment
|
|
|
247,530 |
|
|
|
274,974 |
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
36,210 |
|
|
|
36,210 |
|
Other
assets, net
|
|
|
19,304 |
|
|
|
20,543 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
439,794 |
|
|
$ |
475,094 |
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Securitization
facility
|
|
$ |
47,964 |
|
|
$ |
54,981 |
|
Checks outstanding in excess of
bank balances
|
|
|
4,572 |
|
|
|
4,280 |
|
Current maturities of
acquisition obligation
|
|
|
333 |
|
|
|
333 |
|
Current maturities of long-term
debt
|
|
|
2,335 |
|
|
|
- |
|
Accounts payable and accrued
expenses
|
|
|
35,029 |
|
|
|
30,521 |
|
Current portion of insurance
and claims accrual
|
|
|
19,827 |
|
|
|
20,097 |
|
Total
current liabilities
|
|
|
110,060 |
|
|
|
110,212 |
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
86,467 |
|
|
|
104,900 |
|
Insurance and claims accrual,
net of current portion
|
|
|
10,810 |
|
|
|
18,002 |
|
Deferred income
taxes
|
|
|
57,902 |
|
|
|
50,685 |
|
Other long-term
liabilities
|
|
|
2,289 |
|
|
|
2,451 |
|
Total
liabilities
|
|
|
267,528 |
|
|
|
286,250 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Class A common stock, $.01 par
value; 20,000,000 shares authorized;
13,469,090 shares issued;
11,676,298 and 11,650,690
outstanding as of December 31,
2007 and 2006, respectively
|
|
|
135 |
|
|
|
135 |
|
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
|
|
|
92,238 |
|
|
|
92,053 |
|
Treasury stock at cost;
1,792,792 and 1,818,400 shares as of December 31,
2007 and 2006,
respectively
|
|
|
(21,278 |
) |
|
|
(21,582 |
) |
Retained
earnings
|
|
|
101,147 |
|
|
|
118,214 |
|
Total
stockholders' equity
|
|
|
172,266 |
|
|
|
188,844 |
|
Total
liabilities and stockholders' equity
|
|
$ |
439,794 |
|
|
$ |
475,094 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
YEARS
ENDED DECEMBER 31, 2007, 2006, AND 2005
(In
thousands, except per share data)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Freight revenue
|
|
$ |
602,629 |
|
|
$ |
572,239 |
|
|
$ |
555,428 |
|
Fuel surcharges
|
|
|
109,897 |
|
|
|
111,589 |
|
|
|
87,626 |
|
Total
revenue
|
|
$ |
712,526 |
|
|
$ |
683,828 |
|
|
$ |
643,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and related
expenses
|
|
|
270,435 |
|
|
|
262,303 |
|
|
|
242,157 |
|
Fuel expense
|
|
|
211,022 |
|
|
|
194,355 |
|
|
|
170,582 |
|
Operations and
maintenance
|
|
|
40,437 |
|
|
|
36,112 |
|
|
|
33,625 |
|
Revenue equipment rentals and
purchased transportation
|
|
|
66,515 |
|
|
|
63,532 |
|
|
|
61,701 |
|
Operating taxes and
licenses
|
|
|
14,112 |
|
|
|
14,516 |
|
|
|
13,431 |
|
Insurance and
claims
|
|
|
36,391 |
|
|
|
34,104 |
|
|
|
41,034 |
|
Communications and
utilities
|
|
|
7,377 |
|
|
|
6,727 |
|
|
|
6,579 |
|
General supplies and
expenses
|
|
|
23,377 |
|
|
|
21,387 |
|
|
|
17,778 |
|
Depreciation and amortization,
including net gains and losses on
disposition of
equipment
|
|
|
51,876 |
|
|
|
41,150 |
|
|
|
39,101 |
|
Asset impairment
charge
|
|
|
1,665 |
|
|
|
- |
|
|
|
- |
|
Total
operating expenses
|
|
|
723,207 |
|
|
|
674,186 |
|
|
|
625,988 |
|
Operating
income (loss)
|
|
|
(10,681 |
) |
|
|
9,642 |
|
|
|
17,066 |
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
12,285 |
|
|
|
7,166 |
|
|
|
4,203 |
|
Interest income
|
|
|
(477 |
) |
|
|
(568 |
) |
|
|
(273 |
) |
Other
|
|
|
(183 |
) |
|
|
(157 |
) |
|
|
(538 |
) |
Other
expenses, net
|
|
|
11,625 |
|
|
|
6,441 |
|
|
|
3,392 |
|
Income
(loss) before income taxes and cumulative effect of change
in accounting
principle
|
|
|
(22,306 |
) |
|
|
3,201 |
|
|
|
13,674 |
|
Income
tax expense (benefit)
|
|
|
(5,580 |
) |
|
|
4,582 |
|
|
|
8,003 |
|
Income
(loss) before cumulative effect of change in accounting
principle
|
|
|
(16,726 |
) |
|
|
(1,381 |
) |
|
|
5,671 |
|
Cumulative
effect of change in accounting principle, net of tax
(Note
1)
|
|
|
- |
|
|
|
- |
|
|
|
(485 |
) |
Net
income (loss)
|
|
$ |
(16,726 |
) |
|
$ |
(1,381 |
) |
|
$ |
5,186 |
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share before cumulative effect of change
in accounting
principle:
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
- |
|
|
|
- |
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share before cumulative effect of change
in accounting
principle:
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
- |
|
|
|
- |
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
14,018 |
|
|
|
13,996 |
|
|
|
14,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
14,018 |
|
|
|
13,996 |
|
|
|
14,270 |
|
The accompanying notes are an integral
part of these consolidated financial statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
AND
COMPREHENSIVE INCOME (LOSS)
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(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, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 123R stock-based employee
compensation
cost
|
|
|
- |
|
|
|
- |
|
|
|
189 |
|
|
|
- |
|
|
|
- |
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
impact of change in
accounting
for uncertainties in
income
taxes (FIN 48 – See Note 10)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(341 |
) |
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock to non-
employee directors from
treasury
stock
|
|
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
|
304 |
|
|
|
- |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(16,726 |
) |
|
|
(16,726 |
) |
|
|
(16,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(16,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
$ |
135 |
|
|
$ |
24 |
|
|
$ |
92,238 |
|
|
$ |
(21,278 |
) |
|
$ |
101,147 |
|
|
$ |
172,266 |
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(16,726 |
) |
|
$ |
(1,381 |
) |
|
$ |
5,186 |
|
Adjustments
to reconcile net income (loss) to net cash
provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses on accounts
receivable
|
|
|
1,163 |
|
|
|
590 |
|
|
|
1,598 |
|
Depreciation and amortization,
including impairment
charge
|
|
|
51,801 |
|
|
|
43,234 |
|
|
|
39,769 |
|
Amortization of deferred financing
fees
|
|
|
281 |
|
|
|
- |
|
|
|
- |
|
Income tax benefit from exercise
of stock options
|
|
|
- |
|
|
|
- |
|
|
|
50 |
|
Deferred income taxes
(benefit)
|
|
|
4,414 |
|
|
|
3,660 |
|
|
|
(6,249 |
) |
Loss (gain) on disposition of
property and equipment
|
|
|
1,741 |
|
|
|
(2,071 |
) |
|
|
(668 |
) |
Non-cash stock
compensation
|
|
|
489 |
|
|
|
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
|
|
|
(7,631 |
) |
|
|
14,449 |
|
|
|
(4,841 |
) |
Prepaid expenses and other
assets
|
|
|
4,386 |
|
|
|
6,295 |
|
|
|
(4,555 |
) |
Inventory and
supplies
|
|
|
865 |
|
|
|
(283 |
) |
|
|
(1,081 |
) |
Insurance and claims
accrual
|
|
|
(7,462 |
) |
|
|
(6,255 |
) |
|
|
(4,399 |
) |
Accounts payable and accrued
expenses
|
|
|
400 |
|
|
|
2,187 |
|
|
|
278 |
|
Net
cash flows provided by operating activities
|
|
|
33,721 |
|
|
|
60,664 |
|
|
|
25,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and
equipment
|
|
|
(64,261 |
) |
|
|
(162,750 |
) |
|
|
(109,918 |
) |
Proceeds from disposition of
property and equipment
|
|
|
53,486 |
|
|
|
71,652 |
|
|
|
65,992 |
|
Proceeds from building sale
leaseback
|
|
|
- |
|
|
|
29,630 |
|
|
|
- |
|
Payment of acquisition
obligation
|
|
|
(333 |
) |
|
|
(83 |
) |
|
|
- |
|
Purchase of Star
Transportation, Inc., net of cash acquired
|
|
|
- |
|
|
|
(39,061 |
) |
|
|
- |
|
Net
cash flows used in investing activities
|
|
|
(11,108 |
) |
|
|
(100,612 |
) |
|
|
(43,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
|
|
- |
|
|
|
246 |
|
|
|
445 |
|
Excess tax benefits from exercise
of stock options
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
Repurchase of company
stock
|
|
|
- |
|
|
|
- |
|
|
|
(11,657 |
) |
Proceeds from disposition of
interest rate hedge
|
|
|
- |
|
|
|
175 |
|
|
|
- |
|
Change in checks outstanding in
excess of bank balances
|
|
|
292 |
|
|
|
4,280 |
|
|
|
- |
|
Proceeds from issuance of
debt
|
|
|
62,839 |
|
|
|
167,188 |
|
|
|
122,000 |
|
Repayments of debt
|
|
|
(85,954 |
) |
|
|
(129,768 |
) |
|
|
(93,889 |
) |
Debt refinancing
costs
|
|
|
(697 |
) |
|
|
(401 |
) |
|
|
6 |
|
Net
cash flows provided by/(used in) financing activities
|
|
|
(23,520 |
) |
|
|
41,737 |
|
|
|
16,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(907 |
) |
|
|
1,789 |
|
|
|
(1,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
5,407 |
|
|
|
3,618 |
|
|
|
5,066 |
|
Cash
and cash equivalents at end of year
|
|
$ |
4,500 |
|
|
$ |
5,407 |
|
|
$ |
3,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid/(received) during the
year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized
interest
|
|
$ |
11,969 |
|
|
$ |
7,486 |
|
|
$ |
4,255 |
|
Income taxes
|
|
$ |
(11,287 |
) |
|
$ |
1,485 |
|
|
$ |
16,261 |
|
The accompanying notes are an integral
part of these consolidated financial statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
DECEMBER
31, 2007, 2006 AND 2005
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Covenant
Transportation Group, 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
Transportation Group, Inc. a holding company incorporated in the state of Nevada
in 1994, and its wholly-owned subsidiaries: Covenant Transport, Inc., a
Tennessee corporation; ("Covenant"); 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"); Harold Ives Trucking Co., an
Arkansas corporation; ("Harold Ives"); and Volunteer Insurance Limited, a Cayman
Islands company; ("Volunteer"). References in this report to "it," "we," "us,"
"our," the "Company," and similar expressions refer to Covenant Transportation
Group, Inc. and its wholly owned subsidiaries. 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, 2007, we had checks outstanding
in excess of cash balances for our primary disbursement accounts totaling $4.6
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 does 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 diversity
that results in a lack of a concentration of credit risk for the year ended
December 31, 2007.
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 7% to 26% and new trailers over seven
to ten years to salvage values of 22% 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 accounts 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. Expected future
cash flows are used to analyze whether an impairment has occurred. If the sum of
expected undiscounted cash flows is less than the carrying value of the
long-lived asset, then an impairment loss is recognized. The Company
measures 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. During 2007,
related to the Company's decision to sell its corporate aircraft, the Company
recorded an impairment charge of $1.7 million, reflecting the unfavorable market
value of the airplane as compared to the combination of the estimated payoff of
the long-term operating lease and current net book value of related airplane
leasehold improvements. The sale of the airplane was completed in December
2007.
Accounting
for Business Combinations
In
accordance with business combination accounting, the Company allocates the
purchase price of acquired companies to the tangible and intangible assets
acquired, and liabilities assumed based on their estimated fair values. The
Company engages 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, the Company 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.
Intangibles
and Other Assets
SFAS No.
142, Goodwill and Other
Intangible Assets, 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
primary claims arising against the Company consist of cargo liability, personal
injury, property damage, workers' compensation, and employee medical
expenses. The Company's insurance program involves self-insurance
with high retention levels. Because of the Company's significant self-insured
retention amounts, it has significant exposure to fluctuations in the number and
severity of claims and to variations between its estimated and actual ultimate
payouts. The Company accrues the estimated cost of the uninsured
portion of pending claims. Its 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. The Company has significant exposure to
fluctuations in the number and severity of claims. If there is an
increase in the frequency and severity of claims, or the Company is 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 its
insurance coverage, its profitability would be adversely affected.
In
addition to estimates within the Company's self-insured retention layers, it
also must make judgments concerning its aggregate coverage limits. If
any claim occurrence were to exceed the Company's aggregate coverage limits, it
would have to accrue for the excess amount. The Company's critical
estimates include evaluating whether a claim may exceed such limits and, if so,
by how much. Currently, the Company is not aware of any such
claims. If one or more claims were to exceed the Company's then
effective coverage limits, its financial condition and results of operations
could be materially and adversely affected.
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. 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. Subsequent to the Company's
February 2007 renewal, the Company is 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.
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, 2007 and 2006 was approximately $136.8 million and $159.9 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 income
taxes represent a substantial liability on our consolidated balance sheets and
are determined in accordance with SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities (tax benefits and liabilities expected to be
realized in the future) are recognized for the expected future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry over.
The
carrying value of the Company's deferred tax assets assumes that it 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, it
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 the Company assesses the need for adjustment of the valuation
allowance. Based on forecasted income and prior years' taxable
income, no valuation reserve has been established at December 31, 2007, because
the Company believes that it is more likely than not that the future benefit of
the deferred tax assets will be realized.
Lease
Accounting and Off-Balance Sheet Transactions
The
Company issues residual value guarantees in connection with the operating leases
it enters into for its revenue equipment. These leases provide that if the
Company does not purchase the leased equipment from the lessor at the end of the
lease term, then it is 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, the Company would accrue for the
difference over the remaining lease term. The Company believes 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.
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 2007 and 2006 equaled net
income (loss).
Basic
and Diluted Earnings (Loss) Per Share
The
Company applies the provisions of SFAS No. 128, Earnings per Share, which
requires it 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 years ended
December 31, 2007 and 2006 excludes all 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 year ended December 31,
2005 excludes approximately 1.4 million shares 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)
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(16,726 |
) |
|
$ |
(1,381 |
) |
|
$ |
5,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share
– weighted-average
shares
|
|
|
14,018 |
|
|
|
13,996 |
|
|
|
14,175 |
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock
options
|
|
|
- |
|
|
|
- |
|
|
|
95 |
|
Denominator
for diluted earnings per share
– adjusted weighted-average
shares and assumed
conversions
|
|
|
14,018 |
|
|
|
13,996 |
|
|
|
14,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share
|
|
$ |
(1.19 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
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.
Segment
Information
The
Company has one reportable segment under the provisions of Statement of
Financial Accounting Standards ("SFAS") No.131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). 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 as 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. The
operations of this subsidiary are not material and are therefore not disclosed
separately.
Reclassifications
Certain
reclassifications have been made to the prior years' consolidated financial
statements to conform to the 2007 presentation.
New
Accounting Pronouncements
In December 2007,
the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 (revised 2007), Business Combinations ("SFAS
No. 141R"). This statement establishes requirements for (i)
recognizing and measuring in an acquiring company's financial
statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree,
(ii) recognizing and measuring the goodwill acquired in the
business combination or a
gain from a bargain purchase, and (iii)
determining what information to disclose to enable
users of the financial statements to
evaluate the nature and financial effects of the
business combination. The provisions of SFAS No.
141R are effective for business combinations for which
the acquisition date is on or after the beginning of the
first annual reporting period
beginning on or after December 15, 2008. The
Company does not believe the adoption of SFAS No. 141R will have a material
impact in the consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51 ("SFAS No.
160"). This statement amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. The provisions of SFAS No.
160 are effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The
Company does not believe the adoption of SFAS No. 160 will have a material
impact in the consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities ("SFAS No. 159"). SFAS No.
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 No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company does not believe the adoption of SFAS No. 159
will have a material impact in the consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). 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 July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"). The Company was required to adopt the provisions of FIN
48, effective January 1, 2007. As a result of this adoption, the Company
recognized additional tax liabilities of $0.3 million with a corresponding
reduction to beginning retained earnings as of January 1, 2007. As of January 1,
2007, the Company had a $2.8 million liability recorded for unrecognized tax
benefits, which includes interest and penalties of $0.5 million. The Company
recognizes interest and penalties accrued related to unrecognized tax benefits
in tax expense.
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 years ended December 31, 2007 and 2006, the
impact of the adoption of FIN 47 was approximately $24,000 and $0.2 million,
respectively, 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 for the year ended
December 31, 2005 would have been affected as follows:
(in
thousands except per share data)
|
|
|
|
Income
before cumulative effect of change in accounting principle, as
reported:
|
|
$ |
5,671 |
|
Deduct: Accretion
of conditional asset retirement liability and amortization
of related asset, net of related tax effects
|
|
|
(251 |
) |
Pro
forma net income
|
|
$ |
5,420 |
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
As
reported, before cumulative effect of change in accounting principle
|
|
$ |
0.40 |
|
Pro
forma earnings per share
|
|
$ |
0.38 |
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
As
reported, before cumulative effect of change in accounting principle
|
|
$ |
0.40 |
|
Pro
forma diluted earnings per share
|
|
$ |
0.38 |
|
The value
of the conditional asset retirement obligation liability calculated on a pro
forma basis as if the standard had been retrospectively applied to the prior
period presented is as follows:
|
December 31, 2005
|
|
$1.6
million
|
2. LIQUIDITY
As
discussed in Note 7, the Company's Credit Facility and Securitization Facility
contains certain restrictions and covenants relating to, among other things,
dividends, tangible net worth, leverage, acquisitions and dispositions, and
total indebtedness. On August 28, 2007, the Company signed Amendment No. 1 to
the Credit Facility ("Amendment No. 1"), to modify the financial covenants to
levels better aligned with the Company's expected ability to maintain compliance
and to grant and expand the security interest to include, with limited
exceptions, then owned revenue equipment, as well as revenue equipment acquired
subsequently utilizing proceeds from the Credit Facility. At December
31, 2007, the Company was in compliance with the covenants of the Credit
Facility and Securitization Facility. However, if the Company
experiences future defaults under our Credit Facility, its bank group could
cease making further advances, declare its debt to be immediately due and
payable, impose significant restrictions and requirements on its operations, and
institute foreclosure procedures against their security. If the Company was
required to obtain waivers of defaults, the Company may incur
significant fees and transaction costs. If waivers of defaults are not obtained
and acceleration occurs, it may have difficulty in borrowing sufficient
additional funds to refinance the accelerated debt or the Company may
have to issue equity securities, which would dilute stock ownership. Even if new
financing is made available to the Company, it may not be available on
acceptable terms. As a result, the Company's liquidity, financial condition, and
results of operations would be adversely affected.
3. 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 (the "Board"),
its stockholders approved the Covenant Transportation Group, Inc. 2006 Omnibus
Incentive Plan ("2006 Plan"). The 2006 Plan replaced the Covenant Transportation
Group, 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 non-employee 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 a 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, 2007, 310,604 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. Included in
salaries, wages, and related expenses within the consolidated statements of
operations is stock-based compensation expense for each of the years ended
December 31, 2007 and 2006 of approximately $0.2 million. As a result of the
acceleration of vesting of all outstanding unvested stock options on August 31,
2005, 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
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 year ended December 31, 2005
would have been $2.2 million.
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
Net
income, as reported:
|
|
$ |
5,186 |
|
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
|
|
|
(2,235 |
) |
Pro
forma net income
|
|
$ |
2,951 |
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
As reported
|
|
$ |
0.37 |
|
Pro forma
|
|
$ |
0.21 |
|
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 table summarizes the Company's stock option activity for the
fiscal years ended December 31, 2005, 2006 and 2007:
|
|
Number
of
options
(in
thousands)
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term
|
|
Aggregate
intrinsic value
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2004
|
|
|
1,261 |
|
|
$ |
14.42 |
|
71
months
|
|
$ |
8,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
237 |
|
|
$ |
14.11 |
|
|
|
|
|
|
Options
exercised
|
|
|
(28 |
) |
|
$ |
15.86 |
|
|
|
|
|
|
Options
canceled
|
|
|
(16 |
) |
|
$ |
14.99 |
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
1,454 |
|
|
$ |
14.33 |
|
68
months
|
|
$ |
1,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
106 |
|
|
$ |
13.15 |
|
|
|
|
|
|
Options
exercised
|
|
|
(19 |
) |
|
$ |
12.64 |
|
|
|
|
|
|
Options
canceled
|
|
|
(254 |
) |
|
$ |
15.74 |
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,287 |
|
|
$ |
13.98 |
|
68
months
|
|
$ |
685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
112 |
|
|
$ |
6.76 |
|
|
|
|
|
|
Options
exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Options
canceled
|
|
|
(194 |
) |
|
$ |
13.93 |
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,205 |
|
|
$ |
13.33 |
|
64
months
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
1,031 |
|
|
$ |
14.02 |
|
56
months
|
|
$ |
- |
|
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:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Expected
volatility
|
|
|
57.3 |
% |
|
|
37.4 |
% |
|
|
42.2 |
% |
Risk-free
interest rate
|
|
|
4.4 |
% |
|
|
4.6%
- 5.0 |
% |
|
|
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 judgment,
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
fiscal years ended December 31, 2006 and 2007:
|
|
Number
of
stock
awards
|
|
|
Weighted
average
grant
date
fair value
|
|
Unvested
at January 1, 2006
|
|
|
- |
|
|
|
- |
|
Granted
|
|
|
484,984 |
|
|
$ |
12.65 |
|
Vested
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(28,000 |
) |
|
$ |
12.65 |
|
Unvested
at January 1, 2007
|
|
|
456,984 |
|
|
$ |
12.65 |
|
Granted
|
|
|
113,533 |
|
|
$ |
10.72 |
|
Vested
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(69,933 |
) |
|
$ |
12.68 |
|
Unvested
at December 31, 2007
|
|
|
500,584 |
|
|
$ |
12.21 |
|
As of
December 31, 2007, the Company had no unrecognized compensation expense related
to stock options and restricted stock awards which is expected to be
recognized in the future.
4. 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"). Transplace operates a global transportation
logistics service. In the transaction, the Company contributed its 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. The Company continues to evaluate its 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 the Company determines 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 the 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, 2007, no such charge had been recorded.
However, the Company has continued to assess this investment for impairment as
its evaluation of the value of this investment had been steadily declining prior
to the first quarter of 2007, at which time Transplace's cash flow
improvements have steadied this decline. It 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.
5. PROPERTY
AND EQUIPMENT
A summary
of property and equipment, at cost, as of December 31, 2007 and 2006 is as
follows:
(in
thousands)
|
Estimated
Useful
Lives
|
|
2007
|
|
|
2006
|
|
Revenue
equipment
|
3-10
years
|
|
$ |
266,189 |
|
|
$ |
264,063 |
|
Communications
equipment
|
5
years
|
|
|
15,325 |
|
|
|
17,565 |
|
Land
and improvements
|
10-24
years
|
|
|
16,663 |
|
|
|
17,483 |
|
Buildings
and leasehold improvements
|
10-40
years
|
|
|
36,503 |
|
|
|
31,069 |
|
Construction
in-progress
|
|
|
|
768 |
|
|
|
3,333 |
|
Other
|
1-5
years
|
|
|
14,710 |
|
|
|
16,150 |
|
|
|
|
$ |
350,158 |
|
|
$ |
349,663 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense amounts were $48.6 million, $42.7 million, and $39.7 million in 2007,
2006, and 2005, respectively.
6. OTHER
ASSETS
A summary
of other assets as of December 31, 2007 and 2006 is as follows:
(in
thousands)
|
|
2007
|
|
|
2006
|
|
Covenants
not to compete
|
|
$ |
2,690 |
|
|
$ |
2,690 |
|
Trade
name
|
|
|
1,250 |
|
|
|
1,250 |
|
Customer
relationships
|
|
|
3,490 |
|
|
|
3,490 |
|
Less:
accumulated amortization of intangibles
|
|
|
(3,671 |
) |
|
|
(2,167 |
) |
Net intangible
assets
|
|
|
3,759 |
|
|
|
5,263 |
|
Investment in
Transplace
|
|
|
10,666 |
|
|
|
10,666 |
|
Note receivable from
Transplace
|
|
|
2,748 |
|
|
|
2,642 |
|
Other, net
|
|
|
2,131 |
|
|
|
1,972 |
|
|
|
$ |
19,304 |
|
|
$ |
20,543 |
|
|
|
|
|
|
|
|
|
|
7. SECURITIZATION
FACILITY AND LONG-TERM DEBT
Current
and long-term debt consisted of the following at December 31, 2007 and
2006:
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization
Facility
|
|
$
|
47,964
|
|
|
$
|
-
|
|
|
$
|
54,981
|
|
|
$
|
-
|
|
Borrowings
under Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
equipment installment notes with finance company,
weighted average interest rate of 5.65% at December 31, 2007,
due in monthly installments with final maturities at various
dates ranging from September 2010 to April 2011, secured by
related revenue equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
$
|
50,299
|
|
|
$
|
86,467
|
|
|
$
|
54,981
|
|
|
$
|
104,900
|
|
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. The Company signed Amendment No. 1 to the
Credit Facility on August 28, 2007, which, among other revisions, modified the
financial covenants to levels better aligned with the Company's expected ability
to maintain compliance and granted and expanded the security interest to
include, with limited exceptions, then owned revenue equipment, as well as
revenue equipment acquired subsequently utilizing proceeds from the Credit
Facility. 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 0.875% and 2.250% based on a 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 2.25% at December 31, 2007). At December 31, 2007,
the Company had borrowings outstanding under the Credit Facility totaling $75.0
million with a weighted average interest rate of 7.21%. 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. As amended, the Credit Facility is secured by a pledge of the stock of
most of the Company's subsidiaries and certain owned revenue equipment, as well
as revenue equipment acquired subsequently utilizing proceeds from the Credit
Facility. A commitment fee, which is adjusted quarterly between 0.175% and
0.500% per annum based on a 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, is due on the daily
unused portion of the Credit Facility. At December 31, 2007 and 2006, the
Company had undrawn letters of credit outstanding of approximately $62.5 million
and $60.1 million, respectively. As of December 31, 2007, the Company had
approximately $34.1 million of available borrowing capacity.
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. CRC sells a percentage ownership
in such receivables to unrelated financial entities. The Company can receive up
to $60.0 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,
2007 and 2006, the Company had $48.0 million and $55.0 million in outstanding
current liabilities related to the Securitization Facility, respectively, with
weighted average interest rates of 5.24% for 2007 and 5.31% for 2006. CRC's
Securitization Facility does not meet the requirements for off-balance sheet
accounting; therefore, it is reflected in the consolidated financial
statements.
The
Credit Facility and Securitization Facility contain certain restrictions and
covenants relating to, among other things, dividends, tangible net worth, cash
flow coverage, acquisitions and dispositions, and total indebtedness. Although
certain defaults under the Securitization Facility create a default under the
Credit Facility, a default under the Credit Facility does not create a default
under the Securitization Facility. The Company was in compliance with the
covenants as of December 31, 2007.
8.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
1,491 |
|
|
$ |
1,163 |
|
|
$ |
1,117 |
|
|
$ |
1,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
2,200 |
|
|
$ |
590 |
|
|
$ |
1,299 |
|
|
$ |
1,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
1,700 |
|
|
$ |
1,598 |
|
|
$ |
1,098 |
|
|
$ |
2,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. 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):
2008
|
$35,038
|
2009
|
27,317
|
2010
|
20,764
|
2011
|
8,724
|
2012
|
7,632
|
Thereafter
|
40,672
|
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 $36.3 million and $45.3
million at December 31, 2007 and December 31, 2006, 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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
equipment rentals
|
|
$ |
33,546 |
|
|
$ |
42,129 |
|
|
$ |
41,379 |
|
Building
and lot rentals
|
|
|
4,067 |
|
|
|
3,508 |
|
|
|
1,252 |
|
Other
equipment rentals
|
|
|
2,759 |
|
|
|
3,311 |
|
|
|
3,060 |
|
|
|
$ |
40,372 |
|
|
$ |
48,948 |
|
|
$ |
45,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
10. INCOME
TAXES
Income
tax expense (benefit) from continuing operations for the years ended December
31, 2007, 2006 and 2005 is comprised of:
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Federal,
current
|
|
$ |
(6,202 |
) |
|
$ |
784 |
|
|
$ |
13,344 |
|
Federal,
deferred
|
|
|
(498 |
) |
|
|
3,415 |
|
|
|
(6,056 |
) |
State,
current
|
|
|
(78 |
) |
|
|
138 |
|
|
|
1,205 |
|
State,
deferred
|
|
|
1,198 |
|
|
|
245 |
|
|
|
(490 |
) |
|
|
$ |
(5,580 |
) |
|
$ |
4,582 |
|
|
$ |
8,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007, 2006 and 2005 as
follows:
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Computed
"expected" income tax expense
|
|
$ |
(7,809 |
) |
|
$ |
1,120 |
|
|
$ |
4,786 |
|
State
income taxes, net of federal income tax
effect
|
|
|
(781 |
) |
|
|
96 |
|
|
|
465 |
|
Per
diem allowances
|
|
|
2,371 |
|
|
|
2,233 |
|
|
|
2,591 |
|
Tax
contingency accruals
|
|
|
(105 |
) |
|
|
470 |
|
|
|
542 |
|
Nondeductible
foreign operating loss
|
|
|
290 |
|
|
|
294 |
|
|
|
- |
|
Other,
net
|
|
|
454 |
|
|
|
369 |
|
|
|
(381 |
) |
Actual
income tax expense
|
|
$ |
(5,580 |
) |
|
$ |
4,582 |
|
|
$ |
8,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 2007 and 2006 are as
follows:
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$ |
378 |
|
|
$ |
345 |
|
Insurance and
claims
|
|
|
10,469 |
|
|
|
13,237 |
|
Net operating loss
carryovers
|
|
|
2,601 |
|
|
|
3,375 |
|
Investments
|
|
|
163 |
|
|
|
161 |
|
Other accrued
liabilities
|
|
|
910 |
|
|
|
- |
|
Other, net
|
|
|
1,245 |
|
|
|
866 |
|
Total
net deferred tax assets
|
|
|
15,766 |
|
|
|
17,984 |
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and
equipment
|
|
|
(51,773 |
) |
|
|
(50,352 |
) |
Intangible and other
assets
|
|
|
(1,952 |
) |
|
|
(2,183 |
) |
Prepaid expenses
|
|
|
(1,459 |
) |
|
|
- |
|
Other, net
|
|
|
- |
|
|
|
(113 |
) |
Total
net deferred tax liabilities
|
|
|
(55,184 |
) |
|
|
(52,648 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
|
|
$ |
(39,418 |
) |
|
$ |
(34,664 |
) |
|
|
|
|
|
|
|
|
|
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, 2007. However, there can be no assurance that the Company will meet
our forecasts of future income.
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"). The Company was required to adopt the provisions of FIN
48, effective January 1, 2007. This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109 and prescribes a recognition threshold of
more-likely-than-not to be sustained upon examination. As a result of this
adoption, the Company recognized additional tax liabilities of $0.3 million with
a corresponding reduction to beginning retained earnings as of January 1, 2007.
As of January 1, 2007, the Company had a $2.8 million liability recorded for
unrecognized tax benefits, which includes interest and penalties of $0.5
million. The Company recognizes interest and penalties accrued related to
unrecognized tax benefits in tax expense.
The
following table summarizes the activity related to the Company's gross
unrecognized tax benefits from January 1, 2007 to December 31, 2007 (in
thousands):
Balance
as of January 1, 2007
|
|
$ |
2,295 |
|
Increases related to prior year
tax positions
|
|
|
53 |
|
Decreases related to prior year
positions
|
|
|
(439 |
) |
Increases related to current
year tax positions
|
|
|
159 |
|
Decreases related to settlements
with taxing authorities
|
|
|
(69 |
) |
Decreases related to lapsing of
statute of limitations
|
|
|
(76 |
) |
Balance
as of December 31, 2007
|
|
$ |
1,923 |
|
If
recognized, $1.7 million of unrecognized tax benefits would impact the Company's
effective tax rate as of December 31, 2007. Any prospective adjustments to the
Company's reserves for income taxes will be recorded as an increase or decrease
to its provision for income taxes and would impact our effective tax rate. In
addition, the Company accrues interest and penalties related to unrecognized tax
benefits in its provision for income taxes. The gross amount of interest and
penalties accrued was $0.8 million as of December 31, 2007, of which $0.3
million was recognized in 2007.
The
Company's 2003 through 2007 tax years remain subject to examination by the IRS
for U.S. federal tax purposes, the Company's only major taxing jurisdiction. In
the normal course of business, the Company is also subject to audits by state
and local tax authorities. While it is often difficult to predict the final
outcome or the timing of resolution of any particular tax matter, the Company
believes that its reserves reflect the probable outcome of known tax
contingencies. The Company adjusts these reserves, as well as the related
interest, in light of changing facts and circumstances. Settlement of any
particular issue would usually require the use of cash. Favorable resolution
would be recognized as a reduction to the Company's annual tax rate in the year
of resolution. The Company does not expect any significant increases or
decreases for uncertain income tax positions during the next twelve
months.
11. STOCK
REPURCHASE PLAN
In May
2007, 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 2007 or 2006. During 2005, the Company purchased a
total of 720,800 shares with an average price of $16.17. The stock repurchase
plan expires June 30, 2008.
12. 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 in 2007 and
2006 and approximately $1.1 million in 2005, to the profit sharing and
savings plan.
13. RELATED
PARTY TRANSACTIONS
Transactions
involving related parties are as follows:
The
Company utilizes outside legal services from one of the former members of its
Board of Directors, whose resignation was effective November 13, 2007. During
2007, 2006, and 2005, the Company paid approximately $402,000, $597,000 and
$332,000, respectfully, for legal and consulting services to a firm that employs
the former member of its Board of Directors.
The
Company provides transportation services to Transplace. During 2007, 2006, and
2005, gross revenue from services provided to Transplace was approximately $16.0
million, $12.9 million, and $14.1 million, respectively. The accounts receivable
balance as of December 31, 2007 was approximately $3.4 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 $117,000, $163,000 and $373,000 in 2007, 2006, and 2005
respectively.
14. 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 were not designated as hedging
instruments under SFAS No. 133. Consequently, these derivatives were marked to
fair value through earnings, in other expense in the accompanying 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 did 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.
15. ACQUISITION
On
September 14, 2006, the Company 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. 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 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
|
|
|
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 included 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 |
|
16. 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.
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.
17. QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)
(in
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
ended
|
|
Mar
31, 2007
|
|
|
June
30, 2007
|
|
|
Sep.
30, 2007
|
|
|
Dec.
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$ |
143,542 |
|
|
$ |
151,033 |
|
|
$ |
148,531 |
|
|
$ |
159,524 |
|
Operating
income (loss)
|
|
|
(2,744 |
) |
|
|
(11,072 |
) |
|
|
(2,168 |
) |
|
|
5,302 |
|
Net
income (loss)
|
|
|
(2,070 |
) |
|
|
(11,257 |
) |
|
|
(3,575 |
) |
|
|
176 |
|
Basic
and diluted earnings (loss) per share
|
|
|
(0.15 |
) |
|
|
(0.80 |
) |
|
|
(0.25 |
) |
|
|
0.01 |
|
(in
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
ended
|
|
Mar.
31, 2006
|
|
|
June
30, 2006
|
|
|
Sep.
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
and diluted earnings (loss) per share
|
|
|
(0.06 |
) |
|
|
(0.03 |
) |
|
|
0.06 |
|
|
|
(0.06 |
) |
68