COVENANT LOGISTICS GROUP, INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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[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, 2009
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)
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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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$0.01
Par Value Class A Common Stock – The NASDAQ Global Select
Market
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Securities
registered pursuant to Section 12(b) of the Act:
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(Title
of class)
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
[ ]
Yes [X] No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
[ ]
Yes [X] No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X]
Yes [ ] No
Indicate
by checkmark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
[ ]
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.
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[
] Large Accelerated Filer
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[
] Accelerated Filer
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[ X
] 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 30, 2009, was approximately $47 million (based upon the
$5.50 per share closing price on that date as reported by NASDAQ). 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 23, 2010, the registrant had 11,840,568 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 2010 Annual Meeting of
Stockholders to be held on May 6, 2010, have been incorporated by reference into
Part III of this Form 10-K.
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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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Reserved
and Removed
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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(T).
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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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Report
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 Loss
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Consolidated
Statements of Cash Flows
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Notes
to Consolidated Financial Statements
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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 and such statements are subject to the safe harbor created by those
sections. 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 focus
on targeted markets throughout the United States where we believe our service
standards can provide a competitive advantage. We are a major carrier
for transportation companies such as freight forwarders, less-than-truckload
carriers, and third-party logistics providers that require a high level of
service to support their businesses, as well as for traditional truckload
customers such as manufacturers, retailers, and food and beverage
shippers. 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. A
combination of customer demand for additional services and changes in freight
distribution patterns caused us to seek to provide additional
services. Through several acquisitions in the late 1990's and
continuing through 2006, we entered the refrigerated, solo, and regional
markets. In addition, over the past several years, we internally
developed the capacity to provide dedicated fleet and freight brokerage
services.
We have
two reportable segments: Asset-Based Truckload Services ("Truckload") and our
Brokerage Services, also known as Covenant Transport Solutions, Inc.
("Solutions").
The
Truckload segment consists of three asset-based operating fleets that are
aggregated because they have similar economic characteristics and meet the
aggregation criteria. The three operating fleets that comprise our
Truckload segment are as follows: (i) Covenant Transport, Inc. ("Covenant
Transport"), our historical flagship operation, which provides expedited long
haul, dedicated, and regional solo-driver service; (ii) Southern Refrigerated
Transportation, Inc. ("SRT"), which provides primarily long-haul and regional
temperature-controlled service; and (iii) Star Transportation, Inc. ("Star"),
which provides regional solo-driver service.
The
Solutions segment provides freight brokerage service directly and through
freight brokerage agents who are paid a commission for the freight they
provide. 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 our Truckload segment.
The
following chart reflects the size of each of our subsidiaries measured by 2009
freight revenue:
Asset-Based
Truckload Services
Our
truckload segment comprised approximately 91%, 91%, and 97% of our total
operating revenue in 2009, 2008, and 2007, respectively.
We
primarily generate revenue by transporting freight for our
customers. Generally, we are paid a predetermined rate per mile for
our truckload services. We enhance our truckload revenue by charging
for tractor and trailer detention, loading and unloading activities, and other
specialized services, as well as through the collection of fuel surcharges to
mitigate the impact of increases in the cost of fuel. The main
factors that affect our truckload revenue are the revenue per mile we receive
from our customers, the percentage of miles for which we are compensated, and
the number of shipments and miles we generate. These factors relate,
among other things, to the general level of economic activity in the United
States, inventory levels, specific customer demand, the level of capacity in the
trucking industry, and driver availability.
The main
factors that impact our profitability in terms of expenses are the variable
costs of transporting freight for our customers. These costs include
fuel expense, driver-related expenses, such as wages, benefits, training, and
recruitment, and purchased transportation expenses, which include compensating
independent contractors and providers of expedited intermodal rail
services. 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 costs include rentals and depreciation
of long-term assets, such as revenue equipment and terminal facilities, and the
compensation of non-driver personnel.
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.
At
December 31, 2009, we operated 3,113 tractors and 8,005 trailers. Of
these tractors, 2,784 were owned, 236 were financed under operating leases, and
93 were provided by independent contractors, who own and drive their own
tractors. Of these trailers, 2,018 were owned, 5,687 were financed
under operating leases, and 300 were financed under capital leases.
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 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.
The
development of our business has affected our operating metrics over
time. We measure performance of our Truckload segment and the related
subsidiaries’ 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:
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Average Length of Haul in
Miles.
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 dropped
significantly in 2009 because of overcapacity in our industry in
comparison to freight demand in a recessionary economic
environment. All freight revenue per mile numbers exclude fuel
surcharge revenue.
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Average Miles Per
Tractor.
Average miles per tractor reflects economic
demand, our ability to match fleet size to demand, and the percentage of
team-driven tractors in our fleet.
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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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Brokerage
Services
Our
Solutions segment comprised approximately 9%, 9%, and 3% of our total operating
revenue in 2009, 2008, and 2007, respectively. Solutions derives
revenue from arranging transportation services for customers through
relationships with thousands of third-party carriers and integration with our
Truckload segment. Solutions provides freight brokerage services
through freight brokerage agents, who are paid a commission for the freight
brokerage service they provide, and directly through in-house brokerage
personnel working in direct contact with customers. The main factors
that impact profitability in terms of expenses are the variable costs of
outsourcing the transportation freight for our customers and managing selling,
general, and administrative expenses. Our brokerage loads decreased
to 24,769 in 2009, from 27,117 in 2008. Average revenue per load also
decreased approximately 5% to $1,912 in 2009, from $2,017 in 2008, primarily due
to a decrease in fuel surcharge collection and an overall decrease in rates paid
to carriers as a result of the weakened economic climate.
Customers
and Operations
Our
primary customers include manufacturers and retailers, as well as other
transportation companies. In 2009, our five largest customers were
Estes Express Lines, Georgia Pacific, Transplace, UPS, and
Wal-Mart. Estes Express Lines, Transplace, and UPS are other
transportation providers who seek our services when our team-driven tractors or
other service capabilities offer them an advantage. No customer
accounted for more than 10% of our consolidated revenue in 2009, 2008, or
2007. Our top five customers accounted for approximately 26%, 20%,
and 22% of our revenue in 2009, 2008, and 2007, respectively.
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 generally 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 thirty (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, around holidays, 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.
In 2009,
we began a multi-year project to upgrade the hardware and software of our
information systems. The goal upon completion of the project is to
have uniform operational and financial systems across the entire company as we
believe this will improve customer service, utilization, and enhance our
visibility into and across the organization. The Company incurred
approximately $2.6 million in 2009 related to this system upgrade, and all
related amounts are included in construction in progress in the consolidated
balance sheet as the related systems were not implemented as of December 31,
2009.
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 five 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% in a
year. At times, there are driver shortages in the trucking
industry. In past years, when there were driver shortages, the number
of qualified drivers had 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 became available in a
growing economy; and (iii) individual drivers' desire to be home more
often.
While the
driver recruiting market was less difficult than prior years, retention remained
challenging in 2009. We believe weakness in the housing market
contributed favorably to our recruiting and retention efforts for much of
2009. Our results of operations could be negatively impacted by the
new Comprehensive Safety Analysis regulations that will go into effect in late
2010 and, if adopted, recent rules proposed by the Federal Motor Carrier Safety
Administration ("FMCSA") requiring additional training for potential drivers to
obtain a commercial driver's license, as these regulations could materially
impact the number of potential new drivers entering the industry or the
qualifications of drivers already in the industry. We anticipate that
competition for qualified drivers will remain high, particularly if the economy
improves, and cannot predict whether we will experience future
shortages. If such a shortage was to occur and a driver pay rate
increase became necessary to attract and retain drivers, our consolidated
results of operations could 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 teams
are able to handle longer routes and drive more miles while remaining within
U.S. Department of Transportation ("DOT") hours of service 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, 2009, teams operated approximately
29% of our tractors.
We are
not a party to a collective bargaining agreement. At December 31,
2009, we employed approximately 4,065 drivers and approximately 754 non-driver
personnel. At December 31, 2009, we also contracted with
approximately 93 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 a low age fleet of tractors, with the majority of units 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, 2009, our tractor fleet had an average
age of approximately 22 months and our trailer fleet had an average age of
approximately 58 months. At December 31, 2009, approximately 64% of
our tractors were equipped with 2007 emission-compliant
engines. Approximately 82% of our trailers were dry vans and the
remainder were refrigerated vans.
Over the
past several years, the price of new tractors has risen dramatically, while the
resale value has generally not changed or has decreased. This has
substantially increased our costs of operation over the past several
years. Tractor manufacturers have indicated that they intend to
continue increasing prices prior to and following the introduction of 2010
emission-compliant engines.
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 ourselves 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. In times of high fuel prices or less consumer
demand, however, rail-intermodal competition becomes more
significant.
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.
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 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 Environmental
Protection Agency ("EPA") and the Department of Homeland Security ("DHS"), also
regulate our equipment, operations, and drivers.
The DOT,
through the 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"). In July 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 allowed drivers to restart calculations of the weekly on-duty
time limits after the driver had 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. In November 2008, following the submission
of additional data by FMCSA and a series of appeals and related court rulings,
FMCSA published its final rule, which retains the 11 hour driving day and the
34-hour restart (the "Final Rule"). However, advocacy groups have
continued to challenge the Final Rule and on October 26, 2009, the FMCSA agreed
pursuant to a settlement agreement with certain advocacy groups that the Final
Rule on driver hours-of-service would not take effect pending the publication of
a new Notice of Proposed Rulemaking. Under the settlement agreement,
the FMCSA will submit the draft Notice of Proposed Rulemaking to the Office of
Management and Budget by July 2010, and the FMCSA will issue a final rule by
2012. The current hours-of-service rules, adopted in 2005, will
remain in effect during the rulemaking proceedings. In December 2009,
the FMCSA issued a notice soliciting data and research information the FMCSA may
consider in drafting the forthcoming Notice of Proposed Rulemaking.
We are
unable to predict what form the new rules may take, how a court may rule on such
challenges to such rules, and to what extent the FMCSA might attempt to
materially revise the rules under the current presidential
administration. On the whole, however, we believe any modifications
to the current rules will 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.
The
FMCSA's new Comprehensive Safety Analysis 2010 initiative introduces a new
enforcement and compliance model, which implements driver standards in addition
to the Company standards currently in place. Under the new
regulations, the methodology for determining a carrier's DOT safety rating will
be expanded to include the on-road safety performance of the carrier's
drivers. Implementation of the new regulations is set for July 1,
2010, and enforcement will begin in late 2010. As a result of new
regulations, including the expanded methodology for determining a carrier's DOT
safety rating, there may be an adverse effect on our DOT safety
rating. The Company currently has a satisfactory DOT safety rating,
which is the highest available rating. A conditional or
unsatisfactory DOT safety rating could adversely affect our business because
some of our customer contracts may require a satisfactory DOT safety rating, and
a conditional or unsatisfactory rating could negatively impact or restrict our
operations. The new regulations also may result in a reduced number
of eligible drivers. If current or potential drivers are eliminated
due to the Comprehensive Safety Analysis 2010 initiative, we may have difficulty
attracting and retaining qualified drivers.
The
Transportation Security Administration ("TSA") has adopted regulations that
require determination by the TSA that each driver who applies for or renews his
or her license for carrying hazardous materials is not a security
threat. This could reduce the pool of qualified drivers, which could
require us to increase driver compensation, limit our fleet growth, or result in
trucks sitting idle. These regulations also could complicate the
matching of available equipment with hazardous material shipments, thereby
increasing our response time on customer orders and our non-revenue
miles. As a result, it is possible we could fail to meet the needs of
our customers or could incur increased expenses to do so.
Certain
states and municipalities continue 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, discharge and retention of storm water,
and other environmental matters that import inherent environmental
risks. 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 three 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 more restrictive in
2010. Compliance with such regulations has increased the cost of our
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 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, though the cost of fuel was lower in
2009 than 2008 considering the historical highs for petroleum products in
2008. We have also reduced the maximum speed of many of our trucks,
implemented strict idling guidelines for our drivers, encouraged the use of
shore power units in truck stops, and imposed standards for accepting broker
freight that include a minimum combined rate and assumed fuel surcharge
component. This combination of initiatives has contributed to
significant improvements in fleet wide average fuel
mileage. Moreover, 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 price
of fuel has affected 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 cannot be fully recovered due to our
engines being idled during cold or warm weather, empty or out-of-route miles,
and for fuel used by refrigerated trailer units that generally are not billed to
customers. In addition, during 2008 and 2009, 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.
The
Company engages in activities that expose it to market risks, including the
effects of changes in 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 fuel
markets may have on operating results. In an effort to seek to reduce
the variability of the ultimate cash flows associated with fluctuations in
diesel fuel prices, we periodically enter into various derivative instruments,
including forward futures swap contracts. The Company does not engage
in speculative transactions, nor does it hold or issue financial instruments for
trading purposes.
The
Company did not enter into any derivatives until the third quarter of 2009;
however, in September 2009 we entered into forward futures swap contracts, which
pertain to 2.5 million gallons of diesel, or approximately 4%, of our
projected January through December 2010 fuel requirements. Under
these contracts, we pay a fixed rate per gallon of heating oil and receive the
monthly average price of New York heating oil. The retrospective and
prospective regression analyses provided that changes in the prices of diesel
fuel and heating oil were deemed to be highly effective based on the relevant
authoritative guidance.
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 sometimes
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, 2009, 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; Southern
Refrigerated Transport, Inc., an Arkansas corporation; Star Transportation,
Inc., a Tennessee corporation; Covenant Transport Solutions, Inc., a Nevada
corporation; Covenant Logistics, Inc., a Nevada corporation; Covenant Asset
Management, Inc., a Nevada corporation; CTG Leasing Company, a Nevada
corporation; and Volunteer Insurance Limited, a Cayman Islands
company.
Our
headquarters is 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 discussion of risk factors contains
forward looking statements as discussed in Item 1 above. 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 affecting the trucking industry 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. The risks associated with these factors are heightened in
the current, severe recession facing the U.S. economy. Some of the
principal risks are as follows:
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We
may experience a reduction in overall freight levels, which may impair our
asset utilization;
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Certain
of our customers are facing credit issues and could experience cash flow
problems that may lead to payment delays, increased credit risk,
bankruptcies, and other financial hardships that could result in even
lower freight demand and may require us to increase our allowance for
doubtful accounts;
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Freight
patterns may change as supply chains are redesigned, resulting in an
imbalance between our capacity and our customers' freight
demand;
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Customers
may bid out freight or select competitors that offer lower rates from
among existing choices in an attempt to lower their costs, and we might be
forced to lower our rates or lose freight; and
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We
may be forced to accept more freight from freight brokers, where freight
rates are typically lower, or may be forced to incur more non-revenue
miles to obtain loads.
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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 increased fuel prices that have
persisted since the second half of 2006, as well as the negative impact economic
conditions have had on freight rates and volumes since
mid-2008. Despite our efforts to execute the strategic plan, we
experienced a net loss in 2009 and also may experience a net loss in
2010. If we are unable to improve our profitability, then our
liquidity, financial position, and results of operations may be adversely
affected.
Our
Credit Facility and other financing arrangements contain certain covenants,
restrictions, and requirements, and we may be unable to comply with the
covenant, restrictions, and requirements. A default could result in
the acceleration of all or part 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
an $85.0 million Credit Facility with a group of banks and numerous other
financing arrangements. The Credit Facility contains certain
restrictions and covenants relating to, among other things, dividends, liens,
acquisitions and dispositions outside of the ordinary course of business,
affiliate transactions, and a fixed charge coverage ratio. On
February 25, 2010, the Company obtained an amendment to its Credit Facility,
which, among other things (i) amended certain defined terms in the Credit
Facility, (ii) retroactively to January 1, 2010, amended the fixed charge
coverage ratio covenant through June 30, 2010, which prevented a default of that
covenant for January 2010, (iii) restarted the look back requirements of the
fixed coverage ratio covenant beginning on January 1, 2010, and (iv) required
the Company to order updated appraisals for certain real estate described in the
Credit Facility. In consideration of these changes, we agreed to
certain fees in connection with the amendment. We have had difficulty
meeting budgeted results in the past. If we are unable to meet
budgeted results or otherwise comply with our Credit Facility, we may be unable
to obtain a further amendment or waiver under our Credit Facility, or doing so
may result in additional fees. See "Material Debt Agreements" below
for additional information.
Certain
other financing arrangements contain certain restrictions and covenants, as
well. If we fail to comply with any of our financing arrangement
covenants, restrictions, and requirements, we will be in default under the
relevant agreement, which could cause cross-defaults under our other financing
arrangements. In the event of any such default, if we failed to
obtain replacement financing, amendments to, or waivers under the applicable
financing arrangements, our lenders could cease making further advances, declare
our debt to be immediately due and payable, fail to renew letters of credit,
impose significant restrictions and requirements on our operations, institute
foreclosure procedures against their collateral, or impose significant fees and
transaction costs. If acceleration occurs, the current credit market
crisis may make it difficult or expensive 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, the current
lack of available credit and consequent more stringent borrowing terms may mean
that credit is not available to us on acceptable terms. A default
under our financing arrangements could cause a materially adverse effect on our
liquidity, financial condition, and results of operations.
Our
substantial indebtedness and capital 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, capital leases, 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.
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, weather, and other factors beyond our
control each of which may lead to an increase in the cost of
fuel. 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 use hedging contracts and volume
purchase arrangements to attempt to limit the effect of price
fluctuations. 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. A failure to improve our fuel price protection through
these measures, 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. Due
to 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 was 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.
We
operate in a highly competitive and fragmented industry, and numerous
competitive factors could impair our ability to 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 cost of fuel, insurance, and tractors, the available pool of
independent contractor drivers has been declining. Regulatory
requirements, including the new Comprehensive Safety Analysis 2010 initiative
(discussed below), and an improvement in the economy could reduce the number of
eligible drivers or force us to pay more to attract and retain
drivers. A shortage of qualified drivers and intense competition for
drivers from other trucking companies will create difficulties in 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 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 forced to, among other things, adjust our compensation packages,
increase the number of our tractors without drivers, or operate with fewer
trucks and face difficulty meeting shipper demands, any of which could adversely
affect our growth and profitability.
We
operate in a highly regulated industry, and changes in regulations or 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
also are 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 EPA, and the 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 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"). In July 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 allowed drivers to restart calculations of the weekly
on-duty time limits after the driver had 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. In November 2008, following the submission
of additional data by FMCSA and a series of appeals and related court rulings,
FMCSA published its final rule, which retains the 11 hour driving day and the
34-hour restart (the "Final Rule"). However, advocacy groups have
continued to challenge the Final Rule and on October 26, 2009, the FMCSA agreed
pursuant to a settlement agreement with certain advocacy groups that the Final
Rule on driver hours-of-service would not take effect pending the publication of
a new Notice of Proposed Rulemaking. Under the settlement agreement,
the FMCSA will submit the draft Notice of Proposed Rulemaking to the Office of
Management and Budget by July 2010, and the FMCSA will issue a final rule by
2012. The current hours-of-service rules, adopted in 2005, will
remain in effect during the rulemaking proceedings. In December 2009,
the FMCSA issued a notice soliciting data and research information the FMCSA may
consider in drafting the forthcoming Notice of Proposed Rulemaking.
We are
unable to predict what form the new rules may take, how a court may rule on such
challenges to such rules, and to what extent the FMCSA might attempt to
materially revise the rules under the current presidential
administration. On the whole, however, we believe any modifications
to the current rules will 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.
The
FMCSA's new Comprehensive Safety Analysis 2010 initiative introduces a new
enforcement and compliance model, which implements driver standards in addition
to the Company standards currently in place. Under the new
regulations, the methodology for determining a carrier's DOT safety rating will
be expanded to include the on-road safety performance of the carrier's
drivers. Implementation of the new regulation is set for July 1,
2010, and enforcement will begin in late 2010. As a result of these
new regulations, including the expanded methodology for determining a carrier's
DOT safety rating, there may be an adverse effect on our DOT safety
rating. The Company currently has a satisfactory DOT rating, which is
the highest available rating. A conditional or unsatisfactory DOT
safety rating could adversely affect our business because some of our customer
contracts may require a satisfactory DOT safety rating, and a conditional or
unsatisfactory rating could negatively impact or restrict our
operations. The new regulations also may result in a reduced number
of eligible drivers. If current or potential drivers are eliminated
due to the Comprehensive Safety Analysis 2010 initiative, we may have difficulty
attracting and retaining qualified drivers.
On
December 26, 2007, the FMCSA published a Notice of Proposed Rule Making in the
Federal Register regarding minimum requirements for entry level driver
training. Under the proposed rule, a commercial driver's license
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 commercial driver's license 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 commercial driver's license
during the three-year period after the FMCSA issues a final rule would be
exempt. The FMCSA has not established a deadline for issuing the
final rule, but the comment period expired on May 23, 2008. If the
rule is approved as written, this rule could materially affect the number of
potential new drivers entering the industry and, accordingly, negatively affect
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.
On
December 1, 2008, the FMCSA issued a final rule that will require CDL holders to
provide an original or current copy of the medical examiners certification to
their State Driver Licensing Agency. This action is the preamble to
merge the CDL and the Medical Examination Certificate into a single electronic
record. We are unable to predict the effect of this rule on our
industry, but we expect that this rule could increase costs and potentially
could decrease productivity and the availability of qualified CDL
drivers.
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.
In
general, the increasing burden of regulation raises our costs and lowers our
efficiency. 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 on to us through higher prices could adversely affect our results of
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. We
expect to pay for projected capital expenditures with cash flows from
operations, borrowings under our Credit Facility, proceeds under our financing
facilities, and 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 fleet size, 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 a portion 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 have
the financial capacity or be successful in identifying, negotiating, or
consummating any future acquisitions. If we fail to make any future
acquisitions, our historical 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 three 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 more restrictive in 2010. Engines
meeting new emissions standards generally cost more and require additional
maintenance compared with earlier models. Compliance with such
regulations has increased the cost of our 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 newly designed diesel engines and the residual values of
these vehicles, could materially increase our costs or otherwise adversely
affect our business or operations.
Concern
over climate change, including the impact of global warming, has led to
significant legislative and regulatory efforts to limit greenhouse gas
emissions, and some form of federal climate change legislation is possible in
the relatively near future. Regulations related to climate change
that potentially impose restrictions, caps, taxes, or other controls on
emissions of greenhouse gases could adversely affect our operations and
financial results. More specifically, legislative or regulatory
actions related to climate change could adversely impact the Company by
increasing our fuel costs and reducing fuel efficiency and could result in the
creation of substantial additional capital expenditures and operating costs in
the form of taxes, emissions allowances, or required equipment
upgrades. Until the timing, scope, and extent of any future
regulation becomes known, we cannot predict its effect on our cost structure or
our operating results; however, any future regulation could impair our operating
efficiency and productivity and result in higher operating costs.
Increased
prices, reduced productivity, and scarcity of financing for new revenue
equipment may adversely affect our earnings and cash flows.
We are
subject to risk with respect to higher prices for new
tractors. Prices may increase, due, in part, to government
regulations applicable to newly manufactured tractors and diesel engines and due
to the pricing power among equipment manufacturers. More restrictive
EPA emissions standards have required vendors to introduce new
engines. Additional EPA mandated emissions standards became effective
for newly manufactured trucks in January 2010. Compliance with such
regulations has increased the cost of our 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 realized from the disposition of these vehicles, could
increase our costs or otherwise adversely affect our business or operations as
the regulations become effective.
In
addition, our financial results and shrinking capacity of lenders and lessors
that provide tractor and trailer financing have made it increasingly difficult
for us to finance acquisitions of new equipment. 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.
We have a
combination of agreements and non-binding statements of indicative trade values
covering the terms of trade-in commitments from our primary equipment vendors
for disposal of a 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 consistent with the indicative trade values, 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.
Near the
end of 2008, we lowered our tractor disposal proceeds expectations in response
to a combination of sharply lower economic indicators, a worsening credit
market, and significantly lower prices received for disposals of our used
revenue equipment. Based on these factors and the expected remaining
useful lives of some of our equipment, we recorded impairments of the carrying
values of most of the tractors and trailers recorded as held for sale that were
expected to be traded or sold in 2009 as well as most of our in-use tractors
that were expected to be traded or sold in 2009 or 2010. Although we
do not expect to be required to make any future cash expenditures as a result of
this impairment charge, cash proceeds of future disposals of revenue equipment
are anticipated to be lower than expected prior to this impairment
charge. Additional impairments of the carrying values of our revenue
equipment could have a materially adverse effect on our business and operating
results.
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, and
President of our Covenant subsidiary; Richard B. Cribbs, our Senior Vice
President and Chief Financial Officer; Tony Smith, our President of SRT; James
Brower, our President of Star; M. David Hughes, our Senior Vice President,
Corporate Treasurer, and Covenant subsidiary's Senior Vice President of Fleet
Management and Procurement; and R.H. Lovin, Jr., our Covenant subsidiary's
Executive Vice President of Administration. We currently do not have
employment agreements with any of the employees referenced above. 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 other
stockholders’ 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 40% of our
outstanding Class A and Class B 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 48% of the voting power of all of our
outstanding stock. The Parkers are able to substantially influence
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 other
stockholders disagree.
We
depend on the proper functioning and availability of our information systems and
a system failure or inability to effectively upgrade our information systems
could cause a significant disruption to our business and have a materially
adverse effect on our results of operation.
We depend
on the proper functioning and availability of our information systems, including
financial reporting and operating systems, in operating our
business. Our operating system is critical to understanding customer
demands, accepting and planning loads, dispatching equipment and drivers, and
billing and collecting for our services. Our financial reporting
system is critical to producing accurate and timely financial statements and
analyzing business information to help us manage effectively. We have
begun a multi-year project to upgrade the hardware and software of our
information systems. If any of our critical information systems fail
or become otherwise unavailable, whether as a result of the upgrade project or
otherwise, we would have to perform the functions manually, which could
temporarily impact our ability to manage our fleet efficiently, to respond to
customers' requests effectively, to maintain billing and other records reliably,
and to bill for services and prepare financial statements accurately or in a
timely manner. Our business interruption insurance may be inadequate
to protect us in the event of an unforeseeable and extreme
catastrophe. Any system failure, delays, or complications in the
upgrade, security breach, or other system failure could interrupt or delay our
operations, damage our reputation, cause us to lose customers, or impact our
ability to manage our operations and report our financial performance, any of
which could have a materially adverse effect on our business.
If
our stock does not continue to be traded on an established exchange or our
public float is diminished, an active trading market may not exist and the
trading price of our stock may decline.
Our
common stock is listed on the NASDAQ Global Select Market. Nasdaq's
continued listing standards for our common stock require, among other things,
that (i) the closing bid price for our common stock not fall below $1.00; (ii)
we have at least 400 beneficial holders and/or holders of record of our common
stock; (iii) our stockholders' equity not fall below $10 million; (iv) we
have more than 750,000 shares held by the public (excluding officers, directors,
and beneficial holders of 10% or more) with a market value of at least $5.0
million; and (v) we have at least two registered and active dealers meeting the
requirements set forth in the standards. A failure to meet these
continued listing requirements is generally required to exist for a period of 10
to 30 consecutive business days (depending upon the type of failure) before a
deficiency will be determined to exist. If our common stock was
threatened with delisting from the NASDAQ Global Select Market, we may,
depending on the circumstances, seek to extend the period for regaining
compliance with NASDAQ listing requirements or we may pursue other strategic
alternatives to meet the continuing listing standards.
In
addition, we may choose to voluntarily delist from NASDAQ, or "go dark", in the
event we believe we may be subject to a delisting proceeding or for any other
reason our Board of Directors determines it to be in the best interest of our
stockholders.
If our
common stock is delisted by, or we voluntarily delist from, NASDAQ, our common
stock may be eligible to trade on the NYSE Alternext U.S., the OTC Bulletin
Board, or the Pink OTC Markets. In such an event, it could become
more difficult to dispose of, or obtain accurate quotations for the price of,
our common stock, and there also would likely be a reduction in our coverage by
security analysts and the news media, which could cause the price of our common
stock to decline further.
The stock
market has recently experienced price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating
performance. These broad market fluctuations may materially adversely
affect the market price of our common stock, regardless of our operating
results. In addition, as a result of our small public float and
limited trading volume, our common stock may be more susceptible to volatility
arising from any of these factors.
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 also can 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 also could 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
corporate 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 60,000 square
feet, and a truck wash. Our Solutions segment is also operated and
managed out of the Chattanooga facility. We maintain eleven
terminals, which are utilized by our Truckload segment 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
|
|
Indianapolis,
Indiana
|
Leased
|
|||
|
Texarkana,
Arkansas
|
x
|
x
|
x
|
Owned
|
|
Hutchins,
Texas
|
x
|
x
|
Owned
|
|
|
French
Camp, California
|
Leased
|
|||
|
Long
Beach, California
|
Owned
|
|||
|
Pomona,
California
|
x
|
Owned
|
||
|
Allentown,
Pennsylvania
|
Owned
|
|||
|
Nashville,
Tennessee
|
x
|
x
|
x
|
Owned
|
|
Olive
Branch, Mississippi
|
x
|
Owned
|
||
|
Orlando,
Florida
|
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.
Price
Range of Common Stock
Our Class
A common stock is traded on the NASDAQ Global Select 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, 2008, to December 31, 2009.
|
Period
|
High
|
Low
|
||||||
|
Calendar
Year 2008:
|
||||||||
|
1
st
Quarter
|
$ | 8.48 | $ | 5.10 | ||||
|
2
nd
Quarter
|
$ | 6.45 | $ | 2.90 | ||||
|
3
rd
Quarter
|
$ | 5.64 | $ | 2.70 | ||||
|
4
th
Quarter
|
$ | 3.22 | $ | 1.36 | ||||
|
Calendar
Year 2009:
|
||||||||
|
1
st
Quarter
|
$ | 2.38 | $ | 1.60 | ||||
|
2
nd
Quarter
|
$ | 5.88 | $ | 1.92 | ||||
|
3
rd
Quarter
|
$ | 5.47 | $ | 3.40 | ||||
|
4
th
Quarter
|
$ | 5.09 | $ | 3.68 | ||||
As of
March 23, 2010, we had approximately 113 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. As of March 23, 2010,
Mr. Parker, together with certain of his family members, owned all of the
outstanding Class B common stock.
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 financing arrangements. 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
,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||
|
Freight
revenue
|
$ | 520,495 | $ | 615,810 | $ | 602,629 | $ | 572,239 | $ | 555,428 | ||||||||||
|
Fuel
surcharge revenue
|
68,192 | 158,104 | 109,897 | 111,589 | 87,626 | |||||||||||||||
|
Total revenue
|
$ | 588,687 | $ | 773,914 | $ | 712,526 | $ | 683,828 | $ | 643,054 | ||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Salaries, wages, and related
expenses
|
216,158 | 263,793 | 270,435 | 262,303 | 242,157 | |||||||||||||||
|
Fuel expense
|
143,835 | 260,704 | 211,022 | 194,355 | 170,582 | |||||||||||||||
|
Operations and
maintenance
|
35,409 | 42,459 | 40,437 | 36,112 | 33,625 | |||||||||||||||
|
Revenue equipment rentals and
purchased
transportation
|
76,484 | 90,974 | 66,515 | 63,532 | 61,701 | |||||||||||||||
|
Operating taxes and
licenses
|
12,113 | 13,078 | 14,112 | 14,516 | 13,431 | |||||||||||||||
|
Insurance and
claims
|
31,955 | 37,578 | 36,391 | 34,104 | 41,034 | |||||||||||||||
|
Communications and
utilities
|
5,740 | 6,702 | 7,377 | 6,727 | 6,579 | |||||||||||||||
|
General supplies and
expenses
|
23,593 | 26,399 | 23,377 | 21,387 | 17,778 | |||||||||||||||
|
Depreciation
and amortization, including
net gains on disposition of equipment
and impairment of assets (1)
|
48,122 | 63,235 | 53,541 | 41,150 | 39,101 | |||||||||||||||
|
Goodwill impairment charge
(2)
|
- | 24,671 | - | - | - | |||||||||||||||
|
Total
operating expenses
|
593,409 | 829,593 | 723,207 | 674,186 | 625,988 | |||||||||||||||
|
Operating
income (loss)
|
(4,722 | ) | (55,679 | ) | (10,681 | ) | 9,642 | 17,066 | ||||||||||||
|
Other
(income) expense:
|
||||||||||||||||||||
|
Interest
expense
|
14,184 | 10,373 | 12,285 | 7,166 | 4,203 | |||||||||||||||
|
Interest
income
|
(144 | ) | (435 | ) | (477 | ) | (568 | ) | (273 | ) | ||||||||||
|
Loss
on sale of Transplace investment
and
note receivable (3)
|
11,485 | - | - | - | - | |||||||||||||||
|
Loss on early extinguishment of
debt
|
- | 726 | - | - | - | |||||||||||||||
|
Other
|
(199 | ) | (160 | ) | (183 | ) | (157 | ) | (538 | ) | ||||||||||
|
Other
expenses, net
|
25,326 | 10,504 | 11,625 | 6,441 | 3,392 | |||||||||||||||
|
Income (loss) before cumulative effect of
change in accounting
principle
|
(30,048 | ) | (66,183 | ) | (22,306 | ) | 3,201 | 13,674 | ||||||||||||
|
Income
tax expense (benefit)
|
(5,018 | ) | (12,792 | ) | (5,580 | ) | 4,582 | 8,003 | ||||||||||||
|
Income
(loss) before cumulative effect of
change
in accounting principle
|
(25,030 | ) | (53,391 | ) | (16,726 | ) | (1,381 | ) | 5,671 | |||||||||||
|
Cumulative
effect of change in accounting
principle,
net of tax (4)
|
- | - | - | - | (485 | ) | ||||||||||||||
|
Net
income (loss)
|
$ | (25,030 | ) | $ | (53,391 | ) | $ | (16,726 | ) | $ | (1,381 | ) | $ | 5,186 | ||||||
|
(1)
|
Includes
a $1,665 pre-tax impairment charge related to an airplane in 2007 and a
$15,791 pretax impairment charge related to revenue equipment in
2008. See the discussion below under "Additional Information
Concerning Non-Cash Charges" for a more extensive description of these
impairments.
|
|
(2)
|
Represents
a non-cash impairment charge to write off the goodwill associated with the
acquisition of our Star Transportation subsidiary. See the
discussion below under "Additional Information Concerning Non-Cash
Charges" for a more extensive description of this
impairment.
|
|
(3)
|
Represents
a non-cash loss on sale of investment in Transplace and a related
receivable.
|
|
(4)
|
Represents
a $485 adjustment, net of tax, related to the adoption of a new accounting
standard related to asset retirement
obligations.
|
|
Basic
earnings (loss) per share before
cumulative effect of change in accounting principle
|
$ | (1.77 | ) | $ | (3.80 | ) | $ | (1.19 | ) | $ | (0.10 | ) | $ | 0.40 | ||||||
|
Cumulative
effect of change in accounting principle
|
- | - | - | - | (0.03 | ) | ||||||||||||||
|
Basic
earnings (loss) per share
|
$ | (1.77 | ) | $ | (3.80 | ) | $ | (1.19 | ) | $ | (0.10 | ) | $ | 0.37 | ||||||
|
Diluted
earnings (loss) per share before cumulative
effect of change in accounting principle:
|
$ | (1.77 | ) | $ | (3.80 | ) | $ | (1.19 | ) | $ | (0.10 | ) | $ | 0.40 | ||||||
|
Cumulative
effect of change in accounting principle
|
- | - | - | - | (0.03 | ) | ||||||||||||||
|
Diluted
earnings (loss) per share
|
$ | (1.77 | ) | $ | (3.80 | ) | $ | (1.19 | ) | $ | (0.10 | ) | $ | 0.37 | ||||||
|
Basic
weighted average common shares outstanding
|
14,124 | 14,038 | 14,018 | 13,996 | 14,175 | |||||||||||||||
|
Diluted
weighted average common shares outstanding
|
14,124 | 14,038 | 14,018 | 13,996 | 14,270 |
|
Years Ended December
31
,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Selected
Balance Sheet Data:
|
||||||||||||||||||||
|
Net
property and equipment
|
$ | 278,335 | $ | 236,018 | $ | 247,530 | $ | 274,974 | $ | 211,158 | ||||||||||
|
Total
assets
|
$ | 398,312 | $ | 393,676 | $ | 439,794 | $ | 475,094 | $ | 371,261 | ||||||||||
|
Long-term
debt and capital lease obligations, less current
maturities
|
$ | 146,556 | $ | 107,956 | $ | 86,467 | $ | 104,900 | $ | 33,000 | ||||||||||
|
Total
stockholders' equity
|
$ | 94,675 | $ | 118,820 | $ | 172,266 | $ | 188,844 | $ | 189,724 | ||||||||||
|
Selected
Operating Data:
|
||||||||||||||||||||
|
Average
freight revenue per loaded mile (1)
|
$ | 1.42 | $ | 1.53 | $ | 1.52 | $ | 1.51 | $ | 1.51 | ||||||||||
|
Average
freight revenue per total mile (1)
|
$ | 1.27 | $ | 1.36 | $ | 1.36 | $ | 1.36 | $ | 1.36 | ||||||||||
|
Average
freight revenue per tractor per week (1)
|
$ | 2,920 | $ | 3,105 | $ | 3,088 | $ | 3,077 | $ | 3,013 | ||||||||||
|
Average
miles per tractor per year
|
119,836 | 118,992 | 118,159 | 117,621 | 115,765 | |||||||||||||||
|
Weighted
average tractors for year (2)
|
3,111 | 3,456 | 3,623 | 3,546 | 3,535 | |||||||||||||||
|
Total
tractors at end of period (2)
|
3,113 | 3,292 | 3,555 | 3,719 | 3,471 | |||||||||||||||
|
Total
trailers at end of period (3)
|
8,005 | 8,277 | 8,667 | 9,820 | 8,565 | |||||||||||||||
| (1) | Excludes fuel surcharge revenue. |
| (2) | Includes monthly rental tractors and tractors provided by owner-operators. |
| (3) | Excludes monthly rental trailers. |
EXECUTIVE
OVERVIEW
We focus
on targeted markets where we believe our service standards can provide a
competitive advantage. We are a major carrier for transportation
companies such as freight forwarders, less-than-truckload carriers, and
third-party logistics providers that require a high level of service to support
their businesses, as well as for traditional truckload customers such as
manufacturers, retailers, and food and beverage shippers. We also
generate revenue through a subsidiary that provides freight brokerage
services.
Our
consolidated operating freight revenue, which excludes fuel surcharges,
decreased to $520.5 million for 2009, a 15.5% decrease from $615.8 million in
2008. Lower fuel prices resulted in fuel surcharge revenues of $68.2
million during 2009, compared with $158.1 million for 2008. The
decreased level of freight revenue was primarily attributable to reduced fleet
size, a reduction in loads, and continued severe pressure on freight rates as a
result of the economic recession. We measure freight revenue because
management believes that fuel surcharges tend to be a volatile source of
revenue, and the removal of such surcharges affords a more consistent basis for
comparing results of operations from period to period.
The weak
economic environment negatively impacted freight volumes and freight rates
across each of the subsidiaries when comparing 2009 to 2008, as evidenced by the
6.0% decrease in average freight revenue per truck per week, our primary measure
of asset productivity, and a 6.9% or $0.10 decrease in average freight revenue
per total mile in our Truckload segment. Similarly, revenue in our
Brokerage segment declined year-over-year because of a 17% reduction in the rate
per loaded mile, a 5% reduction in revenue per load, and the closure of a large
company store in October 2008. In anticipation of lower freight
volumes, we proactively reduced our fleet size in the first half of 2009 and
maintained the decreased level throughout the second half of the year, providing
for a decrease in weighted average tractors of 10% to 3,111 in the 2009 period,
from 3,456 in the 2008 period. With the assistance of the fleet
reduction, we experienced a 0.7% increase in average miles per tractor in 2009
versus 2008.
Additional
items of note included the following:
|
•
|
Operating
loss of $4.7 million and an operating ratio of 100.9%, compared with an
operating loss of $55.7 million and an operating ratio of 109.0% in
2008;
|
|
•
|
Operating
expenses, excluding impairments of goodwill and property and equipment, in
our asset-based operations declined $0.13 per mile compared with
2008;
|
|
•
|
A
decrease in overall compensation while achieving our highest ratio of
tractors per non-driving employee since becoming a public company in
1994;
|
|
•
|
We
finished the year with the lowest number of DOT reportable accidents per
million miles since we began tracking the data in 2001;
|
|
•
|
Non-cash
impairment charge of $11.5 million (with no tax benefit) in 2009 relating
to the loss on our investment in and note receivable from Transplace, Inc.
and non-cash impairments totaling $40.5 million in 2008 related to
property and equipment and goodwill; and
|
|
•
|
Net
loss of $25.0 million, or ($1.77) per basic and diluted share, compared
with a net loss of $53.4 million, or ($3.80) per basic and diluted share
in 2008 (including the impairment charges in both periods).
|
For
information about our current trends and future outlook, readers are encouraged
to review our statements contained in the "Results of Consolidated Operations"
and "Results of Segment Operations" sections below.
RESULTS OF CONSOLIDATED
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 $68.2
million, $158.1 million, and $109.9 million of fuel surcharges in 2009, 2008,
and 2007, respectively.
The
following table sets forth the percentage relationship of certain items to total
revenue and freight revenue:
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||
|
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
|
36.7
|
34.1
|
38.0
|
Salaries, wages, and related
expenses
|
41.5
|
42.8
|
44.9
|
|||||||
|
Fuel expense
|
24.4
|
33.7
|
29.6
|
Fuel expense (1)
|
14.6
|
16.7
|
16.8
|
|||||||
|
Operations and
maintenance
|
6.0
|
5.5
|
5.7
|
Operations and
maintenance
|
6.8
|
6.9
|
6.7
|
|||||||
|
Revenue equipment
rentals
and
purchased transportation
|
13.0
|
11.8
|
9.3
|
Revenue equipment
rentals
and
purchased transportation
|
14.7
|
14.8
|
11.0
|
|||||||
|
Operating taxes and
licenses
|
2.1
|
1.7
|
2.0
|
Operating taxes and
licenses
|
2.3
|
2.1
|
2.3
|
|||||||
|
Insurance and
claims
|
5.4
|
4.9
|
5.1
|
Insurance and
claims
|
6.1
|
6.1
|
6.0
|
|||||||
|
Communications and
utilities
|
1.0
|
0.9
|
1.0
|
Communications and
utilities
|
1.1
|
1.1
|
1.2
|
|||||||
|
General supplies and
expenses
|
4.0
|
3.2
|
3.3
|
General supplies and
expenses
|
4.5
|
4.3
|
3.9
|
|||||||
|
Depreciation and
amortization,
including net gains
on
disposition of equipment
(2)
|
8.2
|
8.2
|
7.5
|
Depreciation and
amortization,
including net gains
on
disposition of equipment
(2)
|
9.3
|
10.3
|
8.9
|
|||||||
|
Goodwill impairment
(3)
|
0.0
|
3.2
|
0.0
|
Goodwill impairment
(3)
|
0.0
|
4.0
|
0.0
|
|||||||
|
Total
operating expenses
|
100.8
|
107.2
|
101.5
|
Total
operating expenses
|
100.9
|
109.1
|
101.8
|
|||||||
|
Operating
loss
|
(0.8)
|
(7.2)
|
(1.5)
|
Operating
loss
|
(0.9)
|
(9.1)
|
(1.8)
|
|||||||
|
Other
expense, net (4)
|
4.3
|
1.4
|
1.6
|
Other
expense, net (4)
|
4.9
|
1.7
|
1.9
|
|||||||
|
Loss
before income taxes
|
(5.1)
|
(8.6)
|
(3.1)
|
Loss
before income taxes
|
(5.8)
|
(10.8)
|
(3.7)
|
|||||||
|
Income
tax benefit
|
(0.9)
|
(1.7)
|
(0.8)
|
Income
tax benefit
|
(1.0)
|
(2.1)
|
(0.9)
|
|||||||
|
Net
loss
|
(4.2)%
|
(6.9)%
|
(2.3)%
|
Net
loss
|
(4.8)%
|
(8.7)%
|
(2.8)%
|
|||||||
|
(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 $68.2 million, $158.1 million, and
$109.9 million in 2009, 2008, and 2007, respectively.
|
|
(2)
|
Includes
a $9.4 million pre-tax impairment charge for held and used equipment and
$6.4 million of pre-tax impairment charges for equipment held for sale in
the year ended December 31, 2008, which together represent 2.0% of total
revenue and 2.6% of freight revenue. Includes a $1.7 million
pre-tax impairment charge for equipment held for sale in the year ended
December 31, 2007. See the discussion below under "Additional
Information Concerning Non-Cash Charges" for a more extensive description
of these impairments.
|
|
(3)
|
Represents
a $24.7 million non-cash impairment charge to write off the goodwill
associated with the acquisition of our Star Transportation
subsidiary. See the discussion below under "Additional
Information Concerning Non-Cash Charges" for a more extensive description
of this impairment.
|
|
(4)
|
Includes
an $11.5 million non-cash loss on the sale of the investment in and note
receivable from Transplace in 2009. See the discussion below
under "Additional Information Concerning Non-Cash Charges" for a more
extensive description of the loss.
|
Comparison
of Year Ended December 31, 2009 to Year Ended December 31, 2008
Total
revenue decreased $185.2 million, or 23.9%, to $588.7 million in 2009,
from $773.9 million in 2008. Freight revenue excludes $68.2
million of fuel surcharge revenue in 2009 and $158.1 million in
2008. Freight revenue (total revenue less fuel surcharges) decreased
$95.3 million, or 15.5%, to $520.5 million in 2009, from
$615.8 million in 2008. For comparison purposes, we use freight
revenue (total revenue less fuel surcharge revenue) when discussing changes as a
percentage of revenue. We believe removing this sometimes volatile
source of revenue affords a more consistent basis for comparing the results of
operations from period to period. As previously discussed, the rate
environment was difficult in 2009, and freight volumes were significantly lower
than 2008 as a result of the overall weak economic environment. The
decreased level of freight revenue was primarily attributable to weak freight
demand, excess tractor and trailer capacity in the truckload industry, and
significant rate pressure from customers and freight brokers. Through
mid-year 2009, we continued to reduce the size of our tractor fleet to achieve
greater utilization of the remaining tractors in our fleet and attempt to
improve profitability. With the assistance of this fleet reduction,
we experienced a 0.7% increase in average miles per tractor versus the 2008
period. Average freight revenue per tractor per week, our primary
measure of asset productivity, decreased 6.0% to $2,920 in 2009, from $3,105 in
2008, while total miles were down 9.3% from 2008. As the economy has
begun to show signs of improvement in 2010, we expect customer demand to
increase at a modest rate in the second half of the year.
Salaries,
wages, and related expenses decreased $47.6 million, or 18.1%, to $216.2 million
in 2009, from $263.8 million in 2008. As a percentage of freight
revenue, salaries, wages, and related expenses decreased to 41.5% in 2009, from
42.8% in 2008. Driver pay decreased $33.7 million to $147.1 million
in 2009, from $180.8 million in the 2008 period. The decrease was
attributable to a 38.4 million reduction in truck miles, a decrease in driver
pay per mile, and an increase in participation in our driver per diem pay
program. Our payroll expense for employees, other than over-the-road
drivers, decreased $6.1 million to $39.4 million from $45.4 million, due to a
reduction in our non-driver work force. Additionally, workers'
compensation and group health costs were $3.1 million and $0.9 million lower,
respectively, in the 2009 period than the 2008 period, primarily as a result of
reduced miles and head count along with favorable development in workers'
compensation claims. If the economy continues to show signs of
recovery, our ability to hold in place prior reductions in salaries and wages
could be limited. Accordingly, these expenses could increase in
absolute terms (and as a percentage of revenue absent an increase in revenue to
offset increased costs).
Fuel
expense, net of fuel surcharge revenue of $68.2 million in 2009 and $158.1
million in 2008, decreased $26.9 million to $75.6 million in 2009, from $102.6
million in 2008. As a percentage of freight revenue, net fuel expense
declined to 14.6% in 2009 from 16.7% in 2008. Lower average fuel
prices in 2009 versus 2008, multiple operating improvements, and the continued
addition of auxiliary power units and more fuel efficient engines improved fuel
efficiency and contributed to these decreases.
During
2009, fuel prices were less volatile than in 2008, contributing to the decrease
in net fuel expense and the related percentage of revenue. After
reaching unprecedented record fuel high fuel prices during most of 2008, diesel
fuel prices started to fall in the fourth quarter of 2008 and continued through
the first quarter of 2009. Significant fluctuations in fuel prices
impact recovery of surcharges because we purchase fuel daily, while the U.S.
Department of Energy ("DOE") index on which the surcharges are based resets
weekly.
The
Company receives a fuel surcharge on its loaded miles from most shippers;
however, this may not cover the entire cost of high fuel prices for several
reasons, including the following: surcharges cover only loaded miles, surcharges
do not cover miles driven out-of-route by our drivers, and surcharges typically
do not cover refrigeration unit fuel usage or fuel burned by tractors while
idling. Additionally, fuel surcharges vary in the percentage of
reimbursement offered, and not all surcharges fully compensate for fuel price
increases even on loaded miles. The rate of fuel price increases and
decreases also can have an impact. Most fuel surcharges are based on
the average fuel price as published by the DOE for the week prior to the
shipment. In times of decreasing fuel prices, the lag time causes
under-recovery. Accordingly, volatility in fuel prices could cause
volatility in our results of operations.
Operations
and maintenance, consisting primarily of vehicle maintenance, repairs, and
driver recruitment expenses, decreased $7.1 million to $35.4 million in 2009,
from $42.5 million in 2008. As a percentage of freight revenue,
operations and maintenance decreased to 6.8% in 2009, from 6.9% in
2008. The decrease resulted from decreased tractor and trailer
maintenance costs, as a result of fewer tractors and less
miles. Additionally, tire expense decreased due to a somewhat newer
average fleet age. Finally, expenses related to tolls and unloading
were less in the 2009 period than the 2008 period, due to the reduction in
miles, and driver recruitment expenses were less as a result of the decreased
demand for drivers. As a percentage of freight revenue, operations
and maintenance remained relatively constant, as this mostly variable cost
tracked our decrease in revenue, and the modest benefit from a somewhat younger
tractor fleet was offset by an older trailer fleet and fixed
costs. With the adverse economic environment in 2009, we had less
difficulty recruiting and retaining drivers. If the economy improves,
we could face more difficulty recruiting and retaining drivers, which could
impact this expense category going forward. Further, the new
Comprehensive Safety Analysis initiative could limit the pool of available
drivers and increase these costs.
Revenue
equipment rentals and purchased transportation decreased $14.5 million, or
15.9%, to $76.5 million in 2009, from $91.0 million in 2008. The
decrease was a result of payments to third-party transportation providers
associated with our Solutions subsidiary, which decreased to $40.0 million in
2009, from $45.3 million in 2008, primarily due to decreased loads and lower
fuel costs passed on to those providers. In addition, we had a $3.8
million reduction in payments to independent contractors, which decreased to
$10.3 million in 2009, from $14.1 million in 2008, mainly due to a decrease in
the size of the independent contractor fleet and the reduction in fuel
surcharges passed through that are a component of the related
expense. Additionally, tractor and trailer equipment rental and other
related expenses decreased to $25.9 million in 2009, compared with $31.2 million
in 2008. We had financed approximately 236 tractors and 5,987
trailers under operating leases at December 31, 2009, compared with 646 tractors
and 5,706 trailers under operating leases at December 31, 2008. As a
percentage of freight revenue, revenue equipment rentals and purchased
transportation expense remained relatively constant at 14.7% in 2009, and 14.8%
in 2008. This expense category will fluctuate with the number of
loads hauled by independent contractors and handled by Solutions and the
percentage of our fleet financed with operating leases, as well as the amount of
fuel surcharge revenue passed through to the independent contractors and
third-party carriers. Because we anticipate adding new equipment over
the next twelve months through on-balance sheet financing, the percentage of our
tractor fleet financed with operating leases is expected to decrease in the near
term. If the economy continues to improve, we may need to increase
the amounts we pay to independent contractors and third-party transportation
providers, which could increase this expense category absent an offsetting
increase in revenue.
Operating
taxes and licenses decreased $1.0 million, or 7.4%, to $12.1 million in 2009,
from $13.1 million in 2008. As a percentage of freight revenue,
operating taxes and licenses increased slightly to 2.3% in the 2009 period, from
2.1% in the 2008 period. This increase as a percentage of freight
revenue resulted from increased costs per tractor as various taxing authorities
increased their rates, as well as lower revenue per tractor, which less
effectively covered this fixed cost.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, decreased
$5.6 million, or 15.0%, to approximately $32.0 million in 2009, from
approximately $37.6 million in 2008. The costs on a per mile basis
were approximately half a cent per mile lower when comparing 2009 to 2008
because of a lower accident rate and slightly higher miles per
tractor. The Company's overall safety performance has improved as our
DOT reportable accidents dropped to the lowest level per million miles since
2001, giving us the best overall safety performance in at least nine years
(based on DOT reportable accidents per million miles). As a
percentage of freight revenue, insurance and claims remained constant at 6.1% in
2009 and 2008 because the decline in average freight revenue per mile offset the
improvements in cost per mile. 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 decreased to $5.7 million in 2009, from $6.7 million in
2008. As a percentage of freight revenue, communications and
utilities remained constant at 1.1% in 2009 and 2008.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, decreased $2.8 million to $23.6 million in 2009, from $26.4
million in 2008. As a percentage of freight revenue, general supplies
and expenses increased slightly to 4.5% in 2009, from 4.3% in
2008. The increase as a percentage of revenue was primarily due to
certain of these costs being fixed in nature, which were less efficiently spread
over a reduced revenue base when comparing the 2009 period to the 2008
period.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
decreased $15.1 million or 23.9%, to $48.1 million in 2009, from $63.2 million
in 2008. As a percentage of freight revenue, depreciation and
amortization decreased to 9.3% in 2009, from 10.3% in 2008. The
decreases were related to a $15.8 million revenue equipment impairment
charge that was recorded in 2008 with no similar charge in 2009. See
"Additional Information Concerning Non-Cash Charges" below for a further
description of impairment charges affecting our operating
results. Additionally, included in depreciation and amortization was
$1.9 million of losses on the sale of property and equipment in 2008, with only
$0.1 million of losses in 2009. Excluding the impairment charge and
the losses on sale of equipment, depreciation and amortization increased $2.5
million in 2009 compared to 2008 as a result of having more owned tractors on
our balance sheet as opposed to leased, as we owned 2,784 and 2,555 tractors at
December 31, 2009 and 2008, respectively. Excluding the impairment
charge and the losses on sale of equipment, as a percentage of revenue,
depreciation and amortization increased to 9.2% in 2009, from 7.5% in 2008, as a
result of lower revenue per tractor, which less effectively covered this fixed
cost. We anticipate purchasing additional equipment through
on-balance sheet financing over the next twelve months, which will likely cause
an increase in depreciation and amortization in the near term.
Goodwill
impairment in 2008 related to the $24.7 million write-off of all goodwill
associated with our 2006 acquisition of Star Transportation, while there was no
similar charge in 2009. This amount was non-cash and non-deductible
for tax purposes. See "Additional Information Concerning Non-Cash
Charges" below for a further description of impairment charges affecting our
operating results.
The other
expense category includes interest expense, interest income, and other
miscellaneous non-operating items. Other expense, net, increased
$14.8 million, to $25.3 million in the 2009 period, from $10.5 million in the
2008 period. The increase is primarily attributable to the loss on
the sale of the investment in and note receivable from Transplace, which
provided for $11.5 million of the increase. The remainder of the
increase is a result of higher interest costs in the 2009 period, compared to
the 2008 period, resulting from a period-over-period increase in debt and the
increase in our average interest rate on our Credit Facility, as amended,
compared to the average interest rates in the 2008 period.
Our
income tax benefit was $5.0 million in 2009 compared to $12.8 million in
2008. 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 partial nondeductible
effect of the per diem payments, our tax rate will fluctuate in future periods
as income fluctuates. Additionally, the loss on the sale of the
investment in Transplace and goodwill impairment in 2009 and 2008, respectively,
were not deductible.
Primarily
as a result of the factors described above, net loss was approximately $25.0
million in 2009, compared with a net loss of $53.4 million in
2008. As a result of the foregoing, our net loss as a percentage of
freight revenue improved to (4.8%) in 2009, from (8.7%) in 2008.
Comparison
of Year Ended December 31, 2008 to Year Ended December 31, 2007
Total
revenue increased $61.4 million, or 8.6%, to $773.9 million in 2008,
from $712.5 million in 2007. Freight revenue excludes $158.1
million of fuel surcharge revenue in 2008 and $109.9 million in
2007. Freight revenue (total revenue less fuel surcharges) increased
$13.2 million, or 2.2%, to $615.8 million in 2008, from
$602.6 million in 2007.
Average
freight revenue per tractor per week increased 0.6% to $3,105 in 2008, from
$3,088 in 2007. The increase was primarily generated by a 0.7%
increase in average miles per tractor. The average miles per tractor
increase was attributable to a 7 percentage point increase in the percentage of
our fleet operated by driver teams (which usually generate higher miles than a
solo-driver truck). The increase in teams offsets deterioration in
miles per truck in our solo fleets. Weighted average tractors
decreased 4.6% to 3,456 in 2008, from 3,623 in 2007.
Salaries,
wages, and related expenses decreased $6.6 million, or 2.5%, to $263.8 million
in 2008, from $270.4 million in 2007. As a percentage of freight
revenue, salaries, wages, and related expenses decreased to 42.8% in 2008 from
44.9% in 2007. Driver pay decreased $7.7 million to $180.8 million in
2008, from $188.5 million in the 2007 period. The decrease was
attributable to lower driver wages as more drivers opted onto our driver per
diem pay program. Our payroll expense for employees, other than
over-the-road drivers, decreased $1.8 million to $45.4 million from $47.2
million, due to a reduction in non-driver work force comparable to the
percentage reduction in tractor fleet. These reductions were
partially offset by an increase in workers' compensation expense related to
unfavorable development of some outstanding claims during 2008, as well as
increases in our group health expenses and additional office salary expense
related to severance payments.
Fuel
expense, net of fuel surcharge revenue of $158.1 million in 2008 and $109.9
million in 2007, increased $1.5 million to $102.6 million in 2008, from $101.1
million in 2007. As a percentage of freight revenue, net fuel expense
was essentially constant at 16.7% in 2008 and 16.8% in 2007. Net fuel
expense was highly volatile during 2008, however, amounting to 19.0% of freight
revenue during the second quarter and dropping to 11.5% of freight revenue in
the fourth quarter. Fuel surcharges amounted to $0.384 per total mile
in 2008, compared to $0.257 per total mile in 2007.
Operations
and maintenance, consisting primarily of vehicle maintenance, repairs, and
driver recruitment expenses, increased $2.0 million to $42.5 million in 2008,
from $40.4 million in 2007. The increase resulted from increased
tractor and trailer maintenance costs, as well as increased tire expense
associated with a somewhat older average fleet age and the associated tire
replacement cycle. As a percentage of freight revenue, operations and
maintenance increased to 6.9% in 2008, from 6.7% in 2007.
Revenue
equipment rentals and purchased transportation increased $24.5 million, or
36.8%, to $91.0 million in 2008, from $66.5 million in 2007. As a
percentage of freight revenue, revenue equipment rentals and purchased
transportation expense increased to 14.8% in 2008, from 11.0% in
2007. These increases were primarily driven by increased payments to
third-party transportation providers associated with Solutions, which increased
to $45.7 million in 2008 from $16.3 million in 2007. This was offset
by a $3.7 million reduction in payments to independent contractors, which
decreased to $14.1 million in 2008, from $17.8 million in 2007, mainly due to a
decrease in the independent contractor fleet and a decrease in tractor and
trailer equipment rental and other related expenses to $31.2 million in 2008
compared with $32.5 million in 2007. We had financed approximately
646 tractors and 5,706 trailers under operating leases at December 31, 2008,
compared with 693 tractors and 6,322 trailers under operating leases at December
31, 2007.
Operating
taxes and licenses decreased $1.0 million, or 7.3%, to $13.1 million in 2008
from $14.1 million in 2007. As a percentage of freight revenue,
operating taxes and licenses remained essentially constant at 2.1% in 2008 and
2.3% in 2007.
Insurance
and claims increased $1.2 million, or 3.3%, to approximately $37.6 million in
2008, from approximately $36.4 million in 2007. As a percentage of
freight revenue, insurance and claims remained essentially constant at 6.1% in
2008 and 6.0% in 2007. During 2008, there was a small number of
severe accidents late in the year that resulted in a negative impact of
approximately $5.4 million. During 2007, there were unfavorable
developments on two prior-period claims that increased our accrual for casualty
claims in 2007 by $5.2 million. The 2007 increase was partially
offset by the receipt of a $1.0 million refund from our insurance carrier
related to achieving certain monetary claim targets for our casualty policy in
the 2007 policy year. The insurance refund in 2008 was approximately
$0.4 million.
Communications
and utilities decreased to $6.7 million in 2008, from $7.4 million in
2007. As a percentage of freight revenue, communications and
utilities remained essentially constant at 1.1% in 2008 and 1.2% in
2007.
General
supplies and expenses increased $3.0 million to $26.4 million in 2008, from
$23.3 million in 2007. As a percentage of freight revenue, general
supplies and expenses increased to 4.3% in 2008, from 3.9% in
2007. The increase was primarily due to increased sales agent
commissions from our growing brokerage subsidiary, which increased $2.5 million
to $3.8 million in 2008, compared to $1.3 million in 2007.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment
increased $9.7 million or 18.1%, to $63.2 million in 2008, from $53.5 million in
2007. As a percentage of freight revenue, depreciation and
amortization increased to 10.3% in 2008, from 8.9% in 2007. The
increase was related to a $15.8 million revenue equipment impairment charge
that was recorded in 2008, as compared to a $1.7 million impairment charge
recorded in 2007. Excluding the impairment charges, depreciation and
amortization decreased $4.4 million in 2008 and, as a percentage of freight
revenue, decreased to 7.7% in 2008, from 8.6% in 2007. These
decreases were primarily the result of our efforts to eliminate excess equipment
and terminals during 2008, and we reduced our fleet by approximately 263
tractors and 390 trailers. Depreciation and amortization expense
includes any gain or loss on the disposal of equipment, which was an
approximately $1.9 million loss in 2008 and a $1.7 million loss in
2007. See "Additional Information Concerning Non-Cash Charges" below
for a further description of impairment charges affecting our operating
results.
Goodwill
impairment in 2008 related to the $24.7 million write-off of all goodwill
associated with our 2006 acquisition of Star Transportation. This
amount is non-cash and non-deductible. See "Additional Information
Concerning Non-Cash Charges" below for a further description of impairment
charges affecting our operating results.
Our
income tax benefit was $12.8 million in 2008 compared to $5.6 million in
2007. We reversed a contingent tax accrual during 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 for 2007.
Primarily
as a result of the factors described above, net income decreased approximately
$36.7 million to a net loss of $53.4 million in 2008, from a net loss of $16.7
million in 2007. As a result of the foregoing, our net loss as a
percentage of freight revenue declined to (8.7%) in 2008, from (2.8%) in
2007.
RESULTS OF SEGMENT
OPERATIONS
We
operate two reportable business segments. Our Asset-Based Truckload
Services ("Truckload") segment consists of Covenant Transport, Inc., SRT, and
Star Transportation. Our Brokerage Services segment consists of
Covenant Transport Solutions, Inc. ("Solutions"). The operation of
each of these businesses is described in our notes to the "Business
Section." Unallocated corporate overhead includes costs that are
incidental to our activities and are not specifically allocated to one of the
segments. The following tables summarize financial and operating data
by segment:
|
Twelve
months ended
December
31,
|
||||||||||||
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Revenues:
|
||||||||||||
|
Asset-Based
Truckload Services
|
$ | 541,325 | $ | 719,220 | $ | 692,722 | ||||||
|
Brokerage
Services
|
47,362 | 54,694 | 19,804 | |||||||||
|
Total
|
$ | 588,687 | $ | 773,914 | $ | 712,526 | ||||||
|
Operating
Income (Loss):
|
||||||||||||
|
Asset-Based
Truckload Services
|
$ | 10,552 | $ | (37,091 | ) | $ | (7,011 | ) | ||||
|
Brokerage
Services
|
155 | 466 | 1,031 | |||||||||
|
Unallocated
Corporate Overhead
|
(15,429 | ) | (19,054 | ) | (4,701 | ) | ||||||
|
Total
|
$ | (4,722 | ) | $ | (55,679 | ) | $ | (10,681 | ) | |||
Comparison
of Year Ended December 31, 2009 to Year Ended December 31, 2008
Our
asset-based truckload services segment revenue decreased 24.7%, to $541.3
million for the twelve-month period ended December 31, 2009, compared to $719.2
million for the comparable period in 2008. Lower fuel prices resulted
in fuel surcharge revenue of $68.2 million in the twelve months ended
December 31, 2009, versus $158.1 million in the 2008 period. The
decrease in freight revenue is related to a decrease in rates and miles as a
result of the weakened economy in 2009. In 2009, management decreased
the fleet size approximately 10% in response to weak
demand. Excluding unallocated corporate overhead, the segment
generated an operating income of $10.6 million for the twelve months ended
December 31, 2009, compared to an operating loss of $37.1 million for the same
2008 period, primarily due to certain non-cash charges in 2008 totaling $40.5
million related to the impairment of certain property and equipment and Star's
goodwill, both of which are discussed in more detail below. Excluding
these charges in 2008, the Truckload segment generated operating income of $3.4
million, representing an increase in operating income in 2009 from 2008, with
the exclusion of the impairments, as a result of lower net fuel expenses and
cost savings initiatives.
Our
brokerage segment revenue decreased 13.4% to $47.3 million for the twelve months
ended December 31, 2009, compared to $54.7 million for the same period in the
prior year. The decreases were primarily attributable to a reduction
in the portion of revenue attributable to fuel surcharges given fuel was at
historic highs throughout much of 2008 and less volume due to the closure of a
large company store in October 2008. Excluding unallocated corporate
overhead, operating income for our brokerage segment was $0.2 million for the
twelve-month period ended December 31, 2009, compared to an operating income of
$0.5 million for the comparable 2008 period. The decreases are a
result of an increase in bad debt expense of $0.3 million from the comparable
2008 period due to several large bankruptcies, an increase in purchased
transportation expense per revenue dollar, and an increase in depreciation
expense of approximately $0.3 million related to accelerating the depreciation
of certain software that will be abandoned in 2010. These increases
were partially off-set by various reductions in selling, general, and
administrative expenses as a result of cost savings initiatives.
Comparison
of Year Ended December 31, 2008 to Year Ended December 31, 2007
Our
asset-based truckload services segment revenue increased 3.9%, to $719.2 million
for the twelve-month period ended December 31, 2008, compared to $692.3 million
for the comparable period in 2007. Higher fuel prices resulted in
fuel surcharge revenue of $158.1 million in the twelve months ended
December 31, 2008, versus $109.9 million in the 2007 period. The
decrease in freight revenue is related to a decrease in rates, total miles, and
fleet size, specifically in the third and fourth quarters, related to the onset
of the recession in 2008. Excluding unallocated corporate overhead,
an operating loss of $37.1 million for the twelve months ended December 31, 2008
compared to operating loss of $7.0 million for the same 2007
period. The fluctuations are primarily due to certain non-cash
charges in 2008 totaling $40.5 million related to the impairment of certain
property and equipment and Star's goodwill and a $1.7 million impairment charge
related to a corporate aircraft in 2007, each of which is discussed in more
detail below. Excluding these charges, the Truckload segment
generated operating income of $3.4 million in 2008 and an operating loss of $5.3
million in 2007. The increase in operating income from 2007 to 2008,
with the exclusion of the impairments, is primarily a result of a $6.6 million
reduction in salaries and wages due to more drivers participating in the per
diem plan and a reduction in our non-driving workforce.
Our
brokerage segment revenue increased 176.3% to $54.7 million for the twelve
months ended December 31, 2008, compared to $19.8 million for the same period in
the prior year, primarily due to an increase in fuel surcharge collection, much
of which is passed on to the third-party carriers, and an increase in brokerage
loads to 27,117 in 2008, from 10,743 loads in 2007. As a result,
average revenue per load increased approximately 9.4% to $2,017 in 2008, from
$1,843 per load in 2007. Excluding unallocated corporate overhead,
operating income for our brokerage segment was $0.5 million for the twelve-month
period ended December 31, 2008, compared to an operating income of $1.0 million
for the comparable 2007 period. The decrease is a result of an
increase in legal expense of $0.8 million related to litigation surrounding the
closure of a large Company store in 2008, partially offset by a more efficient
spreading of fixed costs due to the increase in loads
year-over-year.
Additional Information
Concerning Non-Cash Charges
Transplace
From July
2001 to December 2009, we owned approximately 12.4% of Transplace, Inc.
("Transplace"), a global logistics provider. During the first quarter
of 2005, we loaned Transplace approximately $2.6 million through a 6%
interest-bearing note receivable. After receiving an offer to
purchase our 12.4% equity ownership and related note receivable that was
accepted by a majority of Transplace's shareholders, we determined, pursuant to
the guidance provided by the Financial Accounting Standards Board ("FASB")
Accounting Standards Codification 325, that the value of our equity investment
had become completely impaired in the third quarter of 2009, and the value of
the note receivable had become impaired by approximately $0.9
million. As a result, we recorded a non-cash impairment charge of
$11.6 million during the third quarter of 2009.
The
transaction closed in December 2009, whereby the proceeds of $1.9 million
provided for a recovery of $0.1 million of the previously impaired amount in the
fourth quarter of 2009 and thus an $11.5 million non-cash loss on the sale of
our investment and related note receivable. There was no tax benefit
recorded in connection with the loss on the sale of the investment, given a full
valuation allowance was established for the related capital loss.
Goodwill
In light
of changes in market conditions and the related declining market outlook for the
Star Transportation operating subsidiary, which is included in our Truckload
segment, noted in the fourth quarter of 2008, we engaged an independent third
party to assist us in the completion of valuations used in the impairment
testing process. The completion of this work concluded that the
goodwill previously recorded for the Star acquisition was fully impaired and
resulted in a $24.7 million, or $1.75 per basic and diluted share, non-cash
goodwill impairment charge, recorded in the fourth quarter of
2008. There was no tax benefit associated with this nondeductible
charge. Pursuant to applicable accounting standards, we conducted our
2009 annual impairment test for goodwill in the second quarter and did not
identify any impairment.
Revenue
Equipment, including Assets Held For Sale
As a
result of sharply lower economic indicators, a worsening credit market, and
significantly lower prices received for disposals of our owned used revenue
equipment, all of which deteriorated substantially during the fourth quarter of
2008, we recorded a $9.4 million asset impairment charge to write-down the
carrying values of tractors and trailers in-use in our Truckload segment which
were expected to be traded or sold in 2009 or 2010. The carrying
values for revenue equipment scheduled for trade in 2011 and beyond were not
adjusted because those tractors and trailers were not required to be impaired
based on recoverability testing using the expected future cash flows and
disposition values of such equipment.
Similarly,
we recorded a $6.4 million asset impairment charge ($1.2 million was recorded in
the third quarter and $5.2 million was recorded in the fourth quarter) to write
down the carrying values of tractors and trailers held for sale in our Truckload
segment, which were expected to be traded or sold in future
periods.
Although
we do not expect to be required to make any current or future cash expenditures
as a result of these impairment charges, cash proceeds of future disposals of
revenue equipment are anticipated to be lower than expected prior to the
impairment charges.
Our
evaluation of the future cash flows compared to the carrying value of the
tractors and trailers in-use in 2009 has not resulted in any additional
impairment charges. Additionally, there were no indicators triggering
an evaluation for impairment of assets held for sale during the 2009 period, as
evidenced by our minimal gains and losses on the disposal of revenue equipment,
including assets held for sale.
Aircraft
In
addition, our 2007 asset impairment charge was related 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.
LIQUIDITY
AND CAPITAL RESOURCES
Our
business requires significant capital investments over the short-term and the
long-term. Recently, we have financed our capital requirements with
borrowings under our Credit Facility, cash flows from operations, long-term
operating leases, capital leases, and secured installment notes with finance
companies. Our primary sources of liquidity at December 31, 2009,
were funds provided by operations, proceeds from the sale of used revenue
equipment, borrowings under our Credit Facility, borrowings from secured
installment notes, capital leases, operating leases of revenue equipment, and
cash and cash equivalents. We had a working capital (total current
assets less total current liabilities) deficit of $17.8 million at December 31,
2009, and a working capital surplus of $16.3 million at December 31,
2008. Working capital deficits are common to many trucking companies
that expand by financing revenue equipment purchases through borrowing or
capitalized leases. When we finance revenue equipment through
borrowing or capitalized leases, the principal amortization scheduled for the
next twelve months is categorized as a current liability, although the revenue
equipment is classified as a long-term asset. Consequently, each
purchase of revenue equipment financed with borrowing or capitalized leases
decreases working capital. We believe our working capital deficit had
little impact on our liquidity. Based on our expected financial
condition, results of operations, net capital expenditures, a material refund of
previously paid federal income taxes as a result of net operating loss carry
backs pursuant to the Worker, Homeownership, and Business Assistance Act of
2009, and net cash flows during the next twelve months, which contemplate an
improvement compared with the past twelve months, we believe our working capital
and 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 our anticipated financial condition, results of operations, and cash
flows, and continued availability of our Credit Facility, secured installment
notes, and other sources of financing that we expect will be available to us, we
do not expect to experience material liquidity constraints in the foreseeable
future.
The
Company has had significant losses from 2007 through 2009, attributable to
operations, impairments, and other charges. The Company has managed
its liquidity during this time through a series of cost reduction initiatives,
refinancing, amendments to credit facilities, and sales of assets. We
have had difficulty meeting budgeted results in the past. If we are
unable to meet budgeted results or otherwise comply with our Credit Facility, we
may be unable to obtain a further amendment or waiver under our Credit Facility,
or we may incur additional fees.
Cash
Flows
Net cash
provided by operating activities was $30.9 million in 2009 and $40.3 million in
2008. Excluding the effects of $40.4 million in non-cash charges in
2008 and $11.5 million in 2009, our cash from operating activities was lower in
2009 primarily due to an $11.5 million net change from 2009 to 2008 related to
cash payments for insurance and claims accruals resulting from the payment of a
large volume of claims in 2009, including several large
claims. Additionally, as a result of an increase in our acquisition
of revenue equipment using balance sheet debt as opposed to operating leases,
accelerated depreciation for tax purposes provided for an increase in the
deferred tax provision, which resulted in an $8.7 million adjustment to net loss
for the related non-cash activity in 2009 versus $2.5 million in the
corresponding 2008 period. The decrease in our cash from operating
activities was partially offset by an increase in our collections of
receivables, primarily resulting from the impact of fuel prices on revenue and
accounts receivable, which resulted in a $2.9 million increase in cash from
operating activities in 2009.
Net cash
used in investing activities was $63.0 million in 2009 and $62.6 million in
2008. In 2009, gross capital expenditures increased approximately $24
million, consistent with proceeds from dispositions. The increase in
gross capital expenditures was primarily due to increasing our percentage of
owned tractors and reducing tractors under operating leases.
Net cash
provided by financing activities was $38.0 million in 2009, compared to $24.1
million provided by financing activities in 2008. The primary
contributors to the differences in our net cash provided by financing activities
and net borrowings in the 2009 period, as compared to the 2008 period, were the
purchase of additional tractors in 2009 using balance sheet debt as opposed to
operating leases and fluctuations in checks outstanding in excess of bank
balances resulting from the timing of certain payments, partially off-set by
lower debt refinancing costs given the Company's new credit facilities in
2008.
We had 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 2009, which expired on June 30, 2009. However, we remitted
approximately $0.1 million to the proper taxing authorities in satisfaction of
the employees' minimum statutory withholding requirements related to employees'
vesting in restricted share grants. The tax withholding amounts paid
by the Company have been accounted for as a repurchase of shares. Our
Credit Facility now prohibits the repurchase of any shares, except those
purchased to off-set an employee's minimum statutory withholding requirements
upon the vesting of equity awards, without obtaining approval from the
lenders.
In
September 2008, the Company and substantially all its subsidiaries entered into
a Third Amended and Restated Credit Facility with Bank of America, N.A., as
agent (the "Agent"), JPMorgan Chase Bank, N.A. ("JPM"), and Textron Financial
Corporation (collectively with the Agent and JPM, the "Lenders") that matures
September 2011 (the "Credit Facility").
The
Credit Facility is structured as an $85.0 million revolving credit facility,
with an accordion feature that, so long as no event of default exists, allows
the Company to request an increase in the revolving credit facility of up to
$50.0 million. The Credit Facility includes, within its $85.0 million
revolving credit facility, a letter of credit sub facility in an aggregate
amount of $85.0 million and a swing line sub facility in an aggregate amount
equal to the greater of $10.0 million or 10% of the Lenders' aggregate
commitments under the Credit Facility from time to time.
Borrowings
under the Credit Facility are classified as either "base rate loans" or "LIBOR
loans." Base rate loans accrue interest at a base rate equal to the
greater of the prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%,
plus an applicable margin that is adjusted quarterly between 2.5% and 3.25%
based on average pricing availability. LIBOR loans accrue interest at
the greater of 1.5% or LIBOR, plus an applicable margin that is adjusted
quarterly between 3.5% and 4.25% based on average pricing
availability. The unused line fee is adjusted quarterly between 0.5%
and 0.75% of the average daily amount by which the Lenders' aggregate revolving
commitments under the Credit Facility exceed the outstanding principal amount of
revolver loans and the aggregate undrawn amount of all outstanding letters of
credit issued under the Credit Facility. The obligations under the
Credit Facility are guaranteed by the Company and secured by a pledge of
substantially all of the Company's assets, with the notable exclusion of any
real estate or revenue equipment pledged under other financing agreements,
including revenue equipment installment notes and capital leases.
Borrowings
under the Credit Facility are subject to a borrowing base limited to the lesser
of (A) $85.0 million, minus the sum of the stated amount of all outstanding
letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable,
plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value
of eligible revenue equipment, (b) 95% of the net book value of eligible revenue
equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the
Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the
appraised fair market value of eligible real estate. The borrowing
base is limited by a $15.0 million availability block, plus any other reserves
the Agent may establish in its judgment. The Company had
approximately $12.7 million in borrowings outstanding under the Credit Facility
as of December 31, 2009, undrawn letters of credit outstanding of approximately
$42.0 million, and available borrowing capacity of $27.7 million. The
weighted average interest rate on outstanding borrowings was 6.25%.
On March
27, 2009, the Company obtained an amendment to its Credit Facility, which among
other things, (i) retroactively to January 1, 2009 amended the fixed charge
coverage ratio covenant for January and February 2009 to the actual levels
achieved, which cured our default of that covenant for January 2009, (ii)
restarted the look back requirements of the fixed charge coverage ratio covenant
beginning on March 1, 2009, (iii) increased the EBITDAR portion of the fixed
charge coverage ratio definition by $3.0 million for all periods between March 1
to December 31, 2009, (iv) increased the base rate applicable to base rate loans
to the greater of the prime rate, the federal funds rate plus 0.5%, or LIBOR
plus 1.0%, (v) sets a LIBOR floor of 1.5%, (vi) increased the applicable margin
for base rate loans to a range between 2.5% and 3.25 % and for LIBOR loans to a
range between 3.5% and 4.25%, with 3.0% (for base rate loans) and 4.0% (for
LIBOR loans) to be used as the applicable margin through September 2009, (vii)
increased the Company's letter of credit facility fee by an amount corresponding
to the increase in the applicable margin, (vii) increased the unused line fee to
a range between 0.5% and 0.75% , and (ix) increased the maximum number of field
examinations per year from three to four. In exchange for these
amendments, the Company agreed to the increases in interest rates and fees
described above and paid fees of approximately $0.5 million.
The
Credit Facility includes usual and customary events of default for a facility of
this nature and provides that, upon the occurrence and continuation of an event
of default, payment of all amounts payable under the Credit Facility may be
accelerated, and the Lenders' commitments may be terminated. The
Credit Facility contains certain restrictions and covenants relating to, among
other things, dividends, liens, acquisitions and dispositions outside of the
ordinary course of business, and affiliate transactions. The Credit
Facility contains a single financial covenant, which required the Company to
maintain a consolidated fixed charge coverage ratio of at least 1.0 to
1.0. The fixed charge coverage covenant became effective October 31,
2008, and the Company was in compliance with the covenant as of December 31,
2009.
On
February 25, 2010, the Company obtained an additional amendment to its Credit
Facility, which, among other things (i) amended certain defined terms in the
Credit Facility, (ii) retroactively to January 1, 2010, amended the fixed charge
coverage ratio covenant through June 30, 2010, to the levels set forth in the
table below, which prevented a default of that covenant for January 2010, (iii)
restarted the look back requirements of the fixed coverage ratio covenant
beginning on January 1, 2010, and (iv) required the Company to order updated
appraisals for certain real estate described in the Credit
Facility. In exchange for these amendments, we agreed to pay the
Agent, for the pro rata benefit of the Lenders, a fee equal to 0.125% of the
Lenders' total commitments under the Credit Facility, or approximately $0.1
million. Following the effectiveness of the amendment, our fixed
charge coverage ratio covenant requirement will be as follows:
|
One
month ending January 31, 2010
|
.80
to 1.00
|
|
Two
months ending February 28, 2010
|
.65
to 1.00
|
|
Three
months ending March 31, 2010
|
.72
to 1.00
|
|
Four
months ending April 30, 2010
|
.80
to 1.00
|
|
Five
months ending May 31, 2010
|
.85
to 1.00
|
|
Six
months ending June 30, 2010
|
.90
to 1.00
|
|
Seven
months ending July 31, 2010
|
1.00
to 1.00
|
|
Eight
months ending August 31, 2010
|
1.00
to 1.00
|
|
Nine
months ending September 30, 2010
|
1.00
to 1.00
|
|
Ten
months ending October 31, 2010
|
1.00
to 1.00
|
|
Eleven
months ending November 30, 2010
|
1.00
to 1.00
|
|
Twelve
months ending December 31, 2010
|
1.00
to 1.00
|
|
Each
rolling twelve-month period thereafter
|
1.00
to 1.00
|
Capital
lease obligations are utilized to finance a portion of our revenue equipment and
are entered into with certain finance companies who are not parties to our
Credit Facility. The leases terminate in January 2015 and contain
guarantees of the residual value of the related equipment by the Company, and
the residual guarantees are included in the related debt balance as a balloon
payment at the end of the related term as well as included in the future minimum
lease payments. These lease agreements require us to pay personal
property taxes, maintenance, and operating expenses.
Pricing
for the revenue equipment installment notes are quoted by the respective
financial captives of our primary revenue equipment suppliers at the funding of
each group of equipment acquired and include fixed annual rates for new
equipment under retail installment contracts. Approximately $185.6
million and $159.8 million were reflected on our balance sheet for these
installment notes at December 31, 2009 and 2008, respectively. The
notes included in the funding are due in monthly installments with final
maturities at various dates ranging from January 2010 to June
2013. The notes contain certain requirements regarding payment,
insurance of collateral, and other matters, but do not have any financial or
other material covenants or events of default. Additional borrowings
from the financial captives of our primary revenue equipment suppliers are
available to fund new tractors expected to be delivered in 2010.
Contractual
Obligations and Commercial Commitments (1)
The
following table sets forth our contractual cash obligations and commitments as
of December 31, 2009:
|
Payments
due by period:
(in
thousands)
|
Total
|
2010
|
2011
|
2012
|
2013
|
2014
|
There-after
|
|||||||||||||||||||||
|
Credit
Facility, including
interest
(2)
|
$ | 12,686 | - | $ | 12,686 | - | - | - | - | |||||||||||||||||||
|
Revenue
equipment and property
installment
notes, including
interest
(3)
|
$ | 207,837 | $ | 77,176 | $ | 59,409 | $ | 67,450 | $ | 3,802 | - | - | ||||||||||||||||
|
Operating
leases (4)
|
$ | 81,989 | $ | 22,898 | $ | 9,650 | $ | 7,668 | $ | 5,358 | $ | 3,216 | $ | 33,199 | ||||||||||||||
|
Capital
leases (5)
|
$ | 18,052 | $ | 2,177 | $ | 2,177 | $ | 2,177 | $ | 2,177 | $ | 8,064 | $ | 1,280 | ||||||||||||||
|
Lease
residual value guarantees
|
$ | 23,594 | $ | 12,714 | $ | 10,880 | - | - | - | - | ||||||||||||||||||
|
Purchase
obligations (6)
|
$ | 98,014 | $ | 97,607 | $ | 407 | - | - | - | - | ||||||||||||||||||
|
Total
contractual cash
obligations
|
$ | 442,172 | $ | 212,572 | $ | 95,209 | $ | 77,295 | $ | 11,337 | $ | 11,280 | $ | 34,479 | ||||||||||||||
|
(1)
|
Excludes
any amounts accrued for unrecognized tax benefits 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, 2009. The
borrowings consist of draws under the Company's Credit Facility, 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, 2009, was utilized. The table assumes
long-term debt is held to maturity. Refer to Note 8, "Debt" of
the accompanying consolidated financial statements for further
information.
|
|
(3)
|
Represents
principal and interest payments owed at December 31, 2009. The
borrowings consist of installment notes with finance companies, with fixed
borrowing amounts and fixed interest rates. The table assumes
these installment notes are held to maturity. Refer to Note 8,
"Debt" of the accompanying consolidated financial statements for further
information.
|
|
(4)
|
Represents
future monthly rental payment obligations under operating leases for
tractors, 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. These
leases generally run for a period of three to five years for tractors and
five to seven years for trailers. Refer to Note 9, "Leases" of
the accompanying consolidated financial statements for further
information.
|
|
(5)
|
Represents
principal and interest payments owed at December 31, 2009. The
borrowings consist of capital leases with a finance company, with fixed
borrowing amounts and fixed interest rates. Borrowings in 2014
and thereafter include the residual value guarantees on the related
equipment as balloon payments. Refer to Note 8, "Debt" of the
accompanying consolidated financial statements for further
information.
|
|
(6)
|
Represents
purchase obligations for revenue equipment and communications equipment
totaling approximately $97.2 million in 2010. These commitments
are cancelable, subject to certain adjustments in the underlying
obligations and benefits. The Company also had commitments
outstanding at December 31, 2009, to acquire computer software totaling
$0.4 million in 2010 and 2011. These purchase commitments are
expected to be financed by operating leases, capital leases, long-term
debt, proceeds from sales of existing equipment, and/or cash flows from
operations. Refer to Notes 8 and 9, “Debt” and "Leases",
respectively, of the accompanying consolidated financial statements for
further information
|
Off
Balance Sheet Arrangements
Operating
leases have been an important source of financing for our revenue equipment,
computer equipment, and certain real estate. At December 31, 2009, we
had financed approximately 236 tractors and 5,987 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 $25.9 million in 2009, compared to $31.2 million in
2008. The total amount of remaining payments under operating leases
as of December 31, 2009, was approximately $81.9 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, 2009, the maximum amount of the
residual value guarantees was approximately $23.6 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 generated by our Truckload
reportable segment 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.
Revenue
generated by our Solutions reportable segment is recognized upon completion of
the services provided. Revenue is recorded on a gross basis, without
deducting third party purchased transportation costs, as we act as a principal
with substantial risks as primary obligor, except for transactions whereby
equipment from our Truckload segment perform the related services, which we
record on a net basis in accordance with the related authoritative
guidance.
Depreciation
of Revenue Equipment
Depreciation
is determined using the straight-line method over the estimated useful lives of
the assets. 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 5% to 31% and new trailers over seven
to ten years to salvage values of 26% to 43%. 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.
The
Company leases certain revenue equipment under capital leases with terms of 60
months. Amortization of leased assets is included in depreciation and
amortization expense.
Pursuant
to applicable accounting standards, 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.
Although
a portion of our tractors are protected by non-binding indicative trade-in
values or binding trade-back agreements with the manufacturers, we continue to
have some tractors and substantially all of our trailers subject to fluctuations
in market prices for used revenue equipment. Moreover, our trade-back
agreements are contingent upon reaching acceptable terms for the purchase of new
equipment. Further declines in the price of used revenue equipment or
failure to reach agreement for the purchase of new tractors with the
manufacturers issuing trade-back agreements could result in impairment of, or
losses on the sale of, revenue equipment.
Assets
Held For Sale
Assets
held for sale include property and revenue equipment no longer utilized in
continuing operations which are 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 the
majority of these assets within twelve months.
Goodwill
and Other Intangible Assets
Pursuant
to applicable accounting standards, we classify intangible assets into two
categories: (i) intangible assets with definite lives subject to amortization
and (ii) goodwill. We test intangible assets with definite lives for
impairment if conditions exist that indicate the carrying value may not be
recoverable. Such conditions may include an economic downturn in a
geographic market or a change in the assessment of future
operations. We record an impairment charge when the carrying value of
the definite lived intangible asset is not recoverable by the cash flows
generated from the use of the asset.
We test
goodwill for impairment at least annually or more frequently if events or
circumstances indicate that such intangible assets or goodwill might be
impaired. We perform our impairment tests of goodwill at the
reporting unit level. The Company's reporting units are defined as
its subsidiaries because each is a legal entity that is managed
separately. Such impairment tests for goodwill include comparing the
fair value of the respective reporting unit with its carrying value, including
goodwill. We use a variety of methodologies in conducting these
impairment tests, including discounted cash flow analyses and market
analyses.
We
determine the useful lives of our identifiable intangible assets after
considering the specific facts and circumstances related to each intangible
asset. Factors we consider when determining useful lives include the
contractual term of any agreement, the history of the asset, the Company's
long-term strategy for the use of the asset, any laws or other local regulations
which could impact the useful life of the asset, and other economic factors,
including competition and specific market conditions. Intangible
assets that are deemed to have definite lives are amortized, generally on a
straight-line basis, over their useful lives, ranging from 4 to 20
years.
Accounting
for Transplace
From July
2001 through December 2009, we owned approximately 12.4% of
Transplace. In the formation transaction for Transplace, we
contributed our logistics customer list, logistics business software and
software licenses, certain intellectual property, intangible assets, and $5.0
million in cash, in exchange for our ownership. We accounted for this
investment, which totaled approximately $10.7 million, using the cost method of
accounting, and it was historically included in other assets in the consolidated
balance sheet. Also, during the first quarter of 2005, we loaned
Transplace approximately $2.6 million, which along with the related accrued
interest was historically included in other receivables in the consolidated
balance sheet.
Based on
an offer to purchase our 12.4% equity ownership and related note receivable in
Transplace that was accepted by a majority of Transplace's shareholders, we
determined that pursuant to the guidance provided by FASB Accounting Standards
Codification 325, the value of our equity investment had become completely
impaired in the third quarter of 2009, and the value of the note receivable had
become impaired by approximately $0.9 million. As a result, we
recorded a non-cash impairment charge of $11.6 million during the third quarter
of 2009.
The
transaction closed in December 2009, whereby the proceeds of $1.9 million
provided for a recovery of $0.1 million of the previously impaired amount in the
fourth quarter of 2009 and thus an $11.5 million non-cash loss on the sale of
our investment and related note receivable. There was no tax benefit
recorded in connection with the loss on the sale of the investment, given a full
valuation allowance was established for the related capital loss.
Insurance
and Other 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 risk retention levels. Because of the Company's significant
self-insured retention amounts, it has 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. 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 was 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. 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.
In
general for casualty claims, we currently have insurance coverage up to $50.0
million per claim. We are self-insured on an occurrence/per claim
basis for personal injury and property damage claims for amounts up to the first
$4.0 million, except for Star where we currently have insurance coverage up to
$2.0 million per claim after the first $0.3 million for which we are
self-insured. We are self-insured on an occurrence/per claim basis for workers'
compensation up to the first $1.25 million. The Company is completely
self-insured for physical damage to its own tractors and trailers and is
generally completely self-insured for damages to the cargo we
haul. The Company also maintains a self-insured group medical plan
for its employees with annual per individual claimant stop-loss deductible of
$0.4 million with a maximum lifetime benefit of $0.7 million.
Insurance
and claims expense varies based on the frequency and severity of claims, the
premium expense, 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.
Lease
Accounting and Off-Balance Sheet Transactions
The
Company issues residual value guarantees in connection with the operating leases
it enters into for certain of 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.
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.
Deferred
income taxes represent a substantial liability on our consolidated balance
sheets and are determined in accordance with applicable accounting
standards. 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 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
taxable income and tax planning strategies available to the Company, no
valuation allowance has been established at December 31, 2009, except for $0.3
million related to certain state net operating loss carryforwards and $1.6
million related to the deferred tax asset associated with the Company's capital
loss generated by the loss on the sale of its investment in
Transplace. These valuation allowances were established because the
Company believes that it is more likely than not that certain state net
operating loss carryforwards and the capital loss carryforward related to
Transplace will not be realized. If these estimates and related
assumptions change in the future, it may be required to modify its valuation
allowance against the carrying value of the deferred tax assets.
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.
Stock-Based
Employee Compensation
The
Company issues several types of share-based compensation, including awards that
vest based on service, market, and performance conditions or a combination of
the conditions. Performance-based awards vest contingent upon meeting
certain performance criteria established by the Compensation
Committee. Market-based awards vest contingent upon meeting certain
stock price targets selected by the Compensation Committee. All
awards require future service and thus forfeitures are estimated based on
historical forfeitures and the remaining term until the related award
vests. Determining the appropriate amount to expense in each period
is based on likelihood and timing of achieving of the stated targets for
performance and market based awards, respectively, and requires judgment,
including forecasting future financial results and market
performance. The estimates are revised periodically based on the
probability and timing of achieving the required performance and market targets,
respectively, and adjustments are made as appropriate. Awards that
are only subject to time vesting provisions are amortized using the
straight-line method.
Recent
Accounting Pronouncements
Improving Disclosures About Fair
Value Measurements –
In January 2010, the FASB issued authoritative
guidance to clarify certain existing disclosure requirements and require
additional disclosures for recurring and nonrecurring fair value
measurements. These additional disclosures include amounts and
reasons for significant transfers between Level 1 and Level 2 of the fair value
hierarchy; significant transfers in and out of Level 3 of the fair value
hierarchy; and information about purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of recurring Level 3
measurements. Further, the guidance amends employer's disclosures
about post-retirement benefit plans to require that disclosures be provided by
classes of assets instead of by major categories of assets. The
requirements of this guidance are effective for periods beginning after December
15, 2009, with the exception of the requirement of information about purchases,
sales, issuances, and settlements of Level 3 measurements, which becomes
effective for periods ending after December 15, 2010. The Company
does not expect the adoption of this guidance to have a material impact on its
consolidated financial statements.
Accounting Standards
Codification
- In June 2009, the FASB issued authoritative guidance which
establishes the FASB Accounting Standards Codification as the single source of
authoritative U.S. generally accepted accounting principles recognized by the
FASB to be applied by nongovernmental entities. The FASB Accounting
Standards Codification is effective for interim and annual periods ending after
September 15, 2009. The adoption of the FASB Accounting
Standards Codification did not have a material effect on the Company's
consolidated financial statements.
Fair Value Measurement of
Liabilities
- In August 2009, the FASB issued authoritative guidance
which provides clarification regarding the required techniques for the fair
value measurement of liabilities. This update applies to all entities
that measure liabilities at fair value, and is effective for the first interim
or annual reporting period beginning after its issuance in August
2009. The Company does not expect the adoption of this guidance to
have a material effect on its consolidated financial statements.
Transfers of Financial Assets
- In June 2009, the FASB issued authoritative guidance which requires entities
to provide more information regarding sales of securitized financial assets and
similar transactions, particularly if the seller retains some risk with respect
to the assets. This authoritative guidance is effective for fiscal
years beginning after November 15, 2009. The Company does not
expect the adoption of this guidance to have a material effect on its
consolidated financial statements.
Variable Interest Entities
-
In June 2009, the FASB issued authoritative guidance designed to improve
financial reporting by companies involved with variable interest entities and to
provide more relevant and reliable information to users of financial
statements. This authoritative guidance is effective for fiscal years
beginning after November 15, 2009. The Company does not expect
the adoption of this guidance to have a material effect on its consolidated
financial statements.
Subsequent Events
- In May
2009, the FASB issued authoritative guidance that established general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. This authoritative guidance was effective for interim or
annual financial periods ending after June 15, 2009. The
adoption of this guidance did not affect the Company's consolidated financial
statements.
Interim Disclosures about Fair Value
of Financial Instruments
- In April 2009, the FASB issued authoritative
guidance to require disclosures about fair values of financial instruments for
interim reporting periods as well as in annual financial
statements. The guidance also amends previous guidance to require
those disclosures in summarized financial information at interim reporting
periods. This guidance was effective for interim reporting periods
ending after June 15, 2009. The adoption of this guidance did
not affect the Company's consolidated financial statements.
Disclosures about Derivative
Instruments and Hedging Activities
- In March 2008, the FASB issued
authoritative guidance which amends and expands the previous disclosure
requirements, to provide an enhanced understanding of an entity's use of
derivative instruments, how they are accounted for, and their effect on the
entity's financial position, financial performance, and cash
flows. The Company adopted the guidance as of the beginning of the
2009 fiscal year and its adoption did not have a material impact to the
Company's consolidated financial statements.
Business Combinations
- In
December 2007, the FASB issued authoritative guidance that 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 the guidance 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 adopted the guidance as of the beginning of the
2009 fiscal year and its adoption did not have a material impact to the
Company's consolidated financial statements.
Noncontrolling Interests in
Consolidated Financial Statements
- In December 2007, the FASB issued
authoritative guidance that modified accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The provisions of the guidance are effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company adopted the guidance as of the
beginning of the 2009 fiscal year and its adoption did not have a material
impact to the Company's consolidated financial statements.
Fair Value Measurements
- In
September 2006, the FASB issued authoritative guidance which provides guidance
on how to measure assets and liabilities at fair value. The guidance
applies whenever another U.S. GAAP standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also requires
additional disclosures in both annual and quarterly reports. Portions
of the guidance were effective for financial statements issued for fiscal years
beginning after November 15, 2007, and the Company began applying those
provisions effective January 1, 2008. The adoption of the guidance
did not have a significant impact on the Company's consolidated financial
statements.
In
February 2008, the FASB amended the scope of the original guidance to exclude
accounting for leases, and other accounting standards that address fair value
measurements for purposes of lease classification or measurement. The
scope of this exception does not apply to assets acquired and liabilities
assumed in a business combination that are required to be measured at fair
value. Also, in February 2008, the FASB delayed the effective date of
the aforementioned fair value guidance one year for all nonfinancial assets and
nonfinancial liabilities, except those recognized at fair value in the financial
statements on a recurring basis. The Company adopted the remaining
provisions as of January 1, 2009. The adoption of the guidance did
not have a significant impact on the Company's consolidated financial
statements.
Uncertain Tax Positions
- In
June 2006, the FASB issued guidance for accounting for uncertainty in income
taxes, which established a single model to address accounting for uncertain tax
positions. The Company was required to adopt the provisions of the
new guidance, 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.
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 fuel prices. New emissions control regulations and increases in
commodity prices, wages of manufacturing workers, and other items have resulted
in higher tractor prices. The cost of fuel also has risen
substantially over the past three years, though prices have eased over the last
six months. Although we believe at least some of this increase
primarily reflects world events rather than underlying inflationary pressure, we
have attempted to limit the effects of inflation through certain cost control
efforts and limiting 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, 2009, 82% of
our tractor fleet has engines compliant with stricter regulations regarding
emissions that became effective in 2007. 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 may be forced to make cash payments under the
hedging arrangements. The Company did not enter into any derivatives
until the third quarter of 2009. As of December 31, 2009, we entered
into forward futures swap contracts, which pertain to 2.5 million gallons
or approximately 4% percent of our projected January through December 2010 fuel
requirements. Under these contracts, we pay a fixed rate per gallon
of heating oil and receive the monthly average price of New York heating
oil. 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 excluding charges. 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.
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
The
Company is subject to risks associated with the availability and price of fuel,
which are subject to political, economic, and market factors that are outside of
the Company's control. We also may be adversely affected by the
timing and degree of fluctuations in fuel prices. The Company's
fuel-surcharge program mitigates the effect of rising fuel prices but does not
always result in fully recovering the increase in its cost of
fuel. In part, this is due to fuel costs that cannot be billed to
customers, including costs such as those incurred in connection with empty and
out-of-route miles or when engines are being idled during cold or warm weather
and due to fluctuations in the price of fuel between the fuel surcharge's
benchmark index reset.
The
Company did not enter into any derivatives until the third quarter of 2009;
however, in September 2009 we entered into forward futures swap contracts, which
pertain to 2.5 million gallons or approximately 4% percent of our projected
January through December 2010 fuel requirements. Under these
contracts, we pay a fixed rate per gallon of heating oil and receive the monthly
average price of New York heating oil. Given that the forward futures
swap contracts are not significant, a one dollar change in the related price of
heating oil or diesel would not have a material impact on the Company's results
of operations.
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 raise. Of our total $215.0 million of debt,
we had $15.9 million of variable rate debt outstanding at December 31,
2009, including both our Credit Facility and a real-estate note. The
interest rates applicable to these agreements are based on either the prime rate
or LIBOR. Our earnings would be affected by changes in these
short-term interest rates. Risk can be quantified by measuring the
financial impact of a near-term adverse increase in short-term interest
rates. At our current level of borrowing, a 1% increase in our
applicable rate would reduce annual pretax earnings by approximately $0.2
million. Our remaining debt is effectively fixed rate debt, and
therefore changes in market interest rates do not directly impact our interest
expense.
The
consolidated financial statements of Covenant Transportation Group, Inc. and
subsidiaries, as of December 31, 2009 and 2008, and the related consolidated
balance sheets, statements of operations, statements of stockholders' equity and
comprehensive loss, and statements of cash flows for each of the years in the
three-year period ended December 31, 2009, together with the related notes, and
the report of KPMG LLP, our independent registered public accounting firm for
the years ended December 31, 2009, 2008, and 2007 are set forth at pages 47
through 73 elsewhere in this report.
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, 2009, our Chief Executive Officer and Chief
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:
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•
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pertain
to the maintenance of records, that in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
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•
|
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
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•
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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.
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We have
confidence in our internal controls and procedures. Nevertheless, our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure procedures and controls or our internal
controls will prevent all errors or intentional fraud. An internal
control system, no matter how well-conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of such internal
controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in all internal control systems, no evaluation of controls
can provide absolute assurance that all our control issues and instances of
fraud, if any, have been detected.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009. 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, 2009, our internal
control over financial reporting is effective based on those
criteria.
Attestation
Report of Independent Registered Public Accounting Firm
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the
company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management's report in this annual report.
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,
2009, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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Item
5.02
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Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers
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On March
24, 2010, the Compensation Committee of the Board of Directors (the "Committee")
of the Company approved revised performance-based bonus opportunities for the
Company's senior management group (the "Program") under the Company's 2006
Omnibus Incentive Plan, as amended (the "Plan").
On
September 14, 2009, the Committee previously approved consolidated operating
income and operating ratio targets for the Program based upon a preliminary
consolidated budget for 2010. The Company's 2010 consolidated budget
was finalized and the Committee reset the operating income and operating ratio
targets to more difficult levels to achieve based upon the final
budget. Under the Program and consistent with the objectives of the
Plan, certain employees, including the Company's named executive officers, may
receive bonuses upon satisfaction of the revised consolidated operating income
and operating ratio targets and the satisfaction of operating income and
operating ratio targets established for the Company's subsidiaries (together,
the "Performance Targets"), as applicable. Each applicable
Performance Target corresponds to a percentage bonus opportunity for the
employee that is multiplied by the employee's base salary to determine the
employee's bonus. Pursuant to the Program, the performance-based
bonus opportunities for David Parker, Joey Hogan, and Richard Cribbs, as named
executive officers, will remain the same as previously reported, except that
their bonus opportunities depend on the achievement of the revised consolidated
Performance Targets. The Company also finalized subsidiary budgets
and the Committee approved the performance-based bonus opportunities for Tony
Smith and James Brower, two of the Company's named executive
officers. Messrs. Smith and Brower may receive between 10% and 15% of
their respective base salary based on the revised Performance Targets achieved
for the consolidated group, if any, and between 40% and 60% of their base salary
based on Performance Targets achieved for the Company's subsidiaries, SRT and
Star, respectively, if any.
On March
24, 2010, the Committee also clarified that the number of restricted shares of
the Company's Class A common stock granted as part of the January 12, 2010,
incentive opportunity previously described in the Company's report on Form 8-K
filed with the Commission on January 15, 2010, was based on the closing price of
the Company's Class A common stock on the date the blackout period lifted
following the release of the Company's 2009 year-end earnings, rather than the
date the blackout period lifted following the release of the Company's 2010
first quarter earnings.
We
incorporate by reference the information respecting executive officers and
directors set forth under the captions "Proposal 1 - Election of Directors",
"Corporate Governance – Section 16(a) Beneficial Ownership Reporting
Compliance", "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
2010 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 "Corporate Governance – Committees of the Board of
Directors – The Audit Committee – Report of the Audit Committee" 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 –Compensation Committee Report" in our
Proxy Statement for the 2010 annual meeting of stockholders; provided, that the
section entitled "Corporate Governance – Committees of the Board of Directors –
The Compensation Committee – Compensation Committee Report" contained in the
Proxy Statement is not incorporated by reference.
We
incorporate by reference the information set forth under the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.
Summary
Description of Equity Compensation Plans Not Approved by Security Holders (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.
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.
We
incorporate by reference the information set forth under the section entitled
"Relationships with Independent Registered Public Accounting Firm – Principal
Accountant Fees and Services" in the Proxy Statement.
|
(a)
|
1.
|
Financial
Statements.
|
|
|
Our
audited consolidated financial statements are set forth at the
following pages of this report:
|
|||
|
Report
of Independent Registered Public Accounting Firm – KPMG
LLP
|
47
|
||
|
Consolidated
Balance Sheets
|
48
|
||
|
Consolidated
Statements of Operations
|
49
|
||
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Loss
|
50
|
||
|
Consolidated
Statements of Cash Flows
|
51
|
||
|
Notes
to Consolidated Financial Statements
|
52
|
||
|
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
|
Description
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation (Incorporated by reference to
Exhibit 99.2 to the Company's Report on Form 8-K, filed May 29, 2007 (SEC
Commission File No. 0-24960))
|
|
|
3.2
|
Amended
and Restated Bylaws, dated December 6, 2007 (Incorporated by reference to
Exhibit 3.2 to the Company's Form 10-K, filed March 17, 2008 (SEC
Commission File No. 0-24960))
|
|
|
4.1
|
Amended
and Restated Articles of Incorporation (Incorporated by reference to
Exhibit 99.2 to the Company's Report on Form 8-K, filed May 29, 2007 (SEC
Commission File No. 0-24960))
|
|
|
4.2
|
Amended
and Restated Bylaws, dated December 6, 2007 (Incorporated by reference to
Exhibit 3.2 to the Company's Form 10-K, filed March 17, 2008 (SEC
Commission File No. 0-24960))
|
|
|
10.1
|
401(k)
Plan (Incorporated by reference to Exhibit 10.10 to the Company's Form
S-1, Registration No. 33-82978, effective October 28,
1994)
|
|
|
10.2
|
Master
Lease Agreement, dated April 15, 2003, between Transport International
Pool, Inc. and Covenant Transport, Inc. (Incorporated by reference to
Exhibit 10.4 to the Company's Form 10-Q/A, filed October 31, 2003 (SEC
Commission File No. 0-24960))
|
|
|
10.3
|
Form
of Indemnification Agreement between Covenant Transport, Inc. and each
officer and director, effective May 1, 2004 (Incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q, filed August 5, 2004 (SEC
Commission file No. 0-24960))*
|
|
|
#
|
Purchase
and Sale Agreement, dated April 3, 2006, between Covenant Transport, Inc.,
a Tennessee corporation, and CT Chattanooga TN, LLC
|
|
|
#
|
Lease
Agreement, dated April 3, 2006, between Covenant Transport, Inc., a
Tennessee corporation, and CT Chattanooga TN, LLC
|
|
|
10.6
|
Lease
Guaranty, dated April 3, 2006, by Covenant Transport, Inc., a Nevada
corporation, for the benefit of CT Chattanooga TN, LLC (Incorporated by
reference to Exhibit 10.20 to the Company's Report on Form 8-K, filed
April 7, 2006 (SEC Commission File. No. 0-24960))
|
|
|
10.7
|
Form
of Restricted Stock Award Notice under the Covenant Transport, Inc. 2006
Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.22 to the
Company's Form 10-Q, filed August 9, 2006 (SEC Commission File No.
0-24960))*
|
|
|
10.8
|
Form
of Restricted Stock Special Award Notice under the Covenant Transport,
Inc. 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit
10.23 to the Company's Form 10-Q, filed August 9, 2006 (SEC Commission
File No. 0-24960))*
|
|
|
10.9
|
Form
of Incentive Stock Option Award Notice under the Covenant Transport, Inc.
2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.24 to
the Company's Form 10-Q, filed August 9, 2006 (SEC Commission File No.
0-24960))*
|
|
10.10
|
Form
of Lease Agreement used in connection with Daimler Facility (Incorporated
by reference to Exhibit 10.3 to the Company's Form 10-Q, filed August 11,
2008 (SEC Commission File No. 0-24960))
|
|
|
10.11
|
Amendment
to Lease Agreement (Open End) (Incorporated by reference to Exhibit 10.4
to the Company's Form 10-Q, filed August 11, 2008 (SEC Commission File No.
0-24960))
|
|
|
10.12
|
Form
of Direct Purchase Money Loan and Security Agreement used in connection
with Daimler Facility (Incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q, filed August 11, 2008 (SEC Commission File No.
0-24960))
|
|
|
10.13
|
Amendment
to Direct Purchase Money Loan and Security Agreement (Incorporated by
reference to Exhibit 10.6 to the Company's Form 10-Q, filed August
11, 2008 (SEC Commission File No. 0-24960))
|
|
|
#
|
Third
Amended and Restated Credit Agreement, dated September 23, 2008, among
Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing
Company, Covenant Asset Management, Inc., Southern Refrigerated Transport,
Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank
of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial
Corporation
|
|
|
10.15
|
Covenant
Transportation Group, Inc. Amended and Restated 2006 Omnibus Incentive
Plan (Incorporated by reference to Appendix A to the Company's Schedule
14A, filed April 10, 2009 (SEC Commission File No.
0-24960))*
|
|
|
10.16
|
Amendment
No. 1 to Third Amended and Restated Credit Agreement, dated March 27,
2009, among Covenant Transportation Group, Inc., Covenant Transport, Inc.,
CTG Leasing Company, Covenant Asset Management, Inc., Southern
Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star
Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A.,
and Textron Financial Corporation (Incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q, filed May 15, 2009 (SEC Commission File
No. 0-24960))
|
|
|
10.17
|
Description
of Covenant Transportation Group, Inc. 2009 Voluntary Incentive
Opportunity, dated March 31, 2009 (Incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q, filed May 15, 2009 (SEC Commission File
No. 0-24960))*
|
|
|
10.18
|
Description
of Covenant Transportation Group, Inc. 2009 Named Executive Officer Bonus
Program, dated March 31, 2009 (Incorporated by reference to Exhibit 10.3
to the Company's Form 10-Q, filed May 15, 2009 (SEC Commission File No.
0-24960))*
|
|
|
#
|
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 Richard B. Cribbs, the
Company's Chief Financial Officer
|
|
|
#
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief
Executive Officer
|
|
|
#
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by Richard B. Cribbs, the Company's Chief
Financial Officer
|
References:
|
#
|
Filed
herewith
|
|
*
|
Management
contract or compensatory plan or
arrangement
|
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
30, 2010
|
By:
|
/s/Richard B. Cribbs |
|
Richard
B. Cribbs
|
||
|
Senior
Vice President and Chief Financial 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
30, 2010
|
|
|
David
R. Parker
|
||
|
Chairman
of the Board, President, and Chief Executive Officer
(principal
executive officer)
|
||
| /s/Richard B. Cribbs |
March
30, 2010
|
|
|
Richard
B. Cribbs
|
||
|
Senior Vice President and Chief
Financial Officer
(principal
financial and accounting officer)
|
||
| /s/Bradley A. Moline |
March
30, 2010
|
|
|
Bradley
A. Moline
|
||
|
Director
|
||
| /s/William T. Alt |
March
30, 2010
|
|
|
William
T. Alt
|
||
|
Director
|
||
| /s/Robert E. Bosworth |
March
30, 2010
|
|
|
Robert
E. Bosworth
|
||
|
Director
|
||
| /s/Niel B. Nielson |
March
30, 2010
|
|
|
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, 2009 and 2008, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 2009. 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, 2009 and 2008, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounted for tax uncertainties as of January 1,
2007.
KPMG
LLP
/s/ KPMG
LLP
Atlanta,
Georgia
March 30,
2010
|
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
DECEMBER
31, 2009 AND 2008
(In
thousands, except share data)
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 12,221 | $ | 6,300 | ||||
|
Accounts receivable, net of
allowance of $1,845 in 2009
and
$1,484
in
2008
|
64,857 | 72,635 | ||||||
|
Drivers' advances and other
receivables, net of allowance
of
$2,608
in
2009 and $2,794 in 2008
|
3,311 | 4,818 | ||||||
|
Inventory and
supplies
|
4,004 | 3,894 | ||||||
|
Prepaid expenses
|
7,172 | 8,921 | ||||||
|
Assets held for
sale
|
9,547 | 21,292 | ||||||
|
Deferred income
taxes
|
458 | 7,129 | ||||||
|
Income taxes
receivable
|
257 | 717 | ||||||
|
Total
current assets
|
101,827 | 125,706 | ||||||
|
Property
and equipment, at cost
|
399,712 | 352,857 | ||||||
|
Less:
accumulated depreciation and amortization
|
(121,377 | ) | (116,839 | ) | ||||
|
Net property and
equipment
|
278,335 | 236,018 | ||||||
|
Goodwill
|
11,539 | 11,539 | ||||||
|
Other
assets, net
|
6,611 | 20,413 | ||||||
|
Total
assets
|
$ | 398,312 | $ | 393,676 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Checks outstanding in excess of
bank balances
|
$ | 4,838 | $ | 85 | ||||
|
Current maturities of
acquisition obligation
|
- | 250 | ||||||
|
Accounts payable
|
7,528 | 8,235 | ||||||
|
Accrued expenses
|
26,789 | 24,979 | ||||||
|
Current maturities of long-term
debt
|
67,365 | 59,083 | ||||||
|
Current portion of capital lease
obligations
|
1,098 | - | ||||||
|
Current portion of insurance and
claims accrual
|
12,055 | 16,811 | ||||||
|
Total
current liabilities
|
119,673 | 109,443 | ||||||
|
Long-term debt
|
134,084 | 107,956 | ||||||
|
Long-term portion of capital
lease obligations
|
12,472 | - | ||||||
|
Insurance and claims
accrual
|
11,082 | 15,869 | ||||||
|
Deferred income
taxes
|
24,525 | 39,669 | ||||||
|
Other long-term
liabilities
|
1,801 | 1,919 | ||||||
|
Total
liabilities
|
303,637 | 274,856 | ||||||
|
Commitments
and contingent liabilities
|
- | - | ||||||
|
Stockholders'
equity:
|
||||||||
|
Class A common stock, $.01 par
value; 20,000,000 shares authorized;
13,469,090 shares issued;
11,840,568 and 11,699,182 outstanding as of
December 31, 2009 and 2008,
respectively
|
136 | 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
|
90,679 | 91,912 | ||||||
|
Treasury stock at cost;
1,628,522 and 1,769,908 shares as of
December 31, 2009 and 2008,
respectively
|
(19,195 | ) | (21,007 | ) | ||||
|
Accumulated other comprehensive
income
|
305 | - | ||||||
|
Retained
earnings
|
22,726 | 47,756 | ||||||
|
Total
stockholders' equity
|
94,675 | 118,820 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 398,312 | $ | 393,676 | ||||
The accompanying notes are an integral
part of these consolidated financial statements
.
|
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
(In
thousands, except per share data)
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
||||||||||||
|
Freight revenue
|
$ | 520,495 | $ | 615,810 | $ | 602,629 | ||||||
|
Fuel surcharge
revenue
|
68,192 | 158,104 | 109,897 | |||||||||
|
Total
revenue
|
$ | 588,687 | $ | 773,914 | $ | 712,526 | ||||||
|
Operating
expenses:
|
||||||||||||
|
Salaries, wages, and related
expenses
|
216,158 | 263,793 | 270,435 | |||||||||
|
Fuel expense
|
143,835 | 260,704 | 211,022 | |||||||||
|
Operations and
maintenance
|
35,409 | 42,459 | 40,437 | |||||||||
|
Revenue equipment rentals and
purchased transportation
|
76,484 | 90,974 | 66,515 | |||||||||
|
Operating taxes and
licenses
|
12,113 | 13,078 | 14,112 | |||||||||
|
Insurance and
claims
|
31,955 | 37,578 | 36,391 | |||||||||
|
Communications and
utilities
|
5,740 | 6,702 | 7,377 | |||||||||
|
General supplies and
expenses
|
23,593 | 26,399 | 23,377 | |||||||||
|
Depreciation and amortization,
including gains and losses on
disposition of equipment and
impairment of assets (1)
|
48,122 | 63,235 | 53,541 | |||||||||
|
Goodwill impairment
charge
|
- | 24,671 | - | |||||||||
|
Total
operating expenses
|
593,409 | 829,593 | 723,207 | |||||||||
|
Operating
loss
|
(4,722 | ) | (55,679 | ) | (10,681 | ) | ||||||
|
Other
(income) expenses:
|
||||||||||||
|
Interest expense
|
14,184 | 10,373 | 12,285 | |||||||||
|
Interest income
|
(144 | ) | (435 | ) | (477 | ) | ||||||
|
Loss on early extinguishment of
debt
|
- | 726 | - | |||||||||
|
Loss on sale of Transplace
investment and note receivable
|
11,485 | - | - | |||||||||
|
Other
|
(199 | ) | (160 | ) | (183 | ) | ||||||
|
Other
expenses, net
|
25,326 | 10,504 | 11,625 | |||||||||
|
Loss
before income taxes
|
(30,048 | ) | (66,183 | ) | (22,306 | ) | ||||||
|
Income
tax benefit
|
(5,018 | ) | (12,792 | ) | (5,580 | ) | ||||||
|
Net
loss
|
$ | (25,030 | ) | $ | (53,391 | ) | $ | (16,726 | ) | |||
|
(1)
|
Includes
a $15,791 pre-tax impairment charge related to revenue equipment in 2008
and a $1,665 pre-tax impairment charge related to an airplane in
2007.
|
|
Loss
per share:
|
||||||||||||
|
Basic
and diluted loss per share:
|
$ | (1.77 | ) | $ | (3.80 | ) | $ | (1.19 | ) | |||
|
Basic
and diluted weighted average shares outstanding
|
14,124 | 14,038 | 14,018 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
AND
COMPREHENSIVE LOSS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
(In
thousands)
|
Common
Stock
|
Additional
Paid-
|
Treasury
|
Accumulated
Other
Comprehensive
|
Retained
|
Total
Stockholders'
|
|||||||||||||||||||||||
|
Class
A
|
Class
B
|
In Capital | Stock | Income | Earnings | Equity | ||||||||||||||||||||||
|
Balances
at
December
31, 2006
|
$ | 135 | $ | 24 | $ | 92,053 | $ | (21,582 | ) | $ | - | $ | 118,214 | $ | 188,844 | |||||||||||||
|
Stock-based
employee
compensation
cost
|
- | - | 189 | - | - | - | 189 | |||||||||||||||||||||
|
Cumulative
impact of
change
in accounting
for
uncertainties
income
taxes
(See
Note 1)
|
- | - | - | - | - | (341 | ) | (341 | ) | |||||||||||||||||||
|
Issuance
of restricted
stock
to
non-employee
directors
from treasury stock
|
- | - | (4 | ) | 304 | - | - | 300 | ||||||||||||||||||||
|
Net
loss and
comprehensive
loss
|
- | - | - | - | - | (16,726 | ) | (16,726 | ) | |||||||||||||||||||
|
Balances
at
December
31, 2007
|
$ | 135 | $ | 24 | $ | 92,238 | $ | (21,278 | ) | $ | - | $ | 101,147 | $ | 172,266 | |||||||||||||
|
Reversal
of previously
recognized
stock-
based
compensation
cost
|
- | - | (414 | ) | - | - | - | (414 | ) | |||||||||||||||||||
|
Stock-based
employee
compensation
cost
|
- | - | 260 | - | - | - | 260 | |||||||||||||||||||||
|
Issuance
of restricted
stock
to non-
employee
directors
from
treasury stock
|
- | - | (172 | ) | 271 | - | - | 99 | ||||||||||||||||||||
|
Net
loss and
comprehensive
loss
|
- | - | - | - | - | (53,391 | ) | (53,391 | ) | |||||||||||||||||||
|
Balances
at
December
31, 2008
|
$ | 135 | $ | 24 | $ | 91,912 | $ | (21,007 | ) | $ | - | $ | 47,756 | $ | 118,820 | |||||||||||||
|
Net
loss
|
- | - | - | - | - | (25,030 | ) | (25,030 | ) | |||||||||||||||||||
|
Other
comprehensive loss:
|
||||||||||||||||||||||||||||
|
Unrealized
gain on effective portion of fuel hedge, net of tax of
$191
|
- | - | - | - | 305 | - | 305 | |||||||||||||||||||||
|
Comprehensive
loss
|
- | - | - | - | 305 | (25,030 | ) | (24,725 | ) | |||||||||||||||||||
|
Issuance
of restricted stock to non-employee directors from treasury
stock
|
- | - | (375 | ) | 475 | - | - | 100 | ||||||||||||||||||||
|
Stock-based
employee compensation cost
|
- | - | 595 | - | - | - | 595 | |||||||||||||||||||||
|
Issuance
of restricted stock to employees from treasury stock, net of shares
repurchased to satisfy minimum withholding requirements
|
1 | - | (1,453 | ) | 1,337 | - | - | (115 | ) | |||||||||||||||||||
|
Balances
at December 31, 2009
|
$ | 136 | $ | 24 | $ | 90,679 | $ | (19,195 | ) | $ | 305 | $ | 22,726 | $ | 94,675 | |||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
(In
thousands)
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (25,030 | ) | $ | (53,391 | ) | $ | (16,726 | ) | |||
|
Adjustments
to reconcile net loss to net cash provided by
operating
activities:
|
||||||||||||
|
Provision for losses on accounts
receivable
|
1,727 | 987 | 1,163 | |||||||||
|
Loss on early extinguishment of
debt
|
- | 726 | - | |||||||||
|
Depreciation and amortization,
including impairment of
property and
equipment
|
47,987 | 61,289 | 51,801 | |||||||||
|
Impairment of
goodwill
|
- | 24,671 | - | |||||||||
|
Amortization of deferred
financing fees
|
851 | 405 | 281 | |||||||||
|
Loss on sale of Transplace
investment and note receivable
|
11,485 | - | - | |||||||||
|
Gain on ineffective portion of
fuel hedge
|
(31 | ) | - | - | ||||||||
|
Deferred income taxes
(benefit)
|
(8,664 | ) | (2,456 | ) | 4,414 | |||||||
|
Loss on disposition of property
and equipment
|
135 | 1,946 | 1,741 | |||||||||
|
Stock-based compensation expense
(reversal), net
|
695 | (55 | ) | 489 | ||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Receivables and
advances
|
9,948 | 7,023 | (7,631 | ) | ||||||||
|
Prepaid expenses and other
assets
|
1,545 | (1,709 | ) | 4,386 | ||||||||
|
Inventory and
supplies
|
(110 | ) | 286 | 865 | ||||||||
|
Insurance and claims
accrual
|
(9,543 | ) | 2,044 | (7,462 | ) | |||||||
|
Accounts payable and accrued
expenses
|
(97 | ) | (1,458 | ) | 400 | |||||||
|
Net
cash flows provided by operating activities
|
30,898 | 40,308 | 33,721 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Acquisition of property and
equipment
|
(113,063 | ) | (89,024 | ) | (64,261 | ) | ||||||
|
Proceeds from disposition of
property and equipment
|
50,305 | 26,711 | 53,486 | |||||||||
|
Payment of acquisition
obligation
|
(250 | ) | (333 | ) | (333 | ) | ||||||
|
Net
cash flows used in investing activities
|
(63,008 | ) | (62,646 | ) | (11,108 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Repurchase of company
stock
|
(115 | ) | - | - | ||||||||
|
Proceeds from borrowings under
revolving credit facility, net
|
8,879 | (71,193 | ) | (29,900 | ) | |||||||
|
Repayments of capital lease
obligation
|
(298 | ) | - | - | ||||||||
|
Change in checks outstanding in
excess of bank balances
|
4,753 | (4,487 | ) | 292 | ||||||||
|
Proceeds from issuance of notes
payable
|
95,592 | 188,455 | 14,339 | |||||||||
|
Repayments of notes
payable
|
(70,219 | ) | (38,796 | ) | (537 | ) | ||||||
|
Repayments of securitization
facility, net
|
- | (47,964 | ) | (7,017 | ) | |||||||
|
Debt refinancing
costs
|
(561 | ) | (1,877 | ) | (697 | ) | ||||||
|
Net
cash flows provided by/(used in) financing activities
|
38,031 | 24,138 | (23,520 | ) | ||||||||
|
Net
change in cash and cash equivalents
|
5,921 | 1,800 | (907 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
6,300 | 4,500 | 5,407 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 12,221 | $ | 6,300 | $ | 4,500 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash paid (received) during the
year for:
|
||||||||||||
|
Interest, net of capitalized
interest
|
$ | 13,016 | $ | 9,296 | $ | 11,969 | ||||||
|
Income taxes
|
$ | 239 | $ | (12,480 | ) | $ | (11,287 | ) | ||||
|
Equipment purchased under
capital leases
|
$ | 14,000 | - | - | ||||||||
|
Non-cash change in variable rate
real-estate note
|
$ | 157 | - | - | ||||||||
|
Accrued property
additions
|
$ | 811 | - | - | ||||||||
The accompanying notes are an integral
part of these consolidated financial statements
.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
DECEMBER
31, 2009, 2008 AND 2007
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business and Segments
Covenant
Transportation Group, Inc., a Nevada holding company, together with its
wholly-owned subsidiaries offers truckload transportation and brokerage services
to customers throughout the continental United States.
We have
two reportable segments: Asset-Based Truckload Services ("Truckload") and our
Brokerage Services, also known as Covenant Transport Solutions, Inc.
("Solutions").
The
Truckload segment consists of three asset-based operating fleets that are
aggregated because they have similar economic characteristics and meet the
aggregation criteria. The three operating fleets that comprise our
Truckload segment are as follows: (i) Covenant Transport, Inc., our historical
flagship operation, which provides expedited long haul, dedicated, and regional
solo-driver service; (ii) Southern Refrigerated Transportation, Inc., or SRT,
which provides primarily long-haul and regional temperature-controlled service;
and (iii) Star Transportation, Inc., which provides regional solo-driver
service.
The
Solutions segment provides freight brokerage service directly and through
freight brokerage agents who are paid a commission for the freight they
provide. 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 our Truckload segment.
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; Southern Refrigerated Transport, Inc., an Arkansas
corporation; Star Transportation, Inc., a Tennessee corporation; Covenant
Transport Solutions, Inc., a Nevada corporation; Covenant Logistics, Inc., a
Nevada corporation; Covenant Asset Management, Inc., a Nevada corporation; CTG
Leasing Company, a Nevada corporation, and Volunteer Insurance Limited, a Cayman
Islands company. Covenant.com, Inc. and CIP, Inc., both of which were
Nevada corporations, were dissolved effective December 31, 2007, and Harold Ives
Trucking Co., an Arkansas corporation, was dissolved effective July 7,
2008. In September 2008, CVTI Receivables Corp. ceased to exist by
virtue of its merger with and into Covenant Transportation Group, Inc., with the
Company as the surviving entity.
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
In our
Truckload segment, 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.
Revenue
generated by our Solutions reportable segment is recognized upon completion of
the services provided. Revenue is recorded on a gross basis, without
deducting third party purchased transportation costs, as we act as a principal
with substantial risks as primary obligor, except for transactions whereby
equipment from our Truckload segment perform the related services, which we
record on a net basis in accordance with the related authoritative
guidance.
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 at acquisition to be cash equivalents. Additionally, the
Company is also subject to concentrations of credit risk related to deposits in
banks in excess of the Federal Deposit Insurance Corporation
limits.
Accounts
Receivable and Concentration of Credit Risk
The
Company extends credit to its customers in the normal course of
business. The Company performs ongoing credit evaluations and
generally does not require collateral. Trade accounts receivable are
recorded at their invoiced amounts, net of allowance for doubtful
accounts. The Company evaluates the adequacy of its allowance for
doubtful accounts quarterly. Accounts outstanding longer than
contractual payment terms are considered past due and are reviewed individually
for collectability. The Company maintains reserves for potential
credit losses based upon its loss history and specific receivables aging
analysis. Receivable balances are written off when collection is
deemed unlikely.
Accounts
receivable are comprised of a diversified customer base that results in a lack
of concentration of credit risk. During 2009, 2008, and 2007, the
Company's top ten customers generated 26%, 20%, and 22% of total revenue,
respectively. During the three year period ended December 31, 2009,
no single customer represented more than 10% of total revenue. The
carrying amount reported in the balance sheet for accounts receivable
approximates fair value based on the fact that the receivables collection
averaged approximately 40 days from the billing date.
The
following table provides a summary of the activity in the allowance for doubtful
accounts for 2009, 2008, and 2007:
|
Years
ended December 31:
|
Beginning
balance
January
1,
|
Additional
provisions
to
allowance
|
Write-offs
and
other
deductions
|
Ending
balance
December
31,
|
||||||||||||
|
2009
|
$ | 1,484 | $ | 1,727 | $ | 1,366 | $ | 1,845 | ||||||||
|
2008
|
$ | 1,537 | $ | 987 | $ | 1,040 | $ | 1,484 | ||||||||
|
2007
|
$ | 1,491 | $ | 1,163 | $ | 1,117 | $ | 1,537 | ||||||||
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 expects to sell the majority of
these assets within twelve months.
Property
and Equipment
Property
and equipment is stated at cost less accumulated
depreciation. Depreciation for book purposes is determined using the
straight-line method over the estimated useful lives of the assets, while
depreciation for tax purposes is generally recorded using an accelerated
method. 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 5% to 31% and new
trailers over seven to ten years to salvage values of 26% to 43%. 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.
Impairment
of Long-Lived Assets
Revenue
equipment, including assets held for sale, and definite-lived intangible assets
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.
Goodwill
and Other Intangible Assets
We
evaluate goodwill for impairment on an annual basis. Pursuant to
applicable accounting standards, we classify intangible assets into two
categories: (i) intangible assets with definite lives subject to amortization
and (ii) goodwill, noting we have no indefinite lived intangible
assets. As discussed above, we test intangible assets with definite
lives for impairment if conditions exist that indicate the carrying value may
not be recoverable. Such conditions may include an economic downturn
in a geographic market or a change in the assessment of future
operations.
We test
goodwill for impairment at least annually or more frequently if events or
circumstances indicate that such intangible assets or goodwill might be
impaired. We perform our impairment tests of goodwill at the
reporting unit level. The Company's reporting units are its
subsidiaries. Such impairment tests for goodwill include comparing
the fair value of the respective reporting unit with its carrying value,
including goodwill. We use a variety of methodologies in conducting
these impairment tests, including discounted cash flow analyses and market
analyses.
We
determine the useful lives of our identifiable intangible assets after
considering the specific facts and circumstances related to each intangible
asset. Factors we consider when determining useful lives include the
contractual term of any agreement, the history of the asset, the Company's
long-term strategy for the use of the asset, any laws or other local regulations
which could impact the useful life of the asset, and other economic factors,
including competition and specific market conditions. Intangible
assets that are deemed to have definite lives are amortized, generally on a
straight-line basis, over their useful lives, ranging from 4 to 20
years.
Insurance
and Other 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 risk retention levels. Because of the Company's significant
self-insured retention amounts, it has 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. 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 was 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. 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.
In
general for casualty claims, we currently have insurance coverage up to $50.0
million per claim. We are self-insured on an occurrence/per claim
basis for personal injury and property damage claims for amounts up to the first
$4.0 million, except for Star where we currently have insurance coverage up to
$2.0 million per claim after the first $0.3 million for which we are
self-insured. We are self-insured on an occurrence/per claim basis for workers'
compensation up to the first $1.25 million. The Company is completely
self-insured for physical damage to its own tractors and trailers and is
generally completely self-insured for damages to the cargo we
haul. The Company also maintains a self-insured group medical plan
for its employees with annual per individual claimant stop-loss deductible of
$0.4 million with a maximum lifetime benefit of $0.7 million.
Insurance
and claims expense varies based on the frequency and severity of claims, the
premium expense, 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.
Interest
The
Company capitalizes interest on major projects during
construction. Interest is capitalized based on the average interest
rate on related debt. Capitalized interest was less than $0.1 million
in 2009, 2008, and 2007.
Fair
Value of Financial Instruments
The
Company's financial instruments consist primarily of cash and cash equivalents,
accounts receivable, commodity contracts, accounts payable, and
debt. The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable, and current debt 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, which primarily consists of revenue equipment
installment notes. Borrowings under the Company's revolving credit
facility approximate fair value due to the variable interest rate on the
facility. Additionally, commodity contracts, which are accounted for
as hedge derivatives, as discussed in Note 14, are valued based on the forward
rate of the specific indices upon which the contract is being settled and
adjusted for counterparty credit risk using available market information and
valuation methodologies.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. We have reflected the necessary deferred tax assets and
liabilities in the accompanying consolidated balance sheets. We
believe the future tax deductions will be realized principally through future
reversals of existing taxable temporary differences and future taxable income,
except for when a valuation allowance has been provided as discussed in Note
10.
In the
ordinary course of business there is inherent uncertainty in quantifying our
income tax positions. We assess our income tax positions and record
tax benefits for all years subject to examination based upon management's
evaluation of the facts, circumstances, and information available at the
reporting dates. For those tax positions where it is
more-likely-than-not that a tax benefit will be sustained, we have recorded the
largest amount of tax benefit with a greater than 50% likelihood of being
realized upon ultimate settlement with a taxing authority that has full
knowledge of all relevant information. For those income tax positions
where it is not more-likely-than-not that a tax benefit will be sustained, no
tax benefit has been recognized in the financial
statements. Potential accrued interest and penalties related to
unrecognized tax benefits are recognized as a component of income tax
expense.
Lease
Accounting and Off-Balance Sheet Transactions
The
Company issues residual value guarantees in connection with the operating leases
it enters into for certain of 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
Loss
Comprehensive
loss generally includes all changes in equity during a period except those
resulting from investments by owners and distributions to
owners. Comprehensive loss for 2009 was comprised of the net loss,
partially offset by the unrealized gain on the effective portion of hedged fuel
costs, while in 2008 and 2007 comprehensive loss equaled net loss.
Basic
and Diluted Earnings (Loss) Per Share
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, 2009, 2008, and 2007 excludes all
unexercised options and unvested shares, since the effect of any assumed
exercise of the related options would be anti-dilutive.
Stock-Based
Employee Compensation
The
Company issues several types of share-based compensation, including awards that
vest based on service, market and performance conditions, or a combination of
the conditions. Performance-based awards vest contingent upon meeting
certain performance criteria established by the Compensation
Committee. Market-based awards vest contingent upon meeting certain
stock price targets selected by the Compensation Committee. All
awards require future service and thus forfeitures are estimated based on
historical forfeitures and the remaining term until the related award
vests. Determining the appropriate amount to expense in each period
is based on likelihood and timing of achieving of the stated targets for
performance and market based awards, respectively, and requires judgment,
including forecasting future financial results and market
performance. The estimates are revised periodically based on the
probability and timing of achieving the required performance and market targets,
respectively, and adjustments are made as appropriate. Awards that
are only subject to time vesting provisions are amortized using the
straight-line method.
The
following table sets forth the calculation of net 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)
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net loss
|
$ | (25,030 | ) | $ | (53,391 | ) | $ | (16,726 | ) | |||
|
Denominator:
|
||||||||||||
|
Denominator for basic loss per
share – weighted-average shares
|
14,124 | 14,038 | 14,018 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Equivalent
shares issuable upon conversion of unvested restricted
stock
|
- | - | - | |||||||||
|
Equivalent
shares issuable upon conversion of unvested employee stock
options
|
- | - | - | |||||||||
|
Denominator
for diluted loss per share adjusted weighted-average shares and assumed
conversions
|
14,124 | 14,038 | 14,018 | |||||||||
|
Net
loss per share:
|
||||||||||||
|
Basic
and diluted loss per share
|
$ | (1.77 | ) | $ | (3.80 | ) | $ | (1.19 | ) | |||
Derivative
Instruments and Hedging Activities
We
periodically utilize derivative instruments to manage exposure to changes in
fuel prices. At inception of a derivative contract, we document
relationships between derivative instruments and hedged items, as well as our
risk-management objective and strategy for undertaking various derivative
transactions, and assess hedge effectiveness. We record derivative
financial instruments in the balance sheet as either an asset or liability at
fair value. If it is determined that a derivative is not highly
effective as a hedge, or if a derivative ceases to be a highly effective hedge,
we discontinue hedge accounting prospectively. The effective portion
of changes in the fair value of derivatives are recorded in other comprehensive
income, and reclassified into earnings in the same period during which the
hedged transaction affects earnings. The ineffective portion is
recorded in other income or expense.
Subsequent
Events
The
Company considers events or transactions that occur after the balance sheet date
but before the financial statements are issued to provide additional evidence
relative to certain estimates or to identify matters that require additional
disclosure. The Company evaluated subsequent events through the date
the consolidated financial statements were issued.
Reclassifications
Certain
reclassifications have been made to the prior years' consolidated financial
statements to conform to the 2009 presentation. The reclassifications
did not affect shareholders' equity or net loss reported.
Recent
Accounting Pronouncements
Improving Disclosures About Fair
Value Measurements
– In January 2010, the FASB issued authoritative
guidance to clarify certain existing disclosure requirements and require
additional disclosures for recurring and nonrecurring fair value
measurements. These additional disclosures include amounts and
reasons for significant transfers between Level 1 and Level 2 of the fair value
hierarchy; significant transfers in and out of Level 3 of the fair value
hierarchy; and information about purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of recurring Level 3
measurements. Further, the guidance amends employer's disclosures
about post-retirement benefit plans to require that disclosures be provided by
classes of assets instead of by major categories of assets. The
requirements of this guidance are effective for periods beginning after December
15, 2009, with the exception of the requirement of information about purchases,
sales, issuances, and settlements of Level 3 measurements, which becomes
effective for periods ending after December 15, 2010. The Company
does not expect the adoption of this guidance to have a material impact on its
consolidated financial statements.
Accounting Standards
Codification
- In June 2009, the Financial Accounting Standards Board
("FASB") issued authoritative guidance which establishes the FASB Accounting
Standards Codification as the single source of authoritative U.S. generally
accepted accounting principles recognized by the FASB to be applied by
nongovernmental entities. The FASB Accounting Standards Codification
is effective for interim and annual periods ending after September 15,
2009. The adoption of the FASB Accounting Standards Codification
during the three months ended September 30, 2009, did not have a material
effect on the Company's consolidated financial statements.
Fair Value Measurement of
Liabilities
- In August 2009, the FASB issued authoritative guidance
which provides clarification regarding the required techniques for the fair
value measurement of liabilities. This update applies to all entities
that measure liabilities at fair value, and is effective for the first interim
or annual reporting period beginning after its issuance in August
2009. The Company does not expect the adoption of this guidance to
have a material effect on its consolidated financial statements.
Transfers of Financial Assets
- In June 2009, the FASB issued authoritative guidance which requires entities
to provide more information regarding sales of securitized financial assets and
similar transactions, particularly if the seller retains some risk with respect
to the assets. This authoritative guidance is effective for fiscal
years beginning after November 15, 2009. The Company does not
expect the adoption of this guidance to have a material effect on its
consolidated financial statements.
Variable Interest Entities
-
In June 2009, the FASB issued authoritative guidance designed to improve
financial reporting by companies involved with variable interest entities and to
provide more relevant and reliable information to users of financial
statements. This authoritative guidance is effective for fiscal years
beginning after November 15, 2009. The Company does not expect
the adoption of this guidance to have a material effect on its consolidated
financial statements.
Subsequent Events
- In May
2009, the FASB issued authoritative guidance that established general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. This authoritative guidance was effective for interim or
annual financial periods ending after June 15, 2009. The
adoption of this guidance did not affect the Company's consolidated financial
statements.
Interim Disclosures about Fair Value
of Financial Instruments
- In April 2009, the FASB issued authoritative
guidance to require disclosures about fair values of financial instruments for
interim reporting periods as well as in annual financial
statements. The guidance also amends previous guidance to require
those disclosures in summarized financial information at interim reporting
periods. This guidance was effective for interim reporting periods
ending after June 15, 2009. The adoption of this guidance did
not affect the Company's consolidated financial statements.
Disclosures about Derivative
Instruments and Hedging Activities
- In March 2008, the FASB issued
authoritative guidance which amends and expands the previous disclosure
requirements, to provide an enhanced understanding of an entity's use of
derivative instruments, how they are accounted for, and their effect on the
entity's financial position, financial performance and cash
flows. The Company adopted the guidance as of the beginning of the
2009 fiscal year and its adoption did not have a material impact to the
Company's consolidated financial statements.
Business Combinations
- In
December 2007, the FASB issued authoritative guidance that 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 the guidance 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 adopted the guidance as of the beginning of the
2009 fiscal year and its adoption did not have a material impact to the
Company's consolidated financial statements.
Noncontrolling Interests in
Consolidated Financial Statements
- In December 2007, the FASB issued
authoritative guidance that modified accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The provisions of the guidance are effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company adopted the guidance as of the
beginning of the 2009 fiscal year and its adoption did not have a material
impact to the Company's consolidated financial statements.
Fair Value Measurements
- In
September 2006, the FASB issued authoritative guidance which provides guidance
on how to measure assets and liabilities at fair value. The guidance
applies whenever another U.S. GAAP standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also requires
additional disclosures in both annual and quarterly reports. Portions
of the guidance were effective for financial statements issued for fiscal years
beginning after November 15, 2007, and the Company began applying those
provisions effective January 1, 2008. The adoption of the guidance
did not have a significant impact on the Company's consolidated financial
statements.
In
February 2008, the FASB amended the scope of the original guidance to exclude
accounting for leases, and other accounting standards that address fair value
measurements for purposes of lease classification or measurement. The
scope of this exception does not apply to assets acquired and liabilities
assumed in a business combination that are required to be measured at fair
value. Also, in February 2008, the FASB delayed the effective date of
the aforementioned fair value guidance one year for all nonfinancial assets and
nonfinancial liabilities, except those recognized at fair value in the financial
statements on a recurring basis. The Company adopted the remaining
provisions as of January 1, 2009. The adoption of the guidance did
not have a significant impact on the Company's consolidated financial
statements.
Uncertain Tax Positions
- In
June 2006, the FASB issued guidance for accounting for uncertainty in income
taxes, which established a single model to address accounting for uncertain tax
positions. The Company was required to adopt the provisions of the
new guidance 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.
2. LIQUIDITY
Our
business requires significant capital investments over the short-term and the
long-term. Recently, we have financed our capital requirements with
borrowings under our Credit Facility, cash flows from operations, long-term
operating leases, capital leases, and secured installment notes with finance
companies. Our primary sources of liquidity at December 31, 2009,
were funds provided by operations, proceeds from the sale of used revenue
equipment, borrowings under our Credit Facility, borrowings from secured
installment notes, capital leases, operating leases of revenue equipment and
cash and cash equivalents. We had a working capital (total current
assets less total current liabilities) deficit of $17.8 million at December 31,
2009 and a working capital surplus of $16.3 million at December 31,
2008. Working capital deficits are common to many trucking companies
that expand by financing revenue equipment purchases through borrowing or
capitalized leases. When we finance revenue equipment through
borrowing or capitalized leases, the principal amortization scheduled for the
next twelve months is categorized as a current liability, although the revenue
equipment is classified as a long-term asset. Consequently, each
purchase of revenue equipment financed with borrowing or capitalized leases
decreases working capital. We believe our working capital deficit had
little impact on our liquidity. Based on our expected financial
condition, results of operations, a material refund of previously paid federal
income taxes as a result of net operating loss carry backs pursuant to the
Worker, Homeownership, and Business Assistance Act of 2009, and net cash flows
during the next twelve months, which contemplate an improvement compared with
the past twelve months, we believe our working capital and 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 our anticipated
financial condition, results of operations, and cash flows, and continued
availability of our Credit Facility, secured installment notes, and other
sources of financing that we expect will be available to us, we do not expect to
experience material liquidity constraints in the foreseeable
future.
The
Company has had significant losses from 2007 through 2009, attributable to
operations, impairments, and other charges. The Company has managed
its liquidity during this time through a series of cost reduction initiatives,
refinancing, amendments to credit facilities, and sales of assets. If
we are unable to comply with our Credit Facility, we may be unable to obtain a
further amendment or waiver under our Credit Facility or we may incur additional
fees.
3. FAIR
VALUE OF FINANCIAL INSTRUMENTS
Fair
value is defined as an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. Accordingly, fair value is a
market-based measurement that is determined based on assumptions that market
participants would use in pricing an asset or liability. The fair
value of the hedge derivative asset was determined based on quotes from the
counterparty which were verified by comparing them to the exchange on which the
related futures are traded, adjusted for counterparty credit risk. A
three-tier fair value hierarchy is used to prioritize the inputs in measuring
fair value as follows:
|
•
|
Level
1. Observable inputs such as quoted prices in active
markets;
|
|
•
|
Level
2. Inputs, other than the quoted prices in active markets, that
are observable either directly or indirectly; and
|
|
•
|
Level
3. Unobservable inputs in which there is little or no market
data, which require the reporting entity to develop its own
assumptions.
|
| Assets and Liabilities Measured at Fair Value on a Recurring Basis |
|
(in
thousands)
|
December
31,
2009
|
Quoted
Prices
in
Active
Markets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
|
Hedge
derivative asset
|
$ | 496 | — | $ | 496 | — | ||||||||||
4. SHARE-BASED
COMPENSATION
On May 5,
2009, at the annual meeting, the Company's stockholders approved an amendment to
the Covenant Transportation Group, Inc. 2006 Omnibus Incentive Plan ("2006
Plan"), which among other things, (i) provides that the maximum aggregate number
of shares of Class A common stock available for the grant of awards under the
2006 Plan from and after such annual meeting date shall not exceed 700,000, and
(ii) limits the shares of Class A common stock that shall be available for
issuance or reissuance under the 2006 Plan from and after such annual meeting
date to the additional 700,000 shares reserved, plus any expirations,
forfeitures, cancellations, or certain other terminations of such
shares.
The 2006
Plan permits annual awards of shares of the Company's Class A common stock to
executives, other key employees, non-employee directors and eligible
participants under various types of options, restricted stock awards, or other
equity instruments. The number of shares available for issuance under
the 2006 Plan is 700,000 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, 2009, 533,900 of these 700,000 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. To the
extent available, the Company has issued treasury stock to satisfy all
share-based incentive plans.
Included
in salaries, wages, and related expenses within the consolidated statements of
operations is stock-based compensation expense (benefit) of $0.7 million,
($0.1) million, and $0.5 million in 2009, 2008, and 2007,
respectively. The benefit recorded in the 2008 period is the result
of reversing $0.4 million of expense when it was determined that certain awards
that contained performance conditions were not probable to
vest. Income tax benefits associated with stock compensation expense
were $0.3 million and $0.2 million in 2009 and 2007,
respectively. There were no significant tax benefits in 2008 as a
result of the aforementioned reversal and related minimal expense.
The 2006
Plan allows participants to pay the Company for the federal and state minimum
statutory tax withholding requirements related to awards that vest or allows the
participant to deliver to the Company, shares of common stock having a fair
market value equal to the minimum amount of such required withholding
taxes. To satisfy withholding requirements for shares that vested in
the third quarter, certain participants elected to deliver to the Company 20,982
shares which were withheld at a per share price of $5.50, totaling approximately
$0.1 million, based on the closing price of our common stock on the date of
exercise, in lieu of the federal and state minimum statutory tax withholding
requirements. We remitted approximately $0.1 million to the proper
taxing authorities in satisfaction of the employees' minimum statutory
withholding requirements. The tax withholding amounts paid by the
Company have been accounted for as a repurchase of shares in the accompanying
consolidated statement of stockholders' equity. However, these deemed
share repurchases are not included as part of the Company's stock repurchase
program, noting such program expired on June 30, 2009.
The
following table summarizes the Company's stock option activity for the fiscal
years ended December 31, 2009, 2008 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, 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
|
$ | - | |||||||
|
Options
granted
|
- | - | |||||||||||
|
Options
exercised
|
- | - | |||||||||||
|
Options
canceled
|
(109 | ) | $ | 12.30 | |||||||||
|
Outstanding
at December 31, 2008
|
1,096 | $ | 13.43 |
52
months
|
$ | - | |||||||
|
Options
granted
|
- | - | |||||||||||
|
Options
exercised
|
- | - | |||||||||||
|
Options
canceled
|
(116 | ) | $ | 14.05 | |||||||||
|
Outstanding
at December 31, 2009
|
980 | $ | 13.36 |
43
months
|
$ | - | |||||||
|
Exercisable
at December 31, 2009
|
821 | $ | 14.10 |
34
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 in 2007:
|
2007
|
||
|
Expected
volatility
|
57.3%
|
|
|
Risk-free
interest rate
|
4.4%
|
|
|
Expected
lives (in years)
|
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
following tables summarize the Company's restricted stock award activity for the
fiscal years ended December 31, 2009, 2008, and 2007:
|
Number
of
stock
awards
|
Weighted
average
grant
date
fair value
|
|||||||
|
(in
thousands)
|
||||||||
|
Unvested
at December 31, 2006
|
457 | $ | 12.65 | |||||
|
Granted
|
113 | $ | 10.72 | |||||
|
Vested
|
- | - | ||||||
|
Forfeited
|
(70 | ) | $ | 12.68 | ||||
|
Unvested
at December 31, 2007
|
500 | $ | 12.21 | |||||
|
Granted
|
269 | $ | 3.44 | |||||
|
Vested
|
- | - | ||||||
|
Forfeited
|
(3 | ) | $ | 5.83 | ||||
|
Unvested
at December 31, 2008
|
766 | $ | 9.14 | |||||
|
Granted
|
335 | $ | 3.07 | |||||
|
Vested
|
(162 | ) | $ | 3.15 | ||||
|
Forfeited
|
(165 | ) | $ | 9.30 | ||||
|
Unvested
at December 31, 2009
|
774 | $ | 7.76 | |||||
The
unvested shares at December 31, 2009 will vest based on when and if the related
vesting criteria are met for each award. All awards require continued
service to vest, noting that 123,000 of these awards vest solely based on
continued service, of which 103,000 are expected to vest in
2010. Additionally, 162,000 awards vest based on market conditions
such that one third of the each employee's awards vests if the Company's Class A
Stock trades above $4, $6, and $8, respectively, for thirty trading days
beginning January 1, 2010 through December 31, 2011. Performance
based awards account for 489,000 of the unvested shares at December 31, 2009,
noting that 384,000 of these shares are not expected to vest based on the
expectation that the related performance criteria will not be met. As
such, all previously recognized compensation expense was reversed in 2008, and
no related expense was recognized in 2009 given there was no change in the
expectation regarding the performance targets being met that would trigger the
shares to vest. The remaining 105,000 shares that include a
performance target will vest if the Company's fiscal 2010 earnings per share is
equal to or greater than $0.05 per share, excluding certain non-cash
charges.
The fair
value of restricted stock awards that vested in 2009 was approximately $0.5
million, noting no awards vested in 2007 or 2008. As of December 31,
2009, the Company had approximately $1.2 million of unrecognized compensation
expense related to restricted stock awards, which is probable to be recognized
over a weighted average period of approximately sixteen months. All
restricted shares awarded to executives and other key employees pursuant to the
2006 Plan have voting and other stockholder-type rights, but will not be issued
until the relevant restrictions are satisfied.
5. INVESTMENT
IN TRANSPLACE
From July
2001 through December 2009, we owned approximately 12.4% of Transplace, Inc.
("Transplace"), a global transportation logistics service. In the
formation transaction for Transplace, we contributed our logistics customer
list, logistics business software and software licenses, certain intellectual
property, intangible assets, and $5.0 million in cash, in exchange for our
ownership. We accounted for this investment, which totaled
approximately $10.7 million, using the cost method of accounting, and it was
historically included in other assets in the consolidated balance
sheet. Also, during the first quarter of 2005, we loaned Transplace
approximately $2.6 million, which along with the related accrued interest was
historically included in other assets in the consolidated balance
sheet.
Based on
an offer to purchase our 12.4% equity ownership and related note receivable in
Transplace that was accepted by a majority of the shareholders, we determined
that pursuant to the guidance provided by FASB Accounting Standards Codification
325, the value of our equity investment had become completely impaired in the
third quarter of 2009, and the value of the note receivable had become impaired
by approximately $0.9 million. As a result, we recorded a non-cash
impairment charge of $11.6 million during the third quarter of
2009.
The
transaction closed in December 2009, whereby the proceeds of $1.9 million
provided for a recovery of $0.1 million of the previously impaired amount in the
fourth quarter of 2009 and thus an $11.5 million non-cash loss on the sale of
our investment and related note receivable. There was no tax benefit
recorded in connection with the loss on the sale of the investment, given a full
valuation allowance was established for the related capital
loss. Under our credit facility, the non-cash loss is added back in
the computation of the Company's fixed charge coverage ratio; and therefore does
not unfavorably impact our single financial covenant.
6. PROPERTY
AND EQUIPMENT
A summary
of property and equipment, at cost, as of December 31, 2009 and 2008 is as
follows:
|
(in
thousands)
|
Estimated
Useful Lives
|
2009
|
2008
|
|||||||||
|
Revenue
equipment
|
3-10
years
|
$ | 309,668 | $ | 266,148 | |||||||
|
Communications
equipment
|
5
years
|
15,606 | 15,602 | |||||||||
|
Land
and improvements
|
10-24
years
|
17,541 | 16,690 | |||||||||
|
Buildings
and leasehold improvements
|
7-40
years
|
38,543 | 37,030 | |||||||||
|
Construction
in-progress
|
--------- | 2,715 | 2,054 | |||||||||
|
Other
|
1-7
years
|
15,639 | 15,333 | |||||||||
| $ | 399,712 | $ | 352,857 | |||||||||
Depreciation
expense was $47.2 million, $60.2 million, and $50.3 million in 2009, 2008, and
2007, respectively. The 2008 and 2007 amounts include a $15.8 million
and a $1.7 million impairment charge, respectively.
The
Company leases certain revenue equipment under capital leases with terms of 60
months. At December 31, 2009, property and equipment included
capitalized leases, which had capitalized costs of $14.0 million and accumulated
amortization of $0.2 million. Amortization of these leased assets is
included in depreciation and amortization expense in the consolidated statement
of operations and totaled $0.2 million during 2009. There was no
equipment held under capital leases during 2008 or 2007.
As a
result of sharply lower economic indicators, a worsening credit market, and
significantly lower prices received for disposals of our own used revenue
equipment, all of which deteriorated substantially during the fourth quarter of
2008, we recorded a $9.4 million asset impairment charge to write-down the
carrying values of tractors and trailers in-use in our Truckload segment which
were expected to be traded or sold in 2009 or 2010. The carrying
values for revenue equipment scheduled for trade in 2011 and beyond were not
adjusted because those tractors and trailers were not required to be impaired
based on recoverability testing using the expected future cash flows and
disposition values of such equipment.
Similarly,
in 2008 we recorded a $6.4 million asset impairment charge ($1.2 million
was recorded in the third quarter and $5.2 million was recorded in the fourth
quarter) to write down the carrying values of tractors and trailers held for
sale in our Truckload segment which were expected to be traded or sold in future
periods.
Although
we do not expect to be required to make any current or future cash expenditures
as a result of these impairment charges, cash proceeds of future disposals of
revenue equipment are anticipated to be lower than expected prior to the
impairment charges.
Our
evaluation of the future cash flows compared to the carrying value of the
tractors and trailers in-use in 2009 has not resulted in any additional
impairment charges. Additionally, there were no indicators triggering
an evaluation for impairment of assets held for sale during the 2009 period, as
evidenced by our minimal gains and losses on the disposal of revenue equipment,
including assets held for sale.
In
addition, our 2007 asset impairment charge was related 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.
In 2009,
we began a multi-year project to upgrade the hardware and software of our
information systems. The goal upon completion of the project is to
have uniform operational and financial systems across the entire company as we
believe this will improve customer service, utilization, and enhance our
visibility into and across the organization. The Company incurred
approximately $2.6 million in 2009 related to this system upgrade, and all
related amounts are included in construction in progress in the consolidated
balance sheet as the related systems were not implemented at December 31,
2009.
7
. GOODWILL
AND OTHER ASSETS
Goodwill
of $11.5 million at December 31, 2009 and 2008 relates to two reporting units
within our Truckload segment. Pursuant to the applicable accounting
standards, we conducted our 2009 annual impairment test for goodwill in the
second quarter and did not identify any impairment and noted no subsequent
indicators of impairment within these reporting units.
While our
2008 annual impairment analysis performed in the second quarter did not provide
for impairment, in light of changes in market conditions and the related
declining market outlook for the Star Transportation reporting unit, which is
included in our Truckload segment, noted in the fourth quarter of 2008, we
engaged an independent third party to assist us in the completion of valuations
used in the impairment testing process. The completion of this work
concluded that the goodwill previously recorded for the Star acquisition was
fully impaired and resulted in a $24.7 million, or $1.75 per basic and diluted
share non-cash goodwill impairment charge, recorded in the fourth quarter of
2008. There was no tax benefit associated with this nondeductible
charge.
A summary
of other assets as of December 31, 2009 and 2008 is as follows:
|
(in
thousands)
|
2009
|
2008
|
||||||
|
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
|
(5,541 | ) | (4,712 | ) | ||||
|
Net intangible
assets
|
1,889 | 2,718 | ||||||
|
Investment in
Transplace
|
- | 10,666 | ||||||
|
Note receivable from
Transplace
|
- | 2,748 | ||||||
|
Other, net
|
4,722 | 4,281 | ||||||
| $ | 6,611 | $ | 20,413 | |||||
Amortization
expenses of intangible assets was $0.8 million, $1.0 million, and $0.4 million
for 2009, 2008, and 2007, respectively. Approximate intangible
amortization expense for the next five years is as follows:
|
(
In
thousands
)
|
|
|
2010
|
636
|
|
2011
|
382
|
|
2012
|
317
|
|
2013
|
227
|
|
2014
|
91
|
|
Thereafter
|
236
|
8. DEBT
Current
and long-term debt consisted of the following at December 31, 2009 and
2008:
|
(in
thousands)
|
December 31, 2009
|
December 31, 2008
|
||||||||||||||
|
Current
|
Long-Term
|
Current
|
Long-Term
|
|||||||||||||
|
Borrowings
under Credit Facility
|
$ | - | $ | 12,686 | $ | - | $ | 3,807 | ||||||||
|
Revenue
equipment installment notes; weighted average interest rate of 6.5% and
6.0% at December 31, 2009, and December 31, 2008, respectively, due in
monthly installments with final maturities at various dates ranging from
January 2010 to June 2013, secured by related revenue
equipment
|
67,000 | 118,574 | 58,718 | 101,118 | ||||||||||||
|
Real
estate note; interest rate of 2.75% and 4.0% at December 31, 2009 and
2008, respectively, due in monthly installments with fixed maturity at
October 2013, secured by related real-estate
|
365 | 2,824 | 365 | 3,031 | ||||||||||||
|
Total
debt
|
67,365 | 134,084 | 59,083 | 107,956 | ||||||||||||
|
Capital
lease obligations, secured by related
revenue equipment
|
1,098 | 12,472 | - | - | ||||||||||||
|
Total
debt and capital lease obligations
|
$ | 68,463 | $ | 146,556 | $ | 59,083 | $ | 107,956 | ||||||||
In
September 2008, the Company and substantially all its subsidiaries entered into
a Third Amended and Restated Credit Facility with Bank of America, N.A., as
agent (the "Agent"), JPMorgan Chase Bank, N.A. ("JPM"), and Textron Financial
Corporation ("Textron"); collectively with the Agent, and JPM, the ("Lenders")
that matures September 2011 (the "Credit Facility").
The
Credit Facility is structured as an $85.0 million revolving credit facility,
with an accordion feature that, so long as no event of default exists, allows
the Company to request an increase in the revolving credit facility of up to
$50.0 million. The Credit Facility includes, within its $85.0 million
revolving credit facility, with an accordion feature that, so long as no event
of default exists, allows the Company to request an increase in the revolving
credit facility of up to $50.0 million. The Credit Facility includes,
within its $85.0 million revolving credit facility, a letter of credit sub
facility in an aggregate amount of $85.0 million and a swing line sub facility
in an aggregate amount equal to the greater of $10.0 million or 10% of the
Lenders' aggregate commitments under the Credit Facility from time to
time.
Borrowings
under the Credit Facility are classified as either "base rate loans" or "LIBOR
loans". Base rate loans accrue interest at a base rate equal to the
greater of the prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%,
plus an applicable margin that is adjusted quarterly between 2.5% and 3.25%
based on average pricing availability. LIBOR loans accrue interest at
the greater of 1.5% or LIBOR, plus an applicable margin that is adjusted
quarterly between 3.5% and 4.25% based on average pricing
availability. The unused line fee is adjusted quarterly based between
0.5% and 0.75% of the average daily amount by which the Lenders' aggregate
revolving commitments under the Credit Facility exceed the outstanding principal
amount of revolver loans and the aggregate undrawn amount of all outstanding
letters of credit issued under the Credit Facility. The obligations
under the Credit Facility are guaranteed by the Company and secured by a pledge
of substantially all of the Company's assets, with the notable exclusion of any
real estate or revenue equipment pledged under other financing agreements,
including revenue equipment installment notes and capital leases.
Borrowings
under the Credit Facility are subject to a borrowing base limited to the lesser
of (A) $85.0 million, minus the sum of the stated amount of all outstanding
letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable,
plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value
of eligible revenue equipment, (b) 95% of the net book value of eligible revenue
equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the
Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the
appraised fair market value of eligible real estate. The borrowing
base is limited by a $15.0 million availability block, plus any other reserves
the Agent may establish in its judgment. The Company had
approximately $12.7 million in borrowings outstanding under the Credit Facility
as of December 31, 2009, undrawn letters of credit outstanding of approximately
$42.0 million, and available borrowing capacity of $27.7 million. The
weighted average interest rate on outstanding borrowings was 6.3%.
On March
27, 2009, the Company obtained an amendment to its Credit Facility, which, among
other things, (i) retroactively to January 1, 2009 amended the fixed charge
coverage ratio covenant for January and February 2009 to the actual levels
achieved, which cured our default of that covenant for January 2009, (ii)
restarted the look back requirements of the fixed charge coverage ratio covenant
beginning on March 1, 2009, (iii) increased the EBITDAR portion of the fixed
charge coverage ratio definition by $3.0 million for all periods between March 1
to December 31, 2009, (iv) increased the base rate applicable to base rate loans
to the greater of the prime rate, the federal funds rate plus 0.5%, or LIBOR
plus 1.0%, (v) sets a LIBOR floor of 1.5%, (vi) increased the applicable margin
for base rate loans to a range between 2.5% and 3.25% and for LIBOR loans to a
range between 3.5% and 4.25%, with 3.0% (for base rate loans) and 4.0% (for
LIBOR loans) to be used as the applicable margin through September 2009, (vii)
increased the Company's letter of credit facility fee by an amount corresponding
to the increase in the applicable margin, (viii) increased the unused line fee
to a range between 0.5% and 0.75%, and (ix) increased the maximum number of
field examinations per year from three to four. In exchange for these
amendments, the Company agreed to the increases in interest rates and fees
described above and paid fees of approximately $0.5 million.
The
Credit Facility includes usual and customary events of default for a facility of
this nature and provides that, upon the occurrence and continuation of an event
of default, payment of all amounts payable under the Credit Facility may be
accelerated, and the Lenders' commitments may be terminated. The
Credit Facility contains certain restrictions and covenants relating to, among
other things, dividends, liens, acquisitions and dispositions outside of the
ordinary course of business, and affiliate transactions. The Credit
Facility contains a single financial covenant, which required the Company to
maintain a consolidated fixed charge coverage ratio of at least 1.0 to
1.0. The fixed charge coverage covenant became effective October 31,
2008, and the Company was in compliance with the covenant as of December 31,
2009.
On
February 25, 2010, the Company obtained an additional amendment to its Credit
Facility, which, among other things (i) amended certain defined terms in the
Credit Facility, (ii) retroactively to January 1, 2010, amended the fixed charge
coverage ratio covenant through June 30, 2010, to the levels set forth in the
table below, which prevented a default of that covenant for January 2010, (iii)
restarted the look back requirements of the fixed coverage ratio covenant
beginning on January 1, 2010, and (iv) required the Company to order updated
appraisals for certain real estate described in the Credit
Facility. In exchange for these amendments, we agreed to pay the
Agent, for the pro rata benefit of the Lenders, a fee equal to 0.125% of the
Lenders' total commitments under the Credit Facility, or approximately $0.1
million. Following the effectiveness of the amendment, our fixed
charge coverage ratio covenant requirement will be as follows:
|
One
month ending January 31, 2010
|
.80
to 1.00
|
|
Two
months ending February 28, 2010
|
.65
to 1.00
|
|
Three
months ending March 31, 2010
|
.72
to 1.00
|
|
Four
months ending April 30, 2010
|
.80
to 1.00
|
|
Five
months ending May 31, 2010
|
.85
to 1.00
|
|
Six
months ending June 30, 2010
|
.90
to 1.00
|
|
Seven
months ending July 31, 2010
|
1.00
to 1.00
|
|
Eight
months ending August 31, 2010
|
1.00
to 1.00
|
|
Nine
months ending September 30, 2010
|
1.00
to 1.00
|
|
Ten
months ending October 31, 2010
|
1.00
to 1.00
|
|
Eleven
months ending November 30, 2010
|
1.00
to 1.00
|
|
Twelve
months ending December 31, 2010
|
1.00
to 1.00
|
|
Each
rolling twelve-month period thereafter
|
1.00
to 1.00
|
Capital
lease obligations are utilized to finance a portion of our revenue equipment and
are entered into with certain finance companies who are not parties to our
Credit Facility. The leases terminate in January 2015 and contain
guarantees of the residual value of the related equipment by the Company, and
the residual guarantee's are included in the related debt balance as balloon
payment at the end of the related term as well as included in the future minimum
lease payments. These lease agreements require us to pay personal
property taxes, maintenance and operating expenses.
Pricing
for the revenue equipment installment notes are quoted by the respective
financial captives of our primary revenue equipment suppliers at the funding of
each group of equipment acquired and include fixed annual rates for new
equipment under retail installment contracts. Approximately $185.6
million and $159.8 million were reflected on our balance sheet for these
installment notes at December 31, 2009 and 2008, respectively. The
notes included in the funding are due in monthly installments with final
maturities at various dates ranging from January 2010 to June
2013. The notes contain certain requirements regarding payment,
insurance of collateral, and other matters, but do not have any financial or
other material covenants or events of default. Additional borrowings
from the financial captives of our primary revenue equipment suppliers are
available to fund new tractors expected to be delivered in 2010.
As of
December 31, 2009, the scheduled principal payments of debt, excluding capital
leases for which future payments are discussed in Note 9 are as
follows:
|
(in
thousands)
|
||||
|
2010
|
$ | 67,365 | ||
|
2011
|
$ | 65,572 | ||
|
2012
|
$ | 64,851 | ||
|
2013
|
$ | 3,661 | ||
|
2014
|
$ | 0 | ||
|
Thereafter
|
$ | 0 | ||
9. LEASES
The
Company has operating lease commitments for office and terminal properties,
revenue equipment, and computer and office equipment and capital lease
commitments for revenue equipment, exclusive of owner/operator rentals and
month-to-month equipment rentals, summarized for the following fiscal years (in
thousands):
| Operating |
Capital
|
||||||||
|
2010
|
$ | 22,898 | $ | 2,177 | |||||
|
2011
|
9,650 | 2,177 | |||||||
|
2012
|
7,668 | 2,177 | |||||||
|
2013
|
5,358 | 2,177 | |||||||
|
2014
|
3,216 | 8,064 | |||||||
|
Thereafter
|
33,199 | 1,280 | |||||||
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 $23.6 million
and $21.4 million at December 31, 2009 and 2008,
respectively. Approximately $12.7 million and $10.9 million of the
residual guarantees at December 31, 2009 expire in 2010 and 2011,
respectively. The Company expects its residual guarantees to
approximate the expected market value at the end of the lease
term. Additionally, certain leases contain cross-default provisions
with other financing agreements and additional charges if the unit's mileage
exceeds certain thresholds defined in the lease agreement.
Rental
expense is summarized as follows for each of the three years ended December
31:
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Revenue
equipment rentals
|
$ | 25,863 | $ | 31,219 | $ | 33,546 | ||||||
|
Building
and lot rentals
|
3,976 | 3,884 | 4,067 | |||||||||
|
Other
equipment rentals
|
1,829 | 2,097 | 2,759 | |||||||||
| $ | 31,668 | $ | 37,200 | $ | 40,372 | |||||||
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. 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, which comprises a
significant portion of building rentals above. The transaction
resulted in a gain of approximately $2.1 million, which is being amortized
ratably over the life of the lease, noting $1.8 million of the deferred gain is
included in other long-term liabilities in the consolidated balance
sheet.
10. INCOME
TAXES
Income
tax expense (benefit) for the years ended December 31, 2009, 2008, and 2007 is
comprised of:
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Federal,
current
|
$ | 189 | $ | (208 | ) | $ | (6,202 | ) | ||||
|
Federal,
deferred
|
(4,547 | ) | (10,901 | ) | (498 | ) | ||||||
|
State,
current
|
(34 | ) | 72 | (78 | ) | |||||||
|
State,
deferred
|
(626 | ) | (1,755 | ) | 1,198 | |||||||
| $ | (5,018 | ) | $ | (12,792 | ) | $ | (5,580 | ) | ||||
Income
tax expense 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, 2009, 2008, and 2007 as follows:
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Computed
"expected" income tax expense
|
$ | (10,517 | ) | $ | (23,164 | ) | $ | (7,809 | ) | |||
|
State
income taxes, net of federal income tax effect
|
(1,050 | ) | (2,316 | ) | (781 | ) | ||||||
|
Per
diem allowances
|
3,320 | 2,769 | 2,371 | |||||||||
|
Tax
contingency accruals
|
(216 | ) | (131 | ) | (105 | ) | ||||||
|
Nondeductible
foreign operating (income) loss
|
(504 | ) | 298 | 290 | ||||||||
|
Nondeductible
goodwill impairment
|
- | 9,498 | - | |||||||||
|
Realization
of outside basis difference related to Transplace
|
2,599 | - | - | |||||||||
|
Valuation
allowance
|
1,896 | - | - | |||||||||
|
Disallowed
interest
|
(189 | ) | - | - | ||||||||
|
Other,
net
|
(357 | ) | 254 | 454 | ||||||||
|
Actual
income tax expense
|
$ | (5,018 | ) | $ | (12,792 | ) | $ | (5,580 | ) | |||
The
temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 2009 and 2008 are as
follows:
|
(in
thousands)
|
2009
|
2008
|
||||||
|
Net
deferred tax assets:
|
||||||||
|
Allowance for doubtful
accounts
|
$ | 702 | $ | 412 | ||||
|
Insurance and
claims
|
7,594 | 11,087 | ||||||
|
Net operating loss
carryovers
|
38,398 | 13,625 | ||||||
|
Capital
loss carryover related to Transplace
|
1,671 | - | ||||||
|
Investments
|
- | 163 | ||||||
|
Other accrued
liabilities
|
476 | 988 | ||||||
|
Other, net
|
4,933 | 2,221 | ||||||
|
Valuation
allowance
|
(1,896 | ) | - | |||||
|
Total
net deferred tax assets
|
51,878 | 28,496 | ||||||
|
Net
deferred tax liabilities:
|
||||||||
|
Property and
equipment
|
(71,127 | ) | (56,865 | ) | ||||
|
Intangible
and other assets
|
(1,899 | ) | (1,797 | ) | ||||
|
Prepaid
expenses
|
(2,919 | ) | (2,374 | ) | ||||
|
Total
net deferred tax liabilities
|
(75,945 | ) | (61,036 | ) | ||||
|
Net
deferred tax liability
|
$ | (24,067 | ) | $ | (32,540 | ) | ||
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. There was no
valuation allowance in 2008 or 2007. Based on forecasted taxable
income and tax planning strategies available to the Company, no valuation
allowance has been established at December 31, 2009, except for $0.3 million
related to certain state net operating loss carryforwards and $1.6 million
related to the deferred tax asset associated with the Company's capital loss
generated by the loss on the sale of its investment in
Transplace. These valuation allowances were established because the
Company believes that it is more likely than not that certain state net
operating loss carryforwards and the capital loss carryforward related to
Transplace will not be realized. If these estimates and related
assumptions change in the future, it may be required to modify its valuation
allowance against the carrying value of the deferred tax assets.
The
activity in the valuation allowance on deferred tax assets (in thousands) is as
follows:
|
Year
ended December 31:
|
Beginning
balance
January
1,
|
Additional
provisions
to
allowance
|
Write-offs
and
other
deductions
|
Ending
balance
December
31,
|
||||||||||||
|
2009
|
$ | - | $ | 1,896 | $ | - | $ | 1,896 | ||||||||
The
Company was required to adopt the FASB's new guidance on accounting for
uncertain tax positions, effective January 1, 2007. This guidance
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements 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 December 31, 2009, the Company had a $3.1 million
liability recorded for unrecognized tax benefits, which includes interest and
penalties of $1.0 million. The Company recognizes interest and
penalties accrued related to unrecognized tax benefits in tax
expense. As of December 31, 2008, the Company had a $2.8 million
liability recorded for unrecognized tax benefits, which included interest and
penalty of $0.8 million. Interest and penalties recognized for
uncertain tax positions were approximately $0.2 million, $0.1 million, and $0.1
million in 2009, 2008, and 2007, respectively.
The
following tables summarize the annual activity related to the Company's gross
unrecognized tax benefits (in thousands) for the years ended December 31, 2009,
2008, and 2007:
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
as of January 1,
|
$ | 1,971 | $ | 1,923 | $ | 2,295 | ||||||
|
Increases related to prior year
tax positions
|
67 | 206 | 53 | |||||||||
|
Decreases related to prior year
positions
|
(3 | ) | (3 | ) | (439 | ) | ||||||
|
Increases related to current
year tax positions
|
279 | 17 | 159 | |||||||||
|
Decreases related to settlements
with taxing authorities
|
(122 | ) | (28 | ) | (69 | ) | ||||||
|
Decreases related to lapsing of
statute of limitations
|
(55 | ) | (144 | ) | (76 | ) | ||||||
|
Balance
as of December 31,
|
$ | 2,137 | $ | 1,971 | $ | 1,923 | ||||||
If
recognized, $2.1 million and $1.8 million of unrecognized tax benefits would
impact the Company's effective tax rate as of December 31, 2009 and 2008
respectively. 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.
The
Company's 2006 through 2009 tax years remain subject to examination by the IRS
for U.S. federal tax purposes, the Company's 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 more
likely than not 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.
The
Company's federal net operating loss carryforwards are available to offset
future federal taxable income, if any, through 2029, while its state net
operating loss carryforwards and state tax credits expire over various periods
through 2029 based on jurisdiction. The capital loss carryforward
related to the loss on the investment in Transplace is available to offset
future capital gains through 2014.
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 2009, 2008, or 2007. The stock repurchase plan
expired on June 30, 2009. However, as discussed in Note 4, we
remitted approximately $0.1 million to the proper taxing authorities in
satisfaction of the employees' minimum statutory withholding requirements
related to employees' vesting in restricted share grants. The tax
withholding amounts paid by the Company have been accounted for as a repurchase
of shares. Our Credit Facility prohibits the repurchase of any
shares, except those purchased to off-set an employee's minimum statutory
withholding requirements upon the vesting of equity awards, without obtaining
approval from the lenders.
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 made minimal
contributions in 2009 and contributed approximately $1.3 and $1.2 million in
2008 and 2007, respectively, to the profit sharing and savings
plan. The Board approved the suspension of employee matching
"discretionary" contributions to be made beginning early in 2009 for an
indefinite time period.
13. RELATED
PARTY TRANSACTIONS
As
discussed in Note 5, from July 2001 through December 2009, we owned
approximately 12.4% of Transplace and had receivables from Transplace related to
a bridge loan made in 2005 and related accrued interest. In addition,
the Company provides transportation services to Transplace which provided for
gross revenues of approximately $18.8 million, $26.2 million, and $16.0 million
during 2009, 2008, and 2007, respectively. The trade accounts
receivable balance as of December 31, 2008 was approximately $4.7
million.
Additionally,
a company wholly owned by a relative of a significant shareholder and executive
officer operated a "company store" on a rent-free basis in the Company's
headquarters building, and used Covenant service marks on its products at no
cost. The "company store" ceased operations in 2008. The
Company paid fair market value for all supplies that were purchased which
totaled approximately less than $0.1 million and $0.1 million in 2008 and 2007,
respectively.
14. DERIVATIVE
INSTRUMENTS
The
Company engages in activities that expose it to market risks, including the
effects of changes in 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 fuel
markets may have on operating results. In an effort to seek to reduce
the variability of the ultimate cash flows associated with fluctuations in
diesel fuel prices, we periodically enter into various derivative instruments,
including forward futures swap contracts. The Company does not engage
in speculative transactions, nor does it hold or issue financial instruments for
trading purposes. Additionally, 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.
The
Company did not enter into any derivatives until the third quarter of 2009;
however, in September 2009, we entered into forward futures swap contracts,
which pertain to 2.5 million gallons or approximately 4% percent of our
projected January through December 2010 fuel requirements. Under
these contracts, we pay a fixed rate per gallon of heating oil and receive the
monthly average price of New York heating oil, noting the retrospective and
prospective regression analyses provided that changes in the prices of diesel
fuel and heating oil were deemed to be highly effective based on the relevant
authoritative guidance.
We
perform, at least quarterly, both a prospective and retrospective assessment of
the effectiveness of our hedge contracts, including assessing the possibility of
counterparty default. If we determine that a derivative is no longer
expected to be highly effective, we discontinue hedge accounting prospectively
and recognize subsequent changes in the fair value of the hedge in
earnings. As a result of our effectiveness assessment at
December 31, 2009, we believe our hedge contracts will continue to be
highly effective in offsetting changes in cash flow attributable to the hedged
risk.
We
recognize all derivative instruments at fair value on our consolidated balance
sheet. The Company's derivative instruments are designated as cash
flow hedges, thus the effective portion of the gain or loss on the derivative is
reported as a component of accumulated other comprehensive income and will be
reclassified into earnings in the same period during which the hedged
transaction affects earnings. The effective portion of the derivative
represents the change in fair value of the hedge that offsets the change in fair
value of the hedged item. To the extent the change in the fair value
of the hedge does not perfectly offset the change in the fair value of the
hedged item, the ineffective portion of the hedge is immediately recognized in
other income on our consolidated statements of
operations.
As of
December 31, 2009, the derivatives had a fair value of approximately $0.5
million, which is included in other assets in the consolidated balance
sheet. Approximately 93% of the related change in fair value or $0.3
million, net of tax of $0.2 million, was deemed effective and thus is included
in accumulated other comprehensive income, while the remainder of the change
which represents the ineffective portion of the change in the hedge is included
in other expense, net in the Company's consolidated financial
statements. No amounts were reclassified from accumulated other
comprehensive income to earnings given the futures swap contracts are forward
starting in 2010 and as such there have been no transactions involving purchases
of the related diesel fuel being hedged.
Based on
fair values as of December 31, 2009 and the expected timing of the purchases of
the diesel hedged, we expect to reclassify $0.5 million of gains on derivative
instruments from accumulated other comprehensive income to earnings during the
next twelve months due to the actual diesel fuel purchases. However,
the amounts actually realized will be dependent on the fair values as of the
date of settlement.
Outstanding
financial derivative instruments expose us to credit loss in the event of
nonperformance by the counterparties to the agreements. However, we
do not expect any of the counterparties to fail to meet their
obligations. Our credit exposure related to these financial
instruments is represented by the fair value of contracts reported as
assets. To manage credit risk, we review each counterparty's audited
financial statements, credit ratings, and obtain references.
15. COMMITMENTS
AND CONTINGENT LIABILITIES
From time
to time, the Company is a party to ordinary, routine litigation arising in the
ordinary course of business, most of which involves claims for personal injury
and property damage incurred in connection with the transportation of
freight. The Company maintains insurance to cover liabilities arising
from the transportation of freight for amounts in excess of certain self-insured
retentions. In management's opinion, the Company's potential exposure
under pending legal proceedings is adequately provided for in the accompanying
consolidated financial statements.
The
Company had $42.0 million and $40.6 million of outstanding and undrawn letters
of credit as of December 31, 2009 and 2008, respectively. The letters
of credit are maintained primarily to support the Company's insurance
programs.
The
Company had commitments outstanding at December 31, 2009, to acquire revenue
equipment and communications equipment for totaling approximately $97.2 million
in 2010. These commitments are cancelable, subject to certain
adjustments in the underlying obligations and benefits. These
purchase commitments are expected to be financed by operating leases, capital
leases, long-term debt, proceeds from sales of existing equipment, and/or cash
flows from operations. The Company also had commitments outstanding
at December 31, 2009, to acquire computer software totaling $0.4 million in 2010
and 2011.
16. SEGMENT
INFORMATION
As
previously discussed, we have two reportable segments: Asset-Based Truckload
Services and our Brokerage Services.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Substantially all
intersegment sales prices are market based. The Company evaluates
performance based on operating income of the respective business
units.
"Unallocated
Corporate Overhead" includes expenses that are incidental to our activities and
are not specifically allocated to one of the segments.
|
Year
Ended December 31, 2009
|
Truckload
|
Brokerage
|
Unallocated
Corporate Overhead
|
Consolidated
|
||||||||||||
|
Revenue
– external customers
|
$ | 541,325 | $ | 58,771 | $ | - | $ | 600,096 | ||||||||
|
Intersegment
revenue
|
- | (11,409 | ) | - | (11,409 | ) | ||||||||||
|
Operating
income (loss) (1)
|
10,552 | 155 | (15,429 | ) | (4,722 | ) | ||||||||||
|
Depreciation
and amortization
|
46,482 | 374 | 1,266 | 48,122 | ||||||||||||
|
Goodwill
at carrying value
|
11,539 | - | - | 11,539 | ||||||||||||
|
Total
assets
|
369,979 | 7,856 | 20,477 | 398,312 | ||||||||||||
|
Capital
expenditures, net
|
60,946 | 104 | 1,958 | 63,008 | ||||||||||||
|
Year
Ended December 31, 2008
|
||||||||||||||||
|
Revenue
– external customers
|
$ | 719,220 | $ | 74,474 | $ | - | $ | 793,694 | ||||||||
|
Intersegment
revenue
|
- | (19,780 | ) | - | (19,780 | ) | ||||||||||
|
Operating
income (loss) (2)
|
(37,091 | ) | 466 | (19,054 | ) | (55,679 | ) | |||||||||
|
Depreciation
and amortization (3)
|
61,888 | 81 | 1,266 | 63,235 | ||||||||||||
|
Goodwill
at carrying value
|
11,539 | - | - | 11,539 | ||||||||||||
|
Total
assets
|
351,831 | 11,770 | 30,075 | 393,676 | ||||||||||||
|
Capital
expenditures, net
|
58,587 | 222 | 3,837 | 62,646 | ||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||
|
Revenue
– external customers
|
$ | 692,722 | $ | 26,716 | $ | - | $ | 719,438 | ||||||||
|
Intersegment
revenue
|
- | (6,912 | ) | - | (6,912 | ) | ||||||||||
|
Operating
income (loss) (4)
|
(7,011 | ) | 1,031 | (4,701 | ) | (10,681 | ) | |||||||||
|
Depreciation
and amortization (4)
|
53,169 | 18 | 354 | 53,541 | ||||||||||||
|
Goodwill
at carrying value
|
36,210 | - | - | 36,210 | ||||||||||||
|
Total
assets
|
419,225 | 726 | 19,843 | 439,794 | ||||||||||||
|
Capital
expenditures, net
|
10,161 | 217 | 730 | 11,108 | ||||||||||||
|
(1)
|
Unallocated
corporate overhead includes $11.5 million loss on Transplace discussed in
Note 5.
|
|
(2)
|
Truckload
segment includes $24.7 million goodwill impairment discussed in Note 7 and
$15.8 million related to property and equipment impairments discussed in
Note 6.
|
|
(3)
|
Truckload
segment includes $15.8 million related to property and equipment
impairments discussed
in
Note 6.
|
|
(4)
|
Truckload
segment includes $1.7 million property and impairment discussed in Note
6.
|
17. QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)
|
(in
thousands except per share amounts)
|
||||||||||||||||
|
Quarters
ended
|
Mar.
31, 2009
|
June
30, 2009
|
Sep.
30, 2009
|
Dec.
31, 2009
|
||||||||||||
|
Freight
revenue
|
$ | 122,129 | $ | 129,247 | $ | 133,332 | $ | 135,787 | ||||||||
|
Operating
income (loss)
|
(5,145 | ) | (637 | ) | 1,829 | (769 | ) | |||||||||
|
Net
loss
|
(5,543 | ) | (3,146 | ) | (13,600 | ) | (2,741 | ) | ||||||||
|
Basic
and diluted loss per share (1)
|
(0.39 | ) | (0.22 | ) | (0.96 | ) | (0.19 | ) | ||||||||
|
(in
thousands except per share amounts)
|
||||||||||||||||
|
Quarters
ended
|
Mar.
31, 2008
|
June
30, 2008
|
Sep.
30, 2008
|
Dec.
31, 2008
|
||||||||||||
|
Freight
revenue
|
$ | 148,596 | $ | 160,451 | $ | 162,901 | $ | 143,862 | ||||||||
|
Operating
loss
|
(9,594 | ) | (256 | ) | (720 | ) | (45,109 | ) | ||||||||
|
Net
loss
|
(7,821 | ) | (2,349 | ) | (3,416 | ) | (39,805 | ) | ||||||||
|
Basic
and diluted loss per share
|
(0.56 | ) | (0.17 | ) | (0.24 | ) | (2.83 | ) | ||||||||
|
(1)
|
Quarter
totals do not aggregate to annual loss per share due to
rounding.
|
73
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (reserved and Removed)Part IIItem 5. Market For Registrant's Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9a(t). Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers, and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules