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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
[X] |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
|
For
the fiscal year ended December 31, 2004 |
|
OR |
[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
|
For
the transition period from to |
Commission
file number 0-24960
COVENANT
TRANSPORT, INC.
(Exact
name of registrant as specified in its charter)
Nevada |
|
88-0320154 |
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
No.) |
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|
|
400
Birmingham Hwy. |
|
|
Chattanooga,
TN |
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37419 |
(Address
of principal executive offices) |
|
(Zip
Code) |
Registrant's
telephone number, including area code: |
423-821-1212 |
|
|
Securities
registered pursuant to Section 12(b) of the Act: |
None |
|
|
Securities
registered pursuant to Section 12(g) of the Act: |
$0.01
Par Value Class A Common Stock |
|
(Title of class) |
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes
[ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). [X] Yes
[ ] No
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2004, the last business day of the registrant's
most recently completed fiscal second quarter was approximately
$160.0 million (based upon the $17.09 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 1, 2005, the registrant had 12,340,492 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 2005 annual meeting of
stockholders to be held on May 10, 2005 have been incorporated by reference into
Part III of this Form 10-K.
|
Part
I |
|
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|
Business |
3 |
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|
Properties |
10 |
|
|
Legal
Proceedings |
10 |
|
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Submission
of Matters to a Vote of Security Holders |
10 |
|
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Part
II |
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
11 |
|
|
Selected
Financial and Operating Data |
12 |
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations |
14 |
|
|
Quantitative
and Qualitative Disclosures about Market Risk |
30 |
|
|
Financial
Statements and Supplementary Data |
31 |
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
31 |
|
|
Controls
and Procedures |
32 |
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|
Other
Information |
|
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|
Part
III |
|
|
|
|
Directors
and Executive Officers of the Registrant |
33 |
|
|
Executive
Compensation |
33 |
|
|
Security
Ownership of Certain Beneficial Owners and Management |
33 |
|
|
Certain
Relationships and Related Transactions |
34 |
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Principal
Accounting Fees and Services |
34 |
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Part
IV |
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Exhibits,
Financial Statement Schedules |
35 |
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37 |
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Reports of Independent Registered Public Accounting
Firm |
38 |
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Financial
Data |
|
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|
40 |
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41 |
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42 |
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43 |
|
Notes to Consolidated Financial
Statements |
44 |
PART
I
This
Annual Report contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements may be identified by their use of terms or phrases such as "expects,"
"estimates," "projects," "believes," "anticipates," "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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors that May
Affect Future Results" 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. We disclaim any obligation to update or
revise any forward-looking statements to reflect actual results or changes in
the factors affecting the forward-looking information.
References
in this Annual Report to "we," "us," "our," or the "Company" or similar terms
refer to Covenant Transport, Inc. and its
subsidiaries.
General
We are
one of the ten largest truckload carriers in the United States measured by
revenue, according to Transport
Topics, a
publication of the American Trucking Associations. We focus on targeted markets
where we believe our service standards can provide a competitive advantage. We
are a major carrier for traditional truckload customers such as manufacturers
and retailers, as well as for transportation companies such as freight
forwarders, less-than-truckload carriers, and third-party logistics providers
that require a high level of service to support their businesses.
Offering
superior service is a key component of our marketing and operations
strategy. In each of the past ten years, we have provided 99% on-time
performance to our customers, measured by the delivery standards they give
us. By targeting premium service freight, we seek to obtain higher rates,
build long-term service-based customer relationships, and avoid
competition from rail, intermodal, and trucking companies that compete
primarily on the basis of price. |
![](delivery.jpg) |
We were
founded as a provider of expedited long-haul freight transportation, primarily
using two-person driver teams in transcontinental lanes. From our inception in
1986 through the late 1990's, we focused primarily on expedited team service.
During this time, approximately 60% to 70% of our tractors were operated by
teams, and our solo driver operations primarily supported certain customer needs
and provided a driver pool from which to build teams. Our operations were
characterized by very long lengths of haul, intense asset utilization that
generated significant mileage and revenue per truck, and a high level of
customer service.
Beginning
in the late 1990's and continuing into 2001, a combination of customer demand
for additional services, changes in freight distribution patterns, a desire to
reduce exposure to the more cyclical and seasonal long-haul markets, and a
desire for additional growth markets convinced us to offer additional services.
Through our acquisitions of Bud Meyer Truck Line and Southern Refrigerated
Transport, we entered the temperature-controlled market. Through our
acquisitions of Harold Ives Trucking and Con-Way Truckload Services, we
developed a significant solo-driver operation. In addition, over the past
several years, we internally developed the capacity to provide dedicated fleet
services.
The
following charts demonstrate the development of our business into multiple
transportation services.
Today, we
categorize our business into the following four major transportation
services:
· |
Expedited
Team Service. At December 31, 2004, we operated approximately 1,030
two-person driver teams, of which approximately 786 teams operated in our
expedited team service, with the remainder of our teams operating in our
dedicated and temperature-controlled services.. Our teams generally
operate over distances ranging from 1,000 to 2,000 miles and had an
average length of haul 1,266 miles in 2004. Our expedited teams offer
service standards such as coast-to-coast delivery in 72 hours,
meeting delivery appointments within 15 minutes, and delivering 99%
of loads on-time. We believe our expedited teams offer greater speed and
reliability than rail, rail-truck intermodal, and solo-driver competitors
at a lower cost than air freight. The main advantage to us of expedited
team service is high revenue per tractor. The main challenges are managing
the mileage on the trucks to avoid decreasing the resale value and
recruiting and pairing two drivers, particularly during driver shortages,
which tend to coincide with strong economic activity that increases
demand. |
|
|
· |
Dedicated
Fleet Service. At December 31, 2004, we operated approximately 554
tractors in our dedicated fleet service. These tractors operate for a
single customer or on a defined route and frequently have contractually
guaranteed revenue. This part of our business has grown rapidly as over
the past two years as customers have desired committed capacity and we
have expanded our participation in their design, development, and
execution of supply chain solutions. We believe the advantages of
dedicated fleet service include protection against rate pressure during
the term of the agreement and predictable equipment utilization and
routes, which assist with driver retention, asset productivity and
management planning. We believe the challenges of dedicated fleets include
limited ability to react to certain cost changes and to increase rates to
take advantage of market shifts. |
|
|
· |
Temperature-Controlled
Service. At December 31, 2004, we operated approximately
648 tractors in our temperature-controlled service. Most operate in
our Southern Refrigerated Transport, or SRT, subsidiary, but we also have
temperature-controlled operations under the Covenant name. Our
temperature-controlled operations primarily transport fresh produce from
the West Coast to the Midwest or Southeast and return with either
temperature-controlled or general commodities. We believe the advantages
of temperature-controlled service include less cyclical freight patterns
and a growing population that requires food products. We believe the
challenges of temperature-controlled service include more expensive
trailers, the perishable nature of commodities, and the fuel and
maintenance expense associated with refrigeration
units. |
|
|
· |
Regional
Truckload Service. At December 31, 2004, we operated approximately
1,488 tractors in our regional truckload service. The average length
of haul was 881 miles in 2004. We expect this to decrease over time as our
business gravitates toward movements with lengths of haul closer to
500-600 miles. According to industry sources, 70-80% of the freight
transported in the United States moves in distances of less than 500
miles. We expect most freight to continue to move in regional lengths of
haul as manufacturers, retailers, and distributors move elements of their
supply chains into closer proximity. We believe the advantages of regional
truckload service include access to large freight volumes, generally
higher rates per mile, and driver-friendly routes. We believe the
disadvantages of regional truckload service include lower equipment
utilization and a greater percentage of non-revenue miles than in
long-haul lanes. |
The
development of our business into four major transportation services has affected
our operating metrics over time. Three measures with significant changes are
average length of haul, average revenue per mile (excluding fuel surcharges),
and average miles per tractor. A description of each follows:
Our
average length of haul has decreased significantly 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. |
![](haullength.jpg) |
Average
Revenue Per Mile. Our average revenue per mile has increased sharply.
Average revenue per loaded mile has increased 12.0% since 2000, while
non-revenue miles have also increased. This led to a 10.4% increase in
average revenue per total mile. All revenue per mile numbers exclude fuel
surcharge revenue. |
![](permilerev.jpg) |
Average
Miles Per Tractor. Our average miles per tractor have decreased because of
a lower percentage of teams in our fleet and a shortening of our average
length of haul. |
![](milesavg.jpg) |
Because
of the changes in our business, 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. |
![](freightrev.jpg) |
Customers
and Operations
Our
primary customers include manufacturers and retailers, as well as other
transportation companies. In 2004, our five largest customers were Wal-Mart
Stores, Con-Way Transportation, Georgia Pacific, Eagle Global Logistics and Shaw
Industries. In the aggregate, subsidiaries of CNF, Inc. including Con-Way
Transportation and Emery Air Freight, accounted for approximately 9% of our
revenue in 2004 and 11% for 2003 and 2002.
We
operate tractors driven by a single driver and also tractors assigned to
two-person driver teams. Over time the percentage of our revenue generated by
driver teams has trended down, although the mix will depend on a variety of
factors over time. Our single driver tractors generally operate in shorter
lengths of haul, generate fewer miles per tractor, and experience more
non-revenue miles, but the lower productive miles are expected to be offset by
generally higher revenue per loaded mile and the reduced employee expense of
compensating only one driver.
We equip
our tractors with a satellite-based tracking and communications system that
permits direct communication between drivers and fleet managers. We believe that
this system enhances our operating efficiency and improves customer service and
fleet management. This system also updates the tractor's position every 30
minutes, which allows us and our customers to locate freight and accurately
estimate pick-up and delivery times. We also use the system to monitor engine
idling time, speed, performance, and other factors that affect operating
efficiency.
As an
additional service to customers, we offer electronic data interchange and
Internet-based communication for customer usage in tendering loads and accessing
information such as cargo position, delivery times, and billing information.
These services allow us to communicate electronically with our customers,
permitting real-time information flow, reductions or eliminations in paperwork,
and the employment of fewer clerical personnel. Since 1997, we have used a
document imaging system to reduce paperwork and enhance access to important
information.
Our
operations generally follow the seasonal norm for the trucking industry.
Equipment utilization is usually at its highest from May to August, maintains
high levels through October, and generally decreases during the winter holiday
season and as inclement weather impedes operations.
We
operate throughout the United States and in parts of Canada and Mexico, with
substantially all of our revenue generated from within the United States. All of
our assets are domiciled in the United States, and for the past three years less
than one percent of our revenue has been generated in Canada and Mexico. We do
not separately track domestic and foreign revenue from customers or domestic and
foreign long-lived assets, and providing such information would be
impracticable.
Drivers
and Other Personnel
Driver
recruitment, retention, and satisfaction are essential to our success, and we
have made each of these factors a primary element of our strategy. We recruit
both experienced and student drivers as well as independent contractor drivers
who own and drive their own tractor and provide their services to us under
lease. We conduct recruiting and/or driver orientation efforts from four of our
locations and we offer ongoing training throughout our terminal network. We
emphasize driver-friendly operations throughout our organization. We have
implemented automated programs to signal when a driver is scheduled to be routed
toward home, and we assign fleet managers specific tractor units, regardless of
geographic region, to foster positive relationships between the drivers and
their principal contact with us.
The
truckload industry has periodically experienced difficulty in attracting and
retaining enough qualified truck drivers. It is also common for the driver
turnover rate of individual carriers to exceed 100%. We believe a combination of
greater demand for freight transportation and the alternative careers provided
by the expansion in economic activity over the past few years, together with the
demographics of the truck driving population and other factors, have exacerbated
the shortage of drivers recently. This has increased our costs of recruiting,
training, and retaining drivers and has resulted in more of our trucks lacking
drivers.
We use
driver teams in a substantial portion of our tractors. Driver teams permit us to
provide expedited service on selected long-haul lanes because driver teams are
able to handle longer routes and drive more miles while remaining within
Department of Transportation ("DOT") safety rules. The use of teams contributes
to greater equipment utilization of the tractors they drive than obtained with
single drivers. The use of teams, however, increases personnel costs as a
percentage of revenue and the number of drivers we must recruit. At
December 31, 2004, teams operated approximately 30% of our
tractors.
We are
not a party to a collective bargaining agreement. At December 31, 2004, we
employed approximately 4,936 drivers and approximately 927 nondriver personnel.
At December 31, 2004, we also contracted with approximately 217 independent
contractor drivers. We believe that we have a good relationship with our
personnel.
Revenue
Equipment
We
believe that operating high quality, late-model equipment contributes to
operating efficiency, helps us recruit and retain drivers, and is an important
part of providing excellent service to customers. Our policy is to operate our
tractors while under warranty to minimize repair and maintenance cost 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, 2004, our tractor fleet had an average age of
approximately 16 months and our trailer fleet had an average age of
approximately 35 months. Approximately 82% of our tractors were equipped with
post October 2002 emission-compliant engines. Approximately 87% of our trailers
were dry vans and the remainder were temperature-controlled vans.
Industry
and Competition
The U.S.
market for truck-based transportation services generated total revenues of
approximately $610.1 billion in 2003 and is projected to follow in line
with the overall U.S. economy. The trucking industry includes both private
fleets and "for-hire" carriers. We operate in the highly fragmented for-hire
truckload segment of this market, which generated estimated revenues of
approximately $270 billion in 2003. Our dedicated business also competes in
the estimated $279 billion private fleet portion of the overall trucking
market, by seeking to convince private fleet operators to outsource or
supplement their private fleets. The trucking industry accounted for
approximately 87% of domestic spending on freight transportation in 2002. All
market estimates contained in this section are derived from data compiled by the
American Trucking Associations.
The
United States trucking industry is highly competitive and includes thousands of
for-hire motor carriers, none of which dominates the market. Service and price
are the principal means of competition in the trucking industry. Measured by
annual revenue, the ten largest dry van truckload carriers accounted for
approximately $12.0 billion or approximately five percent of annual
for-hire truckload revenue in 2003. We compete to some extent with railroads and
rail-truck intermodal service but differentiate our self from rail and
rail-truck intermodal carriers on the basis of service because rail and
rail-truck intermodal movements are subject to delays and disruptions arising
from rail yard congestion, which reduces the effectiveness of such service to
customers with time-definite pick-up and delivery schedules.
We
believe that the cost and complexity of operating trucking fleets are increasing
and that economic and competitive pressures are likely to force many smaller
competitors and private fleets to consolidate or exit the industry over time. As
a result, we believe that larger, better capitalized companies, like us, will
have opportunities to increase profit margins and gain market share. In the
market for dedicated services, we believe that truckload carriers, like us, have
a competitive advantage over truck lessors, who are the other major participants
in the market, because we can offer lower prices by utilizing back-haul freight
within our network that traditional lessors may not have.
Over the
past two years our industry has enjoyed an improved pricing environment compared
with our historical experience. We believe that stronger freight demand and
industry-wide capacity constraints caused by a shortage of truck drivers and a
lack of capital investment in additional revenue equipment by many carriers
contributed to the pricing environment. In addition, many shippers have
recognized that the costs of operating in our industry have increased
significantly, particularly in the areas of driver compensation, revenue
equipment, fuel, and insurance and claims. Although we expect the pricing
environment to remain more favorable than average for at least the remainder of
2005, we cannot assure you that it will do so and we cannot assure you that we
will continue to capitalize on increases in pricing.
Insurance
and Claims
We
operate business with significant self-insured retention amounts for most of our
risk areas, particularly casualty claims and workers' compensation. We chose
this strategy in part because of changes in the insurance market that caused
insurance premiums for low self-insured retention programs to be prohibitively
expensive. Because of higher self-insured retentions, the frequency, severity,
and timing of claims have a significant effect on our insurance and claims
expense, balance sheet reserves, and letter of credit requirements. During the
fourth quarter of 2004, we recorded a $19.6 million non-cash, pretax
increase to our claims reserves. See, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Increase to Claims
Reserves."
During
the first quarter of 2005, we renewed our casualty and workers' compensation
programs through February 2007. In general, for casualty claims after
March 1, 2005, we are self-insured for personal injury and property damage
claims for amounts up to $2.0 million per occurrence, subject to an
additional $2.0 million self-insured aggregate amount, which results in the
total self-insured retention of up to $4.0 million until the
$2.0 million aggregate threshold is reached. We are self insured for cargo
loss and damage claims for amounts up to $1.0 million per occurrence. We
maintain a workers' compensation plan and group medical plan for our employees
with a deductible amount of $1.0 million for each workers' compensation
claim and a stop loss amount of $275,000 for each group medical claim. The
following chart reflects the major changes in our casualty program since
March 1, 2001:
Coverage
Period |
Primary
Coverage |
Primary
Coverage
SIR/deductible |
Excess
Coverage |
Excess
Coverage
SIR/deductible |
|
|
|
|
|
March
2001 - February 2002 |
$1.0
million |
$250,000 |
$49.0
million |
$3.0
million |
March
2002 - July 2002 |
$2.0
million |
$500,000 |
$48.0
million |
$3.0
million |
July
2002 - November 2002 |
$2.0
million |
$500,000 |
$0
(1) |
$0
(1) |
November
2002 - February 2003 |
$4.0
million |
$1.0
million |
$16.0
million |
$3.0
million |
March
2003 - February 2004 |
$5.0
million |
$2.0
million (2) |
$15.0
million |
$2.0
million |
March
2004 - February 2005 |
$5.0
million |
$2.0
million (3) |
$15.0
million |
$2.0
million |
March
2005 - February 2007 |
$2.0
million |
$2.0
million (4) |
$48.0
million |
$0 |
(1) |
Represents
period for which no proof of insurance was available from agent and
coverage was determined to be invalid. We expensed the premiums paid in
2002 and settled litigation against the insurance agency in February
2005. |
(2) |
Self
insured retention is $1.0 million for cargo claims. Subject to an
additional $2.0 million self-insured aggregate amount, limited to
$1.0 million per occurrence, which results in the total self-insured
retention of up to $3.0 million per occurrence in the
$5.0 million layer until the $2.0 million aggregate threshold is
reached. |
(3) |
Self
insured retention is $1.0 million for cargo claims. Subject to an
additional $4.0 million self-insured aggregate amount, limited to
$2.0 million per occurrence, which results in the total self-insured
retention of up to $4.0 million per occurrence in the
$5.0 million layer until the $4.0 million aggregate threshold is
reached. |
(4) |
Self
insured retention is $1.0 million for cargo claims. Subject to an
additional $2.0 million self-insured aggregate amount, which results
in the total self-insured retention of up to $4.0 million until the
$2.0 million aggregate threshold is
reached. |
Regulation
We
operate in a highly regulated industry. The primary regulatory agencies
affecting our business are the United States Department of Transportation, or
DOT, and similar state, local agencies that exercise broad powers over our
business, generally governing such activities as authorization to engage in
motor carrier operations, safety, and insurance requirements. Our company
drivers and independent contractors also must comply with the safety and fitness
regulations promulgated by the DOT, including those relating to drug and alcohol
testing, licensing requirements, and additional restrictions imposed by homeland
security requirements in January 2005. The DOT has rated us "satisfactory" which
is the highest safety and fitness rating. Changes in the laws and regulations
governing our industry could affect the economics of the industry by requiring
changes in operating practices or by influencing the demand for, and the costs
of providing, services to shippers. New and more restrictive hours of service
regulations for drivers became effective on January 4, 2004. After nine
months of operation under the revised hours-of-service regulations, citizens'
advocacy groups successfully challenged the regulations in court, alleging that
they were developed without properly considering issues of driver health.
Pending further action by the courts or the effectiveness of new rules
addressing the issues raised by the appellate court, Congress has enacted a law
that extends the effectiveness of the revised hours-of-service rules until
September 30, 2005. We expect that any new rule making resulting from the
litigation will be no
more favorable than existing rules. If driving hours are further restricted by
new revisions to the hours-of-service rules, we could experience a reduction in
driver miles that may adversely affect our business and results of
operations.
Our
operations are subject to various federal, state, and local environmental laws
and regulations, implemented principally by the federal Environmental Protection
Agency and similar state regulatory agencies, governing the management of
hazardous wastes, other discharge of pollutants into the air and surface and
underground waters, and the disposal of certain substances. If we should be
involved in a spill or other accident involving hazardous substances, if any
such substances were found on our property, or if we were found to be in
violation of applicable laws and regulations, we could be responsible for
clean-up costs, property damage, and fines or other penalties, any one of which
could have a materially adverse effect on us.
The
engines used in our tractors are subject to emissions control regulations that
require progressive reductions in exhaust emissions from diesel engines
manufactured after specified dates in 2002, 2007, and 2010. Compliance with such
regulations has increased the cost of our new tractors and lowered our fuel
mileage, and the additional changes required in 2007 and beyond are expected to
have similar effects. These adverse effects combined with the uncertainty as to
the long-term reliability of 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. At December 31, 2004, approximately 82% of our company
owned tractors were equipped with the new emission compliant
engines.
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 2004, the cost of fuel was in
the range at which we received fuel surcharges. Even with the fuel surcharges,
the high price of fuel decreased our profitability. Although we historically
have been able to pass through a substantial part of increases in fuel prices
and taxes to customers in the form of higher rates and surcharges, the increases
usually are not fully recovered. We do not collect surcharges on fuel used for
non-revenue miles or, out-of-route miles, or for fuel used by refrigeration
units or while the tractor is idling.
Additional
Information
At
December 31, 2004, our corporate structure included Covenant Transport, Inc., a
Nevada holding company organized in May 1994 and its wholly owned subsidiaries:
Covenant Transport, Inc., a Tennessee corporation; Covenant Asset Management,
Inc., a Nevada corporation; CIP, Inc., a Nevada corporation; Covenant.com, Inc.,
a Nevada corporation; Southern Refrigerated Transport, Inc. ("SRT"), an Arkansas
corporation; Harold Ives Trucking Co., an Arkansas corporation; CVTI Receivables
Corp. ("CRC"), a Nevada corporation, and Volunteer Insurance Limited, a Cayman
Island company. Terminal Truck Broker, Inc. and Tony Smith Trucking, Inc., both
Arkansas corporations and former subsidiaries, were dissolved in September 2003
and December 2004, respectively.
Our
headquarters are located at 400 Birmingham Highway, Chattanooga, Tennessee
37419, and our website address is www.covenanttransport.com. Our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all other reports we file with the SEC pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
are available free of charge through our website. Information contained in or
available through our website is not incorporated by reference into, and you
should not consider such information to be part of, this Annual Report on Form
10-K.
Our
headquarters and main terminal are located on approximately 180 acres of
property in Chattanooga, Tennessee. This facility includes an office building of
approximately 182,000 square feet, a maintenance facility of approximately
65,000 square feet, a body shop of approximately 16,600 square feet, and a truck
wash. We maintain sixteen terminals located on our major traffic lanes in or
near the cities listed below. These terminals provide a base for drivers in
proximity to their homes, a transfer location for trailer relays on
transcontinental routes, parking space for equipment dispatch, and the other
uses indicated below.
Terminal
Locations |
Maintenance |
Recruiting/
Orientation |
Sales |
Ownership |
Chattanooga,
Tennessee |
x |
x |
x |
Owned |
Dalton,
Georgia |
x |
|
|
Owned |
Greensboro,
North Carolina |
|
|
|
Leased |
Dayton,
Ohio |
|
|
|
Leased |
Sayreville,
New Jersey |
|
|
|
Leased |
Indianapolis,
Indiana |
|
|
|
Leased |
Ashdown,
Arkansas |
x |
x |
x |
Owned |
Little
Rock, Arkansas |
|
|
|
Owned |
Oklahoma
City, Oklahoma |
|
|
|
Owned |
Hutchins,
Texas |
x |
x |
|
Owned |
El
Paso, Texas |
|
x
|
|
Leased |
Columbus,
Ohio |
|
|
|
Leased |
French
Camp, California |
|
|
|
Leased |
Fontana,
California |
x |
|
|
Leased |
Long
Beach, California |
|
|
|
Owned |
Pomona,
California |
|
x |
|
Owned |
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, and administrative
proceedings incidental to our business. We maintain insurance to cover
liabilities arising from the transportation of freight for amounts in excess of
certain self-insured retentions.
On
October 26, 2003, a pickup truck collided with a trailer being operating by our
SRT subsidiary. Two of the occupants of the pickup were killed in the accident
and the other occupant was injured. A lawsuit was filed in the United States
District Court for the Southern District of Mississippi on February 4, 2004, on
behalf of Donald J. Byrd, an injured passenger in the pickup truck, and an
amended complaint was filed on February 18, 2004, on behalf of Mr. Byrd and
Marilyn S. Byrd, his wife. The relief sought in the lawsuit is judgment against
SRT and the driver of the SRT truck in excess of $1.0 million. In addition, we
have received demands in the form of letters seeking a total of
$27.0 million from attorneys representing potential beneficiaries of the
two decedents who occupied the pickup truck. Settlement agreements have been
entered into between SRT/Covenant and the plaintiffs in all three suits.
Judgments of Dismissal with Prejudice have also been entered in all three suits
in the United States District Court for the Southern District of Mississippi.
These settlements were below the aggregate coverage limits of our insurance
policies.
On March
7, 2003, an accident occurred on in Wisconsin involving a vehicle and one of our
tractors. Two adult occupants of the vehicle were killed in the accident. The
only other occupant of the vehicle was a child, who survived with little
apparent injury. Suit has been filed in United States District Court in
Minnesota by heirs of one of the decedents against us and our driver. A demand
for $20.0 million was made by the plaintiffs in that case in October 2004.
The demand was reduced during an early settlement conference presided over by a
judge. The last articulated demand was $6.0 million. The case is scheduled
for trial in November 2005. Heirs of the other adult decedent and
representatives of the child may file additional suits against us. We expect all
matters involving the occurrence to be resolved at a level below the aggregate
coverage limits of our insurance policies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
During
the fourth quarter of the year ended December 31, 2004, no matters were
submitted to a vote of security holders.
PART
II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Price
Range of Common Stock
Our Class
A Common Stock is traded on the NASDAQ National Market, under the symbol "CVTI."
The following table sets forth for the calendar periods indicated the range of
high and low bid price for our Class A Common Stock as reported by NASDAQ from
January 1, 2003 to December 31, 2004.
Period |
High |
|
Low |
|
|
|
|
Calendar
Year 2003 |
|
|
|
|
|
|
|
|
1st
Quarter |
$19.42 |
|
$14.70 |
|
2nd
Quarter |
$19.99 |
|
$15.65 |
|
3rd
Quarter |
$20.30 |
|
$15.91 |
|
4th
Quarter |
$21.21 |
|
$17.25 |
|
|
|
|
|
Calendar
Year 2004 |
|
|
|
|
|
|
|
|
|
1st
Quarter |
$20.66 |
|
$16.50 |
|
2nd
Quarter |
$19.21 |
|
$15.08 |
|
3rd
Quarter |
$20.60 |
|
$16.28 |
|
4th
Quarter |
$20.97 |
|
$16.50 |
As of
March 1, 2005, we had approximately 54 stockholders of record of our Class
A Common Stock. However, we estimate our actual number of stockholders is much
higher because a substantial number of our shares are held of record by brokers
or dealers for their customers in street names.
Dividend
Policy
We have
never declared and paid a cash dividend on our Class A or Class B
common stock. It is the current intention of our Board of Directors to continue
to retain earnings to finance our business and reduce our indebtedness rather
than to pay dividends. The payment of cash dividends is currently limited by our
credit agreements. Future payments of cash dividends will depend upon our
financial condition, results of operations, capital commitments, restrictions
under then-existing agreements, and other factors deemed relevant by our Board
of Directors.
See
"Equity Compensation Plan Information" under Item 12 in Part III of this Annual
Report for certain information concerning shares of our Class A common
stock authorized for issuance under our equity compensation plans.
ITEM 6. SELECTED FINANCIAL AND OPERATING
DATA
(In
thousands, except per share and operating data
amounts) |
|
|
|
|
|
|
|
Years
Ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue |
|
$ |
558,453 |
|
$ |
555,678 |
|
$ |
550,603 |
|
$ |
554,132 |
|
$ |
558,664 |
|
Fuel
surcharges |
|
|
45,169 |
|
|
26,779 |
|
|
13,815 |
|
|
19,489 |
|
|
25,326 |
|
Total
revenue |
|
$ |
603,622 |
|
$ |
582,457 |
|
$ |
564,418 |
|
$ |
573,621 |
|
$ |
583,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses (1) |
|
|
225,778 |
|
|
220,665 |
|
|
227,332 |
|
|
244,849 |
|
|
244,704 |
|
Fuel
expense |
|
|
127,723 |
|
|
109,231 |
|
|
96,332 |
|
|
103,894 |
|
|
104,154 |
|
Operations
and maintenance |
|
|
30,555 |
|
|
39,822 |
|
|
39,625 |
|
|
39,410 |
|
|
36,267 |
|
Revenue
equipment rentals and
purchased transportation |
|
|
69,928 |
|
|
69,997 |
|
|
59,265 |
|
|
65,104 |
|
|
76,200 |
|
Operating
taxes and licenses |
|
|
14,217 |
|
|
14,354 |
|
|
13,934 |
|
|
14,358 |
|
|
14,940 |
|
Insurance
and claims (2) |
|
|
54,847 |
|
|
35,454 |
|
|
31,761 |
|
|
27,838 |
|
|
18,907 |
|
Communications
and utilities |
|
|
6,517 |
|
|
7,177 |
|
|
7,021 |
|
|
7,439 |
|
|
7,189 |
|
General
supplies and expenses |
|
|
15,104 |
|
|
14,495 |
|
|
14,677 |
|
|
14,468 |
|
|
13,970 |
|
Depreciation
and amortization, including
gains (losses) on disposition of
equipment and impairment of assets (3) |
|
|
45,001 |
|
|
43,041 |
|
|
49,497 |
|
|
56,324 |
|
|
38,879 |
|
Total
operating expenses |
|
|
589,670 |
|
|
554,236 |
|
|
539,444 |
|
|
573,684 |
|
|
555,210 |
|
Operating
income (loss) |
|
|
13,952 |
|
|
28,221 |
|
|
24,974 |
|
|
(63 |
) |
|
28,780 |
|
Other
(income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
3,098 |
|
|
2,332 |
|
|
3,542 |
|
|
7,855 |
|
|
9,894 |
|
Interest
income |
|
|
(48 |
) |
|
(114 |
) |
|
(63 |
) |
|
(328 |
) |
|
(520 |
) |
Other |
|
|
(926 |
) |
|
(468 |
) |
|
916 |
|
|
799 |
|
|
(368 |
) |
Loss
on early extinguishment of debt |
|
|
¾ |
|
|
¾ |
|
|
1,434 |
|
|
¾ |
|
|
¾ |
|
Other
expenses, net |
|
|
2,124 |
|
|
1,750 |
|
|
5,829 |
|
|
8,326 |
|
|
9,006 |
|
Income
(loss) before income taxes |
|
|
11,828 |
|
|
26,471 |
|
|
19,145 |
|
|
(8,389 |
) |
|
19,774 |
|
Income
tax expense (benefit) |
|
|
8,452 |
|
|
14,315 |
|
|
10,871 |
|
|
(1,727 |
) |
|
7,899 |
|
Net
income (loss) |
|
$ |
3,376 |
|
$ |
12,156 |
|
$ |
8,274 |
|
$ |
(6,662 |
) |
$ |
11,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes
a $1,500 pre-tax increase to workers' compensation claims reserve in
2004. |
(2) |
Includes
an $18,000 pre-tax increase to casualty claims reserve in
2004. |
(3) |
Includes
a $3,300 and a $15,400 pre-tax impairment charge related to tractors in
2002 and 2001, respectively. |
Basic
earnings per share |
$0.23 |
$0.84 |
$0.58 |
$(0.48) |
$0.82 |
Diluted
earnings per share |
0.23 |
0.83 |
0.57 |
(0.48) |
0.82 |
|
|
|
|
|
|
Basic
weighted average common shares
Outstanding |
14,641 |
14,467 |
14,223 |
13,987 |
14,404 |
|
|
|
|
|
|
Diluted
weighted average common shares
Outstanding |
14,833 |
14,709 |
14,519 |
13,987 |
14,533 |
|
|
Years
Ended December 31, |
|
Selected
Balance Sheet Data: |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
property and equipment |
|
$ |
209,422 |
|
$ |
221,734 |
|
$ |
238,488 |
|
$ |
231,536 |
|
$ |
256,049 |
|
Total
assets |
|
|
360,026 |
|
|
354,281 |
|
|
361,541 |
|
|
349,782 |
|
|
390,513 |
|
Long-term
debt, less current maturities |
|
|
8,013 |
|
|
12,000 |
|
|
1,300 |
|
|
29,000 |
|
|
74,295 |
|
Total
stockholders' equity |
|
|
195,699 |
|
|
192,142 |
|
|
175,588 |
|
|
161,902 |
|
|
167,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
freight revenue per loaded mile (1) |
|
$ |
1.40 |
|
$ |
1.27 |
|
$ |
1.24 |
|
$ |
1.23 |
|
$ |
1.25 |
|
Average
freight revenue per total mile (1) |
|
$ |
1.27 |
|
$ |
1.17 |
|
$ |
1.15 |
|
$ |
1.14 |
|
$ |
1.15 |
|
Average
freight revenue per tractor per week (1) |
|
$ |
2,995 |
|
$ |
2,897 |
|
$ |
2,870 |
|
$ |
2,803 |
|
$ |
2,842 |
|
Average
miles per tractor per year |
|
|
122,899 |
|
|
129,656 |
|
|
129,906 |
|
|
127,714 |
|
|
128,754 |
|
Weighted
average tractors for year (2) |
|
|
3,558 |
|
|
3,667 |
|
|
3,680 |
|
|
3,791 |
|
|
3,759 |
|
Total
tractors at end of period (2) |
|
|
3,476 |
|
|
3,752 |
|
|
3,738 |
|
|
3,700 |
|
|
3,829 |
|
Total
trailers at end of period (3) |
|
|
8,867 |
|
|
9,255 |
|
|
7,485 |
|
|
7,702 |
|
|
7,571 |
|
(1) |
Excludes
fuel surcharge revenue. |
(2) |
Includes
monthly rental tractors and tractors provided by
owner-operators. |
(3) |
Excludes
monthly rental trailers. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are
one of the ten largest truckload carriers in the United States measured by
revenue according to Transport
Topics, a
publication of the American Trucking Associations. We focus on targeted markets
where we believe our service standards can provide a competitive advantage. We
are a major carrier for transportation companies such as freight forwarders,
less-than-truckload carriers, and third-party logistics providers that require a
high level of service to support their businesses as well as for traditional
truckload customers such as manufacturers and retailers.
Recent
Results and Year-End Financial Condition
For the
year ended December 31, 2004, total revenue increased 3.6%, to
$603.6 million from $582.5 million during 2003. Freight revenue, which
excludes revenue from fuel surcharges, increased 0.5%, to $558.5 million in
2004 from $555.7 million in 2003. We generated net income of
$3.4 million, or $0.23 per diluted share, for the year compared with
$12.2 million, or $0.83 per diluted share, for 2003. Excluding a non-cash
increase to claims reserves, net income for the year was $15.6 million, or
$1.05 per diluted share. Excluding the increase to reserves, we achieved the
best operating ratio (which we define as operating expenses, net of fuel
surcharge, as a percentage of freight revenue) and highest earnings and earnings
per share of any year since 1999.
We
believe the improvements in our profitability (excluding the increase to
reserves) were attributable primarily to the continued execution of our
operating strategy, which involves allocating our equipment to customers and
freight that provide the most favorable returns. The most significant components
of this effort were raising rates, expanding our dedicated business, and
continuing to shift assets toward shorter lengths of haul, particularly in our
regional truckload operations. Our efforts were aided by stronger freight demand
and a better rate environment in 2004 primarily due to continued growth in the
U.S. economy and a favorable relationship between demand and trucking capacity.
As a result, average freight revenue per loaded mile, increased $0.135 per mile
to $1.40, a 10.7% increase compared with 2003. The increase in average freight
revenue per loaded mile was offset partially by an increase in our percentage of
non-revenue miles and a 5.2% decrease in average miles per tractor, both related
to a 10% decrease in average length of haul to 950 miles and a decrease in the
percentage of our fleet comprised of team-driven tractors. Average freight
revenue per tractor per week, our main measure of asset productivity, improved
by 3.4%, to $2,995 in 2004 compared with $2,897 for 2003. These factors more
than offset a significant increase in costs, primarily attributable to increased
costs of driver compensation, revenue equipment, insurance and claims, and fuel.
Our operating ratio, excluding the increase to claims reserves, improved to
94.0% for 2004 compared with 94.9% for 2003.
At
December 31, 2004, our total balance sheet debt was $52.2 million and
our total stockholder's equity was $195.7 million, for a total
debt-to-capitalization ratio of 21.0% and a book value of $13.15 per share. In
addition, during December 2004 we amended our revolving credit facility to
increase the maximum borrowing capacity to $150.0 million, lower our
interest rate grid, and extend the term for five years. At December 31,
2004, we had a combined $73 million of available borrowing capacity under
our revolving credit facility and securitization facility.
Non-GAAP
Reconciliation
The 2004
net income and earnings per diluted share results that exclude the increase to
claims reserves are non-GAAP measures. Management believes these measures
provide an alternative presentation of results that more accurately reflects our
on-going operations, without the distorting effect of the non-cash adjustment.
These measures should be considered in addition to, not as a substitute for, net
income and earnings per diluted share. The following table reconciles 2004 net
income and earnings per diluted share, excluding the adjustment charge, to net
income and earnings per diluted share calculated in accordance with GAAP, which
includes the adjustment:
(numbers
in thousands, except per share) |
Twelve
Months Ended
December
31, 2004 |
|
Net
income |
Per
share |
Net
income and earnings per diluted share, excluding increase to claims
reserves |
$15,605 |
$1.05 |
|
|
|
After-tax
increase to claims reserves, total and per share |
$12,227 |
$0.82 |
|
|
|
Net
income and earnings per diluted share |
$
3,377 |
$0.23 |
Increase
to Claims Reserves
During
the fourth quarter of 2004, we recorded a non-cash, after-tax increase to claims
reserves of $12.2 million, or $0.82 per diluted share. Between 2001 and
2003, we increased our primary retention amounts from $5,000 per occurrence for
workers' compensation and casualty claims to $1.0 million for workers'
compensation and $2.0 million for casualty claims. Later during that
period, we experienced substantial increases in the frequency of accidents and
workers' compensation claims. Because of the significant increases in our
retention amounts and in the frequency of claims, we engaged an independent
third-party actuary as part of our process of assessing our claims reserve
estimates. Based on the actuarial report and our own evaluation, we recorded an
aggregate $19.6 million pre-tax adjustment to our claims reserves during
the fourth quarter of 2004. The adjustment included an $18.0 million
increase to our casualty reserve, which was reflected in insurance and claims on
our consolidated statement of operations, and a $1.5 million increase to
our workers' compensation reserve, which was reflected in salaries, wages, and
benefits on our consolidated statement of operations.
The
actuary also recommended a range of future accrual rates for workers'
compensation and casualty claims. The expected range for workers' compensation
accruals going forward is consistent with the rates we used over the last two
years. This expense is recorded in salaries, wages and related expenses in our
income statement. The expected range for casualty accruals going forward is
between $0.085 and $0.095 per mile (including premiums), which would be
approximately 6.2% to 7.0% of freight revenue based on our fourth quarter
results. The expected range for future accruals is based on our historical
incident trends. Our actual future accrual rates will depend on a number of
factors, including the frequency and severity of claims and our self-insured
retention amounts.
Revenue
We
generate substantially all of our revenue by transporting freight for our
customers. Generally, we are paid by the mile or by the load for our services.
The main factors that affect our revenue are the revenue per mile we receive
from our customers, the percentage of miles for which we are compensated, the
number of tractors operating, and the number of miles we generate with our
equipment. These factors relate to, among other things, the U.S. economy,
inventory levels, the level of truck capacity in our markets, specific customer
demand, the percentage of team-driven tractors in our fleet, driver
availability, and our average length of haul.
We also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, and other accessorial services. Prior to 2004, we measured freight
revenue, before fuel and accessorial surcharges, in addition to total revenue.
In 2004, we reclassified accessorial revenue, other than fuel surcharges, into
freight revenue, and our historical financial statements have been conformed to
this presentation. We continue to report fuel surcharge revenue
separately.
Expenses
and Profitability
The main
factors that impact our profitability on the expense side are the variable costs
of transporting freight for our customers. These costs include fuel expense,
driver-related expenses, such as wages, benefits, training, and recruitment, and
independent contractor costs, which we record as purchased transportation.
Expenses that have both fixed and variable components include maintenance and
tire expense and our total cost of insurance and claims. These expenses
generally vary with the miles we travel, but also have a controllable component
based on safety, fleet age, efficiency, and other factors. Our main fixed cost
is the acquisition and financing of long-term assets, primarily revenue
equipment and operating terminals. We have other mostly fixed costs, such as our
non-driver personnel.
The
trucking industry has experienced significant increases in expenses over the
past three years, in particular those relating to equipment costs, driver
compensation, insurance, and fuel. As the United States economy has expanded,
many trucking companies have been able to raise freight rates to cover the
increased costs. This is primarily due to industry-wide tight capacity of
tractors and trailers, which in general has arisen because many fleets have
stated they will not add equipment until margins improve. In addition,
competition for drivers has become increasingly intense, as the expanding
economy has provided alternative jobs at the same time as increasing freight
demand. To obtain capacity, shippers have been willing to accept the largest
rate increases in recent memory. As long as freight demand continues to exceed
truck capacity, we expect increases in driver pay by many carriers, which we may
do as well, and higher freight rates.
Revenue
Equipment
We
operate approximately 3,476 tractors and 8,867 trailers. Of our tractors, at
December 31, 2004, approximately 1,939 were owned, 1,320 were financed
under operating leases, and 217 were provided by independent contractors, who
own and drive their own tractors. Of our trailers, at December 31, 2004,
approximately 1,199 were owned and approximately 7,668 were financed under
operating leases. We recognized pre-tax impairment charges of $15.4 million
in the fourth quarter of 2001 and $3.3 million in the first quarter of 2002
in relation to the reduced value of our model year 1998 through 2000 tractors.
In addition, we increased the depreciation rate and decreased salvage values on
our remaining tractors to reflect our expectations concerning market value at
disposition. Our assumptions represent management's best estimate, and actual
values could differ by the time those tractors are scheduled for trade. Because
of the increases in purchase prices and lower residual values, the annual
expense per tractor on model year 2004 and 2005 tractors is expected to be
higher than the annual expense on the units being replaced.
We
finance a portion of our tractor fleet and most of our trailer fleet with
off-balance sheet operating leases. These leases generally run for a period of
three years for tractors and five to seven years for trailers. In April 2003, we
entered into a sale-leaseback arrangement covering approximately 1,266 of our
trailers. This arrangement is more fully described below in the revenue
equipment rentals and purchased transportation discussion.
We
changed our process on our tractor trade cycle from a period of approximately
four years to three years. We evaluated the decision based on maintenance costs,
capital requirements, prices of new and used tractors, and other factors. This
resulted in substantial capital expenditures in 2003 and 2004 and lower
maintenance expense in 2004.
Independent
contractors (owner operators) provide a tractor and a driver and are responsible
for all operating expenses in exchange for a fixed payment per mile. We do not
have the capital outlay of purchasing the tractor. The payments to independent
contractors and the financing of equipment under operating leases are recorded
in revenue equipment rentals and purchased transportation. Expenses associated
with owned equipment, such as interest and depreciation, are not incurred, and
for independent contractor tractors, driver compensation, fuel, and other
expenses are not incurred. Because obtaining equipment from independent
contractors and under operating leases effectively shifts financing expenses
from interest to "above the line" operating expenses, we evaluate our efficiency
using net margin as well as operating ratio.
Outlook
Looking
forward, our profitability goal is to return to an operating ratio of
approximately 90%. We expect this to require additional improvements in revenue
per tractor per week, particularly in revenue per mile, to overcome expected
additional cost increases to expand our margins. Because a large percentage of
our costs are variable, changes in revenue per mile affect our profitability to
a greater extent than changes in miles per tractor. For 2005, the key factors
that we expect to have the greatest effects on our profitability are our freight
revenue per tractor per week, our compensation of drivers, our cost of revenue
equipment, our fuel costs, and our insurance and claims expense. We expect our
costs for driver compensation to increase in connection with an expected two
cent per mile increase for employee drivers and a four cent per mile increase
for our independent contractor drivers in March and an additional one cent per
mile increase for our team drivers in April. To overcome these cost increases
and improve our margins, we will need to achieve significant increases in
freight revenue per tractor, particularly in revenue per mile. Operationally, we
will seek improvements in safety, driver recruiting and retention, and executing
our regional truckload business. Our success in these areas primarily will
affect revenue, driver-related expenses, and insurance and claims expense. We
believe that improving our regional truckload service offers the largest
opportunity for improving our profitability.
RESULTS
OF OPERATIONS
For
comparison purposes in the table below, we use freight revenue, or total revenue
less fuel surcharges, in addition to total revenue when discussing changes as a
percentage of revenue. We believe excluding this sometimes volatile source of
revenue affords a more consistent basis for comparing our results of operations
from period to period. Freight revenue excludes $45.2 million,
$26.8 million and $13.8 million of fuel surcharges in each of 2004,
2003, and 2002, respectively.
The
following table sets forth the percentage relationship of certain items to total
revenue and freight revenue:
|
2004 |
|
2003 |
|
2002 |
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
37.4 |
|
37.9 |
|
40.3 |
|
Salaries,
wages, and related
expenses |
|
40.4 |
|
39.7 |
|
41.3 |
Fuel
expense |
21.2 |
|
18.8 |
|
17.1 |
|
Fuel
expense (1) |
|
14.8 |
|
14.8 |
|
15.0 |
Operations
and maintenance |
5.1 |
|
6.8 |
|
7.0 |
|
Operations
and maintenance |
|
5.5 |
|
7.2 |
|
7.2 |
Revenue
equipment rentals and
purchased transportation |
11.6 |
|
12.0 |
|
10.5 |
|
Revenue
equipment rentals and
purchased transportation |
|
12.5 |
|
12.6 |
|
10.8 |
Operating
taxes and licenses |
2.4 |
|
2.5 |
|
2.5 |
|
Operating
taxes and licenses |
|
2.5 |
|
2.6 |
|
2.5 |
Insurance
and claims |
9.1 |
|
6.1 |
|
5.6 |
|
Insurance
and claims |
|
9.8 |
|
6.4 |
|
5.8 |
Communications
and utilities |
1.1 |
|
1.2 |
|
1.2 |
|
Communications
and utilities |
|
1.2 |
|
1.3 |
|
1.3 |
General
supplies and expenses |
2.5 |
|
2.5 |
|
2.6 |
|
General
supplies and expenses |
|
2.7 |
|
2.6 |
|
2.7 |
Depreciation
and amortization,
including gains (losses) on
disposition of equipment and
impairment of assets |
7.5 |
|
7.4 |
|
8.8 |
|
Depreciation
and amortization,
including gains (losses) on
disposition of equipment and
impairment of assets (2) |
|
8.1 |
|
7.7 |
|
9.0 |
Total
operating expenses |
97.7 |
|
95.2 |
|
95.6 |
|
Total
operating expenses |
|
97.5 |
|
94.9 |
|
95.5 |
Operating
income |
2.3 |
|
4.8 |
|
4.4 |
|
Operating
income |
|
2.5 |
|
5.1 |
|
4.6 |
Other
expense, net |
0.4 |
|
0.3 |
|
0.8 |
|
Other
expense, net |
|
0.4 |
|
0.3 |
|
1.1 |
Income
before income taxes |
2.0 |
|
4.5 |
|
3.6 |
|
Income
before income taxes |
|
2.1 |
|
4.8 |
|
3.5 |
Income
tax expense |
1.4 |
|
2.4 |
|
2.0 |
|
Income
tax expense |
|
1.5 |
|
2.6 |
|
2.0 |
Net
Income |
0.6% |
|
2.1% |
|
1.5% |
|
Net
Income |
|
0.6% |
|
2.2% |
|
1.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $45.2 million, $26.8 million, and
$13.8 million in 2004, 2003 and 2002,
respectively. |
(2) |
Includes
a pre-tax impairment charge or 0.6% of freight revenue in
2002. |
Comparison
of Year Ended December 31, 2004 to Year Ended December 31,
2003
Total
revenue increased $21.2 million, or 3.6%, to $603.6 million in 2004,
from $582.5 million in 2003. Freight revenue excludes $45.2 million of
fuel surcharge revenue in 2004 and $26.8 million in 2003. For comparison
purposes in the discussion below, we use freight revenue when discussing changes
as a percentage of revenue. We believe removing this sometimes volatile source
of revenue affords a more consistent basis for comparing the results of
operations from period to period.
Freight
revenue (total revenue less fuel surcharges) increased $2.8 million (0.5%),
to $558.5 million in 2004, from $555.7 million in 2003. Revenue per
tractor per week, a key statistic that we use to evaluate our asset
productivity, increased 3.4% to $2,995 in 2004 from $2,897 in 2003. Our revenue
per tractor per week increase was primarily generated by a 10.7% increase in
average freight revenue per loaded mile which was partially offset by lower
miles per tractor and an increase in our percentage of non-revenue miles. Our
rates have increased primarily due to a strong freight market, tightened truck
capacity, a decrease in our average length of haul, and an improvement in our
freight selection. Weighted average tractors decreased 3.0% to 3,558 in 2004
from 3,667 in 2003. We have elected to constrain the size of our tractor fleet
until fleet production and profitability improve.
Salaries,
wages, and related expenses increased $5.1 million, or 2.3%, to
$225.8 million in 2004, from $220.7 million in 2003. As a percentage
of freight revenue, salaries, wages, and related expenses increased to 40.4% in
2004, from 39.7% in 2003. Driver pay increased $5.4 million, to 27.7% of
freight revenue in 2004 from 26.8% of freight revenue in 2003. The increase was
largely attributable to pay increases and new retention bonus programs. Driver
wages are expected to increase as a percentage of revenue in future periods, due
to a planned two cent per mile pay increase that will go into effect March 2005
and an additional one cent per mile pay increase for team drivers in April 2005.
If the shortage of qualified drivers continues, additional driver pay increases
may be necessary in the future. Our payroll expense for employees other than
over the road drivers remained relatively constant at 7.0% of freight revenue in
2004 and 7.2% of freight revenue in 2003. Health insurance, employer paid taxes,
workers' compensation, and other employee benefits remained essentially constant
at 5.8% of freight revenue in 2004 and 5.7% of freight revenue in 2003. Workers
compensation expense increased in 2004 and 2003. During the fourth quarter of
2004, we incurred a $1.5 million non-cash increase to our workers'
compensation claims reserves as a result of a change of estimated ultimate
liability. In 2003, we incurred an approximately $723,000 claim relating to a
natural gas explosion in our Indianapolis terminal that injured four
employees.
Fuel
expense, net of fuel surcharge revenue of $45.2 million in 2004 and
$26.8 million in 2003, remained constant at $82.6 million in 2004 and
$82.5 million in 2003. Fuel prices increased sharply during 2003 and
remained at high levels in 2004. As a percentage of freight revenue, net fuel
expense remained relatively constant at 14.8% in 2004 and 2003. Fuel surcharges
amounted to $0.103 per revenue mile in 2004 and $0.056 per revenue mile in 2003,
which partially offset the increased fuel expense. Fuel costs may be affected in
the future by price fluctuations, volume purchase commitments, the terms and
collectibility of fuel surcharges, the percentage of miles driven by independent
contractors, and lower fuel mileage due to government mandated emissions
standards that have resulted in less fuel efficient engines. At
December 31, 2004, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
Operations
and maintenance, which consist primarily of vehicle maintenance, repairs and
driver recruitment expenses, decreased $9.3 million, or 23.3%, to
$30.6 million in 2004 from $39.8 million in 2003. As a percentage of
freight revenue, operations and maintenance expense decreased to 5.5% of freight
revenue from 7.2% in 2003. The decrease resulted in part from the implementation
of our equipment plan to change our four year tractor trade cycle back to a
period of approximately three years, which has reduced the average age of our
tractor fleet. Accordingly, maintenance costs have decreased. The average age of
our tractor and trailer fleets decreased substantially during 2003 and remained
relatively low during 2004. At December 31, 2004, the average age of our
tractor and trailer fleets was approximately 16 and 35 months, respectively. The
maintenance savings are expected to be partially offset by increased driver
recruiting expense due to the greater demand for trucking services and a tighter
supply of drivers.
Revenue
equipment rentals and purchased transportation remained essentially constant at
$69.9 million and $70.0 million in 2003. During 2004, revenue
equipment rental expense increased and was offset by a decrease in purchased
transportation. Revenue equipment rental expense increased $9.9 million, or
38.8%, to $35.3 million in 2004 from $25.4 million in 2003 as we
financed more equipment under operating leases. As of December 2004, we had
financed approximately 1,222 tractors and 7,149 trailers under operating leases
as compared to 963 tractors and 6,050 trailers under operating leases as of
December 2003. Payments to independent contractors decreased $9.9 million
to $34.7 million in 2004 from $44.6 million in 2003, mainly due to a
decrease in the independent contractor fleet to an average of 301 during 2004
versus an average of 390 in 2003. We have experienced difficulty in retaining
our independent contractors due to the challenging operating conditions. In an
effort to retain and attract more independent contractors, we have planned a
four cents per mile increase that will go into effect March 2005. Payments due
to independent contractors could increase as a percentage of revenue in future
periods if the independent contractor fleet remains at its current level.
Operating
taxes and licenses remained essentially constant at $14.2 million in 2004
and $14.4 million in 2003. As a percentage of freight revenue, operating
taxes and licenses remained essentially constant at 2.5% in 2004 and 2.6% in
2003.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, increased
$19.4 million (54.7%), to $54.8 million in 2004 from
$35.5 million in 2003. As a percentage of freight revenue, insurance and
claims expense increased to 9.8% in 2004 from 6.4% in 2003. During the fourth
quarter of 2004, we recorded an $18.0 million non-cash increase to our
reserves for casualty claims. Excluding the effect of that adjustment, insurance
and claims was 6.6% of freight revenue in 2004 and 6.4% of freight revenue in
2003. Insurance and claims expense will vary based on the frequency and severity
of claims, the premium expense, and the level of self-insured retention and may
cause our insurance and claims expense to be higher or more volatile in future
periods than in historical periods.
Communications
and utilities decreased $0.7 million, or 9.2%, to $6.5 million in 2004
from $7.2 million in 2003. As a percentage of freight revenue,
communications and utilities remained essentially constant at 1.2% in 2004 and
1.3% in 2003.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $0.6 million, or 4.2%, to $15.1 million
in 2004 from $14.5 million in 2003. As a percentage of freight revenue,
general supplies and expenses remained essentially constant at 2.7% in 2004 and
2.6% in 2003. An increase in public company expenses relating to Sarbanes-Oxley
requirements affected this category of expenses.
Depreciation
and amortization expense, consisting primarily of depreciation of revenue
equipment, increased $2.0 million, or 4.6%, to $45.0 million in 2004
from $43.0 million in 2003. As a percentage of freight revenue,
depreciation and amortization increased to 8.1% in 2004 from 7.7% in 2003. The
increase primarily related to trade-in preparation costs and losses on the sale
of equipment. This was partially offset by a decrease in the value of owned
revenue equipment being depreciated due to more equipment being leased instead
of purchased. To the extent equipment is leased under operating leases, the
amounts will be reflected in revenue equipment rentals and purchased
transportation. Depreciation and amortization expense is net of any gain or loss
on the disposal of tractors and trailers. Loss on the disposal of tractors and
trailers was approximately $3.5 million in 2004 compared to a gain of
$0.9 million in 2003.
Other
expense, net, increased $0.4 million, or 21.4%, to $2.1 million in
2004 from $1.8 million in 2003. As a percentage of freight revenue, other
expense remained essentially constant at 0.4% in 2004 and 0.3% in 2003. The
increase is due to a $0.4 million interest charge related to a proposed
disallowed IRS transaction and higher interest expense. These increases were
partially offset by a $0.8 million pre-tax, non-cash gain in 2004 related
to the accounting for interest rate derivatives under SFAS No. 133, compared to
a gain of $0.4 million in 2003. The other expense category includes
interest expense, interest income, and pre-tax non-cash gains or losses related
to the accounting for interest rate derivatives under SFAS No. 133.
Income
tax expense decreased $5.9 million, or 41.0%, to $8.5 million in 2004
from $14.3 million in 2003. The effective tax rate is different from the
expected combined tax rate due to permanent differences related to a per diem
pay structure implemented in 2001. Due to the nondeductible effect of per diem,
our tax rate will fluctuate in future periods as income fluctuates.
As a
result of the factors described above, net income decreased $8.8 million,
or 72.2%, to $3.4 million in 2004 from $12.2 million in 2003. As a
result of the foregoing, our net margin decreased to 0.6% in 2004 from 2.2% in
2003. Excluding the $12.2 million non-cash, after-tax increase to claims
reserves, net income increased $3.4 million, or 28.4%, to
$15.6 million, for a net margin of 2.8%.
Comparison
Of Year Ended December 31, 2003 To Year Ended December 31,
2002
Total
revenue increased $18.0 million, or 3.2%, to $582.5 million in 2003,
from $564.4 million in 2002. Freight revenue excludes $26.8 million of
fuel surcharge revenue in 2003 and $13.8 million in 2002. For comparison
purposes in the discussion below, we use freight revenue when discussing changes
as a percentage of revenue. We believe removing this sometimes volatile source
of revenue affords a more consistent basis for comparing the results of
operations from period to period.
Freight
revenue (total revenue less fuel surcharge revenue) increased $5.1 million
(0.9%), to $555.7 million in 2004, from $550.6 million in 2003.
Revenue per tractor per week increased 9.4% to $2,897 in 2003 from $2,870 in
2002. The revenue per tractor per week increase was primarily generated by a
2.4% higher rate per loaded mile which was partially offset by an increase in
non revenue miles. Weighted average tractors decreased 0.4% to 3,667 in 2003
from 3,680 in 2002. We have elected to constrain the size of our tractor fleet
until fleet production and profitability improve.
Salaries,
wages, and related expenses, decreased $6.7 million (2.9%), to
$220.7 million in 2003, from $227.3 million in 2002. As a percentage
of freight revenue, salaries, wages, and related expenses decreased to 39.7% in
2003, from 41.3% in 2002. The decrease was largely attributable to our utilizing
a larger percentage of single-driver tractors, with only one driver per tractor
to be compensated and implementing changes in our pay structure. Driver wages
are expected to increase as a percentage of revenue in future periods, due to a
pay increase that will go into effect March 15, 2004. Management expects
wages to increase approximately three cents per mile or approximately
$13 million pre-tax on an annualized basis. Our payroll expense for
employees other than over the road drivers remained relatively constant at 7.2%
of freight revenue in 2003 and 7.1% of freight revenue in 2002. Health
insurance, employer paid taxes, workers' compensation, and other employee
benefits decreased to 5.7% of freight revenue in 2003 from 6.3% of freight
revenue in 2002, mainly due to improving claims experience in our workers'
compensation plan. As a percentage of freight revenue, salaries, wages, and
related expenses was impacted during the year in part by an approximately
$723,000 claim relating to a natural gas explosion in our Indianapolis terminal
that injured four employees, which was partially offset by favorable workers'
compensation experience otherwise.
Fuel
expense, net of fuel surcharge revenue of $26.8 million in 2003 and
$13.8 million in 2002, remained constant at $82.5 million in 2003 and
2002. As a percentage of freight revenue, net fuel expense remained relatively
constant at 14.8% in 2003 and 15.0% in 2002. Fuel prices increased sharply
during 2003 due to unrest in Venezuela and the Middle East and low inventories.
However, fuel surcharges amounted to $.060 per loaded mile in 2003 compared to
$.031 per loaded mile in 2002, which partially offset the increased fuel
expense. Higher fuel prices will increase our operating expenses. Fuel costs may
be affected in the future by volume purchase commitments, the collectibility of
fuel surcharges, and lower fuel mileage due to government mandated emissions
standards that were effective October 1, 2002, and have resulted in less fuel
efficient engines.
Operations
and maintenance consist primarily of vehicle maintenance, repairs and driver
recruitment expenses. Operations and maintenance increased $0.2 million to
$39.8 million in 2003 from $39.6 million in 2002. As a percentage of
freight revenue, operations and maintenance expense remained relatively constant
at 7.2% in 2003 and 2002. We extended the trade cycle on our tractor fleet from
three years to four years in 2001, which resulted in an increase in the number
of required repairs during the first half of 2003. We are in the process of
changing our tractor trade cycle back to a period of approximately three years,
and we expect maintenance costs to decrease as the reduced maintenance cost of
the new tractors is no longer offset by the high cost of preparing used tractors
for disposition. The average age of our tractor and trailer fleets decreased to
19 and 34 months at December 2003, from 26 and 55 months as of December 2002,
respectively. Driver recruiting expense is expected to increase because of
greater demand for trucking services and a tighter supply of drivers.
Revenue
equipment rentals and purchased transportation increased $10.7 million
(18.1%), to $70.0 million in 2003, from $59.3 million in 2002. As a
percentage of freight revenue, revenue equipment rentals and purchased
transportation increased to 12.6% in 2003 from 10.8% in 2002. The increase is
due principally to two factors. First, the revenue equipment rental expense
increased $7.7 million, or 43.1%, to $25.4 million in 2003, from
$17.7 million in 2002. As of December 2003, we had financed approximately
1,025 tractors and 6,611 trailers under operating leases as compared to 891
tractors and 2,628 trailers under operating leases as of December 2002. On April
14, 2003, we entered into a sale-leaseback transaction involving approximately
1,266 dry van trailers. We sold the trailers to a finance company for
approximately $15.6 million in cash and leased the trailers back under
three year walk away leases. The approximately $0.3 million gain on the
sale-leaseback transaction will be amortized over the life of the lease. Also in
April 2003, we entered into an agreement with a finance company to sell
approximately 2,585 dry van trailers for approximately $20.5 million in
cash and to lease 3,600 model year 2004 dry van trailers over the next twelve
months. The leases on the new trailers are seven year walk away leases. The
approximately $2.0 million loss on the dry van transaction will be
recognized with additional depreciation expense from the date of the transaction
until the units are sold. Our revenue equipment rental expense is expected to
increase in the future to reflect these transactions, which will be partially
offset by no longer recognizing depreciation and interest expense with respect
to these trailers or tractors. In addition, in September 2003, we entered into
an agreement with Volvo for the lease with an option to purchase of up to 500
new tractors, with these units being leased under 39 month walk away leases. The
increase in revenue equipment rentals and purchased transportation is also due
to the payments to independent contractors increasing $3.1 million to
$44.6 million in 2003 from $41.5 million in 2002, mainly due to an
increase in the independent contractor fleet to an average of 390 in 2003 versus
an average of 355 in 2002. Payments due to independent contractors are expected
to increase as a percentage of revenue in future periods, due to the
approximately three cents per mile increase in compensation to independent
contractors that will go into effect March 15, 2004. The financial impact
will be approximately $1.5 million pretax on an annualized basis.
Operating
taxes and licenses increased $0.4 million (3.0%), to $14.4 million in
2003, from $13.9 million in 2002. As a percentage of freight revenue,
operating taxes and licenses remained essentially constant at 2.6% in 2003 and
2.5% in 2002.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, increased
$3.7 million (11.6%), to $35.5 million in 2003 from $31.8 million
in 2002. As a percentage of freight revenue, insurance and claims expense
increased to 6.4% in 2003 from 5.8% in 2002. Insurance and claims expense has
increased greatly since 2001. The increase is a result of an industry-wide
increase in insurance rates, which we addressed by adopting an insurance program
with significantly higher deductible exposure, and our unfavorable accident
experience over the past three years. Insurance and claims expense will vary
based on the frequency and severity of claims, the premium expense, and the
level of self-insured retention. Because of another increase in self-insured
retentions, effective March 1, 2004, our future expenses of insurance and claims
may be higher or more volatile than in historical periods.
Communications
and utilities increased $0.2 million (2.2%), to $7.2 million in 2003,
from $7.0 million in 2002. As a percentage of freight revenue,
communications and utilities remained essentially constant at 1.3% in 2003 and
2002.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, decreased $0.2 million (1.2%), to $14.5 million
in 2003, from $14.7 million in 2002. As a percentage of freight revenue,
general supplies and expenses remained essentially constant at 2.6% in 2003 and
2.7% in 2002.
Depreciation,
amortization and impairment charge, consisting primarily of depreciation of
revenue equipment, decreased $6.5 million (13.0%), to $43.0 million in
2003 from $49.5 million in 2002. As a percentage of freight revenue,
depreciation and amortization decreased to 7.7% in 2003 from 9.0% in 2002. The
decrease in part resulted because we did not have an impairment charge in the
2003 period, as we recorded a $3.3 million impairment charge in the 2002
period. Depreciation and amortization expense is net of any gain or loss on the
disposal of tractors and trailers. Gains on the disposal of tractors and
trailers were approximately $0.9 million in 2003 compared to a loss of
$2.4 million in 2002. In addition, we executed the April 2003
sale-leaseback transaction, discussed under the revenue equipment rentals and
purchased transportation discussion above. These factors were partially offset
by increased depreciation expense on our 2001 tractors and on our new tractors.
We expect our annual cost of tractor and trailer ownership and/or leasing to
increase in future periods. The increase is expected to result from a
combination of higher initial prices of new equipment, lower resale values for
used equipment, and increased depreciation expense on some of our existing
equipment over their remaining lives in order to better match expected book
values or lease residual values with market values at the equipment disposal
date. To the extent equipment is leased under operating leases, the amounts will
be reflected in revenue equipment rentals and purchased transportation. To the
extent equipment is owned or obtained under capitalized leases; the amounts will
be reflected as depreciation expense and interest expense. Those expense items
will fluctuate with changes in the percentage of our equipment obtained under
operating leases versus owned and under capitalized leases.
Amortization
expense relates to deferred debt costs incurred and covenants not to compete
from five acquisitions. Goodwill amortization ceased beginning January 1, 2002,
in accordance with SFAS No. 142, and we evaluate goodwill and certain
intangibles for impairment, annually. During the second quarter of 2003 and
2002, we tested our goodwill for impairment and found no impairment.
Other
expense, net, decreased $4.1 million (70.0%), to $1.8 million in 2003,
from $5.8 million in 2002. As a percentage of freight revenue, other
expense decreased to 0.3% in 2003 from 1.1% in 2002. The decrease was the result
of lower debt balances and more favorable interest rates. Included in the other
expense category are interest expense, interest income, and pre-tax non-cash
adjustments related to the accounting for interest rate derivatives under SFAS
No. 133, which amounted to a $0.4 million gain in 2003 and a
$0.9 million loss in 2002.
During
the first quarter of 2002, we prepaid the remaining $20.0 million in
previously outstanding 7.39% ten year, private placement notes with borrowings
from the Credit Agreement. In conjunction with the prepayment of the borrowings,
we recognized an approximate $1.4 million pre-tax charge to reflect the
early extinguishment of debt. The losses related to the write off of debt
issuance and other deferred financing costs and a premium paid on the retirement
of the notes. Upon adoption of SFAS 145 in 2003, we reclassified the loss and it
is no longer classified as an extraordinary item.
Income
tax expense increased $3.4 million (31.7%) to $14.3 million in 2003
from $10.9 million in 2002. The effective tax rate is different from the
expected combined tax rate due to permanent differences related to a per diem
pay structure implemented in 2001. Due to the nondeductible effect of per diem,
our tax rate will fluctuate in future periods as income fluctuates.
As a
result of the factors described above, net income increased $3.9 million,
or 46.9%, to $12.2 million in 2003 from $8.3 million in 2002. As a
result of the foregoing, our net margin increased to 2.2% in 2003 from 1.5% in
2002.
LIQUIDITY
AND CAPITAL RESOURCES
Our
business requires significant capital investments. In recent years, we have
financed our capital requirements with borrowings under credit facilities, cash
flows from operations, and long-term operating leases. Our primary sources of
liquidity at December 31, 2004, were funds provided by operations, proceeds
under the Securitization Facility and borrowings under our Credit Agreement,
each as defined in Notes 5 and 6 to our consolidated financial statements
contained herein, and operating leases of revenue equipment.
Over the
past several years, we have financed a large and increasing percentage of our
revenue equipment through operating leases. This has reduced the net value of
revenue equipment reflected on our balance sheet, reduced our borrowings, and
increased our net cash flows compared to purchasing all of our revenue
equipment. Certain items could fluctuate depending on whether we finance our
revenue equipment through borrowings or through operating leases. We expect
capital expenditures, primarily for revenue equipment (net of trade-ins), to be
approximately $65 to $70 million in 2005, exclusive of acquisitions of
companies, assuming all revenue equipment is purchased. We believe our sources
of liquidity are adequate to meet our current and projected needs for at least
the next twelve months. On a longer term basis, based on anticipated future cash
flows, expected availability under our Credit Agreement and Securitization
Facility, and sources of financing that we expect will be available to us, we do
not expect to experience significant liquidity constraints in the foreseeable
future.
Cash
Flows
Net cash
provided by operating activities was $44.1 million in 2004,
$47.7 million in 2003 and $67.2 million in 2002. Our primary sources
of cash flow from operations in 2004 were net income increased by depreciation
and amortization. Net income decreased in 2004 due to a $19.6 million
pre-tax insurance adjustment and we experienced increases in receivables
associated with detention accessorial revenue. Our number of days sales in
accounts receivable increased to 42 days in 2004 from 40 days in 2003 due to
difficulty in resolving and collecting detention accessorial revenue related to
the hours of service regulations that went into effect in 2004.
Net cash
used in investing activities was $32.4 million in 2004, $25.9 million
in 2003 and $56.4 million in 2002. The net cash was used was primarily for
the acquisition of new revenue equipment (net of trade-ins) using proceeds from
the Credit Agreement.
Net cash
used in financing activities was $9.9 million in 2004, $18.6 million
in 2003 and $11.2 million in 2002, primarily to reduce debt. During 2004,
we reduced outstanding balance sheet debt by $9.5 million. During 2003, we
reduced our outstanding balance sheet debt by $21.9 million, which included
$15.6 million of proceeds from a sale-leaseback transaction. At
December 31, 2004, we had outstanding debt of $52.2 million,
consisting of $44.1 million in the Securitization Facility and
$8.0 million drawn under the Credit Agreement. We also repaid a
$1.3 million interest bearing note to the former primary stockholder of SRT
in September 2004. In addition, we used approximately $2.0 million to
repurchase shares of our Class A common stock. In May 2004, the Board of
Directors authorized a stock repurchase plan for up to 1.0 million company
shares to be purchased in the open market or through negotiated transactions
subject to criteria established by the board. During 2004, we purchased a total
of 126,100 shares with an average price of $15.78. The stock repurchase plan
expires May 31, 2005.
Material
Debt Agreements
In
December 2004, we amended and restated our Credit Agreement with a group of
banks. The facility matures in December 2009. Borrowings under the Credit
Agreement are based on the banks' base rate, which floats daily, or LIBOR, which
accrues interest based on one, two, three, or six month LIBOR rates plus an
applicable margin that is adjusted quarterly between 0.75% and 1.25% based on a
consolidated leverage ratio. The applicable margin was 1.0% at December 31,
2004. At December 31, 2004, we had only LIBOR borrowings in the amount of
$8.0 million outstanding on which the interest rate was 3.4%. The Credit
Agreement is guaranteed by us and all of our subsidiaries except CVTI
Receivables Corp. and Volunteer Insurance Limited.
The
Credit Agreement has a maximum borrowing limit of $150.0 million with an
accordion feature which permits an increase up to a maximum borrowing limit of
$200.0 million. Borrowings related to revenue equipment are limited to the
lesser of 90% of net book value of revenue equipment or the maximum borrowing
limit. Letters of credit are limited to an aggregate commitment of
$75.0 million. The Credit Agreement is secured by a pledge of the stock of
all of the subsidiaries that guaranty the Credit Agreement. A commitment fee,
that is adjusted quarterly between 0.15% and 0.25% per annum based on
consolidated leverage ratio, is due on the daily unused portion of the Credit
Agreement. As of December 31, 2004, we had $8.0 million of borrowings
outstanding under the Credit Agreement with approximately $73.0 million of
available borrowing capacity. At December 31, 2004 and December 31,
2003, we had undrawn letters of credit outstanding of approximately
$65.4 million and $51.0 million, respectively. The Credit Agreement
contains certain restrictions and covenants relating to, among other things,
dividends, tangible net worth, consolidated leverage ratio, acquisitions and
dispositions, and total indebtedness and is cross-defaulted with the
Securitization Facility. As of December 31, 2004, we were in compliance
with the Credit Agreement covenants.
In
December 2000, we entered into an accounts receivable securitization facility
(the "Securitization Facility"). On a revolving basis, we sell our interests in
our accounts receivable to CRC, a wholly-owned bankruptcy-remote special purpose
subsidiary. CRC sells a percentage ownership in such receivables to an unrelated
financial entity. We can receive up to $62.0 million of proceeds, subject
to eligible receivables, and pay a service fee recorded as interest expense,
based on commercial paper interest rates plus an applicable margin of 0.44% per
annum and a commitment fee of 0.10% per annum on the daily unused portion of the
facility. The net proceeds under the Securitization Facility are required to be
shown as a current liability because the term, subject to annual renewals, is
364 days. As of December 31, 2004 and December 31, 2003, we had
received $44.1 million and $48.4 million, respectively, in proceeds,
with a weighted average interest rate of 2.4% and 1.0%, respectively. CRC does
not meet the requirements for off-balance sheet accounting; therefore, it is
reflected in our consolidated financial statements. The Securitization Facility
contains certain restrictions and covenants relating to, among other things,
dividends, tangible net worth, consolidated leverage ratio, acquisitions and
dispositions, and total indebtedness and is cross-defaulted. As of
December 31, 2004, we were in compliance with the Securitization Facility
covenants.
Sale-Leaseback
Transactions
In April
2003, we engaged in a sale-leaseback transaction involving approximately 1,266
dry van trailers. We sold the trailers to a finance company for approximately
$15.6 million in cash and leased the trailers back under three year walk
away leases. The resulting gain was approximately $0.3 million and is being
amortized over the life of the lease. The monthly cost of the lease payments
will be higher than the cost of the depreciation and interest expense; however,
there will be no residual risk of loss at disposition.
In April
2003, we also entered into an agreement with a finance company to sell
approximately 2,585 dry van trailers and to lease an additional 3,600 model year
2004 dry van trailers. We sold the trailers, which consisted of model year 1991
to model year 1997 dry van trailers, to the finance company for approximately
$20.5 million in cash and leased the 3,600 dry van trailers back under
seven year walk away leases. The monthly cost of the lease payments will be
higher than the cost of the depreciation and interest expense; however, there
will be no residual risk of loss at disposition. The transaction was completed
in the first quarter of 2004 and the leases begin to expire in June
2010.
Contractual
Obligations and Commercial Commitments
The
following table sets forth our contractual cash obligations and commitments as
of December 31, 2004.
Payments
Due By Period
(in
thousands) |
|
Total |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
There-
after |
|
Long-term
debt, including current
maturities |
|
$ |
8,022 |
|
$ |
9 |
|
$ |
9 |
|
$ |
4 |
|
$ |
¾ |
|
$ |
8,000 |
|
$ |
¾ |
|
Securitization
facility (1) |
|
|
44,148 |
|
|
44,148 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
Operating
leases |
|
|
141,788 |
|
|
43,924 |
|
|
36,735 |
|
|
23,657 |
|
|
15,416 |
|
|
10,737 |
|
|
11,319 |
|
Lease
residual value guarantees |
|
|
55,567 |
|
|
9,486 |
|
|
11,029 |
|
|
15,266 |
|
|
14,401 |
|
|
4,418 |
|
|
967 |
|
Purchase
Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel
fuel (2) |
|
|
53,331 |
|
|
40,799 |
|
|
12,532 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
Equipment
(3) |
|
|
117,891 |
|
|
117,891 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
Total
Contractual Cash Obligations |
|
$ |
420,747 |
|
$ |
256,257 |
|
$ |
60,305 |
|
$ |
38,927 |
|
$ |
29,817 |
|
$ |
23,155 |
|
$ |
12,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In
2005, this amount represents proceeds drawn under our Securitization
Facility. The net proceeds under the Securitization Facility are required
to be shown as a current liability because the term, subject to annual
renewals, is 364 days. We expect the Securitization Facility to be renewed
in December 2005. |
(2) |
This
amount represents volume purchase commitments through our truck stop
network. We estimate that these amounts represent approximately 11% and
35% of our fuel needs for 2006 and 2005, respectively. |
(3) |
Amount
reflects the total purchase price or lease commitment of tractors and
trailers scheduled for delivery throughout 2005. Net of estimated trade-in
values and other dispositions, the estimated amount due under these
commitments is approximately $78 million. These purchases are
expected to be financed by debt, proceeds from sales of existing
equipment, cash flows from operations, and operating leases. We have the
option to cancel commitments relating to tractor equipment with 60 days
notice. |
Off
Balance Sheet Arrangements
At
December 31, 2004, we financed approximately 1,222 tractors and 7,149
trailers under operating leases. Vehicles held under operating leases are not
carried on our balance sheet, and lease payments in respect of such vehicles are
reflected in our income statements in the line item "Revenue equipment rentals
and purchased transportation." Our revenue equipment rental expense was
$35.3 million in 2004, compared to $25.4 million in 2003. The total
amount of remaining payments under operating leases as of December 31,
2004, was $141.8 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, then we are
liable to the lessor for an amount equal to the shortage (if any) between the
proceeds from the sale of the equipment and an agreed value. As of
December 31, 2004, the maximum amount of the residual value guarantees was
approximately $55.6 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 the proceeds from
the sale of equipment under operating leases would exceed the payment obligation
on substantially all operating leases.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make decisions
based upon estimates, assumptions, and factors we consider as relevant to the
circumstances. Such decisions include the selection of applicable accounting
principles and the use of judgment in their application, the results of which
impact reported amounts and disclosures. Changes in future economic conditions
or other business circumstances may affect the outcomes of our estimates and
assumptions. Accordingly, actual results could differ from those anticipated. A
summary of the significant accounting policies followed in preparation of the
financial statements is contained in Note 1 of the financial statements attached
hereto. The following discussion addresses our most critical accounting
policies, which are those that are both important to the portrayal of our
financial condition and results of operations and that require significant
judgment or use of complex estimates.
Property
and Equipment
Depreciation
is calculated using the straight-line method over the estimated useful lives of
the assets and was approximately $36.5 million on tractors and trailers in 2004.
We depreciate revenue equipment excluding day cabs over five to ten years with
salvage values ranging from 9% to 33%. We evaluate the salvage value, useful
life, and annual depreciation of tractors and trailers annually based on the
current market environment and our recent experience with disposition values.
Any change could result in greater or lesser annual expense in the future. Gains
or losses on disposal of revenue equipment are included in depreciation in our
statements of operations. We also evaluate the carrying value of long-lived
assets for impairment by analyzing the operating performance and future cash
flows for those assets, whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable. We evaluate the
need to adjust the carrying value of the underlying assets if the sum of the
expected cash flows is less than the carrying value. Impairment can be impacted
by our projection of the actual level of future cash flows, the level of actual
cash flows and salvage values, the methods of estimation used for determining
fair values and the impact of guaranteed residuals. Any changes in management's
judgments could result in greater or lesser annual depreciation expense or
additional impairment charges in the future.
Insurance
and Other Claims
Our
insurance program for liability, property damage, and cargo loss and damage,
involves self-insurance with high risk retention levels. We accrue the estimated
cost of the uninsured portion of pending claims. These accruals are based on our
evaluation of the nature and severity of the claim and estimates of future
claims development based on historical trends, as well as the legal and other
costs to settle or defend the claims. Because of our significant self-insured
retention amounts, we have significant exposure to fluctuations in the number
and severity of claims. If there is an increase in the frequency and severity of
claims, or we are required to accrue or pay additional amounts if the claims
prove to be more severe than originally assessed, our profitability would be
adversely affected. The rapid and substantial increase in our self-insured
retention makes these estimates an important accounting judgment.
During
2004 we engaged an independent, third-party actuarial firm to assist us in
evaluating our claims reserves estimates. As a result of the actuarial study and
our own procedures we recorded a $19.6 million non-cash, pretax increase to
claims reserves during the fourth quarter of 2004. We have incorporated several
procedures suggested by the actuary into our claims estimation process for
future periods.
In
addition to estimates within our self-insured retention layers, we also must
make judgments concerning our aggregate coverage limits. From 1999 to present,
we carried excess coverage in amounts that have ranged from $15.0 million
to $49.0 million in addition to our primary insurance coverage, although
for the period from July through November 2002, our aggregate coverage limit was
$2.0 million because of a fraudulently issued binder for our excess
coverage. If any claim occurrence were to exceed our aggregate coverage limits,
we would have to accrue for the excess amount, and our critical estimates
include evaluating whether a claim may exceed such limits and, if so, by how
much. Currently, we are not aware of any such claims. If one or more claims from
this period were to exceed the then effective coverage limits, our financial
condition and results of operations could be materially and adversely affected.
Lease
Accounting and Off-Balance Sheet Transactions
Operating
leases have been an important source of financing for our revenue equipment,
computer equipment and company airplane. In connection with the leases of a
majority of the value of the equipment we finance with operating leases, we
issued residual value guarantees, which provide that if we do not purchase the
leased equipment from the lessor at the end of the lease term, then we are
liable to the lessor for an amount equal to the shortage (if any) between the
proceeds from the sale of the equipment and an agreed value. As of
December 31, 2004, the maximum amount of the residual value guarantees was
approximately $55.6 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
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
In this
area, 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. In connection with an audit of our 2001 and 2002 tax returns,
the IRS proposed to disallow three of our tax strategies. We have filed an
appeal in the matter and have not yet been contacted by the IRS Appeals Division
to schedule a hearing. In April 2004, we submitted a $5.0 million cash
bond to the Internal Revenue Service to prevent any future interest expense in
the event of an unsuccessful defense of the strategies. In addition, we have
accrued amounts that we believe are appropriate given our expectations
concerning the ultimate resolution of the strategies. 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 sheet
and are determined in accordance with SFAS No. 109, Accounting
for Income Taxes.
Deferred tax assets
and
liabilities (tax benefits and liabilities expected to be realized in the future)
are recognized for the expected future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and operating loss and tax
credit carry forwards.
The
carrying value of our deferred tax assets assumes that we will be able to
generate, based on certain estimates and assumptions, sufficient future taxable
income in certain tax jurisdictions to utilize these deferred tax benefits. If
these estimates and related assumptions change in the future, we may be required
to establish a valuation allowance against the carrying value of the deferred
tax assets, which would result in additional income tax expense. On a periodic
basis we assess the need for adjustment of the valuation allowance. No valuation
reserve has been established at December 31, 2004, because, based on forecasted
income, we
believe that it is more likely than not that the future benefit of the deferred
tax assets
will be
realized. However, there can be no assurance that we will meet our forecasts of
future income.
We
believe that we have adequately provided for our future tax consequences based
upon current facts and circumstances and current tax law. During 2004, we made
no material changes in our assumptions regarding the determination of income tax
liabilities. However, should our tax positions be challenged, different outcomes
could result and have a significant impact on the amounts reported through our
consolidated statement of operations.
Most of
our operating expenses are inflation-sensitive, with inflation generally
producing increased costs of operations. During the past three years, the most
significant effects of inflation have been on revenue equipment prices and the
compensation paid to the drivers. New emissions control regulations and
increases in commodity prices, wages of manufacturing workers, and other items
have resulted in higher tractor prices, and there has been an industry-wide
increase in wages paid to attract and retain qualified drivers. The cost of fuel
also has risen substantially over the past three years. We believe this increase
primarily reflects world events rather than underlying inflationary pressure. We
attempt to limit the effects of inflation through increases in freight rates,
certain cost control efforts and the effects of fuel prices through fuel
surcharges.
SEASONALITY
In the
trucking industry, revenue generally decreases as customers reduce shipments
during the winter holiday season and as inclement weather impedes operations. At
the same time, operating expenses generally increase, with fuel efficiency
declining because of engine idling and weather creating more equipment repairs.
For the reasons stated, first quarter net income historically has been lower
than net income in each of the other three quarters of the year. Our equipment
utilization typically improves substantially between May and October of each
year because of the trucking industry's seasonal shortage of equipment on
traffic originating in California and because of general increases in shipping
demand during those months. The seasonal shortage typically occurs between May
and August because California produce carriers' equipment is fully utilized for
produce during those months and does not compete for shipments hauled by our dry
van operation. During September and October, business increases as a result of
increased retail merchandise shipped in anticipation of the
holidays.
The table
below sets forth quarterly information reflecting our equipment utilization
(miles per tractor per period) during 2004, 2003 and 2002. We believe that
equipment utilization more accurately demonstrates the seasonality for our
business than changes in revenue, which are affected by the timing of deliveries
of new revenue equipment. Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends.
Equipment
Utilization Table
(Miles
Per Tractor Per Period)
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
2004 |
29,749 |
31,215 |
31,043 |
30,911 |
2003 |
30,308 |
32,612 |
33,568 |
33,214 |
2002 |
30,986 |
33,461 |
32,664 |
32,801 |
FACTORS
THAT MAY AFFECT FUTURE RESULTS
The
following issues and uncertainties, among others, should be considered in
evaluating our business and growth outlook.
Our
business is subject to general economic and business factors that are largely
out of our control, any of which could have a materially adverse effect on our
operating results. Our
business is dependent on a number of factors that may have a materially adverse
effect on our results of operations, many of which are beyond our control. Some
of the most significant of these factors include excess tractor and trailer
capacity in the trucking industry, declines in the resale value of used
equipment, strikes or other work stoppages, increases in interest rates, fuel
taxes, tolls, and license and registration fees, rising costs of
healthcare.
We also
are affected by recessionary economic cycles, changes in customers' inventory
levels, and downturns in customers' business cycles, particularly in market
segments and industries, such as retail and manufacturing, where we have a
significant concentration of customers, and regions of the country, such as
California, Texas, and the Southeast, where we have a significant amount of
business. Economic conditions may adversely affect our customers and their
ability to pay for our services. Customers encountering adverse economic
conditions represent a greater potential for loss and we may be required to
increase our allowance for doubtful accounts.
In
addition, it is not possible to predict the effects of actual or threatened
terrorist attacks, efforts to combat terrorism, military action against any
foreign state, heightened security requirements, or other related events. Such
events, however, could negatively impact the economy and consumer confidence in
the United States. Such events could also have a materially adverse effect on
our future results of operations. Moreover, our results of operations may be
affected by seasonal factors. Customers tend to reduce shipments after the
winter holiday season and our operating expenses tend to be higher in the winter
months primarily due to colder weather, which causes higher fuel consumption
from increased idle time and higher repairs and maintenance costs.
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 currently self-insure for a portion of our claims
exposure and accrue amounts for liabilities based on our assessment of claims
that arise and our insurance coverage for the periods in which the claims arise.
In general, for casualty claims after March 1, 2005, we are self-insured
for the first $2.0 million of each personal injury and property damage
claim and the first $1.0 million of each cargo claim. We are also
responsible for a pro rata portion of legal expenses relating to such claims. We
maintain a workers' compensation plan and group medical plan for our employees
with a deductible amount of $1.0 million for each workers' compensation
claim and a stop loss amount of $275,000 for each group medical claim. Because
of our significant self-insured retention amounts, we have significant exposure
to fluctuations in the number and severity of claims. If there is an increase in
the frequency and severity of claims, or we are required to accrue or pay
additional amounts if the claims prove to be more severe than originally
assessed, our profitability would be adversely affected and could vary
significantly from period to period. During the fourth quarter of 2004, we
recorded a $19.6 million adjustment to our claims reserves, and we cannot
assure you that future adjustments will not occur.
We
maintain insurance above the amounts for which we self-insure with licensed
insurance carriers. Our insurance and claims expense could increase when our
current coverages expire or we could raise our self-insured retention. If these
expenses increase, our earnings could be materially and adversely affected.
Our
current aggregate primary and excess casualty insurance provides coverage up to
a maximum per claim amount of $50.0 million. We do not maintain directors
and officers insurance coverage, although we are obligated to indemnify them
against certain liabilities they may incur while serving in such capacities. If
any claim were to exceed our coverage, we would bear the excess, in addition to
our other self-insured amounts. Any such claim could materially and adversely
affect our financial condition and results of operations.
Ongoing
insurance requirements could constrain our borrowing
capacity. The
increase in our self-insured retention has caused our outstanding undrawn
letters of credit in favor of insurance companies to increase. At
December 31, 2004, our revolving line of credit had a maximum borrowing
limit of $150.0 million, outstanding borrowings of $8.0 million, and
outstanding letters of credit of $65.4 million. We expect outstanding
letters of credit to increase in the future. Outstanding letters of credit
reduce the available borrowings under our credit agreement, which could
negatively affect our liquidity should we need to increase our borrowings in the
future.
We
operate in a highly competitive and fragmented industry, and numerous
competitive factors could impair our ability to maintain or improve our current
profitability. These
factors include:
· |
We
compete with many other truckload carriers of varying sizes and, to a
lesser extent, with less-than-truckload carriers, railroads, and other
transportation companies, many of which have more equipment and greater
capital resources than we do. |
· |
Many
of our competitors periodically reduce their freight rates to gain
business, especially during times of reduced growth rates in the economy,
which may limit our ability to maintain or increase freight rates or
maintain significant growth in our business. |
· |
Many
of our customers are other transportation companies, and they may decide
to transport their own freight. |
· |
Many
customers reduce the number of carriers they use by selecting so-called
"core carriers" as approved, service
providers, and in some instances we may not be selected.
|
· |
Many
customers periodically accept bids from multiple carriers for their
shipping needs, and this process may depress freight rates or result in
the loss of some business to competitors. |
· |
The
trend toward consolidation in the trucking industry may create other large
carriers with greater financial resources
and other competitive advantages relating to their size.
|
· |
Advances
in technology require increased investments to remain competitive, and our
customers may not be
willing to accept higher freight rates to cover the cost of these
investments. |
· |
Competition
from non-asset-based logistics and freight brokerage companies may
adversely affect our customer relationships and freight rates.
|
· |
Economies
of scale that may be passed on to smaller carriers by procurement
aggregation providers may improve their ability to compete with us.
|
We
derive a significant portion of our revenue from our major customers, the loss
of one or more of which could have a materially adverse effect on our
business. A
significant portion of our revenue is generated from our major customers. For
2004, our top 25 customers, based on revenue, accounted for approximately
49% of our revenue; and our top 10 customers, approximately 36% of our
revenue. In the aggregate, subsidiaries of CNF, Inc. accounted for approximately
9% of our revenue in 2004. We do not expect these percentages to change
materially for 2005. Generally, we do not have long term contractual
relationships with our major customers, and we cannot assure you that our
customers will continue to use our services or that they will continue at the
same levels. For some of our customers, we have entered into multi-year
contracts and we cannot assure you that the rates will 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 compensation or difficulty in attracting drivers could affect our
profitability and ability to grow. The
trucking industry experiences substantial difficulty in attracting and retaining
qualified drivers, including independent contractors. Our ability to attract and
retain drivers could be adversely affected by increased availability of
alternative employment opportunities in an economic expansion and by the
potential need for more drivers due to more restrictive driver hours-of-service
requirements imposed by the U.S. Department of Transportation effective
January 4, 2004. If we are unable to continue to attract drivers and
contract with independent contractors, we could be required to adjust our driver
compensation package, let trucks sit idle, or operate with fewer independent
contractors and face difficulty meeting shipper demands, all of which could
adversely affect our growth and profitability.
We
may not be successful in improving our profitability. We have
implemented certain initiatives designed to improve our profitability. In 2003
our net margin improved. In 2004 our net margins excluding the
$12.2 million non-cash, after-tax increase to claims reserves, increased
further. However, we face significant cost increases in 2005, and we cannot
assure you that we will be successful in continuing to improve our
profitability. If we fail to sustain or improve our profitability, our stock
price could decline.
Our
growth may not return to historical rates, which could adversely affect our
stock price. We
experienced significant growth in revenue between our founding in 1986 and 1999.
Since 2000, however, our revenue base has remained relatively constant. There
can be no assurance that our revenue growth rate will return to historical
levels or that we can effectively adapt our management, administrative, and
operational systems to respond to any future growth. We can provide no assurance
that our operating margins will not be adversely affected by future changes in
and expansion of our business or by changes in economic conditions. Slower or
less profitable growth could adversely affect our stock price.
We
operate in a highly regulated industry and increased costs of compliance with,
or liability for violation of, existing or future regulations could have a
materially adverse effect on our business. Our
operations are regulated and licensed by various U.S., Canadian, and Mexican
agencies. Our company drivers and independent contractors also must comply with
the safety and fitness regulations of the United States Department of
Transportation, or DOT, including those relating to drug and alcohol testing and
hours-of-service. Such matters as weight and equipment dimensions are also
subject to U.S. and Canadian regulations. We also may become subject to new or
more restrictive regulations relating to fuel emissions, drivers'
hours-of-service, ergonomics, or other matters affecting safety or operating
methods. 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 would
adversely affect our results of operations.
Beginning
in 2004, motor carriers were required to comply with several changes to DOT
hours-of-service requirements that may have a positive or negative effect on
driver hours (and miles) and our operations. A citizens' advocacy group
successfully petitioned the courts that the new rules were developed without
driver health in mind. Pending further action by the courts or the effectiveness
of new rules addressing these issues, Congress has enacted a law that extends
the effectiveness of the new rules until September 30, 2005. We cannot
predict whether there will be changes to the hours-of-service rules, the extent
of any changes, or whether there will be further court challenges. Given this
uncertainty, we are unable to determine the future effect of driver hour
regulations on our operations. The DOT is also considering implementing higher
safety requirements on trucks. These regulatory changes may have an adverse
affect on our future profitability.
The
IRS has audited our 2001 and 2002 tax returns and proposed the disallowance of
deductions related to certain of our tax planning structures, which could affect
our effective tax rate. Federal,
state, and local taxes comprise a significant part of our expenses. As such, we
actively manage these expenses when executing our business strategy.
Consequently, when we believe it is appropriate, we use a number of structures
to permanently decrease our overall tax liability or to defer tax payments.
During 2001, we implemented two structures of a type that have been subject to
heightened IRS scrutiny. In the first of these structures, we formed a trust to
fund the payment of certain contested third-party claims. We deducted the
contributions to the trust in the form of our right to receive payment on
certain notes issued by our subsidiaries. In the second of these structures, we
changed our 401(k) plan year to end on December 29, and as a result deducted our
2002 plan year contribution in 2001. Both of these structures were designed to
accelerate deductions to an earlier date than when they otherwise would have
been available.
The IRS
has proposed the disallowance of the deductions relating to the trust and 401(k)
plan structures. The IRS also reviewed a captive insurance company that we
established in 2002, and that also was disclosed, and proposed the disallowance
of deductions for premium payments made by certain insured subsidiaries. We are
prepared to vigorously defend these deductions, and accordingly have filed a
formal protest with the IRS. This protest is subject to review by and a formal
hearing with the IRS Appeals division. IRS Appeals has acknowledged the timely
filing of our protest, but a hearing has not yet been scheduled.
In April
2004, we submitted a $5.0 million cash bond to the IRS, which stopped the
running of interest expense in the event of a successful challenge by the IRS of
all issues under protest. In addition, we have accrued amounts that we believe
are appropriate given our expectations concerning the ultimate resolution of
these matters. A successful challenge by the IRS of the trust and 401(k) plan
deductions would affect only the timing, not the ultimate deductibility of, the
related deductions, and there would consequently be no effect on income tax
expense or the effective tax rate. If the IRS successfully challenges the
captive insurance company deductions, we would incur additional income tax
expense related to 2002, 2003 and 2004 of approximately $1.3 million, which
would adversely impact our effective tax rate both in the year of payment and
prospectively.
We
have significant ongoing capital requirements that could affect our
profitability if we are unable to generate sufficient cash from operations and
obtain financing on favorable terms. The
truckload industry is capital intensive, and our policy of operating newer
equipment requires us to expend significant amounts annually. For the past few
years, we have depended on cash from operations, our credit facilities, and
operating leases to fund our revenue equipment. Our budget for capital
expenditures, net of any offsets from sales or trades of equipment, is $65 to
70 million in 2005, exclusive of acquisitions. If we elect to expand our
fleet in future periods, our capital needs would increase. We expect to pay for
projected capital expenditures with cash flows from operations, borrowings under
our line of credit, proceeds under the securitization facility and operating
leases of revenue equipment. If we are unable to generate sufficient cash from
operations and obtain financing on favorable terms in the future, we may have to
limit our growth, enter into less favorable financing arrangements, or operate
our revenue equipment for longer periods, any of which could have a materially
adverse effect on our profitability.
We
currently have trade-in or fixed residual agreements with certain equipment
suppliers concerning the substantial majority of our tractor fleet. If the
suppliers refuse or are unable to meet their financial obligations under these
agreements, or if we decline to purchase the relevant number of replacement
units from the suppliers, we may suffer a financial loss upon the disposition of
our equipment.
Fluctuations
in the price or availability of fuel, as well as hedging activities, surcharge
collection, and the volume and terms of diesel fuel purchase commitments, may
increase our cost of operation, which could materially and adversely affect our
profitability. Fuel is
one of our largest operating expenses. Diesel fuel prices fluctuate greatly due
to economic, political, and other factors beyond our control. For example, our
average price for diesel fuel was $1.72 per gallon in 2004, as compared to $1.43
per gallon in 2003. Fuel also is subject to regional pricing differences and
often costs more on the West Coast, where we have significant operations. From
time-to-time we have used fuel surcharges, hedging contracts, and volume
purchase arrangements to attempt to limit the effect of price fluctuations.
Although we impose fuel surcharges on substantially all accounts, these
arrangements do not fully protect us from fuel price increases and also may
result in us not receiving the full benefit of any fuel price decreases. We
currently do not have any fuel hedging contracts in place. If we do hedge, we
may be forced to make cash payments under the hedging arrangements. A small
portion of our fuel requirements for 2005 are covered by volume purchase
commitments. Based on current market conditions, we have decided to limit our
hedging and purchase commitments, but we continue to evaluate such measures. The
absence of meaningful fuel price protection through these measures, fluctuations
in fuel prices, or a shortage of diesel fuel, could materially and adversely
affect our results of operations.
We
may not make acquisitions in the future, or if we do, we may not be successful
in our acquisition strategy. We made
nine acquisitions between 1996 and 2000, including four between September 1999
and August 2000. Accordingly, acquisitions have provided a substantial portion
of our growth. There is no assurance that we will be successful in identifying,
negotiating, or consummating any future acquisitions. If we fail to make any
future acquisitions, our growth rate could be materially and adversely affected.
Any acquisitions we undertake could involve the dilutive issuance of equity
securities and/or incurring indebtedness. In addition, acquisitions involve
numerous risks, including difficulties in assimilating the acquired company's
operations, the diversion of our management's attention from other business
concerns, risks of entering into markets in which we have had no or only limited
direct experience, and the potential loss of customers, key employees, and
drivers of the acquired company, all of which could have a materially adverse
effect on our business and operating results. If we make acquisitions in the
future, we cannot assure you that we will 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, 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 two of our
facilities. A small percentage of our freight consists of low-grade hazardous
substances, which subjects us to a wide array of 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
that could have a materially adverse effect on our business and operating
results. If we should fail to comply with applicable environmental regulations,
we could be subject to substantial fines or penalties and to civil and criminal
liability.
Increased
prices, reduced productivity, and restricted availability of new revenue
equipment may adversely affect our earnings and cash flows.
We have
experienced higher prices for new tractors over the past three years, partially
as a result of government regulations applicable to newly manufactured tractors
and diesel engines. More restrictive Environmental Protection Agency, or EPA,
emissions standards for 2007 will require vendors to introduce new engines, and
some carriers may seek to purchase large numbers of tractors with pre-2007
engines, possibly leading to shortages. Our business could be harmed if we are
unable to continue to obtain an adequate supply of new tractors and trailers for
these or other reasons. As a result, we expect to continue to pay increased
prices for equipment and incur additional expenses and related financing costs
for the foreseeable future. Furthermore, the new engines are expected to reduce
equipment productivity and lower fuel mileage and, therefore, increase our
operating expenses.
We have
agreements covering the terms of trade-in and/or repurchase commitments from our
primary equipment vendors for disposal of a substantial portion of our revenue
equipment. The prices we expect to receive under these arrangements may be
higher than the prices we would receive in the open market. We may suffer a
financial loss upon disposition of our equipment if these vendors refuse or are
unable to meet their financial obligations under these agreements, if we fail to
enter into definitive agreements that reflect the terms we expect, if we fail to
enter into similar arrangements in the future, or if we do not purchase the
required number of replacement units from the vendors.
New
Accounting Pronouncements
In
December 2003, the FASB issued FIN 46-R, Consolidation
of Variable Interest Entities, ("FIN
46-R"). This Interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements,
addresses consolidation by business enterprises of variable interest entities.
For enterprises that are not small business issuers, FIN 46-R is to be applied
to all variable interest entities by the end of the first reporting period
ending after March 15, 2004. Our adoption of FIN 46-R did not have an impact on
our financial condition or results of operations.
In
December 2004, the FASB issued SFAS No. 123-R, Share-Based
Payments, an
Amendment of FASB 123 and 95 on Accounting
for Stock Based Compensation. SFAS
123-R requires companies to recognize in the income statement the grant date
fair value of stock options and other equity-based compensation issued to
employees. SFAS 123-R is effective for most public companies with interim or
annual periods beginning after June 15, 2005. We will adopt this statement
effective July 1, 2005. Our adoption of SFAS 123-R will impact our results
of operations by increasing salaries, wages and related expenses. The amount of
the expected impact is still being reviewed by the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
experience various market risks, including changes in interest rates and fuel
prices. We do not enter into derivatives or other financial instruments for
trading or speculative purposes, nor when there are no underlying related
exposures.
COMMODITY
PRICE RISK
From
time-to-time we may enter into derivative financial instruments to reduce our
exposure to fuel price fluctuations. In accordance with SFAS 133, we adjust any
derivative instruments to fair value through earnings on a monthly basis. As of
December 31, 2004, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
INTEREST
RATE RISK
Our
market risk is also affected by changes in interest rates. Historically, we have
used a combination of fixed rate and variable rate obligations to manage our
interest rate exposure. Fixed rate obligations expose us to the risk that
interest rates might fall. Variable rate obligations expose us to the risk that
interest rates might rise.
Our
variable rate obligations consist of our Credit Agreement and our Securitization
Facility. Borrowings under the Credit Agreement, provided there has been no
default, are based on the banks' base rate, which floats daily, or LIBOR, which
accrues interest based on one, two, three, or six month LIBOR rates plus an
applicable margin that is adjusted quarterly between 0.75% and 1.25% based on a
consolidated leverage ratio, which is generally defined as the ratio of
borrowings, letters of credit, and the present value of operating lease
obligations to our earnings before interest, income taxes, depreciation,
amortization, and rental payments under operating leases. The applicable margin
was 1.0% at December 31, 2004. At December 31, 2004, we had variable,
base rate borrowings of $8.0 million outstanding under the Credit
Agreement.
During
the first quarter of 2001, we entered into two $10 million notional amount
interest rate swap agreements to manage the risk of variability in cash flows
associated with floating-rate debt. The swaps
expire January 2006 and March 2006. Due to the counter-parties' embedded options
to cancel, these
derivatives are not designated as hedging instruments under SFAS No. 133 and
consequently are marked to fair value through earnings, in other expense in the
accompanying consolidated statement of operations. At
December 31,
2004, the
fair value of these interest rate swap agreements was a liability of $0.4
million.
Our
Securitization Facility carries a variable interest rate based on the commercial
paper rate plus an applicable margin of 0.44% per annum. At December 31,
2004, borrowings of $44.1 million had been drawn on the Securitization
Facility. Assuming variable rate borrowings under the Credit Agreement and
Securitization Facility at December 31, 2004 levels, a one percentage point
increase in interest rates could increase our annual interest expense by
approximately $321,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Our
audited consolidated balance sheets, statements of operations, cash flows,
stockholders' equity and comprehensive loss, and notes related thereto, are
contained at Pages 40 to 54 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has
been no change in accountants during our three most recent fiscal years.
Evaluation
of Disclosure Controls and Procedures
We have
established disclosure controls and procedures to ensure that material
information relating to us and our consolidated subsidiaries is made known to
the officers who certify our financial reports and to other members of senior
management and the Board of Directors.
Based on
their evaluation as of December 31, 2004, our principal executive officer
and principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) 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
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(f) or 15d-(f) promulgated under the Exchange Act as a process
designed by, or under the supervision of, the principal executive and principal
financial officers and effected by the board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
· |
pertain
to the maintenance of records, that in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets; |
|
|
· |
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and |
|
|
· |
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial
statements. |
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2004. 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, 2004, our
internal control over financial reporting is effective based on those
criteria.
Management's
assessment of the effectiveness of internal control over financial reporting as
of December 31, 2004, has been audited by KPMG LLP, the independent registered
public accounting firm who also audited our consolidated financial statements.
KPMG LLP's attestation report on management's assessment of the Company's
internal control over financial reporting appears on page 39
herein.
Design
and Changes in Internal Control over Financial Reporting
The
design, monitoring, and revision of the system of internal accounting controls
involves, among other things, management's judgments with respect to the
relative cost and expected benefits of specific control measures.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2004, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
Not
applicable.
PART
III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
We
incorporate by reference the information respecting executive officers and
directors set forth under the captions "Election of Directors - Information
Concerning Directors and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Proxy Statement for the 2005 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 "Audit Committee Report for 2004" and the Stock Performance
Graph contained in the Proxy Statement are not incorporated by
reference.
We
incorporate by reference the information set forth under the section entitled
"Executive Compensation" in our Proxy Statement for the 2005 annual meeting of
stockholders; provided, that the section entitled "Compensation Committee Report
on Executive Compensation" contained in the Proxy Statement is not incorporated
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
We
incorporate by reference the information set forth under the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement for the 2005 annual meeting of stockholders. The following table
provides certain information as of December 31, 2004, with respect to our
compensation plans and other arrangements under which shares of our Class A
common stock are authorized for issuance.
Equity
Compensation Plan Information
Plan
category |
Number
of
securities
to
be
issued
upon
exercise
of
outstanding
options,
warrants
and
rights |
Weighted-
average
exercise
price
of
outstanding
options,
warrants
and
rights |
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a)) |
|
(a) |
(b) |
(c) |
Equity
compensation plans approved by
security holders (1) |
1,205,592 |
$14.53 |
1,035,700 |
Equity
compensation plans not approved
by security holders (2) |
55,500 |
$12.01 |
0 |
Total |
1,261,092 |
$14.42 |
1,035,700 |
(1) |
Includes
1994 Incentive Stock Plan, Outside Director Stock Option Plan, and 2003
Incentive Stock Plan. |
(2) |
Includes
1998 Non-Officer Incentive Stock Plan, and shares reserved for issuance
pursuant to grants outside any plan. |
Summary
Description of Equity Compensation Plans Not Approved by Security
Holders
Summary
of 1998 Non-Officer Incentive Stock Plan
In
October 1998, our Board of Directors adopted the Non-Officer Plan to attract and
retain executive personnel and other key employees and motivate them through
incentives that were aligned with our goals of increased profitability and
stockholder value. The Board of Directors authorized 200,000 shares of our Class
A Common Stock for grants or awards pursuant to the Non-Officer Plan. Awards
under the Plan could be in the form of incentive stock options, non-qualified
stock options, restricted stock awards, or any other awards of stock consistent
with the Non-Officer Plan's purpose. The Non-Officer Plan was to be administered
by the Board of Directors or a committee that could be appointed by the Board of
Directors. All non-officer employees were eligible for participation, and actual
participants in the Non-Officer Plan were selected from time-to-time by the
administrator. The administrator could substitute new stock options for
previously granted options. In conjunction with adopting the 2003 Plan, the
Board of Directors voted to terminate the Non-Officer Plan effective as of
May 31, 2003. Option grants previously issued continue in effect and may be
exercised on the terms and conditions under which the grants were
made.
Summary
of Grants Outside the Plan
On August
31, 1998, our Board of Directors approved the grant of an option to purchase
5,000 shares of our Class A Common Stock to each of our four outside directors.
The exercise price of the stock was equal to the mean between the lowest
reported bid price and the highest reported asked price on the date of the
grant. The options have a term of ten years from the date of grant, and the
options vest 20% on each of the first through fifth anniversaries of the
grant.
On
September 23, 1998, our Board of Directors approved the grant of an option to
purchase 20,000 shares of our Class A Common Stock to Tony Smith upon closing of
the acquisition of SRT and Tony Smith Trucking, Inc. The exercise price was the
mean between the low bid price and the high asked price on the closing date. The
options have a term of ten years from the date of grant, and the options vest
20% on each of the first through fifth anniversaries of the grant.
On May
20, 1999, our Board of Directors approved the grant of an option to purchase
2,500 shares of our Class A Common Stock to each of our four outside directors.
The exercise price of the stock was equal to the mean between the lowest
reported bid price and the highest reported asked price on the date of the
grant. The options have a term of ten years from the date of grant, and the
options vest 20% on each of the first through fifth anniversaries of the
grant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
We
incorporate by reference the information set forth under the sections entitled
"Compensation Committee Interlocks and Insider Participation" and "Certain and
Relationships and Related Transactions" in our Proxy Statement for the 2005
annual meeting of stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
We
incorporate by reference the information set forth under the section entitled
"Principal Accounting Fees and Services" in our Proxy Statement for the 2005
annual meeting of stockholders.
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
(a) |
1. |
Financial
Statements. |
|
|
|
|
|
|
|
Our
audited consolidated financial statements are set forth at the following
pages of this report: |
|
|
|
Reports
of Independent Registered Public Accounting Firm - KPMG
LLP |
38 |
|
|
Consolidated
Balance Sheets |
40 |
|
|
Consolidated
Statements of Operations |
41 |
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income
(Loss) |
42 |
|
|
Consolidated
Statements of Cash Flows |
43 |
|
|
Notes
to Consolidated Financial Statements |
44 |
|
|
|
|
|
2. |
Financial
Statement Schedules. |
|
|
|
|
|
|
|
Financial
statement schedules are not required because all required information is
included in the financial statements. |
|
|
|
|
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|
3. |
Exhibits. |
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|
|
|
|
|
|
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. |
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|
(b) |
|
Exhibits. |
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|
|
|
|
|
|
The
following exhibits are filed with this Form10-K or incorporated by
reference to the document set forth next to the exhibit listed
below. |
|
Exhibit
Number |
Reference |
Description |
3.1 |
(1) |
Restated
Articles of Incorporation. |
3.2 |
(1) |
Amended
Bylaws dated September 27, 1994. |
4.1 |
(1) |
Restated
Articles of Incorporation. |
4.2 |
(1) |
Amended
Bylaws dated September 27, 1994. |
10.1 |
(1) |
401(k)
Plan filed as Exhibit 10.10.* |
10.2 |
(2) |
Outside
Director Stock Option Plan, filed as Appendix A. |
10.3 |
(3) |
Amendment
No. 1 to the Outside Director Stock Option Plan, filed as Exhibit
10.11. |
10.4 |
(4) |
Loan
Agreement dated December 12, 2000, among CVTI Receivables Corp., Covenant
Transport, Inc., Three Pillars Funding Corporation, and SunTrust Equitable
Securities Corporation, filed as Exhibit 10.10. |
10.5 |
(4) |
Receivables
Purchase Agreement dated as of December 12, 2000, among CVTI
Receivables Corp., Covenant Transport, Inc., and Southern Refrigerated
Transport, Inc., filed as Exhibit 10.11. |
10.6 |
(5) |
Clarification
of Intent and Amendment No. 1 to Loan Agreement dated March 7, 2001, among
CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding
Corporation, and SunTrust Equitable Securities Corporation, filed as
Exhibit 10.12. |
10.7 |
(6) |
Incentive
Stock Plan, Amended and Restated as of May 17, 2001, filed as
Appendix B.* |
10.8 |
(7) |
Covenant
Transport, Inc. 2003 Incentive Stock Plan, filed as Appendix
B.* |
10.9 |
(8) |
Consolidating
Amendment No. 1 to Loan Agreement effective May 2, 2003, among CVTI
Receivables Corp., Covenant Transport, Inc., Three Pillars Funding
Corporation, and SunTrust Capital Markets, Inc. (formerly SunTrust
Equitable Securities Corporation), filed as Exhibit
10.3. |
10.10 |
(9) |
Master
Lease Agreement dated April 15, 2003, between Transport International
Pool, Inc. and Covenant Transport, Inc., filed as Exhibit
10.4. |
10.11 |
(10) |
Amendment
No. 5 to Loan Agreement dated December 9, 2003, among CVTI Receivables
Corp., Covenant Transport, Inc., Three Pillars Funding LLC (successor to
Three Pillars Funding Corporation), and SunTrust Capital Markets, Inc.
(formerly SunTrust Equitable Securities Corporation) (Three other
amendments were consolidated into Consolidating Amendment No. 1, filed
with the Form 10-Q for the quarter ended June 30, 2003), filed as Exhibit
10.16. |
10.12 |
(11) |
Amendment
No. 6 to Loan Agreement dated July 8, 2004, among CVTI Receivables Corp.,
Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a Three Pillars
Funding Corporation), and SunTrust Capital Markets, Inc. (formerly
SunTrust Equitable Securities Corporation) effective July 1, 2004, filed
as Exhibit 10.1. |
10.13 |
(11) |
Form
of Indemnification Agreement between Covenant Transport, Inc. and each
officer and director, effective May 1, 2004, filed as Exhibit
10.2. |
10.14 |
# |
Amendment
No. 7 to Loan Agreement dated November 17, 2004, among CVTI Receivables
Corp., Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a Three
Pillars Funding Corporation), and SunTrust Capital Markets, Inc. (formerly
SunTrust Equitable Securities Corporation). |
10.15 |
# |
Amended
and Restated Credit Agreement dated December 16, 2004, among Covenant
Asset Management, Inc., Covenant Transport, Inc., Bank of America, N.A.,
and each other financial institution which is a party to the Credit
Agreement. |
21 |
# |
List
of Subsidiaries. |
23 |
# |
Consent
of Independent Registered Public Accounting Firm - KPMG,
LLP. |
31.1 |
# |
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. |
31.2 |
# |
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the
Company's Chief Financial Officer. |
32.1 |
# |
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. |
32.2 |
# |
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief
Financial Officer. |
____________________________________________________________________________________________________________________
References:
All other
footnotes indicate a document previously filed as an exhibit to and incorporated
by reference from the following:
(1) |
Form
S-1, Registration No. 33-82978, effective October 28,
1994. |
(2) |
Schedule
14A, filed April 13, 2000. |
(3) |
Form
10-Q for the quarter ended September 30, 2000, filed November 13,
2000. |
(4) |
Form
10-K for the year ended December 31, 2000, filed March 29,
2001. |
(5) |
Form
10-Q for the quarter ended March 31, 2001, filed May 14,
2001. |
(6) |
Schedule
14A, filed April 5, 2001. |
(7) |
Schedule
14A, filed April 16, 2003. |
(8) |
Form
10-Q for the quarter ended June 30, 2003, filed August 11,
2003. |
(9) |
Form
10-Q/A for the quarter ended June 30, 2003, filed October 31,
2003. |
(10) |
Form
10-K, filed March 15, 2004. |
(11) |
Form
10-Q, filed August 5, 2004. |
(c) |
|
Financial
Statement Schedules. |
|
|
|
|
|
|
|
Not
applicable. |
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
COVENANT
TRANSPORT, INC. |
|
|
|
|
Date:
March 16, 2005 |
By: |
/s/
Joey B. Hogan |
|
|
Joey
B. Hogan |
|
|
Executive
Vice President and Chief |
|
|
Financial
Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
and Title |
|
Date |
|
|
|
/s/
David R. Parker |
|
March
16, 2005 |
David
R. Parker |
|
|
Chairman
of the Board, President, and Chief Executive Officer (principal executive
officer) |
|
|
|
|
|
/s/
Joey B. Hogan |
|
March
16, 2005 |
Joey
B. Hogan |
|
|
Executive
Vice President and Chief Financial Officer
(principal
financial and accounting officer) |
|
|
|
|
|
/s/
Bradley A. Moline |
|
March
9, 2005 |
Bradley
A. Moline |
|
|
Director |
|
|
|
|
|
/s/
William T. Alt |
|
March
8, 2005 |
William
T. Alt |
|
|
Director |
|
|
|
|
|
/s/
Robert E. Bosworth |
|
March
8, 2005 |
Robert
E. Bosworth |
|
|
Director |
|
|
|
|
|
/s/
Hugh O. Maclellan, Jr. |
|
March
8, 2005 |
Hugh
O. Maclellan, Jr. |
|
|
Director |
|
|
|
|
|
/s/
Mark A. Scudder |
|
March
15, 2005 |
Mark
A. Scudder |
|
|
Director |
|
|
|
|
|
/s/
Niel B. Nielson |
|
March
8, 2005 |
Niel
B. Nielson |
|
|
Director |
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board
of Directors and Stockholders
Covenant
Transport, Inc.:
We have
audited the accompanying Consolidated Balance Sheets of Covenant Transport, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the related Consolidated
Statements of Operations, Stockholders’ Equity and Comprehensive Income (Loss),
and Cash Flows for each of the fiscal years in the three-year period ended
December 31, 2004. These Consolidated Financial Statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these Consolidated Financial Statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the Consolidated Financial Statements referred to above present fairly,
in all material respects, the financial position of Covenant Transport, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the fiscal years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Covenant Transport, Inc.
and subsidiaries’ internal control over financial reporting as of December 31,
2004, based on criteria established in
Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 16, 2005, expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
KPMG
LLP
/s/ KPMG LLP
Atlanta,
Georgia
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
Covenant
Transport, Inc.:
We have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting set forth in Item 9A of
Covenant Transport, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2004, that Covenant Transport, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in
Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, management's assessment that Covenant Transport, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in
Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Covenant Transport, Inc. and subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria
established in Internal
Control—Integrated Framework issued by
the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Consolidated Balance Sheets of Covenant
Transport, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related Consolidated Statements of Operations, Stockholders’ Equity and
Comprehensive Income (Loss), and Cash Flows for each of the fiscal years in the
three-year period ended December 31 2004, and our report dated March 16,
2005, expressed
an unqualified opinion on those consolidated financial statements.
KPMG
LLP
/s/ KPMG LLP
Atlanta,
Georgia
COVENANT TRANSPORT, INC. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2004 AND 2003
(In
thousands, except share data) |
|
|
|
2004 |
|
2003 |
|
ASSETS |
|
|
|
|
|
Current
assets: |
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
5,066 |
|
$ |
3,306 |
|
Accounts
receivable, net of allowance of $1,700 in 2004
and $1,350 in 2003 |
|
|
74,127 |
|
|
62,998 |
|
Drivers
advances and other receivables |
|
|
7,400 |
|
|
9,622 |
|
Inventory
and supplies |
|
|
3,581 |
|
|
3,581 |
|
Prepaid
expenses |
|
|
11,643 |
|
|
16,185 |
|
Deferred
income taxes |
|
|
19,832 |
|
|
13,462 |
|
Income
taxes receivable |
|
|
5,689 |
|
|
278 |
|
Total
current assets |
|
|
127,338 |
|
|
109,432 |
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost |
|
|
298,389 |
|
|
320,909 |
|
Less
accumulated depreciation and amortization |
|
|
(88,967 |
) |
|
(99,175 |
) |
Net
property and equipment |
|
|
209,422 |
|
|
221,734 |
|
|
|
|
|
|
|
|
|
Other
assets |
|
|
23,266 |
|
|
23,115 |
|
|
|
|
|
|
|
|
|
Total
assets |
|
$ |
360,026 |
|
$ |
354,281 |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
Current
maturities of long-term debt |
|
|
9 |
|
|
1,300 |
|
Securitization
facility |
|
|
44,148 |
|
|
48,353 |
|
Accounts
payable |
|
|
6,574 |
|
|
8,822 |
|
Accrued
expenses |
|
|
15,253 |
|
|
14,420 |
|
Insurance
and claims accrual |
|
|
46,200 |
|
|
27,420 |
|
Total
current liabilities |
|
|
112,184 |
|
|
100,315 |
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities |
|
|
8,013 |
|
|
12,000 |
|
Deferred
income taxes |
|
|
44,130 |
|
|
49,824 |
|
Total
liabilities |
|
|
164,327 |
|
|
162,139 |
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity: |
|
|
|
|
|
|
|
Class
A common stock, $.01 par value; 20,000,000 shares authorized;
13,421,527 and 13,295,026 shares issued; 12,323,927 and
12,323,526
outstanding as of December 31, 2004 and 2003, respectively |
|
|
134 |
|
|
133 |
|
Class
B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of December 31, 2004 and
2003 |
|
|
24 |
|
|
24 |
|
Additional
paid-in-capital |
|
|
91,058 |
|
|
88,888 |
|
Treasury
stock at cost; 1,097,600 and 971,500 shares as of December
31,
2004 and 2003, respectively |
|
|
(9,925 |
) |
|
(7,935 |
) |
Retained
earnings |
|
|
114,408 |
|
|
111,032 |
|
Total
stockholders' equity |
|
|
195,699 |
|
|
192,142 |
|
Total
liabilities and stockholders' equity |
|
$ |
360,026 |
|
$ |
354,281 |
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
COVENANT TRANSPORT, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2004, 2003, AND 2002
(In
thousands, except per share data) |
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Freight
revenue |
|
$ |
558,453 |
|
$ |
555,678 |
|
$ |
550,603 |
|
Fuel
surcharges |
|
|
45,169 |
|
|
26,779 |
|
|
13,815 |
|
Total
revenue |
|
|
603,622 |
|
|
582,457 |
|
|
564,418 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses (1) |
|
|
225,778 |
|
|
220,665 |
|
|
227,332 |
|
Fuel
expense |
|
|
127,723 |
|
|
109,231 |
|
|
96,332 |
|
Operations
and maintenance |
|
|
30,555 |
|
|
39,822 |
|
|
39,625 |
|
Revenue
equipment rentals and purchased
transportation |
|
|
69,928 |
|
|
69,997 |
|
|
59,265 |
|
Operating
taxes and licenses |
|
|
14,217 |
|
|
14,354 |
|
|
13,934 |
|
Insurance
and claims (2) |
|
|
54,847 |
|
|
35,454 |
|
|
31,761 |
|
Communications
and utilities |
|
|
6,517 |
|
|
7,177 |
|
|
7,021 |
|
General
supplies and expenses |
|
|
15,104 |
|
|
14,495 |
|
|
14,677 |
|
Depreciation
and amortization, including impairment charge and
gains (losses) on disposition of equipment (3) |
|
|
45,001 |
|
|
43,041 |
|
|
49,497 |
|
Total
operating expenses |
|
|
589,670 |
|
|
554,236 |
|
|
539,444 |
|
Operating
income |
|
|
13,952 |
|
|
28,221 |
|
|
24,974 |
|
Other
(income) expenses: |
|
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
3,098 |
|
|
2,332 |
|
|
3,542 |
|
Interest
income |
|
|
(48 |
) |
|
(114 |
) |
|
(63 |
) |
Other
|
|
|
(926 |
) |
|
(468 |
) |
|
916 |
|
Loss
on early extinguishment of debt |
|
|
¾ |
|
|
¾ |
|
|
1,434 |
|
Other
expenses, net |
|
|
2,124 |
|
|
1,750 |
|
|
5,829 |
|
Income
before income taxes |
|
|
11,828 |
|
|
26,471 |
|
|
19,145 |
|
Income
tax expense |
|
|
8,452 |
|
|
14,315 |
|
|
10,871 |
|
Net
income |
|
$ |
3,376 |
|
$ |
12,156 |
|
$ |
8,274 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share: |
|
|
|
|
|
Basic
earnings per share: |
$0.23 |
|
$0.84 |
|
$0.58 |
Diluted
earnings per share: |
$0.23 |
|
$0.83 |
|
$0.57 |
|
|
|
|
|
|
Basic
weighted average shares outstanding |
14,641 |
|
14,467 |
|
14,223 |
Diluted
weighted average shares outstanding |
14,833 |
|
14,709 |
|
14,519 |
(1) |
Includes
a $1,500 pre-tax increase to workers' compensation claims reserve in
2004. |
(2) |
Includes
an $18,000 pre-tax increase to casualty claims reserve in
2004. |
(3) |
Includes
a $3,300 pre-tax impairment charge related to tractors in
2002. |
See
accompanying notes to consolidated financial statements.
COVENANT TRANSPORT, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME (LOSS)
FOR
THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In
thousands)
|
|
|
Additional |
|
Accumulated |
|
Total |
|
|
Common
Stock |
Paid-In |
Treasury |
Other |
Retained |
Stockholders' |
Comprehensive |
|
|
|
Capital |
Stock |
Comprehensive |
Earnings |
Equity |
Income
(Loss) |
|
Class
A |
Class
B |
|
|
Income
(Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2001 |
$127 |
$24 |
$79,832 |
$(7,935) |
$(748) |
$90,602 |
$161,902 |
|
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options |
3 |
¾ |
3,878 |
¾ |
¾ |
¾ |
3,881 |
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from the
exercise
of stock options |
¾ |
¾ |
783 |
¾ |
¾ |
¾ |
783 |
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on cash flow
hedging
derivatives, net of taxes |
¾ |
¾ |
¾ |
¾ |
748 |
¾ |
748 |
748 |
|
|
|
|
|
|
|
|
|
Net
income |
¾ |
¾ |
¾ |
¾ |
¾ |
8,274 |
8,274 |
8,274 |
|
|
|
|
|
|
|
|
|
Comprehensive
income for 2002 |
|
|
|
|
|
|
|
$9,022 |
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2002 |
$130 |
$24 |
$84,493 |
$(7,935) |
$
¾ |
$98,876 |
$175,588 |
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options |
3 |
¾ |
3,615 |
¾ |
¾ |
¾ |
3,618 |
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from the
exercise
of stock options |
¾ |
¾ |
780 |
¾ |
¾ |
¾ |
780 |
|
|
|
|
|
|
|
|
|
|
Net
income |
¾ |
¾ |
¾ |
¾ |
¾ |
12,156 |
12,156 |
12,156 |
|
|
|
|
|
|
|
|
|
Comprehensive
income for 2003 |
|
|
|
|
|
|
|
$12,156 |
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2003 |
$133 |
$24 |
$88,888 |
$(7,935) |
$¾ |
$111,032 |
$192,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options |
1 |
¾ |
1,960 |
¾ |
¾ |
¾ |
1,961 |
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from the
exercise
of stock options |
¾ |
¾ |
210 |
¾ |
¾ |
|
210 |
|
|
|
|
|
|
|
|
|
|
Stock
repurchase |
¾ |
¾ |
¾ |
(1,990) |
¾ |
¾ |
(1,990) |
|
|
|
|
|
|
|
|
|
|
Net
income |
¾ |
¾ |
¾ |
¾ |
¾ |
3,376 |
3,376 |
3,376 |
|
|
|
|
|
|
|
|
|
Comprehensive
income for 2004 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
$3,376 |
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2004 |
$134 |
$24 |
$91,058 |
$(9,925) |
$
¾ |
$114,408 |
$195,699 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
COVENANT TRANSPORT, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(In
thousands)
|
|
2004 |
|
2003 |
|
2002 |
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
Net
income |
|
$ |
3,376 |
|
$ |
12,156 |
|
$ |
8,274 |
|
Adjustments
to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Net
provision for losses on accounts receivable |
|
|
547 |
|
|
94 |
|
|
852 |
|
Loss
on early extinguishment of debt |
|
|
¾ |
|
|
¾ |
|
|
1,434 |
|
Depreciation,
amortization, and impairment of assets (1) |
|
|
41,456 |
|
|
43,909 |
|
|
47,090 |
|
Provision
for losses on guaranteed residuals |
|
|
¾ |
|
|
¾ |
|
|
324 |
|
Income
tax benefit from exercise of stock options |
|
|
210 |
|
|
780 |
|
|
783 |
|
Deferred
income taxes (benefit) |
|
|
(12,063 |
) |
|
(9,605 |
) |
|
(1,537 |
) |
Loss
(gain) on disposition of property and equipment |
|
|
3,545 |
|
|
(867 |
) |
|
2,407 |
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Receivables
and advances |
|
|
(9,454 |
) |
|
(4,193 |
) |
|
(1,317 |
) |
Prepaid
expenses and other assets |
|
|
4,542 |
|
|
(1,735 |
) |
|
(2,625 |
) |
Inventory
and supplies |
|
|
|
|
|
(356 |
) |
|
245 |
|
Insurance
and claims accrual (2) |
|
|
18,779 |
|
|
6,210 |
|
|
9,356 |
|
Accounts
payable and accrued expenses |
|
|
(6,825 |
) |
|
1,343 |
|
|
1,881 |
|
Net
cash flows provided by operating activities |
|
|
44,113 |
|
|
47,716 |
|
|
67,167 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment |
|
|
(81,615 |
) |
|
(94,362 |
) |
|
(70,720 |
) |
Proceeds
from disposition of property and equipment |
|
|
49,179 |
|
|
68,487 |
|
|
14,369 |
|
Net
cash used in investing activities |
|
|
(32,436 |
) |
|
(25,875 |
) |
|
(56,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options |
|
|
1,961 |
|
|
3,615 |
|
|
3,881 |
|
Repurchase
of company stock |
|
|
(1,990 |
) |
|
¾ |
|
|
¾ |
|
Proceeds
from issuance of debt |
|
|
57,026 |
|
|
72,000 |
|
|
85,000 |
|
Repayments
of long-term debt |
|
|
(66,510 |
) |
|
(93,877 |
) |
|
(100,038 |
) |
Deferred
costs |
|
|
(404 |
) |
|
(315 |
) |
|
¾ |
|
Net
cash used in financing activities |
|
|
(9,917 |
) |
|
(18,577 |
) |
|
(11,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents |
|
|
1,760 |
|
|
3,264 |
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period |
|
|
3,306 |
|
|
42 |
|
|
383 |
|
Cash
and cash equivalents at end of period |
|
$ |
5,066 |
|
$ |
3,306 |
|
$ |
42 |
|
Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for: |
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,031 |
|
$ |
2,332 |
|
$ |
4,016 |
|
Income
taxes |
|
$ |
20,867 |
|
$ |
22,795 |
|
$ |
12,389 |
|
(1) |
Includes
a $3,300 pre-tax impairment charge related to tractors in
2002. |
(2) |
Includes
a $19,600 pre-tax adjustment to increase workers' compensation and
casualty claims reserves in 2004 |
See
accompanying notes to consolidated financial statements.
COVENANT
TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER
31, 2004, 2003 AND 2002
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Business - Covenant Transport, Inc. (the "Company") is a holding company for
subsidiaries that offer transportation services to customers throughout the
United States. The Company operations comprise a single segment for financial
reporting purposes.
Principles
of Consolidation - The consolidated financial statements include the accounts of
the Company, a holding company incorporated in the state of Nevada in 1994, and
its wholly-owned subsidiaries, Covenant Transport, Inc., a Tennessee
corporation; Harold Ives Trucking Co., an Arkansas corporation; "Harold Ives";
Southern Refrigerated Transport, Inc., an Arkansas corporation; "SRT";
Covenant.com, Inc., a Nevada corporation; Covenant Asset Management, Inc., a
Nevada corporation; CIP, Inc., a Nevada corporation; CVTI Receivables Corp., a
Nevada corporation, and Volunteer Insurance Limited, a Cayman Islands company;
"Volunteer". Tony Smith Trucking, Inc. and Terminal Truck Broker, Inc., Arkansas
corporations were dissolved in December 2004 and September 2003, respectively.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue
Recognition - Revenue, drivers' wages and other direct operating expenses are
recognized on the date shipments are delivered to the customer. The Company
includes fuel surcharges in total revenue in its statements of operations. The
Company also reports freight revenue, which is total revenue excluding fuel
surcharge revenue because the Company believes that fuel surcharges tend to be a
volatile source of revenue and the exclusion of fuel surcharges affords a more
consistent basis for comparing the results of operations from period to period.
Cash and
Cash Equivalents - The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents.
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 vehicle 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.
Property
and Equipment - Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets. Revenue equipment is generally
depreciated over five to ten years with salvage values ranging from 9% to 33%.
The salvage value, useful life, and annual depreciation of tractors and trailers
are evaluated annually based on the current market environment and on the
Company's recent experience with disposition values. Any change could result in
greater or lesser annual expense in the future. Gains or losses on disposal of
revenue equipment are included in depreciation in the statements of operations.
Impairment
of Long-Lived Assets - The Company evaluates the carrying value of long-lived
assets by analyzing the operating performance and future cash flows for those
assets when events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable. Impairment can be impacted by the
Company's projection of the actual level of future cash flows, the level of
actual cash flows and salvage values, the methods of estimation used for
determining fair values and the impact of guaranteed residuals. Any changes in
management's judgments could result in greater or lesser annual depreciation
expense or additional impairment charges in the future.
Intangible
Assets - The Company periodically evaluates the net realizability of the
carrying amount of intangible assets. Non-compete agreements are amortized over
the life of the agreement and deferred loan costs are amortized over the life of
the loan.
Goodwill
- - The Company utilizes Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill
and Other Intangible Assets, which
requires the Company to evaluate goodwill and other intangible assets with
indefinite useful lives for impairment on an annual basis, with any resulting
impairment recorded as a cumulative effect of a change in accounting principle.
Goodwill that was acquired in purchase business combinations completed before
July 1, 2001, is no longer being amortized after January 1, 2002. During the
second quarter of each year, the Company completed its annual evaluation of its
goodwill for impairment and determined that there was no impairment. At
December 31, 2004, the Company has approximately $11.5 million of
goodwill.
Fair
Value of Financial Instruments - The Company's financial instruments consist
primarily of cash, accounts receivable, accounts payable and long term debt. The
carrying amount of cash, accounts receivable and accounts payable approximates
their fair value because of the short term maturity of these instruments.
Interest rates that are currently available to the Company for issuance of long
term debt with similar terms and remaining maturities are used to estimate the
fair value of the Company's long term debt. The carrying amount of the Company's
short and long term debt at December 31, 2004 and 2003 was approximately
$52.2 million and $61.7 million, respectively, including the accounts
receivable securitization borrowings and approximates the estimated fair value,
due to the variable interest rates on these instruments.
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 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 Board of Directors.
Insurance
and Claims - The Company's insurance program for liability, property damage, and
cargo loss and damage, involves self-insurance with high retention levels. Under
the casualty program, the Company is self-insured for personal injury and
property damage claims for varying amounts depending on the date the claim was
incurred. The insurance retention also provides for an additional self-insured
aggregate amount, with a limit per occurrence until an aggregate threshold is
reached. The deductible amount increased from $250,000 in 2001 to
$2.0 million in 2004, subject to aggregate thresholds. For the year ended
December 31, 2004, the Company was self-insured for personal injury and property
damage claims for amounts up to $2.0 million per occurrence, subject to an
additional $2.0 million self-insured aggregate amount, which results in the
total self-insured retention of up to $4.0 million per occurrence until the
$4.0 million aggregate threshold is reached. For cargo loss and damage
claims, the Company is self-insured for amounts up to the first
$1.0 million per occurrence. The Company maintains a workers' compensation
plan and group medical plan for its employees with a deductible amount of
$1.0 million for each workers' compensation claim and a stop loss amount of
$275,000 for each group medical claim. The Company accrues the estimated cost of
the retained portion of incurred claims. These accruals are based on an
evaluation of the nature and severity of the claim and estimates of future
claims development based on historical trends. Insurance and claims expense will
vary based on the frequency and severity of claims, the premium expense and
self-insured retention levels.
Between
2001 and 2003, the Company increased its primary retention amounts from $5,000
per occurrence for workers' compensation and casualty claims to
$1.0 million for workers' compensation and $2.0 million for casualty
claims. Later during that period, the Company experienced substantial increases
in the frequency of accidents and workers' compensation claims. Because of the
significant increases in the Company's retention amounts and in the frequency of
claims, the Company engaged an independent third-party actuary as part of its
process of assessing its claims reserve estimates. Based on the actuarial report
and the Company's evaluation, the Company recorded an aggregate
$19.6 million pre-tax adjustment to its claims reserves during the fourth
quarter of 2004. The adjustment included an $18.0 million increase to the
Company's casualty reserve, which was reflected in insurance and claims on its
consolidated statement of operations, and a $1.5 million increase to the
Company's workers' compensation reserve, which was reflected in salaries, wages,
and benefits on its consolidated statement of operations.
Concentrations
of Credit Risk - The Company performs ongoing credit evaluations of its
customers and does not require collateral for its accounts receivable. The
Company maintains reserves which management believes are adequate to provide for
potential credit losses. The Company's customer base spans the continental
United States. Three of the Company's customers, which are autonomously managed
and operated, are wholly owned subsidiaries of a public entity, when added
together amounted to approximately 9% of revenue in 2004 and approximately 11%
of revenue in 2003 and 2002.
Use of
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.
Income
Taxes - Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Derivative
Instruments and Hedging Activities - The Company engages in activities that
expose it to market risks, including the effects of changes in interest rates
and fuel prices. Financial exposures are evaluated as an integral part of the
Company's risk management program, which seeks, from time to time, to reduce
potentially adverse effects that the volatility of the interest rate and fuel
markets may have on operating results. The Company does not regularly engage in
speculative transactions, nor does it regularly hold or issue financial
instruments for trading purposes.
All
derivatives are recognized on the balance sheet at their fair values. On the
date the derivative contract is entered into, the Company designates the
derivative a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability ("cash
flow hedge"). The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash-flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions.
The
Company also formally assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair-value hedge, along with the loss or gain on
the hedged asset or liability or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk are recorded in earnings. Changes in the
fair value of a derivative that is highly effective and that is designated and
qualifies as a cash-flow hedge are recorded in other comprehensive income, until
earnings are affected by the variability in cash flows or unrecognized firm
commitment of the designated hedged item.
The
Company discontinues hedge accounting prospectively when it is determined that
the derivative is no longer effective in offsetting changes in the fair value or
cash flows of the hedged item, the derivative expires or is sold, terminated, or
exercised, the derivative is undesignated as a hedging instrument, because it is
unlikely that a forecasted transaction will occur, a hedged firm commitment no
longer meets the definition of a firm commitment, or management determines that
designation of the derivative as a hedging instrument is no longer
appropriate.
When
hedge accounting is discontinued because it is determined that the derivative no
longer qualifies as an effective fair-value hedge, the Company continues to
carry the derivative on the balance sheet at its fair value, and no longer
adjusts the hedged asset or liability for changes in fair value. The adjustment
of the carrying amount of the hedged asset or liability is accounted for in the
same manner as other components of the carrying amount of that asset or
liability. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company continues to carry
the derivative on the balance sheet at its fair value, removes any asset or
liability that was recorded pursuant to recognition of the firm commitment from
the balance sheet and recognizes any gain or loss in earnings. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the Company continues to carry the derivative on the balance
sheet at its fair value, and gains and losses that were accumulated in other
comprehensive income are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the Company continues to
carry the derivative at its fair value on the balance sheet, and recognizes any
changes in its fair value in earnings.
Effect of
New Accounting Pronouncements - In December 2003, the FASB issued FIN 46-R,
Consolidation
of Variable Interest Entities, ("FIN
46-R"). This Interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements,
addresses consolidation by business enterprises of variable interest entities.
For enterprises that are not small business issuers, FIN 46-R is to be applied
to all variable interest entities by the end of the first reporting period
ending after March 15, 2004. The Company's adoption of FIN 46-R did not have an
impact on the Company's financial condition or results of
operations.
In
December 2004, the FASB issued SFAS No. 123-R, Share-Based
Payments, an
Amendment of FASB 123 and 95 on Accounting
for Stock Based Compensation. SFAS
123-R requires companies to recognize in the income statement the grant date
fair value of stock options and other equity-based compensation issued to
employees. SFAS 123-R is effective for most public companies with interim or
annual periods beginning after June 15, 2005. The Company will adopt this
statement effective July 1, 2005. The Company's adoption of SFAS 123-R will
impact its results of operations by increasing salaries, wages and related
expenses. The amount of the expected impact is still being reviewed by the
Company.
Earnings
per Share ("EPS") - The Company applies the provisions of FASB SFAS No.
128,
Earnings per Share, which
requires companies to present basic EPS and diluted EPS. Basic EPS excludes
dilution and is computed by dividing income 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
following table sets forth for the periods indicated the weighed average shares
outstanding used in the calculation of net income per share included in the
Company's consolidated statements of operations:
(in
thousands except per share data) |
2004 |
|
2003 |
|
2002 |
Denominator
for basic earnings per share - weighted-average shares |
14,641 |
|
14,467 |
|
14,223 |
|
|
|
|
|
|
Effect
of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
Dilutive
options |
192 |
|
242 |
|
296 |
|
|
|
|
|
|
Denominator
for diluted earnings per share - adjusted weighted-average shares and
assumed conversions |
14,833 |
|
14,709 |
|
14,519 |
|
|
|
|
|
|
At
December 31, 2004, the Company had four stock-based compensation plans, which
are described more fully in Note 12. The Company accounts for those plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and
related Interpretations. No stock-based compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting
for Stock-Based Compensation, to
stock-based compensation.
(in
thousands except per share data) |
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
Net
income, as reported: |
$3,376 |
|
$12,156 |
|
$8,274 |
|
|
|
|
|
|
Deduct:
Total stock-based compensation expense determined under fair value based
method for all awards, net
of related tax effects |
(1,185) |
|
(1,743) |
|
(1,894) |
|
|
|
|
|
|
Pro
forma net income |
$2,190 |
|
$10,413 |
|
$6,380 |
|
|
|
|
|
|
Basic
earnings per share: |
|
|
|
|
|
As
reported |
$0.23 |
|
$0.84 |
|
$0.58 |
Pro
forma |
$0.15 |
|
$0.72 |
|
$0.45 |
|
|
|
|
|
|
Diluted
earnings per share: |
|
|
|
|
|
As
reported |
$0.23 |
|
$0.83 |
|
$0.57 |
Pro
forma |
$0.15 |
|
$0.71 |
|
$0.44 |
Reclassifications
- - Certain prior period financial statement balances have been reclassified to
conform to the current period's classification.
2.
INVESTMENT IN TRANSPLACE
Effective
July 1, 2000, the Company combined its logistics business with the logistics
businesses of five other transportation companies into a company called
Transplace, Inc. Transplace operates a global transportation logistics service.
In the transaction, Covenant contributed its logistics customer list, logistics
business software and software licenses, certain intellectual property,
intangible assets totaling approximately $5.1 million, and
$5.0 million in cash for the initial funding of the venture, in exchange
for 12.4% ownership. Upon completion of the transaction, Covenant ceased
operating its own transportation logistics and brokerage business. The Company
accounts for its investment using the cost method of accounting, with the
investment recorded under "Other Assets."
3.
PROPERTY AND EQUIPMENT
A summary
of property and equipment, at cost, as of December 31, 2004 and 2003 is as
follows:
(in
thousands) |
|
Estimated
Useful Lives |
|
2004 |
|
2003 |
|
Revenue
equipment |
|
|
3-8
years |
|
$ |
207,422 |
|
$ |
237,890 |
|
Communications
equipment |
|
|
5
years |
|
|
16,829 |
|
|
16,271 |
|
Land
and improvements |
|
|
10-24
years |
|
|
14,781 |
|
|
14,392 |
|
Buildings
and leasehold improvements |
|
|
10-40
years |
|
|
40,423 |
|
|
40,039 |
|
Construction
in progress |
|
|
|
|
|
5,611 |
|
|
51 |
|
Other |
|
|
1-5
years |
|
|
13,323 |
|
|
12,266 |
|
|
|
|
|
|
$ |
298,389 |
|
$ |
320,909 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense amounts were $41.2 million, $43.7 million and
$46.7 million in 2004, 2003 and 2002, respectively. The 2002 amount
included a $3.3 million pre-tax impairment charge relating to tractor
values.
4.
OTHER ASSETS
A summary
of other assets as of December 31, 2004 and 2003 is as
follows:
(in
thousands) |
|
2004 |
|
2003 |
|
Covenants
not to compete |
|
$ |
1,690 |
|
$ |
1,690 |
|
Trade
name |
|
|
330 |
|
|
330 |
|
Goodwill |
|
|
12,416 |
|
|
12,416 |
|
Less
accumulated amortization of intangibles |
|
|
(2,536 |
) |
|
(2,507 |
) |
Net
intangible assets |
|
|
11,900 |
|
|
11,929 |
|
Investment
in Transplace |
|
|
10,666 |
|
|
10,666 |
|
Other |
|
|
700 |
|
|
520 |
|
|
|
$ |
23,266 |
|
$ |
23,115 |
|
|
|
|
|
|
|
|
|
5.
LONG-TERM DEBT
Long-term
debt consists of the following at December 31, 2004 and 2003:
(in
thousands) |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Borrowings
under Credit Agreement |
|
$ |
8,000 |
|
$ |
12,000 |
|
Note
payable to former SRT shareholder, bearing interest at 6.5% with
interest payable quarterly |
|
|
¾ |
|
|
1,300 |
|
Equipment
and vehicle obligations with commercial lending institutions |
|
|
22 |
|
|
¾ |
|
Total
long-term debt |
|
|
8,022 |
|
|
13,300 |
|
Less
current maturities |
|
|
9 |
|
|
1,300 |
|
Long-term
debt, less current portion |
|
$ |
8,013 |
|
$ |
12,000 |
|
|
|
|
|
|
|
|
|
In
December 2004, the Company entered into the Credit Agreement with a group of
banks. The facility matures in December 2009. Borrowings under the Credit
Agreement are based on the banks' base rate, which floats daily, or LIBOR, which
accrues interest based on one, two, three, or six month LIBOR rates plus an
applicable margin that is adjusted quarterly between 0.75% and 1.25% based on
cash flow coverage (the applicable margin was 1.0% at December 31, 2004).
At December 31, 2004, the Company had only LIBOR borrowings in the amount
of $8.0 million outstanding on which the interest rate was 3.4%. The Credit
Agreement is guaranteed by the Company and all of the Company's subsidiaries
except CRC and Volunteer.
The
Credit Agreement has a maximum borrowing limit of $150.0 million with an
accordion feature which permits an increase up to a maximum borrowing limit of
$200.0 million. Borrowings related to revenue equipment are limited to the
lesser of 90% of net book value of revenue equipment or the maximum borrowing
limit. Letters of credit are limited to an aggregate commitment of
$75.0 million. The Credit Agreement is secured by a pledge of the stock of
most of the Company's subsidiaries. A commitment fee, that is adjusted quarterly
between 0.15% and 0.25% per annum based on cash flow coverage, is due on the
daily unused portion of the Credit Agreement. As of December 31, 2004, the
Company had approximately $73 million of available borrowing capacity. At
December 31, 2004 and December 31, 2003, the Company had undrawn
letters of credit outstanding of approximately $65.4 million and
$51.2 million, respectively.
In
October 1995, the Company issued $25 million in ten-year senior notes to an
insurance company. On March 15, 2002, the Company retired the remaining
$20 million in senior notes with borrowings from the Credit Agreement and
incurred a $1.4 million pre-tax loss to reflect the early extinguishment of
this debt.
Maturities
of long-term debt at December 31, 2004 are as follows (in
thousands):
2005 $ 9
2006 9
2007 4
2008 ¾
2009 8,000
The
Credit Agreement contains certain restrictions and covenants relating to, among
other things, dividends, tangible net worth, cash flow, acquisitions and
dispositions, and total indebtedness and are cross-defaulted with the
Securitization Facility. At December 31, 2004, the Company was in
compliance with the Credit Agreement covenants.
6.
ACCOUNTS RECEIVABLE SECURITIZATION AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS
In
December 2000, the Company entered into an accounts receivable securitization
facility (the "Securitization Facility"). On a revolving basis, the Company
sells its interests in its accounts receivable to CRC, a wholly-owned
bankruptcy-remote special purpose subsidiary incorporated in Nevada. CRC sells a
percentage ownership in such receivables to an unrelated financial entity. The
Company can receive up to $62.0 million of proceeds, subject to eligible
receivables and pay a service fee recorded as interest expense, based on
commercial paper interest rates plus an applicable margin of 0.44% per annum and
a commitment fee of 0.10% per annum on the daily unused portion of the Facility.
The net proceeds under the Securitization Facility are required to be shown as a
current liability because the term, subject to annual renewals, is 364 days. As
of December 31, 2004 and December 31, 2003, the Company had
$44.1 million and $48.4 million outstanding, respectively, with
weighted average interest rates of 2.4% and 1.0%, respectively. CRC does not
meet the requirements for off-balance sheet accounting; therefore, it is
reflected in the Company's consolidated financial statements.
The
Securitization Facility contains certain restrictions and covenants relating to,
among other things, dividends, tangible net worth, cash flow coverage,
acquisitions and dispositions, and total indebtedness. As of December 31,
2004, the Company was in compliance with the Securitization Facility
covenants.
The
activity in allowance for doubtful accounts (in thousands) is as
follows:
Years
ended December 31: |
|
Beginning
Balance
January
1, |
|
Additional
provisions
to
allowance |
|
Write-offs
and
other
deductions |
|
Ending
Balance
December
31, |
|
|
|
|
|
|
|
|
|
2004 |
|
$1,350 |
|
$547 |
|
$197 |
|
$1,700 |
|
|
|
|
|
|
|
|
|
2003 |
|
$1,800 |
|
$94 |
|
$544 |
|
$1,350 |
|
|
|
|
|
|
|
|
|
2002 |
|
$1,623 |
|
$852 |
|
$675 |
|
$1,800 |
|
|
|
|
|
|
|
|
|
7.
LEASES
The
Company has operating lease commitments for office and terminal properties,
revenue equipment, computer and office equipment, exclusive of owner/operator
rentals, and month-to-month equipment rentals, summarized for the following
fiscal years (in thousands):
2005 $43,924
2006
36,735
2007 23,657
2008 15,416
2009 10,737
Thereafter
11,319
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 $55.6 million and
$42.7 million at December 31, 2004 and
December 31, 2003, respectively. The residual guarantees approximate
the expected market value at the end of the lease term.
Rental
expense is summarized as follows for each of the three years ended December
31:
(in
thousands) |
2004 |
2003 |
2002 |
|
|
|
|
Revenue
equipment rentals |
$36,625 |
$25,625 |
$16,877 |
Terminal
rentals |
1,236 |
1,041 |
1,115 |
Other
equipment rentals |
3,158 |
3,201 |
2,943 |
|
$41,019 |
$29,867 |
$20,934 |
|
|
|
|
8.
INCOME TAXES
Income
tax expense for the years ended December 31, 2004, 2003, and 2002 is comprised
of:
(in
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
Federal,
current |
$ 17,796 |
|
$ 20,011 |
|
$ 11,116 |
Federal,
deferred |
(10,930) |
|
(7,771) |
|
(387) |
State,
current |
2,720 |
|
3,909 |
|
1,251 |
State,
deferred |
(1,134) |
|
(1,834) |
|
(1,109) |
|
$ 8,452 |
|
$ 14,315 |
|
$ 10,871 |
|
|
|
|
|
|
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, 2004, 2003 and 2002 as follows:
(in
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
Computed
"expected" income tax expense |
$ 4,140 |
|
$ 9,265 |
|
$ 6,701 |
State
income taxes, net of federal income tax
effect |
1,031 |
|
1,349 |
|
91 |
Change
in valuation allowance |
¾ |
|
¾ |
|
(392) |
Per
diem allowances |
2,760 |
|
3,487 |
|
3,471 |
Other,
net |
521 |
|
214 |
|
1,000 |
Actual
income tax expense |
$ 8,452 |
|
$ 14,315 |
|
$ 10,871 |
|
|
|
|
|
|
The
temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 2004 and 2003 are as
follows:
(in
thousands) |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Deferred
tax assets: |
|
|
|
|
|
Accounts
receivable |
|
$ |
249 |
|
$ |
351 |
|
Insurance
and claims |
|
|
17,417 |
|
|
10,836 |
|
State
net operating loss carryovers |
|
|
1,805 |
|
|
1,815 |
|
Deferred
gain |
|
|
201 |
|
|
300 |
|
Investments |
|
|
160 |
|
|
160 |
|
Total
deferred tax assets |
|
|
19,832 |
|
|
13,462 |
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities: |
|
|
|
|
|
|
|
Property
and equipment |
|
|
43,099 |
|
|
48,001 |
|
Intangible
assets |
|
|
271 |
|
|
76 |
|
Accrued
salaries and wages |
|
|
609 |
|
|
605 |
|
Prepaid
liabilities |
|
|
151 |
|
|
1,142 |
|
Total
deferred tax liabilities |
|
|
44,130 |
|
|
49,824 |
|
|
|
|
|
|
|
|
|
Net
deferred tax liability |
|
$ |
24,298 |
|
$ |
36,362 |
|
|
|
|
|
|
|
|
|
Based
upon the expected reversal of deferred tax liabilities and the level of
historical and projected taxable income over periods in which the deferred tax
assets are deductible, the Company's management believes it is more likely than
not that the Company will realize the benefits of the deductible differences at
December 31, 2004. Currently, the IRS is auditing the Company's 2001 and
2002 federal income tax returns. The Company has accrued interest expense of
$408,000 as of December 31, 2004 related to issues raised by the IRS
affecting the timing, but not the ultimate deductibility of, items related to a
tax planning strategy implemented during 2001. The amount ultimately paid upon
resolution of the issue raised may differ from the amount accrued. In the normal
course of business, the Company is also subject to audits by the state and local
tax authorities. The Company believes that its liability for state and local
taxes is adequately accrued at December 31, 2004. However, should the
Company’s tax positions be challenged, different outcomes could result and have
an impact on the amounts reported in the Company’s consolidated financial
statements.
9.
STOCK REPURCHASE PLAN
In May
2004, the Board of Directors authorized a stock repurchase plan for up to 1.0
million company shares to be purchased in the open market or through negotiated
transactions subject to criteria established by the board. During 2004, the
Company purchased a total of 126,100 shares with an average price of $15.78. The
stock repurchase plan expires May 31, 2005.
10.
DEFERRED PROFIT SHARING EMPLOYEE BENEFIT PLAN
The
Company has a deferred profit sharing and savings plan that covers substantially
all employees of the Company with at least six months of service. 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 the Board of Directors. The
Company contributed approximately $0.9 million, $0.8 million and
$1.0 million in 2004, 2003 and 2002, respectively, to the profit sharing
and savings plan.
11.
STOCK OPTION PLANS
The
Company has adopted stock plans for employees and directors. Awards may be stock
options or other forms. The Company has reserved approximately 2,300,000 shares
of Class A Common Stock for distribution at the discretion of the Board of
Directors. The following table details the activity of the incentive stock
option plan:
|
Shares |
Weighted
Average
Exercise
Price |
Options
Exercisable
at
Year
End |
|
|
|
|
Under
option at December 31, 2001 |
1,582,445 |
$12.99 |
856,486 |
|
|
|
|
Options
granted in 2002 |
186,250 |
$15.61 |
|
Options
exercised in 2002 |
(318,832) |
$12.22 |
|
Options
canceled in 2002 |
(68,323) |
$14.29 |
|
Under
option at December 31, 2002 |
1,381,540 |
$13.48 |
855,685 |
|
|
|
|
Options
granted in 2003 |
196,664 |
$17.51 |
|
Options
exercised in 2003 |
(295,711) |
$12.24 |
|
Options
canceled in 2003 |
(53,103) |
$15.19 |
|
Under
option at December 31, 2003 |
1,229,390 |
$14.37 |
891,813 |
|
|
|
|
Options
granted in 2004 |
196,300 |
$15.81 |
|
Options
exercised in 2004 |
(126,501) |
$15.50 |
|
Options
canceled in 2004 |
(38,097) |
$16.45 |
|
Under
option at December 31, 2004 |
1,261,092 |
$14.42 |
926,713 |
|
|
|
|
|
Options
Outstanding |
Options
Exercisable |
Range
of Exercise
Prices |
Number
Outstanding
at
12/31/04 |
Weighted-
Average
Remaining
Contractual
Life |
Weighted-
Average
Exercise
Price |
Number
Exercisable
At
12/31/04 |
Weighted-
Average
Exercise
Price |
$
8.00 to $13.00 |
385,856 |
60 |
$10.04 |
385,856 |
$10.04 |
$13.01
to $16.50 |
490,204 |
70 |
$15.49 |
266,840 |
$15.35 |
$16.51
to $20.00 |
385,032 |
84 |
$17.44 |
274,017 |
$17.38 |
|
1,261,092 |
|
|
926,713 |
|
|
|
|
|
|
|
The
Company accounts for its stock-based compensation plans under APB No. 25, under
which no compensation expense has been recognized because all employee and
outside director stock options have been granted with the exercise price equal
to the fair value of the Company's Class A Common Stock on the date of grant.
Under SFAS No. 123, fair value of options granted are estimated as of the date
of grant using the Black-Scholes option pricing model and the following weighted
average assumptions: risk-free interest rates ranging from 1.7% to 4.8%;
expected life of 5 years; dividend rate of zero percent; and expected volatility
of 50.7% for 2004, 52.2% for 2003 and 53.3% for 2002. Using these assumptions,
the fair value of the employee and outside director stock options which would
have been expensed in 2004, 2003 and 2002 is $1.2 million,
$1.7 million and $1.9 million respectively.
12.
RELATED PARTY TRANSACTIONS
Transactions
involving related parties are as follows:
Tenn-Ga
Truck Sales, Inc., a corporation wholly owned by a significant shareholder,
purchased used tractors and trailers from the Company for approximately
$3.0 million during 2002. In 2003 and 2002, the Company purchased equipment
from Tenn-Ga Truck Sales for approximately $286,000 and $37,000, respectively.
Also in 2003, the Company was retained to repair certain equipment owned by
Tenn-Ga Truck Sales for approximately $223,000.
The
Company provides transportation services for Transplace. During 2004, 2003 and
2002, gross revenue from Transplace was $15.0 million, $9.6 million
and $7.4 million, respectively. The accounts receivable balance as of
December 31, 2004 was approximately $2.1 million. During the first
quarter of 2005, the Company loaned Transplace approximately $2.7 million. The
6% interest-bearing note matures January 2007.
A company
wholly owned by a relative of a significant shareholder and executive officer
operates a "company store" on a rent-free basis in the Company's headquarters
building, and uses Covenant service marks on its products at no cost. The
Company pays fair market value for all supplies that are purchased which totaled
approximately $512,000, $350,000 and $390,000 in 2004, 2003 and 2002
respectively.
The
Company from time to time utilizes outside legal services from two members of
the Company's Board of Directors. During 2004, 2003 and 2002, the Company paid
approximately $196,000, $434,000 and $265,000, respectfully, for legal and
consulting services to a firm that employs a member of the Company's Board of
Directors. Also, during 2003, the Company paid approximately $138,000 in 2003
for legal services to another firm that employs another member of the Company's
Board of Directors.
13.
DERIVATIVE INSTRUMENTS
The
Company adopted SFAS No. 133 effective January 1, 2001 but had no instruments in
place on that date. In 2001, the Company entered into two $10 million
notional amount cancelable interest rate swap agreements to manage the risk of
variability in cash flows associated with floating-rate debt. Due to the
counter-parties' imbedded options to cancel, these derivatives did not qualify,
and are not designated, as hedging instruments under SFAS No. 133. Consequently,
these derivatives are marked to fair value through earnings, in other expense in
the accompanying consolidated statement of operations. At December 31, 2004
and 2003, the fair value of these interest rate swap agreements was a liability
of $0.4 million and $1.2 million, respectively, which are included in
accrued expenses on the consolidated balance sheets.
The
derivative activity as reported in the Company's financial statements for the
years ended December 31, 2004 and 2003 is summarized in the
following:
(in
thousands): |
|
2004 |
|
2003 |
|
|
|
|
|
Net
liability for derivatives at January 1, |
$ |
(1,201) |
$ |
(1,645) |
Changes
in statements of operations: |
|
|
|
|
Gain
on derivative instruments: |
|
|
|
|
Gain
in value of derivative instruments that do
not qualify as hedging instruments |
|
762 |
|
444 |
Net
liability for derivatives at December 31, |
$ |
(439) |
$ |
(1,201) |
|
|
|
|
|
14.
COMMITMENTS AND CONTINGENT LIABILITIES
The
Company, in the normal course of business, is 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 the opinion of management, the Company's potential
exposure under pending legal proceedings is adequately provided for in the
accompanying consolidated financial statements. Currently the Company is
involved in two significant personal injury claims that are described
below.
On
October 26, 2003, a pickup truck collided with a trailer being operating by the
Company's SRT subsidiary. Two of the occupants of the pickup were killed in the
accident and the other occupant was injured. A lawsuit was filed in the United
States District Court for the Southern District of Mississippi on February 4,
2004, on behalf of Donald J. Byrd, an injured passenger in the pickup truck, and
an amended complaint was filed on February 18, 2004, on behalf of Mr. Byrd and
Marilyn S. Byrd, his wife. The relief sought in the lawsuit is judgment against
SRT and the driver of the SRT truck in excess of $1.0 million. In addition, the
Company has received demands in the form of letters seeking a total of
$27.0 million from attorneys representing potential beneficiaries of the
two decedents who occupied the pickup truck. Settlement agreements have been
entered into between SRT/Covenant and the plaintiffs in all three suits.
Judgments of Dismissal with Prejudice have also been entered in all three suits
in the United States District Court for the Southern District of Mississippi.
These settlements were below the aggregate coverage limits of the Company's
insurance policies.
On March
7, 2003, an accident occurred on in Wisconsin involving a vehicle and one of the
Company's tractors. Two adult occupants of the vehicle were killed in the
accident. The only other occupant of the vehicle was a child, who survived with
little apparent injury. Suit has been filed in United States District Court in
Minnesota by heirs of one of the decedents against the Company and its driver. A
demand for $20.0 million was made by the plaintiffs in that case in October
2004. The demand was reduced during an early settlement conference presided over
by a judge. The last articulated demand was $6.0 million. The case is
scheduled for trial in November 2005. Heirs of the other adult decedent and
representatives of the child may file additional suits against us. The Company
expects all matters involving the occurrence to be resolved at a level below its
aggregate coverage limits of our insurance policies.
Financial
risks which potentially subject the Company to concentrations of credit risk
consist of deposits in banks in excess of the Federal Deposit Insurance
Corporation limits. The Company's sales are generally made on account without
collateral. Repayment terms vary based on certain conditions. The Company
maintains reserves which management believes are adequate to provide for
potential credit losses. The majority of the Company's customer base spans the
United States. The Company monitors these risks and believes the risk of
incurring material losses is remote.
The
Company uses purchase commitments through suppliers to reduce a portion of its
cash flow exposure to fuel price fluctuations. At December 31, 2004, the
notional amount for purchase commitments for 2005 is approximately 25.1 million
gallons. During the third quarter of 2001, the Company entered into two heating
oil commodity swap contracts to hedge its cash flow exposure to diesel fuel
price fluctuations on floating rate diesel fuel purchase commitments. These
contracts were considered highly effective in offsetting changes in anticipated
future cash flows and were designated as cash flow hedges under SFAS No. 133.
Each called for 6 million gallons of fuel purchases at a fixed price of $0.695
and $0.629 per gallon, respectively. The contracts expired December 31, 2002.
15.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In
thousands except per share amounts) |
|
|
|
|
|
Quarters
ended |
March
31, 2004 |
June
30, 2004 |
Sept.
30, 2004 |
Dec.
31, 2004 (1) |
|
|
|
|
|
Total
revenue |
$130,590 |
$140,036 |
$140,631 |
$147,196 |
Operating
income (loss) |
3,058 |
8,725 |
10,242 |
(8,071) |
Net
earnings |
721 |
4,388 |
4,745 |
(6,476) |
Basic
earnings per share |
0.05 |
0.30 |
0.33 |
(0.44) |
Diluted
earnings per share |
0.05 |
0.30 |
0.32 |
(0.44) |
|
|
|
|
|
Quarters
ended |
March
31, 2003 |
June
30, 2003 |
Sept.
30, 2003 |
Dec.
31, 2003 |
|
|
|
|
|
Total
revenue |
$130,353 |
$139,480 |
$140,313 |
$145,533 |
Operating
income |
3,514 |
7,449 |
8,486 |
8,773 |
Net
earnings |
839 |
3,164 |
4,050 |
4,104 |
Basic
earnings per share |
0.06 |
0.22 |
0.28 |
0.28 |
Diluted
earnings per share |
0.06 |
0.22 |
0.28 |
0.28 |
|
|
|
|
|
(1) |
Includes
a $19,600 pre-tax adjustment to claims reserves in the quarter ended
December 31, 2004. |