x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Nevada
|
88-0320154
|
|
(State
or other jurisdiction of incorporation
|
(I.R.S.
Employer Identification No.)
|
|
or
organization)
|
||
400
Birmingham Hwy.
|
||
Chattanooga,
TN
|
37419
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Yes
x
|
No
o
|
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Yes
o
|
No
x
|
PART
I
FINANCIAL
INFORMATION
|
||
Page
Number
|
||
Item
1.
|
Financial
Statements
|
|
Consolidated
Condensed Balance Sheets as of September 30, 2006 (Unaudited) and
December
31, 2005
|
||
Consolidated
Condensed Statements of Operations for the three and nine months
ended
September
30, 2006 and 2005 (Unaudited)
|
||
Consolidated
Condensed Statements of Stockholders' Equity and Comprehensive Loss
for
the
nine months ended
September 30, 2006 (Unaudited)
|
||
Consolidated
Condensed Statements of Cash Flows for the nine months ended
September
30, 2006 and 2005 (Unaudited)
|
||
Notes
to Consolidated Condensed Financial Statements (Unaudited)
|
||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
Item
4.
|
Controls
and Procedures
|
|
PART
II
OTHER
INFORMATION
|
||
Page
Number
|
||
Item
1.
|
Legal
Proceedings
|
|
Item
1A.
|
Risk
Factors
|
|
Item
6.
|
Exhibits
|
|
COVENANT
TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(In
thousands, except share data)
|
|||||||
September
30, 2006
|
December
31, 2005
|
||||||
ASSETS
|
(unaudited)
|
||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
8,328
|
$
|
3,618
|
|||
Accounts
receivable, net of allowance of $1,943 in 2006 and
$2,200
in 2005
|
81,091
|
77,969
|
|||||
Drivers
advances and other receivables
|
8,173
|
3,932
|
|||||
Inventory
and supplies
|
4,572
|
4,661
|
|||||
Prepaid
expenses
|
11,415
|
16,199
|
|||||
Assets
held for sale
|
36,416
|
3,204
|
|||||
Deferred
income taxes
|
15,904
|
16,158
|
|||||
Income
taxes receivable
|
6,452
|
7,559
|
|||||
Total
current assets
|
172,351
|
133,300
|
|||||
Property
and equipment, at cost
|
326,000
|
295,433
|
|||||
Less
accumulated depreciation and amortization
|
(66,654
|
)
|
(84,275
|
)
|
|||
Net
property and equipment
|
259,346
|
211,158
|
|||||
Other
assets
|
47,293
|
26,803
|
|||||
Total
assets
|
$
|
478,990
|
$
|
371,261
|
|||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Securitization
facility
|
$
|
57,281
|
$
|
47,281
|
|||
Accounts
payable and accrued expenses
|
38,107
|
25,545
|
|||||
Current
maturities of long-term debt
|
5,882
|
-
|
|||||
Current
portion of insurance and claims accrual
|
20,624
|
18,529
|
|||||
Total
current liabilities
|
121,894
|
91,355
|
|||||
Long-term
debt
|
105,833
|
33,000
|
|||||
Insurance
and claims accrual, net of current portion
|
19,343
|
23,272
|
|||||
Deferred
income taxes
|
42,249
|
33,910
|
|||||
Total
liabilities
|
289,319
|
181,537
|
|||||
Commitments
and contingent liabilities
|
-
|
-
|
|||||
Stockholders'
equity:
|
|||||||
Class
A common stock, $.01 par value; 20,000,000 shares authorized;
13,469,090
and 13,447,608 shares issued; 11,650,690 and 11,629,208
outstanding
as of September 30, 2006 and December 31, 2005,
respectively
|
135
|
134
|
|||||
Class
B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000
shares issued and outstanding
|
24
|
24
|
|||||
Additional
paid-in-capital
|
91,986
|
91,553
|
|||||
Treasury
stock at cost; 1,818,400 shares
|
(21,582
|
)
|
(21,582
|
)
|
|||
Retained
earnings
|
119,108
|
119,595
|
|||||
Total
stockholders' equity
|
189,671
|
189,724
|
|||||
Total
liabilities and stockholders' equity
|
$
|
478,990
|
$
|
371,261
|
Three
months ended
September
30,
(unaudited)
|
Nine
months ended
September
30,
(unaudited)
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Revenue:
|
|||||||||||||
Freight revenue
|
$
|
144,148
|
$
|
144,681
|
$
|
412,926
|
$
|
406,988
|
|||||
Fuel surcharges
|
32,513
|
25,214
|
84,621
|
57,647
|
|||||||||
Total
revenue
|
$
|
176,661
|
$
|
169,895
|
$
|
497,547
|
$
|
464,635
|
|||||
Operating
expenses:
|
|||||||||||||
Salaries,
wages, and related expenses
|
66,892
|
63,264
|
189,955
|
178,177
|
|||||||||
Fuel
expense
|
52,858
|
48,109
|
145,075
|
121,504
|
|||||||||
Operations
and maintenance
|
9,062
|
9,174
|
26,334
|
24,846
|
|||||||||
Revenue
equipment rentals and purchased transportation
|
16,462
|
15,263
|
46,598
|
45,672
|
|||||||||
Operating
taxes and licenses
|
3,423
|
3,117
|
10,190
|
10,060
|
|||||||||
Insurance
and claims
|
8,360
|
10,090
|
24,773
|
28,527
|
|||||||||
Communications
and utilities
|
1,785
|
1,726
|
4,902
|
4,967
|
|||||||||
General
supplies and expenses
|
5,675
|
4,759
|
15,719
|
13,223
|
|||||||||
Depreciation
and amortization, including net gains on
disposition
of equipment
|
8,624
|
10,543
|
27,179
|
30,491
|
|||||||||
Total
operating expenses
|
173,141
|
166,045
|
490,725
|
457,467
|
|||||||||
Operating
income
|
3,520
|
3,850
|
6,822
|
7,168
|
|||||||||
Other
(income) expenses:
|
|||||||||||||
Interest expense
|
1,752
|
1,290
|
3,951
|
2,942
|
|||||||||
Interest income
|
(169
|
)
|
(90
|
)
|
(491
|
)
|
(191
|
)
|
|||||
Other
|
-
|
(113
|
)
|
(13
|
)
|
(443
|
)
|
||||||
Other
expenses, net
|
1,583
|
1,087
|
3,447
|
2,308
|
|||||||||
Income
before income taxes
|
1,937
|
2,763
|
3,375
|
4,860
|
|||||||||
Income
tax expense
|
1,142
|
1,546
|
3,862
|
3,640
|
|||||||||
Net
income (loss)
|
$
|
795
|
$
|
1,217
|
$ |
(487
|
)
|
$
|
1,220
|
||||
Net
income (loss) per share:
|
|||||||||||||
Basic
earnings (loss) per share:
|
$
|
0.06
|
$
|
0.09
|
$ |
(0.03
|
)
|
$
|
0.09
|
||||
Diluted
earnings (loss) per share:
|
$
|
0.06
|
$
|
0.09
|
$ |
(0.03
|
)
|
$
|
0.08
|
||||
Basic
weighted average shares outstanding
|
14,000
|
13,979
|
14,074
|
14,241
|
|||||||||
Diluted
weighted average shares outstanding
|
14,059
|
14,044
|
14,074
|
14,355
|
|||||||||
Common
Stock
|
Additional
Paid-In
|
Treasury
|
Retained
|
Total
Stockholders'
|
Comprehensive
|
|||||||||||||||||
Class
A
|
Class
B
|
Capital
|
Stock
|
Earnings
|
Equity
|
Loss
|
||||||||||||||||
Balances
at December 31, 2005
|
$
|
134
|
$
|
24
|
$
|
91,553
|
$
|
(21,582
|
)
|
$
|
119,595
|
$
|
189,724
|
|||||||||
Exercise
of employee stock options
|
1
|
-
|
245
|
-
|
-
|
246
|
||||||||||||||||
Income
tax benefit arising from
the exercise of stock options
|
-
|
-
|
17
|
-
|
-
|
17
|
||||||||||||||||
SFAS
No. 123R stock-based
employee compensation cost
|
-
|
-
|
171
|
-
|
-
|
171
|
||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
(487
|
)
|
(487
|
)
|
(487
|
)
|
||||||||||||
Comprehensive
loss for nine
months ended September 30, 2006
|
$
|
(487
|
)
|
|||||||||||||||||||
Balances
at September 30, 2006
|
$
|
135
|
$
|
24
|
$
|
91,986
|
$
|
(21,582
|
)
|
$
|
119,108
|
$
|
189,671
|
|||||||||
Nine
months ended September 30,
(unaudited)
|
|||||||
2006
|
2005
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
income (loss)
|
$ |
(487
|
)
|
$
|
1,220
|
||
Adjustments
to reconcile net income (loss) to net cash provided by
operating
activities:
|
|||||||
Provision
for losses on accounts receivable
|
441
|
1,440
|
|||||
Depreciation
and amortization
|
29,946
|
31,007
|
|||||
Deferred
income tax benefit
|
(1,380
|
)
|
(9,229
|
)
|
|||
Net
gain on disposition of property and equipment
|
(2,884
|
)
|
(516
|
)
|
|||
Non-cash
stock compensation
|
171
|
-
|
|||||
Changes
in operating assets and liabilities, net of effects from
purchase
of Star Transportation, Inc.:
|
|||||||
Receivables
and advances
|
4,618
|
(3,093
|
)
|
||||
Prepaid
expenses and other assets
|
6,044
|
(6,320
|
)
|
||||
Inventory
and supplies
|
130
|
(951
|
)
|
||||
Insurance
and claims accrual
|
(4,387
|
)
|
(2,064
|
)
|
|||
Accounts
payable and accrued expenses
|
9,085
|
2,301
|
|||||
Net
cash flows provided by operating activities
|
41,297
|
13,795
|
|||||
Cash
flows from investing activities:
|
|||||||
Acquisition
of property and equipment
|
(118,958
|
)
|
(89,089
|
)
|
|||
Purchase
of Star Transportation, Inc., net of cash acquired
|
(39,004
|
)
|
-
|
||||
Proceeds
from building sale leaseback
|
29,630
|
-
|
|||||
Proceeds
from disposition of property and equipment
|
44,947
|
57,063
|
|||||
Net
cash flows used in investing activities
|
(83,385
|
)
|
(32,026
|
)
|
|||
Cash
flows from financing activities:
|
|||||||
Changes
in checks outstanding in excess of bank balances
|
-
|
3,890
|
|||||
Exercise
of stock options
|
246
|
418
|
|||||
Income
tax benefit arising from exercise of stock options
|
17
|
50
|
|
||||
Proceeds
from issuance of debt
|
104,807
|
107,000
|
|||||
Repayments
of debt
|
(58,272
|
)
|
(82,888
|
)
|
|||
Deferred
costs
|
-
|
8
|
|||||
Net
cash provided by financing activities
|
46,798
|
16,821
|
|||||
Net
change in cash and cash equivalents
|
4,710
|
(1,410
|
)
|
||||
Cash
and cash equivalents at beginning of period
|
3,618
|
5,066
|
|||||
Cash
and cash equivalents at end of period
|
$
|
8,328
|
$
|
3,656
|
(in
thousands except per share data)
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Numerator:
|
|||||||||||||
Net
earnings (loss)
|
$
|
795
|
$
|
1,217
|
$ |
(487
|
)
|
$
|
1,220
|
||||
Denominator:
|
|||||||||||||
Denominator
for basic earnings per share
- weighted-average shares
|
14,000
|
13,979
|
14,074
|
14,241
|
|||||||||
Effect
of dilutive securities:
|
|||||||||||||
Employee
stock options
|
59
|
65
|
0
|
114
|
|||||||||
Denominator
for diluted earnings per share
-
adjusted weighted-average shares and
assumed
conversions
|
14,059
|
14,044
|
14,074
|
14,355
|
|||||||||
Net
income (loss) per share:
|
|||||||||||||
Basic
earnings (loss) per share:
|
$
|
0.06
|
$
|
0.09
|
$ |
(0.03
|
)
|
$
|
0.09
|
||||
Diluted
earnings (loss) per share:
|
$
|
0.06
|
$
|
0.09
|
$ |
(0.03
|
)
|
$
|
0.08
|
(in
thousands, except per share data)
|
Three
months ended
September
30, 2005
|
Nine
months ended
September
30, 2005
|
|||||
Net
income, as reported:
|
$
|
1,217
|
$
|
1,220
|
|||
Deduct:
Total stock-based employee compensation
expense
determined under fair value based method for
all
awards, net of related tax effects
|
(790
|
)
|
(2,235
|
)
|
|||
Pro
forma net income (loss)
|
$
|
427
|
$
|
(1,015
|
)
|
||
Basic
earnings (loss) per share:
|
|||||||
As
reported
|
$
|
0.09
|
$
|
0.09
|
|||
Pro
forma
|
$
|
0.03
|
$
|
(0.07
|
)
|
||
Diluted
earnings (loss) per share:
|
|||||||
As
reported
|
$
|
0.09
|
$
|
0.08
|
|||
Pro
forma
|
$
|
0.03
|
$
|
(0.07
|
)
|
Number
of
options
(in
thousands)
|
Weighted
average
exercise
price
|
Weighted
average remaining
contractual
term
|
Aggregate
intrinsic
value
(in
thousands)
|
||||||||||
|
|||||||||||||
Outstanding
at beginning of the
period
|
1,454
|
$
|
14.33
|
||||||||||
Options
granted
|
5
|
$
|
13.80
|
||||||||||
Options
exercised
|
(19
|
)
|
$
|
12.64
|
|||||||||
Options
forfeited
|
(25
|
)
|
$
|
15.75
|
|||||||||
Options
expired
|
(178
|
)
|
$
|
15.50
|
|||||||||
Outstanding
at end of period
|
1,237
|
$
|
14.16
|
5.5
years
|
$
|
871
|
|||||||
Exercisable
at end of period
|
1,222
|
$
|
14.21
|
5.5
years
|
$
|
861
|
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
||||||
2006
|
2005
|
2006
|
2005
|
|||||
Expected
volatility
|
37.4%
- 39.5%
|
42.3%
|
37.4%
- 39.5%
|
42.3%
- 51.9%
|
||||
Risk-free
interest rate
|
4.9%
- 5.0%
|
2.8%
- 4.2%
|
4.9%
- 5.0%
|
2.8%
- 4.2%
|
||||
Expected
lives (in years)
|
5.0
|
5.0
|
5.0
|
5.0
|
Number
of
stock
awards
|
Weighted
average
grant
date
fair value
|
||||||
Unvested
at January 1, 2006
|
-
|
-
|
|||||
Granted
|
484,984
|
$
|
12.65
|
||||
Vested
|
-
|
-
|
|||||
Forfeited
|
(28,000
|
)
|
-
|
||||
Unvested
at September 30, 2006
|
456,984
|
$
|
12.65
|
(in
thousands)
|
Nine
months ended
September
30,
|
||||||
2006
|
2005
|
||||||
Net
liability for derivatives at January 1
|
$
|
(13
|
)
|
$
|
(439
|
)
|
|
Gain
in value of derivative instruments that do not qualify as
hedging
instruments
|
13
|
372
|
|||||
Net
liability for derivatives at September 30
|
$
|
-
|
$
|
(67
|
)
|
(in
thousands)
|
September
30, 2006
|
December
31, 2005
|
|||||
|
|||||||
Securitization
Facility
|
$
|
57,281
|
$
|
47,281
|
|||
Borrowings
under Credit Agreement
|
$
|
69,000
|
$
|
33,000
|
|||
Installment
notes payable with banks, weighted average
interest rate of 5.99% at September 30, 2006, due in
monthly installments with final maturities at various dates
through September 2010, secured by related revenue
equipment
|
42,715
|
-
|
|||||
111,715
|
33,000
|
||||||
Less
current maturities
|
(5,882
|
)
|
-
|
||||
Long-term
debt, less current maturities
|
$
|
105,833
|
$
|
33,000
|
(In thousands) | ||||
Current assets
|
$
|
10,970
|
||
Property and equipment
|
64,089
|
|||
Deferred tax assets
|
297
|
|||
Other assets - Interest rate swap (See Note 7)
|
252
|
|||
Identifiable intangible assets:
|
||||
Tradename
(5-year estimated useful life)
|
1,950
|
|||
Customer
relationships (7-year estimated useful life)
|
1,200
|
|||
Goodwill
|
19,995
|
|||
Total
assets
|
$
|
98,753
|
||
Current liabilities
|
$
|
13,181
|
||
Long-term debt, net of current maturities
|
36,298
|
|||
Deferred tax liabilities
|
10,270
|
|||
Total
liabilities
|
$
|
59,749
|
||
Total preliminary purchase price
|
$
|
39,004
|
(in
thousands, except per share data)
|
Three
months ended September 30, 2006
|
Nine
months ended September 30, 2006
|
|||||
Pro
forma revenues
|
$
|
198,131
|
$
|
572,557
|
|||
Pro
forma net income
|
$
|
655
|
$
|
1,989
|
|||
Pro
forma basic and diluted earnings per share
|
$
|
0.05
|
$
|
0.14
|
•
|
Expedited
long haul service. Increased the fleet by approximately 4% and expanded
the length of haul to reflect a renewed focus on transcontinental
loads.
The team operation is also the main training ground for new drivers,
and
improvements in our training have allowed us to lower turnover in
a
difficult driver market. Average freight revenue per total mile has
remained basically flat with last year, although the length of haul
has
expanded about 11%.
|
•
|
Refrigerated
service. Increased our combined Southern Refrigerated Transport (“SRT”)
and Covenant Refrigerated fleet by approximately 19% and expanded
the
length of haul slightly by just over 1%. Average freight revenue
per total
mile remained basically flat. Within this service offering, SRT continues
to generate the best performance of any part of our company, and
Covenant
Refrigerated has been less proactive than desired because of taking
on
more trucks than its business plan called for to cover additional
trucks
coming out of the Covenant regional service offering.
|
•
|
Dedicated
service. Increased the fleet by approximately 23% and expanded the
average
length of haul by 22%, while miles per truck decreased about 6%.
Average
freight revenue per total mile increased 3.9% even with the much
longer
average length of haul. While we believe the reallocation of trucks
from
the regional business to new dedicated business was prudent, the
margins
on the new dedicated business have not reached our long-term targets
due
to the quick expansion of this service offering, but have continued
to
improve.
|
•
|
Regional
solo-driver service. Within our Covenant regional operation, we decreased
the fleet by approximately 37%, decreased the length of haul by
approximately 15% to 542 miles, and increased miles per truck by
7%.
Average freight revenue per total mile remained flat. The freight
mix
within our regional service offering changed substantially, as we
have
worked to reposition several hundred tractors around freight centers
and
driver domiciles. The average truck count for the quarter decreased
by
just over 500 trucks versus the third quarter of last year, and we
expect
the truck count to continue to decrease over the remainder of the
year, as
additional trucks are allocated elsewhere and the overall size of
the
company’s fleet is reduced. Our Star
regional
service is not involved in the business realignment and was only
included
in our results of operations since September 14, 2006,
the date of acquisition.
|
Three
Months Ended
September
30,
|
Three
Months Ended
September
30,
|
|||||||||
2006
|
2005
|
2006
|
2005
|
|||||||
Total
revenue
|
100.0%
|
100.0%
|
Freight
revenue (1)
|
100.0%
|
100.0%
|
|||||
Operating
expenses:
|
Operating
expenses:
|
|||||||||
Salaries,
wages, and related
expenses
|
37.9
|
37.2
|
Salaries,
wages, and related
expenses
|
46.4
|
43.7
|
|||||
Fuel
expense
|
29.9
|
28.3
|
Fuel
expense (1)
|
14.1
|
15.8
|
|||||
Operations
and maintenance
|
5.2
|
5.4
|
Operations
and maintenance
|
6.3
|
6.3
|
|||||
Revenue
equipment rentals and
purchased
transportation
|
9.3
|
9.0
|
Revenue
equipment rentals and
purchased
transportation
|
11.4
|
10.5
|
|||||
Operating
taxes and licenses
|
1.9
|
1.8
|
Operating
taxes and licenses
|
2.4
|
2.2
|
|||||
Insurance
and claims
|
4.7
|
5.9
|
Insurance
and claims
|
5.8
|
7.0
|
|||||
Communications
and utilities
|
1.0
|
1.0
|
Communications
and utilities
|
1.2
|
1.2
|
|||||
General
supplies and expenses
|
3.2
|
2.8
|
General
supplies and expenses
|
3.9
|
3.3
|
|||||
Depreciation
and amortization
|
4.9
|
6.2
|
Depreciation
and amortization
|
6.0
|
7.3
|
|||||
Total
operating expenses
|
98.0
|
97.7
|
Total
operating expenses
|
97.5
|
97.3
|
|||||
Operating
income
|
2.0
|
2.3
|
Operating
income
|
2.5
|
2.7
|
|||||
Other
expense, net
|
0.9
|
0.6
|
Other
expense, net
|
1.1
|
0.8
|
|||||
Income
before income taxes
|
1.1
|
1.6
|
Income
before income taxes
|
1.4
|
1.9
|
|||||
Income
tax expense
|
0.6
|
0.9
|
Income
tax expense
|
0.8
|
1.1
|
|||||
Net
income
|
0.5%
|
0.7%
|
Net
income
|
0.6%
|
0.8%
|
(1)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel surcharge
revenue is shown netted against the fuel expense category ($32.5
million
and $25.2 million in the three months ended September 30, 2006 and
2005,
respectively).
|
Nine
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||
2006
|
2005
|
2006
|
2005
|
|||||||
Total
revenue
|
100.0%
|
100.0%
|
Freight
revenue (2)
|
100.0%
|
100.0%
|
|||||
Operating
expenses:
|
Operating
expenses:
|
|||||||||
Salaries,
wages, and related
expenses
|
38.2
|
38.3
|
Salaries,
wages, and related
expenses
|
46.0
|
43.8
|
|||||
Fuel
expense
|
29.1
|
26.2
|
Fuel
expense (2)
|
14.6
|
15.7
|
|||||
Operations
and maintenance
|
5.2
|
5.3
|
Operations
and maintenance
|
6.4
|
6.1
|
|||||
Revenue
equipment rentals and
purchased
transportation
|
9.4
|
9.8
|
Revenue
equipment rentals and
purchased
transportation
|
11.3
|
11.2
|
|||||
Operating
taxes and licenses
|
2.0
|
2.2
|
Operating
taxes and licenses
|
2.5
|
2.5
|
|||||
Insurance
and claims
|
5.0
|
6.1
|
Insurance
and claims
|
6.0
|
7.0
|
|||||
Communications
and utilities
|
1.0
|
1.1
|
Communications
and utilities
|
1.2
|
1.2
|
|||||
General
supplies and expenses
|
3.2
|
2.8
|
General
supplies and expenses
|
3.8
|
3.2
|
|||||
Depreciation
and amortization
|
5.5
|
6.6
|
Depreciation
and amortization
|
6.6
|
7.5
|
|||||
Total
operating expenses
|
98.6
|
98.5
|
Total
operating expenses
|
98.4
|
98.2
|
|||||
Operating
income
|
1.4
|
1.5
|
Operating
income
|
1.6
|
1.8
|
|||||
Other
expense, net
|
0.7
|
0.5
|
Other
expense, net
|
0.8
|
0.6
|
|||||
Income
before income taxes
|
0.7
|
1.0
|
Income
before income taxes
|
0.8
|
1.2
|
|||||
Income
tax expense
|
0.8
|
0.7
|
Income
tax expense
|
0.9
|
0.9
|
|||||
Net
income (loss)
|
(0.1%)
|
0.3%
|
Net
income (loss)
|
(0.1%)
|
0.3%
|
(2)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel surcharge
revenue is shown netted against the fuel expense category ($84.6
million
and $57.6 million in the nine months ended September 30, 2006 and
2005,
respectively).
|
PART
II
OTHER
INFORMATION
|
|||
LEGAL
PROCEEDINGS
From
time to time we are a party to ordinary, routine litigation arising
in the
ordinary course of business, most of which involves claims for personal
injury and property damage incurred in connection with the transportation
of freight. We maintain insurance to cover liabilities arising from
the
transportation of freight for amounts in excess of certain self-insured
retentions.
Reference
is made in our Form 10-Q for the quarterly period ended March 31,
2006
regarding a lawsuit against us relating to a 2003 vehicular
accident.
|
|||
RISK
FACTORS
While
we attempt to identify, manage, and mitigate risks and uncertainties
associated with our business, some level of risk and uncertainty
will
always be present. Our Form 10-K for the year ended December 31,
2005, in
the section entitled Item 1A. Risk Factors, describes some of the
risks
and uncertainties associated with our business. These risks and
uncertainties have the potential to materially affect our business,
financial condition, results of operations, cash flows, projected
results,
and future prospects. In addition to the risk factors set forth on
our
Form 10-K, we believe that the following issues, uncertainties, and
risks,
should be considered in evaluating our business and growth outlook.
We
may not be successful in executing our business realignment and improving
or maintaining our profitability.
During
2005 we adopted, and we continue to implement, a strategic plan designed
to improve our profitability. The plan generally involves organizing
our
operations around four distinct service offerings. However, we may
not be
successful in executing this plan. As we continue to implement this
plan,
including realigning our business, we expect changes to items such
as the
customer base, rate structure, routes served, driver domiciles,
management, reporting structure, and operating procedures. These
changes,
and others that we did not expect, will present significant challenges,
including, but not limited to, the following:
|
|||
•
|
Developing
management depth to oversee the service offerings and also manage
regional
terminals within the service offerings;
|
||
•
|
Adapting
our personnel to new strategies, policies, and procedures, including
more
distributed decision making;
|
||
•
|
Maintaining
customer relationships and freight volumes while changing routes,
pricing,
and other aspects of our operations;
|
||
•
|
Maintaining
a sufficient number of qualified drivers while changing routes, policies,
procedures, and management structures;
|
||
•
|
Controlling
headcount and expenses generally during a transition that may entail
a
period of duplication of some functions; and
|
||
•
|
Improving
or eliminating processes, functions, services, or other items that
are
identified as substandard.
|
||
As
part of the realignment and our focus on improving the profitability
of
our regional operations, we acquired Star's regional operations and
decided to downsize our historical/Chattanooga-based regional operations.
As part of the downsizing, we plan to replace approximately 2,000
tractors
in 2006, or approximately 55% of our Company-owned tractor fleet.
This is
a substantially greater percentage than we would normally replace
and will
result in a substantial increase in capital expenditures. We are
also
replacing a significant number of trailers, which will be primarily
financed with operating leases. If we are unable to dispose of this
equipment at acceptable prices, our results of operations may be
adversely
affected. Additionally, selling our equipment may adversely affect
our
customer service and driver
turn-over.
|
There
can be no assurance that the integration of Star's regional operations
into our operations will be successful and that we will be able to
continue and improve upon Star's profitability. As we integrate Star's
regional operations, we may lose key components of Star's operation,
including customers, drivers, other employees, and owner-operators,
none
of whom are bound to remain with Star. Further, integrating Star's
regional operations may distract our management from other operations,
including our business realignment. There can be no assurance that
the
expected synergies from the acquisition, including without limitation,
the
impact on our regional service offering, will come to fruition. In
addition, there can be no assurance that we will be able to manage
our
debt levels and cash requirements and maintain adequate liquidity
following the acquisition of Star and through the downsizing and
fleet
replacement process.
Our
credit and securitization facilities and other financing arrangements
contain restrictive and financial covenants, and we may be unable
to
comply with these covenants. A default could result in the acceleration
of
all of our outstanding indebtedness, which could have an adverse
effect on
our financial condition, liquidity, results of operations, and the
price
of our common stock.
Our
credit and securitization facilities and other financing arrangements
contain covenants that impose certain restrictions and require us
to
maintain specified financial ratios. Following the Star acquisition,
we
were very close to the upper limit on our leverage ratio at September
30,
2006. If we fail to comply with any of these covenants, we will be
in
default, which could cause cross-defaults under other loans or agreements.
A default, if not waived by our lenders, could cause our debt and
other
obligations to become immediately due and payable. To obtain waivers
of
defaults, we may incur significant fees and transaction costs. If
waivers
of defaults are not obtained and acceleration occurs, we may be unable
to
borrow sufficient additional funds to refinance the accelerated debt.
Even
if new financing is made available to us, it may not be available
on
commercially acceptable terms.
|
|
EXHIBITS
|
|
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
|
#
|
Stock
Purchase Agreement dated September 14, 2006, among Covenant Transport,
Inc., Star Transportation, Inc., Beth D. Franklin, David D. Dortch,
Rose
D. Shipp, David W. Dortch, and James F. Brower, Jr.
|
|
#
|
Amendment
No. 3 and Limited Waiver to Amended and Restated Credit Agreement
dated
August 11, 2006, among Covenant Asset Management, Inc., Covenant
Transport, Inc., and Bank of America, N.A.
|
|
#
|
Amendment
No. 10 to Loan Agreement dated July 2006 among Three Pillars Funding
LLC
(f/k/a Three Pillars Funding Corporation), SunTrust Capital Markets,
Inc.
(f/k/a SunTrust Equitable Securities Corporation), CVTI Receivables
Corp.,
and Covenant Transport, Inc.
|
|
#
|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker,
the
Company's Chief Executive Officer
|
|
#
|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan,
the
Company's Chief Financial Officer
|
|
#
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's
Chief
Executive Officer
|
|
#
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief
Financial Officer
|
|
References:
|
||
(1)
|
Incorporated
by reference to Form S-1, Registration No. 33-82978, effective October
28,
1994.
|
|
#
|
Filed
herewith.
|
COVENANT
TRANSPORT, INC.
|
||
Date:
November 9, 2006
|
By:
|
/s/
Joey B. Hogan
|
Joey
B. Hogan
|
||
Executive
Vice President and Chief Financial Officer,
|
||
in
his capacity as such and on behalf of the
issuer.
|